Dil se… ❤️❤️

Unique Academy For Commerce has been the pioneer of quality education
propagating zero boundaries when it comes to hard work, and a result
oriented classroom approach. This institution has guided thousands of
students over the years in their professional journeys. Unique Academy For
Commerce is an institute for all CA and CS aspirants. Over the years, the
Academy has been successful in producing All India Rank holders at all the
levels and tremendous results overall.

Unique Academy For Commerce is a place for grooming young talents. The
Academy provides face to face and virtual classes for 11th & 12th Commerce,
All levels of CA and CS courses. The faculty emphasizes on keeping the
classes exam focused and does not compromise on the quality and
conceptual clarity of the topics covered. The sole aim of the Academy and
the teachers is to provide a versatile platform for the students to learn, get
their queries resolved, take test series, participate in discussions and
ultimately, be able to score the best in their exams. The team at Unique
Academy For Commerce is working every minute to put out the best content
for the students, and help them in cracking the exams. The classes and study
material at the Unique Academy For Commerce are designed in such a
manner that it ensures the students only get the relevant information and
knowledge that they need to pass the exams.

At Unique Academy For Commerce it is not just about teaching a subject,

solving questions, finding solutions, passing the exams. The goal is much
bigger because the teachers keep in mind the bigger picture while taking
every class. At Unique Academy For Commerce, the common belief is in
delivering the right kind of education that today’s generation needs to get
ahead in life. It is made sure that no stone is left unturned when it comes to
preparation for the exams.
Recently, Unique Academy For Commerce was able to create history with
over 750+ students clearing the CS Executive level examinations. Out of these
achievers, 250 students were able to get an exemption in Module-1, while over
150 students scored an exemption in the second module. To put a cherry on
the top, the Academy produced more than 20 All India Rank holders in the
Dec-21 CS Executive examinations, including AIR – 1, 2 and 3. These rank
holders are a true inspiration for the hard working mentors at Unique
Academy For Commerce and for all the potential trend setters.

The team at Unique Academy For Commerce wishes each and every student
all the very best in their learning journeys and continuous guidance at every
level of their examinations.

Happy Learning!

Unique Academy For Commerce

 INDEX
PART A –: COMPANY LAW – PRINCIPLES AND CONCEPTS

CHAP – 1 INTRODUCTION TO COMPANY LAW , 02-26

CHAP – 2 LEGAL STATUS AND TYPES OF REGISTERED COMPANIES 27-68

CHAP – 3 MEMORANDUM AND ARTICLES OF ASSOCIATION & ITS ALTERATION 69-117

CHAP – 4 SHARE AND SHARE CAPITAL – CONCEPTS 118-187

CHAP – 5 MEMBERS AND SHAREHOLDERS 188-211

CHAP – 6 DEBT INSTRUMENTS – CONCEPTS 212-240

CHAP – 7 CHARGES 241-261

CHAP – 8 DISTRIBUTION OF PROFITS 262-282

CHAP – 9 ACCOUNTS AND AUDITORS 283-310

CHAP – 10 COMPROMISE, ARRANGEMENT AND AMALGATION – CONCEPTS 311-332

CHAP – 11 DORMANT COMPANY 333-340

CHAP – 12 INSPECTION, INQUIRY AND INVESTIGATION 341-355

PART B –: COMPANY ADMINISTRATION AND MEETINGS

CHAP – 13 GENERAL MEETINGS 357-395

CHAP – 14 DIRECTORS 396-434

CHAP – 15 BOARD COMPOSITION AND POWERS OF THE BOARD 435-468

CHAP – 16 MEETINGS OF BOARD AND ITS COMMITTEES 469-484

CHAP – 17 COPORATE SOCIAL RESPONSIBILITY – CONCEPTS 485-496

CHAP – 18 ANNUAL REPORT – CONCEPTS 497-520

CHAP – 19 KEY MANAGERIAL PERSONS AND THEIR REMUNERATION 521-540

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P age |1

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P age |2

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.

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

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.

