Company Law
Company Law
CS SHUBHAM ABAD
INDEX
CHAPTERS
1. INTRODUCTION TO COMPANY LAWS
2.1 SHARE & SHARE CAPITAL MEANING & TYPES
4 DEBT CAPITAL
5 CHARGE
6 DISTRIBUTION OF PROFITS
7 CORPORATE SOCIAL RESPONSIBILITY
8 ACCOUNTS, AUDIT & AUDITORS
CHAPTER -1
INTRODUCTION TO COMPANY LAW
COMPANY
Section - 2(20): 'Company' means a company incorporated under this Act or under any
previous company law.
COMPANY
Lord Justice Lindley defines a company means an association of many persons who
contribute money or money's worth to a common stock and employ it in some trade or
business and who share the profit and loss arising there from.
In simple words, an individual/association shall be treated as a company provided it is
registered under the current companies or previous companies Act and has obtained a
certificate of registration from the competent authority (i.e. Registrar of Companies).
APPLICABILITY
According to section 1 of the Companies Act, 2013, the Act extends to whole of
India and the provisions of the Act shall apply to the following:-
(a) Companies incorporated under this Act or under any previous company law;
(b) Insurance companies, except in so far as the said provisions are inconsistent with
the provisions of the Insurance Act, 1938 (4 of 1938) or the Insurance Regulatory
and Development Authority Act, 1999
(c) Banking companies, except in so far as the said provisions are inconsistent with the
provisions of the Banking Regulation Act, 1949
(d) Companies engaged in the generation or supply of electricity, except in so far as
the said provisions are inconsistent with the provisions of the Electricity Act, 2003
(e) Any other company governed by any special Act for the time being in force, except
in so far as the said provisions are inconsistent with the provisions of such special
Act; and
(f) Such body corporate, incorporated by any Act for the time being in force, as the
Central Government may, by notification, specify in this behalf, subject to such
exceptions, modifications or adaptation, as
may be specified in the notification.
CHARACTERISTICS OF A COMPANY
A company is a voluntary association of persons registered with the
Registrar of Companies (ROC) and has the following characteristics:
Company
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 favour 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
Limited Liabilities
Case Law: Mrs. Bacha F. Guzdar v. The Commissioner of Income Tax, Bombay
Facts: The plaintiff (Mrs. Guzdar) received certain amounts as dividend in respect
of shares held by her in a tea company.
The Agricultural income is exempted from payment of income-tax. As income of
a tea company is partly agricultural (60%) and partly from manufacture and sale
(40%), and therefore, liable to pay tax to the extent of income from manufacture
and sale.
The plaintiff claimed that the dividend income in her hands should be treated as agricultural
income up to 60%.
Judgment: The Supreme Court held that, though the income of a tea company is entitled
to be exempted from Income-tax up to 60% being partly agricultural, the same income
when received by a shareholder in the form of dividend cannot be regarded as agricultural
income for the assessment of income-tax.
It was further observed by the Supreme Court that a shareholder does not treat as the part
owner of the company or its property
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.
Q1. Six persons are the only members of Tab (Pvt.) Ltd. All of them went to
USA on a pleasure trip by airplane. On the way, the plane crashed and all
the six members died. Does Tab (Pvt.) Ltd. still exist? Decide.(Dec, 2016)
LIFTING OF CORPORATE VEIL [Galat kaam karoge toh, Parda uth jayega]
After incorporation of a company, it enjoys the benefits of separate personality.
Example: ABC Ltd. had been registered by the Registrar of Companies (ROC) on 1st Jan., 2015. At
the time of registration 7 members subscribed their names to fulfil the statutory requirement for
incorporation. After registration, ABC Ltd. shall be held responsible for acts on behalf of the
company, members and directors of the company shall not be held responsible for any acts of the
ABC Ltd.
Such benefits are only available for legitimate business
In reality, sometime the members of the companies misuse the advantage of separate
personality of a company for their fraudulent and dishonest intention.
In such a situation, the members and directors of the company shall be held personally
responsible.
In other words, 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.
.
Lifting of Corporate veil visions
1. Under Statutory Provisions: The veil of corporate personality can be lifted under
the following provisions of the Companies Act, 2013:
Statutory Provisions
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.
Judicial
Pronouncement
of the situation.
Judgment: The Court held that the company was formed by the assessee purely and
simply as a means of avoiding super-tax and the company was nothing more than the
assessee 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 assessee as
pretended loans.
Accordingly, the Court decided to disregard the corporate entity as it was being used
for tax evasion.
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.
4. 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.
6. Where the corporate facade (Artificial face) is really only as an agency and
an instrument [me agent hu]
Where a company works like an agent of other company then the court may lift the
corporate veil.
Q2. Rani is a wealthy lady enjoying large dividend and interest income. She has
formed three private companies and agreed with each of them to hold a
block of investment as an agent for it. Income received was credited in the
accounts of the company but the company handed
back the amount to her as a pretended loan. This way, she divided her income in
three parts
in a bid to reduce her tax liability. Discuss the legality of the purpose for
which the three companies were formed. (5 marks) CS Exe.- June, 2010
A2. Hint: refer case — Sir Dins haw Maneekjee Petit
Q3. Some of the creditors of Get Rich Quick Ltd. have complained that the company
was formed by the promoters only to defraud the creditors and circumvent
the compliance of legal provisions of the Companies Act, 2013. In this
context they seek your advice as to the meaning of corporate veil and when
the promoters can be made personally liable for the debts of the company.
(4 marks) CAIPCC Nov, 2004
A3. Corporate Veil: The company has its own existence and as a result the
shareholders cannot be held liable for the acts of the company even though
they hold the entire share capital of the company. In the following
circumstances, corporate veil can be lifted by the courts and promoters can
be held personally liable for the debts of the company.
■ Trading with enemy country.
■ Evasion of taxes.
■ Forming a subsidiary company to act as its agent.
■ The benefit of limited liability is destroyed by reducing the number of
members below 7 in the case of public company and 2 in the case of
private company for more than six months.
■ Under law relating to exchange control.
Device of incorporation is adopted to defraud creditors or to avoid legal
obligations Also refer case
— Jones v. Lipman
A company can claim the certain fundamental rights which are available to all persons
whether citizen or not like the right to own property.
ILLEGAL ASSOCIATION [association me50 se zyada person hai aur registrationbhi nahi
kiya hai]
An association or a partnership firm which is not registered under the Companies Act,
2013, consists of more than 50 persons, shall be treated as illegal association.
Section 464, "No association or partnership consisting of more than such number of
persons as may be prescribed shall be formed for the purpose of carrying on any
business that has for its object the acquisition of gain by the association or partnership
or by the individual members thereof, unless it is registered as a company under this
Act or is formed under any other law for the time being in force.
PROVIDED that the number of persons which may be prescribed under this sub-section
shall not exceed 100.
Exception: This section does not apply to:
(a) Hindu Undivided Family or
(b) An association or partnership formed by professionals who are governed by special
Acts like LLP.
As per rule 10 of Companies (Miscellaneous) Rules, 2014, as notified on I s' April, 2014
prescribes 50 persons.
Therefore, any unregistered association shall be treated as illegal association provided
such association has more than 50 members.
Earlier, this limit was 10 in case of Banking Business and 20 in case of other Business
in accordance with the erstwhile Companies Act, 1956.
Special Note: If two or more joint Hindu family firms carry on business together and the combined
number of major members exceeds 50, then their association will become illegal.. In computing the
number for illegal association, minor members of joint families are to be ignored. If by reason of minor
members of such joint families on attaining majority, the number of persons exceeds the statutory limit,
it will become an illegal association.
Q4. The United Traders Association was constituted by two Joint Hindu Families
consisting of 51 major and 5 minor members. The Association was carrying the
business of trading as retailers with the object for acquisitions of gain. The
Association was not registered as a company under the Companies Act or other law.
State whether United Traders Association is having any legal status? Will
there be any change in the status of this Association if the members of the
United Traders Association is subsequently reduced to 45. (Nov, 2009) OR
The XYZ Traders Association was constituted by four joint Hindu families
consisting of 605 major and 10 minors members. The Association was carrying
on the business of trading as retailers with the object for acquisition of gains.
The Association was not registered as a company under the Companies Act,
2013 or any other law.
State whether the XYZ Traders Association is having any legal status?
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CS SHUBHAM ABAD
Will there be any change in the status of this Association if the members of
the XYZ Traders Association subsequently were reduced to 40? (Nov. 2014)
(Modified)
A4. ■ In given case, the number of adult members exceeds 50 so United
Traders Association is an illegal association.
■ Any subsequent reduction in number of members would not make any change in
the status of United Traders Association, since on illegal association
continues to be an illegal association.
BODY CORPORATE:
Section - 2(11): Body Corporate or Corporation includes a company incorporated
outside India, but does not include:
(i) A co-operative society registered under any law relating to co-operative societies;
and
(ii) Any other body corporate (not being a company as defined in this Act), which the
Central Government may, by notification, specify in this behalf.
In other words, all foreign companies incorporated outside India or corporation formed
under any foreign laws shall be treated as Body Corporate or corporation.
KEY CONCEPT:
The 2013 Act has introduced several new concepts and has also tried to streamline
many of the requirements by introducing new definitions.
Some of the concepts are discussed here in brief.
1. One-person company: The 2013 Act introduces a new type of entity to the
existing list i.e. apart from forming a public or private limited company, the
Act enables the formation of a new entity a ‘one-person company’ (OPC).
An OPC means a company with only one person as its member (section 3(1)).
2. Private company: The 2013 Act introduces a change in the definition for a
private company, 22 EP-CL inter-alia; the new requirement increases the limit of
the number of members from 50 to 200. [Section 2(68)].
3. A small company has been defined as a company, other than a public company.
(i) paid-up share capital of which does not exceed fifty lakh rupees or
such higher amount as may be prescribed which shall not be more than
ten crore rupees; and
(ii) turnover of which as per profit and loss account for the immediately preceding
financial year does not exceed two crore rupees or such higher amount as may
be prescribed which shall not be more than one hundred crore rupees:
Provided that nothing in this clause shall apply to—
DISTINCTIONS
Distinction between Company & HUF
Basis Company Hindu Undivided Family
Members A company consists of any one (i.e. A HUF Business consists of family
heterogeneous) as members. members (homogenous members).
Contract A company can enter into a contract In a HUF business the Karta has the sole
on its own name after its registration. authority to contract debts for the
purpose of the business, other
coparceners cannot do so.
Acquisition The membership in a company can be A person becomes a member of a HUF
of acquired by way of transfer or business by virtue of birth.
membership transmission of shares.
Distinction between
Company & Partnership Firm
Basis Company Partnership Firm
Separate Legal A company is a distinct legal person. A partnership firm is not distinct
Entity from the several persons who compose
it.
Property The property of the Company belongs The property of the firm is the
to the company and not to the property of the individuals comprising
individuals comprising it. it.
Filing of suit The creditors of a company can Creditors of a partnership firm are
precede lawsuit only against the creditors of individual partners and a
company and not against its members. decree against the firm can be
executed against the partners jointly
and severally.
Transfer of
Shares
INTRODUCTION
A company can choose the source of capital depending on the nature of business
demand which has widened the financing options for companies.
The sources of capital include various modes of raising finance, which may be by
invitation through prospectus or through private placement.
As regards regulatory aspects with reference to rising of finance by listed companies,
SEBI Regulations and Companies Act would become applicable.
As regards unlisted companies, rules framed by MCA and Companies Act are to be
complied with.
CLASSIFICATION OF CAPITAL
(a) Nominal or Authorised or Registered Capital: [maximum share capital]
[Section 2(8) of the Companies Act, 2013] Registered Capital means such capital as is
authorised by the memorandum of a company to be the maximum amount of share
capital of the company.
The authorised capital of a company is the maximum amount of share capital that the
Company is authorised to issue to the shareholders.
In other words, authorised capital means the maximum amount of share capital which is
registered with the Registrar of Companies and a company cannot issue shares above
the limit of authorised share capital.
Capital Reserve:
Capital Reserve is created out of profits.
As opposed to revenue reserve, Capital reserve is not ordinarily available for
distribution among the
share holders of the company as dividend and it can also utilise for issue of Bonus
Shares.
Reserve Capital: [emergency wale paise]
It is that part of the uncalled capital of a company which the limited
company has decided by special resolution, not to call except in the event
and for the purpose of the company being wound up.
Example: A company raises fund via an IPO and the company fixed the face of shares
(Rs.10/- each). As per the resolution of the company, the company kept Rs.5 as reserve
capital.
In this case, the company can demand the balance Rs.5 per share from the subscribers
at the time of winding-up.
KINDS OF SHARES
Types of shares
• Characteristics:
1. Equity shares carry voting rights at the general meetings of the company and
have the right to control the management of the company.
2. Equity shares carry the right to share in the profits of the company in the
form of distribution of dividend and bonus shares.
3. In the event of winding-up of the company, equity share capital is repayable
only after repayment of the claims of the creditors and preference share
capital.
4. Equity shareholders enjoy various rights as members, which include, inter alia,
the following rights:
(a) Right of pre-emption in the matter of fresh issue of capital.
(b) Right to apply to the Tribunal to have any variation of their rights set aside.
(c) Right to receive a copy of the statutory report.
(d) Right to apply to Central Government to call an AGM when the company fails
to call such a meeting.
(e) Right to apply to Tribunal for calling an extraordinary general meeting of the
company.
(f) Right to receive copies of annual accounts along with auditor's report.
✓ Cumulative Convertible Preference Shares (CCP): [convert bhi honunga aur pura
dividend bhi lunga]
The objects of the issue of the instrument should be for setting up new projects,
expansion or diversification of existing projects, capital expenditure for
modernisation and working capital requirements.
The amount of issue of Cumulative Convertible Preference shares will be to the
extent the company would be offering equity shares to the public for subscription.
These shares are deemed to be equity issue for the purpose of calculating debt-
equity ratio.
regulations.
Note: Public offer includes initial public offer or further public offer of securities to the
public by a company, or an offer for sale of securities to the public by an existing shareholder,
through issue of a prospectus.
CONTENTS OF PROSPECTUS
PROSPECTUS
(L) Inquiry, inspection or investigation initiated or conducted under the Companies Act, 2013 or any
previous company law in the last five years.
(m) Fines imposed, if any
(d) Reports about the Business or transactions to which the proceeds of the securities are to be applied
directly or indirectly.
Q1. Transparency Ltd. issued a prospectus. All the statements given in the prospectus were
true. It also stated that the Company had paid dividend for past few years but did not
disclose the fact that the dividends were paid out of capital profits and not trading profits.
An allottee wanted to repudiate the contract on the ground that the prospectus was false.
(4 marks) CA
IPCC May, 2004, May 2013
A1. Non-disclosure of the fact that the dividends were paid out of past years’ profit and
CHAPTER – 2.2 UNIQUE ACADEMY 2.2.5
CS SHUBHAM ABAD
that the Company was incurring losses gave a false impression that the Company is earning
profits.
The suppression of such facts is material as the investor’s decision might be to buy shares
must have been affected due to this.
Therefore the allottee has a right to rescind the contract of allotment of shares as he has
acted on the misleading information.
Q2. Peak Ltd. issued prospectus to invite the investors. The said prospectus contained false
information. Mr. X purchased some shares of the Company in good faith on the Stock
Exchange. Subsequently Mr. X sued the directors for mi- statement. Will he succeed?
A2. No, Mr. X will not succeed as Mr. X did not subscribe for shares on the faith of
misleading prospectus rather he bought it from the Stock Exchange.
So there is no cause of action. Original Allottee will succeed in this case.
Q3. A deceitful prospectus was issued by the directors on behalf of the company, Pawan
received a copy of it, but did not take any shares in the company. The allotment of shares
to applicants was completed. Several months later, Pawan bought 2000 shares of that
company from the stock market. He proceeded with a suit against the director for issuing
deceitful prospectus. Will he succeed? (Dec 2013) 4 marks
A3. The right to claim compensation for any loss or damage sustained by reason of any
untrue statement in a prospectus is available only to a person who has “subscribed” for
securities on the faith of the prospectus containing untrue statement.
The word “subscribed” denotes that the shares were acquired directly from the company by
way of allotment.
A subsequent purchaser of shares in the open market has no remedy against the company or
the directors or promoters.
In the given situation, Pawan bought the shares from the open market (stock market).
It means at the time of buying shares, he did consider contains of prospectus and therefore,
he will not succeed to make claim against the company for any loss or damage sustained by
reason of any untrue statement in a prospectus.
CLASSIFICATION OF PROSPECTUS
Information
Memorandum
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:-
a) The provisions relating to minimum subscription;
b) The provisions for minimum application value;
c) The provisions requiring any statement to be made by the Board of Directors in
respect of the utilization of money; and
d) 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.
e) 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.
Special note: In the case of book-built issue which is also known as price
discovery mechanism. In this method, the price cannot be determined until
CHAPTER – 2.2 UNIQUE ACADEMY 2.2.11
CS SHUBHAM ABAD
The Securities Premium Account may be applied by the company for the following purposes:
(a) Towards the issue of fully paid bonus shares;
(b) In writing off the preliminary expenses of the company;
(c) In writing off the expenses of, or the commission paid or discount allowed on any issue
of shares or debentures of the company;
(d) In providing for the premium payable on the redemption of any redeemable preference
shares or of any debentures of the company; or
(e) For buy-back of its own shares or securities.
Note: Certain class of companies (who comply with applicable accounting standard) can utilise
securities premium account:
(a) In paying up unissued equity shares of the company to be issued to members of the
company as fully paid bonus shares; or
(b) In writing off the expenses of or the commission paid or discount allowed on any issue
of equity shares of the company; or
(c) For the purchase of its own shares or other securities.
Special Note: The premium cannot be treated as profit and as such the amount of premium is
CHAPTER – 2.2 UNIQUE ACADEMY 2.2.12
CS SHUBHAM ABAD
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.
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.
(ii) 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 atleast 15 days and not more than 30 days.
Note: If a company having paid-up share capital does not issue a prospectus, it cannot
proceed with the allotment unless the Company has not filed prospectus/SLP.
(iii) Minimum Application Money:
The amount payable on application on every security shall not be less than 5% of the nominal
amount of the security.
(iv) 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.
(v) 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.
(vi) Allotment by Board:
The Board of Directors or its committee authorised to allot the securities after receiving
the minimum subscription.
(vii) 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 Law: Changa Mai v. Provisional Bank (1914), it was held that Allotment made without proper
authority will be invalid. Allotment of shares made by an irregularly constituted Board of directors shall be
invalid (i.e. without quorum).
Case Law: Homes District Consolidated Gold Mines (1888), it was held that it is necessary that the Board
should be duly constituted and should pass a valid resolution of allotment at a valid meeting.
If 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.
Q4. A public limited company forfeited 80 equity shares and re-issued the same which resulted
in earning a surplus of Rs.2000. The company did not file return of allotment with the
Registrar of Companies in respect of reissued shares. Explain whether the company has
contravened any provisions of the Companies Act, 2013 by non-filing of the return. (June
2007)
A4. In given situation, public company is not required to file return of allotment of shares since
it is not an allotment of shares.
It is an appropriation of shares out of the authorised and unappropriated
capital. Case Law: Sri Gopal Jalan & Co. v. Calcutta Stock Exchange
Association Ltd.(1963)
Facts: In this case, Calcutta Stock Exh. (Company) did not file return of allotment after re-
issue of forfeited shares with the Registrar of Companies.
Judgment: In this case, the Supreme Court held that the Calcutta Stock Exchange was not
liable to file any return of the forfeited shares under Section 75(1) of the Companies Act,
1956 [Corresponds to section 39 of the Companies Act, 2013] when the same were re-issued.
The Court observed that when a share is forfeited and re-issued, there is no allotment, in
the sense of appropriation of shares out of the authorised and un-appropriated capital.
Therefore, no return of allotment is required to file in the given situation and forfeited
shares can be further reissued at a premium without any legal formalities.
A share certificate is a certificate issued to the members by the company under its common seal
specifying the number of shares held by him and the amount paid on each share.
The certificate is the only documentary evidence of title in the possession of the
shareholder. Every share in a company having share capital shall be distinguished by
distinctive number.
Note: This section does not apply to shares held by a person as a beneficial owner in depository (i.e. shares
in demat account).
In case, the shares are held in dematerialised form the record of the depository is the prima facie
evidence of the interest of the beneficial owner.
• Time of Issue of Share Certificate: A Company must deliver share certificate to
the shareholders: Within 2 months from the date of allotment; or
Within 2 months from the date of incorporation for subscribers to the
memorandum; or Within 1 month from the date of receipt by the company for
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CS SHUBHAM ABAD
transfer.
• Significance of Share Certificate: A certificate of shares is evidence to the effect that the
allottee is holding a certain number of shares of the company showing their nominal and paid-up value
and distinctive numbers.
• Issue of Share Certificates
When a company issues any capital, no share certificate shall be issued, except:
(i) In pursuance of a Board resolution and;
(ii) On surrender to the company of its letter of allotment or its fractional coupons of requisite
value, save in cases of issues against letters of acceptance or of renunciation, or in cases of
issue of
bonus shares;
PROVIDED that if the letter of allotment is lost or destroyed the Board may impose such reasonable
conditions as to evidence and indemnity and the payment of out-of-pocket expenses incurred by the
company in investigating evidence as the Board thinks fit. Every certificate of share or shares shall be
in Form No. SH-1.
When can a company issue Duplicate Share Certificate?
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.
• Records of Certificates
(i) 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.
(ii) 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.
(iii) 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.
Special Note: As per the Companies (Amendment) Act, 2015, Common seal is optional to use on shares
certificate.
Q5. Teji Pvt. Ltd. received a cheque ofRs.10 lacs towards the shares application money from
Vinod on 31st March, 2005. On the same day, the Board of Directors allotted the shares,
filed necessary returns and issued the share certificate. The cheque was subsequently
deposited with the bank which bounced. Advise the company. (June 2005)
A5. A company has no right to withdraw amount mentioned on the shares certificate.
Moreover, when the company issues a certificate, it holds out to the world that the facts
contained therein are true.
Any person acting on the faith of the share certificate of the company, can compel the
company to pay compensation for any damage caused by reason of any misstatement in the
share certificate as the company is bound by any statements made in the certificate.
Case Law: Bloomenthal v. Ford (1897)
In this case, it was held that the company cannot dispute the amount mentioned on the
certificate as already paid.
Accordingly, in the given situation, Teji Pvt. Ltd. cannot withdraw share certificate.
It is the responsibility of Board of Directors to make sure that the application money
must be received before allotment of shares and issue of share certificate in this regard.
The Board of Directors who made the allotment of shares shall be liable to the company for such lapse.
CHAPTER 2.3
SHARES & SHARE CAPITAL
Issue of Securities
Issue of Securities
Finance being life blood of any organization is needed both at the time of starting the business as
well as for running the business.
