Corporate law & Secretarial Practice I Sem Bcom

Unit -1 COMPANY

Meaning of company:

The word ” company “ is an amalgamation of the Latin word “com” it means with or together
“pains” it means bread originally it refers to a group of persons who took their meals together

A company is a association of many person who contribute money or money‘s worth to a

common stock &employees it in some trade or business &who share the profit loss arising
there from

Definition:

Section 3 of the companies Act of 1956 define word “company “as accompany formed &
registered under the act or an existing company formed & registered under any of the
previous company laws

Charctestices of a company:

 Separate legal entity :

 The co- is registered under law a co- become a separate legal entity as compared to its
members
 It is different from its members it have its own name ,seal & assets & liabilities are
separate
 Co- have its capable of own property

 Limited liability:
 Liability of the co- members is ltd to contribution to the assets of the co- up to the face
value of shares held by them.
 Even if liability of the co- for exceeds its assets creditors can force the members to pay
but members are not responsible to pay
 Perpetual succession :
 Membership of on co- keep on changing from time to time but that does not affect the
life of the co-

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 Death or insolvency of members does not affect the existence of the co-
 Separate property :
 A co- is a distinct legal entity. the co-‘s property is its own a members cannot claim to
be owner of the co-‘s property
5. Transferability of shares
 Share in a co- is freely transferable , subject to certain condition

6. Common seal:

 A co- is a artificial person it does not have a physical presence there four its board of
directors are use the common seal as the official signature of the co- the name of the
co- should be there in the seal.

7. Separate management:

 A co- is administered & managed by its board of directors the share holders are simply
holders of the share in the co- & not the managers of the co-

8. one share one vote:

 Here one members one vote applies

E.g.:if a person having 10 shares he does not have 10 votes in the co- only he have one
share

Kinds of the co-

A. Based on mode of incorporation

1. Charted co-: co- ‘s incorporated (formed ) under a special royal charter issued by the
king or queen is called charted co-
E.g. in 17th & 18th century the east India co- , Bank of England

2. Statutory co-,s : co- incorporated under a special Act of parliament or legislation are
called “statutory co-‘s” e.g. RBI ,SBI. LIC, the Indian airline & the state trading corporation of
India

3. Registered co-‘s : co-‘s incorporated through registration with register of co-‘s under
provisions of the co-‘s Act of 1956 are called “Registered co-‘s

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B. Based on the liability of the member

1. Unlimited co-‘s : A co- does not have any limit on the liability of its members called
as unlimited co- members of this co-may be sole proprietor or partnership of a firm

2. Co-‘s Limited by guarantee :

It is formed to promote Art, science, religion, trade & sports it may be formed with
or without share capital.

3. co-‘s limited by shares or limited co-:

In a ltd co- the liability of the members is ltd to the amount of the shares held by
them in the event of its winding up a share holder can be called up on pay only the
unpaid amount (if any) on share held by him

It is classified in to 2 types
 Private co-
 Public co-

 Private co- it is a co- in which there can be maximum no .of share holders is 50
& minimum no. of share holders is 2 no invitation can be made to the public for
subscription of share or debentures it can’t accepts deposits from public &
restriction of transfer of share

Conversion of private in to public co-

Pvt co- can converted into public co- by any of 3 modes
1 .By default
2 .By operation of law
3 .By an act of volition (own decision)

1 .By default:

a. Restriction on transfer of share

b. Restriction on public invitation to subscribe to its shares debentures
c. Restriction on the maximum no. of its members which should not exceeds 50
These 3 aspects should be converted

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2. By operation of law:

Pvt co- should be consider public co- in the following cases

a. When 25% or more of its paid –up share capital is held by one or more bodies corporate

b. When its average annual turnover ( during the last 3 years) exceeds Rs -10 cores
c. When it holds 25%or more of the paid-up share capital of a public co-
d. When it accepts deposits from the public after making on invitation by an
advertisement

4. By an act of volition :

a. Conduct a board meeting & decide the time, place & alter the articles of association

b .send notice for the general meeting with special resolution along with the expletory
statement

c.prepare &file a prospectus with in 30 day of passing the resolution

d. File the special resolution & expletory statement along with the prescribed fee within 30
days

a. The no. of directors should be raised

 public co-
*It means the co- which is not a pvt co-
*It as minimum paid up capital of 5 lakh Rs it needs a minimum no. of 7 share holders
*Before commencing by business a public co- is obliged to obtain a certificate from the
registrar of co-
*Every public co- can start its business with a paid up capital of less than 5 lakh shall with
in a period of 2 years from such commencement it can increase its paid up capital to 5 lakh

Conversion of public co- into pvt co-

1. The name of the co- included pvt

2. No special resolution should be passed for amending the articles

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3. After alteration has been approved a printed copy of the articles as altered shall be filled with
the register within one month

Difference between private & public co-

Private co-

1. Requires minimum paid up capital of 1 lakh Rs

2. Requires minimum 2 members

3. Minimum limit of 50 members

4. At least 2 directors required

5. Share are not transferable expect for the provisions in the articles

6. No restriction on managerial remuneration

7. The words private ltd are added top of the co- name

8. It can raise capital by pvt arrangements public subscription is not allowed

Public co-

1. . Requires minimum paid up capital of 5 lakh Rs

2. Requires minimum 7 members
3. No maximum limit
4. At least 3 directors
5. Shares are freely transferable and may be even quoted on stock exchange.
6. Restriction on total managerial remuneration
7. The word ltd is added to the co-‘s name
8. Raiser capital by inviting public subscription or by pvt arrangement

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CHAPTER -2 COMPANY SECRETARY

Meaning

The term secretary is derived from Latin word “Secretaries” which means “Confidential
Officer”

Acco. To Oxford Dictionary the term secretary as “ One who is employed to conduct
correspondence , to keep records &to transact various other b’ss , for on other person , for a
society , corporation , public body “

Acco. To Company Secretary act of 1980 Section 2(c) “A Company Secretary is a person who is a
member of ICSI (Institute of Company Secretary of India)

Qualification

As per the co- rules 1988 co- having a paid up capital of Rs 2 crore / more . To appoint a full
time secretary the qualifications are as follows (any one or more)

 He should be member of ICSC

 He should pass the intermediate examination conducted by the ICSC
 Or post graduation degree in commerce
 Degree in law granted by any university
 Membership of Institute Cost & Works Accounts of India
 Post graduation degree or diploma in management science
 Post graduation diploma in law &Secretarial practice granted by the university

Other qualifications are

 Sound education
 Proficiency in language
 Knowledge of office organization &b’ss methods
 Knowledge of accountancy & taxasation
 Knowledge of mercantile law
 Knowledge of economics ,banking& finance

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Appointment

As per Companies act of 1956 it is not compulsory to appoint co- secretary how ever in practice
all co- is appointing secretary

As per the co-‘s (amendment) act of 1974 only one person is appointed as secretary is
obligatory for every co- having a paid up capital of Rs 2 crore / more . To appoint a full time
secretary

As per the rule (1) of the co- secretary rules of 1983 it is obligator or responsibility for a co-
having a paid up capital of Rs -50 lakh to appoint a co- secretary

Procedures for appointment of a co- secretary

Board of directors has a power to appoint regular secretary by passing a resolution in its
meeting

1. A resolution has to be passed at Board of directors meeting for appointing a secretary on

certain terms & conditions.