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P age |3

(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 –

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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P age |4

 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]

ULTRA VIRES the Memorandum of

Association What is Articles of Association?
SECTION 5(1) OF THE COMPANIES ACT,
 The memorandum of association of company 2013 – It shall contain the bye laws
restricts the powers of a company while and regulations for the management
defining the object of the company. of the internal affairs of the company.
 A company can’t do anything, which is It plays a vital role in governing a
beyond the purview of the object clause. company’s affairs.
 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]

ULTRA VIRES the Articles of

Association
 If a company acts which are ultra vires the
Articles of Association but intra vires the
What is Memorandum of
memorandum of association (i.e. outside the
scope of the articles but within the powers of Association?
the memorandum) will be ultra vires the It is the document listing out
articles of association. the constitution of a company.
 These acts are also void, but the company in
It contains clauses detailing
general meeting may alter the articles by
the boundaries of company’s
passing a special resolution and ratify the
unauthorized acts. activities and its relation with
 The general rule is that the act which is ultra outside world.
vires the company is incapable of ratification.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P age |5

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 –
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”

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P age |6

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.

IMPLIED POWERS

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P age |7

 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]

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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P age |8

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
companies act then
company can be
they will not be
validate by
considered as ultra
shareholders in
vires.
general meeting.

any act which is

any incidental or
outside the
consequentisal
authority of the
effect of the ultra
directors of the
vires act will not be
company but not
invalid unless the
otherwise it is intra
companies act
vires the company
expressely prohibts
can be ratified it by
such act.
shareholders.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P age |9

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]

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 the companies act, 2013 provides for the validity of the 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.

DIRECTORS NOT AWARE OF THEIR DISQUALIFICATION

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 10

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 11

 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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 12

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]

 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"

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 13

 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]
 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
This Photo by Unknown Author is licensed under CC
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 individual’s ka hath h wo dekhti h aur sbko personally liable krti h unke
acts ke liye]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 14

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

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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 15

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;

(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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 16

(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]

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 17

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]
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 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 18

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]

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 19

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.
 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 20

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 21

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.

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 22

 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
 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.

CHAPTER – 2

LEGAL STATUS AND

TYPES OF REGISTERED COMPANIES

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 23

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]

LEGAL STATUS OF REGISTERED COMPANIES

On incorporation basis

A COMPANY ARTIFICIAL JUDICIAL

 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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 24

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

CORPORATE ARTIFICIAL PERPETUAL

PERSONALITY PERSON SUCCESSION

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

LIMITED CONTRACTUAL
NOT A CITIZEN
LIABILITY RIGHTS

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.]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 25

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. 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?

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 26

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."

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]
 Perpetual Succession means that the membership of the company may change from time to
time, but this does not affect its continuity.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 27

 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.]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 28

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.

5) TRANSFERABILLITY OF SHARES – [Mere shares ko transfer kr skte

ho]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 29

 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]

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 30

[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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 31

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]

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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 32

 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.
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,

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 33

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.
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.

TYPES OF COMPANIES

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 34

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

1) Classification on MEMBER the basis of

Incorporation: LIABILITY

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 35

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 36

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 37

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.
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 38

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 39

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 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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 40

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 41

LACK OF
CONFIDEN-
TIALITY

INCREASED OWNERSHIP
GOVT AND AND
REGULATORY CONTROL
SCRUTINY ISSUES

MORE HIGH LEVEL OF

VULNERABLE TRANSPARENC
TO TAKEOVERS Y REQUIRED

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 42

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 43

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 prescribed which shall This Photo by Unknown Author is licensed
not be more than one hundred crore rupees. under CC BY

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 44

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

(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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 45

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 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 46

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 47

 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.

 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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 48

(a) Dividends from subsidiary Companies

(b) Provisions for losses of subsidiary Companies

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

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 49

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.

BENEFITS OF A SUBSIDIARY COMPANY

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 50

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.

ASSOCIATE COMPANY

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 51

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.

ADVANTAGES OF ASSOCIATE COMPANY

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 52

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

DORMANT COMPANY / INACTIVE COMPANY

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 53

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 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 54

 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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 55

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.

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 –

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 56

(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.
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 57

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.

Supplementary Audit Ordered by C & A g –

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—

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 58

(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.

CHAPTER – 3

MEMORANDUM AND ARTICLES

OF ASSOCIATION AND ITS ALTERATION

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 59

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.
 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 60

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 61

(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)

(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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 62

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).

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 63

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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 64

[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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 65

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.

[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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 66

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
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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 67

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:

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 68

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 69

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 www.mca.gov. 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 70

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 71

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.

Methods of changing the name

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 72

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 –

(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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 73

(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 No.INC.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;
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 74

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 No.INC-
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]
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 75

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].