This chapter deals with various ways through which the Company can raise fund
by issue of securities. By the end of this chapter we will be able to raise fund
through:
− Issue of Equity Shares with differential rights
− Issue and Redemption of Preference Shares
− Further Issue of Shares
− Private Placement
− Issue of Bonus shares
− Issue of Sweat Equity shares
Section 43 of the Companies Act, 2013 & Rule 4 of Companies (Share Capital and Debentures)
Rules, 2014
No company (whether unlisted or listed public company) shall issue equity shares with
differential rights as to dividend, voting or otherwise, unless it complies with the following
conditions:
(a) Authorisation in the Articles of Association (AQAI):
The AOA of the company authorizes the issue of shares with differential rights.
(b) Shareholder's Approval:
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.
(c) Maximum Limit: The shares with differential rights shall not exceed 74% of the total post-
issued paid-up equity share capital including equity shares with differential rights issued at
any point of time.(While counting the Limit consider DBR if issued with voting power.)
(d) No default in Statutory Filling:
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.
(e) No Default in the Payment of Dividend, Deposits or Debentures etc.
(f) 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.
(g) No Penalty:
The Company has not been penalized by Court or NCLT during the last three years of any
offence under the RBI Act, 1934, the SEBI Act, 1992, the Securities Contracts Regulation
Act, 1956, the FEMA Act, 1999 or any other special Act.
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.
Listed Company shall inform the decision at BM to Stock Exchange (SE) within 15 minutes
Allot the shares and file Return of allotment in PAS- 3 within 30 days of allotment.
Special Note: In case 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,
subject to the redemption of a minimum 10% of such preference shares per year from the 21st
year onwards or earlier, on proportionate basis, at the option of the preference shareholders.
The explanatory statement to the Special Resolution must contain the following
information:
(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, convertible or non-convertible
etc.;
(c) The objectives of the issue, the manner of issue of shares;
(d) The price at which such shares are proposed to be issued;
(e) The basis on which the price has been arrived at;
(f) The terms of issue, including terms and rate of dividend on each share, etc.;
(g) 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;
(h) The manner and modes of redemption;
(i) The current shareholding pattern of the company;
(j) The expected dilution in equity share capital upon conversion of preference shares. Conditions
for redemption
i. Redemption out of profits or issue Proceeds: A Company can redeem preference
shares in the following two waysRedemption of preference shares out of the profits
which is available for dividend.
ii. Redemption of preference shares out of the proceeds of a fresh issue of shares
made for the purposes of such redemption.
Note: A Company can only redeem those Preference shares which are fully paid-up.
(k) Creation of Capital Redemption Reserve: A company which has issued redeemable preference
shares, shall transfer a sum equal to the nominal amount of the shares to be redeemed, to a
"Capital Redemption Reserve Account".
The capital redemption reserve account may be applied by the company, in paying up unissued
shares of the company to be issued to members of the company as fully paid bonus shares.
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.
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
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.
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
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.
Case Law: Nanalal Zaver v. Bombay Life Assurance Co. Ltd. (1950)
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 authorised
capital, by issue of further shares.
Case Law: Mathalone (R) v. Bombay Life Assurance Co. Ltd. (1954)
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 favour.
Send letter of offer of the existing shareholders atleast 3 days before opening of issue.
Receive acceptance or renunciation or rejection of rights within the specified time (Min:15, Max:30
days)
A public Company files the letter of offer in MGT 14 within 30 days of passing the BR in which it was
approved.
Allot the shares and file Return of allotment in PAS- 3 within 30 days of allotment.
A1. The decision of the Board is invalid as refusal to offer shares on the ground that
already a high percentage of shares is held by a shareholder.
Q2. The Board of Directors of Nav Avtar Ltd. passed a resolution for issue of rights
shares. However, certain shareholders of the company raised an objection as to
whether the company needed additional capitA1. Discuss the validity of the
counter-move taken by the shareholders and resolution passed by the Board.
(4 marks) June, 2012
A2. A shareholder has right to raise a question against the decision of the Board of
Directors for raising fund via rights issue.
If the Board of Directors passed a resolution to raise funds via rights issue for
the legitimate business requirements of the Company, then the shareholder’s
objections shall not be entertained by the Court/Tribunal.
In Needle Industries (India) Ltd. v. Needle Industries Neivay (India) Holding
Ltd., it was held that for the benefits of the Company, the Board of Directors
exercise their rights to raise fund via Rights Issue.
of employees' stock option, subject to special resolution passed by company and subject to such
conditions as may be prescribed.
In case of private company special resolution has been substituted by ordinary resolution.
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 may be refunded to the employees if the options are not vested due to non-
fulfilment of conditions relating to vesting of option as per the Employees Stock Option
Scheme.
Note:
(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.
Convene the Board Meeting and pass the scheme. And call GM to take shareholder's approval
Approve the ESOP Scheme by passing a special resolution (ordinary resolution in case of Private
Company)
File Special Resolution with ROC in form MGT 14 within 30 days of passing SR passed.
III. ISSUE OF SHARES ON PREFERENTIAL BASIS [Joh karib hai unko hi milega]
PREFERENTIAL OFFER/ ISSUE (Section 62 of the Companies Act, 2013 and Rule 13 of Companies
(Share Capital and Debentures) Rules, 2014)
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.
Shares or other securities mean equity shares, fully convertible debentures, partly convertible
debentures or any other securities, which would be convertible into or exchanged with equity
shares at a later date.
Conditions: In case of a listed company, the preferential offer of shares or other securities is made
by a company in accordance with the provisions of the Companies Act, 2013 and SEBI
regulations.
In case of unlisted company, the preferential offer shall be made in accordance with the provisions
of the Companies Act, 2013 and its rules and subject to fulfilment of the following requirements:
—
(a) The issue is authorized by its Articles;
(b) The issue has been authorized by a special resolution of the members.
The following disclosures are required in the Explanatory Statement attached to the notice
of the general meeting for preferential Offer:
(a) the objects of the issue, the total number of shares or other securities to be issued;
(b) the price or price band at/within which the allotment is proposed;
(c) basis on which the price has been arrived at along with report of the registered valuer;
(d) relevant date with reference to which the price has been arrived at;
(e) the class or classes of persons to whom the allotment is proposed to be made;
(f) intention of promoters, directors or key managerial personnel to subscribe to the offer;
(g) the proposed time within which the allotment shall be completed;
(h) the names of the proposed allottees and the % of post preferential offer capital that may be held
by them;
(i) the change in control in the company that would occur consequent to the preferential offer;
(j) the number of persons to whom allotment on preferential basis have already been made
during the year, in terms of number of securities as well as price;
(k) the justification for the allotment proposed to be made for consideration other than cash
together with valuation report of the registered valuer;
(L) pre issue and post issue shareholding pattern of the company.
Completion Period:
The allotment of securities must be completed within 12 months from the date of passing of
special resolution.
In case a Company fails to allot securities within 12 months from the date of passing of the
special resolution, another special resolution shall be passed for the company to complete such
allotment thereafter.
Valuation of Shares:
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.
In case of listed companies the price of shares to be issued on a preferential basis is not required
to be determined by the valuation report of a registered valuer.
However, 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.
Special Note: In addition to above the procedure for private placement discussed below should
also be complied with.
Note: A company may make private placement through issue of a private placement offer letter
in Form PAS-4 to investors.
Special Note:
(a) Restrictions: The above restrictions would be considered individually for each kind of
security i.e. equity share, preference share or debenture etc.
(b) Minimum Investment Size: The value of such offer or invitation per person shall be with
an investment size of not less than Rs 20,000/-of face value of the securities.
(c) Investment only through Bank Account: The payment to be made for subscription to
securities shall be made from the bank account of the person subscribing to such securities
and the company shall keep the record of the Bank account from where such payments
for subscriptions have been received.
(d) Joint Holders: Monies payable on subscription to securities to be held by joint holders shall
be paid from the bank account of the person whose name appears first in the application.
Approvals:
The proposed offer of securities must have been previously approved by a special resolution of
Special Note:
(a) Explanatory Statement: 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) Validity of Special Resolution for Non-convertible debentures: 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) No Fresh Offer: No fresh offer or invitation under this section shall be made unless the
allotments with respect to any offer or invitation made earlier have been completed or
that offer or invitation has been withdrawn or abandoned by the company.
(d) Public offer: Any offer or invitation not in compliance with the provisions of the
Companies Act, 2013 shall be treated as a public offer, and the Securities Contracts
(Regulation) Act, 1956 and the SEBI Act, 1992 shall be required to be complied with.
1. Mode of payment:
All monies payable towards subscription of securities shall be paid through cheque or demand
draft or other banking channels but not by cash.
The Company shall not utilize monies raised through private placement unless:
- Allotment is made, and
-Return of allotment is filed with ROC.
2. Time limit for allotment:
A company making an offer or invitation shall allot its securities within 60 days from the
date of receipt of the application money for such securities.
sent to him, either in writing or in electronic mode, within 30 days of recording the names of
such persons.
No person other than the person so addressed in the application form shall be allowed to
apply through such application form and any application not conforming to this condition
shall be treated as invalid.
Note: No company offering securities under this section shall release any public
advertisements or utilize any media, marketing or distribution channels or agents to inform
the public at large about such an offer.
(b) Return of allotment:
Whenever a company makes any allotment of securities, it shall file with the ROC a return
of allotment within 15 days along with the complete list of all security- holders, with their
full names, addresses, number of securities allotted and such other relevant information.
If a company defaults in filing the return of allotment within the period prescribed under
sub section (8), the company, its promoters and directors shall be liable to a penalty for each
default of Rs. 1000 per day during which such default continues but not exceeding Rs. 25
Lakh.
Penalty: If a company makes any default of the provisions of the Companies Act, 2013, the
company, its promoters and directors shall be liable for a penalty which may extend to the amount
involved or Rs.2 crores, whichever is lower, and the company shall also refund all monies to
subscribers within a period of thirty days of the order imposing the penalty.
Sources:
A company may issue fully paid-up bonus shares to its members by utilizing the following
sources:
(a) free reserves;
(b) the securities premium account; or
Conditions:
No company shall capitalize its profits or reserves for the purpose of issuing fully paid-up bonus
shares, unless—
(a) It is authorised by its articles;
(b) It has, on the recommendation of the Board, been authorised in the general meeting of the
company;
(c) It has not defaulted in payment of interest or principal in respect of fixed deposits or debt
securities issued by it;
(d) It has not defaulted in respect of the payment of statutory dues of the employees, such as,
contribution to provident fund, gratuity and bonus;
(e) The partly paid-up shares, if any on the date of allotment, are made fully paid-up;
Note: No Bonus shares in lieu of dividend.
Special Note: As per the Companies (Share Capital and Debentures) Rules, 2014, the company
which has once announced the decision of its Board recommending a bonus issue, shall not
subsequently withdraw the same.
Q3. The Board of Bloom Well Ltd. recommended bonus issue and thereafter called
general meeting for the approval of the shareholders. The shareholders rejected
the approvA1. Consequent to which the Board did not issue the Bonus Shares.
Is the decision correct?
A3. As per the Companies (Share Capital and Debentures) Rules, 2014, the company
which has once announced the decision of its Board recommending a bonus
issue, shall not subsequently withdraw the same.
Therefore once the Board recommends the Bonus issue, even the subsequent
disapproval by shareholders cannot reverse it. So it is only a formality to take
shareholders’ approval for issue of bonus shares, and even if it is rejected or
not passed by the members, the Board has to go with the decision of issue of
Bonus Shares.
Convene the Board Meeting to issue notice to call GM to take shareholder's approval
Ensure that all the partly paid shares are converted into fully paid
Ensure that source of issue of bonus shares is from the permitted sources
If Special Resolution is passed file it with ROC in form MGT 14 within 30 days of passing SR
Note: Though the section read with the rules nowhere requires that the resolution will be a
special resolution but surprisingly PAS-3 states that special resolution be attached to the form in
case of Bonus Issue.
So if the Company passes Special Resolution, filing of MGT- 14 is mandatory.
Employee includes
Employee means:
(a) Permanent Employees: A permanent employee of the company who has been working in
India or Outside India, for at least the last 1 year; or
(b) Directors: A director of the company whether a whole time director or not; or
(c) Employees of Holding & Subsidiary Companies: An employee or a director of a subsidiary or
of a holding company of the company whether in India or outside India.
equity share, the explanatory statement to be annexed to the Notice of the general meeting,
shall contain the following details:
(a) The date of the Board meeting wherein the sweat equity shares proposal was approved.
(b) Reasons/justification for the issue of sweat equity shares.
(c) Total numbers of shares to be issued as sweat equity including the class of shares are
intended to be issued.
(g) Class of directors or employees to whom such equity shares are to be issued. The price at
which the sweat equity shares are proposed to be issued.
(h) The consideration including consideration other than cash.
(i) Ceiling on managerial remuneration, if any.
(j) A statement to the effect that the company shall conform to the applicable accounting
standards; and diluted Earnings per Share pursuant to the issue of sweat equity securities,
calculated in accordance with the applicable accounting standards.
(b) Validity:
The special resolution shall be valid only for 12 months for allotment of sweat equity shares.
(c) Maximum Limit:
A company cannot issue sweat equity shares not more than 15% of the existing paid-up
equity share capital in a year or
shares of the issue value of Rs.5 Crore,
whichever is higher and 25% of the
paid-up equity capital of the Company
at any time.
Note: The issuance of sweat equity shares in the Company shall not exceed 25% of the
paid-up equity capital at all the time.
Startup Company may issue sweat equity shares up to 50% of paid up capital “up to
10 years” from the date of incorporation.
(d) Valuation:
The Sweat equity shares to be issued shall be valued at a price determined by a registered
valuer, if the shares to be issued for intellectual property rights (Know-how or any other value
addition). A copy of the valuation report obtained in both the above cases shall be sent to the
shareholders along with the notice of the general meeting.
(e) Register of Sweat Equity Shares:
The Company shall maintain a Register of Sweat Equity Shares in Form No. SH.3
(f) Lock in period:
Sweat equity shares shall be non-transferable for three years from the date of allotment.
conditions:
(a) The sweat equity shares are issued to the director or manager; and
(b) They are issued for consideration other than cash.
Note: The sweat equity shares issued during an accounting period, the accounting value of
sweat equity shares shall be treated as a form of compensation to the employee or the
director in the financial statements of the company.
• Disclosure in Director's Report (Board Report): The Board of Directors shall disclose the
following details in Director's Report with regard to issue of sweat equity shares:
(a) Class of director/employee to whom sweat equity shares were issued;
(b) Class of shares issued as Sweat Equity Shares;
(c) The number of sweat equity shares issued to the directors, key managerial personnel
(KMP) 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 allotees holding one
percent or more of the issued share capital;
(d) The reasons/justification for the issue
(e) Principal terms and conditions on which sweat equity shares are to be issued.
Time period of association of Directors or Employees with the company.
Principal terms and conditions for issue of sweat equity shares, including pricing
formula;
(f) Total number of shares arising as a result of issue of sweat equity shares;
(g) Percentage of the sweat equity shares of the total post issued and paid-up share capital;
(h) Consideration including consideration other than cash received;
(i) Diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity shares.
Note:
(a) Entries in respect of sweat equity shares in the register shall be authenticated by the
Company Secretary or by any other person authorized in this regard.
(b) Sweat equity shares may be issued to the employees and directors at a discount and even
without the approval of National Company Law Tribunal (NCLT).
BUY-BACK OF SECURITIES
[paise ki kami nahi hai – shareholder se shares kharid le] 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.
Objectives of Buy-Back
(a) To return the surplus cash to shareholders
(b) To increase the current Market price of the Company
(c) To discourage unwelcome takeover bids
(d) To increase promoters' shareholding
Section 67: A company limited by shares or guarantee having a share capital cannot buy its own
shares and this restriction is applicable on all types of the Companies.
Section 68: This section allows a company to purchase its own shares or securities subject to
certain conditions.
Methods of Buy-Back:
The buy-back may be:
(a) From the existing shareholders
(b) From the open market
(c) By purchasing the securities from employee which have been issued under ESOP or Sweat Equity
Sources to Buy-Back:
A company may purchase its own shares or other specified securities out of:
(a) Its free reserves; or
(b) The securities premium account; or
(c) The proceeds of any shares or other specified securities.
Note: No buy-back of any kind of shares or other specified securities can be made out of the
proceeds of an earlier issueof the same kind of shares or same kind of other specified securities.
The Company can buy-back its own shares at any time provided that the Company has sufficient
balance in any one or more of these accounts to accommodate the total value of the buy-back.
• The Notice of General Meeting shall be annexed with the explanatory statement and shall have
the following details:
(a) A full and complete disclosure of all material facts;
(b) The necessity for the buy-back;
(c) The class of security intended to be purchased under the buy-back;
(d) The amount to be invested under the buy-back;
(e) The time limit for completion of buy-back.
(g) Letter of Offer to be filed with Registrar of Companies before Buy-Back: The Company which has
been authorized by a special resolution shall, before the buy-back of shares, file with the
Registrar of Companies a letter of offer in Form No. SH. 8.
(h) 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.
(i) 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.
(j)Completion of Buy-Back: The buy-back operations should be completed within 1 year of the date
of passing of the special resolution or a resolution passed by the Board.
Time gap between two buy-backs: No offer of buy-back under Section 68(2) 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.
(L) Declaration of Solvency: When a company proposes to buy-back its own securities, shall file with
ROC and SEBI (in case of listed companies), a declaration of solvency signed by at least two
directors of the company, one of whom shall be the managing director, if any, in Form No. SH.9
before making buy-back.
(m) Extinguishment of Securities: After completion of buy-back operation the securities must be
extinguished and physically destroyed within 7 days of the last date of completion of buyback.
(n) No further issue: After completion of buy-back, the company shall not make a further issue of
shares or other specified securities for a period of 6 months except by way of bonus issue or in
discharge of subsisting obligations such as conversion of options/obligations given.
(o) Buy-Back return: A company shall file a return of buy-back in Form No. SH.15 within 30 days from
the date of completion of buy-back. Such form must be 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 Companies Act, 2013 and its rules.
(p) Register for Buy-Back: The Company has to maintain a register of the securities so bought, the
consideration paid for the securities bought-back, the date of cancellation of securities, the date
of extinguishing and physically destroying of securities and such other particulars as may be
prescribed.
Prohibition for buy-back:
Section 70 the Companies Act, 2013
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.
• Transfer of certain sums to Capital Redemption Reserve account: Transfer to CRR (Section 69
of the Companies Act, 2013):
When a company buys-back shares out of free reserves or out of security premium account, then
an amount equal to the nominal value of the shares needs to be transferred to the Capital
Redemption Reserve Account (CRR).
The details of such transferred amount to CRR should be in balance sheet.
Utilization of CRR amount: CRR amount may be utilized for paying un-issued shares of the Company
to the members as fully paid bonus shares.
Q1. The Following information is available from the audited balance sheet of Short Cut Ltd. as at 31st
March, 2015:
Paid-up share capital Rs.500 lakh
Share premium account Rs.100 lakh
General reserves Rs.800 lakh
Secured loans Rs.500 lakh
Unsecured loans Rs.400 lakh
The company plans to buy-back its shares. Compute the maximum limit upto which the company can
buy-back its shares. (4 marks)
A1. According to Section 68(1) of the Companies Act, 2013, a company can buy-back its own shares
to the extent of 25% of the paid-up capital and free-reserve. In case of Short Cut Ltd. the
position is as under:
■ Paid-up Capital Rs.500 lacs
■ Free reserve (include SPA for purpose of section 68) Rs.900 lacs
■ Total Rs. 1,400 lacs
■ 25% of paid-up shares capital and free reserve = Rs.350 lacs. Thus, the maximum limit up to
which the company can buy-back its shares is to the extent of Rs.350 lacs.
Q2. Board of Directors of Pious Ltd. gives you the following information extracted from the
company's financial statement as at 31s1 March, 2015: Rs. (in Crore)
Authorised equity share capital: 10
(1 crore shares ofRs.10 each)
Paid-up equity share capital: 5
General reserve: 5
Debenture redemption reserve: 2
Board of Directors by resolution passed at its meeting decides to go for buy-back shares to
the extent of 20% of the Company’s paid-up share capital and free reserves. Examine the
validity of the Board Resolution with reference to the provisions of the Companies Act, 2013.
(Dec 2015) (4 marks)
A2. As per the provisions of Sections 67 & 68 of the Companies Act, 2013 and Rule 17
Q3. ABC Co. Ltd. at a general meeting of shareholders passed an Ordinary Resolution to buy back
30% of its equity share capitA1. The articles of the company empower the company for buy-
back of shares. The Company further decides that the payment for buy-back be made out of
proceeds of the Company earlier issued equity. Examine whether proposal is in order. Will your
answer be different if instead of 30% Company planned to buy back 20%
CA IPCC (Mau 2002)
A3. The proposal of the Company is not valid as the maximum buy back a company can do is 25%
and that to with the SR.
Further the Company cannot use proceeds from previous issue to buy back the shares.
Even if 20% was proposed it would have been still invalid as OR is passed instead of SR and
even the source is not appropriate.
(b) Either with or without extinguishing or reducing liability on any of its shares:
(i) Cancel any paid-up share capital which is lost or is
unrepresented by available assets; or (ii)Pay off any paid-up
share capital which is in excess of the wants of the company,
(iii) Alter its memorandum by reducing the amount of its share capital and of its shares
accordingly.
the amount paid on the share or reduced amount. The order of confirmation of the
reduction of share capital by the NCLT shall be published by the company in such manner
as directed by the NCLT.
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
capitA1. 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.
■ Where a company is ordered to add to ■ Such a provision does not exist in the
its name the words "and reduced" these case of diminution of the share capital as
words shall exist until the expiry of the envisaged.
period specified in the order.
Transferability
The investor in securities of an incorporated enterprise cannot withdraw his
investment from the company. He can only convert his investment into cash outside
the company in the share market or by private sale.
Transferability feature of securities enables the company, to get permanent capital,
the shareholder, liquid investments. Shares of a Public Company are freely
transferable.
However, a Private Company is required to restrict the right to transfer its shares
by its articles.
Earlier, the shares were transferred only through physical mode, but now, the
securities are transferred in dematerialized form.
Special Note: A company shall not register a 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 by the transferor
or transferee within 60 days from the date of execution of transfer along with the
certificate relating to the securities.
Transfer Rules (Section 56 & Rule 11 of Companies (Shares Capital and Debentures)
Rules, 2014)
Transfer Rules
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.
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.
Effect of Transfer
A transfer is not complete until registered.
The transferee does not acquire a legal title to the shares until his name has been
entered in the Register of Members.
Position during the period, between the date when a contract to transfer shares is
made and the placing of the transferee's name on the Register of Members may be
summed up as:
CHAPTER – 2.5 UNIQUE ACADEMY 2.5.4
CS SHUBHAM ABAD
(a) Transferor must pay the calls. He may recover the amount from the transferee.
(b) If dividends are declared and paid before transfer is registered, the company must
pay it to the transferor.
(c) The voting power rests with the transferor but he must vote as the transferee
directs. If the transferee has not paid the price, the transferor may vote as he
pleases.
Obtain the transfer deed in the prescribed form i.e. Form SH-4 (No specific format in case of
Execute the form by Transferor and Transferee (In case of Joint holding, every joint holder will
The deed should be stamped adequately and the stamp should be cancelled.
Attach Share/ Debenture certificate with the deed (If certificate not yet issued, attach allotment letter)
The company shall serve notice to the transferee in Form SH-5 in case of partly paid shares.