2. The particulars of appointment must be filled in duplicate with a registrar within 30 days of
appointment

3. If the person appointed as a secretary to other co- he has to notify other co- within 20 days
of his appointment

4.if a person appointed as a secretary &he is a relative of a director , a special resolution has to
be passed in general meeting for such appointments.

Rights, Duties & Liabilities

Rights & power

1. He has right to control & manage the departments under his control

2. As a principle officer he has right to sign the documents which require for authentication
(verification)

3. As a employee of the co- he has right to claim his salary as a preferential creditor in case of
winding up of a co-

4. He can be given right to allot the shares

5. He can serve notice under the section 53

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Duties

Duties can be classified under fallowing heads

1. Statutory duties

2. Duties towards directors

3. Duties towards public

4. Duties towards Share holders

5. Duties towards Organization & staffing

6. Duties before &after incorporation

1. Statutory duties

The Statutory duty of a co- secretary by co-‘s act or any of legislation I.e income tax act ,
sales tax act, factories act

1. He as to maintain books & register of a co-

2. Supervising the issue of shares , allotment, transfer, forfeiture of share & debentures
3. Filling of the necessary returns with the registrar of the co-
4. He as to attend the meeting of the directors & share holders & record their proceedings
5. He should sign the documents & proceedings
6. He should make statutory declaration with regards to commencement b’ss
7. He should ensure the safe custody & proper use of the common seal of the co-
8. He should arrange for timely Subscription of returns & payment of tax

2. Duties towards directors

1. He is required to arrange board meeting ,record the proceedings of the board meeting
2. He should look after all the correspondence in which the directors are interested
3. He act as a guide to board of directors
4. He act as a confidential clerk of a board of directors
5. He act as an agent of board of directors& carry out their instructions
6. He should draft the directors report for presenting at the general meeting
7. He communicate the board decision to the staff & share holders

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3. Duties towards public

1. He should inform the debenture holders & creditors about matters affecting their
interest

2. He should arrange for the payment of interest to debenture holders promptly

3. He should supply the necessary explanation & clarification to public when thy demand

4. He should bring the complaints & suggestions of the public to the notice of the director

5. He should take care the confidential matters that should not delivered to public

4. Duties towards Share holders

1. The secretary has to safe guard the interest of share holders & he should attend their
inquiries

2 .He should attend the work of registration, transfer& transmission of shares

3. He should arrange for payment of dividends& issue of shares to share holders

4. He should keep the registration documents open to members for inspection

5. He has to organize & supervise correspondence with share holders regarding application,
allotment &forfeiture of shares

5. Duties towards Organization & staffing

1. He should plan, organize, direct, co-ordinate& control the office work properly
2. He has to ensure that office work with maximum efficiency
3. He should attend the work of recruitment, training &placement of office staff
4. He should attend the purchase of office furniture, equipment & stationary
5. He should observe the work of various departments such as shares department,
accounts department & filling &records department

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6. Duties before & after incorporation

Duties before
1. He has to attend the preliminary meeting of the promoters
2. He has to guide the promoters regarding the provisions of the act
3. He should also help them in the preparation of memorandum of association, articles
of association & prospectus
4. He should arrange the files of the co- for registration

1. Duties after incorporation

1. He has to arrange for the first board meeting &get necessary resolution passed
2. He should take steps to get certificate of incorporation
3. He should prepare statutory report &arrange for the statutory meeting after getting
the certificate
4. He has to look after the work of application, allotment & calls on shares
5. He should look after transfer & forfeiture of shares
6. He has to observe strictly the provisions for forfeiture of shares
7. He has to prepare the list of defaulters & place it before the board meeting
8. He should remove the names of the defaulters from the register of the co-

Liabilities
1. Statutory liabilities
1. If he fails to holds a statutory meeting
2. If he does not circulate the statutory report
3. If he fails to hold annual general meeting
4. If he fail to submit to the register of the co-regarding copies of annual accounts
5. If he fail to give a notice of the board meeting
6. If he fail to record the minutes of the board &general meeting
7. If he fails to maintain register of directors, share holders &debenture holders
8. If he fails to rectify the mistake with in a period of 2 months
9. If he fails to filing of documents with the registrar which is required by act
10. If he fails to submit the annual returns of income of the co-
11. If fails to have name & address of register office

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12. If he fail to issue every employee, share holders &debenture holders a certificate in
respect of tax deducted at a source

2. Contractual liabilities

1. He must carry out the obligations of a service on agreement with the co-
2. He must carry out the order given by the director
3. He should not disclose any confidential information of the co-
4. He should not be anything beyond his authority
5. He is liable for any damages/loss suffered by the co- by his default
6. He should liable for any fraud on the part of any of his assistance if it is proved
7. If a secretary of a co- falsify the books of the co-reports, certificates, documents
then he will be punishable with imprisonment

Removal of co- secretary

The secretary may be removed from the office by the BOD under the power
expressed in the articles
1. The service of secretary may be terminated without notice if he makes secret
profit from the co-
2. He may be dismissed for his disobedience & misconduct
3. He may be permanently dismissed if he show negligence

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Directors & Managing directors

The directors are the brain of the co-who generally control the co- he act as a agent on behalf of the co-

A director is a person who is responsible for the management of the co-

Acc .. to section 252 of co’-s act of 1956 every public co- must have a 3 directors in case of private co- 2
directors the minimum no. of directors are fixed by articles of association

Appointment

1. First director of the co- is appointed by the subscribers to the memorandum of association
2. The subsequent directors are appointed by passing an ordinary resolution at the meeting of the
co-
3. The directors should hold the office in accordance with the provision of the articles

Qualifications

1. The co- act as not made any obligation to the directors in holding shares of the co-

2. The articles prescribes the qualification of the director that any director should be hold specified
numbers of shares of a co- which is called as a qualification of shares

3. A co- want to appoint a director the director has to hold the nominal value of shares of 5000

4. If he should not hold such amount of shares he can hold within 2 months of appointment

Disqualification of directors

1.If he is found to be unsound

2. If he is in solvent

3.

Whole time secretary

It means the director has to spent his time in carrying out of affairs of the co-as may be assigned by the
board of directors

Remuneration of directors

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Acc. To sec. 198 director remuneration includes free accommodation, insurance, pension , gratuity
along with this fixed amount of salary

Rights of the director

Right to refuse transfer of shares

In case of private co- or deemed public co- director has right to refuse transfer of shares

Right to elect chair men

Regulation 76 (1) of table A Provides that the directors are entitle to elect chair person for a board
meeting

Right to appoint a managing director

Acc . to the act of co- the director has right to appoint a managing director with the help of board

Right to recommend dividend

The board of director has right to decide whether to provide dividend to share holders are not thy can
reduce the rate of dividend which is recommended by share holders

Responsibility of director

1. He has responsibly of prepare & deliver the documents on behalf the co-

2. Verifying the annual returns

3. Verifying the annual accounts

4. Notification to the register regarding the changes In the officers of the co-

5. Allotment of shares

6. Registration of cheques

7. He has to give day today information

Managing director

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Unit 3 FORMATION OF A COMPANY

Formation of a co- is 4 stages

1 Promotion

2 Incorporation /Registration

3 Capital subscriptions

4 Commencement of business

1.Promotion

Promotion is the discovery of b ss opportunities’ & the subsequent organization of funds,

property & managerial ability in to a b’ss concern for the purpose of making profits

