Corporate and Allied Laws

PAPER 4
CORPORATE AND ALLIED LAWS
BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
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PREFACE
The liberalisation and globalisation of our economic policies in tune with the global changes
brought several reforms in the Corporate and Allied Laws of our country. A scheme of well-
structured Corporate and Allied Laws is sine qua non for the corporate growth. These laws
have to be amended and fine tuned from time to time in accordance with the changes that are
taking place within the country as well as outside.
Indian Corporate and Allied Laws were once best known for their control that inhibited the
growth of corporate sector. If an economy is to sustain and grow rapidly, there is absolute
need for a change in the outlook of law. A number of external factors especially the WTO
compulsions and relevant developments compelled the Government from time to time, to have
a closer look at the existing laws and introduce appropriate amendments to the various
corporate laws.
The Government took several initiatives and series of action plan by brining more
amendments in Corporate and Allied Laws in the last 2-3 years and new legislations were
brought into force taking into account the global crisis in corporate governance.
The preparation and updating of study material is a continuous process and in the process
inputs from various sources, literature, have gone into the thought process for benefiting the
students in enrichment of their knowledge. Our special thanks to Shri Deepak Kumar Khaitan
FCS, Kolkata, in preparation of the study material relating to The Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the
Prevention of Money Laundering Act, 2002, Shri Bishnupada Sarkhel relating to The Banking
Regulation Act, 1949, and Shri Amit Kumar Das relating to The Insurance Act, 1949, and The
Insurance Regulatory and Development Authority Act, 1999.
We hope that students will find this study material very user friendly and in case of any queries
that they may have while reading the material, the same may be addressed to the Board of
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SYLLABUS
PAPER – 4: CORPORATE AND ALLIED LAWS
(One paper - Three hours - 100 marks)
SECTION A : COMPANY LAW (70 MARKS)
Level of Knowledge: Advanced knowledge

Objective:
To be able to analyze and apply various provisions of the Companies Act in
practical situations
Contents:
1. The Companies Act, 1956, Rules and Regulations thereunder in its entirety with specific
reference to
(a) Accounts and audit
(b) Dividend
(c) Directors - powers, managerial remuneration
(d) Meetings, powers of the Board and related party transactions
(e) Inspection and Investigation
(f) Compromises, Arrangements and Reconstructions
(g) Prevention of Oppression and Mismanagement
(h) Revival and Rehabilitation of Sick Industrial Companies
(i) Corporate Winding up and Dissolution
(j) Producer Companies
(k) Companies incorporated outside India
(l) Offences and Penalties
(m) E-governance
2. Corporate Secretarial Practice – Drafting of Resolution, Minutes, Notices and Reports
SECTION B : ALLIED LAWS (30 MARKS)
Objective:
To develop ability to analyse the requirements of laws stated in the Section.
Contents:
3. An overview of the following laws –
(a) The Securities and Exchange Board of India Act, 1992, Rules, Regulations and
Guidelines issued thereunder.
(b) Securities Contracts (Regulation) Act, 1956
(c) The Foreign Exchange Management Act, 1999
(d) The Competition Act, 2002
(e) The Banking Regulation Act, 1949, The Insurance Act, 1938. The Insurance
Regulatory and Development Authority Act, 1999. The Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(f) The Prevention of Money Laundering Act, 2002
4. Interpretation of Statutes, Deeds and Documents.
CONTENTS
PAGE NO.
SECTION A: COMPANY LAW
CHAPTER 1: ACCOUNTS AND AUDIT ............................................................ 1.1 – 1.18
1.0 Maintenance of Books of Accounts ................................................................. 1.1
1.1 Nature of Books of Account............................................................................ 1.1
1.2 Persons who can Inspect ............................................................................... 1.2
1.3 Place of Maintenance of Books of Account ..................................................... 1.2
1.4 Period of Maintenance ................................................................................... 1.2
1.5 Persons Responsible for Maintenance & Penalty............................................. 1.2
1.6 Laying of Annual Accounts and Balance Sheet................................................ 1.3
1.7 Form and Contents of Balance Sheet and Profit and Loss Account. ................. 1.3
1.8 Deviation from Accounting Standards ............................................................. 1.4
1.9 Authentication of Annual Accounts ................................................................. 1.5
1.10 Board's Report .............................................................................................. 1.5
1.11 Directors' Responsibility Statement (Section 217 (2AA) ................................... 1.6
1.12 Disclosures in Board's Report ........................................................................ 1.6
1.13 Right of Members to Copies of Balance Sheet and Auditors' Report ................. 1.7
1.14 Filing with the Registrar ................................................................................. 1.8
1.15 Holding & Subsidiaries Accounts .................................................................... 1.8
1.16 Qualifications of an Auditor (Section 226) ..................................................... 1.10
1.17 Disqualifications of Auditors ......................................................................... 1.10
1.18 First Auditors............................................................................................... 1.10
1.19 Subsequent Auditors [Section 224 (1)].......................................................... 1.11
1.20 Auditors' Appointment by Special Resolution [Section 224A (1)] .................... 1.11
1.21 Re-Appointment of Retiring Auditor .............................................................. 1.11
1.22 Ceiling on Number of Audits......................................................................... 1.12
1.23 Filling up Casual Vacancy ............................................................................ 1.13
1.24 Remuneration of Auditors ............................................................................ 1.13
1.25 Removal of Auditors .................................................................................... 1.13
1.26 Powers of Auditors ...................................................................................... 1.14
1.27 Duties of Auditors ........................................................................................ 1.14
1.28 Audit of Accounts of Branch Office of Company ............................................ 1.16
1.29 Signature of Audit Report, etc. (Section 229) ................................................ 1.17
1.30 Special Audit (Section 233A)........................................................................ 1.17
1.31 Audit of Cost Accounts (Section 233B) ......................................................... 1.17
CHAPTER 2: DIVIDEND .................................................................................... 2.1 – 2.6
2.0 Manner and Time of Payment......................................................................... 2.1
2.1 Compulsory Transfer to Reserves: ................................................................. 2.2
2.2 Transfer of Higher Percentage of Profits to Reserves ...................................... 2.2
2.3 Declaration of Dividend out of Past Reserves ................................................. 2.3
2.4 Declaration of Interim Dividend ...................................................................... 2.3
2.5 Time Limit ..................................................................................................... 2.4
2.6 Unpaid or Unclaimed Dividend (Section 205A) ................................................ 2.4
2.7 Payment of Unpaid or Unclaimed Dividend (Section 205B) .............................. 2.4
2.8 When Dividend to be kept in Abeyance? (Section 206A).................................. 2.4
2.9 Investor Education & Protection Fund (Section 205C) ..................................... 2.5
2.10 Payment of Interest out of Capital (Section 208) ............................................. 2.5
CHAPTER 3: DIRECTORS, POWERS, MANAGERIAL REMUNERATION........... 3.1 – 3.66
3.0 Introduction ................................................................................................... 3.1
3.1 Legal Position of Directors ............................................................................. 3.1
3.2 Appointment of Directors ............................................................................... 3.2
3.3 Share Qualification for Directors................................................................... 3.19
3.4 Removal of Directors (Section 284) .............................................................. 3.21
3.5 Removal of Managerial Personal ................................................................. 3.22
3.6 Directors to act as a Board........................................................................... 3.25
3.7 Powers of Directors and Restrictions thereon................................................ 3.26
3.8 Duties of Directors ...................................................................................... 3.33
3.9 Directors not to hold Office or Place of Profit ................................................ 3.35
3.10 Liabilities of Directors .................................................................................. 3.38
3.11 Loans to Directors (Section 295) .................................................................. 3.41
3.12 Directorial Registers ................................................................................... 3.43
3.13 Political Contributions .................................................................................. 3.46
3.14 Managerial Remuneration ........................................................................... 3.47
3.15 Managing Director ....................................................................................... 3.53
3.16 Inter Corporate Loans and Investments (Section 372A) ................................. 3.55
3.17 Self-Examination Questions ......................................................................... 3.59
3.18 Answers to the Self-Examination Questions .................................................. 3.64
CHAPTER 4: MEETINGS, POWERS OF THE BOARD AND RELATED PARTY
TRANSACTIONS ............................................................................................. 4.1 – 4.22
4.0 Introduction ................................................................................................... 4.1
4.1 Meetings of Directors..................................................................................... 4.2
4.2 Protection Against Abuse of Fiduciary Capacity of Directors .......................... 4.12
4.3 Disclosure of Interest In Contracts................................................................ 4.13
4.4 Sole Selling Agents ..................................................................................... 4.19
CHAPTER 5: INSPECTION AND INVESTIGATION ............................................. 5.1 – 5.4
5.0 Inspection ..................................................................................................... 5.1
5.1 Investigation.................................................................................................. 5.1
5.2 Power Of Inspectors ...................................................................................... 5.2
5.3 Investigation Of Ownership Of Company (Section 247).................................... 5.3
5.4 Voluntary Winding up of Company, etc., not to stop Investigation
Proceedings (Section 250A) ........................................................................... 5.4
CHAPTER 6: COMPROMISE, ARRANGEMENTS AND RECONSTRUCTIONS ... 6.1 – 6.18
6.0 Compromise and Arrangement ....................................................................... 6.1
6.1 Reconstruction .............................................................................................. 6.1
6.2 Amalgamation of two Companies-Steps to be Taken by Both ......................... 6.13
6.4 Answers to the Self-Examination Questions ................................................. 6.18
CHAPTER 7: PREVENTION OF OPPRESSION AND MISMANAGEMENT ......... 7.1 – 7.14
7.0 "Majority Rule" as Applied in the Management of A Company .......................... 7.1
7.1 Protection at Common Law ............................................................................ 7.1
7.2 Protection Under The Companies Act, 1956 .................................................... 7.1
7.3 Oppression and Mismanagement.................................................................... 7.2
7.4 Who May Apply To The Company Law Board When Oppression or
Mis-Management Is Complained of ? .............................................................. 7.3
7.5 Difference between Sections 397 and 398 ...................................................... 7.3
7.6 Powers of The Company Law Board on Application Under
Sections 397 or 398....................................................................................... 7.5
7.7 Powers of the Central Government: ................................................................ 7.6
7.8 General Observations on Remedy for Oppression Under
Sections 397 and 398 .................................................................................... 7.7
7.9 Distinction between various Remedies for Oppressions: .................................. 7.8
7.10 Powers Of Central Government To Remove Managerial Personnel on
the Recommendation of CLB ......................................................................... 7.9
7.11 Concept of Public Interest and its Impingement on Company Law .................. 7.10
7.13 Answers to Self-Examination Questions........................................................ 7.14
CHAPTER 8: REVIVAL AND REHABILITATION OF SICK INDUSTRIAL
COMPANIES .................................................................................................... 8.1– 8.14
8.0 Definitions..................................................................................................... 8.1
8.1 Procedure For Revival And Rehabilitation ....................................................... 8.2
8.2 Inquiry Into Working Of Sick Industrial Companies (Section 424B) ................... 8.3
8.3 Powers Of Tribunal To Make Suitable Order On Completion Of Inquiry
(Section 424C) .............................................................................................. 8.5
8.4 Preparation And Sanction Of Schemes (Section 424D).................................... 8.5
8.5 Rehabilitation By Giving Financial Assistance (Section 424E) ........................ 8.10
8.6 Arrangement for Continuing Operations, Etc., During Inquiry (Section 424F) .. 8.11
8.7 Winding up of Sick Industrial Company (Section 424G) ................................. 8.11
8.8 Operating Agency to Prepare Complete Inventory, etc. (Section 424H) .......... 8.12
8.9 Direction not to Dispose of Assets (section 424I) .......................................... 8.12
8.10 Power of Tribunal to Call for Periodic Information (Section 424J) ................... 8.12
8.11 Misfeasance Proceedings Section (424K) ..................................................... 8.13
8.12 Penalty for certain offences (section 424L) ................................................... 8.13
CHAPTER 9: CORPORATE WINDING UP AND DISSOLUTION......................... 9.1 – 9.56
9.0 Introduction ................................................................................................... 9.1
9.1 Dissolution of Company ................................................................................. 9.2
9.2 Winding-up by Tribunal ................................................................................ 9.13
9.3 Voluntary Winding up................................................................................... 9.24
9.4 General Provisions on Winding-up................................................................ 9.37
CHAPTER 10: PRODUCER COMPANIES .................................................... 10.1 – 10.34
10.0 Introduction ................................................................................................. 10.1
10.1 Definitions................................................................................................... 10.6
10.2 Objects and Formation of a Producer Company ............................................ 10.8
10.3 Memorandum Of Producer Company (Section 581F) ....................................10.11
10.4 Articles of Association (Section 581G) .........................................................10.11
10.5 Inter-State Co-Operative Societies ..............................................................10.14
10.6 Management ..............................................................................................10.17
10.7 General Meetings .......................................................................................10.22
10.8 Share Capital and Member Rights ...............................................................10.25
10.9 Finance, Accounts and Audit .......................................................................10.25
10.10 Penalties....................................................................................................10.28
10.11 Amalgamation, Merger or Division ...............................................................10.28
10.12 Resolution of Disputes ................................................................................10.31
CHAPTER 11: COMPANIES INCORPORATE OUTSIDE INDIA ....................... 11.1 – 11.8
11.0 Foreign Companies ..................................................................................... 11.1
11.1 Application of Sections 592 to 602 to Foreign Companies (Section 591)......... 11.1
11.2 Documents, etc., to be Delivered to the Registrar By Foreign Companies....... 11.1
11.3 Return to be Delivered to Registrar where Documents are Altered ................. 11.3
11.4 Accounts of Foreign Company...................................................................... 11.3
11.5 Obligation to State Name of Foreign Company .............................................. 11.4
11.6 Service on Foreign Company ....................................................................... 11.4
11.7 Penalties..................................................................................................... 11.5
11.8 Effect of Company's Failure to Comply with the Provisions of Part XI
of The Companies Act Relating to Companies Incorporated Outside India ...... 11.5
11.9 Registration of Charges, Appointment of Receiver and Books of
Account (Section 600) ................................................................................. 11.5
11.10 Fees For Registration of Documents............................................................. 11.6
11.11 Registration of Prospectus ........................................................................... 11.7
11.12 Requirements as Regards Prospectus .......................................................... 11.7
CHAPTER 12: OFFENCES AND PENALTIES ............................................... 12.1 – 12.18
12.0 Types of Penalties ....................................................................................... 12.1
12.1 Offences – Continuing or Not ....................................................................... 12.1
12.2 Non-Cognizable Offences ............................................................................ 12.2
12.3 Offences Compoundable – Section Wise List ................................................ 12.2
CHAPTER 13: E-GOVERNANCE.................................................................. 13.1 – 13.18
13.0 MCA 21 Project ........................................................................................... 13.1
13.1 Set up of MCA ............................................................................................. 13.1
13.2 MCA 21 Program ......................................................................................... 13.2
13.3 Program Scope ........................................................................................... 13.2
13.4 Front Office ................................................................................................. 13.2
13.5 Back Office ................................................................................................. 13.3
13.6 Key Benefits................................................................................................ 13.3
13.7 Some FAQs on E-filing ................................................................................ 13.4
13.8 Details of New Forms and Fees.................................................................... 13.7
CHAPTER 14: OTHER RELEVANT MISCELLANEOUS PROVISIONS OF THE
COMPANIES ACT, 1956 .............................................................................. 14.1 – 14.22
14.0 Application of The Companies Act, 1956 to Companies Formed or
Registered Under Previous Companies Act................................................... 14.1
14.1 Companies Authorised to Register under The Act ......................................... 14.1
14.2 Guarantee Company .................................................................................... 14.7
14.3 Government Companies............................................................................... 14.9
14.4 Provisions for Removal of Administrative Difficulties ....................................14.12
14.5 Powers of the Central Government ..............................................................14.15
14.6 General Provisions .....................................................................................14.17
CHAPTER 15: CORPORATE SECRETARIAL PRACTICE - DRAFTING OF RESOLUTION,
MINUTES, NOTICES AND REPORTS............................................................ 15.1– 15.34
15.0 Definition .................................................................................................... 15.1
15.1 Certain Companies to have Secretaries ........................................................ 15.1
15.2 Qualifications of Secretary ........................................................................... 15.2
15.3 Position of Secretary ................................................................................... 15.3
15.4 Appointment of Secretary............................................................................. 15.5
15.5 Duties of a Company Secretary .................................................................... 15.6
15.6 Company Correspondence & Reports ..........................................................15.11
15.7 Record Maintenance and Filing of Documents..............................................15.15
SECTION B: ALLIED LAWS
CHAPTER 16: THE SECURITIES AND EXCHANGE BOARD OF INDIA
(SEBI) ACT, 1992........................................................................................... 16.1.16.62
Unit I
16.0 Introduction ................................................................................................. 16.1
16.1 Purpose of the Act ....................................................................................... 16.1
16.2 History of the Legislation ............................................................................. 16.2
16.3 Short Title, Extent and Commencement ........................................................ 16.3
16.4 Definitions................................................................................................... 16.3
16.5 Establishment of SEBI Board ....................................................................... 16.4
16.6 Powers & Functions of SEBI [Section 11]...................................................... 16.6
16.7 Penalties....................................................................................................16.17
16.8 Guidelines, Regulations And Rules Under The SEBI Act...............................16.21
Unit II
SEBI (Disclosure and Investor Protection) 2000 .......................................................16.23
CHAPTER 17: SECURITIES CONTRACTS (REGULATION) ACT, 1956 ............ 17.1-17.28
17.0 Introduction ................................................................................................. 17.1
17.1 About Corporatisation & Demutualisation of Stock Exchanges ....................... 17.2
17.2 Highlights of New Legislation on Securities Laws. ......................................... 17.3
17.3 Definitions (Section 2) ................................................................................. 17.4
17.4 Recognition of Stock Exchanges .................................................................. 17.6
17.5 Granting of Recognition (Section 4) .............................................................. 17.7
17.6 Power of Central Government to Make Rules (Section 8)..............................17.11
17.7 Power to Stock Exchange to Make Bye-Laws (Section 9)..............................17.11
17.8 Power of SEBI (Section 10).........................................................................17.14
17.9 Penalties (Section 23).................................................................................17.18
17.10 Offences By Companies (Section 24) ..........................................................17.22
17.11 Title to Dividends (Section 27) ....................................................................17.23
17.12. Right to Receive Income from Collective Investment Scheme (Section 27A) ..17.24
17.13 Act Not to Apply in Certain Cases (Section 28) ............................................17.26
17.14 Power to Make Rules (Section 30)...............................................................17.26
17.15 Power of SEBI to Make Regulations (Section 31) .........................................17.28
CHAPTER 18: FOREIGN EXCHANGE MANAGEMENT ACT, 1999 ................ 18.1 – 18.44
18.0 Introduction ................................................................................................. 18.1
18.1 Broad Structure of FEMA ............................................................................. 18.1
18.2 FEMA, 1999 And FERA, 1973 a Comparison ................................................ 18.2
18.3 Preamble, Extent, Application And Commencement of FEMA, 1999 .............. 18.4
18.4 Definition (Section 2) ................................................................................... 18.5
18.5 Analysis Of Important Definitions.................................................................. 18.8
18.6 Regulations And Management Of Foreign Exchange ....................................18.12
18.7 Authorised Person (Section 10) ...................................................................18.23
18.8 Contraventions and Penalties In Brief ..........................................................18.25
18.9 Adjudication and Appeal .............................................................................18.30
18.10 Directorate of Enforcement .........................................................................18.38
18.11 Miscellaneous ............................................................................................18.39
CHAPTER 19: THE COMPETITION ACT 2002 .............................................. 19.1 – 19.50
19.0 Introduction ................................................................................................. 19.1
19.1 Why MRTP Act Needed A Fresh Look?......................................................... 19.2
19.2 What is Competition?................................................................................... 19.2
19.3 Competition Policy And Law ......................................................................... 19.2
19.4 Competition Laws In UK And US .................................................................. 19.3
19.5 Competition Act, 2002 ................................................................................. 19.4
19.6 MRTP Act, 1969 & Competition Act, 2002 ..................................................... 19.4
19.7 Main Ingredients Of Competition Law ........................................................... 19.5
19.8 Definitions................................................................................................... 19.5
CHAPTER 20: OVERVIEW OF BANKING REGULATION ACT, 1949, THE INSURANCE
ACT, 1938, THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT,
1999, THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND
ENFORCEMENT OF SECURITY INTEREST ACT, 2002 ................................. 20.1– 20.48
THE BANKING REGULATION ACT, 1949 ................................................................ 20.1
20.0 Introduction ................................................................................................ 20.1
20.1 Different Provisions Of Banking Regulation Act 1949 .................................... 20.2
20.2 Applicability Of The Banking Regulation Act, 1949 ........................................ 20.4
20.3 Business of Banking Companies .................................................................. 20.4
20.4 Reserve Fund (Section 17) ............................................................................ 20.6
20.5 RBI’s power to control loans & advances granted by banking company ............... 20.6
20.6 Accounts and balance sheet (section 29) ........................................................ 20.7
20.7 Audit .......................................................................................................... 20.7
20.8 Some Important Recent Changes:- ..............................................................20.12
20.9 Conclusion .................................................................................................20.12
THE INSURANCE ACT, 1938..................................................................................20.14
20.10 Introduction: ...............................................................................................20.14
20.11 Important Definitions:..................................................................................20.14
20.12 Provisions Related To Insurance: ................................................................20.15
20.13 Insurance Association Of India, Council Of Association And Committee ........20.19
20.14 Tariff Advisory Committee And Control Of Tariff Rates: ................................20.19
20.15 Solvency Margin, Advance Payment Of Premium And Restrictions
on the Opening Of A New Place Of Business ...............................................20.20
20.16 Provident Society: ......................................................................................20.20
20.17 Insurance Cooperative Societies: ................................................................20.21
20.18 Mutual Insurance Companies And Cooperative Life Insurance Societies: ......20.21
20.19 Re-Insurance:.............................................................................................20.22
20.20 Miscellaneous Matters: ...............................................................................20.22
20.21 Conclusion: ................................................................................................20.23
THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 1999
20.22 Introduction ................................................................................................20.25
20.23 Important Definitions...................................................................................20.25
20.24 Insurance Regulatory And Development Authority: (Sections 3-12) ...............20.26
20.25 Transfer Of Assets, Liabilities, Etc. Of Indian Insurance Regulatory
Authority (IIRA) To Insurance Regulatory Development Authority (IRDA)
(Section 13) ...............................................................................................20.27
20.26 Duties, Powers And Functions Of Authority: Sec – 14...................................20.27
20.27 Finance, Accounts And Audit: Sections 15 – 17 ...........................................20.27
20.28 Other Matters: Sections 18 – 32 ..................................................................20.28
THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND
ENFORCEMENT OF SECURITY INTEREST ACT, 2002
20.29 Introduction ................................................................................................20.30
20.30 Important Definitions...................................................................................20.30
20.31 Regulation Of Securitisation And Reconstruction Of
Financial Assets Of Banks And Financial Institutions....................................20.32
20.32 Enforcement Of Security Interest.................................................................20.38
20.33 Central Registry .........................................................................................20.43
20.34 Offences And Penalties ..............................................................................20.44
20.35 Miscellaneous Matters ................................................................................20.45
20.36 Self Examination Questions ........................................................................20.47
CHAPTER 21: PREVENTION OF MONEY LAUNDERING ACT, 2002............. 21.1 – 21.14
21.0 Introduction ................................................................................................. 21.1
21.1 Definitions................................................................................................... 21.1
21.2 Punishment For The Offence of Money Laundering ....................................... 21.5
21.3 Obligation of Banking Companies, Financial Institutions and Intermediaries ... 21.5
21.4 Appellate Tribunal ....................................................................................... 21.6
21.5 Special Courts............................................................................................. 21.8
21.6 Authorities Under The Act ............................................................................ 21.9
21.7 Reciprocal Arrangement for Assistance in Certain Matters and Procedure
for Attachment and Confiscation of Property ................................................21.12
21.8 Disclosure of Information ............................................................................21.12
21.9 Recovery of Fines.......................................................................................21.13
21.10 Power to Remove Difficulties.......................................................................21.13
21.11 Conclusion .................................................................................................21.13
21.12 Self Examination Questions ........................................................................21.14
CHAPTER 22: INTERPRETATION OF STATUTES, DEEDS
AND DOCUMENTS ..................................................................................... 22.1 – 22.20
22.0 Introduction ................................................................................................. 22.1
22.1 Why do we need interpretation/construction? ................................................ 22.4
22.2 Rules of interpretation/construction .............................................................. 22.5
22.3 Internal aids to interpretation/construction ...................................................22.14
22.4 External aids to interpretation/construction ..................................................22.17
22.5 Rules of interpretation/construction of deeds and documents........................22.19
22.6 Self-examination Questions ........................................................................22.20
SECTION A
COMPANY LAW
1
(A) ACCOUNTS & AUDIT
1.0 MAINTENANCE OF BOOKS OF ACCOUNTS

Section 209 of the Companies Act, 1956 requires every company to maintain proper
books of account with respect to;
(a) all sums of money received and expended by the company and the matters in respect
of which receipts and expenditure takes places.
(b) all sales and purchases of goods by the company
(c) the assets and liabilities of the company
(d) in the case of a company engaged in production, processing, manufacturing or mining
activities, such particulars relating to utilization of materials or labour or other items of
costs as may be prescribed by the Central Government to any class of companies.
1.1 NATURE OF BOOKS OF ACCOUNT

Proper books of accounts shall not be deemed to be kept with respect to the matters
specified in Section 209(1) & (2),
(a) if there are not kept such books as are necessary to give a true and fair view of the
state of the affairs of the company or branch office, as the case may be, and to explain its
transactions and
(b) if such books are not kept on accrual basis and according to the double entry system
of accounting. [Section 209(3)]
1.2 PERSONS WHO CAN INSPECT

The following persons have the right to inspect the books of accounts.
(a) Directors of the Company [Section 209(4)]
(b) Registrar of Companies (Section 209 A)
(c) Such officer of Government as may be authorized by the Central Government in this
behalf (Section 209A).
1.2 Corporate and Allied Laws
The books of account and other books and papers shall be open to inspection by any
director during business hours. Inspection shall be made by the SEBI in respect of
matters covered under sections referred to in Section 55A. Shareholder has no statutory
right of inspection of the books of account unless the articles specifically provides for.
1.3 PLACE OF MAINTENANCE OF BOOKS OF ACCOUNT

The books of account are required to be kept at the registered office of the company.
However, the books can be kept at any other place in India as the Board of Directors may
decide. In such a case, the company should file with Registrar of Companies a notice in
writing giving the full address of the place where the books are kept. This notice should
be filed within 7 days of the Boards’ decision.
1.4 PERIOD OF MAINTENANCE

The books of account of every company relating to a period of not less than eight years
immediately preceding the current year together with the vouchers relevant to any entry in
such books of account shall be preserved in good order. In case of a company
incorporated less than eight years before the current year, the books of account for the
entire period preceding the current year together with the vouchers relevant to any entry
in such books of account shall be so preserved.
1.5 PERSONS RESPONSIBLE FOR MAINTENANCE & PENALTY

The following persons shall be responsible for the failure of maintenance of proper books
of account
(a) where the company has a managing director or manager, such managing director or
manager and all officers and other employees of the company; and
(b) where the company has neither a managing director nor manager, every director of the
company.]
Penalty for default is imprisonment upto 6 months or fine upto Rs.10,000/- or both, if the
persons mentioned above fail to take all reasonable steps to ensure that the provisions of
Section 209 are duly complied with by the company or default has been committed by
their own willful Act. Further a person shall be sentenced to imprisonment only if the
offence was committed willfully [Section 205(5)].
In any penal proceedings, it shall be a defense to prove that a competent and reliable
person was charged with the duty of seeing that these requirements are complied with
and that he was in a position to discharge that duty [proviso to Section 205(5)]. The
person so charged with responsibility of compliance with provisions of Section 209 is
punishable with imprisonment upto 6 months or fine upto Rs.10, 000/- or both [Sections
205(7)]. Similar provisions are therein Section 211 [Section 211(7) and (8)].
Accounts & Audit 1.3
Even if the company is managed by Managing Director, it is possible for the Board of
Directors to make the Chief Accountant responsible to ensure compliance with Sections
209 and 211 [Section 209(7) and Section 211(8)]. Managing Director may also charge the
Chief Accountant with such duty by issuing a memo or office order. No person shall be
sentenced to imprisonment for any such offence unless it was committed willfully. Where
a director or any other officer has been convicted of an offence, he shall on and from the
date on which he is so convicted shall be disqualified for holding such office in any
company for a period of five years from such date.
1.6 LAYING OF ANNUAL ACCOUNTS AND BALANCE SHEET

At every annual general meeting of a company the Board of directors of the company shall
lay before the company—
(a) a balance sheet as at the end of the period specified in sub-section (3); and
(b) a profit and loss account for that period.
In the case of the first annual general meeting of the company, the profit and loss account
shall relate to the period beginning with the incorporation of the company and ending with
a day which shall not precede the day of the meeting by more than nine months and in the
case of any subsequent annual general meeting of the company, to the period beginning
with the day immediately after the period for which the account was last submitted and
ending with a day which shall not precede the day of the meeting by more than six
months, or in cases where an extension of time has been granted for holding the meeting
under the second proviso to sub-section (1) of section 166, by more than six months and
the extension so granted. The period to which the account aforesaid relates is referred to
as a “financial year” may be less or more than a calendar year, but it shall not exceed
fifteen months.
If any person, being a Director of a company, fails to take all reasonable steps to comply
with the provisions of this section, he shall, in respect of each offence, be punishable with
imprisonment for a term which may extend to six months, or with fine which may extend to
ten thousand rupees, or with both:
1.7 FORM AND CONTENTS OF BALANCE SHEET AND PROFIT AND LOSS
ACCOUNT.
Every balance sheet of a company shall give a true and fair view of the state of affairs of
the company as at the end of the financial year and shall, subject to the provisions of this
section, be in the form set out in Part I of Schedule VI, or as near thereto as
circumstances admit or in such other form as may be approved by the Central
Government either generally or in any particular case; and in preparing the balance sheet
due regard shall be had, as far as may be, to the general instructions for preparation of
balance sheet under the heading “Notes” at the end of that Part.
Similarly every profit and loss account of a company shall give a true and fair view of the
profit or loss of the company for the financial year and shall, subject as aforesaid, comply
with the requirements of Part II of Schedule VI, so far as they are applicable thereto.
Insurance or banking company or any company engaged in the generation or supply of
electricity, or to any other class of company for which a form of profit and loss account
has been specified in or under the Act governing such class of company are exempted
from the purview of Section 210. The Central Government may, by notification in the
Official Gazette, exempt any class of companies from compliance with any of the
requirements in Schedule VI if, in its opinion, it is necessary to grant the
Every profit and loss account and balance sheet of the company shall comply with the
accounting standards. The expression “accounting standards” means the standards of
accounting recommended by the Institute of Chartered Accountants of India constituted
under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the
Central Government in consultation with the National Advisory Committee on Accounting
Standards established under sub-section (1) of section 210A. Further the standards of
accounting specified by the Institute of Chartered Accountants of India shall be deemed to
be the Accounting Standards until the accounting standards are prescribed by the Central
Government under this sub-section.
1.8 DEVIATION FROM ACCOUNTING STANDARDS

Where the profit and loss account and the balance sheet of the company do not comply
with the accounting standards, such companies shall disclose in its profit and loss account
and balance sheet, the following, namely: —
(a) the deviation from the accounting standards;
(b) the reasons for such deviation; and
(c) the financial effect, if any, arising due to such deviation.
If any such person as is referred to in sub-section (6) of section 209 fails to take all
reasonable steps to secure compliance by the company, as respects any accounts laid
before the company in general meeting, with the provisions of this section and with the
other requirements of this Act as to the matters to be stated in the accounts, he shall, in
respect of each offence, be punishable with imprisonment for a term which may extend to
six months, or with fine which may extend to ten thousand rupees, or with both . Further
that in any proceedings against a person in respect of an offence under this section, it
shall be a defence to prove that a competent and reliable person was charged with the
duty of seeing that the provisions of this section and the other requirements aforesaid
were complied with and was in a position to discharge that duty. No person shall be
sentenced to imprisonment for any such offence unless it was committed willfully.
1.9 AUTHENTICATION OF ANNUAL ACCOUNTS

According to Section 215, every balance sheet and every profit and loss account of a
company shall be signed on behalf of the Board of directors by its manager or secretary, if
any, and by not less than two directors of the company one of whom shall be a managing
director where there is one. In the case of a banking company, by the persons specified in
clause (a) or clause (b), as the case may be, of sub-section (2) of section 29 of the
Banking Companies Act, 1949. In the case of a company not being a banking company,
when only one of its directors is for the time being in India, the balance sheet and the
profit and loss account shall be signed by such director; but in such a case there shall be
attached to the balance sheet and the profit and loss account a statement signed by him
explaining the reason for non-compliance with the provisions of Section 215 (1).
The balance sheet and the profit and loss account shall be approved by the Board of
directors before they are signed on behalf of the Board in accordance with the provisions
of this section and before they are submitted to the auditors for their report thereon.
1.10 BOARD’S REPORT

There shall be attached to every balance sheet laid before a company in general meeting,
a report by its Board of directors, with respect to—
(a) the state of the company’s affairs;
(b) the amounts, if any, which it proposes to carry to any reserves in such balance sheet;
(c) the amount, if any, which it recommends should be paid by way of dividend;
(d) material changes and commitments, if any, affecting the financial position of the
company which have occurred between the end of the financial year of the company to
which the balance sheet relates and the date of the report;
(e) the conservation of energy, technology absorption, foreign exchange earnings and
outgo, in such manner as may be prescribed. [Section 217(1)]
The Board’s report shall, so far as is material for the appreciation of the state of the
company’s affairs by its members and will not in the Board’s opinion be harmful to the
business of the company or of any of its subsidiaries, deal with any changes which have
occurred during the financial year—
(a) in the nature of the company’s business;
(b) in the company’s subsidiaries or in the nature of the business carried on by them; and
(c) generally in the classes of business in which the company as an interest.
Further, the Board’s report shall also include a statement showing the name of every
employee of the company who—
(i) if employed throughout the financial year, was in receipt of remuneration for that year
which, in the aggregate, was not less than such sum as may be prescribed; or
(ii) if employed for a part of the financial year, was in receipt of remuneration for any part
of that year, at a rate which, in the aggregate, was not less than such sum per month as
may be prescribed or
(iii) if employed throughout the financial year or part thereof, was in receipt of
remuneration in that year which, in the aggregate, or as the case may be, at a rate which,
in the aggregate, is in excess of that drawn by the managing director or whole-time
director or manager and holds by himself or along with his spouse and dependent
children, not less than two per cent, of the equity shares of the company.
The statement shall also indicate, —
(i) whether any such employee is a relative of any director or manager of the company
and if so, the name of such director, and
(ii) such other particulars as may be prescribed.
“Remuneration” for the purpose has the meaning assigned to it in the Explanation to
section 198.
1.11 DIRECTORS’ RESPONSIBILITY STATEMENT (SECTION 217 (2AA)

The Board’s report shall also include a Directors’ Responsibility Statement, indicating
therein, —
(i) that in the preparation of the annual accounts, the applicable accounting standards
had been followed along with proper explanation relating to material departures;
(ii) that the directors had selected such accounting policies and applied them consistently
and made judgments and estimates that are reasonable and prudent so as to give a true
and fair view of the state of affairs of the company at the end of the financial year and of
the profit or loss of the company for that period;
(iii) that 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;
(iv) that the directors had prepared the annual accounts on a going concern basis.
(Section 217AA)
1.12 DISCLOSURES IN BOARD’S REPORT

The Board’s report shall also specify the reasons for the failure, if any, to complete the
buy-back within the time specified in sub-section (4) of section 77A. The Board shall also
be bound to give the fullest information and explanations in its report aforesaid, or, in
cases falling under the proviso to section 222, in an addendum to that report, on every
reservation, qualification or adverse remark contained in the auditors’ report. The Board’s
report and any addendum thereto shall be signed by its chairman if he is authorised in
that behalf by the Board; and where he is not so authorised, shall be signed by such
number of directors as are required to sign the balance sheet and the profit and loss
account of the company by virtue of sub-sections (1) and (2) of section 215. If any person,
being a director of a company, fails to take all reasonable steps to comply with the
provisions of sub-sections (1) to (3), or being the Chairman, signs the Board’s report
otherwise than in conformity with the provisions of sub-section (4), he shall, in respect of
each offence, be punishable with imprisonment for a term which may extend to six
months, or with fine which may extend to twenty thousand rupees, or with both:
1.13 RIGHT OF MEMBERS TO COPIES OF BALANCE SHEET AND AUDITORS’

REPORT
A copy of every balance sheet (including the profit and loss account, the auditors’ report
and every other document required by law to be annexed or attached, as the case may
be, to the balance sheet) which is to be laid before a company in general meeting shall,
not less than twenty-one days before the date of the meeting, be sent to every member of
the company, to every trustee for the holders of any debentures issued by the company,
whether such member or trustee is or is not entitled to have notices of general meetings
of the company sent to him, and to all persons other than such members or trustees,
being persons so entitled. [Section 219)(a)]. A copy of the documents need not be sent—
(i) to a member, or holder of debentures, of the company, who is not entitled to have
notices of general meetings of the company sent to him and of whose address the
company is unaware;
(ii) to more than one of the joint holders of any shares or debentures none of whom is
entitled to have such notices sent to him;
(iii) in the case of joint holders of any shares or debentures some of whom are and some
of whom are not entitled to have such notices sent to them, to those who are not so
entitled;
(iv) in the case of a company whose shares are listed on a recognized stock exchange, if
the copies of the documents aforesaid are made available for inspection at its registered
office during working hours for a period of twenty-one days before the date of the meeting
and a statement containing the salient features of such documents in the prescribed form
or copies of the documents aforesaid, as the company may deem fit, is sent to every
member of the company and to every trustee for the holders of any debentures issued by
the company not less than twenty-one days before the date of the meeting;
if the copies of the documents are sent less than twenty-one days before the date of the
meeting, they shall, notwithstanding that fact, be deemed to have been duly sent if it is so
agreed by all the members entitled to vote at the meeting.
1.14 FILING WITH THE REGISTRAR

After the balance sheet and the profit and loss account have been laid before a company
at an annual general meeting as aforesaid, there shall be filed with the Registrar within
thirty days from the date on which the balance sheet and the profit and loss account were
so laid, or where the annual general meeting of a company for any year has not been
held, there shall be filed with the Registrar within thirty days from the latest day on or
before which that meeting should have been held. Three copies of the balance sheet and
the profit and loss account, signed by the managing director, manager or secretary of the
company, or if there be none of these, by a director of the company, together with three
copies of all documents which are required by this Act to be annexed or attached to such
balance sheet or profit and loss account:
In the case of a private company, copies of the balance sheet and copies of the profit and
loss account shall be filed with the Registrar separately. If the annual general meeting of
a company before which a balance sheet is laid as aforesaid does not adopt the balance
sheet, or is adjourned without adopting the balance sheet, or, if the annual general
meeting of a company for any year has not been held, a statement of that fact and of the
reasons therefore shall be annexed to the balance sheet and to the copies thereof
required to be filed with the Registrar. If default is made in complying with the
requirements of sub-sections (1) and (2), the company, and every officer of the company
who is in default, shall be liable to the like punishment as is provided by section 162 for a
default in complying with the provisions of section 159, 160 or 161.
1.15 HOLDING & SUBSIDIARIES ACCOUNTS

Section 213(1) of the Companies Act, 1956 states as follows:
Where it appears to the Central Government desirable for a holding company or a holding
company’s subsidiary to extend its financial year so that the subsidiary’s financial year
may end with that of the holding company, and for that purpose to postpone the
submission of the relevant accounts to a general meeting, the Central Government may
on the application or with the consent of the board of directors of the company whose
financial year is to be extended, direct that in the case of that company, the submission of
accounts to a general meeting, the holding of an annual general meeting or the making of
an annual return, shall not be required to be submitted held or made earlier than the dates
specified in the direction notwithstanding anything to the contrary in the Companies Act,
1956 or in any other Act for the time being in force. The Central Government shall, on the
application of the Board of directors of a holding company or a holding company’s
subsidiary, exercise the powers conferred on that Government if it is necessary so to do,
in order to secure that the end of the financial year of the subsidiary does not precede the
end of the holding company’s financial year by more than six months, where that is not
the case at the commencement of this Act, or at the date on which the relationship of
holding company and subsidiary comes into existence, where that date is later than the
commencement of the Companies Act. Consider the following practical problem and
advise.
S. Ltd. is a subsidiary company of H Ltd. The financial year of H Ltd. is from 1 st April to
31 st March, whereas the financial year of S ltd. is 1 st July to 30 th June every year. This is
now causing difficulties particularly in view of the requirement of reporting and circulating
the consolidated annual accounts as required by accounting year of S Ltd. for the year 1 st
July, 2005 to 30 th June, 2006 be extended from present 12 months to 21 months, i.e. 1st
July, 2005 to 31 st March, 2007, so that the financial years of the holding company and the
subsidiary company end on the same date.
The management can extend the financial year of S. Ltd. from 12 months to 21 months as
mentioned in the question.
Following steps are required to be taken for this purpose:
(i) To convene a Meeting of the Board of directors of S. Ltd. where at the resolution for
extending the financial year 1 st July, 2005 to 30 th June, 2006 (12 months) to 1 st July, 2005
to 31 st March,.2007 (21 months) is to be passed so that the year ending matches with the
year ending of H. Ltd.
(ii) To make an application under section 213(1) of the Companies Act, 1956 to the
Central Government giving full details and specific reasons for seeking the extension in
the year ending. The application may be made on a plain paper as there is no prescribed
form for this purpose.
(iii) To attach the following to the application:
(a) A certified true copy of the last Balance Sheet and Profit and Loss Account of H Ltd.
and S. Ltd.
(b) A certified true copy of the Memorandum of Association and Articles of Association of
both the Companies.
(c) A certified true copy of the resolution of the Board of Directors proposing the
extension of the financial year ending from 12 months to 21 months.
(d) Requisite fee payable to the Central Government as per the Companies (Fees on
Application) Rules, 1999.
AUDIT
1.16 QUALIFICATIONS OF AN AUDITOR (SECTION 226)
A person shall not be qualified for appointment as auditor of a company unless he is a
chartered accountant within the meaning of the Chartered Accountants Act, 1949. Further
in the case of a firm whereof all the partners practising in India are qualified for
appointment as aforesaid may be appointed by its firm name to be auditor of a company,
in which case any partner so practising may act in the name of the firm.
1.17 DISQUALIFICATIONS OF AUDITORS

The following persons shall be not qualified for appointment as auditor of a company—
(a) a body corporate;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of
the company;
(d) a person who is indebted to the company for an amount exceeding one thousand
rupees, or who has given any guarantee or provided any security in connection with the
indebtedness of any third person to the company for an amount exceeding one thousand
rupees;
(e) a person holding any security of that company after a period of one year from the date
of commencement of the Companies (Amendment) Act, 2000. “Security” for the purpose
means an instrument which carries voting rights.
An officer or employee shall not be construed as an auditor. Further a person shall also
not be qualified for appointment as auditor of a company if he is disqualified for
appointment as auditor of any other body corporate which is that company’s subsidiary or
holding company or a subsidiary of that company’s holding company, or would be so
disqualified if the body corporate were a company. If an auditor becomes subject, after
his appointment, to any of the disqualifications specified in sub-sections (3) and (4) of
section 226, he shall be deemed to have vacated his office as such.
1.18 FIRST AUDITORS

The first auditor or auditors of a company shall be appointed by the Board of directors
within one month of the date of registration of the company; and the auditor or auditors so
appointed shall hold office until the conclusion of the first annual general meeting.
However the company may, at a general meeting, remove any such auditor or all or any of
such auditors and appoint in his or their places any other person or persons who have
been nominated for appointment by any member of the company and of whose nomination
notice has been given to the members of the company not less than fourteen days before
the date of the meeting and if the Board fails to exercise its powers, the company in
general meeting may appoint the first auditor or auditors.
1.19 SUBSEQUENT AUDITORS [SECTION 224 (1)]

At each annual general meeting, subsequent auditor or auditors are appointed by way of
an ordinary resolution. The auditor or auditors so appointed appoint shall hold office from
the conclusion of that meeting until the conclusion of the next annual general meeting and
shall within seven days of the appointment, give intimation thereof to every auditor so
appointed: Before any appointment or re-appointment of auditor or auditors is made by
any company at any annual general meeting, a written certificate shall be obtained by the
company from the auditor or auditors proposed to be so appointed to the effect that the
appointment or reappointment, if made, will be in accordance with the limits specified.
Every auditor appointed shall within thirty days of the receipt from the company of the
intimation of his appointment, inform the Registrar in writing that he has accepted, or
refused to accept, the appointment.
1.20 AUDITORS’ APPOINTMENT BY SPECIAL RESOLUTION [SECTION 224A (1)]

The appointment or re-appointment at each annual general meeting of an auditor or
auditors shall be made by a special resolution in the case of a company in which not less
than twenty-five per cent of the subscribed share capital is held, whether singly or in any
combination, by—
(a) a public financial institution or a Government company or Central Government or any
State Government, or
(b) any financial or other institution established by any Provincial or State Act in which a
State Government holds not less than fifty-one per cent of the subscribed share capital, or
(c) a nationalised bank or an insurance company carrying on general insurance business,
If any company omits or fails to pass at its annual general meeting any special resolution
appointing an auditor or auditors, it shall be deemed that no auditor or auditors had been
appointed by the company at its annual general meeting, and thereupon the provisions of
sub-section (3) of section 224 shall become applicable in relation to such company.
1.21 RE-APPOINTMENT OF RETIRING AUDITOR

At any annual general meeting, a retiring auditor shall be deemed to be re-appointed,
unless—
(a) he is not qualified for re-appointment;
(b) he has given the company notice in writing of his unwillingness to be re-appointed;
(c) a resolution has been passed at that meeting appointing somebody instead of him or
providing expressly that he shall not be re-appointed; or

(d) where notice has been given of an intended resolution to appoint some person or
persons in the place of a retiring auditor, and by reason of the death, incapacity or
disqualification of that person or of all those persons, as the case may be, the resolution
cannot be proceeded with.
Where at an annual general meeting no auditors are appointed or re-appointed, the
Central Government may appoint a person to fill the vacancy.
1.22 CEILING ON NUMBER OF AUDITS

Any person who is full-time employment elsewhere cannot be appointed as an auditor.
Further no company or its Board of directors shall appoint a firm as its auditor if such
person or firm is, at the date of such appointment or re-appointment, holding appointment
as auditor of the specified number of companies or more than the specified number of
companies. In the case of a firm of auditors, “specified number of companies” shall be
construed as the number of companies specified for every partner of the firm who is not in
full-time employment elsewhere. Where any partner of the firm is also a partner of any
other firm or firms of auditors, the number of companies which may be taken into account,
by all the firms together, in relation to such partner shall not exceed the specified number
in the aggregate. Further where any partner of a firm of auditors is also holding office, in
his individual capacity, as the auditor of one or more companies, the number of
companies which may be taken into account in his case shall not exceed the specified
number, in the aggregate. The ceiling on number of company audits does not include a
private company.
A person or firm holding, appointment as the auditor of a number of companies exceeding
the specified number, shall, within sixty days from such commencement, intimate his or its
unwillingness to be re-appointed as the auditor from the financial year next following such
commencement, to the company or companies of which he or it is not willing to be re-
appointed as the auditor; and shall simultaneously intimate to the Registrar the names of
the companies of which he or it is willing to be re-appointed as the auditor and forward a
copy of the intimation to each of the companies referred to therein.
“specified number” means, —
(a) in the case of a person or firm holding appointment as auditor of a number of
companies each of which has a paid-up share capital of less than rupees twenty-five
lakhs, twenty such companies;
(b) in any other case, twenty companies, out of which not more than ten shall be
companies each of which has a paid-up share capital of rupees twenty-five lakhs or more.
[Explanation I to sub-Sections (IB) & (IC) of Section 224]
In computing the specified number, the number of companies in respect of which or any
part of which any person or firm has been appointed as an auditor, whether singly or in
combination with any other person or firm, shall be taken into account.
1.23 FILLING UP CASUAL VACANCY

The Board may fill any casual vacancy in the office of an auditor; but while any such
vacancy continues, the remaining auditor or auditors, if any, may act:
Where such vacancy is caused by the resignation of an auditor, the vacancy shall only be
filled by the company in general meeting. Any auditor appointed in a casual vacancy shall
hold office until the conclusion of the next annual general meeting.
Any auditor appointed under this section may be removed from office before the expiry of
his term only by the company in general meeting, after obtaining the previous approval of
the Central Government in that behalf.
1.24 REMUNERATION OF AUDITORS

The remuneration of the auditors of a company may be fixed by the Board or the Central
Government, in case the auditor is appointed by the Board or the Central Government as
the case may be. In the case of an auditor appointed under section 619 by the
Comptroller and Auditor-General of India, remuneration shall be fixed by the company in
general meeting or in such manner as the company in general meeting may determine.
The expression “remuneration” includes any sums paid by the company in respect of the
auditors’ expenses shall be deemed to be included in
1.25 REMOVAL OF AUDITORS

Removal of auditor only requires an ordinary resolution. However Section 225 prescribes
certain procedure for the removal of an auditor.
(1) Special notice shall be required for a resolution at an annual general meeting
appointing as auditor a person other than a retiring auditor, or providing expressly that a
retiring auditor shall not be re-appointed.
(2) On receipt of notice of such a resolution, the company shall forthwith send a copy
thereof to the retiring auditor.
(3) Where notice is given of such a resolution and the retiring auditor makes with respect
thereto representations in writing to the company (not exceeding a reasonable length) and
requests their notification to members of the company, the company shall, unless the
representations are received by it too late for it to do so,—
(a) in any notice of the resolution given to members of the company, state the fact of the
representations having been made; and
(b) send a copy of the representations to every member of the company to whom notice
of the meeting is sent, whether before or after the receipt of the representations by
the company;
If a copy of the representations is not sent as aforesaid because they were received too
late or because of the company’s default the auditor may (without prejudice to his right to
be heard orally) require that the representations shall be read out at the meeting :
The copies of the representations need not be sent out and the representations need not
be read out at the meeting if, on the application either of the company or of any other
person who claims to be aggrieved, if the Central Government is satisfied that the rights
conferred are being abused to secure needless publicity for defamatory matter; and the
Central Government may order the company’s costs on such an application to be paid in
whole or in part by the auditor, notwithstanding that he is not a party to the application.
1.26 POWERS OF AUDITORS

1. Every auditor of a company shall have a right of access at all times to the books and
accounts and vouchers of the company, whether kept at the head office of the company or
elsewhere.
2. He shall be entitled to require from the officers of the company such information and
explanations as the auditor may think necessary for the performance of his duties as
auditor.
3. Section 228(2) provides that where the accounts of any branch office are audited by a
person other than the company’s auditor, the company’s auditor (a) shall be entitled to visit
the branch office, if he deems it necessary to do so for the performance of his duties as
auditor, and (b) shall have a right of access at all times to the books and accounts and
vouchers of the company maintained at the branch office.
4. He has the right to attend any general meeting of the company and be heard on matters
that concerns him as an auditor.
1.27 DUTIES OF AUDITORS

1. The auditor shall make a report to the members of the company on the accounts
examined by him, and on every balance sheet and profit and loss account and on every
other document declared by this Act to be part of or annexed to the balance sheet or profit
and loss account, which are laid before the company in general meeting during his tenure
of office, and the report shall state whether, in his opinion and to the best of his
information and according to the explanations given to him, the said accounts give the
information required by this Act in the manner so required and give a true and fair view
[Section 227(2)]
2. It is the duty of the auditor who shall inquire—
(a) whether loans and advances made by the company on the basis of security have been
properly secured and whether the terms on which they have been made are not prejudicial
to the interests of the company or its members;
(b) whether transactions of the company which are represented merely by book entries
are not prejudicial to the interests of the company;
(c) where the company is not an investment company within the meaning of section 372
or a banking company, whether so much of the assets of the company as consist of
shares, debentures and other securities have been sold at a price less than that at which
they were purchased by the company;
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and papers of the company that any shares have been
allotted for cash, whether cash has actually been received in respect of such allotment,
and if no cash has actually been so received, whether the position as stated in the
account books and the balance sheet is correct, regular and not misleading.
(3) The auditors’ report shall also state—
(a) whether he has obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purposes of his audit;
(b) whether, in his opinion, proper books of account as required by law have been kept by
the company so far as appears from his examination of those books, and proper returns
adequate for the purposes of his audit have been received from branches not visited by
him;
(bb) whether the report on the accounts of any branch office audited under section 228
by a person other than the company’s auditor has been forwarded to him as required by
clause (c) of sub-section (3) of that section and how he has dealt with the same in
preparing the auditor’s report;
(c) whether the company’s balance sheet and profit and loss account dealt with by the
report are in agreement with the books of account and returns;
(d) whether, in his opinion, the profit and loss account and balance sheet comply with the
accounting standards referred to in sub-section (3C) of section 211;
(e) in thick type or in italics the observations or comments of the auditors which have any
adverse effect on the functioning of the company;
(f) whether any director is disqualified from being appointed as director under clause (g)
of sub-section (1) of section 274;
(g) whether the cess payable under section 441A has been paid and if not, the details of
amount of cess not so paid.