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 76

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 No.INC-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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 77

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 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 No.INC-
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 78

 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.

[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.]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 79

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]

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 80

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:

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 81

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.
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 82

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 83

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 84

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 85

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.

REGISTRATION OF ARTICLES

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 86

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 87

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 No.MGT.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

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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 88

[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]

DISTINCTION BETWEEN MEMORANDUM AND ARTICLES

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 89

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 90

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.

4) COMPANY NOT BOUND TO OUTSIDERS

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 91

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 92

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
article

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)]

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 93

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.]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 94

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 95

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 96

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.
 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 97

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 98

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]

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 99

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 100

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: —

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 101

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.
TYPES OF PREFERENCE SHARE CAPITAL

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 102

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).
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 103

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 104

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 105

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 106

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.
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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 107

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.
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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 108

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 109

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:

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 110

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 case of Company may charge fee for

original share certificates duplicate share certificate as
the Board decides but not
exceeding Rs. 50 per
certificate

Timeline for Subscribers to Memorandum: Listed Company: 45 days

issue 2 months Unlisted Company: 3 months
Allotment: 2 months from date of submission of
Transfer/Transmission: 1 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 officer if a company with an intention

of the company who is in to defraud, issues a duplicate
default shall be liable to a certificate of shares, the
penalty of fifty thousand company shall be punishable
rupees. 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 111

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.

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]

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
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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 112

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 113

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.
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 114

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 115

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 116

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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 117

(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.

ISSUE OF SECURITIES

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 118

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 119

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 120

or two crore rupees, whichever is lower, and the company 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.

 Passing of Ordinary Resolution at general Meeting:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 121

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;
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 122

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 123

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;

Redemption of preference shares:

the preference shares may be redeemed: -

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 124

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

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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 125

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.
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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 126

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.

[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?

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 127

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

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 128

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 129

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.

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 130

 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.

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 persons
select group of persons whether or not they include
members and employees
Securities to be issued Any security including Equity, Only Equity and other securities
Preference and Debentures convertible into Equity can be
issued
Shareholders’ Approval Required Required
Allottees Any person as identified by the To members, employees or any
Board other persons
Disclosures in Explanatory Only a few as per Rule 14 of the Detailed disclosures as per Rule
Statement Companies (Prospectus and 13 of the Companies (Share
Allotment of Securities) Rules, Capital and Debentures) Rules,
2014 2014
Offer Letter In prescribed format (PAS-4) No format prescribed

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 131

Mode of payment Through any banking channel Either for cash or consideration
but not cash other than cash
Time limit for allotment Within 60 days of receipt of Within 12 months from the date
subscription money of passing Special Resolution
Authorization in Articles Not Required Required
bank Account Separate Bank account is No such requirement
required

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 proportion Shares may be issued to both
made to existing shareholding. existing shareholders and even
outsiders
Approval Board approval through Board Both Board Resolution and
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 be in prescribed format i.e.
any format. PAS-4

Filing with ROC before issue No filing required Offer letter can be issued only
of offer letter 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 of
receipt of application money the earlier of these two -

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 132

– 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 application mandatorily required to receive
money. application money
Valuation Report No need of any valuation report Valuation Report is mandatory
for making
preferential allotment

Right to renounce Shareholders under this option No such right under this option
have right to renounce, reject or
approve
the offer.

Explanatory Statement Not applicable because no Notice should contain

shareholder approval is required. Explanatory statement

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-

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 133

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 134

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 –

Conditions for Issue of Sweat Equity Shares:

 The issue has been authorized by a special resolution passed by the company in the general
meeting.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 135

 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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 136

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;
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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 137

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 138

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;

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 139

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 140

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 141

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 142

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.

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 143

 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;

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 144

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;
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, –

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 145

 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.

 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.”

Case laws on reduction of capital

Sandvik Asia Ltd. v. Bharat Kumar Padamsi

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 146

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
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 147

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 148

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.

CHAPTER 4.5

TRANSFERABILITY OF SHARES

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 149

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 150

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.

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 No.SH.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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 151

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.

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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 152

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.