The company shall serve notice to the transferee in Form SH-5 in case of partly paid shares.
Q1. One of the joint-holders applied to a company requesting for the splitting of300 equity
shares equally among the joint-holders by issuing fresh share certificates to each of
the three joint-holders separately, is the company bound to comply with this
request? Give reasons. 4 marks (June 2005)
A1. Section 58: If the shares held in joint name, the instruction with regard to transfer
of shares or splitting of shares, shall be jointly made by all joint-holders. Based on
that instruction, a Company shall register the transfer or split the shares
certificate. A company shall not register a transfer of shares, unless a proper
instrument of transfer duly stamped and executed by the transferor and by the
transferee, has been delivered to the company along with the share certificate
within 60 days from the date of execution of the Instruments.
In given case, the shares are held in joint name and one of the joint holders requested
to split the shares equally among the joint holders for issuing fresh share certificate
to each joint holders separately.
As per section 58, the company shall not be bound to split the shares certificate
until the request
received by all joint holders.
Q2. Ajay sold his shares and executed a transfer deed in favour of Vijay. The documents
were lodged for transfer with the company. However, before effecting and
registering the transfer by the company, Ajay, the transferor passed away. What is
the impact of the death of Ajay on the registration of transfer of shares in favour
of Vijay, if the death of Ajay is - (i) intimated to the company before the registration;
and (ii) intimated to the company after registration of the transfer of the shares in
favour of Vijay?
If Vijay dies before registration of the transfer of shares, what will be the
consequences — (i) if the death of Vijay is intimated to the company before
registration of transfer; and (ii) if the death of Vijay is not intimated to the company
before the registration of transfer? (June 2008) 4 marks)
A2. Where the transferor dies and the company has no notice of his death the
company would
obviously register the transfer. If the company has notice of his death, the proper
course is not to register until the legal representative of the transferor has been
referred to.
(i) If the Company had intimation about Ajay’s death before registration then the
proper course is
not to register until the legal representative of the transferor has been referred
to.
(ii) If the Company was intimated after then it would have obviously registered it.
The holder of securities has the right to transfer his securities and such right is
absolute in nature.
Private Company:
If a private company limited by shares refuses to register the transfer or
CHAPTER – 2.5 UNIQUE ACADEMY 2.5.8
CS SHUBHAM ABAD
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
Q3. An employee of a company purchased certain shares of his company through a member
of a stock exchange and lodged with the company an application for transfer of
shares in his (employee's) name. The company refused to execute the transfer on
the suspicion that the employee, if admitted as a member of the company, will create
nuisance in general meetings and seek access to the records of the company. Decide
giving reasons:
Whether the company's contention shall be tenable; and
What is the remedy available to the employee in the given case? (June 2015) 4 marks
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.
Therefore, in the given situation considering the judgment of the above mentioned
case law, the contention of the company shall not be tenable. The employee may file
an appeal in the court/tribunal against the company referring the above mentioned
judgment of court.
■ Transfer takes place by a voluntary act of the ■ Transmission is the result of the operation of law i.e.
transferor. death or insolvency
Q4. Grace Ltd., a public limited company has received an application from Rosy for
transmission of certain shares in her name. Rosy, being a widow of a shareholder,
applies for transmission of the shares standing in the name of her deceased husband
without producing a succession certificate. Can the company transfer the shares of
the deceased?
A4. The transmission of shares takes place because of death or lunacy of the registered
shareholders or on his being adjudged as insolvent or also in case, the holder of
securities is a company, when it goes into liquidation because of merger or
amalgamation.
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?
If a widow applies for transmission of the shares standing in the name of her deceased
shares.
Q5. Arun buys 300 shares of a company from Barun on the faith of a share certificate
issued by the company. Arun submits to the company a transfer deed, duly executed,
along with Barun's share certificate for transferring the shares in his name. The
company discovers that the certificate in the name of Barun has been fraudulently
obtained and refuses to register the transfer, is Arun entitled to get the shares
transferred in his name?
(June, 2005), 6 marks
A5. The given case is similar to the concept covered under “Forged Transfer
- to innocent purchaser”.
The Company cannot refuse to register the transfer of shares in favour of the
innocent purchaser. Accordingly, Arun is entitled to register the shares in his name.
He is also entitled to claim damages from the company.
Q6. Anant buys 20 shares of a public company from Basant through a stock broker.
Anant receives the share certificate and the blank-transfer deed countersigned
by Basant but does not lodge the transfer deed for registration. Examine the legal
effect of unregistered transfer between the transferor and the transferee. (Dec,
2007), 4 marks
A6. As per the Companies Act, 2013, the Blank transfer is a valid transfer.
Blank transfer means purchase and sale of shares by mere delivery of share
certificate along with transfer deed without mentioning the name of transferee in
the transfer deed.
The contract between Anant and Basant for transfer of shares is a valid contract
and Anant becomes the beneficial owner of the shares even though the transfer has
not been lodged with the company and he has not acquired the legal title to shares.
In given case, only the formalities of registration of transfer are pending.
• 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.
CHAPTER – 2.5 UNIQUE ACADEMY 2.5.
15
CS SHUBHAM ABAD
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.
• Rematerialisation
(i) Client submits Rematerialisation Request Form (RRF) to DP;
(ii) DP intimates Depository;
(iii) Depository intimates the Registrar/Issuer;
• Objectives
(i) It acts as a legal basis for establishment of depositories;
(ii) Dematerialization of securities in the depositories mode becomes possible;
(iii) Making the securities fungible;
(iv) Making the shares, debentures and any interest thereon of a public limited company
freely transferrable;
(v) Exempting all transfer of shares from the stamp duty.
SEBI may after proper investigations and enquiry, issue such directions to any
depository or participant which may be in the interest of general public.
&
INTRODUCTION
The membership in a company is obtained through subscribing to the memorandum, through
allotment/ transfer/ transmission etc.
The membership rights enable the member to participate into the affairs of the company
through general meeting.
The Companies Act prescribes aspects as to the mode of acquisition of membership,
eligibility criteria, and minimum number of members, rights and liabilities of members.
• Definition of Member
According to Section 2(55) of the Companies Act, 2013:
(a) 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;
(b) 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;
(c) 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.
A person who
(i) has completed 18 years of age.
Accordingly, there are two important elements which must be present before a person can
acquire membership of a company viz.,
(i) Agreement to become a member; and
(ii) Entry of the name of the person so agreeing, in the register of members of the
company. Both these conditions are cumulative.
• Agreement in Writing
1. By an Application and Allotment:
A person who applies for shares becomes a member when shares are allotted to him, a
notice of allotment is issued to him and his name is entered on the register of members.
The general law of contract applies to this transaction.
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.
On the death of a member, his executor or the person who is entitled under the law to
succeed to his estate gets the right to have the shares transmitted and registered in his
name in the company's register of members.
4. By Acquiescence or Estoppels
Q1. Mohan applied for 4000 shares of in a company but no allotment was made to him.
Subsequently, 4000 shares were transferred to him without his request and his name
was entered in the register of members. Mohan stood by and allowed his name to
remain in the register of members. Subsequently, the company went into liquidation and
he was held liable as a contributory. Now Mohan wants to apply to the Court/Tribunal
for rectification of the register of members. Can he do so? Explain. (4 marks) Dec
2012
A holder of American Depository Receipts (ADR) / Global Depository Receipts (GDR) cannot
be treated as a member of the Company.
It was clarified by the MCA on the following grounds:
• A person is a member of a company
• Who is a subscriber to MOA or
• Whose name has been entered in the register of members?
• A person holding share capital of the company and whose name is entered as
beneficial owner in the records of the depository is deemed to be a member of the
Company.
• A holder of ADR/GDR may become a member of the Company only on
transfer/redemption of ADR/GDR into equity shares.
• Since the underlying equity shares are allotted in the name of overseas depository
bank, the name of such overseas bank is to be entered in the register of members of
the issuing company.
Note: Since the overseas depository bank is neither the depository as defined under the
Companies Act, 2013 & the Depositories Act, 1996 non holding share capital.
Therefore, it cannot be deemed to be a member of the Company.
Special Note: Since, a holder of ADR/GDR is neither the subscriber to the Memorandum
nor a holder of the shares, his name cannot be entered in the Register of Members.
Therefore, a holder of Global Depository Receipts cannot be called a member of the
company.
Q2. ABC & Co., a partnership firm applied for shares in XYZ Ltd. The company allotted the
shares required by the partnership firm. In the given context, what is the liability of
the partners and the partnership firm?
A2. 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 Companies Act, 2013.
The allotment in the name of partnership firm is invalid.
Therefore, in the given situation, neither the partnership firm nor partners are liable to
the company.
Q3. Fortune Ltd. refused to enter the name of the minor son of a deceased member in the
register of members on the ground that the minor cannot enter into a contract as per
Section 11 of the Indian Contract Act, 1872. The shares are fully paid-up. Comment on
the decision of the company and suggest remedies available.
(4 marks) Dec 2009
A member, who is 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.
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.
Case Law: Diwan Singh v. Minerva Films Ltd.:
In this case, it was held that law does not prevent a minor to acquire shares in a joint
stock company if they are properly representative by lawful guardians.
In the given case, the shares are fully paid-up and nothing is payable to the Fortune Ltd.
and minor enters into a contract on behalf of deceased lawful guardian.
Therefore, Fortune Ltd. cannot refuse to enter the name of the minor son of deceased
member.
Q4. Rahees, who is a member of Vivek Ltd., a public company, has very recently become an
insolvent. Can the insolvent Rahees continue as a member of the company? June 2011
A4. In this case, Rahees shall continue as a member of the company even after becoming
insolvent but he will loss his beneficial rights like right of dividend and transfer of
shares in favour of transferee.
All kinds of beneficial rights shall be with official receiver of Mr. Rahees duly appointed
by the Court.
Q5. M/s Honest Cycles Ltd. has received an application for transfer of 1,000 equity shares
ofRs.10 each fully paid-up in favour of Mr. Balak. On scrutiny of the application form
it was found that the applicant is minor. Advise the company regarding the contractual
liability of a minor and whether shares can be allotted to the Balak by way of
transfer.
A5. A Company cannot allot shares to the minor since minor has no contractual capacity to
enter into a Contract with the Company.
In the given case, Honest Cycles Ltd. allotted shares to a minor, in such situation
minor shall not be liable for any kind of liabilities but can avail benefits.
Q6. RSP Limited allotted 500fully paid-up shares ofRs.100 each to Z, a minor, in response
to his application without knowing that he was a minor and entered his name in the
Register of members. Later on, the company came to know of this fact. The company
cancelled the allotment and struck-off his name from the Register of members and
also forfeited his entire share money. He filed a suit against the action of the
company. Decide whether Z would be given any relief by the court under the
provisions of the Companies Act, 2013.
A6. A Company cannot allot shares to the minor since minor has no contractual capacity to
enter into a Contract with the Company.
RESTRICTION ON MEMBERSHIP
Any 7 or more persons can form a public company, or where the company to be formed will
be a private company, any 2 or more persons, associated for any lawful purpose may, by
subscribing their names to a memorandum of association and otherwise complying with the
requirements of the Act in respect of registration, form an incorporated company, with or
without limited liability.
One person, where the company to be formed is to be One Person Company with compliance
of the Companies Act, 2013 in respect of registration.
Q7. Thrive Ltd. is a public limited company, incorporated under the Companies Act, 2013.
The Board of Directors of the said company has recently decided to insert an
article in its articles of association relating to expulsion of a member by the Board
of Directors of the company where the directors were of the view that the
activities or conduct of such a member was detrimental to the interests of the
company. Is the Board’s decision valid in the eye of law
4 marks (Dec 2011)
A7. If the article of association provides expulsion of any members, then the Board of
Directors of the Company can expel any members who are working against the
interest of the Company.
MCA has clarified that any assumption of the powers by the Board of Directors to
expel a member by alteration of article of association shall be illegal and void and same
has also been decided “Bajaj Auto
REGISTER OF MEMBERS
Section 88 of the Companies Act, 2013:
(1) Every company shall keep and maintain the following registers in such form as may be
prescribed:
(a) Register of members indicating separately for each class of equity and preference shares
held by each member residing in or outside India;
(b) Register of debenture-holders; and
(c) Register of any other security holders.
(2) The register of the Company includes an index of the names.
(3) 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.
(4) Foreign register.
1. Timing of Entry: 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. Place of keeping the Register: 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.
4. Details of Pledge of securities: If the promoters have pledged the shares of the company
which is listed, the details of pledging of share to be entered in the register within 15
days of event.
security holders, the company and every officer of the company who is in default shall be
punishable with fine which shall not be less than Rs.50,000/- but not more than
Rs.3,00,000/- and where the failure is a continuing one, with a further fine which may
extend to Rs.1000/- for every day, after the first during which the failure continues.
• 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."
• Preservation of Registers:
Book Closure is the periodic closure of the Register of Members and Transfer Books of
the company to take a record of the shareholders to determine their entitlement to
dividends or to bonus or right shares or any other rights pertaining to shares.
A company may close the register of members for a maximum of 45 days in a year and for
not more than 30 days at any one time.
The listed company should close their book atleast once in a year.
Section 91 of the Companies Act, 2013 contains guidelines for closing the register of
members. It lays down:
(1) 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.
(2) 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.
In case of fixation of record date, a company fixes a date for determining the corporate
benefits like dividends rights, bonus shares rights and rights issue.
The listed company should give notice of record date in a newspaper at least 7 days before
the fixation of the record date.
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.
RIGHTS OF MEMBERS
When once a person becomes a member he is entitled to exercise all the rights of a member
until he ceases to be a member in accordance with the provisions of the Act.
The appointment of a receiver, the attachment of the shares, and the pledge of the shares
or taking over of the management of a company which is holding shares in another company
under Section 18A of the Industries (Development & Regulation) Act, 1951 will not alter
the position.
• Individual Rights:
Members of a company enjoy certain rights in their individual capacity, which they can
enforce individually. These rights are contractual rights and cannot be taken away except
with the written consent of the member concerned.
These rights can be categorised as under:
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.
SHAREHOLDERS' DEMOCRACY
The concept of shareholders’ democracy in the present day corporate world denotes the
shareholders’ supremacy in the governance of the business and affairs of corporate sector
either directly or through their elected representatives.
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.
Thus the Companies Act has tried to demarcate the area of control of directors as well as
that of shareholders. Basically all the business to be transacted at the meetings of
shareholders is by means of an ordinary resolution or a special resolution or by postal
ballot.
SHAREHOLDER’S 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.
VETO POWER
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.
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
• Becomes SBO during commencement of rules to filling date (i.e 90days -30 days from
expiry of 90 days)
3. Register of SBO
• Form BEN 3
• Return of SBO – BEN 2 file with ROC within 30 days from declaration
4. Responsibility of Company
• Identify the SBO and send notice to SBO
• SBO shall reply within 30 days
• If no reply has been received then inform to NCLT within 15 days
• NCLT passes an order within 60 days
• NCLT may cease the right of such person
• Aggreived party may appeal company in one year
• If no appeal has been made then such shares transfer to IEPF.
Borrowing Power
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
The company will be liable to such borrowing if the borrowing is within the
director's ostensible authority and the lender acted in good faith or if the
transaction was ratified by the company.
Where the borrowing is intra vires the company but outside the authority of the
directors the directors can be ratified by the company and become binding on the
company.
The company would be liable, particularly if the money has been
used for the benefit of the company. Case Law: V.K.R.S.T Firm v.
Oriental Investment Trust Ltd. (1944)
Facts: Under the authority of the company, its managing director borrowed large
sums of money and misappropriated it. Such borrowed amount is within the limit of
paid-up share capital and free reserves of the company.
Judgment: In this case, 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 has applied the loan to unauthorized activities provided
the lender had no knowledge of the intended misuse.
Case Law: T.R. Pratt. (Bom) Ltd. v. E.D. Sassoon and Co. Ltd. (1936)
Facts: There was no limit on the borrowing for business in the memorandum of the
company. But the directors could not borrow beyond the limit of the issued share
capital of the company without the sanction of the general meeting. The directors
borrowed money from the plaintiff beyond their powers.
Judgment: It was held that the money having been borrowed and used for the
benefit of the principal either in paying its debts, or for its legitimate business,
the company cannot repudiate its liability on the ground that the agent had no
authority from the company to borrow.
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/short term borrowing,
2) Secured/unsecured borrowing,
3) Syndicated/ Bilateral borrowing,
4) Private/Public borrowing.
Funds borrowed for a period ranging for five years or more are termed as long-
term borrowings.
A long term borrowing is made for getting a new project financed or for
making big capital investment etc. Generally Long term borrowing is made
against charge on fixed Assets of the company.
1B. Short Term Borrowings –
Funds needed to be borrowed for a short period say for a period up to one year or
so are termed as short term borrowings. This is made to meet the working capital
need of the company.
Short term borrowing is generally made on hypothecation of stock and debtors.
1C. Medium Term Borrowings –
Where the funds to be borrowed are for a period ranging from two to five years,
such borrowings are termed as medium term borrowings.
The commercial banks normally finance purchase of land, machinery, vehicles etc.
2A Secured/unsecured 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.
2B Unsecured debts –
Unsecured debts comprise financial obligations, where creditors do not have
recourse to the assets of the company to satisfy their claims.
3A 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.
3B Bilateral borrowing –
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 borrower.
A1. The money borrowed by Ajay Ltd. from Prem is ultra vires
borrowing and accordingly, Prem cannot file a claim for such borrowing.
Since, Ajay Ltd. has used such money for payment of intra vires borrowing
(lawful debt) accordingly, such ultra vires borrowing shall be treated as
legal and valid debt to the Company.
Therefore, Ajay Ltd. is liable to repay such ultra vires borrowed debt.
Q2. Balance sheet of Duck Ltd. shows a paid-up capital of Rs.5 crore and
free reserves of Rs.2 crore. Due to heavy financial requirement of the
Company, it plans to apply for a loan of Rs.8 crore with XYZ Bank Ltd. Advise
the company on the formalities required to be fulfilled. Also on the
alternative course of action (4 marks) (June, 2013)
A2. As per section 180 of the Companies Act, 2013, the power of
the company to borrow is exercised by its directors, who cannot borrow
more than the sum authorized.
The powers to borrow money and to issue debentures can only be
exercised by the Directors at a duly convened meeting.
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.
Q3. Alok, the Managing Director of Yellow Ltd., borrowed a large sum of
money and misappropriated the same. Later, when the lender demanded his
money, the company refused to repay, contending that the money borrowed
A3. Refer the case law - V.K.R.S. T Firm v. Oriental Investment Trust
Ltd.
In this case, the company will be held liable stating that where the
borrowing is within the powers of the company, the lender will not be
prejudiced simply because its officer has applied
A4. The provisions of Section 180(l)(c) of the Companies Act, 2013 prohibit
the Board of Directors of a company from borrowing a sum which together
with the monies already borrowed exceeds the aggregate of the paid-up
share capital and free reserves apart from temporary loans unless they have
prior approval from the shareholders by a special resolution in general
meeting.
Here “temporary loan” means a short-term loan which is payable on demand
or within 6 months from the date of loan.
Therefore, the decision of the Board of Directors is in accordance with the
provisions of the Companies Act, 2013 and the Joy Ltd. can provide loan ofRs.50
crore as decided by the BOD.
DEBENTURES
Debenture [Section 2(30)] 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.
But it shall not include
(a) The instruments referred to in Chapter lll-D of the Reserve Bank of
India Act, 1934 (Example: Derivatives and money market instruments); and
(b) Such other instrument, as may be prescribed by the Central
Government in consultation with the Reserve Bank of India, issued by a company
It is evident from the above definition that the term of debentures covers both
types of secured and unsecured debentures.
A debenture certificate is a document given by a company under its seal as an
evidence of a debt to the holder usually arising out of a loan and most commonly
(not necessarily) secured by a charge.
In short, Debenture is a document which creates a debt.
• Characteristics of Debentures
The usual features of a debenture are as follows:
(i) A debenture is usually in the form of a certificate (like a share
certificate) issued under the common seal of the company.
(ii) The certificate is an acknowledgement by the company of its
indebtedness to a holder.
(iii) Debenture usually provides for payment of a specified principal sum at
a specified date. A company may issue perpetual or irredeemable debentures with
no undertaking to pay.
(iv) A debenture usually provides for payment of interest until the principal
sum is paid back.
(v) A debenture is, as a rule, one of a series,
• Issue of Debentures
The debentures can be issued in the same manner as shares in a company.
But unlike shares, they can be issued at a discount without any restriction, if
articles so authorise, the reason being that they do not form part of the capital of
the Company.
They can also be issued at a premium.
There is no ceiling, minimum or maximum, for the rate of interest payable on
debentures.
(d) Creation of Charge in favour of Debenture Trustee: The security for the
debentures by way of a charge or mortgage shall be treated in favour of the
debenture trustee on:
➢ any specific movable property of the company (not being in the nature
of pledge); or
➢ any specific immovable property.
DRR Created out of Profit At least 25% DRR at the Transfer of 15% P.A. in DRR
Time of Redemption before 30th April
When debentures are issued by a company, the company shall create a debenture
redemption reserve account out of the profits of the company, shall not be
utilised by the company except for the redemption of debentures.
(a) Every company required to create DRR is required to invest or deposit at least
15% of the debentures maturing during the current financial year ending 31st
March of next year.
(b) In case of partly convertible debentures, DRR shall be created in respect of non-
convertible portion of debenture issue.
(c) The amount credited to the DRR shall not be utilised by the company except
for the purpose of redemption of debentures.
(e) Has furnished any guarantee in respect of the principal debts secured by the
debentures or interest thereon;
(f) Has any pecuniary relationship with the company amounting to 2% 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) He is relative of any promoter or any person who is in the employment of the
company as a director or key managerial personnel.
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.
Debenture Certificate:
Every company shall, within 2 months of allotment of any of its shares, debentures
or debenture stock and within 1 month after the application for registration of the
transfer of any such debentures or debenture stock, deliver the certificates of all
debentures and debenture stock allotted or transferred in accordance with the
procedure laid down.
(e) Special Note: If the securities for which application money or advance for
such securities was received cannot be allotted within 60 days from the date
of receipt of the application money or advance for such securities and such
(f) Any amount received from a person who was a director of the company at the
time of receipts; relative of the director of the Private Company.
Special Note: If the above mentioned person from whom money is received,
furnishes a declaration in writing that the amount is not being given out of funds
acquired by him by borrowing or accepting loans or deposits from others and the
company shall disclose the details of money so accepted in the Board's report;
(i) Interest free security deposit from an employee not exceeding his annual
salary;
(m) Any amount received as security deposit for the performance of the
contract for supply of goods or provision of services;
(n) Any amount brought in by the promoters of the company by way of unsecured
loan;
(o) (L) Any amount received by the company under any collective investment
scheme in compliance with regulations framed by the Securities and
Exchange Board of India;
(p) Any Amount received as chit by a chit fund Company
(q) Any amount received by a Nidhi Company as per provisions of this Act;
(r) An amount of twenty-five lakh rupees or more received by a start-up
company, by way of a convertible note (convertible into equity shares or
repayable within a period not exceeding five years from the date of issue) in
a single tranche, from a person.