(4).Where any of the matters referred to in clauses (i) and (ii) of sub-section (2) or in
clauses (a), (b) (bb)],(c) and (d) of sub-section (3) is answered in the negative or with a
qualification, the auditor’s report shall state the reason for the answer.
1.28 AUDIT OF ACCOUNTS OF BRANCH OFFICE OF COMPANY

1. Section 228 requires that where a company has a branch office, the accounts of that
office shall be audited by the company’s auditor appointed under section 224 or] by a
person qualified for appointment as auditor of the company under section 226, or where
the branch office is situate in a country outside India, either by the company’s auditor or a
person qualified as aforesaid or by an accountant duly qualified to act as an auditor of the
accounts of the branch office in accordance with the laws of that country.
2. Further in the case of a banking company having a branch office outside India, it shall
be sufficient if the auditor is allowed access to such copies of, and extracts from, the
books and accounts of the branch as have been transmitted to the principal office of the
company in India.
3. Where a company in general meeting decides to have the accounts of a branch office
audited otherwise than by the company’s auditor, the company in that meeting shall for
the audit of those accounts appoint a person qualified for appointment as auditor of the
company under section 226, or where the branch office is situate in a country outside
India, a person who is either qualified as aforesaid or an accountant duly qualified to act
as an auditor of the accounts of the branch office in accordance with the laws of that
country, or authorise the Board of directors to appoint such a person in consultation with
the company’s auditor.
4. The person so appointed as the branch auditor shall have the same powers and duties
in respect of audit of the accounts of the branch office as the company’s auditor has in
respect of the same.
5. The branch auditor shall prepare a report on the accounts of the branch office
examined by him and forward the same to the company’s auditor who shall in preparing
the auditor’s report, deal with the same in such manner as he considers necessary.
6. The branch auditor shall receive such remuneration and shall hold his appointment
subject to such terms and conditions as may be fixed either by the company in general
meeting or by the Board of directors if so authorised by the company in general meeting.
7. The Central Government may make rules providing for the exemption of any branch
office from the provisions of this section to the extent specified in the rules and in making
such rules the Central Government shall have regard to all or any of the following matters,
namely :—
(a) the arrangement made by the company for the audit of accounts of the branch office
by a person otherwise qualified for appointment as branch auditor even though such
person may be an officer or employee of the company;
(b) the nature and quantum of activity carried on at the branch office during a period of
three years immediately preceding the date on which the branch office is exempted from
the provisions of this section;
(c) the availability at a reasonable cost of a branch auditor for the audit of accounts of the
branch office;
(d) any other matter which in the opinion of the Central Government justifies the grant of
exemption to the branch office from the provisions of this section.
1.29 SIGNATURE OF AUDIT REPORT, ETC. (SECTION 229)

Only the person appointed as auditor of the company, or where a firm is so appointed in
pursuance of the proviso to sub-section (1) of section 226, only a partner in the firm
practising in India, may sign the auditor’s report, or sign or authenticate any other
document of the company required by law to be signed or authenticated by the auditor.
1.30 SPECIAL AUDIT (SECTION 233A)

Where the Central Government is of the opinion—
(a) that the affairs of any company are not being managed in accordance with sound
business principles or prudent commercial practices; or
(b) that any company is being managed in a manner likely to cause serious injury or
damage to the interests of the trade, industry or business to which it pertains; or
(c) that the financial position of any company is such as to endanger its solvency;
the Central Government may at any time by order direct that a special audit of the
company’s accounts for such period or periods as may be specified in the order, shall be
conducted and may by the same or a different order appoint either a chartered accountant
whether or not such chartered accountant is a chartered accountant in practice or the
company’s auditor himself to conduct such special audit and such auditor shall be known
as Special auditor. The report of the special auditor shall, as far as may be, include all the
matters required to be included in an auditor’s report under section 227 and, if the Central
Government so directs, shall also include a statement on any other matter which may be
referred to him by that Government.
1.31 AUDIT OF COST ACCOUNTS (SECTION 233B)

Where the Central Government is of the opinion that it is necessary so to do in relation to
any company required under clause (d) of sub-section (1) of section 209 to include in its
books of account the particulars referred to therein, the Central Government may, by
order, direct that an audit of cost accounts of the company shall be conducted in such
manner as may be specified in the order by an auditor who shall be a cost accountant
within the meaning of the Cost and Works Accountants Act, 1959. If the Central
Government is of opinion that sufficient number of cost accountants are not available for
conducting the audit of the cost accounts of companies generally, that Government may,
by notification in the Official Gazette, direct that, for such period as may be specified in
the said notification, that such chartered accountant possessing the prescribed
qualifications may be appointed to audit the cost accounts of the company. The cost
auditor shall be appointed by the Board of directors of the company [in accordance with
the provisions of sub-section (1B) of section 224 and with the previous approval of the
Central Government. Before the appointment of any auditor is made by the Board, a
written certificate shall be obtained by the Board from the auditor proposed to be so
appointed to the effect that the appointment, if made, will be in accordance with the
provisions of sub-section (1B) of section 224. An audit conducted by an auditor under this
section shall be in addition to an audit conducted by an auditor appointed under section
224. Cost auditor shall have the same powers and duties in relation to an audit conducted
by him under this section as an auditor of a company has under sub-section (1) of section
227 and such auditor shall make his report to the Central Government] in such form and
within such time as may be prescribed and shall also at the same time forward a copy of
the report to the company.
Note: For detailed material on Accounts & Audit, students are advised to refer to Study
Material on Accounting and Audit respectively.
2
(B) DIVIDEND
2.0 MANNER AND TIME OF PAYMENT

(a) Dividend to be paid only out of profits: According to Section 205 dividend shall be
declared or paid by a company for any financial year
(a) out of the current year profits of the company for that year arrived at after providing for
depreciation or
(b) out of the profits of the company for any previous financial year or years arrived at after
providing for depreciation and remaining undistributed or out of both or
(c) out of moneys provided by the Central Government or a State Government for the
payment of dividend in pursuance of a guarantee given by that Government :
(b) Provisions for depreciation
(a) The company should provide for depreciation for any previous financial year or years
before declaring or paying dividend for any financial year provide and such depreciation
be provided out of the profits of that financial year or out of the profits of any other
previous financial year or years
(b) If the company has incurred any loss in any previous financial year or years then, the
amount of the loss or an amount which is equal to the amount provided for depreciation
for that year or those years whichever is less
(c) Such loss shall be set off against the profits of the company for the year for which
dividend is proposed to be declared or paid or against the profits of the company for any
previous financial year or years, arrived at in both cases after providing for depreciation
(d) The Central Government may, if it thinks necessary so to do in the public interest, allow
any company to declare or pay dividend for any financial year out of the profits of the
company for that year or any previous financial year or years without providing for
depreciation
(e) It shall not be necessary for a company to provide for depreciation where dividend for any
financial year is declared or paid out of the profits of any previous financial year or years
(c) Method of depreciation

Depreciation shall be provided either—
(a) to the extent specified in section 350; or
(b) in respect of each item of depreciable asset, for such an amount as is arrived at by
dividing ninety-five per cent of the original cost thereof to the company by the specified
period in respect of such asset; or
(c) on any other basis approved by the Central Government which has the effect of writing off
by way of depreciation ninety-five per cent of the original cost to the company of each
such depreciable asset on the expiry of the specified period; or
(d) as regards any other depreciable asset for which no rate of depreciation has been laid
down by this Act or any] rules made there under, on such basis as may be approved by
the Central Government by any general order published in the Official Gazette or by any
special order in any particular case :
(e) In the event of the depreciable asset being sold, discarded, demolished or destroyed the
written down value thereof at the end of the financial year in which the asset is sold,
discarded, demolished or destroyed, shall be written off in accordance with the proviso to
section 350.
2.1 COMPULSORY TRANSFER TO RESERVES:

Dividend shall be declared or paid by a company for any financial year out of the profits of the
company for that year arrived at after providing for depreciation only after the transfer to the
reserves of the company of such percentage of its profits for that year, not exceeding ten per
cent, as may be prescribed According to The Companies (Transfer of Profits to Reserves)
Rules, 1975,
(a) Where the dividend proposed exceeds 10 per cent but not 12.5 per cent of the paid
up capital, the amount to be transferred to the reserves shall not be less than 2.5 per cent of
the current profits;
(b) Where the dividend proposed exceeds 12.5 per cent but des not exceed 15 per cent
of the paid up capital, the amount to be transferred to the reserves shall not be less than 5 per
cent of the current profits;
(c) Where the dividend proposed exceeds 15 per cent but does not exceed 20 per cent of
the paid up capital, the amount to be transferred to the reserves shall not be less than 7.5 per
cent of the current profits;
(d) Where the dividend proposed exceeds 20 per cent of the paid up capital, the amount
to be transferred to the reserves shall not be less than 10 per cent of the current profits
No transfer to reserves is required if the rate of dividend proposed is 10 per cent or less.
2.2 TRANSFER OF HIGHER PERCENTAGE OF PROFITS TO RESERVES

A company can make a transfer of more than 10 per cent to reserves voluntarily provided it
Dividend 2.3
ensures the minimum distribution specified in Rule 3 of the Companies (Transfer of Profits to
Reserves) Rules, 1975. The minimum distribution is the rate of dividend equal to the average
of the rates of dividend for the last 3 financial years. Where bonus shares have been issued
during the financial year, minimum distribution would be constructed as the average of the
amount of dividend for the last three financial years. Where, however, the net profits after tax
for the financial year are lower by 20 per cent or more than the average net profits after tax of
the last two financial years, it will not be necessary to ensure the minimum distribution for
making a higher transfer to reserve. Where no dividend is declared, the transfer to reserves
should be lower than the average amount of dividends declared during the last three financial
years.
2.3 DECLARATION OF DIVIDEND OUT OF PAST RESERVES

Dividend can be declared by the company out of accumulated profits subject to the following
conditions;
1. The rate of the dividend declared does not exceed the average of the rates at which
dividend was declared by it in the 5 years immediately preceding that year or 10 per cent of its
paid up capital, whichever is less.
2. The total amount to be drawn from the accumulated profits earned in previous years
and transferred to the reserves does not exceed an amount equal to 1/10th of the sum of its
paid up capital and free reserves and the amount to drawn must first be utilized to set off the
losses incurred in the financial year before any dividend in respect of preference or equity
shares is declared.
3. The balance of reserves after such drawl does not fall below 15 per cent of its paid up
share capital.
2.4 DECLARATION OF INTERIM DIVIDEND

According to Section 2 (14A) dividend includes any interim dividend. Therefore, the
procedures which are applicable to final dividend (i.e. Sections 205, 205A, 205C, 206, 206A &
207) also applies to any interim dividend. Accordingly, like final dividend, interim dividend
shall be considered as debt once declared and, therefore, cannot be revoked. The Board of
directors may declare interim dividend and the amount of dividend including interim dividend
shall be deposited in a separate bank account within five days from the date of declaration of
such dividend.
2.5 TIME LIMIT

According to Section 207, a company which has declared dividend to the shareholders should
make the payment within 30 days from the date of its declaration. The term payment implies
the posting of dividend warrant irrespective of the fact whether the shareholder has received it
or not. Failure to post dividend warrant within 30 days, constitutes an offence under the Act.
The penalty for the default is punishable with simple imprisonment for a term which may
extend to three years and shall also be liable to a fine of one thousand rupees for every day
during which such default continues and the company shall be liable to pay simple interest at
the rate of eighteen per cent per annum during the period for which such default continues:
However, it shall not be an offence be deemed to have been committed in the following cases:
(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;
(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 aforesaid was not due to any default on the part of the company.
2.6 UNPAID OR UNCLAIMED DIVIDEND (SECTION 205A)

A dividend which has been declared by a company but has not been paid, or claimed within
thirty days from the date of the declaration, to any shareholder shall, within seven days from
the date of expiry of the said period of thirty days, transfer the total amount of dividend which
remains unpaid or unclaimed within the said period of thirty days, to a special account to be
opened by the company in that behalf in any scheduled bank, to be called “Unpaid Dividend
Account of. Company Limited/Company (Private) Limited”.
2.7 PAYMENT OF UNPAID OR UNCLAIMED DIVIDEND (SECTION 205B)
Any money transferred to the unpaid dividend account of a company in pursuance of this
section which remains unpaid or unclaimed for a period of seven years from the date of such
transfer shall be transferred by the company to the Investor Education and Protection Fund
established under sub-section (1) of section 205C.]
Any person claiming to be entitled to any money transferred under sub-section (5) of section
205A to the fund of the Central Government, may apply to the Central Government for an
order for payment of the money claimed; and the Central Government may, if satisfied,
whether on a certificate by the company or otherwise, that such person is entitled to the whole
or any part of the money claimed, make an order for the payment to that person of the sum
due to him after taking such security from him as it may think fit :
2.8 WHEN DIVIDEND TO BE KEPT IN ABEYANCE? (SECTION 206A)

Where any instrument of transfer of shares has been delivered to any company for registration
and the transfer of such shares has not been registered by the company, the company shall —
(a) transfer the dividend in relation to such shares to the special account referred to in
section 205A unless the company is authorised by the registered holder of such share in
writing to pay such dividend to the transferee specified in such instrument of transfer; and
(b) keep in abeyance in relation to such shares any offer of rights shares under clause
(a) of sub-section (1) of section 81 and any issue of fully paid-up bonus shares in pursuance
of sub-section (3) of section 205.
Dividend 2.5
2.9 INVESTOR EDUCATION & PROTECTION FUND (SECTION 205C)

The following amounts shall be credited to the Fund:
(a) amounts in the unpaid dividend accounts of companies;
(b) the application moneys received by companies for allotment of any securities and due
for refund;
(c) matured deposits with companies;
(d) matured debentures with companies;
(e) the interest accrued on the amounts referred to in (a) to (d) as above;
(f) grants and donations given to the Fund by the Central Government, State
Governments, companies or any other institutions for the purposes of the Fund; and
(g) the interest or other income received out of the investments made from the Fund:
No such amounts referred to in clauses (a) to (d) shall form part of the Fund unless such
amounts have remained unclaimed and unpaid for a period of seven years from the date they
became due for payment.
2.10 PAYMENT OF INTEREST OUT OF CAPITAL (SECTION 208)

(a) For the purpose of raising money to defray the expenses of the construction of any
work or building, or the provision of any plant, which cannot be made profitable for a lengthy
period, the company may—
(i) pay interest on so much of that share capital as is for the time being paid up, for the
period and subject to certain conditions and restrictions
(ii) charge the sum so paid by way of interest, to capital as part of the cost of
construction of the work or building, or the provision of the plant.
(b) No such payment shall be made unless it is authorised by the articles or by a special
resolution.
(c) No such payment, whether authorised by the articles or by special resolution, shall be
made without the previous sanction of the Central Government.
(d) Before sanctioning any such payment, the Central Government may, at the expense of the
company, appoint a person to inquire into, and report to the Central Government on, the
circumstances of the case; and may, before making the appointment, require the company to
give security for the payment of the costs of the inquiry.
(e) The payment of interest shall be made only for such period as may be determined by the
Central Government; and that period shall in no case extend beyond the close of the half-year
next after the half-year during which the work or building has been actually completed or the
plant provided.
(f) The rate of interest shall, in no case, exceed four per cent per annum or such other rate as
the Central Government may, by notification in the Official Gazette, direct.
(g) The payment of the interest shall not operate as a reduction of the amount paid up on the
shares in respect of which it is paid.
3
(C) DIRECTORS, POWERS, MANAGERIAL REMUNERATION
3.0 INTRODUCTION
When a company is incorporated under the Companies Act, 1956, it becomes a legal
entity (i.e., a legal person) capable of exercising all its functions. This impersonal creation
of law can only act through some agency, and it must be a human agency. It being
impracticable for all the members of a company (Whose number may be very large in a
big public company) to conduct its affairs they elect their representatives for this purpose.
These elected representatives are usually known as directors. Under Section 2, a director
“includes any person occupying the position of director by whatever name called”
Directors of a company collectively are referred to as “the Board of Directors” or the
“Board”. Any person, in accordance with whose directions or instructions the Board of
Directors of a company is accustomed to act, is also deemed to be a director of the
company (Sections 303 and 397).
3.1 LEGAL POSITION OF DIRECTORS

(i) As trustees: Although a director is described as a trustee, yet he is not a trustee in
the true sense of the term; he is so only in a limited sense, viz., he stands in a
fiduciary relationship with his company. It has been said that directors are trustees. If
this means no more than those directors in the performance of their duties stand in a
fiduciary relationship to the company, the statement is true enough. But if this
statement is meant to be an indication by way of analogy of what those duties are, it
appears to me to be wholly misleading. I can see but little resemblance between the
duties of a director and the duties of a trustee of a will or of a marriage settlement
“(As per Romer J. in re City Equitable Insurance Co., (1925) I ch. 407). Since he is in
a fiduciary relationship with the company, he is, to that extent, also a trustee of the
company’s assets which are under the director’s control or which have come into their
hands (Iyyappan vs. The Dharmodyam Company, 1963 I.S.C.R.85). He is a trustee in
the sense that he must act in the interest of the company and not in his own interest.
(Regal vs. Gulliver (1942), I All E R. 378) Because of his fiduciary relationship he
must exercise the powers according to the best of his judgement for good of the
company and its shareholders. It is his duty to abide by the provisions of the articles
and to exercise his power after due deliberation and careful consideration of what he
is intending to do. His transactions must be fair and proper [Narayandas Sowani vs.
Sangli Bank Ltd. (1965) 35 Comp. Cas 596 SC] Though the directors are trustees,
even in the limited sense, for the company and the shareholders, they are not trustees
for the creditors or for individual shareholders or for outsiders.
(ii) As agents: Although directors are not agents in the legal sense, the law of agency
governs the relationship between the company and its directors. Whenever an agent
acting on behalf of his principal will be liable, the directors would also be liable in the
like circumstances; where the liability would attach to the principal and the principal
only. The liability is the liability of the company. Thus when directors act properly on
behalf of the company, they do not incur personal liability; if they exceed their powers
but the acts are intra vires the company, it can ratify the acts. They are not in the
position of agents to shareholders. In certain respects, their powers are more
extensive than those of agents because the shareholders who appoint them do not
have much opportunity to control their acts.
(iii) As managing partners: The directors who look after a company does so for
themselves as well as for the shareholders. Their position is similar to that of
managing partners, for they are appointed to their offices by an arrangement between
them and other members. But they do not have all the powers or liabilities of
managing partners. Even amongst the directors themselves there is no mutual agency
as in the case of partners.
“Directors” are described as trustees, agents of managing partners, not as exhausting
their powers or responsibilities but as indicating useful points of view. It does not matter
much what you call them, so long as you understand what their true position is, “they are
commercial men managing a trading concern for the benefit of themselves and all other
shareholders in it” (as per Lessel M.R. in re Forest of Dena Mining Co 10 Ch D-450). The
best way to describe their position is to say that they stand in a fiduciary position towards
the company in regard to powers conferred on them by the articles (Re City Equitable Fire
Insurance Co).
♦ Number of Directors: The articles generally specify the maximum number of
directors that a company may have. Every public company (other than a public
company which has become such by virtue of Section 43-A) must have at least three
directors. Every other company must have at least two directors (Section 252).
3.2 APPOINTMENT OF DIRECTORS

You will appreciate that the competence and integrity of directors of a company go a long
Directors – Powers, Managerial Remuneration 3.3
way in bringing about its success. The company, therefore, must be pretty choosy in
selecting the proper persons to vest them with its management. Accordingly, only an
individual can be a director of a company. Consequently a body corporate, firm or other
association of persons cannot be appointed as director (Section 253). Usually the articles
of a company name the first directors but their appointment will be valid only if the
conditions prescribed by Section 266(1) of the Act have been complied with namely
(i) that the director has given his consent in writing and the same has been filed with the
Registrar; and
(ii) that he has subscribed to the memorandum undertaking to purchase the qualification
shares or has acquired the number of shares prescribed as the qualification for a
director or has an affidavit with the Registrar to the effect that he shall take or pay for
his qualification shares or that shares of the value not less than qualification shares,
are registered in his name.
(iii) Section 257 provides that a person who is not a retiring director and is other wise not
disqualified must either himself or some other member intending to propose him must
give a written notice of at least 14 days before the meeting along with a deposit of
Rs.500 which shall be refunded to such person or, as the case may be, to such
member, if the person succeeds in getting elected as a director. The Amendment Act
has added this requirement of deposit of Rs.500, 1998 to discourage frivolous notice
to contest for election as director of a company. These restrictions, however, do not
apply to the case of a private company.
Section 254 provides that “in default of and subject to any provisions in the articles”
subscribers to the memorandum who are individuals shall be deemed to be the directors
of the company till the company under Section 255 appoints directors.
Generally, however, the articles name the first directors. Sometimes (as Regulation 64 of
table A lays down) articles may also provide that both the number and the names of the
first directors have to be determined in writing by subscribers to the memorandum or a
majority of them. In such a case it has been held that a majority or subscribers should be
present (and not the quorum as required by the articles) before the first directors could be
validly appointed [Re London Southern and Company (1885) 31 Ch. D. 223].
According to Section 255, unless the articles provide for the retirement of all directors in
every general meeting, at least 2/3rds of the total number of directors of the public limited
company in question must, in the first place, be appointed, save as otherwise expressly
provided in the Act by the company in general meeting; secondly, they must be persons
whose period of office is liable to be determined by rotation. The remaining directors of
such company must also be appointed in the same way unless some other provision for
such appointments is made in the articles of the company concerned as where, for
instance, the articles authorise a financial institution, which may have advanced large
loans to the company to induct a director on the Board of the Company.

Now, the general meeting italicised above may be either an annual general meeting or an
extraordinary general meeting. But in practice, appointments of directors pursuant to
Section 255 are made, at the first annual general meeting after the in corporation of the
company. Persons who are named, as directors in the articles of the public company have
to retire from office at such meeting unless any of them (not exceeding 1/3rds of the total
number of directors constituting the Board for the time being) had been appointed under
an authority conferred upon some person by the articles as aforesaid.
The provisions as regards the retirement of directors by rotation are designed, in the
words of Justice Sarkar “to eradicate the mischief caused by self-perpetuating
managements” Oriental Metal pressing works vs. Bhaskar A.I.R 1961 S.C. 578 at p.575.
According to Section 256, out of the 2/3rds rotational directors only 1/3rds must retire by
rotation at one general meeting. If the number is not three or multiple of three, then the
number nearest to 1/3 must retire from office. First those directors who are the longest in
office must retire. If two directors have been appointed on the same day, their retirement
will be determined either mutually or by lot. The vacancies caused by such retirement may
be filled in the same annual general meeting by appointing either the retiring directors or
some other person. But the meeting may also decide that the vacancies shall not be filled.
Where, however, the meeting has not done either of two, and then the meeting is deemed
to have been adjourned for a week. If at the adjourned meeting held after the said week,
fresh appointment is not made and if no resolution against appointment is passed, then
the retiring directors shall be deemed to have been appointed except in the following
cases: (a) Where at the meeting or at the previous meeting the resolution for the
reappointment of a particular director was put to vote but lost; (b) where the retiring
director has expressed his unwillingness to be reappointed by a written notice addressed
to the company or its Board of Directors; (c) Where he is unqualified or has been
disqualified for appointment; and (d) where any special or ordinary resolution is required
for his appointment or reappointment.
You should also remember that a director who is to retire by rotation at an annual general
meeting cannot continue in office after the last day on which the meeting ought to have
been called as required by Section 166 [R.H.C. Insurance Society Ltd. (1960) 65 C.W.N.
26; Krishna Prasad Pilani vs. Colaba Land Mills (1960) Bom. 321]. It should further be
noted that a company, which does not carry on business for profit, or a company, which
by its articles prohibits the payment of dividend to its members, would not be affected by
the provisions of Sections 177, 255, 256 and 263. Section 177 provides that at any
general meeting a resolution put to vote at the meeting shall unless a poll is demanded be
decided on a show of hands. Section 255 provides that at least 2/3rds of the directors
shall retire by rotation Section 256 provides that 1/3rds of the retiring directors shall retire
every year. Section 263 provides each director should be elected separately. Such a
company, which does not carry on business for profit or prohibits the payment of dividend
to its members may provide by its articles for election of directors by ballot. The
Companies that will come under this section would be mostly the Chambers of Committee,
Clubs and other associations licensed under Section 25 of the Act where, in most cases,
there exists a practice of electing office bearers by ballot. In some companies where the
articles provide election of directors by ballot, if the context permits the word ‘ballot’ would
probably mean ‘poll’.
♦ Right of person other than retiring Director to stand for Directorship: In terms of
Section 257 as amended by the Amendment Act of 1988, a person other than a
retiring director proposing himself as a director, or any member proposing him for
directorship has to not less than fourteen days before the meeting give notice
signifying his candidature along with depositing with the company concerned a sum of
Rs.500 which shall be refunded to such person or member in the event the person
concerned succeeds in getting elected as a director of the company. Conversely as
clarified by circular nos. of 1989 dt. 15.9.89, in case such a person is not elected as
director, he or the member, as the case may be, will not be entitled to the refund of
Rs.500 and the amount deposited shall stand forfeited by the company.
This provision, it may be noted, does not apply to the appointment of directors otherwise
than by the company in the general meeting. Nor does it apply to a private company,
which is not subsidiary of a public company.
The company shall inform its members of the candidature of a person for the office of
director or the intention of a member to propose such person as a candidate for that
office, by serving individual notices on the members not less than seven days before the
meeting. But the company may avoid serving individual notices as aforesaid if the
company advertise such candidature or the place where the registered office of the
company is located, of which one is published in English and the other in the regional
language of that place. (sub-section 1A of Section 257). Sub-section (1A) will have to be
complied with by all companies, public and private.
♦ Appointment by proportional representation: But the articles of a public company
or a private company which is subsidiary of a public company may adopt the principal
of proportional representation for appointing not less than 2/3 rd if the total number of
the directors, whether by a single transferable vote or by a system of cumulative
voting or otherwise. In such a case, appointments will be so made once in every three
years and interim casual vacancies will be filled in conformity with the provisions of
Sections 262 and 265. Cumulative voting denotes that if there are five candidates or
distributes his five votes. He can cast all the five votes in favour of one candidate or
distribute his five votes among different candidates. This system of voting ensures
that the Board will have fair representation of the minority interest.
♦ Increase in the number of Directors: A public company may by an ordinary
resolution, increase or reduce the number of its directors within the limits fixed by the
articles buy any increase in the number of its directors beyond the maximum
permissible under the articles must be by a special resolution and have the approval
of the Central Government (Sections 258 and 259). Where, however, such permissible
maximum is 12 or less, no approval of the Central Government shall be required if the
increase does not make the total number of directors more than 12 (Proviso to
Section 259). In other words, the approval of the Government would not be required
for increase in the number of director’s upto 12 irrespective of the provision in the
articles of association.
If the articles fix no maximum or minimum, the provision as to minimum required by
Section 252 will govern. Any resolution in any manner increasing the number above
twelve as fixed by the proviso will have to require Central Government approval.
♦ Appointment of Small Shareholders as Director:
The Companies (Amendment) Act, 2000 has provided that a Public Company (a) with
a Paid-up Capital of Rs. 5 crores or more and (b) 1000 or more small shareholders
may have a director elected by such small shareholders as may be prescribed.
In exercise of the powers conferred by Section 642 read with Section 252 of the
Companies Act, 1956 (1 of 1956), the Central Government has framed the following
rules, called the Companies (Appointment of the Small Shareholders’ Director) Rules,
2001.
They shall come into force on the date of their publication in the Official Gazette
Notification No. GSR 168(E), dated 9.3.2001.
In this rules, unless the context otherwise requires “small Shareholder” means
shareholder holding shares of nominal value of twenty thousand rupees or less in public
company to which Section 252 of the Act applies.
These rules shall apply to public companies having-
(a) Paid-up capital of five crores rupees or more;
(b) One thousand or more small shareholders.
Manner of election of small shareholders’ director: (1) A company may act suo moto to
elect a small shareholders’ director from amongst small shareholders or upon the notice
of small (2001) 22 TCR…..(St.) Appt. of Small Shareholders’.Rules shareholders, who are
not less than 1/10 th of total small shareholders and have proposed name of person who
shall also be a small shareholder of the company.
(2) Small shareholders intending to propose a person shall leave a notice of their intention
with the company at least 14 days before the meeting under the signature of at least 100
small shareholders specifying name, address, shares held and folio number and
particulars of share with differential rights as to divided and voting, if any, of the person
whose name is being proposed for the post of director and of other small shareholders
proposing such person as a candidate for the post of director or small shareholders.
(3) A person whose name has been proposed for the post of small shareholders’ director
shall sign, and file with the company, his consent in writing to act as a director.
(4) The listed public company shall elect small shareholders nominee subject to sub-rules
(1), (2) and (3) above through the postal ballot.
(5) The unlisted company may appoint such small shareholders’ nominee subject to above
conditions if majority of small shareholders recommend his candidates for the post of
director in their meeting.
(6) Tenure of such small shareholders’ director shall be for a maximum period of 3 years
subject to meeting the requirement of provisions of Companies Act except that he need
not have to retire by rotation.
(7) On expiry of his tenure, the same person if so desired by small shareholders, may be
elected for another period of 3 years.
(8) Such director shall be treated as director for all other purposes except for appointment
as whole time director or managing director.
Disqualification: A person shall not be capable of being appointed as small
shareholders’ director of a company, if –
(i) he has been found to be of unsound mind by a court of competence jurisdiction and
the finding is in force;
(ii) he is an un-discharged insolvent;
(iii) he has applied to be adjudicated as an insolvent and his application is pending;
(iv) he has been convicted by a court of any offence involving moral turpitude and from
the date of expiry of the sentence;
(v) he has not paid any call in respect of shares of the company held by him, whether
along or jointly with others, and six months from the last day fixed for the payment of
call; or
(vi) an order disqualifying him for appointment as director has been passed by a Court
in pursuance of Section 203 and is in force, unless the leave of the court has been
obtained for his appointment in pursuance of that section.
Vacation of office: A person appointed as small shareholders’ director shall have to
vacate the office if, —
(i) such person so elected, as director of small shareholders ceases to be a small
shareholders’ director on and from such date on which he ceased to be a small

shareholder;
(ii) he has been rendered disqualified by virtue of sub-rule (1) of rule 5;
(iii) he fails to pay any call in respect of shares of the company held by him, whether
alone or jointly with others, within six months from the last date fixed for the
payment of the call;
(iv) he absents himself from three consecutive meetings of the Board of directors, or
from all meetings of the Board for a continuous period of three months, which ever
is longer, without obtaining leave of absence from the Board;
(v) he is a partner of any private company of which he is a director, accepts, a loan, or
any guarantee or security for a loan, from the company in contravention of Section
295;
(vi) he acts in contravention of Section 299;
(vii) he becomes disqualified by an order of court under Section 203;
(viii) he is removed in pursuance of Section 284.
Restriction on number of directorship: No person shall hold office at the same time as
small shareholders director in more than two companies.
♦ Additional Directors: When empowered by the articles, the Board of Director can
appoint additional directors. But such additional directors shall hold office only up to
the date of the next annual general meeting. Also the total number of additional
directors and other directors together must not exceed the maximum strength fixed for
the Board by the articles (Section 260). This Section applies to all companies, public
and private,
Additional Directors must acquire the qualification shares within two months. The
power under Section 260 can be exercised by a board even enough the strength of
the board has fallen below the minimum. However, such appointment of additional
Directors must be in the interest of the general body of shareholders [Anantha
Lakshmi vs. Indian Traders Ltd. A 1953 Mad. 467].
♦ Can an additional Director Continue to be in office where the annual general
meeting is not held as per Section 166? In Krishna Prasad Pilani vs. Colaba Land
Mills Co. 29 Comp. Crs 273, it was observed that an additional Director shall vacate
his office latest on the date on which the annual general meeting could have been
held under Section 166. He cannot continue in office on the ground that the meeting
was not held or could not be called within the time prescribed.
♦ Can an additional Director be appointed in general meeting? Where the articles
have conferred the power of appointing additional directors on the Board of Directors
the company in a general meeting is precluded from appointing additional directors

[Blair Open Hearth Furnance Co. vs. Reigart, (1913) 108 L.T. 665]. However, though
in ordinary circumstances the company in general meeting is precluded from
appointing such directors yet if owing to a deadlock or otherwise there is no board
capable of making the necessary appointment the company in a general meeting may
do so [Barrow vs. Potter, (914) 1 Ch. 895].
♦ Casual Vacancy: Where the office of a director appointed by the public company in
general meeting is vacated before his term of office expires in the normal course,
resulting in a casual vacancy may, in default of and subject to any regulations in the
articles, be filled by the Board of Directors at a meeting of the Board. (Section 262)
Since Section 262 requires the filling of casual vacancy at a Board meeting,
appointment can be made only by a validly convened and constituted Board meeting.
This cannot be done by a resolution by circulation.
Regarding the tenure of a director appointed against casual vacancy, sub-section (2)
of Section 262 provides that the person appointed in the casual vacancy shall hold
office only upto the date to which the director in whose place he is appointed would
have held office.
♦ Appointment of directors by Central Government: Section 408 (as amended from
February, 1975) empowers the Central Government to appoint such number of
persons as the Central Government may, by order in writing, specify as being
necessary to effectively safeguard the interest of the company or its shareholders or
the public interest for a maximum period of 3 years at a stretch, with a view to
preventing the oppression of the members or mismanagement of the affairs of the
company provided the conditions prescribed by the section are fulfilled.
Note: For a detailed discussion on Section 408 refer to Chapter 3 of this book.
♦ Appointment of alternate directors: The Board of Directors of a Company may, if
authorised by its articles or by a resolution passed by the company in general
meeting, appoint an alternate director to act for a director during his absence (for a
period of not less than 3 months from the State in which meetings of the Board are
ordinarily held). Such a director only officiates for the permanent incumbent and
cannot hold office for a period longer than that permissible for the original director
and as such vacates the office on the return of the original director. Also, if the term
of office of the original director is determined before he returns, any provision for the
automatic reappointment of retiring director in default of another appointment shall
apply to the original director and not to the alternate director (Section 313).
♦ Assignment of office by director: Any assignment of office made after the
commencement of the Act by any director is void [Section 312].
It was held in Oriental Metal Pressing Works Private Ltd. vs. B.K. Thakoor (A.I.R.)
1960 Bom. 167 that the appointment of one as managing director by the will of one D
was void in view of the provisions contained in Section 312, since, according to the
High Court, the words ‘any assignment’ were comprehensive enough to include every
assignment to transfer of a director or of the appointment by a director of a person to
the office of a director in his place, whether by a deed inter vivos or by will. But this
ruling has been reversed by the Supreme Court (vide A.I.R. 1961 S.C. 573). The
Court considers that the word ‘assignment’ in Section 312 does not mean or include
appointment. From its every nature transfer inevitably imports the passing of a thing
from one person to another. A transfer without the passage of the thing, even when
that is an office is inconceivable. On the other hand, an ‘appointment’ has nothing to
do with passing from one person to another; it connotes the putting in of someone in a
vacancy. So transfer and appointment are dissimilar. It would be an unusual statute,
which by using a single word intended to prohibit at the same time, two wholly
different acts. A construction leading to such a result cannot be permitted.
♦ Who cannot be appointed as directors? The Companies Act prohibits undischarged
insolvents and fraudulent persons from discharging any of the functions of a director.
Under Section 202 if an undischarged insolvent discharges any of the functions of a
director he is punishable with imprisonment (extending to 2,years) or fine (extending
to Rs. 5000) or with both. ‘Company in this context includes an unregistered company
as well as a foreign company having an established place of business in India).
Similarly, Section 203 provides that: (a) where a person is convicted of an offence in
connection with the promotion, formation or management of a company; or (b) where
in the course of winding up of a company, it appears that (i) a person has been guilty
of an offence under Section 542 (whether convicted or not), or (ii) has been otherwise
guilty while an “officer” of the company of any fraud, misfeasance or breach of duty in
relation to the company, the Court may order that such person shall not, without the
leave of the Court, be a director of a company for a period not exceeding 5 years.
(The court as regards (a) includes the convicting court and as regards (b) the court
having jurisdiction to wind up the company).
Furthermore, under Section 274 a person cannot be appointed as director of a
company in any of the following cases, namely:
(i) where he has been found to be of unsound mind by a court of competent
jurisdiction and the finding is in force;
(ii) where he is an undischarged insolvent;
(iii) where he has applied to be adjudged as an insolvent and his application is
pending;
(iv) where he has been convicted by a court of an offence involving moral turpitude
and sentenced to an imprisonment for not less than six months and a period of
five years has not elapsed from the date of expiry of the sentence;
(v) where he has failed to pay any call in respect of shares held by him, whether
singly or jointly with others and six moths have elapsed since the last day fixed
for the payment of the call;
(vi) where he has been convicted of an offence in relation to promotion, formation or
management of the company, or where has been found, during the course of
winding up to be guilty of fraudulent conduct of business or misfeasance in
relation to the company and as a consequence the Court has disqualified him
from being appointed as director for a period not exceeding 5years. [It may be
noted that the Court may remove this disqualification; the disqualifications
mentioned in (iv) may be removed by the Central Government by notification in
the Official Gazette].
A private company, which is not, a subsidiary of a public company can provide for
additional grounds for disqualification. But a public company or its private subsidiary
cannot provide for additional grounds for disqualification.
CLARIFICATIONS FROM THE DEPARTMENT OF COMPANY AFFAIRS ON
DISQUALIFICATION OF DIRECTORS UNDER SECTION 274(1) (G) OF THE
COMPANIES ACT, 1956
I. General Circular No. 8/2002 dated 22-03.2001
1. Issued by the Ministry of Law, Justice & Company Affairs, Department of Company
Affairs vide No. 2/5/2- 1-CL.V;
As you are aware, the provisions of Section 274 of the Companies Act, 1956 were
amended through Companies (Amendment) Act, 2000 (w.e.f. 13-12-2000) and a new
clause (g) was inserted to sub-section (1) of this Section. Through this clause a director of
a public company, which has made defaults in filing of annual accounts and annual
returns and in repaying deposits/interests thereon on due date or redeeming its
debentures on due date or in paying dividend for period specified in that section, is
disqualified to be appointed as director of other public companies for a period of five
years from the date on which such public company (ies) so defaulted.
3. A high proportion of the companies had been defaulting in filing the annual accounts
and annual returns and a large number of companies were defaulting in repayment of
deposits/ interest thereon and in redemption of debentures which put investor to lots of
hardships and the remedial action including a deterrent punishment to the errant directors
was essential. But ironically, the errant directors were not only continuing in the defaulting
companies but becoming directors in other companies too. It was in this context that in the
Companies Act, 1956 the new sub-section 274(1)(g) was inserted and the RBI also took
some remedial measures.
3. The intention and propose of the above amendment was to disqualify the errant
directors, protect the investors from mismanagement, ensure compliance in filing of
annual accounts and annual returns which are means of a disclosure to all the
stakeholders, increase the compliance rate of filing of the statutory documents and infuse
good corporate governance in the regulation of corporate affairs in the country.
4. The Department, however, has received representations from public financial
institutions, Government owned financial companies and other financial Institutions and
Companies in respect of these provisions. The Banking Division in the Finance Ministry
has also supported the apprehension of the Financial Institution. The representation have
been considered carefully keeping in view on the one hand, the need for strict compliance
with the provisions of the clause (g) of sub-section (1) of Section 274 of the Companies
Act, 1956 and on the other hand the non-obstante clause in statutes of some of the public
Financial Institutions and the special situation of the nominee directors of public Financial
Institutions/banks and the nominees of Central and State Government companies.
5. The Government has decided to – (i) clarify the legal position in respect of the Public
Financial Institutions/banks having non-obstante clause in their statute; (ii) to give some
relief to the nominees of the Public Financial Institutions/Banks/Central and State
Government; and (iii) to exempt Government Companies from the applicability of the
provisions of Section 274(I)(g) of the Companies Act, 1956.
6. While considering the applicability of the provisions of Section 274(1)(g) of the
Companies Act, 1956, the Government has taken into account the following points:
(i) In addition to protecting the interest of the Public Financial Institutions/banks, which
they represent, the Nominee Directors are also expected to serve the best interest of
sound public policy and bring about higher levels of corporate governance.
(ii) In view of implicit disqualification in Section 274(1)(g), qualified and experienced
professionals, both official and non-officials, suitable for being appointed on the
Boards of assisted concerns may not agree/available, thus adversely affecting the
interests of the Banks/ Financial Institutions.
(iii) Presence of the Nominee Directors on the Boards of assisted concerns and close
monitoring through them of all the affairs of the assisted concerns is for more
desirable when the company is in default to the Banks/Financial Institutions.
7. However, the Government hereby further clarifies that the Nominee Directors of Public
Financial Institutions/Banks/Government should in order to avail the relief granted are
expected to comply with the following:
(i) The Nominee Directors are expected to work assiduously towards observance of
good corporate governance practices in the company with due regard to the
legitimate interest of the various shareholders. The various provisions relating to
good corporate governance has been introduced in the Companies Act

Rules/Regulations and clause 49 of the Listing Agreement introduced by the SEBI.
The Nominee Directors are expected to study these provisions of corporate
governance and have them implemented.
(ii) Ensure that the operations of the company are conducted in consonance with public
policy.
(iii) Ensure strict compliance in letter and spirit of all the statutory provisions in
particular the provisions of the Companies Act and the regulations, clarifications etc.
issued thereunder. It is the duty of the nominee directors to fully acquaint
themselves in the relevant provisions of the Company Law and ensure that
measures are instituted to monitor and certify that these statutory provisions are
being observed.
(iv) The Nominee Directors should see that important committees of the Board of
Directors are constituted and are functioning effectively such as Audit Committee,
Nominations Committee, Remuneration Committee etc. The Nominee Directors are
expected to seek membership of these important committees and through their
active participation in such committees ensure that the objectives of setting up these
committees are being achieved.
(v) The Nominee Directors are expected to regularly attended and actively participate in
the proceedings of the Boards and in committee on which they are included. Their
frequent absence for sufficient reasons from the meetings of the Board of
Directors/Committees would negate the purpose for which the Institutions have
nominated the Nominee Directors and they would not be able to perform the various
responsibilities listed out in this paragraph.
(vi) Duly safeguard the interest of the Government/Banks/Financial Institutions, which
they represent. Ensure proper utilisation of financial assistance by the assisted
company and prevent any misuse/diversion of funds by the promoters/management
of the companies.
(vii) Provide adequate feedback to the nominating Institutions/banks/Companies on the
affairs and operations of the assisted concerns.
(viii) The Financial Institutions are expected to closely monitor the participation by the
Nominee Directors in the Boards/Committees as above and to ensure that they are
discharging their responsibilities as listed out above. In case any Nominee Director
is failing to discharge his/her responsibilities the Institutions are expected to take
steps to replace him/her. The Institutions are also expected to send a six monthly
report to the Department of Company Affairs (DOCA) bringing out the steps taken by
them to ensure that their Nominee Directors are discharging their responsibilities.
The Financial Institutions should also in a separate section of their annual Report
clearly bring out the measures instituted by them to ensure that the system of
Nominee Directors is functioning effectively.
8. Accordingly, it is clarified that:
(i) Nominee Directors appointed by the Public Financial Institutions and Companies
established under the Acts of Parliament having non-obstante provisions over the
Companies Act, 1956, like IDBI, LIC, UTI, IIBI etc, in their respective statutes shall
not be liable to be disqualified for appointment as directors by virtue of Section
274(1)(g) of the Companies Act, 1956.
(ii) Nominee Directors appointed on the Boards of assisted concerns or other public
companies by – (a) public financial institutions within the meaning of Section 4A of the
Companies Act, 1956; (b) Central or State Government; and (c) banking companies
are also exempt from the provisions of Section 274(1)(g) of the Companies Act, 1956.
II. (F.No. 2/5/2001-Cl.V dt. 14 th January, 2003)
Further in continuation of the above Department’s Circular No. 8/2002 dated 22 nd March,
2002, it has been further clarified that default of privately placed bonds/ debentures/debt
instruments by public financial institutions will not be considered as default to disqualify
directors u/s 274(1)(g) of the Companies Act of 1956. (F.No. 2/5/2001-Cl.V dt. 14 th
January, 2003)
III. (F.No. 2/5/2001-Cl.V dt. 14 th January, 2003)
G.S.R. 830 (E). - In exercise of the powers conferred by clause (b) of sub-section (1) of
section 642 of the Companies Act, 1956 (1 of 1956), the Central Government hereby
makes the following rules to carry out the purpose of clause (g) of sub-section (1) of
section 274 of the said Act, namely: -
1. Short title, commencement and extent. -
(1) These rules may be called the Companies (Disqualification of Directors under section
274(1)(g) of the Companies Act, 1956) Rules, 2003.
(2) These rules shall come into force from the date of their notification in the Official
Gazette.
(3) These rules shall apply to all public limited companies registered under the
Companies Act, 1956.
3. Definitions –
In these rules, unless the context otherwise requires, -
(a) “disqualifying company” is the company in which the default has occurred on account
of which a director stands disqualified;
(b) “appointing company” is the company in which an individual is seeking appointment as

a director, including re-appointment as director.
3. Disqualifications under clause (g) of sub-section (1) of section 274 of the
Companies Act, 1956.-
(a) Whenever a company fails to file the annual accounts and annual returns, as
described in sub-clause (A) of clause (g) of sub-section (1) of section 274, persons who
are directors on the last due date for filing the annual accounts and the annual returns for
any continuous three financial years commencing on and after the first day of April, 1999,
shall be disqualified.
(b) If a company has failed to repay any deposit, irrespective of the enactment, rules or
regulations under which the deposits have been accepted by the companies, or interest
thereon, or redeem its debentures, or pay any dividend declared on the respective due
dates, and if such failure continues for one year, as described in sub-clause (B) of clause
(g) of sub-section (1) of section 274, then the directors of that company shall stand
disqualified immediately on expiry of that one year from the respective due dates:
Provided that all the directors who have been directors in the relevant year, from the due
date to the expiry of one year after the due date, will be disqualified:
Provided further that disqualification on account of the reasons cited under this Rule shall
also apply to the reappointment as a director.
Explanation.- For the purpose of this rule, it is clarified that non-payment of dividend
referred to in sub-clause (B) of clause (g) of sub-section (1) of section 274 due to the
reason of dividend not being claimed or kept in separate bank account as required under
section 205A of Companies Act, 1956 or paid into Investors Education & Protection Fund
as required under section 205C of that Act shall not be deemed to be a failure to make
payment of dividend.
4. Duty of Statutory Auditor to report on disqualification.-
(a) It shall be the duty of statutory auditor of the appointing company as well as
disqualifying company, as required under section 227(3)(f) to report to the members of the
company whether any director is disqualified from being appointed as director under
clause (g) of sub-section (1) of section 274 and to furnish a certificate each year as to
whether on the basis of his examination of the books and records of the company, any
director of the company is disqualified for appointment as a director or not.
(b) It shall be the duty of the statutory auditors of the “disqualifying company” as required
in section 227(3)(f) to report to the members of the company whether any director in the
company has been disqualified during the year from being re-appointed as director, or
being appointed as director in another company under clause (g), of sub-section (1) of
section 274.
5. Duty of company to intimate disqualification.-
Whenever a company fails to file the annual accounts and returns, or fails to repay any
deposit, interest, dividend, or fails to redeem its debentures, as described in clauses (A)
and (B) of clause (g) of sub-section (1) of section 274, the company shall immediately file
a return in duplicate in Form ‘DD-B’, prescribed under these rules for this purpose, to the
Registrar of Companies, furnishing therein the names and addresses of all the Directors
of the company during the relevant financial years:
Provided that names of such directors who have been exempted from application of
Section 274(1)(g) by the Central Government, from time to time, shall be excluded.
Provided further that no unusual abbreviations or short forms shall be used in filling up the
Form ‘DD-B’, which shall give such details as may be necessary to distinguish and identify
each director without any ambiguity.
6. Failure to intimate disqualification shall render director as officer in default.-
When a company fails to file the Form ‘DD-B’ as above within 30 days of the failure that
would attract disqualification under Section 274(1)(g), officers of the company
listed in section 5 of the Companies Act, 1956 shall be officers in default.
7. (a) Upon receipt of the Form ‘DD-B’ in duplicate under Rule 5, the Registrar of
Companies shall immediately register the document and place one copy of it in the
document file for public inspection.
(b) The Registrar of Companies shall forward the other copy to the Central Government.
8. Names of the disqualified directors on the web-site etc.-
(a) The Central Government shall place on the web site of the Department of Company
Affairs the names and addresses and such other details including names and details of
the companies concerned, as may be necessary, in respect of all the disqualified
directors.
(b) The Central Government may also publicize the names of disqualified directors in such
manner, as it may consider appropriate.
(c) The Central Government shall take such steps as may be required to update its web-
site to ensure that name of the person, in whose respect disqualification period has
expired after 5 years, is deleted from the web-site.
9. Duty of every director.-
Every director in a public company registered under the Companies Act, 1956 shall file
Form ‘DD-A’, prescribed under these Rules, before he is appointed or re-appointed.
10. If any question arises as to whether these rules are or are not applicable to a
particular company, such question shall be decided by the Central Government.
11. Punishment for contravention of the rules.-
If a company or any other person contravenes any provision of these rules for which no
punishment is provided in the Companies Act, 1956, the company and every officer of the
company who is in default or such other person shall be punishable with fine which may
extend to five thousand rupees and where the contravention is a continuing one, with a
further fine which may extend to five hundred rupees for every day after the first, during
which the contravention continues.
13. On the commencement of these rules, all rules, orders or directions in force in relation
to any matter for which provision is made in these Rules shall stand repealed, except as
respects things done or omitted to be done before such repeal.
[F. No.1/8/2002-CL.V]
IV. F.No.2/5/2001-CL.V - G.S.R. 829 (E).- 21 st October, 2003
In exercise of the powers conferred by clause (a) of sub-section (1) of section 620 of the
Companies Act, 1956 (1 of 1956), the Central Government hereby directs that clause (g)
of sub-section (1) of section 274 of the said Act shall not apply to a Government company,
a copy of this notification having been laid in draft before both Houses of Parliament as
required by sub-section (2) of section 620 of the said Act.
♦ Can a Minor be appointed as a Director? In case of a minor there is no provision in
the Act expressly disqualifying him. However, since a minor is not competent to
contract. He cannot file with the Company or with the Registrar any valid consent to
act as Director, as required under Section 264. But, as Section 264 applies only to
public companies and private companies, which are their subsidiaries, there is nothing
to prevent a minor becoming a Director of independent private companies. [Ramaiya,
1988 E., p.829]
♦ Restrictions on number of directorships: A person cannot hold office at the same
time as director in more than fifteen companies [substituted in place of twenty by the
Companies (Amendment) Act, 2000] excluding a private company which is not
subsidiary or holding company of a public company, and unlimited company, an
association not for profit and a company in which such person is only an alternate
director (Sections 275 and 278).
In this context let us now consider an illustration. A is director in 14 public limited
companies. He is offered the directorship of (i) BC Private Limited; (ii) XYZ Ltd.; (iii)
Indian Automobile Association, a company registered under Section 25 of the