In other words promotion is the process of organizing’ planning the finance of b’ss enterprise
under the corporate form

Or it refers to various steps taken to perused a number of persons to come together for
achieving common objectives through the co- form of organization

The work of promotion is done by a person is called promoter .a group of persons are called
promoters

Steps in promotion

1. Discovery of a b’ss idea /opportunity/proposal

2 .Detailed investigation of the b’ss idea

3. Assembling the various requirements for the b’ss idea

4 .Financing the b’ss proposal

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1. Discovery of a b’ss idea /opportunity/proposal

It means an idea of some b’ss to be started in existing line or a new field of a b’ss
The step also include preliminary investigation of the b’ss proposal to find out whether it is
worthwhile to make the detailed investigation

2. Detailed investigation of the b’ss idea

It involves the care full & detailed study of the proposal to find out profitability & practiblity
of the project. It is an investigation about the availability of the raw materials lab, power,
labour, transportation, etc & it is required amount of capital probable cost of production
demand for product & competition the market this information collected & analyzed with
the help of experts &specialist & the decisions are taken about the profitability
&practicability of the b’ss proposal

3. Assembling the various requirements for the b’ss idea

After the detailed investigation of the proposal if the profitability is satisfied the promoter
proceeds with the work of assembling the requirement of the proposal it means
arrangement of necessary things to start the b’ss promoter is entered in to preliminary
contracts for purchase of land ,building, machinery ,patents rights etc & also for the
securing the license from the govt , power supply &raw material supply license
&appointment of technical & managerial personnel.

4. Financing the b’ss proposal

It is the last step in the promotion stage in this stage the promoter proceeds with the
preparation of financial arrangement &he will make decision regarding the types of
securities for raising the capital thy also enter into the contract with the underwriters for
the subscribing of shares & debentures.

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2 Incorporation /Registration

It is the second stage in the formation of a co- it having the following steps

1. Getting the approval of the registrar of the co-‘s for the proposed name of the co-

The co- can chose any name it likes but the proposed name should not be similar to the existing
co- & it should not be undesirable name the promoter has to submit the application to the co-
registrar & obtain the approval of proposed name

2. Getting the memorandum & articles of association prepared &printed

M/A & A/A this two are important documents for incorporation of the co-.it is required to be
prepared &filed with the registrar of the co- M/A is compulsory for every co-but A/A is not
compulsory for public ltd co- having share capital .it can adopt table “A” as A/A

3. Fixing up the signatories to the M/A

The promoters should fix up the signatures of auditors, solicitors, bankers , underwriters &
brokers to the M/A

4. Filing the application with the registrar of co- along with the various documents

a. The M/A properly stamped &signed by minimum subscribers & attested by the signature of
the witness.

b.A/A properly stamped & signed

c. A copy of the letter received from the co registration office for the approval of proposed
name

d. A statement of the nominal capital of the co-

e. A list of person who act as a first director of the co-

f. The written agreement of the directors act as a first director of the co-

g. Statutory declaration prepared &signed by the directors & secretary

h. An undertaking by the first directors to take up the qualification share amount

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5. Payment of stamp duty , filing fees & registration fees

6. Obtaining the certificate of incorporation

After the receipt of application &necessary documents &required fee, the registrar will
carefully examine the documents & enter the name of the co- in the register of the co- &
then issue the certificate of incorporation

CERFICATE OF INCORPORATION

I hereby certify that ----------------------------is this days incorporated under the co-‘s act ,
1956&that the co- is ltd

Given under my hand at Bangalore this ----------day of----------two thousand eight .

Fees and stamp-------------------------------------Rs------------------------------

Stamp duty on capital-----------------------------Rs-------------------------------

Seal of the Signature----------------

Seal of the Signature----------------
Register Registrar of
of co-‘c
co-‘s
Registrar Registrar
Karnataka
Karnataka

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3 Capital subscriptions

It is the third stage in the formation of the co-

Steps for capital subscription

1 convey the first board meeting in this meeting the following b’ss are conducted

a. Appointment of the regular secretary of the co-: the part time secretary is confirmed as a
regular secretary of the co by the board of directors or they can appoint new person as a
secretary
b. Appointment of bankers, auditors, solicitors, brokers etc : This persons are appointed by
the promoter before incorporation now they are confirmed by the board of directors
c. Adoption of preliminary contract : The promoter was entered into the preliminary contract
before incorporation now this contracts are adopted by board of directors in their first
board meeting
d. Approval of listing of shares of the co- in a recognized stock exchange :The public co is
going to raise the capital through public .if it wish to list their shares in stock exchange it
can list by the approval of board by passing resolution at the board meeting .
e. Adoption of the under writing agreement : when the co decided to raise the shares capital
from public through under writer then the co- has to make agreement with underwriters
f. Adoption of draft prospectus or statement in lieu of prospectus: If the public co- wish to
raise the share capital from the public it should prepare prospectus & that should be
registered before the subscription from the public. if the co- wish to raise the share capital
within friends & relatives instead of public then it has to prepare statement in lieu of
prospectus & it should be approved by the board of directors at board meeting.

2. Filling a copy of prospectus or statement in lieu of prospectus with the registrar of co-:
Prospectus should file with registrar of the co- before issue of shares to the public but the
statement in lieu must file with the registrar before the allotment of shares

3. Issue of prospectus to the public & calling application for shares: After completion of filing
of prospectus with registrar it should be issued to public inviting application for its shares this
process will be look after by co- banker.

4. Allotment of shares: After receiving the application the co- will scrutinize &sort out the
application then the co- is ready to allot the shares on certain conditions the allotment of
shares should be finalized within 120 days of the issue of prospectus .letter of allotment should

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be sent to share holders to whom the shares are allotted & letter of regret will be sent to
whom the shares are not allotted & their application money will be refunded After allotment
returns has to be filed with the registrar of the co- within one month of such allotment &
register of members should prepared & share certificate will be issued by the exchange of letter
of allotment from public

4 Commencement of business

The following are the steps for commencement of b’ss

1. Making of application to the registrar

For obtaining the certificate an application must be made by the co- to registrar of the
co- requesting him to grant the b’ss commencement certificate.
2. Filling documents &statements:
a. The declaration of the co- relating to minimum subscription received & shares are
allotted
b. The declaration that the director taken up the qualification shares &paid the amount
in cash
c. The declaration of the co- relating no money will be refundable to the applicants
d. Statutory declaration signed by the secretary or director of the co-stating that all the
requirement of the co –‘s act in respect of commencement of b’ss have been
completed .
3. Payment of the required registration fees :

Along with the application &declaration the co- has to pay required fees to the
registrar of the co-

4. Obtain the b’ss commencement certificate :

After receiving the application, declaration &fees the registrar will verify whether all
the requirement of the co-‘s act is fulfilled by the particular co - then only he will
provide b’ss commencement certificate .

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CERTIFICATE OF COMMENCEMENT OF BUSINESS

I hereby certify that ----------------------------company ltd of (address) ---------------

Which was incorporated under the companies act of 1956, on the ---------- day of

-----------2013 & which has this day field a statutory declaration in the prescribed

Form that the conditions of section 149 have been complied with, is entitled to

Commence business

Given under my hand at (place) -----this (date) -----day of (month) -----------

Two thousand eight.