Explanation : For the purposes of this sub-clause,—
"Start-up Company" means a private company incorporated under the Companies
Act, 2013 or Companies Act, 1956 and recognised as such by the Department of
Industrial Policy and Promotion, Ministry of Commerce and Industry;
"Convertible note" means an instrument evidencing receipt of money initially as a
debt, which is repayable at the option of the holder, or which is convertible into
such number of equity shares of the start-up company.
Q5. Please check which of the following source of funds are coming
under the definition of deposits in case of a company.
(a) Rs. 5 Crore from Government Agency, Financial institutions, Banks
or by way of Commercial Paper.
(b) Rs. 50 Lakh by way of Share Application money
(c) Rs. 50 Lakh from one of its director by way of loan
(d) Rs.50 Lakh by means of inter corporate deposit
(e) Rs.25 Lakh from its employees.
(f) Rs. 50 Lakh as business advance from customers
(g) Rs. 50 Lakh as advance against consideration for an immovable
property.
(h) Rs. 25 Lakh as security deposit for performance of provision of
services
Who is depositor?
Depositor [Rule 2(1)(d)] means:
(a) Any member of the company who has made a deposit with the company.
Any person who has made a deposit with a public company.
Acceptance of Deposits
And where a default had occurred, the company made good the default and a
period of 5 years had lapsed since the date of making good the default
Note: *** Eligible Company means a public company, having
• a net worth of not less than Rs.100 crore or
• a turnover of not less than Rs.500 crore
Eligible Government
Companies Companies
Rate of Interest:
As prescribed by the RBI for Non-Banking Finance Companies (NBFC)
Registers of deposits
(1) 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;
Return of Deposits
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.
Q6. Shine Well Ltd. has accepted deposits from the public under the
Companies (Acceptance of Deposits) Rules, 2014. The company has now
decided to repay some of its deposits before maturity. Can the company do
so? If yes, what are the conditions attached thereto? (4 marks) (June, 2011)
Penal Provisions:
THE COMPANIES (AMENDMENT) ACT, 2015:
1. The Company shall be liable to pay in addition to the deposits & its
interest thereon, also liable to pay Minimum Liability- Rs. 1 crore or twice the
amount of deposit accepted by the company, whichever is lower Maximum liability-
Rs.10 crores
Every officer of the Company who is in default shall be punishable with
imprisonment which may extend to 7 years and with fine between Rs.25 lakhs and
Rs.2 crores or with both.
CHAPTER 5 CHARGE
KINDS OF CHARGE
Charge on the property of the company as security for debts may be of the following
kinds:
The company may sell, mortgage or lease such property in ordinary course of its
business if it is authorised by its memorandum of association.
A floating charge crystallize and the security becomes fixed in the following cases:
(i) When the company goes into liquidation;
(ii) When the company ceases to carry on the business;
(iii) When the creditors or the debenture holders take steps to enforce their security
e.g. by appointing receiver to take possession of the property charged;
(iv) On the happening of the event specified in the deed.
In the aforesaid circumstances, the floating charge is said to become fixed or to
have crystallized.
Until the charge crystallizes or attaches or becomes fixed the company can deal with
the property so charged in any manner it likes.
Meaning Mortgage implies the transfer of Charge refers to the security for
ownership interest in a particular securing the debt, by way of
immovable asset. pledge, hypothecation and
mortgage
Creation A mortgage is created by the act of the A charge may be created either
parties. through the act of parties or by
operation of law.
Registration A mortgage requires registration under A charge created by operation of
the Transfer of Property Act, 1882. law does not require registration.
But a charge created by act of
parties requires registration.
Modification of Charge:
It shall be the duty of the Company to register the modification of charge in Form
CHG-1 in the same way as above for 1st creation of charge even in change of Interest
rate.
Effect of Non-Registration:
If a charge is not registered with the prescribed period with the ROC, then such
charge shall become void against the liquidator and the creditors of the company.
An unregistered charge shall remain valid and be treated as unsecured charge.
SATISFACTION PROCESS
1. Notice to ROC:
The Company shall give intimation to the ROC in respect of the full payment or
satisfaction in full of any charge within 30 days from the date of such payment or
satisfaction in Form No.CHG-4 along with the fee.
If the satisfaction of the charge is not filed within 30 days from the date on which
such payment of satisfaction, the ROC shall not register the same unless the delay is
The dividend is the liability of the company after its declaration by the
shareholders of the company.
On other side, the shareholders have the right to claim dividend only after
a dividend is declared by the company in general meeting.
Special Note: Until and unless dividend is declared, the shareholder has no claim against the company
TYPES OF DIVIDEND
(a) 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.
Final Dividend can be declared only if it is recommended by the Board of
Directors of the Company.
Note: Board of Directors must mention about the amount of dividend in the
Directors’ Report.
(b) 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.
Note: All the provisions relating to the payment of dividend except the
declaration of dividend by the shareholders shall be applicable on the
interim dividend also.
interim dividend, such interim dividend shall not be declared at a rate higher
than the average dividend declared by the company during the immediately
preceding 3 financial years.
A dividend including interim dividend once declared becomes a debt and
cannot be revoked, except with the consent of the shareholders.
A1. Section 2(35) of the Companies Act, 2013: “Dividend includes any
interim dividend”.
The dividend is the liability of the company after its declaration by
the shareholders of the company.
On other side, the shareholders have the Right to claim dividend only
after a dividend is declared by the company in general meeting.
In case of interim dividend, the decision of the Board shall be
treated as a declaration of dividend and once declared dividend
becomes a debt to the company.
Once declared, it cannot be revoked except with consent of the shareholders.
In case, dividend has been declared illegally, then the Board can revoke the
declared dividend.
1. Waiver of dividend
• Follow the provision given in the AOA
2. Distribution of profit.
• Sec-8 co.- cannot distribute dividend
• Nidhi company – 25% -- above 25% permission from RD
• Same amount transfer to reserve.
• No default
• No past default in payment of dividend
3. Producer company.
4. Limited by garentee.
• Cannot distribute the dividend
by that Government.
meeting.
(b) Approval by shareholders: The shareholders in their meeting (i.e. AGM) shall
declare/ approve the rate of dividend as recommended by the Board of
Directors and authorize board of directors for payment of dividend
(c) Payment of Dividend: After declaration of dividend, the company has to pay
the dividend within 30 days from the date of declaration.
Note: The amount of the dividend, including interim dividend, shall be
deposited in a scheduled bank in a separate account within 5 days from the
date of declaration of dividend.
The dividend shall only be payable in cheque or warrant or in any electronic
mode to the shareholders who are entitled for the dividend.
(d) Transfer of dividend to a Special Account: In any reason, the dividend has
not been paid to the members, the company has to open a special account
"unpaid dividend account" and transfer the unpaid or unclaimed dividend
amount to the special account. The unpaid or unclaimed dividend amount shall
be kept in this account for 7 years from the date of transfer.
Note: In case of any default in transfer of the unpaid or unclaimed dividend
within 7 days from the expiry of 30 days of declaration, the company shall
be liable to pay interest at the rate of 12% on remaining unpaid amount.
(e) Transfer to Investors Education and Protection Fund (IEPFI): After 7
years, the company has to transfer the entire unpaid or unclaimed amount to
the Investors Education and Protection Fund.
Shareholder or their legal heirs can claim his dividend and its shares from
the IEPF.
Special Note: No company shall pay dividend in case of failure of repayment of deposits and
its interest
(f) Details of unpaid dividend to be placed at the website: The Company shall
prepare a statement containing the names, their last known addresses and
the unpaid dividend to be paid to each person on the website of the company
within 90 days after making transfer of the amount to the Unpaid Dividend
Account.
A2. The Board of Directors may keep the entire profit for the
purpose of expansion/growth of the company and it is not an
obligation on the Board to recommend dividend to the
shareholders. Therefore, the contentions of shareholders are
not tenable.
(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) where, for any other reason, the failure to pay the dividend or to post the
warrant within the period under this section was not due to any default on
the part of the company.
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
Ensure that the dividend tax is paid to the tax authorities within the prescribed time.
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.
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.
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.
In the same BM, decide about date of closure of register/record date. Authorise to open separate bank
account for payment of dividend.
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 called "Interim Dividend Account of Ltd."
with the bank as resolved by the Board within 5 days of declaration of dividend.
Ensure that the dividend tax is paid to the tax authorities within the prescribed time.
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.
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
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.
Q3. A company for the financial year 2011-12, declared dividend on 19th
September, 2012 but failed to distribute the same within the
prescribed period. A case was filed against a director in this regard.
A3. As per section 127 of Companies Act, 2013, if dividend is not paid
within 30 days or dividend warrant not posted within 30 days, the
Company shall be liable to pay simple interest @ 18%
P.A. until the default continues. Every director is liable for
punishment upto 2 years in addition to fine of Rs. 1000/- per day
(till default continues) if he has committed the default knowingly.
Case Law: N. Kumar V. M. O. Roy, Assistant Director S.E.I.O.
Facts: a company for the financial year 1995-96, declared the
dividend but failed to distribute same within the prescribed period
(i.e. 30 days). A complaint has been filed against the company and its
directors for the contravention under section 127.
Judgement: In this case, the Court held that the director was not a
whole-time director at the time of declaration of dividend.
Therefore, he shall not be liable for default under section 127 of
the Companies Act, 2013.
CHAPTER 7
Benefits of CSR:
The benefits of CSR could be listed as follows:
(a) Strengthened brand positioning
(b) Enhanced corporate image and reputation
(c) Satisfaction of economic and social contribution to society
(d) Contribution to the surrounding society
(e) Increased ability to attract, motivate and retain employees
(f) Enhanced sales and market share
(g) Increased appeals to investors and financial analysts
(h) Local economy gains in all dimensions
CSR Activities:
The CSR activities shall be completed by way of the following methods:
(a) By Charity: A company can donate money to various charitable trusts,
societies, NGOs etc. who work for social economic welfare of society.
(b) By Contract: A company can make a contract with an NGO or any other
agency for carrying out the CSR Activities for and on behalf of the
company.
(c) By Itself: A company can take up any CSR activities on its own or create its
own trust for CSR Activities.
Note:
1. The CSR projects or programs or activities undertaken in India only shall
amount to CSR Expenditure.
2. The CSR projects or programs or activities that benefit only the employees
of the company and their families shall not be considered as CSR activities.
3. Contribution of any amount directly or indirectly to any political party under
section 182 of the Act, shall not be considered as CSR activity.
CSR Activities
As per the Companies Act, 2013, the following shall be treated as CSR
Activities:
1) Social Welfare Work: Eradicating poverty and malnutrition, providing
preventive health care and sanitation and making available safe drinking
water;
2) Promotion of Education: Promoting education including special education and
employment enhancing vocation skills especially among children, women and
others;
3) Promotion of Gender Equality: Promoting gender equality, empowering
women, setting up homes and hostels for women and orphans etc.;
4) Environment Protection: Ensuring environment sustainability, ecological
balance, animal welfare, conservation of natural resources and maintaining
quality of soil, air and water;
5) Protection of national heritage: Protection of national heritage, art and
culture including restoration of building and sites of historical importance
and works of art;
6) Contribution to the Prime Minister's National Relief Fund: Contribution to the
Prime Minister's National Relief Fund or any other fund set up by the Central
Government or the State Governments for socio-economic development and
relief and welfare of the Scheduled Castes, the Scheduled Tribes, other
backward classes, minorities and women.
7) Combating Diseases: Contribution towards combatting HIV/aids, or other
maternal diseases.
8) Contribution to incubator funded by CG or SG or PSU.Public funded IITS
common national laboratories, Indian council of agriculture research, medical
research, department of atomic energy defense research ministry of
electronics and IT.
PM CARES FUND.
PM CARES (PM’s citizen assistance and relief in emergency situation).
Fund may be spending for activities related to covid-19.
Benefit of Central armed police forces (CAPF) and central Para military
forces and their dependents including widows.
Formulation of Policy:
The CSR Committee will prepare and recommend to the Board, a policy which
will specify the activities to be undertaken (CSR Policy); advocate the amount
of expenditure to be incurred on the activities referred and monitor the CSR
Policy related to the company.
The Board will take into account the recommendations made by the CSR
Committee and support the CSR Policy of the company.
Role of the Board of Directors:
The Board of every company shall -
(a) Ensure that the activities which formulate by CSR Committee are duly
undertaken by the company.
(b) Ensure that the company spends in every financial year, at least 2% of the
average net profits of the company made during the 3 immediately preceding
financial years, in pursuance of its CSR Policy.
(c) Ensure that the company shall give preference to the local area and areas
around it where it operates.
Note: If the company fails to spend CSR amount (2%), the Board shall give
CHAPTER – 7 UNIQUE ACADEMY 7.5
CS SHUBHAM ABAD
CSR Expenditure:
• Total Contribution:
The Board of every company shall ensure that the company spends, in every
financial year, at least 2% of the average net profits of the company made
during the three immediately preceding financial years, in pursuance of its
Corporate Social Responsibility Policy.
■ Disclosure if amount not spent: If the company fails to spend such amount,
the Board shall, in its report specify the reasons for not spending the
amount.
■ Preference: The Company shall give preference to the local area and areas
around it where it operates, for spending the amount earmarked for
Corporate Social Responsibility activities.
■ Amount to be spent in India: Expenditure incurred on specified activities
that are carried out in India only will qualify as CSR expenditure.
• Miscellaneous:
Expenditure incurred in undertaking normal course of business will not
form a part of the CSR expenditure. Any surplus arising out of CSR
activities will not be considered as business profit for the spending
company.
Penalty
For Company: If a Company fails to comply with the above provisions, it shall
be punishable with fine which shall not be less than Rs.50.000/- but which
may extend up to Rs.25 lakh.
For every officer: Every officer who is in default shall be punishable with
imprisonment upto 3 years or with fine which shall not be less than Rs.50
thousand but which may extend up to Rs.5 lakh or with both.
A1. (i) Schedule VII mandates expenditure for the following activity—
1. Eradicating hunger, poverty and malnutrition, promoting preventive health
care and sanitation, including contribution to the Swachh Bharat Kosh set-
up by the Central Government and making available safe drinking water,
2. Promoting education, including special education and employment
enhancing vocation skills especially among children, women, elderly, and
the differently abled and livelihood enhancement projects,
3. Promoting gender equality, empowering women, setting up homes and
hostels for women and orphans; setting up old age homes, day care centres
and such other facilities for senior citizens and measures for reducing
inequalities faced by socially and economically backward ,
4. Ensuring environmental sustainability, ecological balance, protection of
flora and fauna, animal welfare, agro forestry, conservation of natural
resources and maintaining quality of soil, air and water including
contribution to the Clean Ganga Fund set-up by the Central Government;
5. Protection of national heritage, art and culture including restoration of
buildings and sites of historical importance and works of art; setting up
public libraries; promotion and development of traditional art and
handicrafts,
6. Measures for the benefit of armed forces veterans, war widows and their
dependents;
7. Training to promote rural sports, nationally recognised sports, para
Olympic sports and Olympic sports;
8. Contribution to the Prime Minister’s National Relief Fund or any other fund
set up by the Central Government for socio-economic development and
relief and welfare of the Scheduled Castes, the Scheduled Tribes, other
backward classes, minorities and women;
9. Contributions or funds provided to technology incubators located within
academic institutions which are approved by the Central Government,
10. Rural development projects,
11. Slum Area Development
Net profit after tax is taken as base and accordingly the adjustments
need to be considered, which disallow Income-tax expense, so effectively
it will be Net Profit Before Tax.
Q2. Net profits of PQR Ltd. during the following years as disclosed in the
statement of profit and loss are as under: Financial year
Net Profits (Rs.in crore)
31st March, 2013 10
31st March, 2014 12
31st March, 2015 08
The Board of Directors of the Company at its meeting decided to continue
to a charitable organization, for charitable purposes, a sum ofRs.3 crore
out of net profits of the financial year ended 31st March, 2015. This
contribution has been made by the Board without seeking approval of
shareholders in general meeting.
In the light of the provisions of the Companies Act, 2013, examine the
validity of the contribution made by the company. What shall be your
answer in case the Board decides to contribute Rs.l crore only? Dec 2015
4 marks
A2. As per section 135 of the Companies Act, 2013, a company is under obligation
to spend in every financial year, at least 2% of the average net profits
of the company made during the 3 immediately preceding financial years,
in pursuance of its CSR Policy.
In the given case, average 2% of last financial profit is only Rs.l.50 crore
and it is responsibility of Board to spend such amount.
The Companies Act, 2013 is silent with regard to spending excess of 2%
of average net profit on CSR activities as prescribed but that can be spent
if the committee and Board agrees.
CHAPTER 8
ACCOUNTS, AUDIT
AND AUDITORS
PART I- ACCOUNTS
ACCOUNTS [hisab bato]
The shareholders give capital to the company for doing the business and they are
the owners of the company.
On contrary, despite providing capital to the company, shareholders do not
participate in managing the affairs of the company.
However, they have every right to know as to how their money has been dealt with
by the directors in a particular period (i.e. financial year).
Special Note: The books of accounts of the branch office relating to transactions of a branch office may be kept at
that office. However, the branch office must send summarized books of accounts of branch at intervals of not more
than 3 months to the registered office
Signing of Financial
staement
Chairperson OR 2 Directors (out of which 1
CEO (if he is
CFO
CS
Other Requirement:
(a) One Person Company's financial statements shall be signed by only one director.
(b) Such sign is required for submission of financial statements to the auditor for
his report.
(c) 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. Penal provisions:
For Company: not less than Rs.50,000/- which may extend upto Rs.5,00,000/-, For
every officer in default: Imprisonment upto 3 years, or fine from Rs.50,000/- to
Rs.5,00,000/- or both.
Q1. The Board of Directors of Grow More Ltd., a public company, has duly
delegated its power to approve the annual accounts of the company for
the year 2011-12 to a committee of directors. The said committee
considered the annual accounts and approved the same before the
accounts were handed over to the statutory auditor of the company.
Will you accept such approval of annual accounts? (4 marks) June 2012
A1. Section 134: The Board of Directors has only the power to approve
the Financial Statements and such power cannot be delegated to a
committee of directors.
The approval of annual accounts which are to be ultimately placed before
the shareholders of the company is not to be treated as a routine or
part of day-to- day work.
Accordingly, the Board of Directors must consider the annual accounts and
approve them before the accounts are handed over to the statutory
auditor of the company.
Therefore, such approval by committee shall not be accepted.
The revised financial statements and board's report shall not be prepared or filed
more than once in a financial year.
Q2. Give your opinion whether the Registrar of Companies can take balance
sheet and profit and loss account on record even if it is not laid before
annual general meeting or placed before the extra- ordinary general
meeting.
(4 marks) Dec 2006
A2. Section 137: Every company has to file financial statements including
consolidated financial statement together with Form AOC- 4 with the
ROC within 30 days from the day on which the annual general meeting
(AGM) held and adopted the financial statements with fees or additional
fee, as the case may be.
Q3. A director of the Company along with another director of the company
was prosecuted under section 137 for their failure to file annual return,
annual accounts and audited balance sheet required to be laid before
AGM. The directors filed a petition before the Court/tribunal to quash
the prosecution initiated by the registrar of companies. As a Company
Secretary in practice, advice in the matter
A3. As per section-137 of the Companies Act, 2013, every company is required
to file the financial statements including consolidated financial
statement together in Form AOC- 4 with ROC within 30 days from the
day on which the annual general meeting held and adopted the financial
statements in accordance with the Companies (Registration Offices and
Fees) Rules, 2014.
If annual general meeting has not been held, the financial statement
duly signed along with the statement of facts and reasons for not
holding the AGM shall be filed with the Registrar within 30 days of the
last days before which the AGM should have been held.
Conclusion: In the given situation, if the company has not filed annual
return and annual account, it is a violation of section 137 and directors
shall be punishable with fine of Rs.1000/- for every day during which
failure continues subject to maximum of Rs.10 lacs.
The MD and CFO if any, and, in the absence of such MD or CFO, any
other director who is charged by the Board with the responsibility of
complying with the provisions of the Act, in the absence of such
director, all directors of the company shall be punishable with
imprisonment for a term which may extend upto 6 months or with fine
which shall not be less than Rs.l lakh but which may extend to Rs.5 lakh
or with both. To avoid such situation, the company should have filed
unadopted financial statement.
Object of Audit:
To make sure that the statement of accounts of the relevant financial year reflects
true and fair affairs of the Company.
Need of Audit:
Generally, in a company, the business is run by persons (Board of Directors) other
than the owners (shareholders) in a company. Therefore, in order to safeguard the
interest of the shareholders, it is necessary to appoint independent person for audit
of statement of accounts of the company.
Types of Audit
STATUTORY AUDIT
any security in connection with the indebtedness of any third person to the
company, or its subsidiary, or its holding or associate company or a subsidiary of
such holding company, in excess of Rs.l 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;
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.
Q4. M/s. C.S Horn & Co. is proposed to be appointed as auditors of Growth
Limited. Mr. A, Mr. B and Mr. C are 3 partners of the firm. Mr. A’s
sister’s husband holds securities in the Growth Limited of the face value
Rs. 5 Lakh. Considering the provisions of the CA, 2013, can the firm be
appointed as the auditors of the company?
A4. Section 141(3) read with Rule 10(1) of the Companies (Audit and Auditor)
Rules, 2014 provides that a relative of an auditor may hold securities
in the company only upto face value of Rs. 1 Lakh.
The prohibition applies only to the relatives, the definition of relative
given under section 2(77) of the Act is
• Members of HUF
• Husband and wife
• Related in the prescribed manner Father (including step father)
Mother
(including
step mother)
Son
(including
step son)
Son’s wife Daughter
Daughter’s husband Brother
(including step brother) Sister
(including step sister)
Therefore sister’s husband not covered under definition of Relative will not
disqualify C.S. Hora &
Co. for being appointed as auditors.
Q5. M/s. Nainee & Co. is the existing auditors of ABC Limited. Mr. L, Mr. M
and Mr. N are 3 partners of the firm. One of the relatives of Mr. L
holds securities in the ABC Limited. Considering the provisions of the
CA, 2013, can the firm continue as the auditors of the company ?
A5. Section 141(3) read with Rule 10(1) of the Companies (Audit and Auditor)
Rules, 2014 provides that a relative of an auditor may hold securities in
the company of face value not exceeding Rs. 1 Lakh. Hence, M/s. Nainee
& Co. will not be disqualified from being the auditors of ABC Limited so
long as the relative is holding security of ABC Limited of the face value
of not more than Rs. 1 lakh. In case the value of the securities held
exceeds Rs. 1 lakh, the same needs to be liquidated within 60 days of
acquisition of interest, i.e. corrective action needs to be taken for the
auditor not to suffer any disqualification under section 141.
A6. Yes. As per section 141(2) of the CA, 2013, a multi-disciplinary firm can
be appointed as the auditors of the company, provided that only the
partners who are chartered accountants are authorised to act and sign
on behalf of the firm.