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 –

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 153

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 (Companies) The resultant company

Distinction between Transfer and Transmission

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 154

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.
(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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 155

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 156

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;
(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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 157

(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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 158

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 159

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 160

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:

MEMBER SHARE HOLDERS

Section 2(55) of the Companies Act, 2013 the meaning of ‘shareholder’ is not defined
specifies the meaning of ‘member’ under the Companies Act, 2013

A shareholder becomes a member of a The person who has ownership of shares of a

company, once his name is entered into the company is known as shareholder
company’s register of members or if he is a Further, in case of companies limited by
subscriber to the incorporation of the company guarantee do not have a share capital, and
consequently, their members are not
shareholders

The person who signs the memorandum of After signing the memorandum, a person may
association with the company becomes a become shareholder only when the shares are
member allotted to him

The bearer of a share warrant is not a member Whereas, the holder of a share warrant is a
shareholder

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 161

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 162

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 163

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 applicants 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.

Minimum Number of Members

Restriction on membership:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 164

 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.

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,

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 165

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;
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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 166

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 167

[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.

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".

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 168

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.

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 169

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, 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 170

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 171

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.

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 172

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 173

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

 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);

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 174

 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

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".

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 175

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 176

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 177

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.

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."

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 178

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 179

DEBTS – The term debt connotes that debt is the money that the company raises through the
issuance of bonds and debentures.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 180

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 181

The company would be liable, particularly if the money has been used for the benefit of the
company.

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:

1) Long term Borrowing:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 182

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 183

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 raising corporations, financial
capital from the investors. institutions and government
agencies for raising additional
fund from the public.

Security Debentures can be secured as Bonds are secured in nature.

well as unsecured.

Owner The owner of a debenture is The owner of a bond is called a

called a debenture holder. bondholder.

Collateral Debentures do not get secured Bonds get secured by the

by the collateral or physical collateral or physical assets of
assets of the the issuing company
issuing company.

Tenure Debentures are generally short Bonds are long term investments
to medium term investments and and their tenure is generally
their tenure is usually lower than higher than
bonds. debentures.

Convertibility Issuing company can convert Bonds cannot be converted into

only convertible and also equity shares of the company.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 184

partially convertible
debentures into shares on the
expiry as specified in the clause.

Rate of Interest The debentures carry a fixed or The bonds carry a fixed 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 after Bondholders are given priority
the bondholders. 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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 185

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 186

b) Unsecured Debentures:
Debentures which are issued without any charge against the issuing company’s assets are
called unsecured debentures.

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.

ISSUE OF DEBENTURES

Conditions for issue of debentures: -

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 187

 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
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 188

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

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 189

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:

Investments / Deposits from DRR

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 190

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.

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 191

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.

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-

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 192

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 193

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 194

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 195

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.
 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:-

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 196

 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

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: -

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 197

 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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 198

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 –

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 199

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:
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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 200

 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.

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-

 at the beginning of the year;

 maximum during the year;
 at the end of the year.
II. Details of deposits which are not in compliance with the requirements of Chapter V of the Act.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 201

CHAPTER – 7

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 202

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 203

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 204

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 until

specific property it is fixed or crystallised

Scope It is created to cover assets It is created on variable property

which are ascertained and which keeps on
definite or are capable of being changing or moving.
ascertained and defined,

Created on It is created on fixed assets like It is created on floating assets

land, building, or plant and like stock-in-trade,
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 property with the property as it sees fit
without the consent of the until the holders of charge take
charge holder 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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 205

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.

Difference between Mortgage and Charge

Mortgage Charge

A mortgage is created by the act of the A charge may be created either through the act of
parties. parties or by operation of law.

A mortgage requires registration under A charge created by operation of law does not
the Transfer of Property Act, 1882 require registration but a charge created by act of
parties requires registration.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 206

A mortgage is a transfer of an interest in A charge only gives a right to receive payment out
specific immovable property 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 liability In case of charge, no personal liability is created.
unless excluded by express contract. But where a charge is the result of a contract,
there may be a personal remedy.

Difference between Charge and Pledge

Charge Pledge

It is not a physical transfer of property of one It is a bailment of personal property as

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, referred to It consists of a delivery of goods by a debtor

as “the lender” in the immovable property of to his creditor as security for a debt or other
another, referred to as “the borrower” obligation, to be held until the debt is repaid
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.

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 207

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 208

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.

ILLUSTRATION:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 209

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].