Seal of the Signature-------------------

Registrar Registrar of companies

Karnataka

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DOCUMENTS OF COMPANIES

For incorporation of a co- two important documents are prepared they are

1 Memorandum of Association

2 Articles of Association

1. Memorandum of Association

The M/A is the life giving document of the co- it is the document which brings the co- into
existence it is the charter or constitution of the co- , contains the fundamental conditions up
on which the co- is incorporated. It is the foundation upon which the structure of the co- is
built. It contains the objects or purpose of the incorporation of the co- & defines or determines
the external operations of the co-

Form of M/A

It should be in prescribed form as per section 14 of the co- act the M/A should be in one of the
forms in table B,C,D & E given in schedule I of the co-‘s act

TABLE “B” is the form of memorandum for company limited by shares.

TABLE” C” is the form of memorandum for a co- limited by guarantee not having share capital

TABLE “D” is the form of memorandum for a co- limited by guarantee having share capital

TABLE “E” ” is the form of memorandum for a co- unlimited

Section 15 of the co-‘s act of 1956 requires that every M/A should be printed, divided into
paragraphs & numbered. & it must contain the name, address &occupation of the minimum
subscribers; the signature of subscribers must be attested by at least one witness.

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The clauses in the M/A of a co- are six

As per section 13 of the co-‘s act of 1956

1 Name clause:

This clause states the name of the co- the co- can adopt any name it wants but before that
the following points must be born in mind .

a. The co- can adopt any name .but as per sec.20 of the co-‘s act it cannot be similar to
other co-
b. The name of the co- must end with limited or private limited
c. The name of the co- must printed on signboards & displayed outside the registered
office of the co-

2 Situation clause

This clause states the state in which the registration office of the co- is to be situated.
The actual address of the registered office of the co- can be sent to the registrar of co-
within 30 days of incorporation

3. Object clause:

This clause states the objects of the do- & also power of the co- as per the amendments act in 1956

1 the main object of the co-

2 the object incidental to the attainment of the main objects

3 the other object of the co- not included in the 1& 2

4. Liability clause:

This clause states that the liability of the co- is limited to the extent of the face value of the shares held
by them it may be noted that the liability of the directors, managing directors & manager shall be
unlimited

5. Capital clause:

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This clause states the details of share capital of the co- in case of limited co- having share capital , the
capital clause states the registered /authorized / nominal capital of the co- & the divisions of the share
capital in to shares of fixed amount & also clause of shares .

6. Association clause/subscription /declaration:

This clause contains a declaration by the minimum subscribers to the M/A . usually this clause runs as
follows “ We the several persons ,whose names , address & occupation are subscribed ,& we
respectively agree to take the number of shares in the capital of the co- set opposite our respective
names.”

Articles of Association

A/A is a second important document of a co- it is a document of a bye-law of a co- or rules &
regulations for the internal management of a co- it prescribes the power of the director &
officers of the co- as well as the rights of the share holders of the co-

Contents of the Articles of Association

1. Share capital & it’s different clause

2. Rights of different classes of share holders

3. Allotment of shares

4. Making of calls on shares

5. Transfer & transmission of shares

6. Surrender & forfeiture of shares

7. Conversions of shares in to stock

8. Co-‘s lien on share (control of co- on some shares)

9. Alteration of share capital

10. Powers, duties, qualification, remuneration etc of directors, managing directors

11. Share holders & directors meeting

12. Quorum of meeting

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13 Voting system

14. Method of keeping accounts

15. Common seal of the co-

16. Winding up of the co-

17. Dividend & reserve fund

18. Rules for meeting

19. Borrowing power of the co-

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Prospectus

Meaning:

The invitation to the public to subscribe to the shares &debentures of a co- by issuing a statement or
document “is known as prospectus

Prospectus contains all material & essential information about the co-affairs & its future prospectus

Definition:

Sec.2(36) the co-‘s act defines prospectus as “any document, notice, circular, prospectus,
advertisement or other document inviting deposits from the public or inviting offers from the public for
subscription or purchase of any shares in or debentures of a body corporate .

Statement in lieu of prospectus

If the promoters of a public co-can secure capital without public subscription, he need not issue the
prospectus, but instead can prepare a statement known as statement in lieu of prospectus it contains
same contents of prospectus

Contents of prospectus

A) Part I of schedule –II

I General Information

1. Name & address of registered office of the co-

2. Consent of the central govt for the present issue & declaration of central govt about non
responsibility for financial matters
3. 3. Date of opening of the issue closing of issue
4. Name & address of auditors & managers
5. Name & address of underwriters & the amount of underwritten by them

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6. Declaration by board of directors that the underwriters have sufficient resources to discharge
their respective obligation

II Capital structure of the co-

1. Authorized , issued , subscribed & paid up capital

2. Size of present issue giving separately reservation for preferential allotment to promoters.

III Terms of the present issue

1. Terms of payment & rights of the instrument holders

2. How to apply availability of forms ,prospectus & mode of payment

IV particulars of the issue

1.Object

2. Project cost

3. Means of financing

V Co- management & project

1. History & main objects & present conditions of the b’ss

2. Promoters & their back ground
3. Names, address & occupation of managers M.D & other directors
4. Location of the project
5. Plant & machinery ,technology, process etc
6. Infrastructure facilities, raw materials,& utilities like water ,electricity.

B) Part II of Schedule –II

I General information

1. Consent of directors, auditors, solicitors , advocates, managers , issue bankers to the co-
2. Expert opinion obtained if any
3. Change if any in directors & auditors during the last 3 years ,& reason for their of
4. Authority for the issue & details of resolution passed for the issue
5. Procedure & time Schedule for allotment & issue of certificates
6. Names & address of the co-. secretary, legal adviser , managers ,auditors, banker to the co-

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II Financial information

1 .A report by the auditor of the co- with respect to

a) Profit & losses & assets & liabilities of the co

b) Rate of dividends if any paid by the co- in respect to each class of shares in the co-

III Statutory & other information

1. Minimum subscription
2. Underwriters commission or brokers
3. Expenses of the issue giving separately the fee payable to advisers, managers, registrar to the
issue
4. Previous issue for cash
5. Commission or brokerage on previous issue
6. Issue of shares otherwise than for cash
7. Details of purchase of property
8. Material contracts & inspection of documents
9. Rights of members regarding voting, dividend, lien on shares ,forfeiture of share
10. Revaluation of assets , if any during last 5 years
11. Restrictions if any on transfer & transmission of shares

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CHAPTER 4 CORPORATE LAW ON MEETING

Meaning:

A meeting is a “congregation, assemble, gathering or get to gather of the members of on

organization at a place. For the purpose of discussing & deciding all important matters
concerning the b’ss of their organization

Definition:

A meeting may be defined as “any gathering, assembly of two or more person in a particular
place to discus some law full b’ss of common concern &to take decisions in the form of
resolutions on the basics of opinion expressed by the members at meeting “

Essentials of meeting

1 Proper authority to convey the meeting

2. Proper notice of the meeting

3. Quorum of the meeting

4. Proxies

5. Proper person in the chair

6. Agenda of meeting

7. Motion

8. Sence of meeting

9. Resolution

10. Minutes of meeting.

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1. Proper authority to convey the meeting:

A meeting must be co by the proper authority. The proper authority to convey a general
meeting of a co- Is the board of directors the board of directors must convey the general
meeting by passing a resolution that effect at a validly held board meeting.