Q7. M/s. ABC & Co. a Chartered Accountancy firm having 2 partners is
currently engaged in the audit of 40 companies. It has been approached
by PQR Private limited and X Ltd (Listed) for accepting assignment as
statutory audit. Can ABC & Co. accept such appointment?
A7. No, it can’t as they are already on threshold of 20 companies per partner
making it 40 already.
at the 2nd, 3rd, 4th and 5th AGM. If the members do not ratify
the appointment then it would arise casual vacancy.
But as per the Companies (Amendment), Act, 2017, there will be no requirement of
annual ratification of auditor's appointment at AGM.
1st Auditor:
The 1st Auditor shall be appointed by the Comptroller and Auditor General (CAG)
within 60 days from the date of incorporation.
In case of failure, the Board shall appoint auditor within next 30 days after 60
days from the date of Incorporation of the Company.
If Board fails to appoint then the Board shall inform to the members, who shall
appoint the auditor within 60 days at an EGM.
Note: 1st Auditor shall hold office till conclusion of first Annual General Meeting.
Subsequent Auditors:
The CAG shall appoint the auditor within 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.
> If the Board disagrees with the recommendation of the Audit Committee, the
following route shall be adopted.
The Board shall refer back the recommendation to the Audit Committee for
reconsideration.
If the Audit Committee reconsiders its decision and agrees with the Board then the
Board's recommendation will be proposed at the AGM.
If the Audit Committee does not reconsider its decision and stick to its original
decision then the Board shall send its own recommendation to the AGM along with
recorded reasons for disagreement.
Note: In case, a Company has an Audit Committee, then all appointments of Auditor
including filling of casual vacancy, shall be made after taking into account the
recommendations of the Committee.
■ Unlisted public companies having paid up share capital of Rs. 10 crore or more;
■ Private limited companies having paid up share capital of Rs. 50 crore or more;
Any Company having public borrowings from financial institutions, banks or
public deposits of Rs. 50 crore or more.
Provisions of Rotation
As per provisions of rotation the above mentioned Companies shall not appoint or re-
appoint an individual as auditor for more than 1 term of 5 consecutive years; and an
audit firm as auditor for more than 2 terms of 5 consecutive years.
These auditors (either individual/audit firm) can be reappointed after cooling off
period of 5 years.
Special Note: a break in the term for a continuous period of five years shall be considered as fulfilling the
requirement of rotation;
Note: 3years' transition period will be given to comply with this requirement.
Q8. Where the rotation requirements are not applicable to a company, can an
auditor be appointed for a term of one year only?
Q9. On the expiry of the tenure of existing auditors (M/s. ABC & Co.), XYZ
Limited, a public limited company considers to appoint M/s. PQR & Co.
as their new auditors. Both the audit firms have a common partner Mr
hi. Considering the provisions of the CA, 2013, can PQR be appointed as
the auditors of XYZ Limited?
Therefore, PQR & Co. is ineligible for being appointed as the statutory
auditors of the company.
Q10. Will the answer to the above change if there is no common partner but
both firms operate under one network/brand?
A10. The answer will not change. The incoming auditor shall not be eligible for
appointment if the auditor or audit firm is under the same network of
audit firms.
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.
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;
(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.
The auditor is required to provide the reasons, where any of the matters required
to be included in the Audit Report is answered in negative or with a qualification.
Special Note: It is the duty of the auditor to sign the audit report and provide it to the Company
Q11. An auditor of a company signed the balance sheet, profit and loss account
and schedules/notes and furnished the auditor’s report on the same
date on which the reports were signed by the directors on behalf of
the Board. One of the directors raised objection stating that the audit
cannot be completed and certified in a day. Do you agree with the
director and if not, why? (4 marks) Dec 2012
A11. Section 143(1) of the Companies Act, 2013 says that the auditors are
having right to examine all times to the: (a) Books of accounts (b) Balance
Sheet (c) Profit and Loss account (d) Vouchers and (e) Every other
document declared by this Act.
If the auditor signs the balance sheet on the same date on which the
directors have approved it, it may not be inferred from the
circumstances that the auditor has not performed about efficiently.
Therefore, the objection of director is not valid.
Q12. Peculiar Ltd., an unlisted company, did not prepare its financial statements
for the year ended 31st March, 2016 in conformity with some of the
mandatory accounting standards.
With reference to the provisions of the Companies Act, 2013, state the
responsibilities of the directors and statutory auditors of the company
in this regard. Dec 2016, 4 marks
A12. As per Section 129 of the Act, preparation of the Financial Statements is
the Responsibility of the Management. Such financial statements shall
be in accordance with the accounting standards. Where the financial
statements of a company do not comply with the accounting standards,
the company shall disclose in its financial statements, the deviation from
the accounting standards, the reasons for such deviation and the
financial effects, if any, arising out of such deviation.
Further as per section 135(5), the Directors' Responsibility statement
which is a part of Board's Report shall state that, the applicable
accounting standards had been followed along with proper explanation
relating to material departures; in the preparation of the annual
accounts.
In addition to the above the Section 143 states that the Auditor of the
Company also has a duty to report in his Auditor's Report whether in his
opinion the Financial Statements comply with applicable
Accounting Standard.
Accordingly, every auditor must comply with the auditing standards while
performing the responsibilities of Auditing.
Q13. Mr. Sharp, auditor of the Happy Future Ltd. refused to provide the
Audit Report of the financial year 2016-17, on the grounds that the
audit fee for the financial year 2015-16 is still unpaid. Can he do so?
A13. No, Mr. Sharp cannot withhold the audit report for the reason of non-
payment of audit fee, as it is his duty to sign and provide audit report.
He can sue the Company to recover his pending payment.
BRANCH AUDIT
The Accounts of branch office can be audited by:
(a) The company's auditor; or
(b) Any other person, qualified to be appointed as an auditor as per the provisions
of the Act as branch auditor; or
(c) In case of foreign branch, by the company's auditor or by an accountant or a
competent person appointed in accordance with the prevailing laws of the
foreign country.
The branch auditor shall prepare a report on the accounts of the branch examined
by him and the company's auditor shall deal with such report in his audit report in a
manner as he considers necessary.
(b) The branch auditor shall submit his report to the company's auditor.
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;
or
(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 to conduct
internal audit of the functions and activities of the Company.
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 alongwith 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.
Act, 2013.
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 which is 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.
COST RECORDS & AUDIT (Section 148 of the Companies Act, 2013)
The Central Government may direct for conducting cost audit of certain class of
companies which are engaged in the production of such goods or providing such
services relating to the utilization of material or labour or to other items of cost.
If the Central Government is of the opinion, that it is necessary to do so, it may, by
order, direct that the audit of cost records of class of companies.
conducting the audit of cost records and the auditor conducting the cost audit shall
comply with the cost auditing standards.
The qualifications, disqualifications, rights, duties and obligations applicable to auditors
shall also apply to a cost auditor and it shall be the duty of the company to give all
assistance and facilities to the cost auditor for auditing the cost records of the
company.
Note: The report on the audit of cost records shall be submitted by the cost
accountant in practice to the Board of Directors of the company.
A company shall within 30 days from the date of receipt of the cost audit report,
furnish with the Central Government
with such report along with full information and explanation on every reservation or
qualification.
The Companies (Cost Records and Cost Audit) Rules. 2014
(a) Applicability for cost audit'. The Central Government may direct for the audit
of cost records of certain class of companies.
(b) Maintenance of records: Every company covered under these rules including all
units and branches thereof, shall, in respect of each financial year commencing
on or after the 1st day of April, 2014, maintain cost records in Form CRA-1.
(c) Cost audit: Every company covered under these rules shall appoint a cost
auditor within 180 days from the commencement of every financial year.
(d) Qualification of 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 suggestion in Form
CRA-3.
• The directors are holding the position of trust and they are under obligation to
manage the business efficiently and effectively for the purpose to maximize the
wealth of shareholders.
Shareholders expect certain level of transparency and disclosure from the Company
and the Board.
• Earlier where Board's Report or Director's Report played an important role for the
stakeholders to judge or analyze the performance and corporate governance
measures adopted by the company.
• Today the ambit of mandatory disclosures by the corporates have increased
manifold and includes disclosure under the Companies Act, 2013, SEBI (LODR)
Regulations, 2015, Sexual Harassment (Prevention, Prohibition and Redressal) Act,
2013 etc.
1) Independent Director:
An Independent Director is a person who is not related to the promoters or the
other members of the company.
An independent director shall hold office for a term up to 5 consecutive years
on the Board of a company, but shall be eligible for reappointment on passing of
a special resolution by the company and disclosure of such appointment in the
Board's report.
2) Audit Committee:
Board's Report shall disclose the composition of audit committee and also
discloses the recommendation of the audit committee which is not accepted by
the Board along with reason thereof.
3) Vigil Mechanism:
It is the whistleblower provision which is a mandatory requirement.
This mechanism would enable a company to evolve a process to encourage
ethical corporate behavior.
Every listed company shall establish a Vigil mechanism for their Directors and
Employees to report their genuine concern or grievances.
4) Nomination and Remuneration committee:
The Board's Report shall disclose the composition of Nomination and
Remuneration Committee and also discloses the recommendation of the
Nomination and Remuneration Committee.
5) Secretarial Audit for Bigger Companies:
Every listed company and other prescribed companies shall annex the
secretarial audit report given by a Company Secretary in practice with
Board's Report.
The Board in its report shall explain any qualification or other remarks made by
the Company Secretary in Practice.
6) Disclosures about CSR Policy:
The disclosure of contents of Corporate Social Responsibility Policy in the
Board's report and on the company's website.
1) Conservation of energy, technology absorption, foreign exchange earnings and
outgo:
Details of steps taken by the Company for energy & technology absorption and
foreign exchange earnings and spending during the financial year to be disclosed
in such manner as may be prescribed.
2) Statement of affairs of Company:
Q1. The Board of Directors of Charming Ltd. seek your advice on the matters
to be included in the directors' responsibility statement forming part of the
company's annual report to shareholders. As the Company Secretary of
Charming Ltd., advise the Board. 4 marks 0une, 2015)
(b) The applicable accounting standards had been complied with along with
proper explanation relating to material departures The directors had
selected such accounting policies and applied them consistently and made
judgments and estimates that are reasonable and pmdent 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;
(c) 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;
(d) The directors had prepared the annual accounts on a going concern basis; and
(e) 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.
V. POLICIES
Both Companies Act, 2013 and SEBI (LODR) Regulation, 2015 lays down
formulation of certain policies. Policies under Companies Act, 2013
Whistle Blower Formulated by every listed company and all companies which:
Policy (i) accept deposits from the public;
(ii) have borrowed money from banks and public financial institutions in
excess of Rs. 50 Crores.
Policy for formal Formulated by every Listed Company and all Public Companies
evaluation of the having: Paid up capital of Rs. 10 Crores or more; OR
Board/
- Turnover of Rs. 100 Crores or more, OR
Committee
- Aggregate of outstanding loans or borrowings or debentures or deposits
exceeding Rs. 50 Crore or more.
Policy on Formulated by every Listed Company and all Public Companies having:
directors' - Paid up capital of Rs. 10 Crore or more; OR
appointment
- Turnover of Rs. 100 Crore or more, OR
& remuneration
of the directors, Aggregate of outstanding loans or borrowings or debentures or deposits
KMP, etc. exceeding Rs. 50 Crore or more.
carried out;
(e) Nature of action taken by the employer or District Officer.
Special Note: Companies as a practice include this disclosure in the Board’s Report
CHAPTER 10
AN OVERVIEW OF INTER CORPORATE LOANS,
INVESTMENT, GUARANATEE & SECURITY, RELATED
PARTY TRANSACTION
The Inter Corporate Loan & Investment is very prevalent in the current Market
Scenario. It is the easiest method to take loan by one company from another.
As per Section 186 of the Companies Act, 2013, a company can make investment
up to 2 layers of investment companies except acquisition of any foreign
company.
A Company can give loan and make investment upto 60% of paid-up share capital
plus free reserves and securities premium account or 100% of free reserves
and securities premium account, whichever is more.
Special Note: Where the companies are not having share capital (guarantee companies) then the computation shall be
based upon the free reserves available with the company.
Q1. As on 31st March, 2010, the balance sheet of ABC Ltd. shows the
following:
Advise the management of ABC Ltd. as to whether the company can give loan
ofRs.20 crore to LKP Ltd.
4 marks (June, 2011)
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.
Related parties (Section 188 of the Companies Act, 2013) [apne wale]
A related party means and includes:
(a) A director or his relative,
A company shall enter into any related party transaction subject to the following
conditions:
Appointment to any office or place of profit in the Monthly remuneration exceeding Rs. 2.5 Lakh
company, its subsidiary company or associate
company
Special Note: In case of any ordinary course of business and on the arm’s length transaction basis, then there is no
requirement of obtaining approval from the audit committee
CHAPTER 11
Registers and Records
A company has to maintain various registers for meeting the requirement for
statutory & management purposes.
A company has also to file many returns with the regulatory authorities based on the
requirements of the Companies Act, 2013. The objective behind such returns is not
only statutory requirement, but these are also helpful for the smooth functioning of
the company.
These returns have to file on quarterly basis, half yearly basis, annual basis or event
basis.
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 affecting any
property or assets of the company or any of its undertakings, indicating in each
case such particulars as may be prescribed.
• The entries in the register of charges maintained by the company shall be made
after the creation, modification or satisfaction of charge.
• The register of charges shall contain the particulars of all the charges registered
with the ROC on any of the property, assets or undertaking of the company and the
particulars of any property acquired subject to a charge as well as particulars of
any modification of a charge and satisfaction of charge.
• 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 for the
purpose. The register of charges shall be preserved permanently and the
instrument creating a charge or modification thereon shall be preserved for a
period of eight years from the date of satisfaction of charge by the company.
• A copy of the instrument creating the charge shall also be kept at the registered
office of the company along with the register of charges.
Register of Members
Every company to keep and maintain the following registers along with the Index
thereof:
(a) Register of members for each class of equity and preference shares (separately);
(b) Register of debenture holders;
(c) Register of any other security holders; and
(d) Foreign register of members and debenture holders etc.
• Every company shall, from the date of its registration, keep and maintain a
register of its members in one or more books in Form No. MGT.1.
In case of existing companies, registered under the erstwhile Companies Act, 1956,
particulars shall be complied within six months from the date of commencement of
rules of the Companies Act, 2013.
The register of members shall contain the following particulars in respect of each
member -
(a) Name of the member;
(b) Address,
(c) e-mail address;
(d) Permanent Account Number or CIN;
(e) Father's/Mother's/Spouse's name;
(f) Occupation;
(g) Status;
(h) Nationality;
(i) In case member is a minor, name of the guardian and the date of birth of the
member; name and address of nominee;
(j) Date of becoming member;
(k) Date of cessation;
(l) Amount of guarantee and instructions etc.
• In the case of existing companies, registered under the erstwhile Companies Act,
1956, particulars shall be complied within six months from the date of
commencement of these rules.
Place of Keeping Books of Account (Section 128 of the Companies Act, 2013)
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 seven days of such
decision to file with the Registrar a notice in writing giving full address of that other
place.
quarterly intervals to the company at its registered office and kept open to
directors for inspection.
Register of Directors & KMP & their Shareholding (Section 170 of the Companies
Act, 2013)
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.
Non-applicability:
The section shall not apply to Government Company in which the entire share capital
is held by the CG, or by any SG or Both.
Members' Right to Inspect the Register of Director & KMP & their shareholding
(a) Section 171 of the Companies Act, 2013 The register of directors and Key
Managerial Personnel (KMP) kept under section 170 shall be open for inspection
during business hours and the members shall have the right to take extracts
therefrom and copies thereof, on request and will be provided within 30 days
free of cost. [Section 171(l)(a)]
(b) 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.[Section 171(l)(b)]
(c) 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 thereunder.
Non-applicability: The section shall not apply to Government Company in which the
entire share capital is held by the CG, or by any SG or Both.
Preservation of Registers and Records in case of Listed Entity
In case of listed entities SEBI (LODR), requires certain policies to be adopted by
the companies for the purpose of preserving documents.
CHAPTER 12
CORPORATE REORGANIZATION
A company may decide to accelerate its growth by developing into new business
areas.
Once a company has decided to enter into a new business area, it has to explore
various alternatives to achieve its aims. Corporate restructuring is one of the
methods to achieve this objective.
Mergers, demerger, amalgamation, compromise and arrangements are the
different modes of corporate restructuring. The Chapter can broadly be
categorised into 3 Parts:
• Merger/ Compromises/ Arrangement/ Amalgamation
• Oppression Mismanagement
• Winding up
Demerger: It is a legal process through which one company splits its two divisions in
two separate companies.
(b) Income Tax Act, 1961: The Income Tax Act, 1961 gives tax reliefs to
(d) The Indian Stamp Act, 1899: This Act applies in relation to payment of Stamp
duties on transfer of undertaking through a merger or demerger.
The Competition Act, 2002: In certain cases, prior permission is required from the
Competition Commission of India (CCI), New Delhi.
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.
Circulation of documents:
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.
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:
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.
Annual statement to be filed with ROC every year until the completion of the
scheme:
Every company in relation to which the order is made shall, until the completion of
the scheme, file a statement in such form and within such time as may be prescribed
with the ROC every year duly certified by a CA/CMA/CS in practice indicating
whether the scheme is being complied with in accordance with the orders of the
Tribunal or not.
Punishment:
If a transferor company or a transferee company contravenes the provisions of
merger or amalgamation, the transferor company or the transferee company, as the
case may be, 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 such transferor or transferee
company who is in default, shall be punishable with imprisonment for a term which
may extend to 1 year or with fine which shall not be less than Rs. 1 lakh rupees but
which may extend to Rs.3 lakh, or with both.
• 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;
• Approval by creditors:
• 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.
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.
(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.
A2. This question is based on a case that was decided by the Gujarat High
Court.
Case Law: Gallops Realty Pvt. Ltd.
In this case, the Court held that Accounting standard is only applicable to
amalgamation not to de-merger.
Therefore, the file scheme was not in contravention of any law nor against
the public interest.
Further, this scheme was also approved by shareholders, secured and
unsecured creditors.
Mismanagement
[gunah]
Democracy is always a better governance structure
as compared to any other set up. It preserves the
rights of every one either majority or minority.
Most of the set ups are always preserving the rights of the section to whom it is
presenting.
The oppression of minority is a normal thing everywhere either in economics
or politics or in the companies. The greed for money is that the companies
are mismanaged for personal gains.
This greed lies with the majority holders.
The best set up for a company is that in which the minority rights are protected
and also in which the mismanagement is avoided.
Presently, the concept of shareholders' democracy means the shareholder's
supremacy in the governance of the business and affairs of corporate sector either
directly or indirectly.
The powers for governing a company are divided into two parts:
- Board of Directors who exercise their powers via Board Meetings
- Shareholders who exercise their powers via General Meetings
Shareholder's Power
The shareholder's powers enumerated at different places in Company Law are as
follow—
(a) Alteration of Memorandum of Association and Articles of Association.
(b) To reduce the share capital of the company.
(c) To shift the registered office of the company outside from one State to
another State.
(d) To appoint auditors in case of companies where 25% or more of the paid-up
share capital is held by Central/State Government or public financial
institutions or any of their constituents.
(e) To approach Central Government for investigation into the affairs of the
company.
(f) Appointment of sole selling agents where paid-up share capital is beyond
Rs.50 lakh.
(g) To allow a director, partner or his relative to hold office or place of profit.
(h) To make loans, to extend guarantee or provide security to other companies
or make investment beyond the limit specified.
(i) To appoint directors.
(j) To increase or reduce the number of directors within the limits laid down in
AO A.
(k) To cancel, redeem debentures etc.
(L) To make contribution to funds not related to the business of the company.
Powers of Majority
Every member of a company which is limited by shares, holding any equity shares
shall have a right to vote in respect of such capital on every resolution.
Member's right to vote is recognised as right of property and the shareholder may
exercise it as he thinks fit according to his choice and interest.
Section 47 of the Companies Act, 2013:
(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.
Therefore, the majority of the members enjoy the supreme authority to exercise
the powers of the company and generally to control its affairs.
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.
simple majority.
Simple or rigid, formalities are to be observed if the majority wants to give
validity to an act which purports to impede the interest of minority.
(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.
An individual shareholder is entitled to enforce his individual rights against
the company, such as, his right to vote, the right to have his vote recorded,
or his right to stand as a director of a company at an election.
(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.
(g) Prevention of Oppression and Mismanagement: The minority shareholders
are empowered to bring action with a view to preventing the majority from
oppression and mismanagement.
• 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.
In the case of a company having a share capital In the case of a company NOT having a share capital
(Minimum Members) (Minimum Members)
Lowest of
100 members
1/ 1Cfh of the total number of members 115th of the total number of members
Note: (1) The applicant or applicants has or have paid all calls and other sums due
on his or their shares;
(2) If shares are held by two or more persons jointly, they shall be counted
Q4. A company was in need of further capital. The majority representing 98%
of the shares were willing to provide the capital if they could buy-up
the 2% minority shares. The majority passed a resolution altering the
articles and enabling them to purchase the minority shares. The
minority shareholders refused to surrender their shares and
challenged the validity of the majority resolution. Decide (5
marks)(June, 2007)
A4. The majority resolution is void as it is neither just nor equitable for the
benefit of the company as a whole to purchase the shares of minority
compulsorily.
When will Tribunal Issue Order (Section 242 of Companies Act, 2013)
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
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:
5. 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.
1. Interim Order by Tribunal: The Tribunal may make any interim order which it
thinks fit for regulating the conduct of the company's affairs.
2. Order for change of MOA/AOA: 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.
Why a separate provision was introduced inspite there being Relief under
Oppression and Mismanagement?
The remedies available under the Oppression & Mismanagement (Sections 241-244)
are different from remedy under section 245.
While oppression and management have a greater range of remedies, all of them
were focused on controlling the affairs and management of the Company and were
of restraining nature.
There was a need of compensatory remedy available to the sufferers, which was
met by introduction of Class Action Suit in the Companies Act, 2013.
By Members
In the case of a company having a share In the case of a company NOT having a
Lowest of
Lowest of
- 100 members
(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;
directorate.
This was held to be sufficient evidence of mismanagement.
Process of winding-up
Special Note: The Tribunal shall make an order on receipt of the petition within
90 days from the date of presentation of the petition
Special Note: Apart from these two cases, a company may also go for voluntary
winding-up for any other reason for which a company has to pass a special
resolution
APPOINTMENT OF LIQUIDATOR
Appointment by Members: One or more liquidators are to be appointed by the
company in general meeting for the purpose of winding-up the affairs and
distributing the assets of the company.
The remuneration of the liquidators is also required to be fixed by the company in
general meeting.
Appointment by Creditors: Where the creditors have passed a resolution for
winding up the company, the appointment of the Company Liquidator shall be
effective only after it is approved by the majority of creditors in value of the
company.
The entire procedure for bringing about a lawful end to the life of a company is
divided into two stages:
(a) Winding-up: Winding-up is the process by which management of a
company's affairs is taken out of its directors' hands, its assets are realized
by a liquidator and its debts are discharged out of proceeds of realization.
Any surplus of assets which remains after such discharge is returned to its
members or shareholders.