Companies Act. Can A accept these directorships? In the first case, A can accept
the directorship of BC private Ltd. In view of the provisions of Section 278(I)(a),
because private company, which is neither a subsidiary nor a holding company of a
public company, is not to be counted in calculating the number of directorships as
prescribed by Section 275. In the second case too; A can accept the directorship of
XYZ Ltd. Because with this he becomes a director of 15 companies which is the
prescribed maximum limit. In the third case as well, A can accept the directorship of
the Indian Automobile Association because the directorship is also to be excluded
from the computations of 15 directorships under Section 278(I)(c).
♦ Choice by person becoming director of more than 15 companies: Section 277
provides that where a person already holding the office of director in 15 companies is
appointed as a director of any other company, the appointment:
(a) shall not take effect unless such person has within 15 days thereof, effectively
vacated his office as director in any of the companies in which he was already a
director; and
(b) shall become void immediately on the expiry of the 15 days if he has not before
such expiry, effectively vacated his office as director in any of the other
companies aforesaid.
Where a person already holding office of director in 14 companies or less is appointed
as a director of other companies, making the total number of his directorships more
than 15, he shall choose the directorships which he wishes to continue to hold or to
accept, so however that the total number or the directorships, old and new, held by
him shall not exceed fifteen.
Please note that none of the new appointments of Directors shall take effect until the
aforesaid choice is made; and all the new appointments shall become void if the
choice is not made within 15 days from the day on which the last of them was made.
According to Section 279 any person who holds office or act as a director of more
than 15 companies in contravention of the aforesaid provisions shall be punishable
with fine, which may extend to Rs.50,000 in respect of each of those companies
exceeding fifteen.
♦ Consent of candidate for directorships: A person who is proposed as a candidate
for the office of director, is required to sign and file with the company his consent to
act as director (if appointed). However, a director retiring by rotation or otherwise or a
person who has left at the office of the company a notice under Section 257 signifying
his candidature for the office of a director, is not required to do so [Section 264(1)].
A person shall not act as a director unless he has signed and filed with the Registrar
his consent in writing to act as director within 30 days of his appointment [Section
264(2)].
The aforesaid provision does not apply to: (a) director reappointed after retirement by
rotation or immediately on the expiry of term of his office; or (b) an additional or
alternate director, or a person filling a casual vacancy under Section 262 appointed as
director or reappointed as an additional or alternate director immediately on the expiry
of his term office, or (c) a person named as director under the articles as first
registered.
♦ Appointed of directors must be voted individually: Each director shall be
appointed by a separate resolution in the case of a public company unless the
meeting first agreed by resolution that the appointment shall be made by single
resolution and no vote has been cast against it. A resolution moved in contravention
of this provision shall be void, whether or not objection thereto was raised at the time
it was so moved. Thus, two or more directors of a company cannot be elected as
directors by a single resolution unless it is done in conformity with the provisions of
Section 263. When such a resolution is passed, provision for automatic re-
appointment of directors retiring by rotation shall not apply. Section 263 does not
apply to a company whose articles provide for election of directors by ballot and which
does not carry on business or prohibits the payment of a dividend to the members
(Section 263A).
♦ Principle of proportional representation for appointment of directors: Under
Section 265, a company can adopt the principle of proportional representation for the
appointment of its directors, buy only if its articles so provide. In such a case, not less
than 2/3rds of the total number of directors shall be appointed according to the
aforesaid principle, whether by the single transferable vote by a system of cumulative
voting or otherwise. Such appointments are to be made once in every three years and
interim casual vacancies can be filled in accordance with the provision, mutatis
mutandis, of Section 263.
3.3 SHARE QUALIFICATION FOR DIRECTORS

It is that number of shares which a shareholder must hold in order to be eligible for
election as a director. The Companies Act, 1956 does not prescribe for any share
qualification for a director. However, Regulation 66 of Table A provides that the
qualification for being a director of a company is the holding of at least one share in the
company. The articles of a company usually prescribe for such qualifications so that a
director has a personal interest in the company. In the event of such a provision by the
articles, it becomes incumbent on the part of every director to hold qualification shares
and if does not hold them at the time of his appointment as director, he must acquire them
within two months after his appointment as director. Any provision, made in the articles of
the company requiring a person proposed for directorship to hold qualification shares
either before appointment or within a third shorter than two months after his appointment
will be void. The nominal value of qualification shares must not exceed Rs. 5,000 and if
the nominal value of each share is Rs. 5,000 or more than the number of shares
prescribed, as qualification will be only one. It is, of course, not necessary for any
company to insist upon the holding of shares for the purpose of qualification for directors.
For the purpose of share qualification, the bearer of a share warrant is not deemed to be
the holder of the shares mentioned in the warrant (Section 270). A Director acting without
qualification shares is punishable with fine, which may extend to Rs. 500/- for every day
during which he continues as director (Section 272). The provisions relating to the share
qualification of a director do not apply to a private company, unless it is subsidiary of a
public company (Section 273): nor do they apply to directors appointed by the Central
Government under Section 408.
♦ Vacation of office by director: The office of a director shall become vacant if (1) he
fails to obtain with in the prescribed time (two months) or ceases to hold thereafter
the qualification shares when he is so required by the articles; (ii) he is found to be of
unsound mind by the Court; (iii) he applies to be adjudged an insolvent; (iv) he is
adjudged as an insolvent; (v) he is convicted by a court of an offence involving moral
turpitude and is sentenced to imprisonment for not less than six months; (vi) he does
not pay the call in respect of shares held by him within six months from the last date
fixed for the payment. The Central Government can, by notification in Official Gazette,
remove this disqualification; (vii) without obtaining leave of absence from the Board,
he absents himself from three consecutive meetings of the Board or from all meetings
thereof for a continuous period of 3 months, whichever is longer; (viii) he, whether by
himself or by any person for his benefit or on his account or any firm in which he is a
partner or any private company of which he is a director, accepts a loan or any
guarantee or security for a loan from the company without previous approval of the
Government as required by Section 295; (ix) having been appointed a director by
virtue of his holding any office or other employment in the company, he ceases to hold
such office or other employment in the company (x) he fails to disclose his interest in
contract or a proposed contract by the company as required by Section 299 (xi) he is
disqualified by an order of Court under Section 203 from acting as director of the
company (xii) he is removed by the company in annual general meeting in pursuance
of Section 284; and (xiii) he holds any office or place of profit in the company or its
subsidiary without the consent of the company accorded by a special resolution.
Note: (i) An alternate director vacates office when the original director returns
[Section 313(2)]. (ii) A person vacates the office of director automatically in such other
company after the expiry of 15 days if he, while holding directorship in 20 companies,
is appointed director in other companies unless he gives notice of choice [Section
277(I)(b)].
♦ Resignation of director: A director can resign from his office. For this purpose, he
must service a notice of his resignation upon the company (Municipal Freehold Co.
vs. Poling ton (1890) 63L. T. 238]. Palmer, however is of the view that if the articles
permit a director to resign at any time, the resignation will be effective from the time
of the service of the notice. There is no need for its acceptance by the Board or the
company in general meeting. If, however, the articles contain no such provision then
the resignation of the director will be effective only when he serves notice on the
company or the Board and resignation is accepted by them.
A verbal resignation is enough, though articles usually provide for a written notice
[Latchford Premier Cinema Ltd. vs. Ennion (1931) 2 Ch.439, Sawer vs. Mann (1938)
184Lt.42]. But a managing or governing or whole-term director cannot resign merely
by giving a notice. In his case, a formal acceptance of resignation by the company is
essential so as to make it complete and effective. This is because he occupies two
positions or possesses two capacities, viz., (i) one that of a director, and (ii) the other
that of manager or officer of the company in the sense of a whole-time employee. An
employee cannot give up office at his pleasure, simply by giving notice. The notice or
the letter of resignation is required to be approved or accepted by the company and
officer concerned has to be relieved of his duties and responsibilities attaching to the
office which he has resigned from [Achutha Pal vs. Registrar of Companies (1956) 36
Comp. Cas 598]. However, in the case of an ordinary director, formal acceptance of
resignation is not needed [Abdul Hug vs. Katpadi Industries Ltd. A.I.R. 1960 Mad.
483.]. A director cannot withdraw his resignation, without the consent of the company,
even if such withdrawal is sought before the Board considered the resignation
(Glossop vs. Glossop (1970) 2 Ch. 370: Lakshmana Mudaliar vs. Emperor (1932) 2
Comp. Cas.370]. Where the articles of a company provide that a person shall be a
director for life or until he resigns, a director so appointed will not be entitled to
damages against the company for wrongful termination of contract on the company
going into liquidation; the reason is that the articles operate so long as company
exists and it must be deemed to have been contemplated by articles that office shall
come to an end on the company going into liquidation [Re-Farrer (1987) 2 All
E.R.505].
3.4 REMOVAL OF DIRECTORS [SECTION 284]

A director (other than a director appointed by the Central Government under Section 408)
may be removed from the office by an ordinary resolution before the period of office
expires. But he cannot be removed in this way if he is the director of a company holding
office for life on 1-4-1953. It is further provided that the directors appointed on the
principle of proportional representation under Section 265 cannot be removed by an
ordinary resolution as aforesaid. Special notice shall be required for a resolution to
remove a director under Section 284. On receiving the notice of this resolution the
company must forthwith send a copy thereof to the director concerned, and the director
shall be entitled to be heard on the resolution at the meeting. The director can make a
representation in writing, a copy of which shall have to be sent to every member to whom
the notice of the meeting is sent. If the copy of the representation is not sent either due to
its having been received too late or due to the company’s default, the director may get the
representation read out at the meeting. However, the copy of the representation need not
be sent out at the meeting if on the application of either the company or any person
claiming to be aggrieved, the Court is satisfied that these rights are being abused to
secure needless publicity for defamatory matter.
The right under the section is a statutory right given to the company to remove by an
ordinary resolution, any director in whatsoever manner or on whatsoever terms appointed.
Where the directors attempt to avoid their removal by omitting to call a meeting or by not
attending with a view to creating a situation of no quorum, the Court/the Central
Government will convene the necessary meeting under Section 186. [Re El Sanbrero Ltd.,
(1958) 3 AIIER of (ch.II)]. Thus, where one of the only two director shareholders who was
holding 51% shares wanted to remove his fellow director who did not attend the meeting
to frustrate him because the articles required quorum of two, the Court (here it would have
to be CLB) ordered a meeting to be called with the presence of one as sufficient quorum
[Opera Photographic Ltd., Re. 1989 B CLC 763 Ch I]. What is important in this decision is
the judicial recognition of the importance of a statutory right. The right of the majority
shareholder to remove a director whom he fell out cannot be permitted to be vetoed by the
quorum requirements.
The vacancy resulting from the aforesaid removal may be filled in by the appointment of
another director at the same meeting at which the director is removed, provided special
notice of the proposed appointment has been given. A director so replaced holds office for
the remaining period for which the director who has been removed would have held office
had he not been removed. If the members of the company do not fill the vacancy, the
Board of Directors may fill it as casual vacancy. But the director who was so removed
from office shall not be reappointed to the Board when the casual vacancy is filled.
The above-mentioned provisions do not deprive any director, so removed of his rights to
compensation or damages payable to him in respect of the premature termination of the
directorship, or of any appointment terminating with that as a director (Section 284).
3.5 REMOVAL OF MANAGERIAL PERSONNEL

In the principal Act, in part VI, a Chapter i.e., (VIA) and Sections 388B, 388C, 388D and
388E dealing with the powers of the Central Government to remove managerial personnel
from office on recommendation of the Company Law Board have been added by the
Companies (Amendment) Act, 1963 the object of introduction of these Sections, as
explained by the Finance Minister, being that the existing provisions in Sections 397 and
398 of the Companies Act and other that follow provide for the removal from office in a
company of persons found to have been guilty of mismanagement in regard to the affairs
of that company only. Section 274 disqualifies a person from being appointed as a
director of a company if he is convicted by a court for any offence involving moral
turpitude and sentenced to imprisonment for a period of not less than 6 months. But under
these Sections, a conviction by a court is a prerequisite. This process, being very difficult
and lengthy process, the Central Government has tried to find an alternative procedure for
effecting removal of such persons from position of authority when the Central Government
comes into possession of certain facts which indicate that any person concerned with the
management of the affairs of a company has been guilty of negligence or default etc. in
carrying out of his obligations and functions and in other circumstances given in the
Sections mentioned above.
These Sections apply to companies both public and private, but do not apply to such body
corporate as foreign companies, which are incorporated outside India, as they are not
companies within the definition given in Section 3 of the Companies Act, 1956. Further,
these Sections deal only with the person who is or has been in management and not with
one whose concern with the management has ceased. These Sections will apply to a
whole body of individuals constituting the Board of Directors. Though the explanation
“managerial personnel” as enumerated in Section 197A does not include the Board of
Directors or individual director, they will also come within the scope of Section 388B
because they supervise, control and direct the manager. It may be construed from the
construction of these Sections that directors come within the scope of the provisions of
these Sections. A summarised view of these Sections is given below:
(A) Reference to Company Law Board of cases against managerial personnel: There
can be circumstances relating to the affairs of a company, which might suggest:
(a) that any person, concerned in the conduct and management of the affairs of a
company is or has been guilty of fraud, misfeasance persistent negligence or
default in carrying out his obligation and functions under the law or breach of
trust in connection therewith;
(b) that the business of a company is not or has not been conducted and managed
by such; person in accordance with sound business principles or prudent
commercial practices;
(c) that the company is or has been conducted and managed by such person in a
manner which is likely to cause or has in fact caused serious injury or damage
to the interest of the trade, industry or business to which such company
pertains;
(d) that the business is or has been conducted and managed by such person with
an intent to defraud its creditors, members or any other persons or otherwise for
a fraudulent or unlawful purpose or in a manner prejudicial to public interest.

If the Central Government is convinced that any one of the aforementioned
circumstances exist, it may state a case against the person aforesaid and refer it to
the Company Law Board with a request that the Board may enquire into the case and
record its findings as to whether or not such a person is fit and proper to hold the
office of director or any other office concerned with the conduct and management of
any company.
The statement of the case should be in the form of an application presented to the
Company Law Board or such officer thereof as it may appoint in this behalf, and the
person against whom such a case is stated and referred, should be joined as a
respondent to the application. The application should contain concise statement of
such circumstances and materials, as the Central Government may consider
necessary for purpose of enquiry to be made by the Company Law Board. The
application must be signed and verified in the manner laid down in the Code of the
Civil Procedure, 1908 for the signature and verification of a plaint in a suit by the
Central Government.
At any stage of the proceedings, the Company Law Board may allow the Central
Government to alter or amend the application in such manner and on such terms as
may be just and all such alterations or amendments shall be made may be necessary
for the purpose of determining the real questions in the enquiry (Section 388B)
(B) Interim order by Company Law Board: During the pendency of case before the
Company Law board, certain situations might come to the knowledge of the Board
which might necessitate the passing of an interim order restraining, in the interest of
the members or creditors of the company, the delinquent person against whom the
case is pending. In such situations, the Board may either on the application of the
Central Government or on its own motion, by order, direct that the respondent
(delinquent person) shall not discharge any of the duties of his office until further
order and appoint in his stead another suitable person to discharge the duties
connected with the office of the respondent subject to such terms and conditions as
the Board may specify in the order. There person, who is temporarily called upon to
discharge the duties in lieu of the respondent, will be regarded as a public servant
within the meaning of Section 21 of the Indian Penal Code [Section 388C].
(C) Findings of the Company Law Board: At the end of hearing of the case, the
Company Law Board shall record its findings. In the findings it must specifically state
as to whether or not the respondent is a fit and proper person to hold the office of
director, or any office and to be concerned with the conduct and management of the
company [Section 388D].
(D) Power of the Central Government to remove managerial personnel: Either on the
basis of the aforesaid finding of the Company Law Board or upon a decision of the
Board, the Central Government may, notwithstanding any other provisions contained
in this Act, by order remove the delinquent respondent from his office. An order of
removal having been passed under Section 388E the person concerned will be
debarred from holding the office for a period of five years from the date of the order of
removal. This time-limit may, however, be relaxed by the Central Government with the
previous concurrence of the Company Law Board, and the Central Government may
accordingly permit such person to hold the office of a director or any other office
connected with the conduct and management of the affairs of the company, even
before the expiry of the period of five years. But, for the loss or termination of his
office, he will not be entitled to or be paid any compensation in any event, even if
there is anything contained in any other provisions of the Act, or any other law or
contract, memorandum or articles. On the removal of the person the company may,
with the previous approval of the Central Government, appoint another person to that
office in accordance with the provisions of this Act. [Sections 388E(3), (4) and (5)].
3.6 DIRECTORS TO ACT AS A BOARD

Directors must act together as a body and generally, at meeting properly convened,
unless special powers are delegated to an individual director. Every company must hold a
meeting of the Board of Directors. Once in every three months and at least four such
meetings shall be held in every year. (The Central Government can by notification direct
that the provision of Section 285 shall not apply to any class of companies or shall apply
in a modified form.) These provisions shall not be deemed to have been contravened
merely by reason of the fact that the meeting of the Board, which had been properly
called, could not be held for want of a quorum [Section 288(2)]. Notice of the Board’s
meeting must be given in writing to every director for the time being in India, and at his
usual address in India (Section 286).
The quorum for a meeting of the Board of Directors must be one-third of its total strength
(any fraction contained in that one-third being rounded off as one), or two directors
whichever is higher. However, where at any time, the number of interested directors
exceeds or is equal to two thirds of the total strength the number of directors who are not
interested and who are present at the meeting not being less than two shall be the
quorum. There must be at least 2 non-interested directors (Section 287). If the meeting
could not be held for want of quorum, then unless the articles otherwise provide, the
meeting shall automatically stand adjourned till the same day in the next week at the
same time and place, or if that day is a public holiday, till the next succeeding day which
is not a public holiday at the same time and place (Section 288(I)].
Section 289 contains conditions, which must be complied with for the passing of a
resolution by circulation. The resolution must be circulated in draft along with necessary
papers to all the directors, or to all the members of the Committee not being less than the
quorum fixed for the Board meeting then in India and to other directors and members at
their usual addresses in India. Also the resolution must have been approved by such of
the directors as are there in India, or by a majority of such of them as are entitled to vote
on the resolution.
♦ Passing of resolution by circulation: Powers of the directors which are not
expressly required to be exercised at the Board’s meeting can also be exercised by
means of resolutions passed by circulation. Moreover, Regulation 81 of Table A of
Schedule 1 to the Act provides that save as otherwise expressly provided in this Act,
a resolution in writing, signed by all the members of the Board or of a committee
thereof, for the time being entitled to receive notice of a meeting of Board or
Committee, shall be as valid and effectual as if it had been passed at a meeting of the
Board or Committee, duly convened and held.
Section 289 lays down the procedure for the passing of resolution by circulation. A
resolution is deemed to have been duly passed by the Board or by Committee thereof
by circulation only if:
(i) the resolution has been circulated in draft along with the necessary papers to all
the directors or to all the members of the committee then in India (not being less
in number than the quorum fixed for a meeting of the Board or Committee) and
to all other directors or members at their usual address in India; and
(ii) the resolution has been approved by such of the directors as are then in India,
or by a majority or them as are entitled to vote on the resolution.
3.7 POWERS OF DIRECTORS AND RESTRICTIONS THEREON

The board of directors in entitled to exercise all such powers of the company and to do all
such acts and things as the company is authorised to exercise and do. But the Board shall
not exercise any power or do any act or thing which is, by the Act or any other statute or
by the memorandum or articles of the company or otherwise required to be exercised by
the company in general meeting. In exercising such powers the Board shall be subject to
regulation made by the company in that general meeting (Section 291). But this ‘subject to
regulation’ does not mean that the company in general meeting can override the Board’s
powers of carrying on the business, by prescribing a regulation, or passing a resolution,
taking away the powers which have been conferred upon the Board by the articles
[Automatic Self Cleaning, etc. Co. vs. Cunningham (1906) 2 Ch.34].
In generality the statement in the question is quite correct. The powers cover all the day-
to-day activities for the company and the actions of the Board of Directors cannot be
called into question. However in no case, can the directors usurp the powers vested by
the articles in the body of shareholders, nor can the shareholders usurp the power vested
likewise in the Board of Directors (Muraka Paint & Varnish Co. Ltd. vs. Mohanlal A.I.R.
1961 Cal. 251 A.P. Pothon vs. Hindustan Trading Corporation, A.I.R. 1966 Ker. 149).
The directors, being agents, are naturally subject to the will of their principal, viz., the
shareholders. Also because of the need to protect the interest of the shareholders, of the
company and in the public interest the law has imposed certain restrictions on the powers
of the Directors the most important of these are contained in Section 293 of the
Companies Act. The general powers of the Directors are subject to the following
limitations:
(i) The Board of Directors must necessarily act according to the Memorandum and the
Articles of Association. The implication of this is that the Board or the shareholders
cannot exercise certain powers, which are ultra vires the company. The acts which
are intra vires the company i.e., those powers which the company is entitled to
exercise and the activities that the company engage itself in, fall within the purview of
the Board of Directors generally, unless the Articles specifically reserve them for
shareholders. For example, it is common that declaration of the dividend is reserved
for the shareholders, to be decided upon at the Annual General Meeting (Regulation
85 of the table A of Schedule I to the Companies Act).
In case, power is reserved for the shareholders by the articles and the Directors
happen to exercise that power, it is possible for the shareholders to ratify the action of
the Board: in the final analysis, the power is exercised by the shareholders and not by
the Directors.
(ii) Certain power can be exercised only by the shareholders under law. In these, the
Directors clearly have no authority. Some of the prominent examples are given below:
(a) Issue of shares at a discount [Section 79(2)(i)]
(b) undertaking lines of business other than those mentioned in Memorandum as
the main objects including auxiliary to those [Section 149(2A)].
(c) selling or otherwise disposing of company’s undertaking or substantial part of
the undertaking (Section 293)].
(d) investing, otherwise than in trust securities, the amount of compensation
received by the company in respect of compulsory acquisition of the company’s
undertaking or of any premises or property used for in such undertaking
(Section 293).
(e) borrowing in excess of the aggregate of paid up capital plus free reserves
(Section 293).
(f) contributing in any financial year, to charitable and other funds not relating to
the company’s business, amounts exceeding Rs.50,000 or 5% of its average net
profits during the three preceding financial years whichever is greater (Section
293 as amended by the Companies) (Amendment) Act, 1977).
(g) issuing bonus shares or debentures.
(h) reorganisation of capital and amendment of Articles or Memorandum of
Association (Sections 94, 31 and 16 respectively).
(i) winding up unless ordered by the Court (Section 484).
(j) appointment of sole selling agents except that the Board can make the
appointment subject to approval of the company in a general meeting within 6
months of the appointment (Section 294).
It follows that except in certain special matters, the Board of Directors can exercise all the
powers and carry on all the activities that are necessary to achieve the object of the
company. A distinction, however, is necessary between the following three categories of
powers and activities:
(1) Those powers and activities in respect of which the Directors have complete
discretion.
(2) Those activities where approval of the shareholders is required but the third parties
would be protected if the Board acts without the consent of the company.
(3) Power, which only the shareholders can exercise, sometimes, subject to the approval
of the Central Government.
♦ Certain powers exercisable with the consent of the general body meeting: Under
Section 293 the Board of Directors of a public company cannot, except with the
consent of the company in general meeting:
(i) sell, lease or otherwise dispose of the whole, or substantially the whole, of the
company’s undertaking or where the company owns more than one undertaking,
of the whole or substantially the whole of any such undertaking.
Any resolution permitting the aforementioned transaction may attach such
conditions to the permission as may be specified in the resolution. Such
conditions may include those regarding the use, disposal or investment of the
sale proceeds, which may result from the transaction;
(ii) remit, or give time for the repayment of, any debt due by a director;
(iii) invest otherwise than in trust securities, the amount of compensation received
by the company in respect of the compulsory acquisition of any such
undertaking as is referred to in clause (i) or of any premises or properties used
for any such undertaking and without which it cannot be carried on or can be
carried on only after a considerable time;
(iv) borrow moneys where the moneys to be borrowed together with moneys already
borrowed by the company will exceed the aggregate of the paid up capital of the
company and its free reserves, (i.e., reserves not set apart for any specific
purpose). Temporary loans (i.e., loans repayable on demand or within 6 months
from the date of the loans, such as, short-term cash credit arrangements, the
discounting of bills and the issue of other short-terms loans of a seasonal
character but does not include loans raised for the purpose of financing
expenditure of a capital nature) obtained from the company’s bankers in the
ordinary course of business are not covered by this provision.
However, if a bank, in the ordinary course of its business, accepts deposits of
money from the public repayable on demand or otherwise, and withdrawable by
cheque, draft, order or otherwise, such acceptance must not be deemed to be a
borrowing by the bank within the meaning of clause (iv) above. A debt incurred
by the company in excess of the ceiling placed by clause (iv) above, shall not be
valid or effectual, unless the lender proves that he advanced the loan in good
faith and without knowledge that the aforesaid limit had been exceeded; and
(v) contribute to charitable and other funds not directly related to the business of
the company or the welfare of its employees, any amounts the aggregate of
which will in any financial year, exceed Rs.50,000 or 5% of its average net
profits during the immediately preceding three financial years, whichever is
greater.
As regards the exercise of the power mentioned either in para (iv) or (v) above,
the resolution in the general meeting must specify the total amount upto which
moneys may be borrowed or total amount which may be contributed to
charitable and other funds in any financial year.
(vi) appoint a sole selling agent for any area; the appointment may be made in the
first instance without the approval of the general meeting but it will be subject to
the subsequent approval by the company in the first general meeting held after
the date on which the appointment is made [Section 294 (2)].
(vii) appoint a director to hold any office or place of profit (excepting that of
managing director, manager, legal or technical advisers, banker or trustees for
the holders of debentures of the company) special resolution being needed
therefore; the consent of the company or its subsidiary in general meeting is
necessary (Section 314).
(viii) make loan to or give guarantee, or provide security in connection with a loan
made by any person to or to any person by, another company except where the
aggregate of loans made to companies not under the same management as the
lending company does not exceed the prescribed percentage of the aggregate
of the subscribed capital and free reserve of the lending company (not
applicable to banking, insurance and purely privates companies and companies
established for financing industrial enterprises) [Section 370]
(ix) to commence any new business; there is the necessity of a special resolution
being passed by the company in its general meeting [Section 149(2A)].
Tutorial Note: The list of the above-mentioned powers is not exhaustive but illustrative.
It should be borne in mind that there are instance of other powers needing general body
meeting’s consent.
♦ Powers to be exercised by Board only at its meeting: According to Section 292,
the following powers can be exercised by the Board only by means of resolution
passed at its meetings:
(a) to make calls; (aa) to authorise the buy back of shares
(b) to issue debentures;
(c) to borrow money otherwise than on debentures;
(d) to invest the funds of the company;
(e) to make loans.
The Board may, however, by resolution passed at meeting, delegate the last three
powers mentioned above to the extent specified hereunder. Such a delegation can be
made 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, a
principal officer thereof. Every resolution delegating the power referred to in (c), (d)
and (e) above shall specify: (i) the total amount outstanding at any time up to which
money may be borrowed by the delegate; (ii) the total amount up to which the funds
may be invested as well as the nature of investment; and (iii) the total amount of
loans and the purpose thereof up to which and for which loans may be raised
respectively. It is to these extents that the delegate may exercise the aforesaid three
powers. The company in general meeting may impose restrictions and conditions on
the exercise by the Board of any of the five powers mentioned above.
In connection with the power mentioned in (c) above a question may arise whether
borrowing on a promissory note is within the powers of the directors.
It has been held in [P. Rangaswami Reddiar and Another vs. R. Krishnaswami
Reddiar and another (1971) 43 Comp. Case 232] that where such a borrowing
permissible under the company’s articles and moneys were borrowed on promissory
notes, such transaction would come within the powers of the director, It has also been
held in the same case that where a person was appointed as the managing director of
the company by the Board’s resolution vested with full powers of the management of
the affairs of the company and authorised to sign all the papers of the company, he
would have full powers to borrow money on a promissory note even without a
resolution of the Board as contemplated by Section 292(c) of the Act.
In addition to Section 292, some other Sections also require the Board to exercise its
powers in its meeting which are:
(f) receive notice of disclosure of shareholdings of directors under Sections 307
[Section 308(2)].
(g) Fill in casual vacancies in the Board (Section 262);
(h) sanction or give consent to contracts of or with any directors [Section 294(4);
and
(i) receive notice of disclosure of interest (Section 299)
The following powers may be exercised by a resolution passed at the meeting only with
the consent of all the directors present at the meeting.
(1) To appoint a managing director or manager a person who is already a managing
director or manager of another company [Sections 316(2) & 386(2)]
(2) To the sanction investment in companies in the same group [Section 372(5)].
♦ Validity of acts of directors: All the acts of a director or a committee of the Board
shall be valid not withstanding that his appointment was afterwards discovered to be
invalid by reason of any defect or disqualification or by reason of the appointment
being terminated by virtue of any provision contained in the Act or in the articles of
the company. But this provision of law shall not have the effect of validating the acts
of a director after his appointment has been shown to the company to be invalid or to
have been terminated (Section 290). But where there was no appointment at all, the
acts of such de facto directors are not protected. This protection applies only to
defects in appointment discovered after the appointment. Thus, if a director, whose
term of office has expired, acts as director, such acts cannot be regarded as valid;
that is not a defect afterwards discovered (Kamal Distillery vs. Ladhi Parshad, A.I.R.
1960 Punj. 655).
It has been held in Morris vs. Kaneseen 1945 I All E.R. 586 that this rule is intended
to be machinery to avoid calling into question the validity of transactions when there
has been a slip or irregularity in the appointment of directors and to override
substantive provisions of law relating to such appointments. The presumption as to
the validity of acts of directors would not cover the case where there has not been any
appointment at all.
♦ Consideration of a few complicated problems based on power of directors:
Having read the directorial powers in detail it would be worthwhile to consider a few
problems on these powers.

The Directors of X & Co. Ltd. desire to authorise the Managing Director to enter into
the following transactions namely- (a) invest from time to time surplus funds in the
purchase of shares of other companies: (b) borrow from banks money required for the
purpose: (c) give loans to persons, including firms in which directors or their relatives
are partners; (d) give donations to charitable trusts in which any of the directors may
be interested as trustees.
Let us now examine the measures to be taken for the proper implementation of the
above proposals.
(a) Although Section 292 empowers the Board of Directors of a company to
delegate to the Managing Directors the power to invest, in general terms, the
funds of the company nevertheless because of the overriding provisions of
Section 372(5) (which Section we shall discuss in detail in Study paper 3), the
transaction in the instant case would be invalid. Section 372(5) provides that no
investment in shares of a company can be made by the Board of Directors of an
investing company in pursuance of sub-section (2), unless it is sanctioned by a
resolution passed at a meeting of the Board with the consent of all the directors
present at the meeting except those not entitled to vote thereat, and unless
further notice of the resolution to be moved at the meeting has been given to
every director in the manner specified in Section 286. Since Section 372 does
not provide for delegation of the power, the proposed delegation to the
Managing Director in question, notwithstanding the general provision of Section
292, cannot be made.
(b) In terms of Section 292 the Board of Directors may also delegate to the
Managing Director the power to borrow money otherwise than debentures, which
it can exercise only by means of resolutions passed at Board meetings. As per
Explanation to Section 292(1), it is the arrangement for an overdraft or cash
credit that constitutes the exercise of the borrowing power and not the actual
utilisation of the arrangement. In other words, an arrangement for an overdraft
or cash credit to the tune of say Rs.5 lakhs constitutes the exercise of the
borrowing power and not the actual drawing of this amount on the basis of the
overdraft or cash credit. Consequently, the transaction in the instant case shall
be valid. But before implementation of the proposal, the Board must pass a
resolution at its meeting authorising the Managing Directors to borrow from
banks money required for the purpose of the company’s business. Also the
resolution delegating this power shall specify the total amount outstanding at
any one time up to which the delegate may borrow money.
If however, the moneys to be borrowed together with the money already
borrowed by the company (apart from temporary loans obtained from the
Company’s bankers in the ordinary course of business) will exceed the

aggregate of the paid up capital of the company and its free reserves, [that is to
say, reserves not set apart for any specific purpose] the Board of Directors of
the company in question must obtain the consent of the company in its general
meeting. Consequently, care should be taken to ensure that while delegating the
power to the managing director the aforesaid provision has not been violated;
also it should be ensured that the memorandum of association permits
borrowing.
(c) Since according to Section 295(1), (which we shall discuss later) without
obtaining prior approval of the Central Government in that behalf, a company
can not directly or indirectly lend money to persons including firms, in which
directors or their relatives are partners, the company in question must in the first
instance seek the Central Government’s approval. Secondly since the power to
make loans may be delegated under Section 292(1)(e), the Board of Directors of
the company in question must pass a resolution therefore and every resolution
delegating this power to the Managing Director shall specify the total amount up
to which loans may be made by the delegate, the purpose for which loans may
be made and the maximum amount of loans which may be made for each such
purpose in individual cases. Thirdly, by virtue of Section 291(1), the Board must
see with reference to the memorandum and articles whether the company is
authorised to exercise the power.
(d) Under Section 293(1) (e), the Board of Directors of a public company can
contribute or donate to charitable and other funds not directly related to the
business of the company or the welfare of its employees any amount the
aggregate of which will not, in any financial year exceed Rs.50,000 or 5% of its
average net profits during the three financial years preceding whichever is
greater. If this power of the company is not ultra vires the memorandum of the
company, then only the Board can act in pursuance of the above-mentioned
resolution of the company and in so acting, it can authorise the Managing
Director to exercise the power on behalf of the Board.
It may be noted that the power of the Board to donate to general charities is not
conditional to the existence of any profits. In such case, they may contribute up to the
limit given in Section 293(1)(e), even though the company may be working at a loss.
3.8 DUTIES OF DIRECTORS

The duties of directors may now be summarised as follows:
(i) Since the directors are in fiduciary position, their duties are onerous. As you know,
they are trustees of the money of the company in the bank as well as of the property
of the company. They are also agents in the transactions entered into by them on
behalf of the company. Therefore they must act in utmost good faith and take as
much care as a man of ordinary prudence would take in respect of his own affairs. In
other words, they will have to exercise all the powers they are vested with only in
this fiduciary capacity. You must remember that a director is a trustee only of the
company and not of the shareholder thereof. Therefore, though he may possess
inside information which may augment the value of shares, yet he is not obliged to
disclose the information to a shareholder who offers to sell his shares to the director
[Percival vs. Wright (1902) 2 Ch. 421]. However, in exceptional circumstances, the
director may owe a fiduciary duty to shareholders as well e.g. where directors are
negotiating terms of sale of issued shares of the company. That is where the
directors approach the shareholders and not vice versa for sale of shares.
(ii) He is required to evince as much skill as is expected from a person of his knowledge
and experience-thus far and no further.
(iii) Every director must act honestly. A director shall be liable to the company for any of
his underhand dealings irrespective of whether or not the company suffers on
account of such underhand dealings. Causing shares to be allotted to a minor, sale
by director to company without the disclosure of his interest, fraudulent
misrepresentation to co-directors enticing them into advancing money to him on
insufficient security, taking of bribes, etc… are some of the instances of dishonest
acts. Where a director derives any secret benefits or accept any bribes or any other
illegal gratifications, he must account for them and make them over to the company
Eden vs. Ridsdale Co. 23 A.B.D. 336. A company may repudiate a contract if it has
been induced by bribes [Shipway vs. Broadwood (1899) I.Q.B. 369; Grant vs. Gold
Explanation Syndicate (1990) 1 A.B. 233].
(iv) It is normally not the duty of the director to detect the frauds of the manager and the
chairman of the company. He can therefore, rely on co-directors and officers. If the
duty of detection of fraud is cast on a director, anything like an intelligent devolution
of labour will be impossible. But if there is anything that gives rise to the slightest
suspicion, then he will be put on an enquiry. If he fails to make the requisite enquiry
to allay his suspicion then he will be guilty of dereliction of duty and be liable for
damage emerging from such dereliction.
(v) It is the duty of a director to see that company’s moneys are kept properly invested,
unless the articles warrant the delegation of this duty to others.
(vi) It is incumbent upon directors to insist on some independent valuation of investment
and fixed assets at appropriate intervals. Revaluation of immovable property may
not be necessary for a considerable time, but revaluation of shares must be made
once a year. In this regard, a director should not put any reliance on the assurances
of the chairman or on the expression of the auditor’s belief. Likewise auditor too
must not rely on the directors’ assurance.

(vii) Directors are required to ensure the accurate compilation of the stock sheets and
the physical checking of certain of these items being done by the auditors.
(viii) According to Palmer a list of cheques that the Board authorises is to be placed
before each meeting of the Board.
(ix) It is the duty of the directors not to act in a manner prejudicial to public interest or
oppressive to any members. If they so act, proceedings will be against them under
Section 397.
(x) Duties of directors regarding take-over under Section 395.
3.9 DIRECTORS NOT TO HOLD OFFICE OR PLACE OF PROFIT

Any office or place shall be deemed to mean office or place of profit under the company
[within the meaning of the Section 314(3)]:
(a) in case the office or place is held by a director, if the director holding it obtains from
the company anything by way of remuneration over and above the remuneration to
which he is entitled as such director, whether as salary, fees, commission,
perquisites, the right to occupy free of rent any premises as a place of residence or
otherwise.
(b) in case the office or place is held by an individual other than a director or by any firm,
private company or other body corporate, if the individual, firm, private company of
body corporate holding it obtains from the company anything by way of remuneration
whether as salary, fees commission, perquisites, the right to occupy free of rent any
premises as a place of residence, or otherwise.
Except with consent of the company accorded by a special resolution, (a) no director of a
company shall hold any office or place of profit, and (b) no partner or relative of his, no
firm in which he or his relative is a partner, no private company of which he is a director or
member and no director or manager of such a private company shall hold any office or
place of profit carrying a total monthly remuneration of such sum as may be prescribed.
[The government by its notification of February, 1994 has fixed this amount at Rs.10,000
or more]. However, any of the aforesaid persons may be appointed as a managing
director or manager, banker or trustee for the debentureholders under any subsidiary of
the company, unless the remuneration received from such subsidiary in respect of such
office or place of profit is paid over the company or its holding company.
The special resolution may be passed before or at the general meeting of the company
held for the first time after the holding of such an office or place of profit. Further, where a
relative of a director, or a firm in which such a relative is a partner is appointed to an
office or place of profit in the company or a subsidiary thereof without the knowledge of
the director, the consent of the company may be obtained either in the general meeting
held for the first time after the holding of such an office within 3 months from the date of
the appointment whichever is later [Section 314(I) and the provision thereof].
But the abovementioned provisions of sub-section (1) shall not be applicable in a case
where the relative of a director or firm in which such relative is a partner holds any office
or place of profit under the company or its subsidiary, if the said relative’s or firm’s
appointment had taken place before the director in question became the director of the
company [Section 314(1A)].
A partner or a relative of a director or manager, a firm in which such director or manager
or relative of either is a partner, or a private company of which such a director or manager
or relative of either is director or member cannot hold any office or place of profit which
carries a total monthly remuneration of such sum as may be prescribed [The Govt. vide its
notification of 5 th February, 2003 has fixed this amount as Rs.50,000 or more], except with
the prior consent of the company by special resolution and the approval of the Central
Government.
When an office is held in contravention of the provision in sub-section (I), the director,
partner, relative, firm etc., concerned shall be deemed to have vacated office from the
date next following the date of the general meeting of the company referred to above or at
the expiry of the period of the three months, as the case may be, and shall be liable to
refund the company any remuneration received or the monetary equivalent of any
perquisite or advantage enjoyed by him for the period immediately preceding the date
aforesaid in respect of such an office or place of profit [Section 314(2)(a)].
The company shall not waive recovery of any sum refundable to it under Section
314(2)(a), unless permitted to do so by Central Government [Section 314(2)(b)].
Every individual, firm, private company or other body corporate proposed to be appointed
to any office or place of profit shall, before shall, before or at the time of such
appointment declare in writing whether he or it is not connected with a director of the
company in any of the ways referred to in sub-section (I) [Section 314(2A].
If may happen that after the commencement of 1947 Amendment Act, an office or place of
profit is held without the prior consent of the company by a special resolution and the
approval of the Central Government. In such a case, the partner, relative, firm or private
company appointed to it shall be liable to refund to the company any remuneration
received or the monetary equivalent of any perquisite or advantage enjoyed by him on and
from the date on which the office was so held by him [Section 314(2B)].
The company shall not waive the recovery of any sum refundable to it under sub-section
(2B) or (2c) as the case may be, unless permitted to do so by the Central Government
[Section 314(2D)].
It may be noted that nothing in Section 314 shall apply to a person who, being the holder
of any office or place of profit in the company, is appointed by the Central Government
under Section 408 as director of the company [Section 314(4)].
The aforementioned provisions are calculated to prevent directors from obtaining unfair
advantage from the company by providing sinecures to their business associates and
relations without the knowledge of the shareholders.
Let us examine the following problems:
1. Mr. Smart is a director of ABC Ltd., accepts the offer of employment as “Chief
Executive-Technical Operations” of the same company on a monthly remuneration of
Rs.15,000. Can he be an employee at the same time being the director of the
company? In case his son is appointed to the same post, does it attract any
provisions of the Companies Act?
Answer: Ordinarily, the shareholders in general meeting elect a director, and once so
elected, he enjoys well-defined rights and powers under the Act. An employee is
appointed by the company under a contract of service is a servant of the company
and the company can always direct his actions and interfere with his work. In Lee
Behrens & Co. (Re [1932] 2 com cas. 588 it was observed that directors are elected
representatives of the shareholders engaged in directing the affairs of the company
on its behalf. However, there is nothing in law to prevent a director from accepting
employment under the company under a special contract, which he may enter into
with the company. (R.R. Kothandaraman vs. Commr. of I.Tax (1957). Section 314
provide for a director holding an office or place of profit under a company.
Except with the consent of the company accorded by a special resolution no director
shall hold any office or place of profit and no partner or relative of his, no firm in
which he or his relative is a partner, no private company of which he is a director or
member and no director or manager of such a private company shall hold any office
or place of profit carrying a monthly remuneration of Rs. 10,000 or more. The special
resolution may be passed before or a general meeting of the company held for the
first time after the holding of such an office or profit. If it is done without the
knowledge of the director, the consent of the company may be obtained either in the
general meeting held for the first time after the holding of such an office or within 3
months from the date of appointment whichever is later.
If a partner or a relative of a director or manager, a firm in which such director or
manager or relative of either is a partner or a private company of which such a
director or manager or relative of either is director or member can not hold any office
or place of profit which carries a total monthly remuneration of Rs.20,000 or more
except with the prior consent of the company by special resolution and the approval of
the Central Government.
Thus, in the instance case, Mr. Smart can accept the offer of employment as Chief
Executive-Technical Operations. If his son is appointed to the said post, it requires
the consent of the company.
3. Mr. True is a director of a company and also a chartered accountant by profession
and one of the partners in M/s True & Fair Co. The company appointed the said firm
as chartered accountant of the company on a regular basis. Does Mr. True holds any
office or place of profit in the company. Would your answer be different if his
appointment is on a case-to-case basis?
Answer: Chartered Accountants appointed by a company on a regular basis are hit by
a restrictive provisions of sub-sections I and I(b) of Section 314 if he is a director
receiving remuneration over and above to which he is entitled. In case the office or
place of profit is held by an individual other than a director or by any firm, private
company or other body corporate, if it obtains from the company anything by way of
remuneration whether as salary, fees, commission perquisite or otherwise, approval of
the company is not required where the monthly remuneration is less than Rs. 10,000/-
. Accordingly, if a director is holding the place of chartered accountants for the
company he would be covered by Section 314(3) irrespective of the fact that office or
place of profit carries a total monthly remuneration less than Rs.10,000/-.
3.10 LIABILITIES OF DIRECTORS