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 210

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 211

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

Registration for registration of charge by chargeholder [section 78]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 212

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 213

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 No.CHG-5.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 214

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 No.CHG-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
Summary of provisions of Satisfaction of Charge

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 215

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 216

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)

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 217

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.

SEARCH AND STATUS REPORT

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 218

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.

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-

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 219

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 no.CHG-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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 220

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
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 221

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 made

borrowed capital 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 company which is arrived after providing
has suffered loss of all expenses including interest

Commitment Interest is always a commitment It is not a 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 debt is It is not an expense of the

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.

Types of Companies and provisions related to payment of dividend

The dividend in other types of entities is as follows:
a) Section 8 Companies:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 222

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

Basis Final Dividend Interim Dividend

Meaning The Dividend recommended by Dividend paid by the Company

the Board of Directors and between two annual general
declared by the Members at an meetings
Annual General Meeting

Power to declare Dividend Recommended by the Board at Declared by the Company’s

the board meeting and declared Board of Directors
by the Members of the
Company

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 223

Meetings Declared in Annual General Declared at the Meeting of the

Meeting of Members Board

Time of Declaration It is declared after the end of the It is declared on the basis of
financial year after the amount provincial financial statements
of distributable or estimates
profit has been computed

Frequency of payment It can be paid only once in a It can be paid more than once in
financial year a financial year

Source of Payment Paid out of profit earned in the Paid:-

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 rate
dividend over and above the higher than the average
amount recommended by the dividends declared by the
Board Company during the
immediately preceding three
financial years

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,

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 224

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.

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 225

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 226

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;
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 227

 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.

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 228

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”.
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 229

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 230

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 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 231

 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 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 232

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;
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 233

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

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 234

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 235

 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.

 Transfer amount to separate bank account with the bank as resolved by the Board within 5
days of declaration of dividend.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 236

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 237

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:

 The maintenance of books of account or other relevant papers in electronic mode is

permitted and shall remain accessible in india, at all times.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 238

 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.

 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 239

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
(d) Statement of change in equity, if applicable This Photo by Unknown Author is licensed under CC
(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.
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 240

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

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 241

 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
(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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 242

 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.

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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 243

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.
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 244

 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
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 245

OBJECTIVES OF NFRA

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 246

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;
(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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 247

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.
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 248

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.
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 249

recommendation of the Board and auditor shall hold the office till the conclusion of the next
annual general meeting.
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.
4) If the application for removal was made by CG, then CG will appoint an auditor in place of
removed auditor.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 250

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.
AUDITOR NOT TO RENDER CERTAIN SERVICES (PROHIBITED SERVICES) [SECTION
144]
(a)accounting and book keeping services;
(b) internal audit;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 251

(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;
• 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 252

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 253

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.

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 254

(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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 255

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

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 256

(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 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 257

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.

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)

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 258

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 259

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 260

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—

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 261

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,
• 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: -

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 262

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

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 263

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.

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 264

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 265

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 No.CAA.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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 266

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.

CROSS BORDER MERGERS (Section - 234 of the Companies Act, 2013)

[firangi se shadi]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 267

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 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 268

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 269

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 270

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

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 271

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 272

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 273

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 274

- 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;

- 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 275

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 276

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.

‘Significant Accounting Transaction’ means any transaction made by the company except
transactions mentioned below:

a) payment of fees by a company to the Registrar;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 277

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 278

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 279

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 280

 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:

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 3/4th 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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 281

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 282

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.

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.

CHAPTER – 12

Inspection, Inquiry and Investigation

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 283

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 284

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:

(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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 285

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 286

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;
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 287

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 288

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 289

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
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 290

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 291

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.

FREEZING OF ASSETS OF COMPANY ON INQUIRY AND INVESTIGATION (SECTION 221)

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 292

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 293

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.

Process of Investigation by Serious Fraud Investigation Office (SFIO)

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 294

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.

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 295

 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.

PART – B
[ 40 MARKS ]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 296

COMPANY ADMINISTRATION
AND MEETINGS

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 297

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.

Corporate Meetings and Collective Decision making

Members’ Meetings

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 298

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.

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 31st March 2019).

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 299

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.

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)

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 300

(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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 301

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 302

■ 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.

■ 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 303

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 304

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 305

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.
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 306

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

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 307

Shorter notice

CONTENTS OF NOTICE

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 308

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 309

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 310

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 quorum. Two joint holders shall be counted as two for quorum if both joint holders
personally present in the General Meeting.
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 311

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 312

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 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 313

 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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 314

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).