(b) Dissolution: Dissolution is the last stage of liquidation, the process by
which a company (or part of a company) is brought to an end, and the assets
and property of the company redistributed.
Basic Winding-up is the 1st stage in the process Dissolution is the final stage
distinction whereby assets are realised, liabilities are whereby the existence of the
paid off and the surplus, if any, distributed company is withdrawn by the law.
among its members.
Appointment The liquidator appointed by the company or The order for dissolution can be
o the Tribunal carries out the winding- up passed by the Tribunal only.
f liquidator proceedings.
Representatio The liquidator can represent the company in Once the Tribunal passes
n by the the process of winding-up. This can be done dissolution orders the liquidator
Liquidator till the order of dissolution is passed by the can no longer represent the
Tribunal. company.
Debts to be Creditors can prove their debts in the Creditors cannot prove their claim
proven by the winding-up of a Company. on the dissolution of the company.
creditors
CHAPTER 13
An Introduction to MCA 21 & filling in XBRL
AN INTRODUCTION TO MCA 21
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.
AGILE Pro.
BENEFITS
1. Enables the business community to register a company and file statutory documents
quickly and easily.
5. Ensures proactive and effective compliance with relevant laws and corporate
governance
SERVICES OFFERED
➢ E-Filing –
User can download LLP Forms or Company Forms from the Portal, submit application for
PAN and TAN, upload e-forms, download Submitted Form for resubmission, check
annual filing status of the company, upload details of security holders or debenture
holders or depositors. Complaints –
A user can raise service related complaints, track the complaints created,
create investor/serious complaint, track the status of complaints created as
‘investor/serious complaint, give feedback or suggestions to MCA-21 and raise
employee grievances.
➢ Investor Services –
A user can search amount unclaimed/unpaid amount due to be transferred to the
Investor Education and Protection Fund (IEPF), upload investor details, and
confirm uploaded files.
CRC is presently tasked to process applications for RUN service for reserving a
name and forms related to new companies incorporations (SPICe/ SPICe MOA/
SPICe AOA /INC-22 andDIR-12).
DIN is an identification number which the Central Government may allot to any
individual, intending to be appointed as director or to any existing directors of
a company, for the purpose of his identification All existing and any person
intending to be appointed as a director are required to obtain the Director
Identification Number (DIN).
RUN FACILITY
The MCA Affairs has simplified the Company Name Approval Process from
26th January 2017 by introducing a new simple web-based application called
RUN (Reserve Unique Name) for Company Registration.
RUN (Reserve Unique Name) is a simple and easy process for reserving a name
for a new company or for change of name of an existing Company.
The complete name of proposed company, including suffix like (OPC) Private
Limited / Private Limited / Limited, should be submitted at the time of
application for approval.
Also, the object of the proposed Company is also to be submitted through RUN
application.
After filing the SPICe Form and making payment the user is required to visit
the MCA portal and access the service ‘Submit application for PAN and TAN’.
He has to download Form 49A (PAN) and 49B (TAN) and upload them on the same
screen after attaching his DSC.
He has to upload these forms (PAN & TAN) within 2 days of filing the SPICe
form failing which the entire SPICe form would be marked as ‘Invalid and Not
to be taken on record’.
registered and CIN would be allocated. DIN gets issued to the proposed
Maximum three proposed Directors are allowed using this integrated form for
filing application of allotment of DIN while incorporating a company.
Every user who is required to sign an e-form for submission with MCA is
required to obtain a Digital Signature Certificate.
For MCA-21, the following four types of users are identified as users of Digital
Signatures and are required to obtain digital signature certificate:
1. DSCs can also be obtained, wherever offered by CA, using Aadhare KYC based
authentication, and herein supporting documents are not required.
3. All companies (Public Company, Private Company, Company not having share
capital, Company limited by share or guarantee, Unlimited Company) must
comply with this requirement of registration of DSC by the director, manager
and secretary.
• PRE-FILL
1. Pre-fill is functionality in an e-Form that is used for filling automatically, the
requisite data from the system without repeatedly entering the same.
2. For example, by entering the CIN of the company, the name and registered
office address of the company shall automatically be pre-filled by the system
without any fresh entry.
• ATTACHMENT
1. An attachment refers to a document that is sent as an enclosure with an e-
Form by means of an attached file.
2. The objective of the attachment is to provide details relevant to the e-Form for
processing.
3. While some attachments are optional, some are mandatory in nature.
4. The attachments to an e-Form have to be in Adobe PDF format only and My
MCA portal has a facility to convert any document format to PDF format.
5. My MCA portal does not accept big attachments and the users are advised to
keep the attachment size to minimum (Not exceeding 2.6 MB of the total size
of the Form including attachments).
• MODIFY
✓ Once the user has done “Check Form” the form gets locked and it cannot be edited.
✓ If the user wishes to make any alteration, the form can be overwritten by clicking
the “Modify” button.
✓ If the user wants to modify the form after pre-scrutiny failure, the user can
get the e-form and whichever fields have to be changed only those may be
modified by using the “Modify” button.
• RADIO BUTTON
1. Frequent use of radio buttons has been done in the e-Form.
2. While filling the e-Form one is required to select applicable option out of two
or more radio buttons given against each point.
• CHECK BOX
Applicable Check box is required to tick out of the two or more boxes
wherever it appears in the e- Form.
• DROP
✓ Down Box Drop down box is a box wherein at the end, a downward arrow is provided.
✓ On clicking the arrow various applicable choices appear.
✓ One is required to highlight the applicable choice and that will be filled in the box.
• TEXT BOX
✓ Text box is meant to provide details on the relevant point by the person filling the
e-form.
✓ Space provided is generally adequate for the text to be written.
✓ However, if the space is not sufficient for a particular matter, information
can be given in the annexure to the form indicating the same in the box.
• COUNTRY CODE
✓ Sometimes the applicant is required to fill up the country code in the e-Form.
✓ This is available in the instruction kit.
• CHECK FORM
✓ By clicking “Check Form”, the user will be in a position to find out whether
the mandatory fields in an e-Form are duly filled-in.
✓ For example, if the user enters alphabets in “Date of Appointment of
Director” field, he/she will be asked to correct the entered information.
✓ If the size of e-Form including attachment is of bigger size then the
attachment may be filed through an addendum.
• PRE-SCRUTINY
✓ Pre-scrutiny is a functionality that is used for checking whether certain core
aspects are properly filled in the e- Form. The user has to make the necessary
attachments in PDF format before submitting the eForm for pre scrutiny.
✓ After this affix digital signature.
• SUBMIT
✓ An e-Form can be submitted after it has been digitally signed.
✓ The process of submission of an e-Form in case of off-line filling is presented
below:
✓ User logs in to MCA21 portal and uses e-Form upload service
✓ User browses the e-Form and clicks on “Submit¨ button
✓ User will be shown errors, if any
✓ If e-Form is successfully submitted, user will get confirmation message and
will be lead to the fee payment screen.
✓ The digital certificate is validated to ensure that the certificate has not
expired and the current status of the same is valid and that the certificate
has not been revoked or suspended.
XBRL
It offers cost savings, greater efficiency and improved accuracy and reliability
to all those involved in supplying or using financial data.
It does not change what is being reported, It only changes how it is reported.
XII has agreed the basic specifications which define how XBRL works.
BENEFITS OF XBRL
XBRL offers major benefits at all stages of business reporting and analysis.
The benefits are seen in automation, cost saving, faster, more reliable and
more accurate handling of data, improved analysis and in better quality of
information and decision-making.
All types of organisations can use XBRL to save costs and improve efficiency in
However, big the size of balance sheet is, .XML will be in a capsule form to
project such details, thus consuming lesser file size in comparison to normal
pdf attachments.
• INC-35 (AGILE form) – filing at the time of INC. APP for reg of GST , employee
state narrate &
employee provident fund
CHAPTER 14
BOARD CONSTITUTION & ITS POWER
The company is a creation of law and treated as artificial person which is managed
by the humans. The humans who run the Company are known Directors of the
Company.
When the Directors act collectively, they are known as Board and individually
treated as Directors. The directors play a very important role to manage the day
to day affairs of the company.
In short, the Directors are responsible to attain the objectives as prescribed in
Memorandum of Association of the company.
The position of board of directors is that of trust as the board is entrusted with
the responsibility to act in the best interests of the company.
Acting collectively as a Board of Directors, they can exercise all the powers of
the company except those, which are prescribed by the Act to be specifically
exercised by the company in general meeting.
BOARD COMPOSITION
Minimum/Maximum Number of Directors (Section 149(1) of the Companies
Act, 2013)
Minimum Directors: Every public company must have a minimum number of 3
directors. In case of private company, there must be 2 directors and
Whereas 1 director is required in One Person Company.
Special Note: The paid-up share capital or turnover as on the last date of latest audited financial statements shall be
taken into account.
of public companies.
In simple words, out of 20 companies maximum 10 can be public companies
or private companies which are holding or subsidiary of public companies.
Section 8 company will not be counted for the purpose of maximum number of
Directorship.
1. Listed company – 8 directorship – 1 April 2019
2. Listed company – 7 directorship – 1 April 2020
3. Independent directorship Max 7
4. If ID, is WTD then max 3 independent directorship
Special Note: For the purpose of counting the limit directorship in dormant company to be ignored.
another company;
11. To make political contributions;
12. To appoint or remove key managerial personnel (KMP);
13. To appoint internal auditors and secretarial auditor;
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.
The banking company is not covered under the purview of this section. The
company may impose restriction and conditions on the powers of the Board.
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.
in good faith.
Special Note: Temporary Loans will not be considered for calculating the limit u/s 180(l)(c).
Temporary loans means a loan which is payable on demand or within 6 months, but it does not include a loan by
whatever name called raised for financing capital expenditure.
accept the liability on the plea that the chairman had borrowed funds without
authorisation from the company. Will the company succeed? Explain. (5 marks)
A1. Case Law: Krishnan Kumar Bohatgi and others v. State Bank of India and others
Facts: An amount of Rs.5 lakh had been borrowed by the company under a promissory
note guaranteeing the repayment by executing a guarantee in favour of the company.
The Chairman of the Company executed such promissory notes in favour of Bank. In
the suit for recovery, the company explained that the promissory note was executed
by the Chairman without proper authorization from the Board.
Judgment: The Patna High Court held that the company shall be liable for the
repayment of borrowed fund which was utilized for benefit of the company whether
the borrowed fund admitted raise with or without proper authorization from the
company.
Therefore, in given question, the company shall be liable to pay the borrowed fund to
the Bank because the Company had utilised for its benefits.
years.
The Finance Act, 2017 amended section 182 of the Companies Act,
2013, accordingly the limit on the maximum amount that can be
contributed by a company to a political party has been removed.
Hence a company now can contribute any percentage without any limit.
BOARD COMMITTEES
A board committee is a small working group identified by the board, consisting of
directors.
Committees are usually formed as a means of improving board effectiveness
and efficiency, in areas where more focused, specialized and technical
discussions are required.
The Companies Act, 2013 also recognizes the formation of Board
Committees Including Audit Committees. The Committees may be formed by
the Board of Directors for following reasons:
(a) Audit
(b) Compensation
(c) Executive
(d) Governance and nomination
(e) Other types of committees
Committees are usually formed as a means of improving board effectiveness
and efficiency in areas where more focused, specialized and technical
discussions are required.
These committees prepare the groundwork for decision-making and report at the
Audit Committee Provisions in Companies Act (Section 177 of the Companies Act, 2013)
Members:
The Audit Committee shall comprise of minimum 3 directors with majority
of the directors being Independent Directors. The majority of members of
Chairman:
The Chairman of the Audit Committee should be financially literate.
Investigation:
The audit committee can start investigation in the matter or referred by
the Board and also have the authority to obtain advice from external
sources and have full access to records of the company.
Note: Financially literate means the ability to read and understand basic financial statements i.e. balance sheet, profit
and loss account, and statement of cash flows. A person will be treated to have accounting or related financial
management expertise if he or she possesses experience in finance or accounting, or requisite professional certification
in accounting, or any other comparable experience.
Compliance:
A listed entity is required to comply both with the Companies Act, 2013 as
well as SEBI (LODR) Regulations, 2015. Whereas, other entities who need
to constitute Audit Committee will comply with Companies Act, 2013.
Comparison of Audit Committee under Companies Act. 2013 and SEBI (LODR) Regulations,
2015
1. LODR requires that all members of audit committee shall be financially
literate and at least one member shall have accounting or related
financial management expertise whereas the Companies Act, 2013
provides for majority of members of Audit Committee including its
Chairperson shall be persons with ability to read and understand, the
financial statement.
2. The Regulations require 2/3rd of members of the Audit Committee to be
The Nomination and Remuneration Committee helps the Board relating to the
appointment of the members of the Board.
This Committee finalizes the conditions of employment and remuneration of
senior management, and to management's and personnel's remuneration and
incentive schemes.
Special Note: Dormant and Section 8 Companies not required to constitute NRC.
Members:
This committee shall consist of 3 or more non-executive directors out of
which not less than one-half shall be independent directors.
Formulation of Policy:
The Nomination and Remuneration Committee shall consider the following while
formulating the policy:
(a) The level and composition of remuneration is reasonable and sufficient
to attract, retain and motivate directors of the quality required to run
the company successfully;
(b) Relationship of remuneration to performance is clear and meets appropriate
performance benchmarks; and
(c) Remuneration to directors, key managerial personnel and senior
management involves a balance between fixed and incentive pay
reflecting short and long-term performance objectives appropriate to
the working of the company and its goals.
Compliance:
A listed entity is required to comply both with the Companies Act, 2013 as well as
SEBI (LODR) Regulations, 2015.
Whereas, other entities who need to constitute Nomination Remuneration
Committee will comply with Companies Act, 2013.
SRC Provisions under Companies Act. 2013 (Section 178(5) of the Companies Act, 2013)
Constitution:
A company has to constitute a "Stakeholders Relationship Committee"
where such company has more than 1000 shareholders, debenture-holders,
deposit-holders and any other security holders at any time during a
financial year.
Note: The provisions of this section are not at all clear regarding the constitution
of Stakeholders Relationship Committee.
Chairperson:
The Chairperson of a Stakeholders Relationship Committee shall be a non-
SRC Provisions under SEBI (Listing Obligation Disclosure Requirements Regulations, 2015
The listed entity shall constitute a Stakeholders Relationship Committee to
specifically look into the mechanism of redressal of grievances of
shareholders, debenture holders and other security holders.
• The chairperson of this committee shall be a non-executive director.
• The board of directors shall decide other members of this committee.
Comparison of Stake Holders Relationship Committee under Companies Act, 2013 and
SEBI (LODR) Regulations, 2015
1. The Regulations specifically prescribe role of the committee in
Schedule II, Part D of the Regulations.
2. Further a listed entity even if having less than 1000 debenture
holders/security holders is required to constitute a stakeholder
relationship committee.
Penalty for Contravention of Sections 177 and 178 of the Companies Act, 2013
For Company: Minimum Fine - Rs.1,00,000/- Maximum Fine - Rs.5,00,000/-.
For Every officer who is in default: Imprisonment - upto one year or
Minimum Fine - Rs.25,000/-, Maximum Fine - Rs.1,00,000/- or both.
management plan.
(b) The company shall also constitute a Risk Management Committee. The
Board shall define the roles and responsibilities of the Risk
Management Committee.
OTHER COMMITTEES
In addition to the Committees of the Board mandated by the Companies Act,
2013 viz, Audit Committee, Nomination and Remuneration Committee,
Stakeholders Relationship Committee and the CSR Committee, Board of
Directors may also constitute other Committees to oversee a specific
objective or project.
The nomenclature, composition and role of such Committees will vary,
depending upon the specific objectives of the company.
A few examples of such Committees prevalent in the corporate sector in India and
abroad are given below:
1. Corporate Governance Committee
2. Science, Technology & Sustainability Committee
3. Regulatory, Compliance & Government Affairs Committee
4. Investment Committee
5. Ethics Committee.
1000 or more
Audit YES YES YES YES NO
Committee
INTRODUCTION
A company being an artificial person created by law does not have any physical existence. It can
act only through natural persons. The person, acting on its behalf, is called Director.
The Directors are appointed due to following reasons:
The shareholders of the Company are scattered throughout the Country and sometimes even
outside the country and therefore their participation in the day to day management is nearly
impossible.
The shareholders lack expertise
to manage the business. It is
mandatory to appoint Directors
under the Act
DIRECTOR (Section 2(34) & Section 2(10) of the Companies Act, 2013)
[Karta Datra]
The definition of the Director or the Board of
Directors is not exhaustive. The Companies Act,
2013 does not explain in real terms who is a
director.
Section 2(34) of the Companies Act, 2013: "Director means a director appointed to the Board of a
company".
Section 2(10) of the Companies Act, 2013: "Board of Directors or Board, in relation to a
15.1
company, means the collective body of the directors of the company".
Directors to be Individual only: As per 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. Office of Director cannot
be assigned
Again Section 166(6) of Companies Act, 2013, prohibits assignment of office of
director to any other person. Any assignment of office made by a director shall be void.
Special Note: If a person is proposed to become a Director in existing Company he has to obtain
it by filing DIR-3.
The Board resolution of the Company where he is proposed to be appointed shall also be
attached along with the application.
If a person is proposed to be appointed in a new Company he may file the application through INC-
32(SPICe) Form.
File an application:
The applicant should file an application in DIR-3 for the allotment of DIN on the website of the
Ministry of Corporate Affairs (i.e. www.mca.aov.in).
Submission of documents:
The applicant shall attach the following documents along with DIR-3:
(a) Photograph;
(b) Proof of identity;
(c) Proof of residence; and verification by the applicant in Form DIR-4.
Note: The specimen signature of the applicant should be duly verified and sign the form digitally.
Form DIR-3 shall be signed and submitted electronically by the applicant using his or her own
DSC and shall also be verified digitally by—
(i) A chartered accountant in practice or a company secretary in practice or a cost accountant in
practice; or
(ii) A company secretary in full time employment of the company or by the managing director
or director of the company in which the applicant is to be appointed a director.
Allotment of DIN:
The Central Government shall within 1 month from the receipt of the application for allotment of
a Director Identification Number to an applicant.
Removal of defects from application:
15.2
If the Central Government, on examination, finds such application to be defective or incomplete
it shall give intimation of such defect or incompleteness to the applicant directing him to rectify
such defects or incompleteness by resubmitting the application within a period of 15 days of
intimation.
Rejection of Application:
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 of such
placing on the website and email.
Special Note:
(a) The DIN so allotted under these rules is valid for the life-time of the applicant and
shall not be allotted to any other person.
(b) No individual shall apply for/obtain/ possess another DIN who has already been
allotted a Director Identification Number under section 154.
(c) If any person furnishes any return, information or particulars which are required to be
furnished under the Act and are related to a director shall mention DIN in that
document.
(d) DIN issued under Companies Act, 1956 to be treated as DIN issued under Companies Act,
2013.
2. Professional director
• Director as well as acting in professional capacity
• Remuneration in 2 capacity
• Remuneration
• Professional fees (not included in marginal remuneration)
3. Director KYC
• Form DIIR 3 KYC – Last date 30.9.2019
15.3
• New form DIR 3 KYC Web – when director has already been filed DIR 3 in such case
for change in particular he should file DIR 3 KYC Web.
15.4
Non-Applicability:
Section 162 will not apply to
▪ Private Company
▪ Government Company in which entire paid up capital is held by CG, SG or both.
▪ Wholly owned subsidiary of such Government Company
Special Note: This section prohibits appointment of more than 1 director through single resolution
at GM only. Therefore directors can be appointed by passing a single resolution at BM.
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.
Q1. A foreign national was intended to be appointed to the Board of an MNC in India.
He contends that, director identification number (DIN) is not required for him
as he is a foreign nationA1. Whether his contention is valid?
Dec., 2013 (4 marks)
A1. The contention of foreign national is not correct. If anyone wants to become a director of a
company
registered in India, must have DIN before his appointment as a Director.
Further under Companies (Amendment) Act, 2017, 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.
Therefore, if the foreign national must have obtained this prescribed number then he can
become
Director without obtaining DIN as that would be sufficient.
15.5
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.
15.6
without leave of absence from the Board;
(c) 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;
(d) He fails to disclose his interest (direct or indirect) in any contract or arrangement.
(e) He becomes disqualified by an order of a court or the Tribunal;
(f) 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;
(g) He is removed in pursuance of the provisions of this Act;
(h) 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.
Q2. Manish, a director of PQR Ltd., defaulted in filing annual accounts and annual
return with the Registrar of Companies for a continuous period of three
financial years ended 31st March, 2012. Based on the provisions of the
Companies Act, 2013, validate the following:
Whether Manish can continue to be a director of PQR Ltd. when he is also a
director in UV Ltd.? Also narrate whether he can be reappointed in PQR Ltd
as well as in UV Ltd. (4 marks) (Dec, 2013)
A2. As per section 164(2) read with section 167(l)(a) and clarifications of MCA Manish
can continue in defaulting Co. for a period of 6 months, but his vacation will
arise in UV Ltd.
He cannot be re-appointed as director in PQR Ltd. as well as UV Ltd.
APPOINTMENT OF DIRECTORS
15.7
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.
15.8
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
Meaning
Rotational Directors are directors who are 'eligible to Directors other than Rotational Directors are Non
retire' at an AGM. Rotational Director
Number
Atleast 2/3rd of the 'Total Number of Directors' should Other than rotational director will be non- rotational.
be Rotational Director. (Maximum l/3rd of the 'Total Number of Directors'
Note: will be Non-Rotational Director)
1. The AOA of Public Company can specify higher
number of Rotational Directors, or All directors
be Rotational
2. Total Number of Directors means total directors
Retirement of Rotational Director: [Inko jane do]
At every Annual General Meeting of a public company l/3rd of the Rotational Director shall retire.
Note:
1. If their number is neither 3 nor a multiple of 3, then, the number nearest to 1/3, shall retire
from office (the number will be rounded off to nearest to l/3rd)
2. The independent directors shall not be included for the computation of total number of
directors retire by rotation.
Example - I: Company having provisions in the AOA for retirement of all directors by rotation
Questions: ABC Ltd. is a public limited company and having 15 directors on its Board. The article
of association of the Company is having provision regarding retire by rotation for all directors. The
company is convening its 1st AGM on 30th September, 2014. Decide (a) how many directors are
Rotational? (b) How many directors will be liable to retire by rotation in 1st AGM (i.e. on 30th
September, 2014)?
Answer:
Total No. of Rotational Directors 15 Directors
(As AOA mentions all directors to be
rotational)
st
Total No. of Directors Retire by rotation on 1 AGM : 1/3 of 15
directors = 5 directors
[retire by rotation on 1st AGM]
15.9
Example - II: Company having no provisions in the AOA for retire by rotation
Questions: ABC Ltd. is a public limited company and having 15 directors on its Board. The article
of association of the Company is not having provision regarding retire by rotation for all directors.
The company is convening its 1st AGM on 30th September, 2014. Decide (a) How many rotational
directors are there? (b) How many directors will be liable to retire by rotation in 1st AGM (i.e. on
30th September, 2014)?