The liability of a director should be considered from the following stand points (i) Directors
may become liable to shareholders in multifarious ways. (ii) They may also become liable
to third parties in certain cases: the liability may be civil and/or criminal.
(1) Liability to Shareholders
(a) Negligence: A director may become liable to shareholders for negligence. Where the
directors acting within their powers, fail to exercise as much reasonable skill and
diligence as may be expected from persons with their knowledge and experience in
the management of the affairs of the company, they can be held liable for negligence
(Re: City Equitable Fire Insurance Co. 1925 Ch.407). They are, however, not liable for
errors of judgement as a result of which a loss might have been caused to the
company provided they acted bonafide for the benefit of the company and with such a
care as may be reasonably expected of them. The burden of proving bad faith in such
a case lies on the person who challenges the act of the directors.
(b) Misfeasance and breach of trust: “Misfeasance” and “breach of trust” are allied heads
of liability. The former is defined as any breach of duty in the conduct of the
company’s affairs, which causes loss to the company: the latter is confined to any
misapplication of the funds of the company (Palmer-P.190). Thus, the payment of
dividend out of capital (Filicroft’s case). is a breach of trust. On the other hand,
allotment of shares to an infant or giving a fraudulent preference to a creditor, or to

commit any breach of articles would be misfeasance.
(c) Ultra vires acts: Where directors do any act which is in excess of their powers, e.g.
borrow money or create a mortgage which is beyond their authority as defined by the
articles such an act is called ultra vires the directors. If, however, it is not beyond the
powers of the company as laid down by the memorandum, the shareholders may, by
subsequent ratification, make the act, which is ultra vires the directors but intra vires
the company, valid and binding on the company.
(d) Act of co-directors: A director is not responsible for the acts and defaults of co-
director, unless he has expressly or impliedly authorised the same [Cargil vs. Bower
10 Ch.D.502]. The directors are jointly and severally liable for a breach of trust.
(2) Liability to third parties
(a) Insofar as contracts entered into by directors on the company’s behalf are concerned,
the directors cannot be generally held personally liable for the some, for they act as
agents of the company. But they may be personally liable if they act, without the
authority of the company, on the ground of a breach of warranty of authority. This
personal liability may attach to them when they have expressly or impliedly
undertaken to be personally responsible for their act.
(b) If the directors commit or authorise a tortious act, they are personally liable therefore
even if they have been acting as agents of the company. Likewise they would be
personally liable for commitment or authorisation of fraud, e.g., issue of a fraudulent
prospectus. But a director would not be liable for the fraud of his co-director, unless it
has been authorised by him, or he has participated therein.
(c) Certain liabilities have also been imposed by the Act as regards director qua third
parties, e.g., for misstatement in prospectus under Section 62 to prospective
subscribers; for irregular allotment under Section 71: for failure to return application
moneys where minimum subscription has not been raised within the prescribed
period, under Section 69; for similar failure mentioned under Section 73 etc.
♦ Directors’ rights and liabilities for their ultra vires acts: The acts of directors
which may be regarded as ultra vires are two-fold in nature, namely, (a) the acts
which are beyond their authority but within the company’s powers (i.e. intra vires the
company) and (b) the acts which are beyond the director’s authority as well as the
company’s. The rights and duties which emanate from ultra vires acts, we shall
discuss here under:
(i) Under the Act, the funds of a company can be applied in carrying out its
permitted objects. Therefore, if the directors of the company make an ultra vires
payment, e.g., payment of the interest out of capital they may be compelled to
repay the money to the company even after it goes into liquidation [In re-Sharpe
(1982 1 Ch. 154)]. But the directors so compelled to refund the money to the
company could claim to be indemnified by the payees who received the money
from the directors with the knowledge that the payment to them was ultra vires.
The reason for this rule of indemnification is that in such a case, the payees
would be constructive trustees of that money (Russel vs. Wakefield Water
Works Co. I R. 20 Eq 474).
(ii) The directors are the agents of the company. That’s why they cannot do
anything, which the company itself cannot do under its memorandum. But if they
make a contract within the powers of the company (i.e. intra vires the
memorandum) but ultra vires the powers which the company by its articles has
conferred upon them, then the company may ratify the contract in general
meeting and be bound by it (Grant vs. United Kingdom Switchback Railway
(1888) 40 Ch. D. 135). If, however the company does not ratify such contract
then the company will not be bound by the contract. Consequently, the directors
will remain liable to the other party to the contract for the breach of an implied
warranty of their authority (Weeks vs. Propert (1873) L.R. 8 C P. 427; Starkey
vs. Bank of England 1903.A.C.114).
♦ Directors with unlimited liability: In a company with limited liability, the liability of
the directors, like that of any other members, is limited to the amount remaining
unpaid on their shares. However, a limited company may, if the memorandum permits,
have directors with an unlimited liability. If a limited company has the powers under its
articles it may also alter its memorandum by a special resolution so as to make the
liability of its directors unlimited (Sections 322 and 323).
♦ Director’s reports: According to Section 217, the directors are under an obligation
to make out and attach to every balance sheet laid before a company; in general
meeting a report with regard to the state of affairs of the company-, the amount (if
any) which they recommend as dividends, the amount if any, which they propose to
carry any reserves in such balance sheet and the material changes and commitments
(if any) affecting the financial position of the company which have occurred between
the end of financial year to which the balance sheet relates and the date of the report.
The report shall deal with any changes, which have occurred during the financial year (i)
to the nature of the company’s business, (ii) in the company’s subsidiaries or in the nature
of the business carried on by them and (iii) generally in the class of business in which the
company has an interest. However, such matters are to be disclosed so far as these are
material for the application of the state of the company’s affairs by its members and will
not, in the board’s opinion be harmful to the business of the company or any of its
subsidiaries. The Board must also give the fullest information and explanation in its report
or in case falling under the proviso to Section 222, in an addendum to the report, on every
reservation, qualification or adverse remark contained in the auditor’s report. The report
and any addendum thereto must be signed by the chairman of the Board if he is
authorised by the Board; otherwise, it is to be signed by such number of directors as are
required to sign the balance sheet and profit and loss account of the company by virtue of
Section 215. In default of compliance with these provisions, each of the directors and
chairman signing the report without the Board’s authority shall be punishable with
imprisonment for a term extending up to six months or with fine up to Rs.20,000 or with
both. But no person is to be sentenced to imprisonment for such offence unless it was
committed willfully.
DIRECTOR’S RESPONSIBILITY STATEMENT [SECTION 217]
This section deals with the Report of Board of Directors to be placed before the general
meeting. A new sub-section (2AA) has now been inserted [by the Companies
(Amendment) Act, 200] to provide that the Report of Board of Directors shall also include
a Directors’ Responsibility Statement as under:
(i) That the applicable accounting standards have been followed in preparing the annual
accounts. If there is material departure, explanation for the same should be given.
(ii) That the directors have selected such accounting policies and applied them
consistently and made judgements and estimates that are reasonable and prudent so
as to give a true and fair view of the state of affairs of the company while preparing
the annual accounts.
(iii) That the Directors have taken proper and sufficient care (a) for maintenance of
adequate accounting records as required by the Act, (b) for safeguarding the assets
of the company and (c) for preventing and detecting fraud and other irregularities.
(iv) That the Directors have prepared the annual accounts on a going concern basis.
3.11 LOANS TO DIRECTORS [SECTION 295]

We will presently see from our discussion hereunder that a company’s power of lending
money to its directors is strictly regulated by the Act. A company without obtaining prior
approval of the Central Government in that behalf, cannot directly or indirectly lend
moneys or guarantee or secure the loans advanced by the other person to: (a) a director
of the lending company or that of its holding company or partner or relative of any such
director (b) any firm in which any such director or relative is a partner; (c) any private
company of which any director is a director or member; (d) any body corporate 25% or
more of whose total voting power may be exercised or controlled by any such or by two or
more such directors together (e) 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 [Section
295(1)].
The impact of the aforesaid provision is that it prohibits the company not only from directly
lending money to its directors but also from giving any guarantee for a loan taken by a
director from any other person and providing any security for such loan. The Section too
prohibits the providing of any guarantee or security for a loan advanced by a director to
any person.
The above provisions do not apply to loans, etc. advanced by a private company (unless it
is a subsidiary of a public company) or by a holding company to its subsidiary. Similarly,
any guarantee or security provided by the holding company in respect of any loans made
to its subsidiary does not attract the provisions referred to above.
It is thus clear from the foregoing discussion that under Section 295, a company cannot
give loan or advance to its directors without obtaining the prior sanctions of the Central
Government in that behalf.
Now suppose that the directors of a public company have to travel often for company’s
business. The company makes some advances to them for this purpose, which sometimes
exceeds the actual requirements. In such a case can the company be deemed to have,
contravened the provision of Section 295? It seems that advances pertaining to travelling
expenses are outside the ambit of Section 295, because such advances are not in the
nature of loans, and are meant to meet expenses on behalf of the company. Therefore,
the provisions of Section 295(I) are not contravened, but the directors are bound to keep
the advances in excess in trust for the company.
In case a director of a public company has take a loan from the company without the
approval of the Central Government, (i) is it possible to avoid prosecution by applying to
the central Government for approval or by refunding the loan? And (ii) whether the offence
is compoundable before or after institution of prosecution and the authority can compound
the offence?
(i) According to Section 295 of the Companies Act, no public company shall make any
loan to any of its directors either directly or indirectly without obtaining the previous
approval of the Central Government. As the Act envisages prior approval, Central
Government will not entertain any application from the company seeking approval for
a loan already given to its director.
The company has, therefore, contravened the provisions of Section 295(1) and for
this offence every person who is knowingly a party to this contravention including the
person to whom the loan is made shall be punishable either with fine which may
extend to Rs. 50,000 or with simple imprisonment for a term which may extend to six
months [Section 255(4)]. Where any such loan has been repaid in full, no punishment
by way of imprisonment shall be imposed and where the loan has been repaid in part,
the maximum punishment, which may be imposed by way of imprisonment, shall be
proportionately reduced. So, by refunding the loan in full, it is possible to avoid

punishment in the form of imprisonment, but it is not possible to a avoid prosecution
and punishment in the form of fine.
(ii) All offences other than an offence which is punishable under the Companies Act with
imprisonment only or with imprisonment and also with fine are compoundable under
Section 621A. As the offence under Section 295 is punishable with fine or
imprisonment, it is compoundable but with the permission of the Court [Section
621A(2)]. The offence may be compounded either before or after the institution of
prosecution. If the offence is compounded before the institution of any prosecution, no
prosecution shall be instituted in relation to such offence, either by the Registrar or by
any shareholder or by any person authorised by the Central Government. Where the
composition of any offence is made after the institution of any prosecution, such
composition shall be brought to the notice of the court by the Registrar in writing and
on such notice of the composition of the offence being given, the company or its
officer in relation to whom the offence is so compounded shall be discharged [Section
621A(4)].
The offence may be compounded by the Regional Director where the maximum amount of
fine, which may impose for such offence, does not exceed Rs. 50,000 and in other cases
by the company Law Board. In this case, Regional Director may compound the offence, as
the maximum fine is only Rs. 50,000. On receipt of applications from the persons liable for
penalty under Section 295(4) along with the comments of the Registrar, the Regional
Director may specify the amount no exceeding the maximum fine which shall be paid to
the Central Government for compounding of the offence.
3.12 DIRECTORIAL REGISTERS

♦ Register of contracts, companies and firms in which directors are interested:
Every company shall keep one or more registers in which particulars of all contracts,
or arrangements to which Section 297 or Section 299 applies shall be entered. These
particulars should include the following to the extent they are applicable in each case:
(a) date of the contract or arrangement; (b) names of the parties thereto; (c) the
principal terms and conditions thereof; (d) in the case of contract to which Section 297
applies or in the case of a contract or arrangement to which Section 299(2) applies,
the date on which it was placed before the Board; (e) the names of the directors
voting for or against the contract or arrangement and the name of those remaining
neutral.
The particulars of every such contract or arrangement to which either of the above
mentioned Sections applies must be entered in the register within 7 days of the receipt at
the registered office of the particulars of contract other than the one requiring the Board’s
approval or within 30 days of date of that contract whichever is later; in the case of
contract requiring the Board approval within 7 days (exclusive of public holidays) of the
meeting of the Board at which the contract is approved. On these entries being made, the
register is required to be placed before the next meeting of the Board, whereupon it shall
be signed by all the directors present at the meeting. The register must also specify, in
relation to each director of the company, the names of the firms or bodies corporate of
which he has given notice under Section 299(3). However, the particular as regards
contracts the value of which does not exceed Rs.1,000 in the aggregate in any year or as
regards contracts entered into by a banking company for collection of bills or as regards
any transactions referred to in Section 297(2)(c) are not required to be entered in the
register. Violation of the aforementioned provision would render the company and every
officer thereof (in respect of each default) punishable with fine up to Rs.5000 (Section
301).
♦ Register of directors, managing director, manager and secretary (Section 303):
Every company must keep at its registered office a register of directors, managing
director, manager and secretary, and send to the Registrar in the prescribed form
within 30 days of the appointment of the first directors, a return in duplicate containing
particulars specified in the register and must notify the Registrar of any subsequent
changes within 30 days of the happening thereof. This notification also must be
submitted in duplicate in the prescribed form.
The above-mentioned register must contain the following particulars:
(i) In the case of an individual, his present (and former) name and surname in full; his
father’s name and surname in full or where the individual is a married woman the
husband’s name and surname in full; his usual residential address, nationality,
business, occupation, if any particulars of office (if any e.g., that of director, managing
director, manager or secretary in any other body corporate), the date of birth;
(ii) In the case of a body, corporate its corporate name and registered or principal office,
etc.
(iii) In the case of a firm, the name of the firm etc.;
(iv) If any director or directors have been nominated by a body corporate, its corporate
name and all the particulars mentioned (i) and (ii);
(v) If any directors have been nominated by a firm, the firm name and all the particulars
mentioned in (i) and (ii) above.
For the purpose of the aforesaid provision any person in accordance with whose
directions, or instructions the Board of Directors of a company is accustomed to act shall
be deemed to be a director of the company. [Explanation to Section 303].
♦ Inspection of the Register (Section 304): The register mentioned in Section 303
must be open to inspection by any member of the company free of charge. But a
person other than the member can inspect it on payment of one rupee for each
inspection. If the inspection is refused, the company and every officer thereof who are
in default are punishable with fine extending upto Rs.50. Also the Company Law
Board may, by order, compel an immediate inspection of the register.
♦ Register to be kept by Registrar (Section 306): The Registrar shall maintain a
separate register wherein he shall enter the particulars received by him under Section
303(2) in respect of companies, so however that all entries in respect of each such
company shall be together. This register shall be open to inspection by any member
of the public at any time during office hours, on payment of the prescribed fee. The
register should be in Form No. 34 of the Companies (Central Government’s) General
Rules and Forms 1956. According to a decision of the Punjab High Court (Jullundur
Dist. Registered Factory owners’ Association vs. Registrar of Companies 1961, Comp.
Cas, 673), where returns under Section 303(2) have been made by rival claimants,
the registrar should wait for the decision of the Court on the conflicting claims before
making entries in his separate register of the particulars furnished by either party.
♦ Register or directors’ shareholding etc. (Section 307): A company must maintain a
register showing, as regards each director, the number, description and the amount of
shares in or debentures of the company or any other body corporate, being the
company’s subsidiary or holding company, or a subsidiary of the company’s holding
company, which are held by him, or in trust for him, or of which he has any right to
become the holder whether on payment or not. Apart from these entries, there must
be an indication in the register of the nature and extent of any interest or right in or
any shares or debentures recorded in relation to a director. The register must also
show the date of each transfer of shares or debentures and the price or other
consideration therefore if the transaction has been entered into after the
commencement of the Act (i.e., April 1, 1956). The register shall be kept at the
registered office of the company. During the period beginning 14 days before the date
of company’s annual meeting, and ending 3 days after the date of its conclusion, any
member or holder of the debentures may inspect it; but during this period or any other
period, any person acting on behalf of the Central Government or the Registrar may
inspect it. Further the Central Government or the Registrar may at any time, require a
copy of the register or any part thereof. Furthermore, it must be produced at the
commencement of every annual general meeting and kept open and accessible during
the continuance of the meeting the any person having the right to attend the meeting.
Any default in the matter or the entries referred to in Sections 307(1) and (2) is
punishable with the extending to Rs. 50,000 and also with a further fine extending to
Rs.200 for every day during which default continues. Similar punishment is leviable in
case a copy required under this Section is not sent within a reasonable time. In the
case of refusal, the Company Law Board may compel an immediate inspection of the
register. The provisions of Sections 307 and 308 shall apply to managers as they
apply to directors.
3.13 POLITICAL CONTRIBUTIONS

Prior to the amendment of Section 293A, by the Companies (Amendment) Act, 1985, there
was a blanket ban on political contributions by companies. The amended Section seeks to
continue the existing blanket ban against political contributions in the case of government
companies and companies which have been in existence for less than three financial
years. The new Section seeks to permit any other company to make political contributions
not exceeding five per cent of the average net profits if a resolution authorising such
contributions is passed at a meeting of the Board of Directors. The New Section also
seeks to impose an obligation on every company to disclose in its profit and loss account
any amount or amounts contributed by it to any political party or for any political purpose.
Under the new Section, if a company makes any political contribution in contravention of
the provisions thereof, the company would be liable to fine which may extend to three
times the amount so contributed. Further every officer of the company in default, would be
liable to imprisonment for a term, which may extend to three years and also to fine.
The detailed provision of Section 293A, as amended, are reproduced below:
(1) Notwithstanding anything contained in any other provision of this act:
(a) no Government company; and
(b) no other company which has been in existence for less than three financial
years, shall contribute any amount or amounts directly or indirectly:
(i) to any political party; or
(ii) for any political purpose to any person.
(2) A company, not being a company referred to in clause (a) or clause (b) of sub-section
(1), may contribute any amount or amounts, directly or indirectly:
(a) to any political party, or
(b) for any political purpose to any person.
Provided that the amount or, as the case may be, the aggregate of the amount which
may be so contributed by a company in any financial year shall not exceed five per
cent of its average net profits determined in accordance with the provisions of
Sections 349 and 350 during the three immediately preceding financial years.
Explanation: Where a portion of a financial year of the company falls before the
commencement, of the Companies Act (Amendment) Act, 1985 and a portion falls
after the amendment, the latter portion shall be deemed to be a financial year within
the meaning, and for the purposes, of this sub-section.

Provided further that no such contribution shall be made by a company unless a
resolution authorising the making of such contribution is passed at a meeting of the
Board of Directors and such resolution shall, subject to the other provision of this
Section, be deemed to be justification in law for the making and the acceptance of the
contribution authorised by it.
(3) Without prejudice to the generality of the provisions of sub-sections (1) and (2):
(a) a donation or subscription or payment caused to be given by a company on its
behalf or on its account to a person who, to its knowledge, is carrying on any
activity which, at the time at which such donation or subscription or payment
was given or made, can reasonably be regarded as likely to affect public
support for a political party shall also be deemed to be contribution of the
amount of such donation, subscription or payment to such person for a political
purpose:
(b) the amount of expenditure incurred, directly or indirectly, by a company on
advertisement in any publication being a publication in the nature of a souvenir,
brochure, tract, pamphlet or the like, by or on behalf of a political party or for its
advantage shall be deemed:
(i) where such publication is by or on behalf of a political party, to a
contribution of such amount to such political party, and
(ii) where such publication is not by or on behalf of but for the advantage of a
political party to be a contribution for a political purpose to the person
publishing it.
(4) Every company shall disclose in its profit and loss account any amount or amounts
contributed by it to any political party or for any political purpose to any person during
the financial year to which that account relates, giving particulars of the total amount
contributed and the name of the party or person to which or to whom such amount has
been contributed.
(5) If a company makes any contribution in contravention of the provisions of this Section:
(a) the company shall be punishable with fine which may extend to three time the
amount so contributed, and
(b) every officer of the company who is in default shall be punishable with
imprisonment for a term, which may extend to three year and shall also be liable
to fine.
3.14 MANAGERIAL REMUNERATION

A director is not a servant of the company but he is the incharge of its management and
controls its affairs. He has no implied rights to remuneration for his services as a director.
However, there may be a specific provision for providing remuneration to him in the
articles or the shareholders may resolve for the same in the General Meeting. The
articles, however, generally provide for director’s remuneration, which is in the nature of
honorarium. Sections 198, 309, 310, 311, 387, 200 and Schedule XIII of the Companies
Act, 1956 provide the relevant provision relating to managerial remuneration, which may
be summarised as under:
(1) For the purpose of the above-mentioned Sections, the term ‘remuneration’ includes:
(i) Any expenditure incurred by the company in providing any rent free
accommodation or any other benefit or amenity in respect of accommodation
free of charge;
(ii) Any expenditure incurred by the company in providing any other benefit or
amenity free of charge or at a concessional rate;
(iii) Any expenditure incurred by the company in respect of any such obligation or
service which but for such expenditure by the company would have been paid by
the person himself; and
(iv) Any expenditure incurred by the company to effect any insurance of the life of,
or to provide any pension, annuity or gratuity for the person or his spouse or
child. (Section 198)
The term ‘remuneration’ however, does not include:
(i) any sitting or attendance fees payable to directors for attending each meeting of
the Board or a Committee there of [Section 198(2)]. However, in case of a
managing director and whole time director, the payment of sitting fee forms a
part of managerial remuneration and if the amounts is payable in accordance
with Schedule XIII, no such sitting fee is payable to them.
(ii) remuneration payable for acting as technical expert. [Section 309(1)]
(iii) if the articles do not provide for the payment of travelling expenses to the
directors, travelling expenses incurred in attending meeting of the Board or
Committee thereof or General Meeting.
(2) The remuneration of the directors must be fixed:
(i) by the articles or
(ii) by a resolution or if the articles so require by a special resolution of the
company [Section 309(1)]
(3) The director may be paid remuneration in one of the following modes:
(i) A director may receive remuneration by way of fee for each meeting of the
Board or a Committee thereof attended by him.
(ii) A director who is either in the whole time employment of the company or a
managing director may be paid remuneration either by way of a monthly
payment or as a specific percentage of the net profits of the company or partly
by one way and partly by the other.
(iii) A director who is neither in the whole time employment of the company nor a
managing director may be paid remuneration either by way of a monthly,
quarterly or annual payment with the approval of the Central Government or by
way of commission if the company by a special resolution authorised such
payment.
(4) According to Section 198, total managerial remuneration payable to directors,
managing director(s) or manager or whole time director(s) in respect of any financial
year should not exceed 11% of the net profits of that company for that financial year.
The approval of the Central Government is required to pay the remuneration to a
whole time director/managing director of a company if such remuneration exceeds
5% of the net profits for one such director, and 10% of net profits for all of them
together. (Section 309)
In case of a director who is neither in the whole time employment of the company nor
a managing director, the approval of the Central Government for their remuneration
is required if it exceeds 1% of the net profits of the company, if a company has a
managing or a whole time director or a manager, and 3% of the net profits of the
company in any other case. (Section 309) In case of a manager the need for
approval of the Central Government arises when the remuneration exceeds 5% of the
net profits (Section 387)
(5) Under sub-section (4) of Section 198 in case of loss or inadequacy of profits, the
approval of the Central Government is required for payment of minimum
remuneration to managerial personnel. Section 269 has dispensed with the
requirement of prior approval of Central Government for appointment of managerial
personnel so long as the appointment and remuneration are in accordance with
Schedule XIII. Section II Part II of the Schedule specifies minimum remuneration
(varying from Rs. 75,000 per month to Rs.2,00,000 per month and Rs. 1,50,000 to
Rs. 4,00,000 as the case may be depending on the effective capital of the company).
It may be inferred that no separate approval of the Central Government would be
required under Sections 198(4) and 309(3) provided the remuneration paid to a
managerial person in the event of absence or inadequacy of net profits in any
financial year is in accordance with the provisions of Section II of Part II of Schedule
XIII.
Note: Earlier provision for 10 per cent reduction in salary of a managerial person has
been deleted from the revised Schedule XIII effective from 14 th July, 1993. In fact the
remuneration specified in Part II of the Schedule as amended on 1 st February, 1994
is itself the ‘minimum remuneration’. Hence, where a managerial person had been
appointed (with or without Central Government approval) on a specified salary with a
provision for 10% reduction in salary in the event of loss or inadequacy of net profits
in any financial year, the company may, if it so wishes, delete the said condition,
without obtaining central Government’s approval in accordance with the provisions of
Section 310.
(6) Remuneration payable by a company having adequate net profits to its managerial;
personnel is governed by Section 1 of Part II of Schedule XIII, according to which,
there would be no restriction on the nature or quantum of remuneration paid by a
company to its managerial personnel as long as the remuneration paid during any
financial year is within 5 per cent or 10 per cent of the net profits, as the case may
be, of that financial year.
It may be further noted that where a profit making company fixes remuneration for all
its managerial personnel in accordance with the provisions of Section 1 of Part II of
the Schedule but in incurred losses or earns inadequate profits in any subsequent
financial year, it would be required to confirm to the provisions of Section II of Part II
of the Schedule during such subsequent financial year unless it obtains the approval
of the Central Government for payment of remuneration to its managerial personnel
in excess of the limits specified in Section II of Part II of the Schedule.
(7) Section 310 prohibits any increase in the remuneration of any director, except with
the approval of the Central Government. However, increase in remuneration effected
by an increase in the sitting fee for each meeting of the Board or Committee thereof
it such fee after the increase, does not exceed the limits prescribed by the Central
Government [presently the amount of remuneration by way of fee for each meeting of
the Board of Directors or a committee thereof is [(a) For companies with a paid up
share capital and free reserves of Rs 10 crore and above or turnover of Rs.50 crore
and above not to exceed Rs.20,000/- and (b) For other companies not to exceed
Rs.10,000/-] do not require the Central Government’s approval. The Amendment Act,
1998, provided that so long the increase in remuneration is in accordance with
Schedule XIII, approval of the Central Government will not be required.
(8) In the case of an appointment or reappointment of a managing or whole-time
director at a remuneration higher than the remuneration which that office previously
carried with it, the approval of Central Government is required except the cases
where such increase is in accordance with the conditions specified in the Schedule
XIII (Section 311).
Schedule XIII provides that in regard to such managerial personnel who are already
in position on the date of the amendment in the Schedule, companies may

themselves raise their remuneration, from a date not earlier than 1 st February 1994,
i.e., the date of the notification of the revised Schedule, without the approval of the
Central Government. This may be done even where the earlier
appointment/remuneration had been approved by the Central Government in
accordance with the provisions of Schedule XIII save and except in those cases
where the Central Government had given conditional approval to the
appointment/remuneration. For example, in some cases the Central Government
approves appointment of a person subject to the condition that the company would
not increase or vary his remuneration without obtaining approval of the Central
Government or that the remuneration of a managerial person shall not exceed a
specified ceiling if he has been permitted to work as managerial person in more than
one company and draw remuneration from both the companies. Where such specific
or special conditions have been imposed by the Central Government while approving
appointment/remuneration, these conditions would still have to be complied with
unless varied by the Central Government.
Any increase in the remuneration of managerial personnel in accordance with the
revised Schedule shall be subject to the approval of the shareholders in a general
meeting, when held, in specific terms so as to comply with Part III of the Schedule.
(10) Under Section 200, a company cannot pay its officer or employee any tax-free
remuneration. Since, under Section 2(30), the term ‘officer’ includes a director, the
payment of tax-free remuneration to a director is also forbidden.
It may, however be noted that despite Section 200 of the Companies Act, Section
10(6)(vii)(a)(ii) of the Income-Tax Act, 1961, provides that in the case of a foreign
technician of the class specified therein and employed by a company, the tax on his
income chargeable under the head ‘salaries’ may be paid by the company for a
period of twenty-four months following the expiry of a tax-free period of thirty-six
months from the date of his arrival in India.
(11) The Companies (Amendment) Act, 1974 introduced a new Section 637-AA
empowering the Central Government while according approval to the appointment or
remuneration of a managing or whole-time director or manager to fix the
remuneration, within the statutory ceilings, at such amount or percentage of profits of
the company, as it may deem fit and while fixing the remuneration, the Central
Government shall have regard to:
(a) the financial of the position of the company;
(b) the remuneration or commission drawn by the individual concerned in any other
capacity, including his capacity as a sole selling agent;
(c) the remuneration or commission drawn by him from any other company;
(d) professional qualifications and experience of the individual concerned;

(e) public policy relating to the removal of disparities in income.
♦ Compensation for loss of office: Sections 318 to 321 lay-down elaborate provisions
for regulating payment of compensation to directors for loss of office or in
consideration of retirement from office or in connection with such losses or retirement.
These provisions apply to all companies, i.e. public companies, private subsidiary of
public companies and to private companies.
Under Section 318 such compensation can be paid only to managing director, director
holding the office of the manager and to a whole time employee director and to no
others. The compensation payable shall be on the basis of average remuneration
actually earned by such persons for three years (or such shorter period as may be the
case) immediately proceeding the ceasing of holding of such office, and shall be for
the unexpired portion of his term or for three years (whichever is shorter). No such
payment however can be made at all if winding up of the company is commenced
before or commences within 12 months after he ceases to hold office if the assets or
winding up (after deducting expenses on winding up) are not sufficient to repay the
shareholders the capital contributed by them (inclusive of premium, if any).
No payment of such compensation can also be made in the following cases:
(a) Where the director resigns office due to reconstruction or amalgamation of the
company with another body or body corporate and such director is appointed manager
or managing director or other office in the resulting new body.
(b) Where a director resigns otherwise that as on reconstruction or amalgamation as
stated above.
(c) Where the director vacates office under Section 203 (acting-fraudently as director or
manager) or Section 283(1) Clauses (a) to (1) (vacation-of office by director).
(d) Where winding up (compulsory, voluntary or under supervision) has been due to the
negligence or default of the director in question.
Where the winding up is not due to negligency or default of the director, he can be
paid compensation for loss of office, even in the winding up. Termination of his
services will not be wrongful if the winding up was due to his default. [Rajagopal vs.
Salem Provident Society (1963)]
(e) Where the director has been guilty of any fraud or breach of trust in relation to or
gross negligency or gross mismanagement of the affairs of the company or any
subsidiary or holding company thereof. This also includes a breach of fiduciary
obligations because that constitutes a breach of trust.
In Bell vs. Lever Brothers, (1932), Lever Brothers removed their managing director of a
subsidiary by paying him compensation. It was afterwards discovered that during his
tenure of office he had been guilty of so many breaches of duty and corrupt practices that
he could have been removed without compensation. An action was then commenced to
recover back the compensation money. It was held that Bell was not bound to refund the
compensation money and to disclose any breach of his fiduciary obligation so as to give
the company an opportunity to dismiss him.
3.15 MANAGING DIRECTOR

A managing director is a person entrusted with any powers of management, which would
not otherwise be exercisable, by him (Section 226). He exercises some or all of the
director’s powers and functions of managing which are delegated to him upon some terms
and conditions and subject to such restrictions as are set-out in the agreement, resolution
or other document appointing him. He may be appointed by:
(i) An agreement with the company, or
(ii) The resolution of the Board of Directors, or
(iii) A resolution passed by the company in Annual General Meeting, or
(iv) By the memorandum, or
(v) By the articles.
Normally, the articles empowers the Board of Directors to appoint one of their body to the
office of the managing director, by a resolution passed at the Board Meeting in separate
service contract stating his powers and his duties and terms of employment. As such a
managing director is a service director and he is to act under the control and supervision
of the Board. As a managing director must necessarily be a director, his appointment is
automatically terminated if he ceases to act as a director either because of any
disqualification, e.g., not purchasing qualification shares within two months of his
appointment as director or because of his retirement by rotation.
Before the Amendment Act of 1988, it was not obligatory for a public company (including a
deemed public company) or a private company, which is subsidiary of a public company to
appoint managerial personnel, that is, a managing or whole time director or a manager.
As per the amended section, it is obligatory for every public company or a subsidiary of a
public limited company having a paid-up share-capital of such sum as may be prescribed
(Rs. 5 crores or more w.e.f. August 18, 1990) to appoint either a managing or whole time
director or a manager.
There can be more than one managing director in a company on functional basis. But
usually there is only one managing director in a company of moderate size in which he is
the chief executive official of the company.
♦ Appointment of managing or whole time director or manager to require

Government approval in certain cases only: In the case of a public company
(including a deemed public company), or a private company which is subsidiary of a
public company, the Companies Act imposes certain restrictions on managing or
whole time director’s appointment, removal etc. which are discussed below:
If the condition specified in Schedule XIII are fulfilled, a managing or whole time director
or manager in public company (including a deemed public company) or a private company
which has a subsidiary thereof can be appointed, reappointed without the approval of the
Central Government. A return in the prescribed form no. 25-C is, however, required to be
filed within 90 days of appointment [Section 269(2)].
If the conditions specified Schedule XIII is not complied with, an application seeking
approval of the appointment must be made to the Central Government within 90 days from
the date of such appointment/re-appointment [Sections 269(2) and (3)].
The Central Government shall not accord its approval unless it is satisfied that:
(a) The proposed managing or whole time director of the company is a fit and proper
person and the appointment of the such an individual as managing or whole time
director is not against public interest;
(b) The terms and conditions of the appointment of the proposed managing or whole time
director of the company are fair and reasonable [Section 269(4)].
The Central Government is also empowered to accord approval to the appointment for a
period less than the period for which the person is proposed to be appointed by the
company [Section 269(5)].
If the appointment re-appointment is not approved by the Central Government the
appointee shall vacate office immediately on communication of the decision by the Central
Government, otherwise he shall be punishable with fine up to Rs. 5,000/- for every day
during which he fails to vacate such office [Section 269(6)].
When the Central Government is, prima-facie, of the opinion that any appointment made
without its approval has been made in contravention of the requirement of Schedule XIII,
the Central Government may render the letter to the Company Law Board for decision.
The Company Law Board after giving reasonable opportunity of hearing to the company
and the appointee may make an order declaring whether contravention of the
requirements of Schedule XIII has or has not taken place. If the Company Law Board
comes to he conclusion that such contravention has occurred, the appointment shall be
deemed to have come to an end on the date of such declaration and the person so
appointed shall, in addition to being liable to pay a fine of Rs. 1,00,000 refund to the
company the entire amount of salaries and perquisites etc., received by him. However, all
the acts of the managerial personnel, whose appointment is invalidated, will be deemed to
be valid [Sections 269(7), (8), (9), (10), (12)].

♦ Restrictions on Appointment: An individual cannot be managing director or
manager of more than two companies, public or private, where out of two companies
at least one is a public company or private company, which is a subsidiary of a public
company. An individual may hold the office of managing director or manager in any
number of private companies, which are not subsidiaries of public company. But if the
office is hold in a public company or a private company which is subsidiary of a public
company, the same individual can not, in addition thereto, hold the office of managing
director in more than one another company whether such every company is a public
company or private company which is subsidiary of public company or any private
company. (Section 316)
♦ Terms of Office: The term of office of a managing director must not exceed 5 years
at a time. The term, however, may be extended for further period not exceeding 5
years at a time. (Section 317)
It is important to note that the person ceases to be managing director with a ceasure
of directorship on account of his retirement by rotation at the Annual General Meeting.
But if such a person is re-elected as director at the AGM and thereby he continues as
the director of the company, he shall continue as a managing director also for the
period for which he is so elected by the AGM and for the unexpired period of present
term of appointment as managing director.
♦ Disqualifications for appointment: A managing director has necessary to be a
director and therefore, all the disqualifications rendering impossibilities for the
appointment of a person as director (Section 274) will apply in the case of
appointment of a managing director. Section 267 specifically provide that company
must appoint or continue the appointment of a person as managing or whole time
director who is:
(a) An undischarged insolvent or has at any time been adjudged insolvent;
(b) Suspends or has at any time suspended payment to his creditor or has made a
composition with them or
(c) Has at any time been convicted of an offence involving moral turpitude.
The term moral turpitude needs a little elaboration. According to American encyclopedia
of Law, it comprises anything contrary to justice, honesty, and principle of good morals,
an act of baseness, vileness or depravity in the private and social duties, which a man
owes to his fellowmen or society in general. The term also comprises anything contrary to
the accepted and customary rule of right and duty between man and man.
3.16 INTER-CORPORATE LOANS AND INVESTMENTS (SECTION 372A)

(a) Overall ceiling limits: No company shall directly or indirectly make

(i) make any loan to any other body corporate;
(ii) give any guarantee or provide security in connection with a loan made by any
other person to, or to any other person by, any body corporate; and
(iii) acquire by way of subscription, purchase or otherwise the securities of any
other body corporate, exceeding 60% of its paid-up share capital and free
reserves or 100% of its free-reserves whichever is more. [sub-section (1)]
Explanation:
1. “Loan” includes debentures, or any deposit of money made by one company
with another company, not being a banking company.
3. “Free Reserves” means those reserves which, as per latest audited balance
sheet of the company, are free for distribution as dividend and shall include
balance to the credit of the securities premium account but shall not include
share application money.
(b) Loans, Investments and guarantees in excess of prescribed limits: Where the
aggregate of the loans and investments so far made, the amounts for which guarantee
or security so far provided to or in all other bodies corporate, along with the
investment, loan, guarantee or security proposed to be made or given by the Board,
exceeds the aforesaid limits, no investment or loan shall be made or guarantee shall
be given or security shall be provided unless previously authorised by a special
resolution passed in a general meeting.
However, the Board may give guarantee, without being previously authorised by a
special resolution if:
1. a resolution is passed in the meeting of the board authorising to give guarantee
in accordance with the provisions of this section;
3. there exists exceptional circumstances which prevent the company from
obtaining previous authorisation by a special resolution passed in a general
meeting for giving a guarantee;
3. the resolution of the Board under (1) as above is confirmed within twelve
months, in a general meeting of the company or the annual general meeting
held immediately after passing of the Board resolution, whichever is earlier.
(c) Matter to be specified in special resolution: The notice of special resolution shall
indicate clearly the specific limits, the particulars of the body corporate in which the
investment is proposed to be made or loan or security or guarantee to be given, the
purpose of the investment, loan or security or guarantee, specific sources of funding
and such other details.
(d) Other Steps: No loan or investment shall be made or guarantee or security given by
the company in pursuance of sub-section (1) of Section 372A unless the resolution
sanctioning it is passed at a meeting of the Board with the consent of all the directors
present at the meeting and the prior approval of the public financial institution referred
to in Section 4A where any term loan is subsisting, is obtained.
The prior approval of a public financial institution shall not be required where the
aggregate of the loans and investments so far made, the amounts for which guarantee
or security so far provided to or in all other bodies corporate, along with the
investments, loans guarantee or security proposed to be made or given does not
exceed the limit of sixty per cent specified in sub-section (1) as referred above, if
there is no default in repayment of loan instalment or payment of interest thereon as
per the terms and conditions of such loan to the public financial institution. [sub-
section (2)].
(e) Rate of interest: No loan to any body corporate shall be made at a rate of interest
lower than the prevailing bank rate, being the standard rate made public under
Section 49 of the Reserve Bank of India Act, 1934. [sub-section (3)].
(f) Default under Section 58A: No company which has defaulted in complying with the
provision of Section 58A, shall directly or indirectly make any loan to any body
corporate; give any guarantee, or provide security, in connection with a loan made by
any other person to, or to any other person by, any body corporate and acquire, by
subscription, purchase or otherwise the securities of any other body corporate till
such default is subsisting. [sub-section (4)]
(g) Register of Investments and Loans: (i) Every company shall keep a register
showing the following particulars in respect of every investment or loan made,
guarantee given or security provided by it in relation to any body corporate under sub-
section (1), namely:
— the name of the body corporate;
— the amount, terms and purpose of the investment or loan or security or
guarantee;
— the date on which the investment or loan has been made; and
— the date on which the guarantee has been given or security has been provided
in connection with a loan.
(ii) The particulars of investment, loan, guarantee referred to in sub-section (1) shall
be entered chronologically in the register aforesaid within seven days of the making of
such investment or loan, or the giving of such guarantee or the provision of such
security. [sub-section (5)]
(iii) The register referred to in sub-section (5) shall be kept at the registered office of
the company concerned and shall be open to inspection at such office and the
extracts may be taken therefrom and copies thereof may be required, by any member
of the company to the same extent, in the same manner, and on payment of the same
fees as in the case of the register of members of the company; and the provisions of
Section 163 shall apply accordingly. [sub-section (6)]
(h) Guidelines: The Central Government may prescribe guidelines for the purposes of
Section 372A. [sub-section (7)]
(i) Exemptions: Nothing contained in Section 372A shall apply,
(a) to any loan made, guarantee given or any security provided or any investment
made by (1) a banking company or an insurance company, or a housing finance
company in the ordinary course of its business, or a company established with
the object of financing industrial enterprise or of providing infrastructural
facilities; (2) a company whose principal business is the acquisition of shares,
stock, debentures or other securities; (3) a private company, unless it is a
subsidiary of a public company;
(b) to investment made in shares allotted in pursuance of clause (a) of sub-section
(1) of Section 81;
(c) to any loan made by a holding company to its wholly owned subsidiary;
(d) to any guarantee given or any security provided by a holding company in
respect of loan made to its wholly owned subsidiary;
(e) to acquisition by a holding company by way of subscription, purchases or
otherwise, the securities of its wholly owned subsidiary [sub-section (8)]
(j) Penalty for default: If default is made in complying with the provisions of this
section, other than sub-section (5), the company and every officer of the company
who is in default shall be punishable with imprisonment which may extend to two
years or with fine which may extend to fifty thousand rupees.
However where any such loan or any loan in connection with which any such
guarantee or security has been given, or provided by the company, has been repaid in
full, no punishment by way of imprisonment shall be imposed under this sub-section
and where such loan has been repaid in part, the maximum punishment which may be
imposed under this sub-section by way of imprisonment shall appropriately be
reduced.
Further that all persons who are knowingly parties to any such contravention shall be
liable, jointly and severally, to the company for the repayment of the loan or for
making good the same which the company may have been called upon to pay by
virtue of the guarantee given or the securities provided by such company. [sub-
section (9)].
If default is made in complying with the provisions of sub-section (5), the company
and every officer of the company who is in default shall be punishable with fine which
may extend to five thousand rupees and also with a further fine which may extend to
five hundred rupees for every day after the first day during which the default
continues. [sub-section (10)].
3.17 SELF-EXAMINATION QUESTIONS

1. It is admitted that a body corporate is a juridical person. But how can an abstract body
function or carry on business?
2. What are the functionaries called both individually and collectively in the field of
Company Law?
3. Are these functionaries nominated or elected and by whom?
4. Of the propositions comprised in the following statements, state which is correct?
(a) Directors (i) are not trustees as conceived by the Indian Trusts Act (ii) are
trustees of the company’s assets, which are or come under the director’s control
and they must act in the interests of the company only.
(b) Directors are trustees (i) for the company (ii) for the shareholders (iii) for the
creditors (iv) for the individual shareholder (v) for outsiders.
(c) The law of agency (i) governs (ii) does not govern the relationship between the
company and it directors.
(d) Directors are (i) agents of the company (ii) agents of the shareholders.
(e) Where the directors exceed their powers, the company can ratify their acts (i) if
the acts are ultra vires the company, (ii) if the acts are intra vires the company.
(f) Directors (i) do stand (ii) do not stand, in a fiduciary position towards the
company in regard to powers conferred on them by the articles.
5. What is the maximum number or directors, prescribed by the Act that a company
might have?
6. What is the minimum number of directors that a company must have?
(a) When it is a public company;
(b) When it is a private company; and
(c) When it is a “deemed public” company?
7. State whether the following statements are true or false:
(a) A body corporate or a firm or an association of persons can be a director of
another company.
(b) Generally articles cannot name the first directors.

(c) Articles may provide that both the number and the names of the first directors
must be determined in writing by the subscribers to memorandum.
(d) The tenure of office of the first directors ends on the last date of the first annual
general meeting of a company.
(e) In the case of a public company subsequent directors can be appointed in an
extraordinary general meeting.
(f) Out of the total number of directors of a public company or its private subsidiary,
only 2/3 rd of them can be given permanent appointments.
(g) The rest of the directors i.e., 1/3rd of them, are liable to retire by rotation.
(h) The object of the provisions as regards rotation of directors is to do way with the
mischief done by self-perpetuating managements.
(i) Of the 2/3 rd rotational directors, only 1/3 rd shall go out at one general meeting.
(j) Those who are longest in office will retire last because their long experience is
beneficial to the company.
(k) When two directors are appointed on the same day, their retirement will be
determined by a lottery.
(l) The vacancies caused by such retirement must be filled in the same meeting in
which the directors retire.
8. Where the vacancies caused by rotational retirement have not been filled in or any
decision not to fill them up has not been taken either, then what will be the effect of
this issue?
9. In the context of your answer to Q.8, if no fresh appointment is made or if no decision
against appointment is taken, can the retiring directors be deemed to have been
reappointed?
10. The articles of a company fix the maximum number of directors at 12 whereas the
company actually has 6 directors: What type of resolution will be necessary if the
number is proposed to be increased to (a) 12, (b) 15, (c) is the approval of the Central
Government necessary in both the cases?
11. Can the Board of Directors appoint additional directors?
13. Can the Board fill a casual vacancy by a resolution passed by circulation?
13. A director of a company has gone out of the State for 2 months, and the Board
desires to appoint an alternate director in his stead, can it do so?
14. Can a minor become a director?
15. Is it necessary that a person must be a graduate of a University if he wants to become
a director of a company?
16. What are the disqualifications for directorship?
17. In how many companies can a person hold directorship at a time?

18. A public company appoints three directors by a single resolution.
(a) Will the appointment be valid?
(b) Would there be any difference in your answer if the meeting had first
unanimously agreed that the appointment would be made by a single resolution?
19. (a) Does the Act prescribe any share qualification for a director?
(b) Can the articles provide for it?
20. Can you be compelled to take the said qualification shares:
(a) Before your appointment as director;
(b) Any time after your appointment which is shorter than 2 months?
21. The nominal value of the qualification shares must not exceed Rs. 5,000. But if it does
exceed this amount what would then constitute the share qualification for
directorship?
23. Does the Act provide for situations for automatic vacation of the office of director?
23. An ordinary director can resign verbally, or in writing informing the company of his
resignation and leave the office forthwith; but a managing or whole-time director
cannot vacate his office in this manner and his resignation has to be formally
accepted. Can you account for this distinction?
24. The articles of a company provide that a person shall be a director for life or until he
resigns. In terms of the articles the director was so appointed. When the company
went into liquidation his service were terminated. Could he claim compensation
against the company for his termination?
25. K and C were directors. At a board meeting of directors S was appointed as a director
and C and S purported to remove K from the Board. Later, C and S acting as directors
allotted shares to M. Before the allotment M had notice that K was contesting the
validity of the appointment of S. Would the allotment be valid?
26. A director whose term of office has expired continues to act as a director. Can his act
regarded as valid in the circumstances?
27. Can a director act individually?
28. The law requires that the Board must meet at least once in every three months. The
last meeting of the Board was held on January 5. The next meeting cannot be held on
April 4 as most of the directors would remain out of India till 29 th April. Would it be
proper if the meeting were held on 30 th April?
29. Has the Act prescribed the maximum number of meetings per year for Board of
Directors?
30. What is the quorum necessary for a Board meeting in the following circumstances?
(a) Where the total number of directors is 9.
(b) Where it is 11.

(c) Where it is 3.
(d) Where the total number is 12, all are present but 10 are “interested directors”
within the meaning of the Act.
31. When a meeting cannot be held for want of quorum, does it stand dissolved?
33. Can the Board pass a resolution by circulation?
33. Can a company in general meeting override the Board’s power of carrying on
business by prescribing a regulation or passing a resolution, taking away the powers,
which have been conferred upon the Board by the articles of the company?
34. What are the acts that can be performed by the Board of public company only with the
consent of the company in general meeting?
35. The power (i) to make calls; (ii) to issue debenture; (iii) to borrow moneys otherwise
than on debentures; (iv) to invest the funds of the company; and (v) to make loans
can be exercised by the Board only by means of resolution passed at the general
meeting of the company. Is it a correct statement?
36. The Board has the requisite sanctions through resolution to borrow otherwise than on
debentures, to invest the funds of the company and to make loan. Can the Board
delegate any of these powers on the basis of the said sanction?
37. A public company wants to make loans to its directors. Can it do so?
38. Can a private company make loans to any firm in which one of the relatives of its
director is partner, without the previous approval of the Central Government?
39. According to law, a director who is director or indirectly interested in any contract or
arrangement – whether actual or proposed – made by or on behalf of a company must
disclose his interest.
(a) Where should it be disclosed if it is an “actual” contract?
(b) Where should it be disclosed it is a “proposed” contract?
40. (a) Can an interested director vote on, participate in the discussion of, any contract
into?
(b) Will he be counted for purpose of quorum?
41. The sanction of the Board of Directors is a ‘must’ for certain contracts in which
particular directors are interested.
(a) What are those contracts?
(b) Can this consent be obtained by a resolution by circulation?
43. What will be the effect of the contract referred to in Q.41, if the sanction of the Board
has not been obtained within 3 months after entering into the contract?
43. Will the said transaction be in order, if the Board accords its sanction to the said
contract says 4 months after it is entered into?