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 315

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 316

 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.

 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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 317

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 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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 318

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 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 319

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;
 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 320

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 321

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.
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 322

 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.
> 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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 323

 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.
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 324

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.
■ 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)

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 325

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.

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/-

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 326

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.
 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 327

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.

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?

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 328

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?
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 329

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.

CHAPTER – 14

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 330

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.

OBTAINING DIN

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 331

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 332

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.

 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 333

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.

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 334

 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.
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 335

 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.

TYPES OF DIRECTORS

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 336

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 337

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.

 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 338

 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:

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 339

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.

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 340

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.
 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 341

 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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 342

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;
 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 343

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;
(e) List of actions that a director should not do while functioning

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 344

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.

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).

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 345

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

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 346

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.
 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 347

 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.

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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 348

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.
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 349

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

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 350

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 351

 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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 352

 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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 353

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 354

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 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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 355

 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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 356

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 357

The following procedure is required to be adopted for removal of a director:

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.

RIGHTS AND DUTIES OF DIRECTORS

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 358

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.

 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 359

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:

I. PROHIBITED CATEGORY:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 360

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 361

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 362

■ 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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 363

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:
(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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 364

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 365

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.
 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)

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 366

5. LLL Limited (A Dormant Company)

6. FFF Private Limited

In how many Companies, Mr. A can further be appointed as Director?

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 367

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 of

Section 177 SEBI (LODR) Regulations,
of the Companies Act, 2013 2015

Number of Minimum 3 directors as Minimum 3 directors as

Directors members members

Independent Independent directors need to At least two-thirds of the

Directors 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 does An Independent Director

not prescribe that the Chairman
shall be an independent
Director.

Educational Majority of members of Audit All members of audit committee

qualification Committee including its need to be
chairperson must have ability to financially literate and at least
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 can committee shall be present at
attend the general meeting. Annual general meeting to
answer shareholder queries.
Secretary of the Committee Not provided Company Secretary

Meeting of the Audit As per SS-1, Audit Committee At least 4 times in a year and not
Committee shall meet as prescribed by any more than 120 daysshall
law or any authority or as elapse between two meetings
stipulated by the Board.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 368

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 specified committee, whichever is greater,
by the Board. If no such with at least two independent
Quorum is specified, the directors.
presence of all the members of
such Committee.

Power of Audit Committee The Audit committee has The audit committee shall have
authority to investigate into any powers to investigate any
matter in relation to the items activity within its terms
specified under Section 177(4) of reference, seek information
of the Act or referred to it by the from any
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;
 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 369

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 370

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.

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 371

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 of Provisions of Regulation 19 of

the Companies Act, 2013 SEBI (LODR) Regulations,
2015

Number of Directors Minimum 3 or more non- Minimum 3 non-executive

executive directors as members. directors as members.

The chairperson of the company The chairperson of the listed

(whether executive or non- entity (whether executive or
executive) may be non-executive) may be
appointed as a member of the appointed as a member of the
Committee but shall not Committee but shall not
chair such Committee. chair such Committee.

Independent Directors Of the total members, one-half At least two-thirds of the

shall be independent directors. members of the committee shall
be independent directors.

Chairperson Not Provided An Independent Director.

Presence in AGM/GM The chairperson of committee The Chairperson of the

or, in his absence, nomination and remuneration
any other member of the committee may be present at
committee authorized by him in the annual general meeting, to
this behalf shall attend answer the shareholders’
the general meetings of the queries’
company.

Meeting of the Nomination As per SS-1, Committees shall At least once in a year.
and Remuneration meet as often as
Committee necessary subject to the
minimum number and frequency
prescribed by any law.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 372

Quorum for the meeting As per SS-1, Unless otherwise Two members or one-third of
stipulated in the Act or the the members of the committee,
Articles or under any other law, whichever is greater, including
the Quorum for Meetings of at least one independent director
Committee constituted by the in attendance.
Board shall
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.
Composition of Stakeholders Relationship Committee

Category Provisions of Section 178(5) of Provisions of Regulation 20 of

the Companies Act, 2013 SEBI (LODR) Regulations,
2015
Number of Directors Stakeholders Relationship i) Minimum 3 directors as
Committee shall consist of a members with at least one being
chairperson and such other an independent
members as may be decided by director;
the Board.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 373

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 absence, Committee shall be present
any other member at the annual general meetings
of the committee authorized by to answer queries of the security
him in this behalf shall attend holders.
the general meetings of the
company.