Answer:
Total No. of Rotational Directors : 2/3 of 15
Directors = 10
directors [10
directors are
rotational]
Total No. of Directors Retire by rotation on 1st AGM : 1/3 of 10
directors = 3 directors
[retire by rotation on 1st AGM]
How to deal with Vacancy in the Office of Retiring Director? [joh gaye unki
jagah ka kuch karo]
15.10
Case II: Appointment: of a person other than Retiring Directors (Section 160)
Appointment of a person as Director other than retiring directors [teri jagah koi aur
aayega]
Notice:
A person who is not a retiring director shall be eligible for appointment as director shall give
notice not less than 14 days before the general meeting at the registered office of the company.
Deposits:
The notice must be in writing under his hand signifying his candidature along with a deposit of
Rs.1,00,000/- which shall be refunded to such person if the person proposed gets elected as a
director or gets more than 25% of the valid votes casted.
The deposit is not required in the following cases:
> Appointment of Independent Director
A person who is recommended to be appointed as director by NRC or Board (if NRC constitution is
not required by the Company)
7 days' advance Notice:
The Company shall inform its members of the candidature of a person for the office of a director
or the intention of a member to propose such person as a candidate for that office, at least 7 days
before the general meeting by serving individual notices to members through e-mail and by post.
Advertisement:
If a company advertises such candidature in a vernacular newspaper in the principal vernacular
language of the registered office's district and also in English language not less than 7 days before
the General Meeting then there is no requirement for serving individual notices to the members.
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]
15.11
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.
15.12
■ 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.
Special Note: The Board is bound to follow instruction or suggestion of Financial Institution/
Bank etc.
Meaning A person appointed on The BOD may appoint a person Where office of a director who
the Board by Directors in place of a director who is out was originally appointed in
of India for 3 months or more. A GM comes to an end otherwise
person alternate to independent than normal course
Director should be independent
Who cannot A person who fails to get A person who holds alternate —
be appointed appointment in GM directorship for another person in
cannot be appointed as the Co. v A person holding
additional director directorship in the Co.
15.13
Specific Specific Authority in Specific Authority in AOA No specific authority needed
Authority AOA needed needed, OR „
A resolution at GM needed for
allowing BOD to appoint
alternate director
Term of Earlier of the following: Earlier of the following: Term of Director of the
office V Date of AGM, or s Last Max tenure of original director, director, in whose place Casual
date at which AGM ought or Vacancy director is appointed.
to be held
When original director returns to
India
Compliance Not Applicable as section Not Applicable as section 162 Not Applicable as section 162
of Section 162 applies to the applies to the directors appointed applies to the directors
162 needed? directors appointed at at GM appointed at GM
GM
Q3. Vinay was appointed as an additional director by the Board of Directors of Prudent
Ltd. in its meeting held on 20th July, 2005. Further, Vinay was appointed as a
director by members of the company in its annual general meeting held on 2nd
September, 2005. Comment whether Vinay is again required to file consent to
act as a director.
(4 marks) (June, 2006)
A3. Section 161(1) of the Companies Act, 2013:
A person appointed as a director or reappointed as an additional or alternate
director must sign and file with the Registrar his consent in writing to act as
such director immediately on the expiry of his term of office within 30 days.
Therefore, Mr. Vinay has to file his fresh consent on his re-appointment as a director.
15.14
(i) Applicability on Companies:
A listed company, May upon notice of not less than 1000 or 1/10 of the total number of
small shareholders, whichever is lower, have a small shareholders' director elected by the
small shareholders. A listed company may also suo moto opt to have a director representing
small shareholders.
(ii) Notice:
The small shareholders intending to propose a person as a candidate for the post of small
shareholders' director shall give a signed notice to the company at least 14 days before the
meeting.
(iii) Attachment of the Notice:
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.
(iv) Eligible as Independent Director:
If proposed director is qualified for appointment as an independent director and has given
declaration for his independence then such director shall be considered as an independent
director.
(v) Tenure:
The director's tenure as 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 reappointment after the expiry of his tenure.
Appointment only in two Companies:
A small director 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 1st company then he shall not be appointed in second company.
(vii) No Appointments for 3 years:
A small director shall directly or indirectly not be appointed or associated in any other
capacity with the company for a period of 3 years from the date of cessation as a small
shareholder's director.
INDEPENDENT DIRECTOR
Which companies are required to have independent directors?
The Companies Act, 2013 provides that every listed company to have at least 1/3 of the total
number of directors as independent directors and further states that the Central Government may
prescribe the minimum number of independent directors for a class of companies.
The Rule 8 prescribes at least two directors as independent directors for the following classes of
public limited companies having:
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(a) Paid-up share capital of Rs.10 crores or more; or
(b) Turnover of Rs.100 crores or more; or
(c) In aggregate, outstanding loans, debentures and deposits, exceeding Rs.50 crore.
However it is not applicable to
(a) Joint venture;
(b) Wholly owned subsidiary; and
(c) Dormant company as defined under section 455 of the Act.
Note: 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.
Special Note: If a Company to which these condition applied, ceases to fulfil any of three
conditions for three consecutive years then it shall not be required to appoint independent
director.
(c) 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. In Government companies, the criteria is not required to be followed.
Special Note: Pecuniary Relationship in respect of Independent Director does not include
following:
• Remuneration
Transaction not exceeding 10% of his total income Inserted by Companies.
No of independent director
4. Chairman
• Executive Director – ½ of board (minimum 50)
• Non executive but he is either a promotor or related to promotor group or related to
board or acting one level below the board (min 50%)
• Non executive – 1/3rd of board
• One independent woman director
• Top 500 company by 1-4-19
• Top 1000 company by 1-4-2020
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• Listed company having outstanding super voting rights (example 1 share max 10
votes, min 2 votes)
• Given to promotor
• 50% director shall be independent
• Top 1000 listed companies 1-4-19 – min 6 dirctor
• Top 2000 listed companies 200 listed companies 1-4-2020 – min 6 directors
• Age 75 beyond 75 – pass SR
KMP – CS limit – 10CR
Since the definition given above is difficult to understand and remember, an attempt
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is made by the author to simplify it as follows:
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15.19
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QUALIFICATION OF INDEPENDENT DIRECTORS
Rule 5 of Companies (Appointment and Qualification of Directors) Rules, 2014
An independent director shall possess appropriate skills, experience and knowledge in one or more
fields of finance, law, management, sales, marketing, administration, research, corporate
governance, technical operations or other disciplines related to the company's business.
Manner of selection of an Independent Director
(a) Selection from Data Bank: Independent directors may be selected from a data bank of
eligible and willing persons maintained by the agency (Anybody, institute or association as
may be authorised by Central Government like ICSI).
(b) Approval from Shareholders: The appointment of independent directors has to be
approved by members in a General meeting and the explanatory statement annexed to the
notice must indicate justification for such appointment.
(c) Application for adding the name in the databank: Any person who desires to get his name
included in the data bank of independent directors shall make an application to the agency
in Form DIR-1 Application for inclusion of name in the databank of Independent Directors
which includes the personal, educational, professional, work experience, other Board details
of the applicant.
The agency may charge a reasonable fee from the applicant for inclusion of his name in the data bank
of independent directors.
An existing or applicant of such data bank of independent directors shall intimate any changes in
his Particulars within 15 days of such change to the agency.
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Declaration by independent director
Every independent director shall give a declaration that he meets the criteria of independence in
following events:
1. At the first meeting of the Board in which he participates as a director
2. At the first meeting of the Board in every financial year
3. Whenever there is any change in the circumstances which may affect his status as an
independent director.
Special Note: 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
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as a one term.
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.
Manner of Appointment
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;
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(f) List of actions that a director should not do while functioning as such in the company; and
Other details like remuneration, sitting fees, reimbursement of expenses for Board Meeting and other
meetings etc.
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:
1. Notice in writing: An Independent director may resign from his office by giving a notice in
writing to the company and the Board.
The receipt of such notice shall be taken into account and shall also be informed to ROC by
the company.
Note: The resignation of a director shall take effect from the date on which the notice is
received by the company or the date as specified by the director, whichever is later.
2. Replacement of Independent Director: An independent director who resigns or is
removed shall be replaced by a independent director within 180 days from the date of
such resignation or removal.
3. 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.
Separate meetings of Independent Directors:
The independent directors shall hold at least 1 meeting in a year without the presence of non-
independent directors (i.e. MD/WTD) and members of management (i.e. Employee).
All independent directors of the Company shall make every effort to be present at the meeting of
Independent Directors.
The meeting of Independent Directors shall:
(a) Review the performance of non-independent directors and the Board as a whole;
(b) Review the performance of the Chairperson of the company, taking into account the views
of executive directors and non-executive directors;
(c) Assess the quality, quantity and timeliness of flow of information between the company
management.
Liability of Independent Director:
An independent director or a non-executive director not being promoter or key managerial
personnel shall be held liable only to those acts of omission which had occurred with their
knowledge and with his consent or connivance or where they had not acted diligently.
Retirement of independent directors:
The provisions in respect of retirement of directors by rotation shall not apply to the independent
directors.
Remuneration of Independent Director:
An independent director shall not be entitled to any stock option scheme (i.e. ESOP & Sweat
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equity) but shall receive remuneration by way of sitting fee, reimbursement of expenses for
participation in the Board Meetings and other meetings and profit related commission as approved
by the members.
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.
RESIGNATION OF DIRECTOR (Section 168 of the Companies Act,
2013)
[ muje nahi karna kaam]
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No director shall be liable for any liabilities if arise after the date of his resignation whether the
company has filed DIR- 12 or not but he shall be responsible for all activities done during his
tenure even after his resignation.
A4. The Chairman and Managing Director of Progressive Limited could not be held
responsible under
sections 138 & 141 of the Negotiable Instruments Act, 1881.
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The duties of directors as contained in section 166 of the Companies Act, 2013 are described
as follows
1. 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.
2. 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.
3. 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.
4. 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.
5. 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.
6. Duty not to assign his office-
A director of a company shall not assign his office and any assignment so made shall be
void.
I. PROHIBITED CATEGORY:
Any Company shall not (directly or indirectly)
■ Advance any loan (including book debt) to
■ Any director of Company or its Holding Company; or
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■ 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
Meaning of Any person in whom any of the director of the company is interested means—
(a) Any private company of which any such director is a director or member;
(b) Any body corporate at a general meeting of which 25% or more of the total voting power
may be exercised or controlled by any such director, or by two or more such directors,
together; or
Any body corporate, the Board of Directors, managing director or manager, whereof is accustomed
to act in accordance with the directions or instructions of the Board, or of any director or directors,
of the lending company.
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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.
Note: A company may give loan to managing or whole-time director as part of the conditions of
service extended by the company to all its employees or pursuant to any scheme approved by the
members by a special resolution. PUNISHMENT OF CONTRAVENTION:
■ To the Company: Fine Minimum Rs.5 lakh to Maximum Rs.25 lakh
■ To the Office in Default:
Imprisonment upto 6 months or
Fine of Minimum Rs.5 lakh to
Maximum Rs.25 lakh or Both
➢ To the person to whom
Loan/Guarantee/Security
is given: Imprisonment
upto 6 months or
Fine: Minimum Rs.5 lakh to
Maximum Rs.25 lakh or Both
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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 Governments.
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CS SHUBHAM ABAD
CHAPTER 16
KEY MANAGERIAL PERSONNEL
The Companies Act, 2013 recognises the appointment of the Key Managerial Personnel (KMP) on
top level of the organizational structure for managing entire business of a Company.
KMP is also responsible for all regulatory compliances not only as per the Companies Act, 2013
but also for other laws applicable on Companies.
It means KMP is the executive management of a company and responsible for the day to day
management of a company.
KEY MANAGERIAL PERSONNEL (Section 2(51) of the Companies Act, 2013) Key Managerial
Personnel, in relation to a company, means:
➢ The Chief Executive Officer or the managing director or the manager;
➢ The Company Secretary;
➢ The Whole-Time Director;
➢ The Chief Financial Officer;
➢ Such other officer, not more than one level below the directors who is in whole time
employment, designated as Key Managerial Personnel by the Board, and
➢ Such other officer as may be prescribed.
Elements of Definition of Kev Managerial Personnel
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
wholetime 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.
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.
Shareholders required
Appointment by Board Resolution: A MD, WTD or manager shall be appointed and the terms and
conditions of such appointment and remuneration payable should also be approved by the Board
Meeting.
Approval by Shareholders & CG: The approval from shareholders and the Central Govt, is required
in case any variances in the terms & conditions as specified in Schedule V.
Note: Approval of the CG is not necessary if the appointment of MD, WTD or Manager, is made
in accordance with the terms & conditions as specified in Schedule V.
In short, the appointment of a MD, WTD or manager and the terms and conditions of such
appointment and remuneration payable thereon must be first approved by the Board and then by
an ordinary resolution passed at a general meeting of the company.
DISQUALIFICATIONS OF KMPS
No company shall appoint or continue the employment of any person as its MD, WTD or manager
who:
Special Note: The person must have obtained the proper Employment Visa from the concerned Indian
Mission abroad.
COMPANY SECRETARY
Who can be Company Secretary? Definition as per Companies Act, 2013
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.
Therefore, 'Company Secretary' means a person who is a member of the Institute of Company
Secretaries of India (ICSI) and who is appointed by a company to perform the functions of a
company secretary.
Appointment of Company Secretary
Rule 8 read with Rule 8A of Companies (Appointment and Remuneration of Managerial Personnel)
Rules, 2014 provides for mandatory appointment of whole time company secretary in companies
having a paid up share capital of Ten crores rupees or more.
Roles & Responsibilities of Company Secretary
Co-ordinator
1. Statutory Officer:
The company secretary is an officer responsible for compliance with numerous legal requirements
under different Acts including the Companies Act, 2013 as applicable to companies. The
responsibilities of company secretary have also increased as he has been included in the definition
2. Co-ordinator:
The Company Secretary as a co-ordinator has an important role to play in administration of the
company's business and affairs.
It is for the secretary to ensure effective execution and implementation of the management
policies laid out by the Board.
The position that the company secretary occupies in the administrative set-up of the company
makes his function as one of co-ordinator and link between the top management and other
levels.
He is not only the communicating channel between the Board and the executives but he also co-
ordinates the actions of other executives vis-a-vis the Board.
The ambit of his role as a co-ordinator also extends beyond the Company and he is the link
between the Company and its shareholders, the society and the Government.
Thus, the role of a company secretary as a co-ordinator has two aspects, namely internal and
external.
Relationship with other Functionaries:
a) Trade Union
b) Shareholders
c) Government
d) Auditor
e) Community
3. Administrative Officer: The role of a company secretary as an administrator can be sub-divided
into following categories:
➢ Organizational Administration
➢ Financial Administration
➢ Tax Administration
➢ Office Administration
➢ Personnel Administration
➢ Administering Company's property
Make entries in Directors and KMP Register
remove a company secretary subject to terms of appointment and opportunity of being heard.
File DIR-12 within 30 days of removal
Additional Functions
• To provide guidance to the directors of the company either collectively and individually as
they may require, with regard to discharge their duties, responsibilities and powers;
• To convene the meetings and attend Board, committee and general meetings, and maintain
the minutes of these meetings;
• To obtain approvals from the Board, general meetings, the Government and such other
authorities as required under this Act;
• To represent before various regulators, Tribunal and other authorities under this Act;
• To assist the Board in the conduct of the affairs of the company;
• To assist and advise the Board in ensuring good corporate governance; and
• To discharge such other duties as may be assigned by the Board from time to time or as
prescribed in this Act.
The provisions relating of the Managerial Personnel in the Companies Act, 2013 are as under:
(a) Section 197: Overall ceiling for Managerial Remuneration i.e. 11% of the Net Profit or Individual
limit.
(b) Section 198: Calculation of Net Profit as required under section 197.
(c) Schedule V: Conditions for Appointments of KMPs and their remunerations in case of a Company
having no profit or inadequate profits.
Special Note: A company may pay more than 11% of the Net Profit with authority of shareholders.
(Prior to Companies (Amendment) Act, 2017 approval of Central Government was also needed)
Q1. Suresh, a solicitor, is appointed as director on the Board of Sam Organic Ltd. The company has
obtained legal opinion from Suresh and paid a fee ofRs. 5 lakh during the financial year 2004-05.
Auditor has raised an objection that fee payable to Suresh exceeds the limit prescribed under
Section 197 and
hence payment made to him is illegal, as the company has not obtained permission from the Central
Government. Therefore, the company should take steps to recover the same from Suresh. Keeping in view
the provisions of the Companies Act, 2013, give your opinion on the objection raised by the auditor. 2006 -
June (5 marks)
A1. Hint: If Nomination & Remuneration Committee and Boards has opinion that the director
possesses the requisite qualification for the services of the professional nature, then any amount
can be paid.
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
More than 100 crores but less than 250 crores 84 Lakhs
250 crores and above 120 Lakh plus 0.01% of the effective capital
in excess of Rs.250 crores
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:
Paid-up share capital : (Excluding Application money or advances against shares) XXXX
Add:
(a) credit of share premium account; : XXXX
(b) reserves and surplus (excluding revaluation reserve); : XXXX
(c) long-term loans and deposits repayable after one year : (Excluding working capital
loans, over drafts, interest due on loans unless funded, bank guarantee, etc., and other short-
term arrangements)
Less: XXXX
whose principal business is acquisition of shares, stock, debentures or other securities), XXXX
Table - B
If the following conditions are satisfied then remuneration can be paid without any limits:
1. The managerial person functions in a professional capacity
2. 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.
3. 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
4. He should possess graduate level qualification with expertise and specialised knowledge in the
field in which the company operates.
General Information:
1) Nature of industry
2) Date or expected date of commencement of commercial production
3) In case of new companies, expected date of commencement of activities as per
project approved by financial institutions appearing in the prospectus
4) Financial performance based on given indicators
5) Foreign investments or collaborations, if any.
(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; and
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.
Q2. Prudent Ltd. is paying remuneration to its non-executive directors in the form of
commission at the rate of 1% of the net profits of the company distributed equally
among all the non-executive directors. The company is providing depreciation on
straight line basis at the rates specified in Schedule II to the Companies Act, 2013. The
company seeks your advice in respect of the following:
(i) Whether it is necessary to make adjustment in respect of depreciation for the
purpose of arriving at the net profit of the company to determine the quantum of
remuneration payable to its non- executive directors?
(ii) Is it possible to pay minimum remuneration to non-executive directors besides
sitting fees in the event of loss in a financial year?
Advise the company explaining the relevant provisions of the Companies Act, 2013.
2004 - Dec (5 marks)
A2. The Company (if profit making) shall make payment of Managerial Remuneration to
Non-executive Directors subject to two sections:
(a) Section 197 for maximum limit of Managerial Remuneration
(b) Section 198 for calculation of net profit
(i) According to Section 198 of the Companies Act, 2013 in computing the net profits
of a company in any financial year for the purposes of determination of managerial
remuneration, the sum of depreciation to the extent specified in Schedule—II of the
Companies Act, 2013 shall be deducted from the gross profit. Accordingly, a company
cannot calculate net profit without adjusting depreciation.
(ii) Section 197 of the Companies Act, 2013, fixes an overall limit of managerial
remuneration payable by a public company and a private company which is a subsidiary
of public company. A Company can pay sitting fees in addition to the managerial
remuneration to the Non-executive directors.
CHAPTER 17
MEETING OF BOARD & ITS COMMITTEES
A company is a separate legal entity distinct from its shareholders and its
directors.
As per provisions of the Companies Act, 2013 & its rules, some of the powers
are reserved for the shareholders and Board of Directors. The powers of
management are vested in the directors. It means they alone can exercise
these powers.
BOARD MEETING
The shareholders cannot usurp the powers of Board of Directors as given
under the Act or in the Articles of Association of the Company.
BOARD MEETING
Section 173 of the Companies Act, 2013
Secretarial Standard on BM
Secretarial Standard on Board Meetings (SS-1) issued by ICSI clarifies
that the Board shall meet at least once in every calendar quarter, with a
maximum interval of 120 days between any two consecutive Meetings.
SS-1 also states that it shall be sufficient that in the year of incorporation if a
company, in addition to the first meeting to be held within thirty days of the date
of incorporation, holds one meeting in every remaining calendar quarter in the year
of incorporation.
In case of OPC, Dormant Company, Small Company and Private Company which
is Start-up,
There must be at least one board meeting in each half of the calendar year and
the gap between two meetings should not be less than 90 days.
Q1. The Board of Directors of a company met thrice in the year 2012 and
the 4th meeting was not held for want of quorum. As a company
secretary, examine the provisions of the Companies Act, 2013 and
decide whether the company has complied with the requirement of
the minimum numbers of meeting to be held in a calendar year or
violated the requirement thereof
A1. For Private or Public Company: 1st Board Meeting: The 1st Board
meeting should be held within 30 days from the date of
incorporation.
2nd & Subsequent Board Meeting: There must be at least 4 Board
Meetings in a year. Thegap between
two consecutive Board Meetings shall not be more than 120 days.
Note: A minimum number of four meetings of the Board of
Directors (either in private or public co.) shall be held every year.
For OPC, Dormant Company & Small Company: There must be at
least one board meeting in each half of the calendar year and the
gap between two meetings should not be less than 90 days.
Secretary, any Director or any other person authorised by the Board for the
purpose.
3. The Notice shall specify the serial number, day, date, time and full address of
the venue of the Meeting.
4. The Notice shall inform the Directors about the option available to them to
participate through Electronic Mode and provide them all the necessary
information.
5. The Notice of a Meeting shall be given even if Meetings are held on pre-
determined dates or at predetermined intervals.
6. 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.
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.
Quorum
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.
ATTENDANCE REGISTER
Every company shall maintain separate attendance registers for the meetings of
the Board and meetings of the committee.
• Loose Leaf & Serially numbered The pages of the respective attendance
registers shall be serially numbered.
If an attendance register is maintained in loose leaf form, it shall be bound
periodically depending on the size and volume.
• Place of Keeping Attendance Register
The attendance register shall be maintained at the Registered Office of the
company or such other place as may be approved by the Board.
The attendance register may be taken to any place where a Meeting of the
Board or Committee is held.
• Inspection of Attendance Register
The attendance register is open for inspection by the Directors. Even after a
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
Serial number and date of the Meeting;
In case of a Committee Meeting name of the Committee;
Place of the Meeting;
Time of the Meeting;
Names and signatures of the Directors,
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.
MINUTES
Section 118 provides that every company shall prepare, sign and keep minutes of
proceedings of meeting. Minutes are evidence of the proceedings at the meeting.
(a) Circulation of draft minutes: 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 authorised
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.
Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014
6.Preparation of Minutes
Compliance with Secretarial Standards:
Section 118(10) "Every company shall observe secretarial standards with respect to
general and Board meetings specified by the Institute of Company Secretaries of India
(ICSI) constituted under section 3 of the Company Secretaries Act,1980, and approved
as such by the Central Government".
The decision making powers of a company are vested in the Members and the Directors and they
exercise their respective powers through Resolutions passed by them.
General Meetings of the Members provide a forum to them to express their will in regard to the
management of the affairs of the company.
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.