44. Is the maintenance of the following compulsory?
(a) Register of contracts, companies and firms in which directors are interested.
(b) Register of directors, managing director, manager and secretary.
(c) Register of director’s shareholdings?
45. If a director assigns his office, what will be the consequence of such an assignment?
46. The managing director of a company, while exercising his power under the articles
appointed by his will one as the managing director to hold the office after his death.
(a) Was the exercise of the power legal?
(b) Didn’t it offend the provision of the Act that any assignment of office by a
director would be void?
47. Is compensation payable for the loss of his office to the following personnel?
(a) To a director;
(b) To a director who has resigned;
(c) To a director whose directorship has been vacated in terms of the specific
provisions of the Act;
(d) To a director where the company was being wound up for reasons for which
such director was not at all responsible in any way.
(e) To a managing or whole-time director or to a manager.
48. The directors of an insurance company left the management of the company’s affairs
almost entirely to B, the g director. On account of B’s fraud, a large quantity of the
assets of the company disappears and in the balance sheet, items appeared under
captions ‘loans at call or short notice’, and “cash at bank or hand”. But the directors
never enquired how these items were made up. Had they done so, they would have
discovered that the loans were chiefly made to B and to the company’s general
manager and that the “cash at bank or in hand” included pounds 93,000/- in the hands
of the company’s stock brokers, in which B was the partner. Could the directors be
held culpably negligent in the circumstances? [iii re-City Equitable Fire Insurance Co.
(1925) Ch. 4071].
49. The Directors left all the management of a bank’s affairs in the hands of a manager
and never cared to enquire whether the loans were made by the manager on
securities or whether the securities were good or worthless. The manager advanced
large amounts to his relatives and friends without security or on securities, which
were obviously, fakes. Decide [Re-Union Bank of Allahabad Ltd.].
50. The entire management of a cotton mill was vested in the manager. The balance
sheet of the mail showed stocks of yarn. As a matter of fume, mill did not possess the
stocks shown and the directors had never made any physical checking of yarn. The
shareholders brought an @ contended that they could not be, of yarn; the
responsibility in this man. Would this contention of the
51. “Where an agent is liable, the directors would be liable; where the liability would
attach to the principal only; the liability is a liability of the company’s [Ferguson vs.
Wilson (1866) per Lord cairns] APPLY THIS test to the following cases and state if the
directors are liable:
(a) Where the directors make themselves personally liable to a third party.
(b) Where the contract and the surrounding circumstances indicate that they are
personally liable.
(c) Where the directors contract without purporting to bind the company.
(d) Where the directors say, “We the directors of X Co. Ltd. hereby agree”.
53. How shall the remuneration payable to directors be determined?
53. Can the remuneration payable to directors be determined at a meeting of the directors
themselves? [Raditey Siiyatyi vs. The Official Liquidation A.LR. 1968 Raj. 226].
54. The remuneration payable to directors:
(a) shall be.
(b) shall not be, subject to the provisions of Sections 198 and 309.
55. The Explanation to Section 198 includes certain items within the purview of the word
“remuneration”. Can you account for this inclusion?
56. What is the overall maximum limit of managerial remuneration?
57. Does the said overall maximum limit include any fee payable to directors for attending
the Board or its Committee?
58. What is the basis on which a managing or whole-time director may be paid his
remuneration?
59. Can the remuneration of directors of public company or its subsidiary be increased?
60. (a) If any director gets any amount in excess of its statutory limit, can be forced to turn
the excess amount to the company.
(b) Can the company waive the recovery of any such sum?
3.18 ANSWERS TO THE SELF-EXAMINATION QUESTIONS

1. Through human agency;
3. Directors and Board of Directors respectively;
3. Elected by shareholders;
4. (a) Both; (b) (i)&(ii); (c) (iii); (d) (i); (e) (ii); (f);
5. The act prescribed none-article, prescription prevails;
6. (a) 3; (b) 2; (c);

7. (a) False; (c) True; (d) True; (e) False; (f) False;
8. Meeting to stand adjourned for a week;
9. Yes subject to the exceptions in Section 256(4)(b);
10. (a) Ordinary resolution; (b) Special resolution; (c) No-necessary only in case of (b);
11. Yes, if the articles permit;
13. No;
13. No;
14. No;
15. No;
16. Those mentioned in Section 274;
17. 20 companies only;
18. (a) No; (b) Yes;
19. (a) No; (b) Yes;
20. No;
21. Value of one share;
23. Yes, in Section 233;
23. Because the latter, being an employee cannot give up office at his pleasure-his
resignation must be approved or accepted;
24. No, because articles operates as long as the company is a going concern;
25. No;
26. No;
27. No, unless so delegated;
28. Yes;
29. No;
30. (a) 3; (b) 4; (c) 2; (d) 2 non-interested directors;
31. No;
33. Yes;
33. No;
34. Those prescribed by Section 293, Sections 294(3), 314, 370, 149(2A) etc.;
35. No;
36. No, further resolution to be passed for delegation;
37. Yes, only with the previous approval of the Central Government;
38. Yes, if the private company is not a subsidiary of public company;
39. (a) At the first meeting of the Board held after the director becomes interested;
(b) At the Board’s meeting at which the question of entering into it is first considered of
interest has arisen by that time or at the first board meeting after the arising of the
interest;
40. (a) No; (b) No;
41. (a) For the sale, purchase or supply of goods or services for underwriting shares or
debentures; (b) No;
43. Voidable at Board’s option;
43. Yes, provided the Board has not repudiated the contract after the expiry of 3 months;
44. Yes;
45. Void;
46. (a) Yes; (b) No;
47. (a) No; (c) No; (d) Yes;
48. Yes;
49. Directors liable for misfeasance could not be said to have acted personally and hence
non-exonerable from their liability;
50. Yes;
51. Yes;
53. Either by the articles or a share holder resolution a general meeting;
53. Yes; If there is a clear provision to that effect in the articles;
54. (a);
55. To prevent directors from drawing more money than that they are statutory entitled to,
in the guise of collateral benefits;
56. 11%;
57. No;
58. Monthly basis or fixed percentage of net profits basis or in combination of both the
basis;
59. Yes;
60. (a) Yes; (b) No.
4
(D) MEETINGS, POWERS OF THE BOARD AND RELATED
PARTY TRANSACTIONS
4.0 INTRODUCTION
A company is a corporate body or corporation, which is an artificial person, recognised as
such by Law and capable of doing many of things a natural person can do. For example, a
company can own property, enter into contracts, and even be guilty of certain offences. It
does all these things on its own accounts, quite apart from the persons who compose it.
Unlike a natural person, a company cannot however think and express its will or make a
decision except through resolutions passed at properly convened and constituted
meetings of its members. They must act collectively, not individually and an act or
decision of individual members while not duly assembled as body is not a valid act of the
company. A company, i.e. its members collectively may delegate most (but not all) of their
functions to directors, who must ordinarily meet together to perform them. Two main
organs members or shareholders in general meetings and directors acting as a Board
conduct the affairs of a company.
♦ CLASSIFICATION OF MEETINGS
Meetings held the Companies Act might be classified as follows:
4. Meetings of shareholders or members:
(a) Statutory meeting.
(b) Annual general meeting.
(c) Extraordinary general meeting.
(d) Class meetings.
2. Meeting of debenture holders.
3. Meetings of creditors and contributories in winding up.
4. Meeting of creditors otherwise than in winding up.
5. Meeting of directors:
(a) Board meeting
(b) Committee meeting.
4.1 MEETINGS OF DIRECTORS

Two main organs, the shareholders in general meeting and the directors acting as a Board
conduct the affairs of a company. The modern practice is to confer on the directors the
right to exercise all company’s powers except for those matters, which are by law required
to be exercised by the company in general meeting. This practice has also been given
statutory acknowledgment in Section 291, which read as follows:
(1) Subject to the provisions of this Act, the Board of Directors of a company shall be
entitled to exercise all such powers, and to do all such acts and things, as the
company is authorised to exercise and do:
Provided that the Board shall not exercise any power or do any act or thing which is
directed or required, whether by this or any other Act or by the memorandum or
articles of the company or otherwise, to be exercised done by the company in general
meeting: Provided further that in exercising any such power or doing any such act or
thing, the Board shall be subject to the provision contained in that behalf in this or any
other Act, or in the memorandum or articles of the company, or in any regulations not
inconsistent therewith and duly made there under, including regulations made by the
company in general meeting.
(2) No regulation made by the company in general meeting shall invalidate any prior act
of the Board, which would have been valid, if that regulation had not been made.
The powers of the directors are, therefore, restricted in two ways: First being agents
of the company, the directors can do nothing which the company itself, their principal,
cannot do under its memorandum of association and any purported act by them,
which is ultra virus the company, will be void and of no effect. Secondly when acting
within the power of the company, the directors cannot exercise any power of the
company which is required by the Companies Act or any other Act or by the
memorandum or articles of the company or otherwise, to be exercised by which the
company in general meeting.
How directors exercise their powers? : Subject to any special provisions in the
articles, powers delegated by a company to its directors must be exercised at properly
convened meeting generally referred to as Board meetings. Only acts done at duly
constituted meetings are therefore valid, unless the articles provide otherwise, and an
individual director has no power to bind the company unless duly authorised so to act
at a Board meeting although subsequent acquiescence by a properly convened Board
Meetings, Powers of the Board and Related Party Transaction 4.3
meeting of invalid act of some directors may have the effect of ratifying the act
[Southern Countries Deposit Bank Ltd. vs. Rider and Kirkwood (1895) 73 LT 374, CA].
4.1.1 Board Meeting: Frequency of Board Meetings: Section 285 required the Board to
meet at least once in every three months irrespective of whether it is the Board of a public
company or a private company. And at least four such meetings must be held in every
year. However, the Central Government may by notification in the official Gazette, direct
that these provisions will not apply in relation to any class of companies or will apply in
relation thereto subject to such exceptions, modifications or conditions as may be
specified in the notification.
It will be worthwhile to consider the question here. Is a director bound to attend the
meeting of the Board? No, he is not so bound. But nonetheless he will be guilty of
breach of duty if he fails to attend the Board meetings with reasonable regularity without
sufficient cause being shown for non-attendance. Willful non-attendance on his part may
give rise to his liability of ground of negligence if it is patently prejudicial either to the
company or to the general body of shareholders. Fairly frequent absence from the Board
meting may however, be excused if the entire control is exercised by a single director or if
the Board is pretty large in number [Re. Denham & Co. D 25 Ch. D. 752; Marquis of
Bute’s case (1892) 2 Ch. 100]. The fewer the directors, the more onerous is the duty to
attend.
Although a director need not attend each Board meeting unless the articles provide
otherwise, yet his continuous non-attendance say two attendances followed by two non-
attendances, again followed by one attendance and so forth just by way of a guard
against infringement of provision of Section 283(1)(g) may render him guilty of breach of
trust which may be committed by other directors [Charitable Corporation vs. Sultan 2 Atk.
400]. For example, the other director or directors take the advantage of the aforesaid non-
attendance by the director and dissipate the company’s assets through wasteful and other
improper expenses. The absenting director would be responsible for the loss caused to
the company, if his presence could otherwise stop their wrongful acts resulting in the said
dissipation of assets.
It is true that Section 285 does not prescribe any penalty for non-compliance with the
requirements of the Section. Nevertheless, Section 622A may be invoked to deal with
such a situation.
If a director is improperly excluded from meeting by the Board, he has an equitable
remedy by way of injunction through a suit [Hayes vs. Bristol Plant hire Ltd., (1957)
I.A.E.R 685; Pulbrook vs. Richmond Mining Co. (1878) 9 Ch. D. 610]. But he will be
deprived of this remedy by Court’s injunction if has been excluded by the general meeting
itself [Read vs. Astoria Garage Streatham Ltd. (1952) Ch. 637 (CA)-(1952) 3 All. E.R.
252]. But even if he remains aggrieved by the said general meting resolution, shall he be
left out without any remedy whatsoever? It seems more appropriate that he should not be
debarred from seeking other remedies like damages.

Suppose, A claims to be director of X & Co. (P) Ltd. but the company’s records prima
facie reveal that A was not appointed as such. In such a case according to a Supreme
Court decision in [Jalan Ram Autar vs. Coal Producers (P) Ltd. (1970) 40 Comp. Cas. 715
(S.C.)] the onus lies on A to prove his claim of directorship before any interim relief can
be granted to him by way of injunction.
According to decision in Burden vs. Sinclair 105 S.J. 586, where there is a suit for a
declaration that a director has been validly removed from his office, an interim injunction
will not be granted.
In the context of Section 285, let us consider another intricate issue. Suppose a
meeting of the Board has been convened within the prescribed period in strict conformity
with the said Section but for want of quorum, the said meeting could not take place. In
such a situation, the meeting automatically stands adjourned by virtue of Section 288(1)
till the same day in the next week, at the same time and place. And if that “same day” is a
public holiday, then the meeting stands adjourned till the next succeeding day, which is
not a public holiday, at the same time and place. And because of this adjournment the
meeting is obviously held after the period specified in Section 285. In terms of Section
288(2), which in not clearly couched, a company shall not be deemed to have contravened
the provisions of Section 285 where the meeting does not take place for want of quorum.
In view of these legal provisions, a pertinent question for our consideration comes up. For
holding the next Board meeting, which date should we take into account for the purpose of
calculating the statutory period of once in every three months. Whether the date of the
original meeting, which was adjourned, for want of quorum or the adjourned date on which
the meeting was actually held?
A practical difficulty arises in this regard owing to the silence of the Act on this point. Our
confusion gets worse confounded when we come across Section 191 which states that
where a resolution is passed at an adjourned meeting inter alia, of the Board of Directors
of a company, it must “for all purposes” be deemed to have been passed at the date of the
adjourned meeting and not on an earlier (i.e., the original) meeting. For resolving our
question indicated in italics above, should we take the indirect provisions of Section 191
and conclude, by correlating the phrase ‘for all purposes’ with the expression ‘be treated
as having been passed on the date on which it was in fact passed, and shall not be
deemed to have been passed on any earlier date’ appearing in Section 191, that for
holding the next meeting for the Board, the statutory period should be calculated from the
date at which the adjourned meeting was held? There is no judicial decision to warrant
this conclusion.
However, according to Buckely’s Companies Act, (p.339, 12 th Edition), except as regards
the meetings of the three classes referred to in Section 144 of the English Companies Act
(corresponding to our Section 191 which is a verbatim copy of the English Section), the
legal fiction of continuity of the original meeting and all adjournments or any legal
consequence emanating therefrom remains unaffected by Section 144 of the English Act.
This is so notwithstanding the phrase “for all purposes”, appearing in Section 144, in as
much as our Section 191 is the verbatim copy of Section 144, we can rely on this treatise.
And relying thereon, we may conclude that the continuity of the original meeting will
remain unhampered and therefore for the purpose of holding the next Board meeting the
statutory period of “every three months” should be computed from the date when the
original meeting was adjourned for want of quorum.
♦ Notice of meeting: Notice of every Board meeting has to be served in writing on
each director for the time being in India, and at his usual address in India to every
other director. Every officer of the company whose duty is to serve the notice as
aforesaid and who fails to do so shall be punishable with fine extending to Rs. 100
(Section 286). It is usually the secretary of the company on whom it casts the duty to
serve the notice as aforesaid. It should be noted that the company is not liable for the
default in the service of the said notice; it is only the officer in default who is subject
to the said penalty.
Where a director goes abroad for a period of more than 3 months and an alternate
director has been appointed in his stead under Section 313(1), to whom should the notice
of Board meeting be given-to the “original director” or to the “alternate director”? Although
there is no legal precedence in this regard, it would be a prudent practice on strictly
construing Section 286 that the notice should be served to the alternate director as well
as on the original director who is outside India for the time being.
In the post-Independence period, there is an upsurge of foreign consortia. Articles of
foreign collaborations frequently provide that notice of Board meetings should be sent by
Air Mail to foreign directors so that they may be able to attend the statutorily prescribed
minimum number of meetings (i.e. 3 consecutive meeting without obtaining the leave of
absence from the Board) so as to prevent the vacation of their office due to continuous
non-attendance under Section 283(1) (g) of the Act. Now a vital question crops up as to
whether such a provision in the articles of foreign collaborations is valid, because of the
provisions of Section 286(1) which, as we have already stated earlier, requires the service
of the said notice on a director out of India at his usual address in India. Such a question
in not free from doubt. In England, such a notice is required to be given to a director
abroad, only when he is within easy reach, else not. But a moot point arises whether a
foreign director falls within the purview of the expression “a director other than a director
for the time being in India.” On a scrutiny of the act we find that whereas Section 53
provides for service of documents like notices, etc. on members by a company there in no
such or similar Section providing for services of notice on directors.
No particular form has been prescribed for the above-mentioned notice of Board
meetings. It has been held in Arunachalam Chettiar vs. Kaleshwarar Mills Ltd. (1957)
I.M.L.J.254-A.I.R. 1957 Mad. 309 that where articles of the company provide that there
will be a meeting on the first Saturday of every month, there will not be no necessity of the
service of the notice under Section 286(1) in as much as a provision in the articles is
sufficient compliance of Section 286(1).
Suppose, the above-mentioned notice, as required by Section 286(1) has not been
served. In such a situation the proceedings at the meeting shall not become invalid
provided (i) all the directors attend the meeting and do not raise any objection to the non-
service of notice; or (ii) where the absent directors make no complaint about the want of
notice, particularly when the proceedings are ratified at a subsequent meeting whereat the
absentee directors are present [Re State of Wyoming Syndicate (1901) 2 Ch. 431].
Let us consider another situation. Suppose, a director states that he will not be able to
attend the next Board meeting. In the circumstances is there any necessity to give the
notice under Section 286(1)? As per the decision in Re. Portuguese Consolidated Coffee
Mines Steel’s Case 42 Ch. D. 160, the answer is ‘yes’.
If the articles are silent, the notice of Board meeting is not required to specify the nature
of business to be transacted thereat [Compagnia de Mayville vs. Whitley, (1861) 1 Ch.
788]. If, however, the articles provided otherwise, then the notice must specify the nature
of the business to be transacted. All said and done, a better course seems to be that the
notice should specify the purpose of the meeting, it is an extraordinary or special meeting.
♦ Time and Place of Board Meeting: Whether or not the Board meeting can be held on
a public holiday and out of business hours is a question open to conflict. As already
state earlier, under Section 288, the adjourned Board meeting is to be held on a day
which is not a holiday but no such restriction has been levied on the matter of holding
the original Board meeting. On the basis of the provision of Section 288, one set of
arguments may be that like the adjourned meeting, the holding of the original Board
meeting is equally a normal and usual work of a company and that is why it should be
held during usual business hours and on a day, which is not a public holiday. On this
analogy, a similar inference may be drawn form the provision of Section 166(2) as
well, because it prescribes only for each annual general meeting that it held on a day
which is not a public holiday and during the business hours and also because annual
general meeting is normal work of the company. Another set of arguments is that a
meeting of the board can take place even on a public holiday and out of business
hours because there is not such restriction as contemplated either by Section 166(2)
or by Section 288. We are rather inclined to subscribe to latter set of arguments. This
is because if the Legislature could think of imposing similar restrictions twice-once at
the time of drafting Section 166(2) in respect of only annual general meeting and the
other at the time of drafting Section 288 in respect of adjourned Board meetings-it
could rationally think of similar restrictions for the third time in respect of original
Board meetings. If the human element of forgetfulness on the part of the draftsmen is
to be given any consideration, even then it can be upheld on the first occasion when
Section 166(2) was drafted. But definitely such forgetfulness is not tenable on second
occasion when Section 288 was enacted especially in respect of adjourned Board
meeting. Had it been the intention of the legislature, it could easily enact a provision
and add it as a sub-section to Section 288. It, therefore, seems that the legislature did
not deliberately think it necessary to provide for original board meeting to be held on
a day other than a public holiday and during usual business hours. The law will take
its course, however the course may sound irrational. Therefore, in the absence of any
specific provisions in Act it seems that the original Board meeting can be held even
on a holiday and out of the business hours.
♦ Quorum: A quorum is the prescribed minimum number of qualified persons
authorised to transact the business at a meeting. In relation to a Board meeting
quorum implies fully qualified and disinterested directors who must be present at the
meeting so as to enable the Board of which they are the constituents to legally
transact the business thereat. Can the articles of a company fix such a quorum? No,
in view of Section 287 which has fixed the quorum of the Board meeting. Accordingly
such a quorum is one third of the total strength of Board (any fraction contained in the
said one third being rounded of as one) or two directors whichever is higher. The total
strength is to be derived after deducting the number of directors whose offices are
vacant. Therefore, the Quorum = 1/3 (of the total strength vacancies). Where total
number of directors are 9 and 2 offices of the directors have fallen vacant, we find:
1/3 of (9-2) = 1/3 of 7 = 21/3 directors. If the fraction of 3 rd were to be rounded off as
one then 3, i.e. 2+1 directors would constitute the quorum for the Board meetings. If
at any time the number of the remaining directors exceeds or is equal to two thirds of
the total strength, the number of the remaining directors who are non-interested but
present at the meeting, not being less than two shall constitute the quorum. For
example, there are in all 15 directors and the Board meeting commences with all the
15 directors. During the currency of the meeting, an item comes up for discussion in
respect of which 13 happen to be “interested” directors. In this case, in spite of the
excess of the interested directors being more than two-thirds, the prescribed minimum
number of non-interested directors constituting the quorum, namely, 2 present at the
meeting are to transact the particular item of business.
Now suppose all the 15 directors cited in the above illustration are equally interested in
that particular item of business and the time is so vital that but for a decision thereon, the
business of the company will be greatly hampered. How to resolve this impasse?
The act has not made any direct provision to take with such a situation, but the Article 48
of Table A of Schedule 1 of the Act, provides a remedy. According to the said article, the
Board may, whenever it thinks fit, call an extraordinary general meeting. By invoking this
Article, the Board should get the aforesaid impasse resolved by the shareholders at the
general meeting. Since according to Section 173(1) (b), all business in the case of any
other meeting than the annual general meeting is to be deemed special, by virtue of sub-
section (2) the notice of the extraordinary meeting must annex to it a statement setting out
all the material facts concerning the item of business, including, in particular, the nature of
the concern or interest there in of every director.
We have seen that interested directors are excluded from the computation of the quorum
under Section 300(1). However, in the terms of Section 300(2), the interested directors
can be counted for the purpose of quorum in the following cases, namely – (a) where the
company is a private company which is neither a subsidiary nor a holding company of a
public company; (b) where the company is a private company which is a subsidiary of a
public company, in respect of any contract or arrangement thereof; (c) where there is any
contract of indemnity against any loss which the directors or any one or more of them may
suffer by reason of becoming or being sureties or surety for the company; (d) in respect of
any contract or arrangement entered or to be entered into with a public company, or a
private company, which is a subsidiary of a public company in which the director’s interest
consist solely (i) in his being a director holding shares of such number or value as to be
just enough and not more than enough to qualify him for appointment as director, or (ii) in
his being a member holding not more than 20% of the paid-up share capital of the
company; (e) where it is a public company in respect of which the Central government
has, through a notification in the official Gazette, waived the necessity to comply with the
requirements of Section 300(1) on considerations of establishing or promoting any
industry, business or trade in the public interest.
Inability to hold a Board meeting for want of quorum results, as has already been stated in
the automatic adjournment thereof under Section 288. It has also been stated earlier that
according to Section 191, a resolution passed at an adjourned meeting is deemed as
having been passed thereat itself; it does not date back to an earlier date, i.e., the date of
the original meeting. It would be worthwhile to recapitulate here the provisions of Sections
174(2) to (5), which deal with adjournment of the general meeting for want of quorum so
as to compare them with the provisions relating to adjournment of board meetings. Unless
the article of a company whether public or private – provide otherwise, if the quorum is not
present within half an hour from the time fixed for the general meeting, it shall stand
dissolved in case the meeting has been convened, under Section 169, on the requisition
of members; in regard to any other class of meeting, it shall stand adjourned to the same
day in the next week at the same time and place of to such other day and at such other
time and place as the board may determine. If again at the adjourned meeting the quorum
is not present within half an hour of the scheduled time then the members present shall
constitute the quorum. According to Article 53 of Table A of Schedule I to the Act, where a
meeting is adjourned for 30 days or more, a fresh notice of the adjourned meeting has to
be served. Thus, Section 288 does not throw any light on what happens if the quorum is
not there at the adjourned meeting as well whether the Board meeting is to be adjourned
over and over again till the quorum is procured. Secondly, for want of quorum, the Board
meeting automatically stands adjourned to the same day in the next week and at the same
time and place. But the Board has no power to fix any other day or place or time for such
adjourned meeting: where as in the case of general meeting, the Board can adjourn it to
any other day or other time and place. Thirdly Section 288 implies that a Board meeting
can be called on a public holiday, though not the adjourned meeting. Under Section
166(2) annual general meeting cannot be held on a public holiday. But in the absence of
any specific prohibitions by the Act, a statutory and an extraordinary meeting can be held
on a public holiday.
The term “public holiday” in this context should be understood. According to the proviso to
Section 2 (38) no day declared by the Central Government to be a public holiday shall be
deemed to be a public holiday unless the declaration was notified before the issue of the
notice of the meeting. Suppose, the notice of a meeting was issued on April 1 st where by it
was to be held on May 3. If on April 2, the Central Government declares the 3 rd day of
May as a public holiday, there is on bar to the holding of the meeting on May 3 in spite of
its being declared as a public holiday. If, however, the declaration is notified before the
issue of the notice convening the meeting, say on 31 st March, the meeting cannot be held
on May 3.
♦ Resolutions: The resolutions of the Board fall into the following three categories:
(a) Those passed at board meeting: Some specific resolutions are covered by
Section 292 which we have already discussed in the Study Paper relating to the
directors. Besides those, there are other resolutions, which must be passed only
at a Board meeting. These are; (i) Resolution for filling casual vacancies under
Section 262; (ii) Resolution for giving consent to contracts with directors as
required by Section 297; (iii) Resolution for appointing managing director or
manager of a company of a person who is already holding such a post in
another company [unanimous consent being necessary under the proviso to
Section 316 (2)]; (iv) Resolution for making investments in companies under the
same management/group (unanimous sanction being necessary under Section
372).
As regards the form of aforesaid resolutions, it would be sufficient if the
substance thereof were entered in the minutes. A formal resolution is not
necessary. Board resolutions may be implied from conduct as well [Freeman vs.
Buckhurst (1964) 2 Comp. L.J. 36 (49)].
(b) Those passed by circulation: According to Section 289 of the Act, a resolution
shall not be deemed to have been passed by the board of directors or by a
committee thereof by circulation, unless (i) the resolution has been circulated in
draft, together with the necessary papers (if any) to all the directors or to all the
members of the committee then in India (not being less in number than the
quorum fixed for a meeting of the Board or committee, as the case may be; (ii)
the resolution has been approved by such of the directors as they are then in
India, or by a majority of such of them as they are entitled to vote on the
resolution.
A resolution, passed by circulation as aforesaid, should be recorded in the
minutes of the next Board meeting in order to ensure its authority.
(c) Those signed by all the members of the Board entitled to receive notice of
Board meeting under Article 81 of Table A Scheduled I to the Act: Accordingly a
resolution in writing signed by all the members of the Board entitled to receive
notice of a Board meeting shall be as valid and effectual as if it had been
passed at a meeting of the Board. However, the matter mentioned in Section
292 cannot be dealt with by a resolution under the said Article 81, because of
mandatory character of the Section 292.
♦ Chairman of the Board: According the Article 76 of Table A, the board may elect a
chairman of its meeting and determine the period for which he is to hold office. If no
such chairman is elected, or if at any meeting the chairman is not present within five
minutes from the schedule time for the meeting then the directors present may choose
one from amongst them to be chairman of the meeting.
♦ Directors, attendance book: It is important that a careful record of the attendance of
directors at Board meetings be kept. The Articles may or may not contain a provision
on the subject, but reg. 71 of Table A states that “every director present at any
meeting of the Board or of a committee shall sign his name in a book to be kept for
that purpose”.
Each director should sign the book before or soon after the signing of the minutes, as
a director may leave before the conclusion of the business; and unless he has
previously signed the attendance book, the secretary has no formal evidence of this
presence.
♦ Voting at Board meetings: Questions at Board meetings are almost invariably
decided by a simple majority of votes, each director having one vote and the
chairman, if the articles so provide but not otherwise, having a casting vote. Reg. 74
of Table A provides that:
(1) Save as otherwise expressly provided in the Act, questions arising at any
meeting of the Board shall be decided by a majority of votes.
(2) In case of an equality of votes, the chairman of the Board shall have a second
or casting vote.
The Articles of most companies usually contain the above provisions.

The Act expressly provides that certain Board decisions must be made by resolutions
passed at board meetings with the consent of all the directors present at such meetings,
e.g. under Section 316(2), for appointing a person as managing director of a public
company or a private company which is a subsidiary of a public company, if he is either
the managing director or the manager of any other company; under Section 386(2), for
appointing a person as manager, if he is either the manager or the managing director of
any other company, or under Section 372, for investing in any shares of any other body
corporate.
Articles may also require more than a bare majority in case of certain resolutions. If there
is such a requirement, it is usually restricted by the articles to resolutions of a particular
kind, e.g. resolutions to borrow money. In some “one-man” companies (invariably very
small private companies), the articles name the chairman and provide that no resolution is
to be passed by the Board without his concurrence.
♦ Minutes of Board Meeting: The procedures for writing out the minutes of the Board
meetings are the same as those applicable to general meetings of the company.
These are Govern by Sections 193-196, which we have already discussed earlier. It
may, however, be noted that the decision of the Board need not in all cases be
formally recorded in writing and their intention may be implied from conduct [H.L.
Bolton (Engineering) Co. Ltd. vs. T.J. Graham & Sons (1956) 3, All E.R. 624].
4.1.2 Committees of Directors and their meetings: Subject to the provisions of the Act,
the Board may delegate any of its power to the committees consisting of such members of
its body as its things fit. A committee so formed shall, in exercise of the powers so
delegated, conform to any regulations that may be imposed on it by the Board (Article 77
of Table A).
A committee may elect a chairman of its meeting. If no chairman is elected, or if at any
meeting the chairman does not turn up within five minutes from the time scheduled for the
meeting, the members present may choose one from amongst themselves to be the
chairman of the meeting (Article 78).
A committee may meet and adjourned and it thinks proper, Questions arising at any
meeting of a committee shall be determined by a majority of votes of the members
present. And in case of equality of votes, the chairman shall have a second or casting
vote (Article 79).
All Acts done by the Board meeting by its committee meeting or by any person acting as a
director shall be as valid as if every such director or such person had been duly appointed
and was qualified to be a director. The validity of all such acts done is not affected even if
it discovered later on that there was some defect in the appointment of any one or more of
such directors or of any person acting as a director. The said acts will also remain
unaffected even the directors are later on discovered to be disqualified (Article 80). This
provision has been intended to prevent the validity of transactions from being questioned
where there has been a slip in the appointment of a director. But the provision cannot be
utilized to ignore or override the substantive provisions pertaining to such appointment. It
is applicable only to acts of directors whose appointment or qualification is later on
discovered to be faulty. Where, however, their appointments have not taken place at all
but they merely choose to act on the company’s behalf, the protection prescribed by either
Article 80 or Section 290 cannot be invoked [Morris vs. Danssen (1964) I, A.E.R. 586 (H,
L.)] This is because the said subsequent discovery must be a discovery of the defect; it
must not be discovery of facts which go to constitute the defect [British Asbestos Co. vs.
Body (1903) 2 Ch. 439].
Suppose a regulation like Articles 80 is included in the Article of association of a
company. What would be the possible impact of this? The impact has been summed up in
Halsbury’s Laws of England (vide p. 277, 3 rd Edition, Vol. VI) thus: “An Article validating
the acts of persons acting as directors, though it is a afterwards discovered that there was
a defect in their appointment or qualification, operates not only between the company and
outsiders but also as between the company and its members; as where defecto directors
make a call, summon meetings of the company, elect other directors or allot shares, A
defecto director may be ordered to furnish a statement of affairs in winding up. Directors
can not take advantage of any infirmity in their proceedings in which they have
themselves participated; they are stopped as between themselves and the company; they
are also stopped from saying they have been improperly appointed if, they have acted
after appointment, persons dealing with them who know of the invalidity are likewise
stopped.”
It should also be noted that Section 290 applies to act of an individual director, whereas
Article 80 covers Act of the Board and of its committee.
4.2 PROTECTION AGAINST ABUSE OF FIDUCIARY CAPACITY OF DIRECTORS

By now, you know that the position of a director vis-a-vis the company is that of an agent
who may not himself contract with his principal; also that it is similar to that of a trustee
who, however fair a proposal may be, is debarred from letting a position arise where his
interest and that of the trust may conflict. To ensure that the authority vested in the
directors is not abused, a number of provisions have been included in the Companies Act.
For instance, in the absence of provisions in the articles, a director is precluded from
entering into a contract with the company. If in such a case he does enter into a contract
then the company is entitled to have the contract set aside or to sue, at its option, the
director for breach of duty. That is why the articles of almost all companies contain a
provision authorising the directors to enter into a contract with the company. In order to
restrain the directors from entering into contracts, which are prejudicial to the companies,
the Act has enacted a number of provisions. These provisions have the effect either of
invalidating contracts entered into by directors unless they have been sanctioned by the
Board of Directors, or of disqualifying the director who is interested in a contract from
continuing as a director unless he has made a disclosure of his interest therein. These
provisions are contained in Sections 297, 299, 300, 301 and 303.
4.3 DISCLOSURE OF INTEREST IN CONTRACTS

A director who is directly or indirectly interested in any contract or arrangement – whether
actual or proposed – made by or on behalf of a company must disclose his interest at a
meeting of the Board of Directors.
Regarding a proposed contract or arrangement, a disclosure must be made at the Board’s
meeting at which the question of entering into it is first taken into consideration. If at the
date of that meeting, the director was not concerned or interested therein then the
disclosure is to be made at the first board’s meeting held after he becomes so concerned
or interested. As regards any other contract or must arrangement, the disclosure must be
made at the first Board’s meeting held after the director becomes concerned or interested.
Every director who fails to comply with the aforementioned provisions shall be punishable
with the fine extending up to Rs.5,000. For example, P is one of the 5 directors of X & Co.
Ltd. At a meeting of the Board of directors, a resolution with all the 5 votes in favour is
passed approving a proposal to enter into a binding contract with Y and Co. Ltd. in which
P has the majority shareholding. In the circumstances, P should have made the disclosure
of the nature of his concern or interest at the stated meeting of the Board of Directors
whereas the resolution was passed unanimously; otherwise P would be punishable with
fine as aforesaid.
For the purpose of the above mentioned disclosure, a director may give a general notice
to the Board that he is a director or a member of a specified body corporate or is a
member of a specified firm and therefore is to be regarded as concerned or interested in
any contract which may, after the date of the service of the notice, be entered into with
that body corporate or firm. Such a notice shall be deemed to be a sufficient disclosure of
interest or concern in relation to any contract or arrangement so made. Such a general
notice shall automatically expire at the end of the financial year in which it is given, but it
may be renewed for further period of one financial year at a time by a fresh notice given in
the last month of the financial year in which it would otherwise have expired. Such a
general notice or renewal thereof is to be given at the [Board’s] meeting or the director
concerned must take reasonable steps to ensure that it is brought up and read at the first
meeting of the directors held after the said notice is given. But as regards any contract or
arrangement entered into or to be entered into between two companies where any of the
directors of one company (or two or more of them together) holds or (hold) not more than
2% of the paid-up share capital in the other company, no disclosure is needed (Section
299). Therefore, if P in our illustration cited earlier does not hold more than 2% of the paid
up share capital of Y & Co. Ltd. he need not make any disclosure. The resolution passed
at the Board meeting of X & Co. Ltd. in respect of the contract with Y & Co. Ltd. would be
valid even if P did not disclose his interest.
Under Section 300(I), a director is forbidden from taking part in the discussion of or voting
on any contract or arrangement (or any proposed contract or arrangement) entered into by
or on behalf of the company, when he is directly or indirectly interested in it. Although he
may be present at the meeting, his presence will not count for the purpose of quorum at
the time of any such discussion or vote. If the interested director votes, his vote shall be
void. In this connection it may be noted that the voting on the contract or arrangement by
the interested director, of itself does not invalidate the contract or arrangement; only the
vote of interested director is to be excluded. If, as a result of such exclusion there is no
quorum, the resolution sanctioning the contract would be void, i.e., a nullity and as such
the contract would be incapable of subsequent ratification. [Firestone Tyre & Rubber Co.
vs. Synthetics and Chemicals (1972) 2 Com. L.J. 200]
Consider the following situation:
(a) A Limited had four directors. At one of its convened Board meeting only two of them
attended and they appointed two additional directors who were their relatives. Is the
appointment of those additional directors valid?
Section 300 provides that a director shall not take part in the discussion of or vote on any
contract or arrangement entered into or to be entered into by or on behalf of the company
if he is in anyway whether directly or in directly concerned or interested in the contract or
arrangement. The Department of Company Affairs has clarified that the word interested as
used in the section should be given a restrictive interpretation and thus excludes a
director who has no pecuniary interest. Accordingly, the relationship of the director with
the contracting party will not per se make the director concerned or interested in the
contract or arrangement.
The scope of the expression ‘contract’ or ‘arrangement’ was examined by the Madras High
Court in Madras Tube Co. Ltd. vs. Hari Krishan Somani, (1985) I Comp LJ 195 (Mad). The
question before the court was whether the appointment of an additional director would
come within the scope of the word ‘contract’ or ‘arrangement’. The company had four
directors. Only two of them attended the meeting. They appointed two additional directors
who were related to them as brother and wife, respectively. The court came to the
conclusion that although appointment as director does not come within the scope of the
expression ‘contract’ because the position of a director may be conferred on a person by
any method other than contract, became interested directors. Without them there was no
independent quorum. Consequently the appointments were a nullity.
The Bombay High Court re-examined the matter in Shailesh Harilal Shah vs. Matushree
Textiles Ltd., (1994) and after giving due consideration to the authorities which influenced
the Madras decision nevertheless came to the conclusion that the appointment as an
additional director of a person who is related to a director does not violate the requirement
of Section 300(1) because the position of a director may be conferred on a person by any
method other than contract buy that it would amount to an arrangement. The attending
directors, therefore, became interested directors. Without them there was no independent
quorum. Consequently the appointments were nullity.
The provisions mentioned above shall not apply to:
(i) a private company, which is neither a subsidiary nor a holding company of a public
company
(ii) a private company, which is a subsidiary of a public company in respect of a contract
or an arrangement, entered into by the private company with the holding company:
(iii) any contract of indemnity against any loss, which the director may suffer by reason of
becoming surety for the company;
(iv) any contract or arrangement entered into (or proposed contract or arrangement) with
a public company or a private company which is subsidiary of a public company in
which the interest of the director consists a) in his being a director of such company
and the holder of not more than the requisite qualification shares and he having been
nominated as such director, or (b) in his being member holding of more than 2% of its
paid up-share capital
(v) a public company or a private company which is subsidiary of a public company in
respect of which the Central Government in the public interest issues a notification
thereof having regard to the desirability of establishing or promoting any industry,
business or trade. However, the Central Government may direct that the provision of
Section 300(1) shall apply to these companies subject to such exceptions,
modifications and conditions as it may specify in the notification in the foregoing
circumstances. [Sections 300(2) and (3)].
According to Section 297, a director of the company or his relative, a firm in which such a
director or relative is a partner, any other partner in such a firm or a private company of
which the director is a member or director, must not enter into contracts with company for
the sale, purchase, or supply of goods, materials or services or for underwriting shares or
debentures except with the consent of the Board of Directors [sub-section (1)]. According
to the provision to sub-section (1) in the case of a company having a paid-up capital of
Rs.1 crore or more no such contract shall be entered into except with previous approval of
the Central Government The consent of the Board is deemed to have been given only if it
is accorded by a resolution of the Board and not otherwise, either before or within three
months of the date of entering into the contract [sub-section (4)].
If the consent is not accorded to any contract under Section 297, anything done in
pursuance of the contract shall be voidable at the option of the Board. [sub-section (5)].
Before we proceed on to discuss the other provisions contained in Sections 297(2) and (3)
let us examine a situation.
(b) X Ltd., recently went in for public issue of shares and for this purpose it paid
brokerage to a share broking firm in which one of the Directors of the company is a
partner in that firm. State in this connection:
(i) Whether the concerned interested director should disclose his interest in the
firm to the company. If so, When?
(ii) Should he still disclose, if the company already knew of this fact.
(iii) What would be your answer, if the concerned director merely acted as a broker
between the firm and the company?
(i) According to Section 297, a director of the company or his relative, a firm in which
such a director or relative is a partner, any other partner in such a firm or a private
company of which the director is a member or director, must not enter into contracts
with company for the sale, purchase, or supply of goods, materials or services or for
underwriting shares or debentures except with the consent of the Board of Directors.
If the company is having a paid-up capital of Rs.1 crore or more no such contract
shall be entered into except with the previous approval of the Central Government.
The consent of the Board is deemed to have been given only if it is accorded by a
resolution of the Board and not otherwise, either before or within three months of the
date of entering into the contract. [sub-section (4)].
In view of the legal position as states above, the appropriate brokerage can be paid to
the broking firm if the contract had been entered into with the consent of the Board of
Directors of X & Co. Ltd. the director in question is to disclose his concern or interest
at the first meeting of the Board meeting held after the director becomes concerned or
interested in the contract. A general notice given in this regard to the Board is
deemed to be sufficient disclosure of his concern or interest, if either it is given at the
meeting of the Board of Directors concerned or he takes reasonable steps to ensure
that it is brought up and read at the first meeting of the board after it is given.
The condition under which the sanction of the Board of Directors in respect of
contracts by directors or persons connected therewith would not be required [as
contained in sub-section (2) of Section 297] have been liberalised. The restrictions do
not apply to:
(a) the purchase of goods and materials from, or sales thereof to, the company for
cash at prevailing market prices;
(b) any contract or contracts between the company and directors or persons
connected therewith in respect of sale, purchase or supply of goods in which the

parties to the contract regularly trade or do business in; provided they are in
respect of goods and materials or services the value whereof or the cost of
service would not exceed Rs.5,000 in aggregate in any year comprised in the
period of the contract;
(c) the transactions by banking or insurance company entered into with any
director, relative, firm, partner, etc. in the ordinary course of his business.
Section 297(3) provides that a director or persons connected with him may enter into
a contract in the circumstances of urgent necessity without obtaining consent of the
Board, even if the value of such a contract exceeds Rs. 5,000 in the aggregate, but in
such a case the consent of the Board must be obtained at meeting within three
months of the date of entering into the contract.
(ii) The term ‘disclosure’ means to make others aware of something, which they are not
aware. The disclosure of interest by a director has been provided in Section 299 only
with a view to know that the director occupies fiduciary position in the company
should disclose his interest in any arrangement or contract either directly or indirectly
so that the company is in a position to know whether he is acting in any way
prejudicial to the interest of the company or for his own benefit. When board is aware
of the fact of the interest of a director in a particular transaction, it would not be
necessary for such a director to formerly disclose his interest. (Ramakrishna Rao vs.
Bangalore Race Club, 40 Comp. Case 674 (Mysore). A. Sivasailam vs. Registrar of
Companies {C.A. No. 11/621A/SRB/94 decided on 31.5.94 (CLB)}).
(iii) A contract to act as broker where the duty of the broker is merely to bring together the
two contracting parties, namely, the company, on the one hand, and the purchaser of
shares or debentures, on the other, does not seem to be covered either by clause (b)
or by clause (a) of sub-section (1) of Section 297. It is not covered by clause (b) for
two reasons: First, clause (b) specifically refers to underwriting and importing into that
clause the act of broking is not permissible. Secondly, there is a good deal of
difference between underwriting and broking. In the case of the former, the obligation
extends far beyond the mere bringing together the two contracting parties together,
while in the case of latter, the broker earns his commission only when he succeeds in
bringing the two parties together and not otherwise. To act as a broker is also not
covered by clause (a) because commission earned as a broker is not earned by
supplying services. The Madras High Court has rightly held that “rendering of services
should consist of the doing of an act for the benefit of another which is more than the
mere making of a contract and which goes beyond the performance of an obligation
undertaken in the course of an ordinary commercial contract”. (Radhakrishna Rao vs.
Province of Madras AIR 1952 Mad. 718)
Having read the provisions of Sections 297 and 299, let us now test for ourselves how
far we have been able to grasp them with particular reference to the following problem:
A & Co. Ltd. wants to sell its products to its following customers: (a) A partnership firm in
which two of the directors of the company are partners; (b) A private company in which
one of the directors of the company is a member; (c) A public company in which one of
the directors of the company is a director. In these three cases what steps are required to
be taken by A & Co. Ltd.?
(a) & (b) According to Section 297, except with the consent of the Board of Directors of a
company, firm in which the director or directors of the company is/are partners or a private
company of which such director or directors is or are a member or members shall not
enter into any contract with the company for the sale, purchase or supply of any goods,
materials or services. Therefore, the public company in the instant two cases should
obtain the consent of its Board of Directors. This consent shall have to be taken by a
resolution passed at the Board meeting and not otherwise. The resolution according the
consent must be passed before the contract to sell the product is entered into or within 5
months of the date on which it was entered into; otherwise consent shall not be deemed to
have been given. If the consent is not accorded, anything done in pursuance of the
contract shall be voidable at the option of the Board. Care should be taken to ensure that
the interested directors do not vote on the motions and their presence is not counted for
the purpose of quorum for the meeting. Also it is to be seen that such directors have
disclosed their interests in the contract pursuant to Section 299 of the Companies Act
unless any of them is enjoying the exemption under sub-section (6) of the above section.
The consent contemplated above is not a general consent but consent referable to each
particular or specific contract or contracts. Consent requires knowledge of the necessary
facts and material, which lead to the consent and cannot be given in general or abstract
manner (Watchand Nagar Industries Ltd. vs. Ratanchand, A.I.R. Bom. 256). Therefore,
the Board of the public company should take appropriate steps in this regard.
(c) The point of the case in question relates to disclosure of interest by directors.
According to Section 299(6), nothing in Section 299 shall apply to any contracts
entered into or to be entered between two companies where one of the directors of
the one company or two or more of them together holds or hold not more than 2% of
the paid up share capital in the other company. This point is not clear from the facts in
the problem. This is a contract to be entered into between two companies. And if the
director of the first company holds 2% or less of the paid-up share capital in the
second public company, the provisions of Section 299 will not apply to this case.
If, however, the said director holds more than the aforesaid 2% then the Board of
Directors should see that the director, pursuant to Section 299, discloses his interest or
concern at the meeting of the Board. This disclosure has to be made at the Board meeting
at which the contract is considered. If the interest is acquired subsequent to the meeting
then it is to be disclosed at the immediately next meeting.