2. Proper notice of the meeting:

This is the second important requirement of a valid general meeting. a proper notice of the
meeting should be given to all those who are entitled to attend the meeting
The notice should contain particulars relating to the kind of meeting, place, date, time of
meeting agenda of meeting

3. Quorum of the meeting :

Next essentials is the presence of quorum in the meeting quorum is the minimum numbers
members required to attend the meeting & transact b’ss validly

Acc to co-‘s act in case of a private co-the quorum is 2 in case of public co-it is 5 members

4. Proxies

As per provision of co-‘s act a member of co- may vote at a meeting either in person or by
proxy
“Proxy” is a person who is authorized by a member of a co- to attend & vote at a meeting of
the co- on behalf of share holder
Types of proxies are
1. Special proxy: he is a person who Is authorized to attend & vote on a particular
proposal or resolution
2. General proxies : he is a person who is authorized to vote & attend all proposal /
resolution

5. Proper person in the chair:

A chair men is a person who has been designated or elected to act as a guide & to preside
over the meeting & conduct the presiding of the meeting
He is the chief authority at a meeting & control & regulates the speech of members at the
meeting every meeting must have the chair men in order to regulate the proceedings of the
meeting

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6. Agenda of meeting

Agenda means the things to be done

& it is a statement of b’ss to be discussed & transacted at meeting

Simple the agenda means the matters to be discussed at the meeting it is list of items of

The b’ss to be transacted at the meeting

Types of agenda are

1. Brief agenda: in this agenda the items of b’ss briefly mentioned to be transacted in b’ss
2. Detailed agenda : it gives more details about each item of the b’ss to be transacted

7. Motion

No discussions will takes place at a meeting unless there is a definite proposal for discussing
before the meeting

A motion is a definite proposal placed before the meeting for discussion & decision

8 Sense of meeting

Co-‘s meeting are held for discussing the specific issues relating to the working of the co- 7
for taking decisions on the same
To arrive at the decision the chairmen has to ascertain the views of the members on each of
the matters under discussion.

9. Resolution

When a motion or a proposal is passed in a meeting it becomes a resolution

Resolution may be defined as “formal expression of the decision of a meeting on any motion /
proposal before it

Types of resolution are

1. Ordinary resolution: As per the co-‘act it is one which is passed by simple majority of votes
of members present in the meeting or more than 50% of voting right share holders

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2. Specal resolution: At least 75% of voting right share holders presented in the meeting
3. Resolution requiring special notice: To appoint auditors, retiring of auditor, removal of the
director before the date expiry of his period & appointment of new director in the place of
removed director

9. Minutes of meeting
It refers to the written record of the b’ss transacted & discussions arrived at a meeting

Kinds of meeting

1. Statutory meeting
2. Annual general meeting
3. Extra ordinary general meeting
4. Directors meeting / board meeting

1. Statutory meeting

Meaning:
Statutory meeting is the first official general meeting of share holders .sec.165 of co-‘s act
lays down that every public co- limited by shares /limited by guarantee & having share
capital must hold statutory meeting with in a period of not more than 6 months from the
date of commencement of b’ss

Objectives
1. To provide an opportunity to the members to discuss the finance of the co-
2. To enable the members to know the progress of the co- since its incorporation &its
present position future prospectus.
3. To help the members to know one on other.

Provisions of co-‘s act relating to statutory meeting

Section 165 lays down the following provisions

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1. Every co-limited by shares &limited by guarantee & having share capital must hold the statutory
meeting with in a period of 6 months but not earlier then one month from the date of
commencement of b’ss
2. The board of directors must send the notice of the statutory meeting along with statutory
report to all the members of the co-at least 21 days before the date of meeting
3. Immediately after sending statutory report to members one copy of report should be registered
with register office of the co-
4. At statutory meeting the board must place a list showing the name, address .occupation of
members & the number of shares held by them
5. At the meeting the members shall have a right to discuss any matter relating to the formation of
the co-

Statutory report

It is a report which is to be set along with the notice of the statutory meeting

Contents of statutory meeting

1. Number of shares fully paid /partly paid

2. Number of shares allotted for consideration thereof
3. The total amount of cash received in respect of shares allotted
4. The names, address, occupation of directors ,auditors, managing directors /managers &
secretary
5. Estimated amount of preliminary expenses
6. Particulars of under writing contracts
7. Particulars of any commission /brokerage
8. Particulars of any contracts to be submitted to meeting for approval
9. Arrears of calls due from directors, managing directors or manager.

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2. Annual general meeting

Meaning:
It is a general meeting of share holders which is held every year every public & private
co- must hold an annual general meeting

Purpose of annual general meeting :

The annual general meeting is the most important meeting of share holders of a co- in
this meeting the performance of the for the past year is reviewed & discussed on the bases of
directors report & audited accounts & directors & auditors are appointed & re appointed &
dividend declared by share holders

Provisions of co-, s act regarding annual general meeting :

1. Acc. To sec 166 of act every co- should hold the annual general meeting of share holders
every year
2. The first annual general meeting must be held within 18 months from the date of its
incorporation. it is held, any annual general meeting in the year of its incorporation or
in following year.
3. Every subsequent annual general meeting must be held each year within 6 months after
closing of financial year of the company and within 15 months from the date of previous
annual general meetings.
4. Notice of meeting must be sent to all the members, directors and auditors atleast 21
days before the date of meeting.
5. Notice of the meeting must be accompanied by a copy of the audited balance sheet and
Profit & Loss account for the previous year and also annual report of directors.

3 .Extra Ordinary General Meeting:

Extra ordinary general meeting means “any general meeting other than the statutory
meeting and also the annual general meeting. It is a meeting which is held between two
annual general meetings.

Objects of Extra ordinary General Meeting:

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The extra ordinary general meeting is held between two annual general meetings. It is
convened for transacting some special. Extra ordinary or urgent business or matters which
cannot be postponed to the next annual general meetings.

Example: Alteration of M/A, A/A, Issue of debentures, increase of share capital, Removal of
directors from office before the expiry of his term etc..

The extra ordinary general meeting is held only for transacting special business. The extra
ordinary general meeting may convened by the board of directors by board of directors on
the requisition by members, company law board.

4 Directors meeting :

Board meeting or directors meeting

The meetings of the director are called board meeting

Sec. 285 of the co’s act of 1956 lay down that the board meeting must be held at least
once in every month & 4 times in annually

Provisions of co-s act regarding board of directors

1. Board meeting must held in every 3 months in a year & 4 times in annually

2. For conveying board meeting a notice specifying the date time & place of the meeting & the
agenda of the meeting must be sent to every director of the co-

3. The quorum of meeting may be fixed by A/A or by directors from time to time the quorum of
board meeting is one third of the total directors or two directors whichever is higher

4. Quorum should be present thought the meeting

5. Every board meeting must have a chairman to priced over the meeting

6. Decisions on any matter discussed at a board meeting are usually taken by passing the
required resolution which is called “Board Resolution “

7. All board resolution s are passed generally passed by a simple majority of votes.

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Unit-5

WINDING UP OF COMPANIES

Meaning:
“Winding up is defined as the process by which the life of a company is ended and its property
is administrated for the benefits of its members and creditors”

Reasons For Winding Up:

If the main object of the company for which it was found have been accomplished.

If the company is unable to carry out its main objects.