Meeting of the Stakeholder’s As per SS-1, Committees shall At least once in a year.
Relationship meet as often as necessary
Committee 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 otherwise Not specified.
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

 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 374

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.
 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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 375

 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.
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 376

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.
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 :-

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 377

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

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 378

• 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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 379

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.

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)]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 380

A company shall make investment not more than two layers of investment companies. However, the
aforesaid provisions shall not be applicable in case:

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 381

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.

PROCEDURE UNDER SECTION 186

 Approval of the board

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 382

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 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 383

 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:
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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 384

■ 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 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 385

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.
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 386

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.

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 387

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.

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 388

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

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 389

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.

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]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 390

 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 391

 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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 392

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 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. (i.e.exclude 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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 393

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 394

 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.

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 395

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.
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 396

The attendance register is open for inspection by the Directors. Even after a 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 397

a) Circulation of draft minutes:

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.

TYPES OF RESOLUTIONS

Board Resolution:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 398

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 399

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;
 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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 400

 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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 401

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 402

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

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 403

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.

CSR COMMITTEE

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 404

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 405

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.

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 406

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;

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 407

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 408

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

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 409

 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.

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 410

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.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 411

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 412

 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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 413

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 414

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 415

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 416

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;
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 417

 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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 418

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;

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 419

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 420

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)

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 421

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;

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 422

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 423

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;
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 424

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;
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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 425

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 426

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.

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;

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 427

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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 428

 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 —
 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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 429

required to file in Form No.MGT-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.

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 430

 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 431

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.

In the matter of Anil kumar Poddar vs. Nessville Trading (P.) Ltd.

FACTS

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 432

Appellant made an application for inspection of register of members and annual return of
respondent company for the years 2009 to 2012.When 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 –
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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 433

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 434

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 435

APPOINTMENT OF KEY MANAEGRIAL PERSONNEL

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 436

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 437

 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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 438

f) The person had not been detained for any period under the Conservation of Foreign
Exchange and Prevention of Smuggling Activities Act, 1974.

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:

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 439

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.

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)]

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 440

“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.

“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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 441

 Corporate Laws Advisory Services

 Representation Services
 Arbitration and Conciliation Services
 Securities Compliance and Certification Services
 Corporate Communications and Public Relations

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.


UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 442

Make entries in Directors and KMP Register


Inform Stock Exchange in case of Listed Company

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

REMUNERATION OF MANAGERIAL PERSONNEL

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 443

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 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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 444

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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 445

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.
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

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 446

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:

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 447

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.

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: —

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 448

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.

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 P a g e | 449

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.

UNIQUE ACADEMY FOR COMMERCE 8007916622/8007916633

 A C A DEM Y FO R CO M M ERC E

UNIQUE ACADEMY FOR COMMERCE

Best Team For 11th & 12th Commerce CSEET,
CA Foundation, CS Executive, CA Inter &
CS Professional Across the Country
India’s Best Coaching for llth Commerce, 12th Commerce,
CS, CA & CMA Students, with a wide coverage of all
topics! Visit now and crack your exams

UNIQUE ACADEMY FOR COMMERCE, an institute where students enter to learn and leaveas
invincible professionals is highly known for the coaching for CA and CS aspirants. Oneof the India’s
best academy with the finest faculty aims to provide quality education fora better future. It is
recognized as the best online classes for Company Secretary Course.

As the word “Unique”, itself suggests that we don’t believe in doing any work ordinarily,we look
forward to direct all our efforts to do ordinary work in an extraordinary manner.We have always tried our
best to lead on a result-oriented approach as well as creatinga professional aura among the students and
has always held the hand of the studentswhile creating their lucrative career.

25,000+ Live+
1000+ Recorded
Unlimited
Google Students Watch
in CA & CS Lectures Time
Review

Unique Academy For Commerce

www.uniqueacademyforcommerce.com
A C A DEM Y FO R CO M M ERC E 8007916622 8007916633
Shop NO.25, Kumar Prestige Point, Behind Telephone Exchange, 283, Bajirao Rd,
Near Chinchechi Talim, Shukrawar Peth, Pune, Maharashtra 411002