Secretarial Standard on General Meetings of companies: Secretarial Standard on General Meeting
(SS-2) is issued by the Institute of Company Secretaries of India (ICSI) and approved by Central
Government. Compliance of Secretarial Standards is a must as per the provision of Section 118(10)
of Companies Act, 2013.
This Standard is applicable to all types of General Meetings of all companies incorporated under
the Act except One Person Company (OPC) and class or classes of companies which are exempted
by the Central Government through notification.
The revised version of Secretarial Standard is effective from 1st October, 2017.
GENERAL MEETINGS
Special Note: Extension can be granted only if the application for extension is served before the
normal due date as calculated above.
Note: No such extension of time shall be granted by the ROC for the holding of the 1st AGM.
Q1. Calculate the last date when the AGM can he held for Patience Pays Ltd., if
the date of last AGM is held on:
(a) 15th June, 2017
(b) 15th September, 2017
Every Company shall have one AGM in 1 calendar year. The last date when the AGM
can be held is the earliest of the following:
-Within 6 months of end of FY -Within 15 months of Last AGM.
(a) In case (a), the 2 dates will be 30th September, 2018 and 15th September,
2018, Therefore due date will be earliest of the 2 i.e. 15th September,
2018
(b) In case (b), the 2 dates will be 30th September 2018 and 15th December
2018. Therefore due date will be earliest of the 2 i.e. 30th September,
2018
Q2. Asia Pacific Co. Ltd., called its AGM on 30th September, 2001 and adjourned it to
31st December, 2001 due to delay in completion of audit of accounts for the
year ended 31stMarch, 2001. At the adjourned meeting, the meeting was
further-adjourned to 31st March, 2002. Subsequently, the AGM was held on
28th January, 2002. State whether the company has complied with the
provisions of Section 96 and, if not, whether the company is liable to default
and conviction. 2005 - June (8 marks)
Between 1st April - 31st December 31st March upcoming XYZ Private Limited Company is
incorporated on 15th Nov, 2014. So the
closing of First Financial Year would be
31st March, 2015
Between 1st January- 31st March 31st March next or XYZ Private Limited Company is
following year incorporated on 15th Feb, 2015. So the
closing of First Financial Year would be
31st March, 2016
Q3. Ki and Ka Ltd. was incorporated on 15th January, 2016. The first AGM of the
Company was held on 15th October, 2017. Some of the shareholders raised a
concern that the due date of first AGM has already been lapsed and therefor the
Company non complied with provisions of holding AGM. Please advice.
A3. As per section 96, the due date of holding the first AGM of the Company is
within 9 months of the end of first financial year.
As per section 2(41), the first financial year of the company where it has been
incorporated on or after the Is' day of January of year will be 31st day of the March of
the following year. In this case the Company was incorporated on 15th Jan, 2016 and
therefore its first financial year will end on 31st March, 2017.
The Company should hold its first AGM within 9 months of the end of 1st Financial
year, i.e. by 31st December, 2017.
Unlisted Company Any Place in India If consent of all members is As per Companies
taken in advance (Amendment) Act, 2017
Annual General Meeting. Every item of the EGM is considered as Special Business
Item.
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.
EGM called by Requisition Either at Registered Office or at any other As per SS-2
place within city, town, or village where
Registered Office is situated
EGM of wholly owned Any Place in India or Outside India As per Companies
subsidiary of Co. incorporated (Amendment) Act, 2017
outside India
Business to be Transacted
An EGM shall only transact the special business and an explanatory statement to be attached with
the notice of an EGM.
GENERAL MEETING FOR ONE PERSON COMPANY (OPC) Section 122 of the
Companies Act, 2013
There is no need to convene an Annual General Meeting or Extra-Ordinary General Meeting for
transacting ordinary or special business.
For passing any special or ordinary business, it shall be sufficient if the resolution is
communicated by the member to the company and entered in the minutes book required
to be maintained and signed and dated by the members.
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.
Special Note:
A general meeting may be called after giving a shorter notice if consent is given in writing or by
electronic mode in following manner:
> In case of AGM- not less than 95% of the members entitled to vote at such meeting.
> In case of EGM of Company having share capital- By majority in numbers and member
holding not less than 95% of the paid up share capital.
> In case of EGM of Company not having share capital- By member who can exercise
not less than 95% of the voting power.
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
Q4. ABC Ltd. issued a notice on 1st August, 2015 to hold its AGM on 24th
August, 2015. Check the validity of the notice referring to the provisions of
the relevant act, in case it is sent by post.
A4. Date of holding AGM: 24th August, 2015 Date of dispatch of notice: 1st August, 2015
Days to be excluded: (a) Day of holding AGM i.e. 24th August, 2015
(b) Day of dispatch of notice i.e. 1st August, 2015
(c) 2 days for service of notice i.e. 2nd & 3rd August, 2015
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
CONTENTS OF NOTICE
The notice of a general meeting shall specify the place, date, day and the
hour of the meeting. Agenda i.e. a statement of the business to be
transacted at such meeting.
Proxy clause with reasonable prominence- a statement that a member entitled to attend and vote is
entitled to appoint a proxy.
RECIPIENT OF NOTICE
The notice of every meeting of the company shall be given to:
(a) every member of the company, legal representative of any deceased member or the assignee of
an insolvent member;
(b) the auditor or auditors of the company; and
(c) every director of the company.
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;
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.
Note: 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.
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 requisitionists shall stand cancelled.
. Khanchakar Limited whose total number of members is 400 called an AGM, in which
Mr. Rajnikant was appointed as representative to appoint the meeting on behalf
of A Ltd., B Ltd., C Ltd., D Ltd., and E Ltd. No other person was present at the
meeting. Is the quorum present? Will your answer be different if in addition to
Mr. Rajnikant, Mr. Ramakant was also present in a person?
As per section 103, the quorum in case of a public co. having upto 1000
members is 5 members present in person.
As per SS-2, 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 atleast one more individual present at the meeting other than the
individual.
Therefore inspite of Mr. Rajnikant counted as 5 separate members for quorum
will not be sufficient to form quorum.
But if Mr. Ramakant is present there is sufficient quorum.
Q6. The articles of association of XYZ Ltd. having 700 members as on cut-off date,
prescribe for physical presence of 7 members to constitute quorum of general
meetings. Following are the status of persons present in a general meeting of
XYZ Ltd to consider the appointment of MD. Check the quorum of the
meeting.
- Mr. A, the representative of Governor of Maharashtra.
- Mr. B & Mr. C are preference shareholders
- Mr. D representing ABC Ltd. and SKY Ltd.
- Mr. E, Mr. F, Mr. G and Mr. H are proxies of shareholders
personally present and they do not constitute proper quorum as fixed by the
company.
Note: The quorum required in respect of general meeting of a public company
is 5 and the quorum can be increased by the articles of the company.
If adjournment for 30 days or more Give proper 21 clear days’ notice to members
individually
If adjournment for more than 3 days but less than 30 Notice of 3 days is sufficient to be served individually
days
If adjournment is for less than 3 days and declaration Notice can be served through newspapers or
of adjourned meeting done at the Original GM individually
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
(i) He must ensure that the meeting is properly convened and constituted (i.e. proper
notice has been served and quorum has also been observed).
(ii) 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.
(iii) 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.
(iv) He must decide questions arising for decisions during the meeting and must ensure
that the majority hears the minority.
(v) He must ensure that the sense of the meeting is properly ascertained in regard to any
question before it.
(vii) 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.
(viii) He must ensure the preparation of the minutes of meeting.
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:
Revocation of proxy:
If after appointment of proxy, the member himself attends the meeting, it amounts to
automatic revocation of proxy. But once the proxy has voted, it cannot be revoked.
If a Proxy had been appointed for the original meeting and such meeting is adjourned, any Proxy
given for the adjourned Meeting revokes the Proxy given for the original Meeting, a proxy later
in date revokes any Proxy/Proxies dated prior to such Proxy.
Proxy is valid until written notice of revocation has been received by the Company before the
commencement of the Meeting or adjourned Meeting, as the case may be.
Note: A notice of revocation shall be signed by the same Member (s) who had signed the Proxy,
in the case of joint Membership.
A Proxy need not be informed of the revocation of the Proxy issued by the Member.
Q7. Long life Limited had a provision in AoA that the proxy form be submitted by the
proxies atleast 72 hours before the commencement of the meeting. Jaggan a
member of the Co. submitted the form on 24th August, 2017 at 10 A.M for a
meeting to be held on 26tl August, 2017 at 11 A.M. Is it valid and within
specified time?
A7. As per section 105, 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.
In this case even if the articles specify a longer minimum time it shall be
deemed as 48 hours. Jaggan has served the notice on 24th August 2017 at
10.A.M for a meeting to be held on 26th August, 2017 at ll.A.M, which, meets
the criteria of 48 hours and therefore it is valid and within specified time.
Q8. Mr. A, a member ofXYZ Limited, appoints Mr. B as his proxy to attend the general
meeting of the company. Later he (Mr. A) also attends the meeting. Both Mr.
A (the member) and Mr. B (the proxy) voted on a particular resolution in the
meeting. Mr. A's vote was declared invalid by the chairman stating that since
he has appointed the proxy and Mr. B's vote has been considered as valid. Mr.
A objects to the decision of the Chairman. Decide, under the provisions of the
Companies Act, 2013 whether Mr. A's objection shall be tenable.
A8. Decision by Chairman is invalid. Since Mr. A i.e. a member himself attended a
meeting and voted on resolution, it will amount to revocation of proxy.
Thus any vote put by Mr. B i.e. proxy shall be invalid.
A9. 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 13.12.2015 (the date of the meeting being 15.12.2015).
X deposited the proxy on 15.12.2015.
Therefore, proxy in favour of Mr. X has become invalid. Thus, rejecting the proxy in
favour of Mr. Y is unsustainable. Proxy in favour of Y is valid since it is deposited in
time.
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 only two kinds of resolutions under the Act, ordinary and special.
There are three types namely, ordinary, special and resolutions requiring special notice.
Resolutions
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.
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.
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.
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.
Q12. PQR Ltd. is an unlisted company and has 400 shareholders in all. The shareholders
of the company propose voting by electronic mode. Chairman of the company
rejected the shareholders' proposA1. Explaining the provisions of the
Companies Act, 2013, examine the validity of rejection of the shareholders'
proposal by the Chairman.
2015 - June (4 marks)
A12. Section 108 of the Companies Act, 2013: Every listed company or a company
having 1000 or more shareholders may provide to its members facility to
exercise their right to vote at general meetings by electronic means.
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.
Therefore, the chairman's rejection of shareholder's resolution is valid in accordance
with the
provisions of section 108.
Responsibilities of
Board 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. ,
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
The Companies as stated above shall get following resolution passed by postal ballot, instead of
transacting the business
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.
> 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:
(i) The board of directors shall appoint one scrutinizer, who is not in employment of the
company;
(ii) The scrutinizer shall submit his report as soon as possible after the last date of receipt of
Postal Ballots;
The scrutinizer will be willing to be appointed and he is available at the Registered Office of the
company for the purpose of ascertaining the requisite majority; (iv) 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.
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.
(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/-.
MISCELLANEOUS
Presence of Statutory or Secretarial Auditor at General Meetings
Section 146 of the Act requires the presence to Auditors in general meetings unless otherwise
exempted, either himself or through his authorized representative, who shall also be qualified to
be an auditor and shall have right to be heard at such meeting on any part of the business which
concerns him as the auditor.
Q13. Mrs. Rukmini is the statutory auditor of Energies Ltd. Free reserves of the
company are four times more than the paid-up share capitA1. The company
has Rohit, as secretarial auditor. There is a cost auditor, Amit, and an internal
auditor, Sunil. Examining the provisions of the Companies Act, 2013 read with
the secretarial standards, advise the company as to who is/are required to be
present at the forthcoming annual general meeting of the company.
4 marks Dec 2016
A13. Rukmini (Statutory Auditor), Rohit (Secretarial Auditor) are required to be present at
AGM
Filing of Resolutions and Agreements with ROC (MGT-14) (Section 117 of the
Companies Act, 2013)
Section 117 provides that a copy of every resolution and an agreement shall
be filed in Form No. MGT.14 with the Registrar, within 30 days of its
passing or making thereof.
Resolutions and agreements to be filed with the Registrar are as under:
• Special resolutions;
• Resolutions which have been agreed to by all the members of a company, but which, if not
so agreed to, would not have been effective for their purpose unless they had been passed as
special resolutions;
• Any resolution of the Board of Directors of a company or agreement executed by a company,
relating to the appointment, re-appointment or renewal of the appointment, or variation of the
terms of appointment, of a managing director;
• Resolutions or agreements which have been agreed to by any class of members but which, if
not so agreed to, would not have been effective for their purpose unless they had been passed
by a specified majority or otherwise in some particular manner; and all resolutions or
agreements which effectively bind such class of members though not agreed to by all those
members;
• Resolutions requiring a company to be wound up voluntarily passed in pursuance of section
59 of the Insolvency and Bankruptcy Code, 2016;
• Resolutions passed in pursuance of sub-section (3) of section 179. No person shall be entitled
under Section 399 to inspect or obtain copies of such resolutions; this clause shall not apply
to a banking company in respect of a resolution passed to grant loans, or give guarantee or
provide security in respect of loans under clause
(f) of sub-section (3) of section 179 in the ordinary course of its business. This sub-clause is not
applicable to private
• Any other resolution or agreement as may be prescribed and placed in the public domain.
Default:
The Company and every officer who is in default including the liquidator shall be punishable with
fine which shall not be less than Rs. 50,000 but which may extend to Rs. 5 Lakh.
INTRODUCTION
With the development of advanced technology, virtual meetings are being used to
bring people in various locations together to conduct business.
Virtual meetings have become a widespread acceptable medium to reach large
participants. They are far cheaper than face-to-face events.
It involves people interacting on the web, rather than meeting in a physical location.
A virtual meeting is when people around the world irrespective of their location,
use video, audio, web, and text to link up online.
It permits real-time sharing of information without being physically located
together.
Success of virtual meetings depends on technical equipment, the software used and
trained manpower which should work well and be operated with ease.
Virtual Equipment should be simple and easy to use and understand by the users
with little instruction or training.
Today's Scenario:
As of today, holding of total virtual shareholder's meeting is not allowed, at present
Hybrid meetings are permitted, "hybrid" to refer to those meetings are combination
of online participation as well as option of attending the meeting in- person, "virtual
meetings" are those conducted wholly online with no physical meeting of
shareholders.
As of now the Companies Act, 2013 has introduced E-Voting as a step to encourage
corporate democracy and promote good corporate governance.
the meeting.
The persons, who are differently abled, may be facilitated by the Board to allow a
person to accompany him.
CHAPTER 20
LEGAL FRAMEWORK GOVERNING COMPANY SECRETARIES
INTRODUCTION
This chapter is made part of the syllabus with an intent to impart ethical
conduct to the future Company Secretary. Company Secretary being one of
the most respectful profession in India expects a certain standard of
conduct, whether ethical, personal or professionA1. To maintain that
decorum we need to understand the code of conduct or code of ethics of our
profession.
EVOLUTION
Stage • Institute of Company Secretaries of India set-up on 4th October 1968 as Section
S 25 Company (Non Profit Company) under Companies Act, 1956
Stage • Government moved the Company Secretaries Bill to convert ICSI into Statutory
4 Body
Stage • Current Legal Framework comprise of The Company Secretaries Act, 1980 and The
5 Company Secretaries Regulation 1982
IMPORTANT TERMINOLOGIES
Company Secretary:
According to section 2(1) (c) of the Company Secretaries Act, 1980
"Company Secretary" means a person who is a member of the Institute of
Company Secretaries of India.
Associate and Fellow Members
The members of the Institute can be categorized into following 2 classes:
Associate Members:
As soon as a person's name is entered into the Register of Members maintained by
the Institute of Company Secretaries of India, he becomes the Associate Member
of the Institute. He can use the letters "A.C.S." after his name to indicate thathe
is an Associate.
Fellow Members:
An associate member who fulfills following conditions can become a fellow member:
• An associate who has been in continuous practice in India as a Company
Secretary for at least 5 years and a person who has been an Associate for a
continuous period of atleast 5 years.
• Possesses such qualifications or practical experience as the Council may
prescribe.
• Paid prescribed fee.
• Whose name is entered in Register as Fellow?
Certificate of practice
A member can practice as a Company Secretary, whether in India or elsewhere, only
after obtaining a Certificate of Practice.
Deemed "to be in practice"
A member of the Institute shall be deemed "to be in practice" if he, either
• Individually or
• In partnership with
Register of Members
The Council shall maintain in the prescribed manner a Register
of the members of the Institute. The Register shall include
the following particulars about every member of the Institute:
• His full name, date of birth, domicile, residential and professional addresses;
• The date on which his name is entered in the Register;
• His qualifications;
• Whether he holds a certificate of practice; and Any other particulars which
may be prescribed.
Every member of the Institute shall whose name is entered in the Register, pay
annual membership fee as may be decided by the council from time to time.
Note: All the above three have powers of the Civil Court.
Appellate Authority
Appellate Authority constituted under sub-section (1) of section 22A of the
Chartered Accountants Act, 1949, shall be deemed to be the Appellate Authority
for the purposes of this Act.
Against whom appeal can be filed?
Appeal can be filed against:
❖ Board of Discipline
❖ Disciplinary Committee Who can file Appeal?
An appeal can be filed by:
✓ Any person aggrieved by decision of Board of Council or Disciplinary Committee
✓ Director (Discipline), if
authorised by the Council
Time Limit for filing appeal
Appeal should be filed within 90 days of the decision of Board of Council or
Disciplinary Committee. Extension may be granted if it is satisfied that there was
sufficient cause for not filing the appeal in time.
FIRST
SCHEDULE
Part I A CS in Practice is deemed to be guilty of professional Misconduct if he
(Professionl
Clause 1 Allows any person to practice in his name as a Company
Misconduct
CS in Secretary, unless such person is also a Company Secretary in
Practice) practice, and is in partnership with or employed by him.
boards.
However, recognized degree of university or membership
recognized institution may be used:
PROVIDED that a member in practice may advertise through a
write up setting out the services provided by him or his
firm and particulars of his firm subject to such
guidelines as may be issued by the Council
Clause 8 Accepts the position of a Company Secretary in Practice
previously held by another Company Secretary in Practice
without first communicating
with him in writing
In following cases it shall not be mandatory (though desirable)
to send a prior written communication to the earlier
incumbent:
■ Certifying e-forms for various companies.
■ Giving Due Diligence Certificate for consortium
borrowers.
■ Holding assignment as retainer for a company or group of
companies.
• Issuing search reports.
■ Issuing certificates as contemplated under SEBI (LODR)
Regulations, 2015.
■ Giving legal opinion
In following cases, it shall be mandatory to send a prior
written communication
■ Signing/Certification of Annual Return
■ Issuance of Secretarial Audit Report in terms of Section
204 of the Companies Act, 2013
* Issuance of Certificate of Securities Transfers.
■ Certificate of reconciliation of capital, updating of
Register of Members, etc. as per the Securities & Exchange
Board of India's Circular D & CC/Cir- 16/2002, dated
December 31, 2002.
■ Conduct of Internal Audit of Operations of the
Depository Participants.
■ Certification of corporate governance under SEBI (LODR)
Regulations, 2015.
Clause 9 Charges or offers to charge, accepts or offers to accept, in
respect of any professional employment,
- fee which is based on a %age of profits or which are
SECOND
SCHEDULE
Part I A CS in Practice is deemed to be guilty of professional Misconduct, if he
(Professional
Clause 1 discloses information acquired in the course of his
Misconduct
professional engagement to any person other than the
CS in
client so engaging him,
Practice)
without the consent of such client, or otherwise than as
required
by any law for the time being in force.
✓ the act of omissions alleged or a copy of the complaint to such member at his
address
✓ in case if it is the firm send particulars of the acts of omission alleged or
a copy of the complaint at the address of the head office of the firm.
✓ Within fourteen days of issue of intimation or within such further time allowed,
the member shall forward a written statement in this defence verified in the
same manner as the complaint.
✓ Council on receipt of the written statement shall give an opinion and may
also call for any additional particulars or documents connected therewith.
✓ The disciplinary committee shall give the complainant and respondent a noticed
of the meeting at which the case shall be considered by the committee.
✓ The Disciplinary Committee shall after investigation report the result of its
enquiry to the Council for its consideration.
✓ Finding is that the member of the Institute has been guilty of a professional or
INTRODUCTION
As per section 118(10), every Company has to comply with Secretarial
Standards on Board Meeting (SS-1) & Standard on General Meeting (SS-2)
as issued by ICSI which became effective on 1st July, 2015 (amended with
effect from 1st October, 2017).
Further it is the duty of Secretarial Auditor to
report on compliance of Secretarial Standards. The
Body which formulates Secretarial Standards is
Secretarial Standard Board (SSB).
SSB was constituted in the year 2000 when there was no such Board or body
throughout the world.
COMPOSITION OF SSB
The SSB comprises of representatives from major industry associations viz,
The Federation of Indian Chambers of Commerce and Industry (FICCI),
Confederation of Indian Industry (CII),
The Associated Chambers of Commerce & Industry of India (ASSOCHAM),
PHD Chamber of Commerce and Industry,
Representatives of regulatory authorities, such as the Ministry of
Corporate Affairs, Securities & Exchange Board of India, Reserve Bank
of India, Bombay Stock Exchange, National Stock Exchange of India Ltd.
And the sister professional bodies viz. the Institute of Chartered
Accountants of India and the Institute of Cost Accountants of India and
eminent members of the Institute of Company Secretaries of India in
employment and in practice.
FUNCTIONS OF SSB
The main functions of SSB are:
(i) Formulating Secretarial Standards;
(ii) Clarifying issues arising out of the Secretarial Standards;
(iii) Issuing Guidance Notes; and
(iv) Reviewing and updating the Secretarial Standards / Guidance Notes at
periodic intervals.
PRE REQUISITES
MDF is a joint or collaborative venture amongst independent individuals. Therefore,
every one wishing to join hands should understand that:
1. All minds should work together and in unison;
2. Say go to ego;
3. Mutual faith and respect lays strong foundation;
4. Unanimity shall be the rule on important policy decisions;
Financial discipline is a must;
6. Founder partners shall be given equal status;
7. Income of the firm shall be distributed at short regular intervals;
8. One shall not put undue influence on the others or show
that he is king pin of the association. Even the small crack in the
PROCESS OF CONSTITUTION
The process of formation of MDF shall be an outcome of conscious and sincere
decision and it is essential that the like- minded professional should deliberate and
take this decision.
It shall be ensured that the proposed constituents
trial period help in getting acclimatized. Mutual faith and understanding is sine
qua non.
interest of the MDF to have all the founder partners on equal footing.
designed to suit the given situation. Partners may adopt simple revenue
In this model it is assumed that each one is bringing equal business and generating
equal revenue.
However, in reality if it doesn’t happen it may give rise to sense of discomfort
against the person who is continuously showing less contribution but at the same
time getting equal share of profits.
Therefore, it is essential to device “performance, contribution and
This model motivates each partner to bring more and more business into the firm
and also to work for maximization of his share and wealth of the firm.
6. There could be more tailor made revenue sharing models, however, the model
based on performance, contribution and efficiency is likely to work better.