If the company has to dispose of its business to another company.

If the company has become insolvent.

If the company undergone for illegal activities.

Types/Modes of Winding up:

The Companies act provides three kinds of Winding up, They Are:

1. Winding up by the court/ Compulsory Winding up

2. Voluntary Winding Up
A. Members Voluntary Winding Up.
B. Creditors Voluntary Winding Up.
3. Winding Up subject to supervision of Court.

1. Winding up by the court/ Compulsory Winding up

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A Company may be wound up by an order of the court, This is called Compulsory

winding up. Section 433 lays down the following grounds for the winding up of a
company by the court.
A. Special resolution of the company.
If the company itself, has passed a special resolution in the general meeting to
wound up the its affairs.
B. Default in holding Statutary Meeting.
If a company makes a default in delivering the statutory report to the registrar or in
holding the statotary meeting, the court may order winding up of the company.
C. Failure to commence or Suspension of business
Where a company doesnot commence its business within a year from incorporation,
or suspends its business for a whole year, then the court may order for its winding
up.
D. Reduction of members below Minimum.
Where the number of members is reduced below 7 in case of public company and
below 2 in case of a private company, the court may order the winding up of the
company.
E. Inability to pay Debts:
If the company is unable to pay debts, where the financial position of the company is
such that it has more liabilities than asset, and after diposing off the assets.
F. If the court itself is of the opinion that the company should be wound up.

Procedure for Compulsory winding up

1. Making an application or petition to the court.

2. Hearing and disposing of petition.
3. Appointment of official liquidator/ communication of winding up order to the liquidator
and registrar of the company.
4. Liquidation proceedings by official liquidator.
5. Dissolution of the Company.

2) Voluntory Winding Up

* Company may Voluntory wind up its affairs, if it is unable to carry on its business.

* If it was formed only for a limited purpose.

* If it is unable to meet its financial obligation.

* When the period fixed for the duration of the company by the articles has expired.

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* If the company passes a special resolution that the company is to wind up voluntarily.

Types of Voluntary Winding Up:

A. Members Voluntary Winding Up:

* This form voluntary winding up exists only when company is solvent.
* Members of the company usually initiate this winding up.
* Management will be looked after by them.
* The liquidator will be appointed by the shareholders.
* Director of the company shall call a board of meeting.
* The company will repay its bedts if any within 3years from the commencement of
winding up.

Procedures for Members Voluntary Winding Up:

 The company shall appoint one or more liquidators in a general meeting, who shall
look after the affairs of winding up procedure, and distributin of assets.
 The liquidator who appointed shall be paid remuneration for his services which shall
also be fixed in general meeting.
 The company shall also give notice of application of liquidator to the registrar within 10
days of appointment.
 Once the company has appointed liquidator the powers of BOD’S, MD, managers shall
be ceased.
 The liquidator is generally given a free hand to carry out the winding up procedure.
 In case the winding up procedure takes more than one year, then the liquidator will
have to call a general meeting, at the end of each year and shall present, a complete
account of the procedure, and position of liquidator.

B. Creditors Voluntary Winding Up.

If any company desires to wind up voluntarily and the creditors fail to make statutory
declaration of solvency, such voluntary winding up is termed as creditor’s voluntary winding up.

Where the resolution for winding has been passed but the Board of directors are not in the
position to give a declaration on liability of the company they may call a meeting of creditors
for the purpose of winding up.

Procedures for Creditors Voluntary Winding Up:

 Call a general meeting and pass a resolution for winding up of the company.

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 Creditors will appoint the liquidator, they may agree on one or two forms of liquidators.
 Any director, or member or creditor may approach the court for the direction that:
Liquidator appointed in general meeting shall act or
He shall act jointly with liquidator appointed by creditors or
Appointing official liquidator
Some other person to be appointed as liquidator.
 The remuneration of liquidator shall be fixed by the creditors, or by the court.
 On appointment of liquidator, all the powers of Board of directors shall cease.
 In case the winding up procedure takes more than one year, then the liquidator will
have to call a general meeting, and meeting of creditors, at the end of each year and
shall present, a complete account of the procedure, and position of liquidator.

3) Winding up subject to supervision of Court:

Winding up subject to supervision of Court is completely different from winding up by the

court & Vice versa.

 At any time after a company has passed a resolution for voluntary winding up, the court
may make an order that the voluntary winding up shall continue.
 Here the court only supervises the winding up procedure.
 The court may also appoint liquidators in addition to already appointed.
 Liquidator is entitled to do such things like proceedings of winding up.

Liquidator

Meaning
Definition
‘In the most general sense, a person or entity that liquidates something. More
specifically, a liquidator refers to an officer that is specially appointed to wind up the
affairs of a company. The liquidator is legally empowered to act on behalf of the
company in various capacities’.

‘Person appointed by the shareholders or unsecured creditors, or on a court order, to

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manage the winding up of a firm by selling off its assets. Most countries require a
suitably qualified liquidator’.

He is a person appointed to wind up the affairs of a company or firm.

Types of Liquidators:
 Official Liquidator
 General Liquidator

Official Liquidators:

He is a person who is appointed by court to wind up the affairs of the company or firm.

General Liquidator

He is a person who is appointed by members, creditors or company to wind up the affairs of the
company or firm.

APPOINTMENT OF COMPANY LIQUIDATOR (SECTION 310):

1. The company in its general meeting, where a resolution of voluntary winding up is passed, shall
appoint a Company Liquidator from the panel prepared by the Central Government for the
purpose of winding up its affairs and distributing the assets of the company and recommend the
fee to be paid to the Company Liquidator.
2. Where the creditors have passed a resolution for winding up the company under sub-section (3)
of section 306, the appointment of the Company Liquidator shall be effective only after it is
approved by the majority of creditors in value of the company.
3. Where creditors do not approve the appointment of a Company Liquidator by members,
creditors shall appoint another Company Liquidator.
4. The creditors, approving of appointing a company liquidator, shall a suitable resolution with
regard to the fee of the Company Liquidator.
5. On appointment as Company Liquidator, such liquidator shall file a declaration within seven
days of the date of appointment disclosing conflict of interest or lack of independence in respect
of his appointment, if any, with the company and the creditors and such obligation shall
continue throughout the term of his or its appointment.

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FUNCTIONS AND POWER / DUTIES OF COMPANY LIQUIDATORS (SECTION 290):

 To carry on the business of the company so far as may be necessary for the beneficial winding
up of the company;
 To do all acts and to execute, in the name and on behalf of the company, all deeds, receipts and
other documents, and for that purpose, to use, when necessary, the company’s seal.
 To sell the immovable and movable property and actionable claims of the company by public
auction or private contract, with power to transfer such property to any person or body
corporate, or to sell the same in parcels;
 To sell the whole of the undertaking of the company as a going concern;
 To raise any money required on the security of the assets of the company;
 To institute or defend any suit, prosecution or other legal proceeding, civil or criminal, in the
name and on behalf of the company;
 To invite and settle claim of creditors, employees or any other claimant and distribute sale
proceeds in accordance with priorities established under this Act;
 To inspect the records and returns of the company on the files of the Registrar or any other
authority;
 To draw, accept, make and endorse any negotiable instruments including cheque, bill of
exchange, hundi or promissory note in the name and on behalf of the company, with the same
effect with respect to the liability of the company as if such instruments had been drawn,
accepted, made or endorsed by or on behalf of the company in the course of its business.
 To take all such actions, steps, or to sign, execute and verify any paper, deed, document,
application, petition, affidavit, bond or instrument as may be necessary,—
(i) For winding up of the company;
(ii) For distribution of assets;
(iii) In discharge of his duties and obligations and functions as Company Liquidator; and
(n) To apply to the Tribunal for such orders or directions as may be necessary for the winding up
of the company.