The Board of the first-mentioned public company should ascertain whether the interest of
director aforesaid consists solely (i) in his being a director of such company and the
holder of not more shares of such number and value therein as is requisite to qualify him
for appointment as a director thereof, he having been nominated as such director by the
company or (ii) in his being a member holding not more than 2% of its paid-up share
capital. Also, there is no restriction on voting, etc. by an interested director if a notification
had been issued by the Central Government under Section 300(3) exempting the company
from the purview of Section 300. If, on such assertion, the interest is not found to be so
consisting as aforesaid, the Board of the company should see that interested director
does not participate in the discussion or vote on the contract and that his presence is
excluded from the computation of quorum.
4.4 SOLE SELLING AGENTS

A company cannot appoint a sole selling agent of any area for a term exceeding 5 years
at a time. But it can re-appoint, or extend the term of office by further period not
exceeding 5 years on each occasion. The Board “shall not appoint a sole selling agent for
any area except subject to the condition that the appointment shall cease to be valid if it is
not approved by the company in the first general meeting held after the date on which the
appointment is made” [Section 294(2)]. It has been held that the appointment of a sole
selling agent must be made by the company in its general meeting; and such clause must
be inserted as a mandatory condition in all appointments of sole selling agent: an
appointment without a such a clause being inserted is void ab initio (Arante Manufacturing
Corp. vs. Bright Bolts Private Ltd. 1967 Comp. Cas. 759; Shelagram Jhaijharia vs.
National Co. Ltd. 1965 Comp. Cas. 706). If the company in the general meeting
disapproves the appointment it shall become invalid from the date of the general meeting
[Section 294(2A)].
Where a company has a sole selling agent, the Central Government may require the
company to furnish to it such information regarding the terms and conditions of the
appointment as it considers necessary for determining whether or not such terms and
conditions are prejudicial to the interest of the company. If the company refuses or
neglects to furnish any such information, the Central Government may appoint a suitable
person to investigate and report on the terms and conditions contained in the appointment
of the sole selling agent. After perusal of the information furnished either by the company
or by investigator (as the case may be); if the Central Government is of the opinion that
the terms and conditions of the appointment are prejudicial to the interest of the company,
it may make the necessary modifications so that they are not longer prejudicial to the
interests of the company. The appointment of sole selling agent shall be regulated by the
terms and conditions as varied by the Central Government from the date as may be
specified by the Central Government [Section 294(5)]. It has been provided that where the
company has more selling agents than one, the Central Government may exercise similar
powers referred to above – only for the purpose of determining whether any of those
selling agents should be declared to be the sole selling agent, and if so, for which area or
areas.
A company may have more selling agents than one in any area or areas. The Central
Government may, if it reasonably feels so, ask the company for such information
regarding the terms and conditions of appointment of all the selling agents as it considers
necessary. The purpose of calling for such information is to determine whether any of
those selling agents should be declared to be the sole selling agent for such area or any
of such areas of the company refuses or neglects to furnish any such information, then
the Central Government may appoint a suitable person to investigate and report on the
terms and conditions of appointment of all the selling agents. On the basis of the
information thus obtained directly or through the investigator, the Central Government
may reasonably form an opinion that any of the selling agents shall to all intents and
purposes be the sole selling agents for such area. If it so forms an opinion, it may by
order declare that selling agent to be the sole selling agent for that area with effect from
such date as may be specified in the order. From the date so specified in the order, his
appointment as the sole selling agent shall be regulated by the terms and conditions as
varied by the Central Government [sub-section (6)].
It shall be the duty of the company (a) to produce to the person under clause (b) of sub-
section (5) or clause (b) of sub-section (6) all books and papers of, or relating to, the
company which are in its custody or power, and (b) otherwise to give to that person all
assistance in connection with the investigation which the company is reasonably able to
give [sub-section (7)]. If the company refuses or neglects to perform these two duties,
then the company and every officer thereof who is in default shall be punished with fine
extending to Rs. 5,000 and with a further fine of not less than Rs. 50 for every day after
the first during which such refusal or neglect continues [sub-section (8)].
Prohibition of payment of compensation to sole selling agents for the loss of office:
Section 294A prohibits payment of compensation to the sole selling agent for the loss of
his office in the following cases:
(i) where the appointment of the sole selling agent ceases to be valid by virtue of Section
294(2A);
(ii) where he resigns his office as a result of reconstruction or amalgamation of the
company, and is appointed as the sole selling agent of the reconstructed company or
the body corporate resulting from the amalgamation;
(iii) where he resigns his office otherwise than in the circumstances envisaged in the
foregoing clause (ii);
(iv) where he has been guilty of fraud or breach of trust in relation to, or of gross
negligence in the conduct of his duty as the sole selling agent; and
(v) where he has instigated or taken part directly or indirectly in bringing about the
termination of the sole selling agency.
The amount of compensation payable for the loss of office must in no case exceed the
remuneration which he would have earned, had he been in office for the unexpired
residue of his term, or for 3 years, whichever is shorter. The amount thereof is to be
calculated on the basis of the average remuneration actually earned by him during a
period of 3 years immediately preceding the date on which he had ceased to be in office
or his appointment was terminated. In case he had held his office for a period lesser than
3 years, the basis would be the average remuneration that he had earned during such
shorter period.
♦ Power of the Central Government to prohibit the appointment of sole selling
agents in certain cases: Section 294AA inserted by the 1974 Amendment Act has
vested the Central Government with this power. It may be of the opinion that the
demand of goods of any category to be specified by that Government – substantially
exceeds the production or supply of such goods and that the services of sole selling
agents will not be necessary to create a market for such goods. If it actually forms this
opinion, then it may, by notification in the Official Gazette, declare that the sole
selling agents shall not be appointed by a company for the sale of such goods for
such period as may be specified in the declaration [sub-section (1)].
A Company cannot appoint any individual, firm or body corporate who or which has a
substantial interest in the company, as sole selling agent of that company, unless such
appointment, has been previously approved by the Central Government [sub-section (2)].
If a company has a paid up share capital of Rs. 50 lakhs or more, then it cannot appoint
sole selling agents without the consent of the company given by a special resolution and
the approval of the Central Government [sub-section (1)]. In Ramesh B. Desai vs. Union
of India (1990), it was held that the Central Government may refuse to grant approval
inspite of the fact that the company has accorded its sanction by passing a special
resolution, when the appointment of a sole selling agent is found to be prejudicial to the
interests of the company.
Read the provisions of Sections 294(5), (6) & (7) above and note that these provisions
shall so far as may be applicable to the sole selling or the sole purchasing or buying
agents of a company [sub-section (4)].
A company seeking approval under Section 294AA is required to furnish such particulars
as may be prescribed [sub-section (5)].
It may so happen that an appointment has been made of sole selling agent by a company
before the commencement of 1974 Amendment Act; also that the appointment is such that
it could not have been made except on the authority of a special resolution passed by the
company on the approval of the Central Government if sub-sections (2), (3) & (8), were in
force at the time of such appointment. In such circumstances, the company shall obtain
the aforesaid authority and approval within 5 months from such commencement. If it does
not do so, then the appointment shall stand terminated on the expiry of 6 months from
such commencement [sub-section (6)]. If the company in general meeting disapproves the
appointment in sub-section (3), then such appointment shall cease to be effective
notwithstanding anything contained in sub-section (6) [sub-section (7)].
All the provisions of Section 294AA but those of sub-section (1) shall apply so far as may
be, to the appointment by a company of a sole selling agent for the buying or purchasing
of goods on behalf of the company [sub-section (8)].
The Central Government has extended the ban on appointing sole selling agents for a
further period of three more years from the date of publication of this notification in the
Official Gazette in respect of every category of public drugs, drugs and formulations as
defined in the Drugs (Price Control) Order, 1987, excluding bona fide preparation
including in Ayurvedic, Siddha or Homeopathic systems of medicine. (vide F.N. 3/7/87
CL.Vs 18.4.94).
The Explanation to Section 294AA explains the expression “appointment” and “substantial
interest” and provides that Appointment include re-appointment and “Substantial interest”
means:
In relation to an individual, the beneficial interest held by such individual or any of his
relatives singly or together, in the shares of the company, the aggregate amount paid up
on which exceeds Rs. 5 lakhs or 5% of the paid-up share capital of the company,
whichever is lesser.
In relation to a firm, or a body corporate, “substantial interest” means the beneficial
interest held by such individual or any of his relative singly or together one or more
partners of the firm or any relative of such partner singly or together such body corporate
or one or more of its directors or any relative of such director singly or together, in the
shares of the company the aggregate amount paid up on which exceeds Rs. 5 lakhs or 5%
of the paid-up share capital of the company, whichever is lesser.
5
(E) INSPECTION AND INVESTIGATION
5.0 INSPECTION
According to Section 209A, the books of account and other books and papers of every
company shall be open to inspection during business hours by the Registrar or by such officer
of the Government as may be authorised by the Central Government in this behalf and by
such officers of the Securities and Exchange Board of India as may be authorised by it: Such
inspection may be made without giving any previous notice to the company or any officer
thereof. The inspection by the Securities and Exchange Board of India shall be made in
respect of matters covered under sections referred to in section 55A.
It shall be the duty of every director, other officer or employee of the company to produce to
the person making inspection,, all such books of account and other books and papers of the
company in his custody or control and to furnish him with any statement, information or
explanation relating to the affairs of the company . Further, it shall be the duty of every
director, other officer or employee of the company to give to the person making inspection all
assistance in connection with the inspection and shall have the same powers as are vested in
a civil court under the Code of Civil Procedure, 1908. Besides any officer authorised to make
an inspection shall have all the powers that a Registrar of Companies (ROC) in relation to the
making of inquiries.
5.1 INVESTIGATION
5.1.1 Who can apply for investigation?
(a) Report of the Registrar: Where a report has been made by the Registrar under sub-
section (6) or sub-section (7) of section 234, the Central government may appoint one
or more competent persons as inspectors to investigate the affairs of a company and
to report thereon in such manner as it may direct.
(b) On application by the members: In the case of a company having a share capital,
an application by not less than two hundred members or from members holding not
less than one-tenth of the total voting power therein and in the case of a company
having no share capital, an application by not less than one-fifth of the persons on the
company’s register of members has been received the Tribunal may, after giving the
parties an opportunity of being heard, by order, declare that the affairs of the
company ought to be investigated by an inspector or inspectors, and on such a

declaration being made, the Central Government shall appoint one or more
competent persons as inspectors to investigate the affairs of the company and to
report thereon in such manner as it may direct.. The application by members of a
company under section 235 (2) shall be supported by such evidence as the Tribunal
may require for the purpose of showing that the applicants have good reason for
requiring the investigation. The Central Government may, before appointing an
inspector, require the applicants to give security, for such amount not exceeding one
thousand rupees as it may think fit, for payment of the costs of the investigation.
(c) By the company on passing the special resolution or by the Order of the Court, the
Central Government shall appoint one or more competent persons as inspectors to
investigate the affairs of a company
(d) By the Central Government, if there are circumstances suggesting
(i) that the business of the company is being conducted with intend to defraud its
creditors, members or any other persons, or otherwise for a fraudulent or
unlawful purpose, or in a manner oppressive of any of its members, or that the
company was formed for any fraudulent or unlawful purpose;
(ii) that persons concerned in the formation of the company or the management of
its affairs have in connection therewith been guilty of fraud, misfeasance or
other misconduct towards the company or towards any of its members; or
(iii) that the members of the company have not been given all the information with
respect to its affairs which they might reasonably expect, including information
relating to the calculation of the commission payable to a managing or other
director, or the manager, of the company.
5.1.2 Firm, body corporate or association not to be appointed as inspector: As per
section 238 no firm, body corporate or other association shall be appointed as an inspector
under section 235 or 237.
5.2 POWER OF INSPECTORS

(a) To carry investigation into affairs of related companies (Section 239)
For the purposes of his investigation, the inspector shall investigate the affairs of—
(a) any other body corporate which is, or has at any relevant time been the company’s
subsidiary or holding company, or a subsidiary of its holding company, or a holding
company of its subsidiary; or
(b) any other body corporate which is, or has at any relevant time been managed by any
person as managing director or as manager, who is, or was, at the relevant time, the
managing director or the manager of the company; or
(c) any other body corporate which is, or has at any relevant time been, managed by the
company or whose Board of directors comprises of nominees of the company or is
accustomed to act in accordance with the directions or instructions of—
Inspection and Investigation 5.3
(i) the company, or

(ii) any of the directors of the company, or
(iii) any company, any of whose directorships is held by the employees or nominees of
those having the control and management of the first-mentioned company; or
(d) any person who is or has at any relevant time been the company’s managing
director or manager,
(b) Production of documents and evidence
The inspector may, with the previous approval of the Central Government, require any body
corporate other than a body corporate to furnish such information to, or produce such books
and papers before, him or any person authorised by him.
(c) The inspector may keep in his custody any books and papers for six months and
thereafter shall return the same to the company, body corporate, firm or individual by whom or
on whose behalf the books and papers are produced.
(d) An inspector may examine on oath—
(a) any of the persons referred to as above
(b) with the previous approval of the Central Government, any other person in relation to the
affairs of the company,
(e) He may administer an oath accordingly and for that purpose may require any of those
persons to appear before him personally.
(c) any reference to officers and other employees, agents or partners shall be construed as
a reference to past as well as present officers and other employees, agents or partners,
as the case may be.
5.3 INVESTIGATION OF OWNERSHIP OF COMPANY (SECTION 247)

(1) If it appears to the Central Government that there is good reason so to do, it may appoint
one or more inspectors to investigate and report on the membership of any company and
other matters relating to the company, for the purpose of determining the true persons—
(a) who are or have been financially interested in the success or failure, whether real or
apparent, of the company; or
(b) who are or have been able to control or materially to influence the policy of the company.
(2) The Central Government shall appoint one or more inspectors under sub-section (1), if the
Tribunal, in the course of any proceedings before it, declares by an order that the affairs of the
company ought to be investigated as regards the membership of the company and other
matters relating to the company, for the purpose of determining the true persons—
(a) who are or have been financially interested in the success or failure, whether real or
apparent, of the company; or
(b) who are or have been able to control or materially to influence the policy of the company.
(11) A prosecution shall not be instituted under this section except by, or with the consent of,
(12) This section shall apply in relation to debentures as it applies in relation to shares.
5.4 VOLUNTARY WINDING UP OF COMPANY, ETC., NOT TO STOP INVESTIGATION

PROCEEDINGS (SECTION 250A)
An investigation may be initiated under section 235, 237, 239 or 247 notwithstanding that—
(a) an application has been made for an order under section 397 or section 398; or
(b) the company has passed a special resolution for voluntary winding up,
and no investigation so initiated shall be stopped or suspended by reason only of the fact that
an application referred to in clause (a) has been made or a special resolution referred to in
clause (b) has been passed.
6
COMPROMISE, ARRANGEMENTS AND RECONSTRUCTIONS
6.0 COMPROMISE AND ARRANGEMENT

Though Companies Act defines “arrangement”, it does not define “compromise”. These
terms have no definite legal connotation. ‘Compromise’ means an amicable agreement
between parties to a controversy to settle their differences by making mutual concessions,
as distinguished from adjudication on the basis of an exact ascertainment of the opposing
rights. In a compromise, “the parties agree to try to settle it between themselves by a
give-and-take arrangement”. For the purpose of a compromise, it has been held that it is
but essential that each party thereto should be empowered to make the necessary
concessions. [Dani Chand & Co. vs. Narain Das & Co. (1947) 7 Comp. Case 195 F.B.].
Thus, compromise envisages the existence of a dispute, e.g. one relating to rights. But
the word “arrangement” is of wide import and its meaning should not be limited to
something analogous to a compromise.
Section 390(b) provides that the expression ‘arrangement’ includes a reorganisation of the
share capital of the company by the consolidation of shares of different classes or by the
division of shares into shares of different classes or by division of shares into shares of
different classes or by both these methods. An arrangement also may involve debenture
holders being given an extension of time for payment, releasing their security in whole or
in part or exchanging their debentures for the claims and the balance in shares or
debentures of the company; preference shareholders giving up their rights to arrears of
dividends, further agreeing to accept a reduced rate of dividend in the future, etc.
6.1 RECONSTRUCTION
Reorganisation or arrangement is said to have taken place only when one company is
involved, Amalgamation, on the other hand, is of two or more companies. The term
“reconstruction” includes reorganisation, arrangement, amalgamation, etc., and thus is a
term of wide import.
A reconstruction is commonly said to have taken place when a company resolves to wind
up its business and it is proposed to form a new company, with only the old shareholders
as its members to take over its undertaking, the rights of shareholders in the old company
being satisfied by their being allotted shares in the new company. In that case, the old
company ceases to exist in point of law, and its assets are transferred to the new
company. It would be, nonetheless, a reconstruction even if all the assets might not pass
to the company, or all the shareholders of the transferor company might not be
shareholders in the transferee company, or all the liabilities of the transferor company
might not be taken over by the transferee company. A reconstruction, in such a case,
would imply that substantially the same persons would carry on the same business
substantially. [Re South African Supply and Cold Storage Co. (1904) 2 Ch. 286].
6.1.1 Why Reconstruction? A reconstruction may be necessary for the following
purposes:
(1) To extend the operations of the company: If the shares are fully paid up and further
capital is desired to be raised, the shareholders in the old company may be issued
only partly paid shares in the new company so that by calling up the uncalled amount
the company would have the funds it would require for carrying on its business.
(2) As a method for altering the Memorandum of Association: When such an alteration
cannot be undertaken under Section 17 i.e., in a case where the new company
desires to have “objects”, in its memorandum, over and above those in the old
company.
Although the companies Act permits companies to alter their objects by a special
resolution, with the confirmation of the Company Law Board, it is not possible to
radically alter the ‘objects clause’ of the Memorandum of Association, e.g., a company
incorporated to manufacture rayon yarn cannot switch over to the business of
manufacturing jams. It may, therefore, be necessary for a company to go into
voluntary liquidation to carry on an activity totally unrelated to those for which it was
originally formed.
(3) For purpose of Reorganisation: The term “reorganisation” is usually applied to an
arrangement to alter or modify the rights of shareholders or creditors, or both.
(4) In order to amalgamate with one or more companies: Amalgamation is the blending of
two or more companies into a single undertaking, the shareholders of each such
company becoming substantially the shareholders in the new company which is to
carry on the blended undertaking. To achieve this objective, either a new company
may be formed to take over the business of the existing companies or the business of
one or more existing companies be taken over by one of the existing companies.
(5) Reconstruction or Arrangement undertaken for bringing the capital structure of
companies into line with the requirements of the Act: The Act requires that the capital
of a company must consist only of equity and preference shares. Companies having
deferred or other forms of capital, therefore, are obliged to conform to the legal
requirement as to their capital structure by a scheme of reconstruction.
Compromise, Arrangements and Reconstruction 6.3
6.1.2 How Reconstruction is effected? Reconstruction may be carried out:

(a) by sale of the company under the powers contained in its Memorandum of
Association;
(b) by a scheme of arrangement under Section 391;
(c) by acquiring all or a majority of the shares in another company under Section 395;
(d) by a compulsory amalgamation of companies in the public interest by an order of the
Central Government under Section 396;
(e) by a sale under Section 494 (members voluntarily winding up); or under Section 507
(creditor’s voluntarily winding up); in the former case a special resolution and in the
latter case the sanction either of the Court or of the Committee of Inspection is
necessary.
(f) by a scheme of arrangement with creditors only; under Section 517 (voluntary winding
up both by members and creditors, a special resolution and consent of three-fourths
in value of creditors are necessary.
(a) Sale powers in the Memorandum: Where a company has power in the objects
clause of memorandum, it may dispose of the whole of its undertaking to
another company. After the sale, the company will be wound up and the shares
in the new company will be distributed among the members in proportion to their
holdings in the old company. When a company is not in a position to raise
further capital and it cannot otherwise carry on its business or when the carrying
on of the company is considered not necessary, the company may resort to such
a course.
“Sale of the whole undertaking and division of the proceeds cannot be a
corporate object. Under its Memorandum of Association, a single steamship
company may no doubt sell its only steamship with whole of its equipment to
another. But under a clause in its Memorandum of Association it cannot, in my
opinion, sell its only steamship and all its undertaking and divide the proceeds.
Distribution of capital (except in reduction of capital) can only be made in a
winding up” [Buckley L.J., in Bisgood vs. Henderson’s Transval Estate, (1908) I
Ch. 743]. That is to say, it can only be effected in liquidation of the company
under the power conferred by Section 287 of the English Companies Act, which
corresponds to Section 494 of Indian Companies Act.
(b) Reconstruction under Section 391: In order to facilitate a reconstruction or
amalgamation, it is frequently desirable or necessary for the company first to
effect a compromise or arrangement with its creditors or any class of them
or/and members or any class of them. Section 391 lays down the procedure by
which the court’s assistance may be invoked in this respect. It must be noted
that the meeting should be conducted in such a manner as the court directs and
that Section 170(2) dealing with class meetings will not apply to meetings held
under where a company is not being wound up, provisions of the Act apply to
such meeting unless the Court orders otherwise [Madras Companies: Rules,
(RR 41, 55)]. Under the Calcutta High Court Rules, (RR.41, 55) notice of petition
under Section 391 has to be given to members and creditors. They should send
notice to the petition to the effect that they intend to appear on the hearing of
the petition.
When a compromise or arrangement between parties aforesaid is proposed the following
persons may apply to the Court:
(i) the company;
(ii) any creditor;
(iii) any member; or
(iv) in the case of company which is being wound up, the liquidator.
On such an application, the Court may order a meeting of the creditors or class of
creditors or the members or class of members, as the case may be, to be called, held and
conducted in such manner as the Court directs. If at the meeting, a majority in number
representing three-fourths in the value of the creditors or members (or any class of them),
as the case may be, present and voting either in person or by proxy, where proxies are
allowed under the Rules made under Section 643, agree to any compromise or
arrangement, it is, if sanctioned by the Court, binding on all the creditors or class of
creditors or on the members or class of members, as the case may be. The compromise
or arrangement is also binding on the company or, if the company is being wound up, on
the liquidator and on the contributories [sub-section (2)].
But, before according the aforesaid sanction, the Court must satisfy itself that the
company or any other person which or who has made the application, has disclosed to the
Court by an affidavit or otherwise all the material facts relating to the company, e.g., latest
financial position of the company, the latest auditor’s report on the accounts of the
company, the pendency of any investigation proceedings in relation to the company under
Sections 235 to 251, etc. [Proviso to Section 391(2)].
You have observed above that if the requisite three-fourths majority is obtained in favour
of a scheme of reconstruction, the same shall bind the creditors, members, liquidators and
contributories “if sanctioned by the Court”. This implies that the Court may not sanction,
i.e. its power is discretionary and not obligatory. Moreover, under proviso to Section
391(2), the Court is under an obligation not to sanction any compromise or arrangement
until a full disclosure of all material facts relating to the company have been made. This
proviso is designed as a safeguard against any compromise placed by consideration of
the shareholders or creditors. Therefore, the claim of minority, on proof that directors had
failed to disclose materials facts regarding a company’s financial position, would succeed
and the Court would not accept the contention if there be any, that the scheme has been
duly approved by the majority if it is satisfied that full disclosure of all material facts had
not been made at the meeting convened by the Court under sub-section (1) of Section
391.
An order of the Court, made as aforesaid shall not be effective until a certified copy of the
same has been filed with the Registrar. A copy of the order is also required to be annexed
to every copy of the memorandum or instrument which defines the constitution of the
company issued after the certified copy of the order has been filed with Registrar; in
default thereof the company and any of its officers at fault shall be punished with fine. An
appeal lies against the order under the Section to the Court, empowered to hear appeals
from the decisions of the original court, or if more than one court is empowered, to the
Court of inferior jurisdiction. [Sections 391(3), (4), (5) & (7)].
Before giving its sanction, the Court must be satisfied that the statutory provisions have
been complied with that the class of creditors or members have been fairly represented by
those who attended, and that the statutory majority in approving the scheme is acting
bonafide in the interest of the class if professes to represent. The arrangement must also
be such as a man of business would reasonably approve, as fair and reasonable as
regards the different classes, if any [Re. Alabama, New Orleans, Texas and Pacific in
Junction Rail Co. 1819 I. Ch. 213 CA; Re. Hindustan General Electric Corporation Ltd.
AIR 1959 Cal 679; Nand Prasad vs. Arjun Prasad (1959) Pat (293)]. The Court cannot
sanction any scheme, which involves the doing of an act, which is ultra vires the company
[Re. Oceanic Steam Navigation Co. Ltd. (1939), Ch. 4]. But the memorandum can be
changed if members consent. It should be noted that a scheme, not certified by the
Reserve Bank, cannot be sanctioned by the Court in respect of banking companies (See
Section 45 of the Banking Regulation Act, 1949).
Powers of Courts: Apart from the power of sanctioning a compromise or arrangement the
Court has inter alia the following powers:
(i) to stay, while application under Section 391 is pending the commencement or
continuation or any suit or proceeding against the company [Section 391(6)];
(ii) to supervise the carrying out of the compromise or arrangement [Section 392(1)(a)].
Only the High Court has this power when it makes an order under Section 391; a
District Court has no such power. It may be noted that under Section 10(2)(b) the
Central Government can confer jurisdiction under Section 391 on District Courts in
respect of companies with a paid up capital of less than Rs. 1 lakh;
(iii) to modify the compromise or arrangement for the proper working thereof [Section
392(1)]; and
(iv) to order winding up of the company, if it is satisfied that the compromise or

arrangement is unworkable [Section 392(2)].
It may be noted that only High Courts have powers (iii) and (iv).
(a) Circulation of information to creditors or members: Section 393 provides for the
circulation of a statement, which must explain the objects of the proposed
compromise or arrangement scheme. The statement should accompany the notice of
the meeting to be called to consider the scheme. The statement should accompany
the notice of the compromise or arrangement and explain its effect. In particular, the
statement must state any material interest of the directors, managing director or
manager of the company whether in their capacity as such or as members or creditors
and the effect on those interests of the compromise or arrangement if and in so far as
the effect is different from the effect thereof on the like interests of other persons. If
the notice calling the meeting is given by an advertisement, a statement, it must be
furnished to such creditor or member free of charge on an application being made in
the manner indicated in the notice. In the event of a default, the company and the
officers responsible thereof would be liable to be penalised. It is the duty of every
director, managing director, manager and trustee for debentureholders to serve notice
on the company of such matters relating to himself as may be necessary for the
purpose of the Section; a default is punishable with a fine.
(b) Facilitating reconstruction and amalgamation: In order to facilitate schemes of
reconstruction and amalgamation when application is made to the Court under
Section 391 for sanction of an arrangement which involves the transfer of the whole or
part of the property of one company (called “transferor company”) to another company
(called “the transferee company”), the Court may make an order under Section 394
dealing with the following matters:
(i) the transfer to the transferee company of the whole or part of the undertaking,
property or liabilities of any transferor company;
(ii) the allotment or appropriation by the transferee company of any shares or
debentures, policies, etc. to or for any person;
(iii) the continuation by or against the transferee company of any legal proceedings
pending by or against the transferor company;
(iv) the dissolution, without winding up, of any transferor company;
(v) the provision to be made for persons who dissent from the scheme, and
(vi) any other incidental matter.
The first proviso, to Section 394(1) restraints the Court from accepting a compromise or
arrangement in connection with the scheme of amalgamation, before receiving a report
from the Company Law Board or the Registrar that the affairs of the transferor company
have not been conducted in a manner prejudicial to the interest of its members or to
public interest.
Further, under the second proviso, the order for the dissolution of the transferor company
cannot be made until the official liquidator, on the scrutiny of the books and papers, has
reported to the Court that the affairs of the company had not been conducted prejudicially
to the interest of the members or to public interest.
Note: A transferor company includes any body corporate whether or not a company under
the Companies Act, while a ‘transferee company’ comprises only a company within the
meaning of this Act. This distinction is presumably designed to facilitate transfer of foreign
companies to Indian companies by schemes of reconstruction or amalgamation.
Where, an order is made under Section 394, every company in relation to which the order
is made must file a certified copy thereof with the Register for registration with 20 days
after the order is made.
In the event of the whole or any part of the undertaking of the company being transferred,
the directors cannot receive from the transferor company any compensation for loss of the
office or by way of consideration for retirement. They may, however, receive such
compensation from the transferee company or from any other person provided the
particulars with respect to the payment proposed, have been disclosed to the members of
the company and have been approved by them in general meeting. (Section 319)
An order under Section 394 does not transfer automatically a contract of personal
services, which are in their nature incapable of being transferred (previously existing
between an individual and the transferor company) to the transferee company. [Noxes vs.
Daneaster Amalgamated Collieries Ltd., (1940) 3 All. ER. 549 (HL)].
Section 394A makes it obligatory on the part of the Court to serve notice of every
application made to it under Section 391 upon the Central Government and to take into
consideration the representations, if any, made to it by the Government before passing
any order under any of these Sections. The objective is to “enable the Government to
study the proposal and to raise such objections thereto as it thinks fit in the light of the
facts and information available with it and also to place the Court in possession of certain
facts which might not have been disclosed by those who appear before it so that the
interests of the investing public at large may be fully taken into account by the Court
before passing its order.”
It may be noted that Section 394A, which provides for notice to the Central Government
does not apply to proceedings under Section 392 [Mehtab Chand Golcha vs. Official
Liquidator, Golcha Properties (P) Ltd. (1981) Comp. Cas. 103 at p. 104].
(c) Acquisition or Amalgamation by Shares Purchase: Of the various methods of
amalgamation, this is the simplest method. A company may acquire business and
control of another company not by amalgamation but by acquisition of a majority of
shares in that company. The consideration for acquisition may be paid either in cash
or shares or both. Section 395 provides a means for the compulsory acquisition of the
shares of a dissenting minority to prevent such a minority from extracting
unreasonably high price for its shares.
Under the aforesaid Section, a scheme of contract involving the transfer of shares or any
class of shares in a company has first to be offered for approval of the holders of such
shares by the company seeking to acquire the shares. The scheme or contract must then
be approved by the holders of not less than 90% in value of the shares concerned within
four months from the date of the offer (by the transferee company). Where, however, such
shares which are to be transferred are already held by the offeror (i.e. transferee
company) or its nominee or its subsidiary to value greater than 10% of the aggregate of
values of all the shares of the transferor company, the terms of the offer must be the
same for the holders of all other shares and the scheme or contract must not only be
approved by 9/10th in value of such holders but they must also be not less than 3/4ths in
number.
When these conditions have been satisfied, the transferee company may give notice in
the prescribed manner to any dissenting shareholder, expressing its desire to acquire his
shares. This notice, if decided to be given, must be served within 2 months after the
expiry of the period of 4 months. If such notice is given, the transferee company is entitled
and bound to acquire these shares on the terms approved by the majority, unless the
dissenting shareholder applies to the Court within one month from the date of the notice,
and the Court orders otherwise.
But, if the transferee company has served the aforesaid notice upon the dissenting
shareholders and they made no application to the Court or, if the application has been
made, but the Court has not ordered to the contrary, the transferee company must within
the prescribed period, send a copy of the notice to the transferor together with an
instrument of transfer executed by the transferee company and on behalf of the
shareholders, by a person appointed by the transferee company. The transferee company
must pay or transfer to the transferor company and on behalf of the shareholders, by a
person appointed by the transferee company. The transferee company must pay or
transfer to the transferor company the amount or other consideration representing the
price payable for the shares, which the transferee company is entitled to acquire. The
transferor company must thereupon register the transferee company as the holder of
those shares, and within one month of the date of such registration and of the receipt of
the money or other consideration representing the price payable to them by the transferee
company [Section 395(3)].
All sums of money and any other consideration received by the transferor company from
the transferee company are to be held in trust for the several persons entitled to the
shares in respect of which they have been received and until disbursed, these are to be
kept in a separate bank account. These are to be paid to the shareholders against the
deposit of relevant share certificates. [Section 395(4)]
In relation every offer of a scheme or contract involving the transfer of shares or any class
of shares in the transferor company to the transferee company, the following provisions
are applicable:
(1) Every such offer of every circular containing such offer or every recommendation to
the member of the transferor company by its directors to accept offer must be
accompanied by such information as may be prescribed.
(2) Every offer must contain a statement by or on behalf of the transferee company,
disclosing the steps it has taken to ensure that the necessary cash will be available.
(3) Every circular containing or recommending acceptance of such an offer should be first
presented to the Registrar for registration and it should not be circularised until it has
been registered.
(4) The Registrar may refuse to Register any such circular which does not contain the
information required to be given under paragraph (1) above or which sets out such
information in a manner likely to give a false impression.
(5) Against as order of the registrar refusing to register any such circular, an appeal lies
to the Court.
(6) Whosoever issues a circular mentioned in paragraph (3) above, which has not been
registered, shall be punishable with fine extending to Rs. 500 [Section 395(4A)].
Further, to safeguard the interest of dissenting shareholders, sub-section (3) of Section
395 imposes an obligation on the transferor company to advise the shareholders, whose
shares have been taken over, as to the price payable to them within one month of the
date of registration of the shares in favour of the transferee company and of the receipt of
the amount or other consideration representing the price.
When all the shares of the company have been agreed to be transferred, the directors,
qualification shares will not be transferred till new directors, properly qualified to act as
directors, have been appointed [Briess vs. Wolley (1954) 2 W.L.K. 832; (1954) I. A.I.R.
909]. The directors of the transferor company cannot receive compensation for the loss of
office or as consideration for retirement from office or in connection with retirement from
the transferor company. But they may receive it from the transferee company or any other
person if the particulars of the payments, proposed to be made, are stated in the notice of
the offer sent to the shareholders of the transferor company and the proposal is approved
by the company in general meeting. (Section 320)
It may be noted that payments received by directors in contravention of Sections 319 and
320 are to be held in trust for the company.
(d) Power of the Central Government to provide for amalgamation of companies in the
public interest: Section 396(1) provides that where in the “Public” interest it appears
to the Central Government that amalgamation of two companies is essential, it may,
through notification in the Official Gazette, provide for the amalgamation of the two
companies into a single company with such constitution, property, powers, rights,
interests, authorities and privileges and with such liabilities, duties and obligations as
may be specified in the notification. Under Section 396(2) [as amended by the
Companies (Amendment) Act, 1985] the order aforesaid may provide for the
continuation by or against the transferee company of any legal proceedings pending
by or against any transferor company; also incidental, consequential and
supplemental provisions necessary to give affect to the amalgamation may be
included therein.
Every member or creditor (including a debentureholder) of each of the companies before
the amalgamation shall have, as nearly as may be, the same interests in and rights
against the amalgamated company as he has in the company of which he was originally a
member or creditor. If his interests in or rights against the amalgamated company are less
than his original interests etc., in the original company, he shall be entitled or receive
compensation from the amalgamated company to the extent these have been reduced.
[Section 396(2)]
The prescribed authority would assess the amount of compensation receivable.
Any person aggrieved by any assessment of compensation made by the prescribed
authority under sub-section (3) may, within thirty days from the date of publication of such
assessment in the Official Gazette, prefer an appeal to the Company Law Board and
thereupon the assessment of the compensation shall be made by the Company Law
Board. [Section 396(3A), added in 1985].
But the Central Government would not make such an order for amalgamation unless:
(a) the draft copy of the proposed order has been sent to each of the companies
concerned.
(b) the time for preferring an appeal under sub-section (3A) has expired, or where any
such appeal has been preferred, the appeal has been finally disposed of (Added by
the Amendment Act of 1985); and
(c) the Central Government has considered the suggestion, objection or modification to
the same made by the said companies or any class of shareholders thereof or any
creditor or class of creditors thereof, within a period fixed by the Central Government.
The expression “public interest” has not been defined either by this Act, or by the General
Clauses Act. It is a very wide expression and comprehends inter alia, (i) economic welfare
of the community [Shri Kishan vs. State of Rajasthan 1955 2 SCR 53]; (ii) welfare of
labour [Basti Sagar Mills vs. Ram Ujagar AIR (1964) S.C. 355]. The concept of public
interest has been discussed in detail at the end of this Study paper.
(e) Reconstruction under Section 494: The Section gives complete power of a special
type for sale of business in winding up. A company which is proposed to be, or in the
course of being wound up, voluntarily, may sell its business to another company and
the compensation received, whether in the form of shares, policies or other like
interest in the transferee company, may be distributed among the shareholders of the
company that is being wound up, or the members of the transferor company may
receive any other benefit from transferee company. To give effect to it the following
condition must exist:
(i) the transferor company should be in process of being wound up as a members’
voluntary winding up.
(ii) there should be a proposal to transfer or sell the whole or part of its business or
property to another company (i.e. the transferee company); and
(iii) the transferor company should approve, by a special resolution, the proposal to
confer authority, whether general or particular on the liquidator to put the above
scheme or arrangement into effect.
The liquidator usually gives notice to the shareholders of the transferor company as
regards the number of shares to which they are entitled, the amount payable by them
thereon and the time within which they must apply for the shares. The sale or
arrangement under this provision is binding on all the members whether they agree to it or
not. If any member does not vote in favour of the special resolution, he may address to
the liquidator his dissent in writing even 7 days subsequent to the passing of the special
resolution and require him:
(a) to abstain from carrying the resolution into effect; or
(b) to purchase his interest at a price to be determined by agreement or arbitration in the
manner provided by Section 494.
The liquidator has the right to exercise either of the above options. Should he elect to
purchase, he must raise the money in such a manner as determined by the company. It
must be paid prior to the company being dissolved.
It is common practice to make a provision in the scheme, enabling the liquidator to sell the
shares of those who neither agree nor apply within the prescribed time and to distribute
the sale proceeds among them.
The transferor company may pass such a special resolution either before or concurrently
with the resolution for voluntary winding up or for the appointment of a liquidator. After an
order for winding up of the company by or subject to the supervision of the court has been
passed within a year, the special resolution would not be valid unless sanctioned by the
Court.
The Arbitration Act, 1940, will govern arbitration, under this Section for determining the
purchase price of shares of the dissentient member.
Section 494 makes no provision as regards the rights of creditors who felt that they have
been affected by the scheme of transfer. As such the only remedy available to them is to
present a petition either for compulsory winding up or for winding up under the supervision
of the Court within a year of the making of the order.
The impact of Section 494 on the sale of the whole or part of the business or property is
that a sale under such scheme can be made even to a foreign company.
Under Section 507, it is provided that the procedure under Section 494 would apply to a
creditors, voluntary winding up as well as to a members’ voluntary winding up. The
liquidator in the former case will have to exercise the power only with the sanction of the
Court or that of the Committee of inspection.
At times an existing company may require further capital to make up the deficiency
caused by losses or otherwise but the usual methods of raising capital may not be
available to it. In such a case, it may resort to reconstruction under Section 494 by
constituting a new company to take over the undertaking. The members of the existing
company will be allotted partly paid shares in the new company in lieu of assets
transferred. Fresh capital after wards will be raised by calling the unpaid amount of the
shares. The shareholders of the existing company however will not be bound to take the
partly paid shares and they may not assent to the scheme; they may call for the purchase
of their interest or for giving up the scheme. The shareholders concurring in the scheme,
however, shall have to pay whenever the call is made for raising further capital.
(f) Reconstruction under Section 517: It is another form of reconstruction pursuant to an
arrangement with the creditors when the company is being voluntarily wound up.
Under this Section, any arrangement entered into between a company about to be
wound up or in the course of winding-up and its creditors is binding on the company
and its creditors provided it has been:
(a) approved by a special resolution of the company; and
(b) agreed to by three fourths in number and value of the creditors.
Any creditor or contributory may, however, within three weeks from the completion of
arrangement, appeal to the Court and the court may amend, vary, confirm or set aside the
arrangement.
Note: Students may note that reconstruction under Section 517 is not commonly resorted
to in as much as it might be difficult to secure the 3/4 the majority referred to in paragraph
(b) above.
♦ Compensation for loss of office on amalgamation or reconstruction: Section
318(3) of the Act prohibits the payment of compensation to a managing director, or
other director for the loss of office when he resign his office in consequence of the
reconstruction of the company or its amalgamation and he is appointed as a
managing director, manager or other officer of the reconstructed or amalgamated
company.
♦ Conditions prohibiting reconstruction or amalgamation of company: Where any
provision in the memorandum or articles of a company, or in any resolution passed in
general meeting by, or by the Board of Directors of, the company, or in an agreement
between the company and any other person, whether made before or after the
commencement of this Act, prohibits the reconstruction of the company or its
amalgamation with any body corporate or bodies corporate, either absolutely or
except on the condition that the managing director or manager of the company is
appointed or reappointed as managing director or manager of the reconstructed
company or of the body resulting from amalgamation, as the case may be shall
become void with effect from the commencement of this Act, or be void, as the case
may be. (Section 376)
Preservation of books and papers of amalgamated company (Section 396A): The
books and papers of a company which has been amalgamated with or whose shares
have been acquired by another company under Chapter V of Part VI cannot be
disposed of without the prior permission of the Central Government which may
appoint a person the examine the books and papers in order to ascertain whether
they contain any evidence of commission of an offence in connection with promotion
or formation or the management of the affairs of the first-mentioned company or its
amalgamation or the acquisition of its shares.
It is a measure introduced to prevent accounts and records of a company being disposed
of following amalgamation with a view to destroying incriminating evidence.
6.2 AMALGAMATION OF TWO COMPANIES-STEPS TO BE TAKEN BY BOTH

Procedures for amalgamation of the Companies: Proceedings for an amalgamation by the
transferor and transferee companies should be carried out simultaneously. These are as
follows:
In The Transferee Company In The Transferor Company
1. To check up whether the memorandum contains 1. The same as in the case of
the power of amalgamation; if not, then to carry transferee Company.
out the proceedings for its alteration and to obtain

Company Law Board’s Confirmation.
2. To Prepare the draft scheme including exchange 2. –do–
ratio and get it approved by the Board’s meeting.
6. To apply to the Court for directions to convene the 6. –do–
general meeting by way of Judge’s Summons
[Rule 67 of the Companies (Court) Rules, 1959];
such directions would be in respect of matters set
out in Rule 69.
4. To send notice for general meeting to every 4. –do–
member along with a statement setting forth the
terms of the compromise or arrangement and
explaining its effect and particularly stating any
material interests of the directors, managing
director or manager, whether in their capacity as
such or as members or creditor, or otherwise and
the effect on those interests on the amalgamation
and insofar as it is different from the effect on the
like interests, of other persons [Section 393(1)(a)].
In case of the said notice being given through
advertisement, to either include the aforesaid
statement or to notify the place for obtaining the
copies of such statement [Section (1)(b)]; these
can be obtained free of charge on making an
application therefore in the manner indicated in
the notice [Section 393(3)].
In case of debenture holders’ rights being affected
by amalgamation, the said statement to give like
information and explanation regarding the trustees
under the deed [Section 393(2)].
[Rules 69 to 76 of the Companies (Court) Rules to
be noted in this connection.]
5. To hold the general meeting and pass the 5. The same as in the case of
resolution approving the draft scheme of transferee company.
amalgamation subject to the confirmation of the
high Court, resolution to be passed by a majority
in number representing 3/4ths in value of the
members as required by Section 391.
6. To move the High Court for approval of the 6. To move the High Court jointly
scheme, and for the purpose to supply it with with the transferee company,
material facts as required by the proviso to and also to supply the court
Section 391(2). with all material facts.
Further the court would need a
satisfactory report from the
Company Law Board or the
Registrar that the affairs of the
Company have not been
conducted in a manner
prejudicial to the interests of
its members or to public
interest, because it is a
scheme for the amalgamation
of it, with the transferee
company which is being wound
up. [Proviso to Section 394(1)].
7. On receipt of the Court’s order, to file the certified 7. The same as in the case of
copy thereof with the registrar within 30 days after transferee company.
the making of the order [Section 394(3)]; otherwise
it would not be effective.
8. A copy of the Court’s order also to be annexed to 8. The same as in the case of
every copy of the memorandum or instrument, transferee company.
which defines the constitution of the company,
issued after the certified copy of the order has
been filed with the Registrar under a pain of
penalty [Section 39(4)].
9. To proceed to effect the scheme of amalgamation 9. To do the same in the case of
as per the scheme approved and the directions the transferee company,
given by the High Court by issuing suitable notices except of allotment of shares
to shareholders and persons concerned and to and taking over business,
allot shares and take over the business as per the because no question of these
scheme. arises in this case.

1. (a) Can a compromise or arrangement be proposed between a company and a class of
its creditors or members?
(b) Can a shipping company with only one steamship, under a clause in its
memorandum, sell it with the whole of its equipment and with the proceeds buy
another ship?
(c) Can the said company, under a clause in its memorandum, sell the ship and its
entire undertaking divide the proceeds amongst its shareholders?
2. (a) Is it necessary to apply to the Court for the above-mentioned proposed
compromise or arrangement?
(b) Who can apply therefor when the company is a going concern?
(c) Can the liquidator do so, when the company goes into liquidation?
3. Suppose, in the said creditors’ meeting convened by the Court a numerical majority
agrees to the arrangement, which is also sanctioned by the Court. Will it be binding
on all the creditors?
4. Before sanctioning the agreement, the Court (a) may (b) may not (must, satisfy itself
that the application has disclosed to the Court all the material facts relating to the
company. Which is correct?
5. An appeal (a) does lie, (b) does not lie against the order of the Court under Section
391. Which is correct?
6. In the matter of sanctioning the scheme of arrangement, say whether the following
statements are correct:
(a) The Court must be satisfied that the statutory provision has been complied with.
(b) It is not necessary for it to see that the members or creditors (as the case may
be) have been fairly represented by those who attended the meeting.
(c) The Court is bound to see that the statutory majority approves the scheme, but
it is not bound to see that the statutory majority was acting bonafide in the
interest of the members or the creditors (as the case may be).
(d) The Court can sanction a scheme even if it involves the doing of an act, which is
ultra vires the company.
(e) While the application for compromise or arrangement is pending with the Court,
it can stay the commencement or continuation of any suit against the company.
(f) A District Court can supervise the carrying out of the compromise or
arrangement.
7. Suppose the compromise or the arrangement is found to be unworkable. What should
the Court do in the circumstances?
8. Suppose, that, application has been made to the court under Section 391 for the
sanction of an arrangement and that the arrangement involves the reconstruction and
amalgamation and the transfer of the whole or the part of the property or liabilities of
one company to another company: (a) Can the Court accord the sanction? (b) When?
9. In the circumstances, mentioned in Q.3, the Act empowers the Court to make
provision for the dissolution of the transferor company. Is this power of the Court
absolute or contingent?
10. Can the aforesaid directors in the like circumstances claim compensation from the
transferee company?
11. Of the propositions comprised in the following statements, state which is correct:
(a) A company (i) can, (ii) cannot, acquire the business and control of another
company by the acquisition of shares in that other company.
(b) The scheme of the acquisition offered by the transferee company to the
transferor company requires approval (i) by the holders of at least 75% in value
of shares concerned (ii) by the holders of not less than 90% in value of the
shares concerned.
(c) The above-mentioned approval of the shareholders may be accorded within (i)
30 days, (ii) 60 days, (iii) one month, (iv) 2 months, (v) 120 days, (vi) 4 months,
from the date of offer for acquisition.
12. It is said that in the matter of acquisition of shares aforementioned 9/10ths in value of
the shareholders of the transferor company must approve the transferee company’s
proposed acquisition. Now suppose, the transferee company already holds shares in
the transferor company to a value greater then 1/10ths of aggregate values of all the
shares concerned:
(a) How would you compute the aforesaid 9/10ths for the purpose of approval?
(b) In such a situation, will the approval by the shareholders holding 9/10ths in
value of the shares be sufficient?
(c) Will your answer be different, if more than its nominee or its subsidiary holds not
by the transferee company but 1/10 of the aggregate value of all the shares in
the transferee company?
13. There are two public limited companies. It is felt that these should be amalgamated
into a single company in the interest of the public. Who is to decide the question of
public interest and order for their amalgamation?
14. Can the Central Government straightaway order, without parliamentary approval, the
amalgamation of two or more companies on ground of public interest?
15. You have noticed that arrangement, reconstruction or amalgamation is possible in the
case of a going company. Is reconstruction also possible of a company, which is in
the process of being wound up voluntarily?

16. A company is proposed to be completely wound up as a member’s voluntary winding-
up. There is a proposal to transfer or sell part of its business or property to another
company.
The transferor company approves by an ordinary resolution of the proposal to confer
authority on the liquidator to put the scheme into effect. Can the liquidator do so in
the circumstances?
17. In the case of members’ voluntary winding-up, how is the authority to sell the
business or property to another company given to the liquidator?
18. Do you find any distinction between reconstruction and amalgamation under Sections
391 to 395 and reconstruction or amalgamation under Sections 494 or 517?
6.4 ANSWERS TO THE SELF-EXAMINATION QUESTIONS

1. Yes;
2. (a) Yes; (b) Company or creditor members; (c) Yes;
3. No, unless the majority represents 3/4ths in value of the creditors;
4. (c);
5. (a);
6. (a) Yes; (b) No; (c) Yes; only regarding the first part of the statement: (d) No; (e) Yes; (f)
No;
7. Order the winding up of the company;
8. (a) Yes; (b) On the receipt of a report from the Company Law Board or Registrar that
transferor company’s affairs have not been conducted prejudicially to its members’
interest or public interest.
9. Contingent;
10. Yes; provided the conditions prescribed by Section 319 are fulfilled;
11. (a) (i); (b) (ii); (c) (vi);
12. (a) Transferee company’s shareholding in the transferor company be included for the
purpose; (b) Yes, only if they constitute at least 3/4ths in number; (c) No;
13. Central Government;
14. Yes;
15. Yes, it is a member’s voluntary winding-up;
16. No;
17. By a special resolution;
18. The former is in respect of a company, which is going concern, and the latter is in respect of
company in liquidator.
7
(G) PREVENTION OF OPPRESSION AND MISMANAGEMENT
7.0 “MAJORITY RULE” AS APPLIED IN THE MANAGEMENT OF A COMPANY

The Companies Act, 1956, together with the protection granted to minority under the
Common Law, attempts to maintain a balance between the rights of majority and the
minority shareholders by admitting in the rule of the majority but limiting it at the same
time by a number of well-defined minority rights, and thus protecting the minority
shareholders.
Minority shareholders are protected by:
1. the Common Law; and
2. the provisions of the Companies Act, 1956.
7.1 Protection at Common Law: It is a well-known principle, enunciated in Foss vs.
Harbottle, which the rule of majority shall prevail. But there are certain exceptions to this
rule where the majority rule does not prevail. These are as under:
(a) Where the act complained of is illegal or ultra vires the company;
(b) Where the act done by the majority constitutes fraud on the minority;
(c) Where a resolution is passed by a simple majority for any act, which requires special
resolution for it to be effective;
(d) Where the act infringes the personal rights of an individual member;
(e) Where any act amounts to oppression of minority or mismanagement of the affairs of
the company.
In all these cases a minority shareholder is entitled to bring an action for a declaration
that the resolution complained of is void, or for an injunction to restrain the company from
passing it. All these principles have been followed in a few leading cases in India as well.
7.2 Protection under the Companies Act, 1956: Various rights are given to minority
shareholders by the Companies Act, 1956. These relate to:

(a) The variation of class rights (Section 107)
(b) Schemes of reconstruction and amalgamation (Section 391)
(c) Prevention of oppression of minority and of mismanagement under Sections 397 and
398.
(d) The rights to apply to the Central Government to have the affairs of the company
investigated. (Section 235)
There are some other Sections of the Companies Act, which protect the minority
shareholders’ rights. These are:
1. S-17: Consent of the Company Law Board is necessary before certain acts can be
validly done by a company, e.g., an alteration of the objects of a company.
2. S-101: Consent of the Court is necessary in case of reduction of share capital.
7. S-111: Rights to appeal to the Central Government against the arbitrary action of the
Board of Directors in refusing to register a transfer of shares.
4. S-408: Right of the Central Government to appoint on an order from the Company
Law Board (C.L.B.) such number of persons as directors as considered
necessary to effectively safeguard the interests of the company or its
shareholders or the public interests. Such an order may be made by C.L.B. on
a reference made to it by the Central Govt. or on an application of not less
than 100 members of company or by such members holding not less than
1/10th of the total voting power.
5. S-439: A contributory is entitled to present a petition to the Court for the winding up of
the company on just and equitable grounds.
6. S-517: An arrangement between a company and its creditors may be amended,
varied, confirmed or set aside by the Court on the application of any creditor
or contributory.
7.3 OPPRESSION AND MISMANAGEMENT

The management of companies is based on the principle of majority rule ordinarily;
decision of the majority is the rule for the minority. This sound principle has, occasionally,
been abused and the whip of the majority has often produced sullen effects, prejudicial to
the best interests of the shareholders. Until the commencement of the Companies Act,
1956 the only remedy available (under the Indian Companies Act, 1913) to an oppressed
minority was to petition to the Court to wind up the company on the ground that it was
Prevention of Oppression and Mismanagement 7.3
“just and equitable” so to do. The winding up remedy is, however, not always
advantageous to the petitioning shareholder, or shareholders because the very persons
whose conduct is complained of, may be the only persons capable of buying up the
shares of the dissentients. Nevertheless, the oppression or mis-management calls for
some remedial action. Sections 397 to 409 of the Companies Act, 1956 empower (i) the
Company Law Board and (ii) the Central Government to deal with such situations.
Section 397 provides that the members of a company who complain that the affairs of the
company are being conducted in a manner oppressive to any member or members may
apply to the Company Law Board for appropriate relief subject to Section 399. Under
Section 398 too, members of a company may apply to the Company are being conducted
in a manner prejudicial to the interest of the company as a whole, subject to Section 399.
Section 399 provides, however, that a single member is not entitled to make an
application under either of the Section, viz., Sections 397 and 398.
7.4 Who may apply to the Company Law Board when oppression or mis-management
is complained of? The application can be made only by:
(a) In the case of a company having a share capital:
(i) not less than one hundred members or not less than one tenth of the total
number of members whichever is less; or
(ii) a member or members holding not less than one-tenth of the issued share
capital of company provided that the applicants have paid all calls and other
sums due on their respective share [Section 399(1)(a)]. It may be noted that
joint members are counted as one member.
(b) In the case of a company not having a share capital: not less than one-fifth of the total
number of members [Section 399(1)(b)].
(c) The Central Government: The Central Government can also apply or authorise a
member or members to make an application under Section 397 or 398, though the
requisite conditions under [a] and [b] are not satisfied [Section 399(4)].
An application under Section 399(4) must contain the names and addresses of the
applicants, the total numbers of applicants, etc., it must be verified by an affidavit. The
Central Government may require the applicant to produce documentary evidence in
support of the complaint [Section 399(4); Rule 13 of the Companies (Central Govt.’s)
General Rules and Forms, 1956]. It may also require the members to give security for
costs [Section 399(5)].
7.5 Difference between Sections 397 and 398: Under Section 397, the existence of
conditions justifying the making of winding up order on the ground that it is just and
equitable that the company should be wound up, is a condition precedent to the
interference by the Company Law Board. On the other hand, under Section 398, the
C.L.B. would interfere on its being satisfied that by reason of any material changes in the
management or control of the company, it is likely that the affairs of the company will be
conducted in a manner prejudicial to the interest of the company. The two positions are
distinct. Whereas in the first case, the C.L.B. acts to prevent injustice being done to a
member or members in his or their individual capacity, in the second case the C.L.B. acts
in order to prevent injury being inflicted to the interest of the company as a whole.
The material change in the management or control contemplated in the preceding
paragraph will be deemed to have taken place in any of the following circumstances, viz.:
(i) when there has been alteration in the Board of Directors;
(ii) when a replacement of its manager has taken place;
(iii) when a change has occurred in the ownership of the shares of the company;
(iv) when there has been a change in the membership of a company having no share
capital;
(v) when a change has taken place in any other manner whatsoever;
(vi) by reason of any of the aforesaid changes, the affairs of the company are likely to be
conducted in manner prejudicial to public interest or to the interest of the company
[Section 398(1)(b)].
Thus on an application made in the foregoing circumstances, the Company Law Board will
interfere only if it is of the opinion:
(1) When it is made under Section 397: (a) that the company’s affairs are being conducted
in a manner oppressive to any member or members [Section 397(2)] or in a manner
prejudicial to public interest; and (b) that to wind up the company would unfairly
prejudice such member or members but that otherwise the facts would justify the
making of a winding up order on “just and equitable” ground.
(2) when it is made under Section 398:
(a) that affairs of the company are being conducted in a manner prejudicial to the
interests of the company [Section 398(1)(a)]; or
(b) that a material change has taken place in the management or control of the
company and as a consequence the affairs of the company may be conducted in
a manner prejudicial to the public interest or in a manner prejudicial to the
interests of the company [Section 398(1)(b)].