41 Vinutha.S.H MBA
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CHAPTER—6

SECURITIES EXCHANGE BOARD OF INDIA (SEBI)

INTRODUCTION

SEBI was established on 12th of April 1988. On January 30, 1992 an ordinance/Act was passed to give
SEBI a legal status.

SEBI out the functions of supervisory and advisory body of the government. It had initiated their
redressed with companies, licensing of merchant banks and evolving guidelines for them and preparing
for mutual funds, the legislation for backing up these activities and others to act as a watchdog of the
capital market was recommended to the Government.

The legislation giving powers to SEBI was passed on 4th April 1992 in the form of the Securities and
Exchange Board of India Act 1992. The Act provided for the establishment of a Board to protect the
interest of investors in securities and to promote development of and to regulate the securities market
and for matters connected therewith.

ORGANISATION/CONSTITUTION OF SEBI

The Board of SEBI consist of SIX members

 Chairman---- nominated by the central government
 Two members from the office of central ministers who are well versed with finance and law.
 One member—deputed by RBI
 Two members nominated by the Central Government.

OBJECTIVES OF SEBI:

1. To protect the interest & rights of investors in securities.

2. To promote the development of the securities market
3. To regulate the securities market & for matters connected there with / incidental there to
4. To prevent trade mal – practices
5. To stimulate competition & encourage innovations
6. To provide a market place.
7. To provide efficient mobilization
8. To allocation of resources through the securities market

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9. To offer competitive market

FUNCTIONS OF SEBI

Regulatory function
1. Regulation of stock exchange & regulatory organizations.
2. Registration & regulation of stock brokers and sub-brokers, registrar to issue, merchant bankers,
underwriters.
3. Registration of collective investment schemes and mutual fund.
4. Calling for information, undertaking inspection, conducting audits of the stock exchanges,
mutual funds.
5. Regulation of stock exchange of stock exchange and SRO’s (self-regulatory organizations)
6. Prohibition of all fraudulent and unfair trade practices.
7. Controlling insider trading and takeover bids and imposing penalties for such practices.

Development function
1. Investors’ education
2. Training of intermediaries
3. Promotion of fair practices and a code of conduct for all SRO’s
4. Conducting research and publishing information useful to all market participants.

SEBI GUIDELINES
SEBI has brought out a number of guideline separately from time to time, for Primary market,
secondary market, mutual funds etc. The Guidelines are as follows:

1. Guidelines for Primary Market.

New Company

A new company is one

- Which has not completed 12 months of commercial production and doesnot have
audited results.
- Where the promoters do not have any track record.
- These companies has to issue shares at par(Face value)

A New company setup by Existing Company

When a new company is being setup by existing companies with a 5 years track record of
consistent profitability, it will be free to price its issue. (i.e. The company can issue share at any
price, face value, premium or Discount).

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Private Companies

These companies having a track record of 3 years consistent profitability, shall be permitted to
price their issues freely. (i.e. The company can issue share at any price, face value, premium or
Discount).

Existing Listed Companies

These companies will be allowed to raise fresh capital by freely pricing expanded capital.

(i.e. The company can issue share at any price, face value, premium or Discount).

Composite Issues

It is the Combination of Right issue and IPC (Initial Public offer)

In case of composite issue i.e. right issue cum public issue by existing listed companies
differential pricing shall be allowed. That means the public can be priced differentially as
compared to issue to right shareholders.

Lock in Period:

Lock in period is 5 years for promoter’s contribution from the date of allotment or from the
commencement of commercial production whichever is late.

1. Guidelines for Public issue.

- Prospectus has to be attached with every application.

- A company has to highlight the risk factors in the prospectus.

- Objectives of the issue and project cost should be mentioned in the prospectus.

-Companies management, past history& present business of the firm should be highlighted in
the prospectus.

- Justification for premium, if any.

-Subscription list for public issues should be kept open for a minimum of 3days and a maximum
of 10 working days.

- The collection agents are not to collect application money in cash.

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- Underwriting has been made mandatory.

2. Guidelines for Secondary Market:

Stock exchange

- Board of Directors of stock exchange have to be constituted so as to include non-

members, public representatives, and govt. representatives to the extent of 50% of total
number of members.
- Capital adequacy norms have been laid down for members of various stock exchanges.
- Working hours for all stock exchanges have been fixed to be from 12 noon to 3.pm.
- All recognized stock exchanges will have to inform about the transactions within 24hrs.

Brokers

- Registration of brokers and sub- brokers is made compulsory.

- Capital adequacy norms for registration of brokers have been evolved.
- Compulsory audit of broker’s book and filing of audit report within SEBI.
- Brokers have to disclose transaction price and brokerage separately in the contract
notes issued to clients.

3. Guidelines for Bonus Issue:

- There should be a provisions in articles of association of the company for issue of bonus
shares.
- The Bonus is made out of the free reserves created out of the genuine profits.
- Bonus issues are permitted unless the partly paid shares existing are fully paid up.
- No bonus can be made within 12 months of public/right issue.
- Reserves created by revaluation of the fixed assets not permitted to be capitalized.

4. Guidelines for Right Issue:

Composite Issue
- When the company is making composite issue, a public and right issue can be made at
different prices where the prices must be fixed by the BOD’s in consultation with lead
manager to the issue.
Appointment of Merchant Bankers
- It is not mandatory if the size of rights issue by a listed company does not exceeds rs,
50lakhs.
-

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Minimum Subscription

- If the company does not receive minimum subscription of 90% of the amount within 120
days from the date of opening of issue, the company has to refund the entire
subscription within 128 days.
Underwriting
- Underwriting of right issue is not mandatory but as per the SEBI rules and regulation,
rights issue can be underwritten.
Over subscription not be retained
- The quantum of right issue should not exceed as specified in the letter of offer. The
Companies are not allowed to retain oversubscription under any circumstances.

5. Guidelines for Debenture:

- The debt equity ratio should not exceed 2:1
- The rate of interest can be fixed by the company.
- Debentures are to be redeemed after the expiry of 7 years from the date of allotment
- Normally debentures above 7 years cannot be issued.
- Debenture redemption reserves is to be set up out of the profits of the company.
- Right issue of shares should affect the interest of Debentures.

6. Guidelines for protection of the interest of Debenture holders:

- Trustees to the debenture issue shall be vested with the requisite powers for protecting
the interest of debenture holders.
- Existing companies need not create Debenture Redemption Reserves (DRR) upto the
date of Commercial Production.
- For new Companies, creation of DRR will commence from the year company earns
profit.
- In the case of partly convertible debentures, DRR should be created only for non
convertible debenture portion.
- DRR shall be treated as a part of general reserves for the purpose of Bonus Issue.

7. Guidelines for Underwriters:

- No person can act as underwriter unless he holds certificate of registration granted by
SEBI.
- Certificate of registration is valid for a period of 3 years from the date of issue.
- The books of Accounts should be maintained for a period of 5 years.

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8. Guidelines for investor protection :

- The issuing company should provide fair and correct information.
- Allotment process should be transparent
- No delay in refunds or dispatch of share certificates.
- Underwriting obligations is necessary to inspire confidence of investors.
- Risk factors should be stated in prospectus.
- Listing of securities should be timely.
- Prohibition of unfair trade practices.
- Regulation of insider trading.

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Unit 5
SERVICES MANAGEMENT

LEASING – Concept, Meaning and Definition

Lease financing denotes procurement of assets through lease. The subject of leasing falls in the
category of finance. Leasing has grown as a big industry in the USA and UK and spread to other
countries during the present century. In India, the concept was pioneered in 1973 when the
First Leasing Company was set up in
Madras and the eighties have seen a rapid growth of this business. Lease as a concept involves
a contract whereby the ownership, financing and risk taking of any equipment or asset are
separated and shared by two or more parties. Thus, the lessor may finance and lessee may
accept the risk through the use of it while a third party may own it. Alternatively the lessor may
finance and own it while the lessee enjoys the use of it and bears the risk. There are various
combinations in which the above characteristics are shared by the lessor and lessee
“A lease transaction is a commercial arrangement whereby an equipment owner or
Manufacturer conveys to the equipment user the right to use the equipment in return for a
rental”. “In other words, lease is a contract between the owner of an asset (the lessor) and its
user (the lessee) for the right to use the asset during a specified period in return for a mutually
agreed periodic payment (the lease rentals)”. The important feature of a lease contract is
separation of the ownership of the asset from its usage.

CLASSIFICATION OF LEASING
1. Financial Lease:
Long-term, non-cancellable lease contracts are known as financial leases. The essential point of
financial lease agreement is that it contains a condition whereby the lessor agrees to transfer
the title for the asset at the end of the lease period at a nominal cost. At lease it must give an
option to the lessee to purchase the asset he has used at the expiry of the lease.

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2. Operating Lease:
An operating lease stands in contrast to the financial lease in almost all aspects. This lease
agreement gives to the lessee only a limited right to use the asset. The lessor is responsible for
the upkeep and maintenance of the asset. The lessee is not given any uplift to purchase the
asset at the end of the lease period.

3. Sale and Lease Back:

It is a sub-part of finance lease. Under this, the owner of an asset sells the asset to a party (the
buyer), who in turn leases back the same asset to the owner in consideration of lease rentals.
However, under this arrangement, the assets are not physically exchanged but it all happens in
records only. This is nothing but a paper transaction. Sale and lease back transaction is suitable
for those assets, which are not subjected depreciation but appreciation, say land. The
advantage of this method is that the lessee can satisfy himself completely regarding the quality
of the asset and after possession of the asset convert the sale into a lease arrangement. The
sale and lease back transaction can be expressed with the help of the following figure.

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4. Leveraged leasing:
Under leveraged leasing arrangement, a third party is involved beside lessor and lessee. The
lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i.e.,
lender and the asset so purchased is held as security against the loan. The lender is paid off
from the lease rentals directly by the lessee and the surplus after meeting the claims of the
lender goes to the lessor.

5. Direct Leasing:
Under direct leasing, a firm acquires the right to use an asset from the manufacturer directly.
The ownership of the asset leased out remains with the manufacturer itself. The major types of
direct lessor include manufacturers, finance companies, independent lease companies, special
purpose leasing companies etc

ADVANTAGES OF LEASING
There are several extolled advantages of acquiring capital assets on lease:

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(1) SAVING OF CAPITAL: Leasing covers the full cost of the equipment used in the business by
providing 100% finance. The lessee is not to provide or pay any margin money as there is no
down payment. In this way the saving in capital or financial resources can be used for other
productive purposes e.g. purchase of inventories.
(2) FLEXIBILITY AND CONVENIENCE: The lease agreement can be tailor- made in respect of lease
period and lease rentals according to the convenience and requirements of all lessees.
(3) PLANNING CASH FLOWS: Leasing enables the lessee to plan its cash flows properly. The
rentals can be paid out of the cash coming into the business from the use of the same assets.
(4) IMPROVEMENT IN LIQUADITY: Leasing enables the lessee to improve their liquidity position
by adopting the sale and lease back technique.

HIRE PURCHASING – Concept, Meaning and Definition

Hire purchase is a type of installment credit under which the hire purchaser, called the hirer,
agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of
principal as well as interest, with an option to purchase. Under this transaction, the hire
purchaser acquires the property (goods) immediately on signing the hire purchase agreement
but the ownership or title of the same is transferred only when the last installment is paid. The
hire purchase system is regulated by the Hire Purchase Act 1972. This Act defines a hire
purchase as “an agreement under which goods are let on hire and under which the hirer has an
option to purchase them in accordance with the terms of the agreement and includes an
agreement under which:
1) The owner delivers possession of goods thereof to a person on condition that such person
pays the agreed amount in periodic installments.
2) The property in the goods is to pass to such person on the payment of the last of such
installments, and
3) Such person has a right to terminate the agreement at any time before the property so
passes”.

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DIFFERENCE BETWEEN HIRE PURCHASE AND LEASING

BASE OF DIFFERENCE LEASE FINANCING HIRE PURCHASING
Meaning A lease transaction is a Hire purchase is a type of
commercial arrangement, installment credit under
whereby an equipment owner which the hire purchaser
or manufacturer conveys to agrees to take the goods on
the equipment user the right hire at a stated rental, which
to use the equipment in is inclusive of the repayment
return for a rental. of principal as well as interest,
with an option to purchase.
Option to user No option is provided to the Option is provided to the hirer
lessee (user) to purchase the (user)
goods.
Nature of Expenditure Lease rentals paid by the Only interest element
lessee are entirely revenue included in the HP
expenditure of the lessee. installments is revenue
expenditure by nature
Components Lease rentals comprises of 2 HP installments comprise of 3
elements (1) Finance charge elements (1) Normal trading
and (2) Capital recovery profit (2) Finance charge and
(3) recovery of cost of
goods/assets.

CREDIT RATING
Credit rating is an unbiased and independent opinion as to an issue’s capacity to meet its
financial obligations. It does not constitute a recommendation to buy, sell or hold a particular
security.

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In India, the first rating agency CRESIL, Credit Rating Information Services if India Ltd, was
promoted by ICICI in 1987. Then ICRA (Investment Information and Credit Rating Agency) was
formed and promoted by IFCI in 1991. Then CARE (Credit Analysis and Research) was promoted
by IDBI.
With economic liberalization, industrial development and increasing trend or financial
disintermediation, there is a genuine need for authentic investment information specifically
designed to facilitate the decision making process of investors and other participants of the
financial services world. This information is provided by Credit Rating Agencies.

SYNDICATION OF LOAN
Syndication of loan refers to the process performed by a lead bank that is responsible for
negotiating terms with the borrowers. Then the lead bank organizes a group of banks to
underwrite the loans. The syndicate of banks is usually formed in about six weeks or less if the
borrower is well known.

FACTORING AND FORFEITING SERVICES

Factoring is a service involving the purchase by a financial organization called a factor, or
receivables owned to manufacture and distributors by their customers, with the factor
assuming full credit and collection responsibilities.
Forfeiting is a form of receivables pertaining to International Trade which denotes the purchase
of trade bills and promissory notes by a bank/ financial institution without resources to the
seller.

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