The Company Law Board may make such order it thinks fit with a view to bringing to
an end, or preventing the matters complained or apprehended, as the case may be.
(3) Under Section 397, the Company Law Board can end the oppression complained of
whereas, under Section 398, it can prevent the matters complained of or
apprehended. In other words, only Section 398 is preventive; Section 397 is not.
A complaint under Section 398 can be made only by a member or members and not by
officers or directors who might be oppressed in these capacities [Elder vs. Elder & Weston
Ltd. (1952) 102 Law J. 91; (1952) S.C. 49].
In the aforementioned case, the interpretation of Section 210 of the English Companies
Act, 1948, corresponding to Section 397 of our Act, was considered. There it was alleged
that the majority of the shareholders of a private company had removed two minority
shareholders from their directorship and employment but there was no suggestion of
mismanagement to the detriment of the share holders. The Court held that these
allegations could not support an application under the Section, which required oppressive
conduct to members in their character as members. Such conduct towards a member in
any other capacity, e.g., as a director or creditor could not per se justify an application.
The “conduct complained of should at the lowest involve a visible departure from the
standards of fair dealing and a violation of the conditions of fair play on which every
shareholder who entrusts his money to a company, is entitled to rely” (ibid) (per Lord
Cooper).
7.6 Powers of the Company Law Board on application under Sections 397 or 398:
Without prejudice to the generality of the powers of making any order as it thinks fit under
Section 397 or 398 the C.L.B. has, in particular under Section 402, the following powers:
(a) to regulate by order the conduct of the company’s affairs in the future;
(b) to order the purchase of shares or interest of any member or members of the
company by the other members thereof or by the company;
(c) in the case of a purchase of shares by the company as aforesaid, to order the
consequent reduction of its share capital;
(d) to terminate, set aside for modify any agreement, howsoever, arrived at, between the
company on the one hand and any of the following persons on the other, namely: (i)
the managing director; (ii) any other director; (iii) the manager upon such terms and
conditions as may, in the opinion of the Company Law Board be just and equitable in
all the circumstances of the case;
(e) to terminate, set aside or modify any arrangement between the company and any
person not referred to above, after giving due notice to, and obtaining the consent of
the party concerned;
(f) to set aside any transfer, delivery of goods, payment, execution of other act, relating
to property made or done by or against the company within 3 months before the date
of the application under Section 397 or 398 which would in the case of an individual
be deemed in his insolvency to be fraudulent preference; and
(g) to deal with any other matter for which, in the opinion of the C.L.B., it is just and
equitable that provision should be made.
The C.L.B. may make an interim order for regulating the conduct of the company’s affairs,
pending the passing by it of a final order under Section 397 or 398 (Section 403).
Where an order made under Section 397 or 398 involves an alteration of the
memorandum or articles of association of the company, the company shall not have the
right to make any alteration therein, subsequently, in a manner which is inconsistent with
the order passed by the C.L.B. without its leave (Section 404). Certified copies of the
alteration must be filed with the Registrar. Where, an order of the Court under the
foregoing Section involves the termination of any of the agreement mentioned herein
before, such termination shall not give rise to any claim for damages against the company
for loss of office or in any other respect either under the agreement or otherwise. Further,
no managing or other directors or manager whose agreement has been terminated or set
aside shall, without leave of the C.L.B. be appointed in any of the above capacity in
respect of the company for a period of five years from the date of the order. Any
contravention of this provision is punishable with imprisonment for a term, which may
extend to one year, or with a fine up to Rs. 50,000 or with both. Before leave is granted,
the Central Government must be notified and heard (Section 407).
7.7 Powers of the Central Government: Section 408 has vested some powers in the
Central Government to prevent oppression or mismanagement. It can exercise these
powers on an order of the Company Law Board which is turn will so order on the
application of at least 100 members of the company or of members holding at least one
tenth of the total voting power therein. But before exercising such powers, it must make
such enquiry as it deems fit and be satisfied that it is necessary to exercise its powers in
order to prevent the affairs of the company being conducted either in a manner oppressive
to any members of the company or in a manner prejudicial to the interests of the company
or to public interest. Being thus satisfied, it may appoint such number of persons as the
Company Law Board may, by order in writing, specify as being necessary to effectively
safeguard the interest of the company, or its shareholders or the public interest, as
directors thereof for such period not exceeding three years at one time as it may think fit
[Section 408(1)]. In the alternative, the company may be asked to elect its directors by the
system of proportional representation by means of a single transferable vote so that the
minority may also have representation in the Board of Directors of the company [Proviso
to Section 408].
If the Company Law Board has passed an order the proviso to Section 408(1), it may,
should it deem fit, direct that until new directors are appointed pursuant to the aforesaid
order, such number of persons as the Company Law Board may, by order in writing,
specify as being necessary to effectively safeguard the interest of the company, or its
shareholders or the public interest will hold office as additional directors. The Central
Government shall appoint such Additional Directors.
The director or directors appointed under sub-section (1) or (2) or Section 408 are not
liable to retire by rotation as contemplated by Section 255 [Section 408(3)]. These
directors are not required to hold any qualification shares; nor are their tenure of office
liable to termination by retirement of directors by rotation. These directors may, however,
be replaced by some others by the Central Government [Section 408(4)]. No change in
the Board of Directors, after a person has been appointed or directed to hold office of a
director or additional director under Section 408 shall so long as such director or
additional director holds office, be effective unless confirmed by the Company Law Board
[Section 408(5)].
On appointing directors or additional directors referred to in the first two sub-sections
above, the Central Government may issue such directions to the company as it may
consider necessary or appropriate in regard to its affairs. Such directions can be issued
notwithstanding anything contained in this Act or in any other law for the time being in
force [Section 408(6)]. The Central Government may require these directors or additional
directors to report to it from time to time with regard to the affairs of the company [Section
408(5)].
On a complaint being lodged by the managing or any other director or the manager, the
Company Law Board is empowered under Section 409 to prevent any change in the Board
of Directors, which is likely to affect the company prejudicially. The power conferred by
this Section, however, cannot be exercised in relation to a private company, unless it is a
subsidiary of a public company.
7.8 General observations on remedy for oppression under Sections 397 and 398: The
remedy available under Section 397 of the Companies Act, 1956, can be invoked only
when the affairs of the company are being conducted in a manner oppressive to a
shareholder or shareholders. Likewise, the remedy available under Section 398 can be
invoked only when the affairs of the company are being conducted in a manner prejudicial
to the interest of the company. These two Sections clearly postulate that at the time
application is made, there must be a continuing course or conduct of the affairs the
company, which is oppressive to any shareholder or shareholders or prejudicial to the
interest of the company. It is this course of oppressive or prejudicial conduct, which can
be made the subject matter of a complaint in the application. The forgoing provisions of
law do not confer any power on the Company Law Board to set aside or interfere with past
and concluded transactions between the company and the shareholders or third parties
which are no longer continuing wrongs or to award a compensation to the company for the
aggrieved shareholders in respect of such transactions [Seth Mohanlal Ganpatram vs.
Shri Satyaji Jubilee Cotton and Jute Mills Co. Ltd. (1964) 34 Comp. Cas 777].
There are only two cases in which, on the application under Section 397 or 398 of the
Companies Act, 1956 the Company Law Board is empowered to give relief in respect of
past and concluded transactions which are no longer continuing wrongs; they are really in
the nature of exceptions to the general principles as stated above. Firstly, Section 402(f)
enables the Company Law Board to set at naught transactions amounting to fraudulent
preference, effected within three months before the date of the application under Section
397 or 398 even though they are no longer continuing wrongs. Secondly, Section 406 of
the Companies Act, 1956, read with Section 543 of that Act set forth in Schedule XI
enables Company Law Board on an application under Section 397 or 398 to bring to book
delinquent directors, managers and other office-bearers of the company and to enforce
the company’s claim against them if they have misapplied or retained company’s money
or have committed any misfeasance or breach of trust in relation to the company [Seth
Mohanlal Ganpatram vs. Shri Satyaji Jubilee Cotton and Jute Mills Co. Ltd. and others,
ibid].
Persons who hold majority of beneficial interest but minority of voting power, can complain
of oppression which term includes not merely obtaining unfair pecuniary advantage but
also an over whelming desire for power (re Hammer Ltd. 109 L.J. 24 C.A.). The remedy
available is analogous to that of winding up and, consequently, Section 406 provides that
Sections 439 to 544 shall only apply to companies in respect of which application has
been made under Section 397 or 398 in form set forth in Schedule XI. Before seeking a
winding up, a member must exhaust his remedy under Section 397 [See Section 433(f)].
7.9 Distinction between various remedies for oppressions: The remedies available
are: (i) suit for injunction and declaration by the minority shareholders who have been
oppressed by an infringement of class rights, etc. This is an exception to the rule in Foss
vs. Harbottle, 2 Hare 461 that in respect of wrong done to the company, only company
can sue; (ii) winding-up petition; (iii) relief under Section 397 or 398. Remedy (i) applies
where wrong consists of single act or acts and it has not been the course of a conduct.
Remedies (ii) and (iii) apply where wrong is the outcome of a course of conduct and not
due to an individual act. The oppressed shareholder must act reasonably exhausting the
remedy (iii) before remedy (ii) can be availed of.
7.10 POWERS OF CENTRAL GOVERNMENT TO REMOVE MANAGERIAL

PERSONNEL ON THE RECOMMENDATION OF CLB
The powers of the Company Law Board to remove a director of a company are contained
in Sections 388B to 388E of Companies Act. The Central Government may state a case
against any of the managerial personnel of a company and refer the case to the Company
Law Board with a request that the Company Law Board may inquire into the case and
record a finding whether or not he is fit and proper person to hold the office of director or
any other office connected with the conduct and management of the company. The
Central Government may exercise this power where in its opinion there are circumstances
suggesting:
(i) that any person concerned in the conduct and management of the affairs of a
company is or has been in connection there with guilty of fraud, misfeasance,
persistent negligence or default in carrying out his obligations and functions under the
law, or
(ii) that the business of a company is not or has not been conducted and managed by
such person in accordance with sound business principles or prudent commercial
practices; or
(iii) that a company is or has been conducted and managed by such person in a manner
which is likely to cause, or has caused, serious injury or damage to the interest of the
trade, industry or business to which such company pertains; or
(iv) that the business of a company is or has been conducted and managed by such
person with intent to defraud its creditors, members or any other person or otherwise
for a fraudulent or unlawful purpose or in a manner prejudicial to public interest
[Section 388B(1)].
Every case under sub-section (1) shall be stated in the form of an application which shall
be presented to the Company Law Board or such officer thereof as it may appoint in this
behalf [Section 338B(2)].
The person against whom a case is referred to the Company Law Board under this section
shall be joined as a respondent to the application [Section 388B(3)]. The application made
to the C.L.B. must contain a concise statement of the circumstances and material as the
Central Government may consider necessary for the purpose of the enquiry, and be
signed and verified in the manner laid down in the Civil Procedure Code, for the signature
and verification of a plaint in a suit by the Central Government [Section 388B(4)].
The Company Law Board may, on the application of the Central Government, or on its
own motion, by an interim order direct that the respondent shall not discharge any of the
duties of his office until further orders of the Company Law Board; and appoint a suitable
person in place of the respondent [Section 388C(1)]. Such appointee shall be deemed to
be a public servant within the meaning of Section 21 of the Indian Penal Code [Section
388C(2)].
At the conclusion of the hearing of the case the Company Law Board must record its
findings (Section 388D). If the finding of the Company Law Board is against the
respondent the Central Government, by order, shall remove him from office [Section
388(1)]. The person against whom order of removal from office is made must not hold the
office of a director or any other office connected with the conduct and management of
affairs of the company for a period of 5 years from the date of the order of removal. The
Central Government may, with the previous concurrence of the Company Law Board,
remit or relax this period of 5 years [Section 388E(3)]. On the removal of a person from
office in the above manner, no compensation in any circumstance whatever is payable to
him for the loss or termination of office [Section 388E(4)]. The company may, with the
previous approval of the Government, appoint another person to the office in place of the
person removed [Section 388E(5)].
7.11 CONCEPT OF PUBLIC INTEREST AND ITS IMPINGEMENT ON COMPANY LAW

The expression “public interest” is an elusive abstraction; it means general welfare of the
society or “regard for social good” and predicates interest of the general public in matters
where regard for the social good is of the first moment.
A thing is said to be in public interest where it is or can made to appear to be contributive
to the general welfare rather than to the special privileges of a class, group or individual.
In common parlance, it is assumed to denote the interest to the community or nation as a
whole as well as the State Government, which represents it. “The expression is not
capable of precise definition and has not a rigid meaning, and is elastic and takes its
colours from the statute in which it occurs, the concept varying with the time and state of
society and its needs. Thus, what is ‘public interest’ today may not be so considered a
decade later. In any case, the expression cannot be considered in vacuum but must be
decided on the facts and circumstance”. [Per Chief Justice Mahajan in State of Bihar vs.
Kameshwar, A.I.R. 1952 SC 252].
Since the concept of public interest is bound to undergo frequent changes with a change
in our social, political and economic values, no hard and fast definition can be and
actually has been, laid down by the Act. Whatever furthers the general interests of the
community as opposed to the particular interest of the individual (a company formed and
registered under the Act is a legal person) is to be considered as “public interest”, i.e., an
interest in which the community is directly and vitally concerned. A survey of the
provisions of the Act would reveal the truth of the statement that the concept of public
interest has been making rapid in-roads into the Indian Company Law, e.g., Sections 396,
397, 398, 408, 637A etc.; Schedule VI also being intended to safeguard public interest.
A survey of the provisions of the Act would reveal the truth of the statement that concept
of “public interest” has been making rapid in roads into the Indian Company Law:
(i) Section 396, as you have seen earlier, empowers the Central Government to
provide for compulsory amalgamation of companies (notwithstanding anything
contained in Sections 394 and 395) into a single company in the public interest. It
may be noted that the expression “national interest” was used in 1956. The
Amendment Act of 1960 brought the substitution of ‘public interests’ for ‘national
interest’ into effect. The Indian Companies Act, 1913 contained no provisions akin to
those of Section 396. Therefore, the Companies Act, 1956, made such provision in
the Company Law for the first time.
(ii) You have read in your Study Paper on Auditing that Section 211(3) empowers the
Central Government to exempt any class of companies from compliance with any of
the requirements in Schedule VI pertaining to form and contents of balance sheet
and profit and loss account if, in its opinion, it is necessary to grant the exemption in
the “public interest”. [The Amendment Act, 1960 has substituted the expression
“public interest” for “national interest”].
(iii) The annual statements of account (in the form set out in Schedule VI) of a public
company and its subsidiary companies are public documents (In the case of a
private company, the profit and loss account is not a public document). The
Companies Act, 1956 has laid down minimum information, which is to be disclosed
in these statements along with general principle that it must exhibit a true and fair
picture. The information now required to be given is much more than under the
Indian Companies Act, 1917. The purpose behind this is, undoubtedly, the
safeguarding of the public interest.
(iv) There may be a case where a transfer of shares in a company has taken place or is
likely to take place and, as a result thereof a change in the composition of the Board
of directors is likely to take place; and further such a situation (in the Govt’s opinion)
may be prejudicial to the public interest. In such a case, the Central Government is
empowered, under Sections 250(3) and (4) to impose restrictions on such transfers
e.g. the voting rights in respect of such shares shall not be exercisable for the
period specified not exceeding three years the resolution approving the transfer of
such shares should first be sanctioned by the Government in order to be effective.
Thus, the Amendment Act of 1960 has extended the provisions of Section 250 in
public interest also.
Mention of ‘public interest’ in the context of restriction on transfer of shares is also
made in Sections 108B, 108C and 108D.
(v) Under Section 397, the member of a company has given the right to file an
application to the Company Law Board for appropriate relief where the affairs of the
company are being conducted, inter alia, in a manner prejudicial to public interest
provided the requirements of Section 399 are fulfilled.
(vi) Under Section 398, the shareholder company can file an application to the Company
Law Board for relief in cases (a) where the affairs of the company are being
conducted in a manner prejudicial to interest.
(vii) Under Section 408, the Central Government is empowered to appoint such number
of persons as the Company Law Board may, by order in writing specify being
necessary to hold office as directors in the company to effectively safeguard public
interest (besides the interest of the company or its shareholders). Such an order
may be made on a reference made to it by the Central Government or on an
application of not less than 100 members of the company or of the members holding
1/10th of the total voting power therein.
(viii) Under Section 394(1) of the Companies Act, 1956, the Court has been empowered:
(a) to refuse its sanction to any compromise or arrangement in connection with a
scheme for the amalgamation of a company which is being wound up, with another
company where it receives a report from the Company Law Board or the Registrar
that the affairs of the company have been conducted inter alia in a manner
prejudicial to public interest; and (b) to refuse the dissolution of any transferor
company under clause (iv) of Section 394(1) where it receives a report from the
Official Liquidator (on security of the books and papers of the company) that the
affairs of the company have been conducted, inter alia in a manner prejudicial to
public interest.
(ix) The office of public trustee has been set up so as to enable him to take over the
voting rights of shares and debentures held in trust from their trustees to be
exercised in such manner as he may determine (Sections 153A and 158B). The
object of this was to ensure that voting powers attaching to funds held in trust for
the company or the public were exercised to promote the public interest and not to
further those of private individuals who had formed tax-free trusts ostensibly for
‘public motives’.
(x) The object of Sections 13(c) and (d) (as amended in 1965 on the recommendation of
the Vivian Bose Enquiry Commission and endorsement of the recommendation by
the Daftary Shastri Committee is to enable shareholders and others interested to
form a clear idea of the main object and other objects. This amendment, in
combination with Section 149(2A) which requires that whenever a company embarks
on any kind of business activity regarding “other objects” the sanction of the
company by special resolution must be obtained, will give the shareholders an
opportunity to know for themselves the actual business which the company is
carrying on or proposes to carry on. This is likely to put a positive check on the
public money being jeopardised.
(xi) The evasion of income-tax or super tax is a matter of public interest, benami
shareholding and shareholding in the names of fictitious or non-existing persons
were once very common because in such cases tax might be evaded and the
revenue could be defrauded in cases where the super-tax limit was reached. To
check such practice, Section 68A has been incorporated in the Act, rendering it a
punishable offence for a person to apply for or get an allotment of share or get a
transfer of shares registered in the names of fictitious or non-existing persons of
benamidars. Further, to check such practice, both the benamidars and the holder of
beneficial interest in a share have to make declarations under Section 187C
(introduced by the Amendment Act, 1974).
The Central Government is empowered to state a case against managerial personnel to
the Company Law Board under Section 388B where the circumstances suggest the
company is or has been conducted and managed by such person in a manner which is
likely to cause or has caused serious injury or damage to the interests of trade, industry
or business to which such company pertains {vide} Amendment Act of 1988.

1. (a) When oppression or mismanagement is complained of, can the Central
Government apply to the Company Law Board for redress?
(b) Can it also authorise a person or a member to make an application?
2. Answer the following questions:
(a) In the case of application for oppression, can the Company Law Board interfere,
if the conditions, warranting a winding up order on just and equitable ground, do
not exist?
(b) If the conditions referred to in (a) exist and the winding up of the company would
not unfairly prejudice the member or members, can the Company Law Board
interfere?
(c) Can the Company Law Board make an interim order for regulating the conduct
of the company’s affairs, pending the final order under Section 397 or 398?
(d) Can the Company Law Board, in the case of oppression and mismanagement,
set aside or interfere with past and conclude transactions between the company
and the shareholders or third parties which are no longer continuing wrong?
(e) Are there any exceptions to rule underlying (b) above?
7.13 ANSWERS TO SELF-EXAMINATION QUESTIONS

1. (a) Yes; (b) Yes;
2. (a) No; (b) No; (c) Yes; (d) No; (e) Yes; 406 Section 402(f) read with Section 543 in
the modified form set forth in Schedule XI.
8
(H) REVIVAL AND REHABILITATION OF SICK INDUSTRIAL
COMPANIES
8.0 DEFINITIONS
Sick Industrial Company
Sick Industrial Company means an industrial undertaking which has
(i) the accumulated losses in any financial year equal to fifty per cent or more of its average
net worth during four years immediately preceding such financial year; or
(ii) failed to repay its debts within any three consecutive quarters on demand made in writing
for its repayment by a creditor or creditors of such company.
Industrial undertaking
“industrial undertaking” means any undertaking, pertaining to any industry carried on in one or
more factories or units by any company, as defined in clause (aa) of section 3 of the Industries
(Development and Regulation) Act, 1951 (65 of 1951) but does not include a small-scale
industrial undertaking as defined in clause (j) of that section [Section 2 (19AB)]
Net Worth
“Net worth” means the sum total of the paid-up capital and free reserves after deducting the
provisions or expenses as may be prescribed.
Explanation.—For the purposes of this clause, “free reserves” means all reserves created out
of the profits and share premium account but does not include reserves created out of
revaluation of assets, write back of depreciation provisions and amalgamation [Section 2
(29A)].
Operating Agency
“operating agency” means any group of experts consisting of persons having special
knowledge of business or industry in which the sick industrial company is engaged and
includes public financial institution, State level institution, scheduled bank or any other person
as may be specified as the operating agency by the Tribunal [Section 2 (31AA)]
Industrial Company
“industrial company” means a company which owns one or more industrial undertakings
[Section 2 (19AA)]
8.1 PROCEDURE FOR REVIVAL AND REHABILITATION
8.1.1 Reference to Tribunal
(a) The Board of directors of a sick industrial company shall make a reference to the
Tribunal and prepare a scheme of its revival and rehabilitation.
(b) Such a reference shall be made to the Tribunal along with an application containing
such particulars as may be prescribed, for determination of the measures which may be
adopted with respect to such company:
(c) The application shall be accompanied by a certificate from an auditor or from a panel
of auditors prepared by the Tribunal indicating—
(a) the reasons of the net worth of such company being fifty per cent or less than fifty per
cent; or
(b) the default in repayment of its debt making such company a sick industrial company, as
the case may be.
(d) The provisions of Section 424A (i) shall not apply to a Government company:
(e) However a Government company may, with the prior approval of the Central
Government or a State Government, as the case may be, make a reference to the Tribunal in
accordance with the provisions of this sub-section and thereafter all the provisions of this Act
shall apply to such Government company:
(f) In case any reference had been made before the Tribunal and a scheme for revival
and rehabilitation submitted before the commencement of the Enforcement of Security Interest
and Recovery of Debts Laws (Amendment) Act, 2004, such reference shall abate if the
secured creditors representing three-fourth in value of the amount outstanding against
financial assistance disbursed to the borrower have taken measures to recover their secured
debt under sub-section (4) of section 13 of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) :
(g) No reference shall be made to the Tribunal under Section 424A (i) if the secured
creditors representing three-fourth in value of the amount outstanding against financial
assistance disbursed to the borrower have taken measures to recover their secured debt
Revival and Rehabilitation of Sick Industrial Companies 8.3
under sub-section (4) of section 13 of the Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest Act, 2002 (54 of 2002).
(h) The Central Government or the Reserve Bank or a State Government or a public
financial institution or a State level institution or a scheduled bank without prejudice to the
provisions contained in Section 424A (1), may if it has sufficient reasons to believe that any
industrial company has become, for the purposes of this Act, a sick industrial company, make
a reference in respect of such company to the Tribunal for determination of the measures
which may be adopted with respect to such company:
(i) A reference shall not be made under Section 424A (1) in respect of any industrial
company by—
(a) the Government of any State unless all or any of the industrial undertakings belonging to
such company are situated in such State;
(b) a public financial institution or a State level institution or a scheduled bank unless it has,
by reason of any financial assistance or obligation rendered by it, or undertaken by it,
with respect to such company, an interest in such company.
(j) A reference under Section 424A (1) or (3) shall be made to the Tribunal within a
period of one hundred and eighty days from the date on which the Board of directors of the
company or the Central Government or the Reserve Bank of India or a State Government or a
public financial institution or a State level institution or a scheduled bank, as the case may be,
come to know, of the relevant facts giving rise to causes of such reference or within sixty days
of final adoption of accounts, whichever is earlier.
(k) The Tribunal may, on receipt of a reference, pass an order as to whether a company
in respect of which a reference has been made has become a sick industrial company and
such order shall be final.
8.2 INQUIRY INTO WORKING OF SICK INDUSTRIAL COMPANIES (SECTION 424B)

(a) The Tribunal may make such inquiry as it may deem fit for determining whether any
industrial company has become a sick industrial company—
(a)upon receipt of a reference with respect to such company under section 424A; or
(b)upon information received with respect to such company or upon its own knowledge as to
the financial condition of the company.
(b) The Tribunal may, if it deems necessary or expedient so to do for the expeditious
disposal of an inquiry, require by order any operating agency to enquire into the scheme for
revival and make a report with respect to such matters as may be specified in the order.
(c) The operating agency shall complete its inquiry as expeditiously as possible and
submit its report to the Tribunal within twenty-one days (extendable to forty days with reasons
with reasons to be recorded in writing) from the date of such order:
(d) The Tribunal shall conclude its enquiry as expeditiously as possible and pass final
orders in the proceedings within sixty days extendable to ninety days with reasons with
reasons to be recorded in writing) from the commencement of the inquiry. An inquiry shall be
deemed to have commenced upon the receipt by the Tribunal of any reference or information
or upon its own knowledge reduced to writing by the Tribunal.
(e) Where the Tribunal deems it fit to make an enquiry or to cause an inquiry to be made
into any industrial company, as the case may be, it may appoint one or more persons who
possess knowledge, experience and expertise in management and control of the affairs of any
other company to be a special director or special directors on the board of such industrial
company on such terms and conditions as may be prescribed for safeguarding its financial
and other interests or in the public interest.
(f) The special director or special directors appointed for the purpose shall submit a report to
the Tribunal within sixty days from the date of appointment of such director or directors about
the state of affairs of the company in respect of which reference has been made and such
special director or directors shall have all the powers of a director of a company under this
Act, necessary for discharge of his or their duties.
(g) The Tribunal may issue such directions to a special director appointed as it may deem
necessary or expedient for proper discharge of his duties.
(h) The appointment of a special director shall be valid and effective notwithstanding
anything to the contrary contained in any other provision of this Act or in any other law for the
time being in force or in the memorandum and articles of association or any other instrument
relating to the industrial company, and any provision regarding share qualification, age limit,
number of directorships, removal from office of directors and such like conditions contained in
any such law or instrument aforesaid, shall not apply to any special director or directors
appointed by the Tribunal.
(i) Any special director appointed, shall—
(a)hold office during the pleasure of the Tribunal and may be removed or substituted by any
person by order of the Tribunal;
(b)not incur any obligation or liability by reason only of his being a director or for anything
done or omitted to be done in good faith in the discharge of his duties as a director or anything
in relation thereto;
(c)not be liable to retirement by rotation and shall not be taken into account for computing the
number of directors liable to such retirement;
(d)not be liable to be prosecuted under any law for anything done or omitted to be done in
good faith in the discharge of his duties in relation to the sick industrial company.
8.3 POWERS OF TRIBUNAL TO MAKE SUITABLE ORDER ON COMPLETION OF

INQUIRY (SECTION 424C)
(a) If after making an inquiry under section 424B, the Tribunal is satisfied that a
company has become a sick industrial company, the Tribunal shall, after considering all the
relevant facts and circumstances of the case, decide, as soon as may be, by an order in
writing, whether it is practicable for the company to make its net worth exceed the
accumulated losses or make the repayment of its debts referred to in clause (b) of sub-section
(2) of section 424A within a reasonable time.
(b) If the Tribunal decides that it is practicable for a sick industrial company to make its net
worth exceed the accumulated losses or pay its debt referred to in that sub-section within a
reasonable time, the Tribunal shall, by order in writing and subject to such restrictions or
conditions as may be specified in the order, give such time to the company as it may deem fit
to make its net worth exceed the accumulated losses or make repayment of the debts.
(c) If the Tribunal decides that it is not practicable for a sick industrial company to make its net
worth exceed the accumulated losses or make the repayment of its debts within a reasonable
time and that it is necessary or expedient in the public interest to adopt all or any of the
measures specified in section 424D in relation to the said company it may, as soon as may be,
by order in writing, direct any operating agency specified in the order to prepare, having
regard to such guidelines as may be specified in the order, a scheme providing for such
measures in relation to such company.
(d) The Tribunal may, if any of the restrictions or conditions specified in an order made
under sub-section (2) are not complied with by the company concerned, or if the company fails
to revive in pursuance of the said order, review such order on a reference in that behalf from
any agency referred to in sub-section (3) of section 424A or on its own motion and pass a
fresh order in respect of such company under sub-section (3) and if the operating agency
specified in an order made under sub-section (3) makes a submission in that behalf, review
such order and modify the order in such manner as it may deem appropriate.
8.4 PREPARATION AND SANCTION OF SCHEMES (SECTION 424D)

(a) Where an order is made under sub-section (3) of section 424C in relation to any sick
industrial company, the operating agency specified in the order shall prepare as expeditiously
as possible and ordinarily within a period of sixty days (extendable to ninety days with reasons
with reasons to be recorded in writing) from the date of such order, having regard to the
guidelines framed by the Reserve Bank of India in this behalf, a scheme with respect to such
company providing for any one or more of the following measures, namely:—
(a) the financial reconstruction of such industrial company;
(b) the proper management of such industrial company by change in, or take over of, the
management of such industrial company;
(c) the amalgamation of—
(i) such industrial company with any other company; or
(ii) any other company with such industrial company (hereafter in this section, in the
case of sub-clause (i), the other company, and in the case of sub-clause (ii), such
industrial company, referred to as “transferee company”);
(d) the sale or lease of a part or whole of any industrial undertaking of such industrial
company;
(e) the rationalisation of managerial personnel, supervisory staff and workmen in accordance
with law;
(f) such other preventive, ameliorative and remedial measures as may be appropriate;
(g) repayment of debt;
(h) such incidental, consequential or supplemental measures as may be necessary or
expedient in connection with or for the purposes of the measures specified in clauses (a)
to (g):
(b) The scheme may provide for any one or more of the following, namely:—
(a) the constitution, name and registered office, the capital, assets, powers, rights, interests,
authorities and privileges, duties and obligations of the sick industrial company or, as the
case may be, of the transferee company;
(b) the transfer to the transferee company of the business, properties, assets and liabilities
of the sick industrial company on such terms and conditions as may be specified in the
scheme;
(c) any change in the Board of directors, or the appointment of a new Board of directors, of
the sick industrial company and the authority by whom, the manner in which and the
other terms and conditions on which, such change or appointment shall be made and in
the case of appointment of a new Board of directors or of any director, the period for
which such appointment shall be made;
(d) the alteration of the memorandum or articles of association of the sick industrial company
or, as the case may be, of the transferee company for the purpose of altering the capital
structure thereof, or for such other purposes as may be necessary to give effect to the
reconstruction or amalgamation;
(e) the continuation by or against the sick industrial company or, as the case may be, the
transferee company of any action or other legal proceeding pending against the sick
industrial company immediately before the date of the order made under sub-section (3)
of section 424C;
(f) the reduction of the interest or rights which the shareholders have in the sick industrial
company to such extent as the Tribunal considers necessary in the interests of the
reconstruction, revival or rehabilitation or repayment of debts of such sick industrial
company or for the maintenance of the business of such industrial company;
(g) the allotment to the shareholders of the sick industrial company, of shares in such
company or, as the case may be, in the transferee company and where any shareholder
claims payment in cash and not allotment of shares or where it is not possible to allot
shares to any shareholder, the payment of cash to those shareholders in full satisfaction
of their claims—
(i) in respect of their interest in shares in the sick industrial company before its
reconstruction or amalgamation; or
(ii) where such interest has been reduced under clause (f) in respect of their interest in
shares as so reduced;
(h) any other terms and conditions for the reconstruction or amalgamation of the sick
industrial company;
(i) sale of the industrial undertaking of the sick industrial company free from all
encumbrances and all liabilities of the company or other such encumbrances and
liabilities as may be specified, to any person, including a co-operative society formed by
the employees of such undertaking and fixing of reserve price for such sale;
(j) lease of the industrial undertaking of the sick industrial company to any person, including
a co-operative society formed by the employees of such undertaking;
(k) method of sale of assets of the industrial undertaking of the sick industrial company such
as by public auction or by inviting tenders or in any other manner as may be specified
and for the manner of publicity therefor;
(l) issue of the shares in the sick industrial company at the face value or at the intrinsic
value which may be at discount value or such other value as may be specified to any
industrial company or any person including the executives and employees of such sick
industrial company;
(m) such incidental, consequential and supplemental matters as may be necessary to secure
that the reconstruction or amalgamation or other measures mentioned in the scheme are
fully and effectively carried out.
(c) Scrutiny of the Scheme
(i) The scheme prepared by the operating agency shall be examined by the Tribunal and a
copy of the scheme with modification, if any, made by the Tribunal shall be sent, in draft,
to the sick industrial company and the operating agency and in the case of
amalgamation, also to any other company concerned, and the Tribunal may publish or
cause to be published the draft scheme in brief in such daily newspapers as the Tribunal
may consider necessary, for suggestions and objections, if any, within such period as the
Tribunal may specify.
(ii) The complete draft scheme shall be kept at the place where registered office of the
company is situated or at such places as mentioned in the advertisement.
(iii) The Tribunal may make such modifications, if any, in the draft scheme as it may consider
necessary in the light of the suggestions and objections received from the sick industrial
company and the operating agency and also from the transferee company and any other
company concerned in the amalgamation and from any shareholder or any creditors or
employees of such companies: Where the scheme relates to amalgamation, the said
scheme shall be laid before the company other than the sick industrial company in the
general meeting for the approval of the scheme by its shareholders and no such scheme
shall be proceeded with unless it has been approved, with or without modification, by a
special resolution passed by the shareholders of the transferee company.
(iv) The sanctioned scheme may thereafter be sanctioned, within sixty days (extendable to
ninety days with reasons with reasons to be recorded in writing) by the Tribunal and shall
come into force on such date as the Tribunal may specify in this behalf: Different dates
may be specified for different provisions of the scheme.
(v) The Tribunal may, on the recommendations of the operating agency or otherwise, review
any sanctioned scheme and make such modifications as it may deem fit or may by order
in writing direct any operating agency specified in the order, having regard to such
guidelines including the guidelines framed by the Reserve Bank of India in this behalf in
order to prepare a fresh scheme providing for such measures as the operating agency
may consider necessary.
(vi) When a fresh scheme is prepared, the provisions of sub-sections (3) and (4) of Section
424D shall apply in relation thereto as they apply to in relation to a scheme prepared
under section 424D(1).
(vii) Where a sanctioned scheme provides for the transfer of any property or liability of the
sick industrial company in favour of any other company or person or where such scheme
provides for the transfer of any property or liability of any other company or person in
favour of the sick industrial company, then, by virtue of, and to the extent provided in, the
scheme, on and from the date of coming into operation of the sanctioned scheme or any
provision thereof, the property shall be transferred to, and vest in, and the liability shall
become the liability of, such other company or person or, as the case may be, the sick
industrial company.
(viii) The sanction accorded by the Tribunal shall be conclusive evidence that all the
requirements of this scheme relating to the reconstruction or amalgamation, or any other
measure specified therein have been complied with and a copy of the sanctioned scheme
certified in writing by an officer of the Tribunal to be a true copy thereof, shall, in all legal
proceedings (whether in appeal or otherwise), be admitted as evidence.
(ix) A copy of the sanctioned scheme shall be filed with the Registrar within the prescribed
time by the company in respect of which such scheme relates.
(x) On and from the date of the coming into operation of the sanctioned scheme or any
provision thereof, the scheme or such provision shall be binding on the sick industrial
company and the transferee company or, as the case may be, the other company and
also on the shareholders, creditors and guarantors and employees of the said
companies.
(xi) The creditors of a sick industrial company may also prepare a scheme for revival or
rehabilitation of such sick industrial company and submit the same to the Tribunal for its
sanction: No scheme shall be submitted by the creditors to the Tribunal unless such
scheme has been approved by at least three-fourth in value of creditors of the sick
industrial company.
(xii) All the provisions relating to the preparation of scheme by the operating agency and
sanction of such scheme by the Tribunal shall, as far as may be, apply to the scheme
referred to in sub-section (11) of Section 424D.
(xiii) The scheme referred to in sub-section (11) if sanctioned by the Tribunal shall be binding
on all the creditors and on other concerned.
(xiv) If any difficulty arises in giving effect to the provisions of the sanctioned scheme, the
Tribunal may, on the recommendation of the operating agency or otherwise, by order, do
anything, not inconsistent with such provisions, which appears to it to be necessary or

expedient for the purpose of removing the difficulty.
(xv) The Tribunal may, if it deems necessary or expedient so to do, by order in writing, direct
any operating agency specified in the order to implement a sanctioned scheme with such
terms and conditions and in relation to the sick industrial company as may be specified in
the order.
(xvi) Where the whole of the undertaking of the sick industrial company is sold under a
sanctioned scheme, the Tribunal may distribute the sale proceeds to the parties entitled
thereto in accordance with the provisions of section 529A and other provisions of this
Act.
(xvii) The Tribunal may monitor periodically the implementation of the sanctioned scheme.
8.5 REHABILITATION BY GIVING FINANCIAL ASSISTANCE (SECTION 424E)

(1) Where the scheme relates to preventive, ameliorative, remedial and other measures with
respect to the sick industrial company, the scheme may provide for financial assistance
by way of loans, advances or guarantees or reliefs or concessions or sacrifices from the
Central Government, a State Government, any scheduled bank or other bank, a public
financial institution or State level institution or any institution or other authority (any
Government, bank, institution or other authority required by a scheme to provide for such
financial assistance being hereafter in this section referred to as the person required by
the scheme to provide financial assistance) to the sick industrial company.
(2) Every scheme shall be circulated to every person required by the scheme to provide
financial assistance for his consent within a period of sixty days from the date of such
circulation or within such further period, not exceeding sixty days, as may be allowed by
the Tribunal and if no consent is received within such period or further period, it shall be
deemed that consent has been given.
(3) Where in respect of any scheme the consent is given by every person required by the
scheme to provide financial assistance, the Tribunal may, as soon as may be, sanction
the scheme and on and from the date of such sanction the scheme shall be binding on all
concerned.
(4) On the sanction of the scheme, the financial institutions and the banks required to provide
financial assistance, shall designate by mutual agreement a financial institution and a
bank from amongst themselves which shall be responsible to disburse financial
assistance by way of loans or advances or guarantees or reliefs or concessions or
sacrifices agreed to be provided or granted under the scheme on behalf of all financial
institutions and banks concerned.
(5) The financial institution and the bank designated shall forthwith proceed to release the
financial assistance to the sick industrial company in fulfilment of the requirement in this
regard.
(6) Where in respect of any scheme consent is not given by any person required by the
scheme to provide financial assistance, the Tribunal may adopt such other measures,
including the winding up of the sick industrial company, as it may deem fit.
8.6 ARRANGEMENT FOR CONTINUING OPERATIONS, ETC., DURING INQUIRY

(SECTION 424F)
(1) At any time before completion of the inquiry under section 424B, the sick industrial
company or the Central Government or the Reserve Bank of India or a State Government
or a public financial institution or a State level institution or a scheduled bank or any
other institution, bank or authority providing or intending to provide any financial
assistance by way of loans or advances or guarantees or reliefs, or concessions to such
industrial company may make an application to the Tribunal—
(a) agreeing to an arrangement for continuing the operations of the sick industrial
company; or
(b) suggesting a scheme for the financial reconstruction of the sick industrial company.
(2) The Tribunal may, within sixty days of the receipt of the application, pass such orders
thereon as it may deem fit.
8.7 WINDING UP OF SICK INDUSTRIAL COMPANY (SECTION 424G)

(1) Where the Tribunal after making inquiry under section 424B and after consideration of all
the relevant facts and circumstances and after giving an opportunity of being heard to all
concerned parties, is of the opinion that the sick industrial company is not likely to make
its net worth exceed the accumulated losses within a reasonable time while meeting all
its financial obligations and that the company as a result thereof is not likely to become
viable in future and that it is just and equitable that the company should be wound up, it
may record its findings and order winding up of the company.
(2) For the purpose of winding up of the sick industrial company, the Tribunal may appoint
any officer of the operating agency, if the operating agency gives its consent, as the
liquidator of such industrial company and the officer so appointed shall for the purpose of
the winding up of such sick industrial company, be deemed to be, and have all the
powers of, the official liquidator under this Act.
(3) The Tribunal may cause to be sold the assets of the sick industrial company in such
manner as it may deem fit and pass orders for distribution in accordance with the
provisions of section 529A, and other provisions of this Act.
(4) Without prejudice to the other provisions contained in the Companies Act, 1956 the
winding up of a company shall, as far as may be, concluded within one year from the
date of the order.
8.8 OPERATING AGENCY TO PREPARE COMPLETE INVENTORY, ETC. (SECTION
424H)
(1) For the proper discharge of the functions of the Tribunal under this Part, the
circumstances so require, the Tribunal may, through any operating agency, cause to be
prepared—
(a) with respect to a company a complete inventory of—
(i) all assets and liabilities of whatever nature;
(ii) all books of account, registers, maps, plans, records, documents of title or
ownership of property and all other documents of whatever nature relating thereto;
(b) a list of shareholders and a list of creditors showing separately in the list of creditors, the
secured creditors and unsecured creditors;
(c) a valuation report in respect of the shares and assets in order to arrive at the reserve
price for the sale of a part or whole of the industrial undertaking of the company or for
fixation of the lease rent or share exchange ratio;
(d) an estimate of reserve price, lease rent or share exchange ratio;
(e) proforma accounts, where no up-to-date audited accounts are available.
8.9 DIRECTION NOT TO DISPOSE OF ASSETS (SECTION 424I)

The Tribunal may, if it is of opinion, that any direction is necessary in the interest of the sick
industrial company or creditors or shareholders or in the public interest, by order, direct such
company not to dispose of, except with the prior approval of the Tribunal any of its assets
during the period of inquiry under section 424B or during the period of preparation or
consideration of the scheme under section 424C.
8.10 POWER OF TRIBUNAL TO CALL FOR PERIODIC INFORMATION (SECTION 424J)
On receipt of reference under section 424A, the Tribunal may call for any periodic information
from the company as to the steps taken by the company to make its net worth exceed the
accumulated losses or to make repayment of its debts referred to in that section, as the case
may be, and the company shall furnish such information.
8.11 MISFEASANCE PROCEEDINGS SECTION (424K)

(1) If, in the course of scrutiny or implementation of any scheme or proposal, it appears
to the Tribunal that any person who has taken part in the promotion, formation or management
of the sick industrial company or its undertaking, including any past or present director,
manager or officer or employee of the sick industrial company—
(a) has misapplied or retained, or become liable or accountable for, any money or
property of the sick industrial company; or
(b) has been guilty of any misfeasance, malfeasance or non-feasance or breach of trust
in relation to the sick industrial company,
the Tribunal may, by order, direct him to repay or restore the money or property or any part
thereof, with or without interest, as it thinks just, or to contribute such sum to the assets of the
sick industrial company or the other person, entitled thereto by way of compensation in
respect of the misapplication, retainer, misfeasance or breach of trust as the Tribunal thinks
just, and also report the matter to the Central Government for any other action which that
Government may deem fit.
(2) If the Tribunal is satisfied on the basis of the information and evidence in its
possession with respect to any person who is or was a director or an officer or other employee
of the sick industrial company, that such person by himself or along with others had diverted
the funds or other property of such company for any purpose other than a bona fide purpose
of the company or had managed the affairs of the company in a manner highly detrimental to
the interests of the company, the Tribunal shall by order, direct the public financial institutions,
scheduled banks and State level institutions not to provide, during a period of ten years from
the date of the order, any financial assistance to such person or any firm of which such person
is a partner or any company or other body corporate of which such person is a director (by
whatever name called).
(3) No order shall be made by the Tribunal against any person unless such person has
been given an opportunity for making his submissions.
(4) The provisions of Section 424K shall apply notwithstanding that the matter is one for
which the person may be criminally liable.
8.12 PENALTY FOR CERTAIN OFFENCES (SECTION 424L)

(1) Whoever violates provisions of this Part or any scheme, or any order, of the Tribunal
or the Appellate Tribunal or makes a false statement or gives false evidence to the Tribunal or
the Appellate Tribunal and attempts to tamper the records of reference or appeal filed under
this Act, shall be punishable with simple imprisonment for a term which may extend to three
years or shall be liable to fine not exceeding ten lakh rupees.

(2) No court shall take cognizance of any offence except on a complaint in writing of an
officer of the Tribunal or the Appellate Tribunal or any officer of the Central Government
authorised by it or any officer of an operating agency as may be authorised in this behalf by
the Tribunal or the Appellate Tribunal as the case may be.
9
(I) CORPORATE WINDING UP AND DISSOLUTION
9.0 INTRODUCTION
Clarification on Companies (Second Amendment) Act, 2002
[Notification issued by Ministry of Finance and Company Affairs (Department of Company
Affairs) vide F. No. 1/1/2003-CL.V dated 9.9.2003].
The Companies (Second Amendment) Act, 2002 (11 of 2003) received the assent of the
President of India on 13.1.2003. Government has decided to bring into force the
provisions of section 2 and 6 of the Companies (Second Amendment) Act, 2002 (11 of
2003) with effect from 1.9.2003. Notification has been published in the Official Gazette
dated 31 st March, 2003 as S.O.344 (E). This has been notified to enable the Government
to initiate necessary steps to establish National Company Law Tribunal and make it
operational.
For the sake of clarity it is stated that this Notification bringing into effect section 6 of the
Companies (Second Amendment) Act, 2002 (11 of 2003) will only set in motion all
preliminary steps required for establishment of National Company Law Tribunal. Upon
establishment of the same a separate Notification regarding constitution of NCLT will be
issued. Till such time, jurisdiction of Company Law Board will continue to remain
unchanged.”
We bring to the attention of students that though the Companies (Second Amendment)
Act, 2002 has been passed by the Parliament, only a few provisions (Section 2 and 6)
have been notified so far. In other words, despite, the Sick Industrial (Special Provisions)
Act, 1985 [SICA] has been repealed, all the provisions of the said Amendment Act, 2002
have not come into force. The reason being though the Government has constituted the
National Company Law Tribunal (NCLT) which shall deal with winding-up and
rehabilitation of sick companies it has not yet become operational.
In view of the above situation, the provisions relating to winding-up of companies as
contained in the legislation prior to the amendment are still having relevance and in view
of the fact that entire provisions of the Companies (Second Amendment) Act, 2002 have
not come into force. Yet the new law has been incorporated in this study material to the
extent possible.
9.1 DISSOLUTION OF COMPANY

9.1.1 How dissolution is brought about: A company, being a body corporate, continues in
existence until it is dissolved according to law. Dissolution can be brought about in the
following ways.
a. By removal of the company’s name from the register by the Registrar (without
winding-up order) (Section 560): A defunct company is a company which has not been
legally dissolved, and the name of which continues on the Register of Companies
maintained in the Registrar’s office.
Where the Registrar has a reasonable ground to believe that a company is not carrying
on business or is not in operation he must send to the company a letter through post
enquiring if it is carrying on business or is in operation. If no reply is received by him
within one month, the Registrar, within 14 days after the expiry of the period of one
month, must send to the company a registered letter referring to the first letter and state
that no answer thereto has been received and further stating that if no answer is received
to the second letter within one month of the date thereof, a notice will be published in the
Official Gazette with a view to striking the companies name off the register. If the
Registrar either gets a reply to the effect that it is not carrying on business or is not in
operation, or does not within one month, after the second letter, receive any reply, he
may publish in the Official Gazette and send to the company by registered post a notice
that at the expiry of a period of three months from the date of the notice, the name of the
company will, unless cause is shown to the contrary, be struck off the Register and the
company will be dissolved.
If the Registrar has reason to believe either that no liquidator is acting or that the affairs
of the company have been completely wound up, and any returns required to be made by
the liquidator have not been made for consecutive six months, the Registrar must publish
in the Official Gazette and send to the company a similar notice. When the time stipulated
in such notice expires, the Registrar may, unless cause to the contrary is previously
shown, strike its name off the Register and publish notice thereof in the Official Gazette,
whereupon the company shall stand dissolved.
But the liability (if any) of every director, manager or other officer who was exercising and
power of management and of every member of the company, shall continue, This liability
may be enforced as if the company had not been dissolved. Also, the aforesaid
provisions will not affect the power of the Tribunal to wind up a company the name of
which has been struck off the register.
b. By order of the Tribunal or the order of the Central Government under Section 396:
A company whose undertaking is being transferred to another company under a scheme
in accordance with Section 394 may be dissolved by an order of the Tribunal [Section 394
(1) (iv)].
Corporate Winding-up and Dissolution 9.3
The dissolution of existing two or more companies may take place when the Central
Government, by virtue of Section 396, orders the amalgamation of the said existing
companies in to a new single company in the public interest.
c. By winding- up : This method is by far the most common one and is followed when for
any reason other than those mentioned above, the company’s existence is not desired or
cought to be terminated e.g., because the object for which the company had been formed
has been accomplished, or because the company is insolvent.
d. Effect of dissolution: “The dissolution puts an end to the existence of the company.
Unless and until it has been set aside, it prevents any proceeding being taken against
promoters, directors, or officers of the company to recover money or property due or
belonging to the company, or to prove a debt due from the company. Where, the
company is dissolved, the statutory duty of the liquidator towards the creditors and
contributories is gone; but if he has committed a breach of his duty to any creditor by
distributing the assets without complying with the requirements of the Act, he is liable to
damages to the creditor”. (Halsbery’s Laws of England, 3rd Edn. Vol. VI, Page, 370);
Kanhaiya Lal Bhargava vs. Official Liquidator (1965) 35 Comp. Cas. 340)
e. Revival of company after dissolution: Where a company has been struck off the
register, the company, or any member or creditor who feels aggrieved, may, within 20
years from the gazetting of the notice, apply to the Tribunal to have the company restored
to the register. If the Tribunal is satisfied that the company was carrying on business or
was in operation when struck off or that it is otherwise just that it be restored to the
register, it may make an order accordingly. When a certified company of this order is
delivered to the Registrar for registration, the company would be deemed to have
continued in existence as if its name had not been struck off.
A letter or notice referred to above may be addressed to the company at its registered
office. If there is no such office, it may be addressed to the company to the care of some
director or other officer of the company. If there is no such director or officer whose name
and address is known to the Registrar, it may be sent to each of the persons who
subscribed to the memorandum at the address mentioned in the memorandum [Section
560].
f. Revival of defunct company under Section 560 and dissolved company under
Section 559 :
Section 559 Section 560
(i) Application for revival must be
presented by the liquidator or other
person who appears to the Tribunal
to be interested.
(ii) Limitation period for application is 2
years of the date of the dissolution.
(iii) Acts done after dissolution and

before revival are not validated by
order of revival.
9.1.2 Distinction between winding-up and dissolution: These two situations differ from
each other in following respects:
(i) Winding- up precedes dissolution. In the former case, the company still remains in
existence, while the latter implies that the company is not extant any more (Employer’s
Liabilities Assurance Corporation vs. Sedwitck........ Co., 1927 A.G.95).
(ii) Winding-up denotes and involves the liquidator’s acts of realising and collecting the
assets of the company, satisfying its debts and obligations, distributing its capital and
surplus assets among the members of the company. But dissolution comes after the
liquidator has done all this in the winding-up; ordinarily it implies that the company’s
affairs have been completely wound-up and that the company is no longer in existence
[Kanhaiya Lal Bhargava’s, Case / (1965) /35 Comp. Cas. 340].
(iii) The Liquidator, in the case of a winding- up, is the representative of the company on
behalf of which he in appointed, but on dissolution he cannot nay more represent a
person not in existence. In the first case any creditor can prove a debt due to him from
the company, while it is not possible to do so after dissolution (Kanhaiya Lal’s Case
Supra).
9.1.3 Implications of Winding-up: Winding- up more popularly known as liquidation of a
company, relate to the proceedings by which (a) all its affairs are wound up, (b) its rights and
liabilities are discerned, and (c) the claims of its creditors are settled either fully or to such an
extent as may be warranted by the assets of the company. Having met all the obligations of
the company out of the assets realised, the surplus assets of the company, if there be any, are
distributed among its members in proportion to their rights laid down by the articles of
association. On this being done and on compliance with certain other statutory requirements,
the company is said to have been dissolved.
The term ‘winding-up’ should not be construed as synonymous with ‘bankruptcy’. In the matter
of winding-up, the general rule is that a company may be wound if its members so desire or if
it cannot pay its debts or if its extinction is considered desirable on any account. It thus follows
that a company may be wound up even if it is otherwise solvent, for instance, winding- up for
purposes of reconstruction.
Where a solvent company is being wound up, all debts payable on a contingency and claims
against the company, present or future, certain or contingent, ascertained or sounding only in,
damages, are admissible to proof against the company, a just estimate being made, as far as
possible, of the value of such debts or claims as may be subject to any contingency, or may
sound only in damages, or for some other reason may not bear a certain value [Section
)(528)]. As regards the right of the creditors of the company which is being wound up for its
inability to pay its debts, the same rules prevail as in the case of insolvency law in respect of
debts provable, the valuation of annuities and future and contingent liabilities and the
respective rights of secured and unsecured creditors (Section 529).
Secured creditors may rely on the security and ignore the liquidation altogether, or value their
security and prove for the balance of their debt, or give up their security and prove for the
whole amount, Unsecured creditors are paid in the order prescribed by Section 530.
Preferential creditors are paid first; liability for dividends is satisfied only if the claims of
outsiders are fully met.
So far as the employees are concerned, a winding- up order by a Tribunal operates as a
notice of discharge to the employees and officers of the company except when the business of
the company is continued [Section 445 (3)]. A voluntary winding- up which involves a
discontinuation of the business also operates as a notice of discharge, and may also raise a
claim for damage where there is an agreement for employment for a fixed time (Reigate vs.
Union Manufacturing Co. (1918) 1KB).
9.1.4 Modes of winding-up : Part VII of the Act deals with the winding-up of a company.
Under Section 425, a company may be winding-up either: (i) by a Tribunal (compulsory
winding- up) or (ii) voluntarily. Whichever method is adopted, a liquidator or liquidators must
be appointed to administer the property of the company, and they first apply the assets of the
company towards the payment of debts which have statutory priority in a winding up, next to
the payment of creditors in their order of precedence and then distribute the surplus, if any,
among the shareholders according to their rights inter se.
In respect of companies with a paid- up capital of less than Rs. I lakh, winding-up jurisdiction
can be conferred on the Tribunals, In other cases, only the Tribunal has jurisdiction in winding-
up matters (Section 10)
9.1.5 Contributories: In a winding up, the term ‘’contributory” means a past or present
member. Strictly, it means every person liable to contribute to the assets of a company in the
event of its being wound up, and includes holders of shares which are fully paid; for the
purposes of all proceedings for determining, and all proceedings prior to the final
determination of the persons who are to be deemed contributories; the term ‘contributory’
includes any person alleged to be contributory (Section 428).
If a member is once placed on the list of contributories, he is liable to the extent of original
shares that remain unpaid, unless he proves that he should not have been placed on the list.
For instance, some applicants consented to become shareholders of a company on the
condition that their suggestions should be included in the memorandum and articles of
association. Their suggestions, however, were not carried out by the promoters but the
applicants signed usual applications for shares which were allotted to them and thereby
became shareholders of the company. It was held that it was not open to them to object
subsequently to their being shareholders of the company on the ground that the condition had
not been fulfilled (East Bengal Sugar Mills Ltd., In re. (1941) 11 Comp. Cas 169).
Liability of contributories as present and past members (Section 426): When a company
goes into liquidation, every member, whether past or present, has to contribute to the assets
of the company. However, a past member will not be required to contribute in the following
circumstances:
(a) If he had ceased to be a member for a period of one year or upwards before the
commencement of winding up;
(b) If the debt or liability of the company was contracted or incurred after he ceased to be a
member;
(c) If the present members are able to satisfy the contributions required to be made by them
under the Act.
There is, however, a limitation on the amount the members may be required to contribute. In
the case of a company limited by shares, any past or present member is not required to
contribute in excess of the amount, if any, unpaid on the shares in respect of which he is liable
as such member.
In the case of a company limited by guarantee, a past or present member is not required to
contribute an amount which is in excess of the amount undertaken to be contributed by him to
the assets of the company in the event of its being wound up. In the case of a company limited
by guarantee but having a share capital, every member (present or past) of the company is
liable, in addition to the guaranteed amount, to contribute to the extent of any sum unpaid on
any shares held by him as if the company were a company limited by shares.
When any provisions are contained in a policy of insurance or other contract whereby the
liability of individual members on the policy or contract is restricted whereby the funds of the
company and alone made payable, the liability of the contributory will be subject to such a
provision. Dividends, profits or other sums due to a past or present member, must not be
treated as debts due from the company payable to that member for setting off the rights of
members as against creditors claiming otherwise than in the character of past or present
members. But such sums shall be taken in to account for finally adjusting the rights of the
contributories per se [Section 426(f) and (g)]. According to Section 426 (g), any debt due to a
past member in respect of unclaimed dividends cannot be admitted to rank in competition with
the debts due to ordinary creditors [Re. Consolidated Goldfields of New Zealand Ltd. (1953)
Ch. 689.]
The liability of a member to be included in the list of contributories is not ex contraactu but ex
lege. This is borne out by Section 426. It provides that the liability of a contributory shall create
a debt accruing due from him at the time when his liability commenced, but payable at the time
specified in the calls made on him by liquidator. In other words, the liability of a contributory
though commencing at the date when he entered into the contract with the company under
which he became a member, is only contingent upon the company being wound up, in as
much as it is, until a call is made, nothing more than a mere liability to contribute, if necessary,
to the assets of the company for payment of the debts due to its creditors and expenses of the
winding up. Thus, the liability of a contributory arises ex lege and not ex contractu. The effect
of this provision is to give to the liquidator a new cause of action which a company itself might
not have. For instance, if the claim of a company for the realisation of any call from a member
is barred by limitation, such member becomes liable to pay all that has remained unpaid on his
shares including the unpaid calls when the company goes into liquidation [In re East Bengal
Sugar Mills Ltd. Supra]. This statutory liability of the contributory is a new liability which arises
after the winding-up of a company has started. Therefore it is no answer to a liquidator’s claim
against any person whose name appears on the register of members that there was an
agreement with the directors to exclude this statutory liability [Hansraj Gupta vs. Asthana
(1932) P.C. 240].
A director or manager-whether past or present- whose liability under the provisions of the Act
is unlimited shall, apart from his liability to contribute as an ordinary member, be liable to
make a further contribution as if he were a member of an unlimited company. No further
contribution is required of him.
(a) if he has ceased to hold office for a year or more before the commencement of the
winding-up;
(b) if the debt was one which the company had contracted after he had ceased to hold office;
(c) subject to the articles, the director or manager shall not be liable to contribute so as to
satisfy his debt or liability of the company and the costs, charges and expenses of the
winding- up unless the Tribunal deems it necessary (Section 427).
Contributories in case of death or insolvency of member or winding- up of a body corporate
which is a member : In the case of death of a member, his legal representative will be liable as
contributories whether the death took place before or after his name had been placed on the
list of contributories. The assignees of insolvent members are liable as contributories subject,
however, to their power of disclaimer. When a body corporate which is a contributory is in the
process of a winding-up, it will be represented by its liquidator in regard to its own liability, and
the liquidator shall be a contributory subject, however, to his power of disclaimer (Sections
430, 431 and 432).
9.1.6 Official Liquidator
a. Appointment of Official Liquidator: In order that the debts and obligations of a
company in liquidation may be satisfied, and the surplus assets distributed amongst the
members according to their right to share in such surplus assets, there must be some
person to discharge these duties. The person who does all these is called the liquidator.
For the purpose of the Companies Act and in so far as it relates to the winding- up of a
company by the Tribunal, there must be attached to each Tribunal an Official Liquidator.
He is appointed by the Central Government and is a whole time officer, unless the Central
Government thinks that there will not be sufficient word to justify a full-time appointment
in which case a part- time officer may be appointed. The Official Receiver attached to a
District Tribunal for insolvency purposes, or if there is no such Official Receiver then such
person as the Central Government may, by notification in the Official Gazette, appoint for
the purpose shall be the Official Liquidator attached to the District Tribunal [Section 448
(1). Also one or more Deputy or Assistant Official Liquidators may be appointed by the
Central Government so as to assist the Official Liquidator in discharging his function
[Section 448 (1-A)]. On a winding- up order being made in respect of a company, the
Official Liquidator ex-officio shall become the liquidator of the company [Section 449].
The legal position of an Official Liquidator is that he is pubic servant and an officer of the
Tribunal. Such a position requires him to be honest and impartial and to act in the
interests of all concerned [Ripon Press vs. Cheti 55 Mad 180]. He has such powers as
are prescribed by Section 457. Section 462 requires him to render account to the
Tribunal. In the case of government company the liquidator shall forward a copy to the
Central Government if that Government is a member or to the Central Government and
State Government if both are members, of the Government company. He is not ‘trustee’,
in the sense of the term; although he is sometimes described as such [ex-parte Watkin
1857. I Dh. E. 130]. He stands in fiduciary relationship with the company he is appointed
for [Black and Co., 1872, 8 Ch. 254]. He is debarred from making any secret profit. If he
abuses his power and betrays his position, he shall be liable to make good any secret
profits that he may have made as well as be liable to be removed by the Tribunal. Thus,
he is a trustee in the sense that he must act in the interest of the company, the creditors
and the contributories. He should not act in his own interest [Silk Stone & Haigh Moor Co.
1900, 1 Ch. 167].
b. Appointment of Provisional Liquidator : After a winding-up petition has been
presented, but before a winding-up order has been issued, the Tribunal may appoint the
Official Liquidator as the provisional liquidator. But prior to such an appointment being
made, the Tribunal is bound to give notice to the company and also a reasonable
opportunity to make its representation. The Tribunal may, however, raise this notice for
special reasons which must be recorded in writing. The provisional liquidator will be
vested with powers of liquidator, unless they are limited or restricted to any extent by the
appointing Tribunal. On winding-up order having been made, the Official Liquidator
ceases to be provisional liquidator and becomes the liquidator [Section 450].
Generally, a provisional liquidator will not be appointed unless a strong case is made out
by showing the necessity for such an appointment and unless it is proved that the
property of the company needs be taken possession of immediately [In re-Dry Docks
Corporation of London, 1888 39 Ch. D. 309; East Punjab Pictures vs. Jhabar Mal 1940
East Punjab 139]. His appointment is temporary and continues till the appointment of the
Official Liquidator. The reason for his temporary appointment is that there must be some
persons to take proper custody of the company’s property so that it debts and obligations
are met with equitably and in accordance with the provisions of the Act and fraudulent
preference is prevented (In re-Dry Docks Corporation, supra]. As against an order of the
Tribunal by which a provisional liquidator is either appointed or not, an application for
permission to move the Supreme Tribunal cannot lie, as this order, being only an
interlocutory order, is not a final order [Jhabar Mal, vs. The Punjab Pictures Ltd., 1949, 99
Comp. Cas. 172].
A liquidator may be removed and replaced by another, if the Tribunal is satisfied that it is
for the general advantage of those interested in the assets of the company [Re Adom
Eyton Ltd. (1887) 36 Ch. D. 209].
c. Powers of Liquidator : A liquidator has the following powers which he must exercise
with the sanction of the Tribunal;
(i) to institute or defend any suit, prosecution or legal proceeding, civil or criminal, in the
name and on behalf of the company
(ii) to carry on the business of the company, so far as may be necessary for its beneficial
winding-up,
(iii) to sell movable and immovable property and actionable claims of the company by public
auction or private contract in whole or in parcels,
(iii) (a) to sell whole of the undertaking of the company as a going concern
(iv) to raise any money required, on the security of the assets of the company
(v) to do such other things as may be necessary for the winding -up of a company and the
distribution of its assets [Section 457 (1)].
The Tribunal may order that the liquidator can exercise the above powers without the sanction
or intervention of the Tribunal. However, in such cases, the liquidator, in exercising the
aforementioned powers, will be subject to the control of the Tribunal (Section 458).
The following is a list of powers which he can exercise without the consent of the Tribunal
(i) do all acts and to execute deeds, receipt and other documents for and on behalf of the
company and use for this purpose the company’s seal;
(ii) to inspect the records and returns of the company on the files of the Registrar without
payment of any fee;
(iii) to prove rank and claim of the insolvency of any contributory for any balance against his
estate and to receive dividends in his insolvency, in respect of that balance, as a
separate debt from the insolvent, and rateably with the other separate creditors;
(iv) to draw, accept, make and endorse bills of exchange, hundi or promissory note in the
name and on behalf of the company as if these have been drawn, accepted, made or
endorsed by or on behalf of the company in the course of its business;
(v) to take out in his official name, letters of administration to any deceased contributory and
do any other acts needed for obtaining payment of money due from the contributory or his
estate and
(vi) to appoint an agent to do any business which he himself is unable to do [Section 457 (2)].
All the above-mentioned powers, exercisable by the liquidator are subject to the control of the
Tribunal. Any contributory or creditor may apply to the Tribunal in regard to the exercise of the
powers conferred on the liquidator [Section 457 (2)].
A liquidator in a voluntary winding-up, with the sanction of a special resolution in case of
member’s winding-up, and, or Tribunal or Committee of Inspection or (if there is no such
committee) of a meeting of the creditors in creditor’s voluntary winding-up, can exercise
powers specified under clauses (a) to (d) of Section 457 (1) [i.e., powers (i) to (iv)
aforementioned which are exercisable with the sanction of the Tribunal [Section 512 (1) (a)].
The exercise of these powers, however, will be subject to the control of the Tribunal [Section
512 (2)]. The liquidator may
(i) without the sanction referred to in Section 512 (1) (a) exercise any of the other powers
given by the Act to the liquidator in a winding-up by the Tribunal;
(ii) exercise the power of the Tribunal, under the Act, of settling a list of contributories which
shall be prima facie evidence of the liability of the person named therein to be
contributories
(iii) exercise the powers of the Tribunal of making calls:
(iv) call general meetings of the company to obtain the sanction of the company by ordinary
or special resolution as the case may require, or for any other purpose he may think fit
[Section 512 (1) (b) to (c)].
A liquidator may (a) with the sanction of the Tribunal when the Company is being wound up by
or subject to the supervision of the Tribunal and (b) with the sanction of a special resolution of
the company in the case of the voluntary winding-up;
(i) pay any class of creditors in full;
(ii) make any compromise or arrangement with creditors or persons claiming to be creditors
or having or alleging themselves to have any claim, present or future, certain or
contingent; ascertained or sounding only in damages against the company or whereby
the company may be rendered liable or
(iii) compromise any call or liability to call, debt and liability capable of resulting in a debt, and
all claims, present or future, certain or contingent, subsisting or alleged to subsist
between the company and a contributory or alleged contributory or other debtor or person
apprehending liability to the company, and all questions in any way concerning or
affecting the assets or liabilities or the winding-up on such terms and conditions as may
be agreed, and take any security for the discharge of any such call, debts, liability or
claim and give a complete discharge in respect thereof.
In the case of voluntary winding-up, the powers aforementioned exercisable by the liquidator
are subject to the control of the Tribunal. Any creditor or contributory may apply to the Tribunal
with respect to the exercise or proposed exercise of any such power [Section 546 (2) and (3)].
The Supreme Tribunal may make rules under Section 643 as regards the manner in which the
liquidator should exercise power under clauses (ii) and (iii) of Section 546 (1) without the
sanction of the Tribunal.
d. Duties of Liquidators: The following are the main duties of a liquidator or provisional
liquidator, as the case may be, as contemplated by the Act.
(1) To take into custody or under his control, all the property, effects and actionable claims to
which the company is or appears to be entitled (Section 456). For this purpose, the
liquidator, or provisional liquidator as the case may be, may in writing request the Chief
Presidency Magistrate or the District Magistrate within whose jurisdiction such property,
effect or actionable claims or any books of account or other documents of the company
may be found to take possession thereof. Thereupon, the Chief Presidency Magistrate or
the District Magistrate may after having given to any party such notice as he may think fit,
take possession of them and deliver the same to the liquidator or the provisional
liquidator [Section 456 (1A)].
For securing compliance with the provisions of Section 456 (1A), the Magistrate
aforementioned may take or cause to be taken such steps and use or cause to be used
such force as he considers necessary [Section 456 (1B). All the property and the effects
of the company shall be deemed to be in the custody of the Tribunal as from the date of
the winding-up [Section 456 (2)].
(2) To submit a preliminary report to the Tribunal giving the particulars mentioned in Section
455.
(3) To keep, in the manner prescribed, proper books in which he shall cause entries or
minutes to be made of proceedings at meeting and of such matters as may be prescribed
(Section 461). Rule 286 of the Companies (Tribunal) Rules 1956 prescribes that the
liquidator should maintain different books for various purposes. The forms of the books
have also been prescribed. In addition the rule requires that registers should be
maintained to keep a record of several routine matters, e.g., receipt and despatch of
letters, remittances received, etc. Where the liquidator finds that the books of account as
have been maintained by the company are incomplete, it is obligatory for him to have the
same completed and brought up-to-date.
(4) To summon meeting of the creditors and contributories in the manner hereinafter stated
under the head “Committee of Inspection” [Section 464].
(5) To pay the moneys, received by him as liquidator, or any company into the Public
Account of India in the Reserve Bank of India (Section 552) and not into his private bank
account (Section 554). But the voluntary liquidator is to pay the moneys into a scheduled
bank to the credit of “Liquidation Account of X & Co. Ltd./X & Co. Private Ltd/X & Co.”
(Section 553).
(6) To pay forthwith dividends payable to creditors, which had remained unpaid for 6 months
after the date on which they were declared and assets refundable to any contributory,
which have remained undistributed for six months after the date on which they become
refundable into the Public Account of India Companies Liquidation Account in the
Reserve Bank of India in a separate account called “Company’s Liquidation Account”
[Section 555 (1)].
(7) To summon meetings at such times as the contributories, by resolution, direct, or
whenever requested to do so by not less than one-tenth in value of creditors or
contributories, as the case may be [Section 460 (3) (b)].
(8) To obey directions given by resolutions of creditors or contributories or by the Committee
of Inspection in the administration of the assets of the company and the distribution
thereof among its creditors [Section 460 (1)]. Note that any directions given by the
creditors or contributories at any general meeting shall in case of conflict, be deemed to
override any direction given by the committee of inspection [Section 460 (2)].
(9) To submit the accounts for inspection to Committee of Inspection [Section 465 (2)].
(10) To account for secret profit made by him.
(11) To be impartial between creditors, members, etc.
(12) To obey the directions of the Tribunal with regard to disposal of books of the company
(Section 550).
(13) To file periodical report with the Tribunal (Section 551).
(14) To notify on invoices that the company is in liquidation (Section 547)
(15) To duly observe all the requirements of the Act [Section 463 (1)].
(16) To participate in public examination of directors, etc. (Section 481).
(17) To forward dissolution order to Registrar within 30 days from the date thereof [Section
481 (2)].
e. Information as to pending liquidations: Section 551 (1) prescribes that when the
winding-up of a company is not concluded within one year after its commencement the
liquidator shall, unless exempted from so doing by the Central Government, within two
months of the expiry of such year and thereafter, until the winding-up is concluded, at
intervals of not more than one year or at such shorter interval, if any, as may be
prescribed, file a statement in Form No. 148 (Rule 311 of Companies (Tribunal) Rules).
The statement shall contain necessary particulars and be audited by a Chartered
Accountant. These particulars must be with respect to the proceedings in and position of
the liquidation. In the case of a winding-up being carried on by or under the supervision of
the Tribunal, the aforesaid statement is to be filed in the Tribunal but in the case of a
voluntary winding-up, it is to be filed with the Registrar. But an audit is not necessary in
case of winding-up by the Tribunal, where provisions of Section 462 apply.
Simultaneously with the filing of a copy of the statements of account in the Tribunal, a
copy shall be filed with a Registrar [Section 551 (2)]. In the case of a government
company, the copy of the Statement of account shall be filed with the Central
Government if that Government is a member, or to the State Government if both are
members of the Government Company. [551 (2A)]. Any person stating himself in writing
to be a creditor or contributory is entitled all reasonable times on payment of the
prescribed fee to inspect the foregoing statements of account and to receive a copy
thereof or an extract therefrom [Section 551 (3)].
f. Audit of Liquidator’s Accounts: As has been stated earlier, Section 462 (1) prescribes
that the liquidator shall, during his tenure of office, present to the Tribunal an account of
his receipts and payments, Rule 98 of the Companies (Tribunal) Rules requires the
Official Liquidator to file his accounts with the Tribunal twice a year, one made up to 31st
March and the second up to 30th September, within 3 months of the closing of the
accounts. The accounts should be drawn up in Form 144 of the Companies Tribunal
Rules.
Section 462 (3) prescribes that the Tribunal shall cause the accounts to be audited as it
thinks fit. In consonance there with, Rule 302 of the Companies Rules provides that the
accounts shall be audited by one or more Chartered Accountants appointed by the
Tribunal or, if the Tribunal so directs, by the Examiner of the Local Fund Accounts of the
State concerned. The audit shall be complete check of the accounts of the Official
Liquidator and of each of the companies in liquidation in his charge. Though the
certificate to be appended to this account has not been prescribed it has been mentioned
that the auditor shall check them with reference to books of account and give his
observations and comments on the accounts. He also must forward a certificate of audit
as well as a copy thereof to the Registrar and another copy to Official Liquidator (Rule
303). A copy of the accounts must be filed and kept by the Tribunal and the same be
open to inspection by any creditor, contributory or any person interested [Section 462
(4)]. In the case of a government company, the liquidator shall forward a copy to the
Central Government if that Government is a member of the Government company or to
any State Government if that Government is a member or to the Central Government and
State Government if both are members of the Government company. [462 (4A)] Section
462 (5) provides that the liquidator shall cause the account when audited, or summary
thereof to be printed and shall send a printed copy of the accounts or summary by post to
every creditor or to every contributory. But the Tribunal is empowered to dispense with
the compliance of this provision.
g. Control exercisable by Central Government over Liquidator: The Central
Government, according to the provisions contained in Section 463, is empowered to take
cognisance of the conduct of the liquidator of companies which are being wound-up by
the Tribunal. If, on the application of any creditor or contributory, it is found that a
liquidator is not faithfully performing the duties and fully observing the requirements
imposed on him by the Act, rules or otherwise the Central Government must enquire into
the matter and take such action as it may think expedient. Also, the Central Government
may at any time (a) require any liquidator to answer any enquiry in relation to any
winding-up in which he is engaged; or (b) direct a local investigation to be made into the
books and vouchers of the liquidator; or (c) apply to the Tribunal to have him examined
on oath concerning the winding-up.
9.2 WINDING-UP BY TRIBUNAL

9.2.1 Circumstances : Section 433 deals with the circumstances in which a company may be
wound up by the Tribunal. These are as follows:
(a) If the company has by a special resolution resolved that it shall be wound up by the
Tribunal;
(b) if the company defaults in delivering the statutory report to the Registrar or in holding the
statutory meeting. But instead of ordering such a company to be wound up, the Tribunal
may direct the report to be filed or the meeting to be held;
(c) if the company does not commence its business within a year from its incorporation or
suspends its business for a whole year. It should be noted that the power of the Tribunal
to wind up, when the company has not carried on business for a year, is discretionary and
it will not be exercised unless there are indications that the company has no intention to
start or to continue its business. However, the Tribunal would not grant an order against
the wishes of a majority of the contributories if the delay in commencing, or the
interruption of, the business is explained and if it is satisfied that business would be
commenced or resumed. [Murlidhar vs. Bengal Steam Co. Ltd., (1921) I.L.R. 47 Cal.
654];
(d) if the number of members is reduced below seven in the case of a public company or
below two in the case of a private company, the Tribunal would, however, permit the
company to wind up itself voluntarily. In this connection, it is necessary to recall that
according to the provisions contained in Section 45 of the Act a member is personally
liable for the debts of the company if the membership falls below the statutory minimum
and the business is carried on for more than six months after the number has been so
reduced and such a fact is within the knowledge of the shareholders;
(e) if the company is unable to pay its debts. Under Section 434, a company is deemed
unable to pay its debts in any of the following circumstances :
(i) If a creditor of the company, to whom the company by assignment or otherwise owes a
sum exceeding Rs.500, has demanded the same in writing, and the company has for 3
weeks thereafter neglected to pay the amount or to secure or compound for it to the
reasonable satisfaction of the creditor.
The above-mentioned letter of demand may be delivered by registered post or otherwise
at the registered office of the company. The meaning of the word “delivered in respect of
a registered letter cannot be limited to cases when the registered letter is accepted by the
addressee. A tender of such a letter, even if it is refused by the assessee, is a good
delivery. The refusal to take the delivery of the letter precludes the addressee from
pleading ignorance of its contents.
Prior to an order for winding-up of a company being made, it is required to be shown that
the debt due from the company is presently payable and that the title of the petitioner is
complete. A petition cannot be supported on the allegation that some debt is due, unless
it was debt for which a statutory demand was made. [In Re. Jambad Coal Syndicate Ltd.
I.L.R. 62 Col 294].
The demand under clause (i) above is called statutory notice and ly form. Notice served
at some place other than the registered office of the company will be invalid [Ankhtiarpur
Bihar Light Railway Co. Ltd. vs. Union of India [1954] 93 Cal. L.J. 271]. But if the
company has no registered office, then the notice of demand for the payment of the debt
may be given at the place where the company carries on business [British & Foreign
Apparatus Co., 1865), 12L.T. 368]. Where the debt is bona fide disputed, clause (i) does
not apply:
(ii) If execution or other process issued on a decree or order of a Tribunal in favour of the
creditor of the company is returned unsatisfied in whole or in part; or
(iii) If it is proved to the satisfaction of the Tribunal that the company is unable to pay its
debts.
A company may be wound up even when its assets are valuable, if they are locked up in
investments and the company is carried on at a loss. In considering whether a company is
able to pay its debts, the company’s contingent and prospective liabilities have to be taken
into account, and, therefore it may be unable to pay its debts, although it has paid its debts as
they become due, if its existing and probable assets will be insufficient to meet its prospective
liabilities.
To justify the application of clause (i) above, the company may be, in the words of Sir William
James, V.C. “commercially insolvent”. Insolvency may be proved easily by notice under clause
(i); under clause (ii), it is more difficult to prove to the satisfaction to the Tribunal. For instance
the fact that the liabilities of a company far exceed its assets does not ipso facto mean that the
company is unable to pay its debts and does not give rise to a ground for compulsory winding
up under Section 433. It is rather the “commercial insolvency” (i.e., the circumstances in which
the existing assets and liabilities” are such as to make the Tribunal feel satisfied that the
existing and probable assets would be insufficient to meet the existing liability”) which affords
an occasion for compulsory winding-up on the ground of inability to pay off its debts. A
particular company may have the capacity to meet the demands of its creditors; in that case, a
winding up order would be unjustified [Krishnaswamy vs. Stressed Concrete Construction
(Pvt) Ltd. AIR. 1964 Mad. 191].
In the Registrar of Companies, Punjab vs. Ajanta Lucky Scheme and Investment Co. Private
Ltd. and Others (1973), 43 Comp Cas. 314, the Registrar of Companies filed petition for the
winding-up of the respondent company under Section 433 (e) read with Section 439 (5) of the
Act on the ground that the company was unable to pay debts and that its liabilities exceeded
its assets. The two issues that emerged therefrom were as follows, viz. (a) whether the
company was unable to pay its debts and meet its liability; and (b) whether it was a proper
case for winding-up. Held: (a) That for determining the company’s ability or otherwise to pay
its debts, it was to be considered whether the company was able to meet its liability as and
when they accrued due. Section 434 of the Act prescribes the circumstances in which a
company was to be treated as unable to pay its debts. Admittedly, none of these
circumstances was present in the case in question and no complaint had even been received
by the company from its creditors as regards non-fulfilment of any of their claims against the
company. In a case where no debt had been due, a demand therefore could not be made. The
mere fact that certain liabilities might accrue due in future, which could exceed the existing
assets of the company, would not necessarily lead to the conclusion that the company would
be unable to meet its liabilities when they accrued due. The mere fact of the company’s
liabilities being in excess of its assets could not ipso facto be a ground for putting the
company into liquidation. The test would be that the company should be commercially solvent,
i.e., the company ought to be on a position to meet its liabilities as and when they arose: (b)
that there was no ground for winding-up, because it was shown that (i) the paid-up capital had
augmented, every year the business flourished, there were additions to list profit and the
subscribers’ claims on maturity had been met; and (ii) any creditor or contributory or even the
Reserve Bank had never lodged any complaint against the financial stability of the company.
(f) “just and equitable” rule: Where there is a petition of the Tribunal to wind up a company
on the ground that it is “just and equitable”, the Tribunal has power to make a winding-up
order in any case where the special circumstances are such that it appears just to make
such an order. Such orders have been made by the Tribunals in the following
circumstances.
(i) Where the substratum of the company has disappeared, e.g., where the main object of
the company was to acquire and work a mine or patent or concession which could not be
obtained or where the mine was worthless or the patent was invalid or the concession has
lapsed [Re, German Date Coffee Co. (1882) 20 Ch. D. 169].
A company will not be wound up because it has ceased to carry on one of several businesses
authorised by its memorandum unless, upon a fair construction of the memorandum, that
business is regarded as the main object of the company [Re. Amalgamated Syndicate (1897)
2 Ch. 600]. Similarly, a company which has amalgamated with another company cannot be
wound up on the ground that it has ceased to carry on business as a separate company.
Thus the substratum of a company is deemed to have disappeared or gone, if the main object
for which the company was formed has become impracticable, i.e., permanently impracticable.
“Usual tests for determining whether the substratum of the company has disappeared are
whether: (a) the subject-matter of the company is gone, or (b) the object for which it was
incorporated has substantially failed, or (c) it is impossible to carry on the business of the
company except at a loss, which means that there is no reasonable hope that the object of
trading at a profit can be attained or (d) the existing and probable assets are insufficient to
meet the existing liabilities” [In re Kaithal and General mills Co. Ltd., 1951,31, Comp. Cas.
461].
Where the substratum has gone, the Tribunal can wind-up the company, even though the
majority of shareholders oppose the winding-up order. But before the Tribunal can wind-up on
this account, it must be proved that the whole of the business of the company has become
impossible of being carried on. The question whether the substratum has gone or not would
depend not on the intention of the Board of Directors or of the shareholders, but would depend
upon, and should be decided by the Tribunal, on a true and accurate construction of the
memorandum of association and the actual facts of the case [Mohan Lal Mehta vs. Chunilal
Mehta (1962) 32 Comp. Cas. 970]. If there are two or more main objects and some are
frustrated and some are pursued, the company cannot be wound up. All the main objects must
be destroyed in order to justify winding-up [Kitson & Co. (1946) I.A.E.R. 435 (C.A.)]. It should
be noted that even if the substratum is gone, if the members do not ask for winding-up,
carrying on of the other objects of the memorandum will not be ultra vires.
(ii) Where there is a deadlock or a crisis in the management of a company, e.g., where the
two sole shareholders, who were also directors, were not on speaking term owing to
disagreement [Re, Yenidje Tobacco Co. 1916, 2 Ch. 426]; Where there is a deteriorating
state of management and control of business owing to sharp differences between the
members as reflected in their resolutions at their meetings [Vijayalakshmi Talkies vs.
Rao. A.I.R. 966 Andh.Pr.285]; where the mismanagement is such that there is no
practicability of remedying it [Rajamundry Electric Corporation vs. Rao, A.I.R. 1955 S.C.
213]. However, factions, quarrels; etc., among shareholders are not sufficient grounds
[S.S. Raj Kumar vs. Project Castings Private Ltd. (1968) I Comp. L.J. 41].
(iii) Where the company has been formed to carry on a fraudulent or an illegal business.
(iv) If the company is a “bubble”, i.e., if it never had any business to carry on [Re London &
Country Coal Co. 1867, 3 Eq. 355].
(v) Where the company is insolvent and is being carried on for the benefit of the debenture
holders [Re. Clandown Colliery Co. (1915), I Ch.369].
(vi) Where the petitioner was excluded from all participation in the business.
(vii) Where preponderance of voting power was permanently vested in a Board in which
minority shareholders had justifiable no confidence [Loch vs. John Blackwood Ltd. (1924)
A.C. 783].
Clause (f) of Section 433 should not be construed as ejusdem generis [i.e. of the same kind or
natural with the other clauses [a] to [c] of that Section. The ground need not at all be similar to
any of the other grounds mentioned in Sectioned in Section 433.
9.2.2 Alternative remedy to winding-up in cases of Oppression: Cases have arisen from
time to time where minority shareholders have found it difficult to resist oppression by the
majority. Section 397 provided that where the affairs of a company are being conducted in a
manner oppressive to some members the Company Law Board may, with a view to bringing to
an end the matters complained of make such order as it think fit to remedy the position, when
the winding-up of the company would unfairly prejudice the complaining members. A similar
relief can be applied for in the case of mismanagement, where the affairs of the company are
being conducted in a manner prejudicial to the interests of the company, or when a material
change in the management or control of the company or in its constitution is likely to prejudice
the interest of members of the company [Section 398].
9.2.3 Who may petition for winding-up? [Section 439]: The various persons who can make
an application for the winding-up a company through Tribunal are :
(1) the company;
(2) any creditor or creditors, including any contingent or prospective creditor or creditors;
(3) any contributory or contributories;
(4) all or any of the above parties, together or separately;
(5) the registrar; and
(6) any person authorised by the Central Government in a case falling under Section 234 of
the Act (i.e., when the Central government is satisfied that it is just and equitable that the
company should be wound up on the ground that the business of the company is being
conducted in a fraudulent or unlawful or oppressive manner or that the company was
formed for any fraudulent or unlawful purpose, etc.
A creditor has a right ex debito justitiae [i.e., a remedy which the applicant gets as a right] to a
winding- up order if he can prove that he claimed an undisputed debt and that the company
has failed to discharge it. Under Section 439 (8), a contingent or prospective creditor,
however, must obtain leave of the Tribunal, give security for costs and the Tribunal must be
satisfied that there is a prima facie case for winding- up of the company. The Central
Government or any State Government or Municipal or other local authority to whom any tax or
other public charge is due is also an entity comprised in the term creditor. It has been held in
[Hari Nagar Sugar Mills Co. Ltd. vs. M.W. Pradhan (1962), 2 Com. LJ. 17 S.C] that a receiver
of creditors, properties is also a creditor and as such he has a right to present a petition. He
is creditor by statutory assignment. A secured creditor, the holder of any debentures [including
debentured stock] whether or not trustees have been appointed in respect of such and other
like debentures and also the trustee for the debenture-holders are creditors and hence entitled
to present a petition for winding- up [Section 439 (2)].
A contributory can present a petition only when: (i) the number of members falls below 7 or
below 2 in the case of a public or private company respectively or (ii) he holds shares which
were originally allotted to him or has held shares for six out of the eighteen months prior to the
commencement of winding- up or the shares have devolved on him through the death of a
former holder [Section 439 (4)]. A holder of fully paid- up shares is also entitled to present a
petition. This right of his as a contributory cannot be excluded on the ground that the company
has no assets at all or that it may not have any surplus assets left for distribution among the
shareholders after the satisfaction of its liabilities [Section 439 (3)].
The Registrar may present a petition for winding -up only on the ground that default has been
made in delivering that statutory report to him or in holding the statutory meeting, or that the
company has not commenced its business within a year from its incorporation, or that from the
financial condition of the company as disclosed in its balance sheet or from an inspectors, S
report under Section 235 or 237, or the report of a special auditor appointed under Section
233 A it appears that the company is unable to pay its debts. But such a partition can be made
only with the previous approval of the Central Government [Section 439 (5)].
The Official Liquidator may also present a petition for winding- up by the Tribunal, where the
company is being wound up either voluntarily or subject to the supervision of the Tribunal. And
the Tribunal, before making a winding- up order on such petition, must be satisfied that in the
circumstances such a winding- up cannot be continued, due regard being had to the interest of
the creditors or contributories or both (Section 440).
9.2.4 Powers of Tribunal on hearing petition (Section 443): The winding- up petition and its
hearing are governed by Rules 95-123 of the Companies (Tribunal) Rules, 1959. Such a
petition is required to be made in Form No. 45, (General form of petition 46 (viz., petition by
creditors), or 47 (viz., petition by company), as the case may be, with such variations as the
circumstances may require, and shall be presented in duplicate. The Registrar shall note on
the petition the date of its presentation.
After the Tribunal hears the petition, it may (i) dismiss it with or without costs, (ii) adjourn the
hearing conditionally, or (iii) make an interim order, or (iv) make an order for winding- up of the
company. It must not refuse to make a winding -up order on the ground only that the
company’s assets have been mortgaged to an amount equal to or in excess of those assets,
or that the company has no assets.
If a petition for winding-up is presented on ‘’just and equitable” ground the Tribunal may refuse
to make an order of winding-up if it is of the opinion that some other remedy is available to the
petitioners and that they are acting unreasonably in seeking winding-up instead of pursuing
that other remedy.
Where the petition is presented on the ground of default in delivering the statutory report or in
holding the statutory meeting, the Tribunal may direct that the report be delivered or the
meeting be held instead of making the winding-up order. The person considered responsible
for the default may be charged with the costs involved.
9.2.5 Date of commencement of winding-up by Tribunal (Section 441): Where, before the
presentation of a petition for the winding-up of a company by the Tribunal, a resolution has
been passed by the company for voluntary winding-up, the winding- up of the company shall
be deemed to have commenced at the time the resolution was passed. Unless the Tribunal,
on proof of fraud or mistake, thinks fit to direct otherwise, all proceedings taken in the
voluntary winding- up shall be deemed to have been validly taken. In any other case, the
winding- up of the company by the Tribunal is deemed to commence at the time of the
presentation of the petition for the winding-up.
This date is important for several reasons. Some of the immediate effects are that the Official
Liquidator becomes the liquidator of the company (Section 449). A statement as to the affairs
of the company has to be submitted to him and he has to report thereon to the Tribunal
(Section 454 and 455). The winding-up order constitutes a notice of discharge to the officers
and employees of the company except when the business of the company is continued
[Section 445 (3). The Tribunal has to communicate winding- up order forthwith to the Official
Liquidator and the Registrar (Section 444).
Within 30 days from the date of the making of a winding- up order, a certified copy of the order
must be filed with the Registrar by the petitioner and the company [Section 445 (1)]. In
computing this period of 30 days, the time required for obtaining a certified copy of the order is
to be excluded. Then the Registrar shall make a minute thereof of in his book relating to the
company and shall notify in the Official Gazette that a winding- up order has been made.
When the winding-up order has been made or the Official Liquidator has been appointed as
provisional liquidator no suit or other legal proceeding can be commenced or if pending at the
date of the order, shall be proceeded with against the company except by leave of the Tribunal
and subject to terms imposed by it [Section 445 (1)]. The expression : ‘’or other legal
proceeding”, in Section 446 does not mean a legal proceeding analogous to a suit (Shaikh
Mansoor vs. Government A.I.R. 1952 T.C. 14). An award under the Industrial Disputes Act is
not a legal proceeding (Price vs. Chandrashekharan A.I.R. 1951 Mad 987). Leave of Tribunal
will be granted where a shareholder applies for rescission or the suit is for specific
performance.
A regards the ‘Leave of the Tribunal’ appearing in Section 446 (1) the Supreme Tribunal
decision is that the Tribunal has the jurisdiction to grant leave to proceed with a suit or other
proceedings against a company in liquidation, even if such leave was not obtained for the
commencement of the suit or proceeding. ‘’ The proceedings may at best be regarded as
instituted on the date on which the leave was obtained from the Tribunal” [Hansidhar
Shankarlal vs. Mohammed Ibrahim (1971) Comp. Cas. 21]. But the Tribunal does not grant
this leave as a matter of course. The facts and circumstances of each case have to be probed
into by the Tribunal. The discretion of the Tribunal must be exercised judicially but not
capriciously or arbitrarily. Usually, leave is granted where outsiders get linked up with some
dispute with the company and the Tribunal thinks it fit that the dispute should be settled in an
action by the ordinary Civil Tribunal. It has been held that against an order refusing leave to
institute a suit, an appeal lies under Section 483 (Balakrishan vs. Indian Association Chemical
Industries Ltd. A.I.R. (1959) Bom. 41
Suppose, RC, a labourer of GD & Co. Ltd. which is in liquidation, prays for permission of the
Tribunal to implead the Official Liquidators as the party respondent in a claim petition made
before the Labour Tribunal subsequent to the winding- up order. Should the leave be granted
in this case? It has been held [R. Chidambaranathan vs. Gannon Dunkerly& Co. (Madras) Ltd.
(1973) 43, Comp. Cas. 500] that the prayer for leave under Section 446 (1) was misconceived.
In the event of such leave being granted, a flood gate of litigation would be opened before the
Laboru Tribunal and every labourer would be filing petitions and drawing the Official Liquidator
to the Labour Tribunals for defending the case of the company. The purpose and the intention
of the Act was that all such claims against the company which has been wound up would have
to be filed before the Official Liquidator who was empowered to decide such claims. The
petition was,. therefore, dismissed. It has, however, been held that RC could withdraw the
proceedings before the labour Tribunal and file the same before the Official Liquidator for
appropriate reliefs.
It has been held that the following proceedings are not affected by [Section 446]: (a) a private
sale autside the Tribunal by public auction by a mortgagees [Ranganathan vs. Govt. or
Madras 1955, S.C. 604 ;]. (b) a defendants plea of set- off or counted claim in defence
[Andhra paper Mills Co. Ltd. vs. Anand Bros. (1951) I.M.L.T. 340]: (c) proceeding by persons
out of jurisdiction on a foreign country [Re. Voclain (Foreign) Ltd. (1932) 2, Ch. 196]; (d) a
claim petition by a third party where a company in winding-up has attached the property of a
judgement debtor [Seiva Lyer vs. Mathura Mercantile bank (1962) 32, Comp Cas. 47]
It may be noted that the proceedings for assessing a company to income tax under the Income
tax Act are not legal proceedings and hence are not affected by Section 446. Until the I.T.O.
makes an assessment order, he is not a creditor, and as such can not prove his claim in the
winding-up [Tilk Ram and Sons (Private) Ltd. vs. Commissioner of Income- tax (1964) 4
Comp. Cas. 151]. However, it has been held in [Rele vs. Deshpande, (1967) Comp, L.J. 210]
that the re-assessment proceedings by the Income-tax authorities cannot be commenced or
continued without the leave of the Tribunal.
It may further be noted that if a secured creditor realises his security without intervention of
the Tribunal, he will be outside the jurisdiction of the Tribunal in the winding up. But where the
secured creditor invokes the aid of the Tribunal and takes any legal proceeding against the
company within the meaning of Section 446, it will be necessary for him to seek leave of the
Tribunal [Ranganathan vs. Government of Madras, Supra].
In the winding-up, the Tribunal shall have the jurisdiction to entertain or dispose of; (i) any suit
or proceeding by or against the company; (ii) any claim made by or against the company
including claims by or against any of its branches in India; (iii) any application made under
Sections 391 by or in respect of the company; (iv) any question of priorities or any other
question of law or fact which may relate to or arise in the course of the winding-up of the
company [Section 446 (2)]. Any such suit or proceeding pending in any other Tribunal may be
transferred to or disposed of by the Tribunal in which the winding-up proceedings are taken
[Section 446 (3)]. The provisions contained in sub-section (1) or (3) as aforementioned, shall
not be applicable to any proceeding in appeal either before the Supreme Tribunal or the
Tribunal [Section 446 (4)].
Section 446 is designed to safeguard the assets of the company in winding-up against
wasteful or expensive litigation in regard to matters capable of being determined expeditiously
and cheaply by the winding-up Tribunal itself ‘’An even- handed justice requires that the
Tribunal should have power to intervene at an early stage for the protection of the assets, and
this power is given by Section 446.”
The winding- up order operates in favour of all the creditors and contributories of the company
as if it had been made on the joint petition of a creditor and of a contributory [Section 477].
9.2.6 Statement of Affairs: Where winding- up order has been made or the Official Liquidator
has been appointed as provisional liquidator by the Tribunal, a statement as regards the
affairs of the company in the prescribed form [57, Companies (Tribunal) Rules, 1959] shall be
delivered to the Official Liquidator. Such a statement shall have to be verified by an affidavit
and shall contain particulars of (i) the assets of the company stating separately the cash
balance in hand and at the bank, negotiable securities; (ii) its debts and liabilities; (iii) the
names, residence and occupations of the creditors (secured debts being segregated from
those considered unsecured) and in the case of secured debts the particulars of the securities
given whether by the company or an officer there of, their value and the dates on which they
were given; (iv) the debts due to the company and the names, and residences, and
occupations of the persons from whom they are due (also estimated amount to be realised);
and (v) such further or other information as may be prescribed or as the Official Liquidator
may required [Section 454 (1)].
The aforementioned statement is required to be made and verified by one of more of the
directors and by a person who, at the date of winding-up order or the appointment of the
provisional liquidator, as the case may be, the manager, secretary or other chief officer of the
company. Also, it may be made by the following persons if the Official Liquidator so requires,
subject to the directions of the Tribunal; (i) who are have been officers of the company; (ii)
who have participated in the formation of the company at any time within one year before the
relevant date; (iii) who are in the employment of the company or have been so within the said
year and are in the opinion of the Official Liquidator, capable of giving the information
required; (iv) so are or have been within the said year, officers of, or in the employment of a
company which is, or within the said year was, an officer of the company to which the
statement related [Section 454(2)].
The above mentioned statement is required to be submitted within 21 days of the winding- up
order of the appointment of the provisional liquidator, as the case may be, or within such
extended time, not exceeding three months, as may be fixed by the Official Liquidator or the
Tribunal for special reasons. The persons, preparing the statement and affidavit shall be
allowed such costs and expenses incurred in connection therewith as the Official Liquidator
may deem reasonable, subject to an appeal to the Tribunal [Section 454] (3) and (4).
Non-compliance with any of the requirements of Section 454, without a reasonable excuse,
shall render the defaulter liable to be punished with imprisonment to the extent of two years or
with a fine extending upto Rs. 100 per day during which the default continues or with both
[Section 454 (5)].
The Tribunal concerned may take cognizance of an offence, mentioned above, upon receiving
a complaint of facts constituting such an offence and try the offence i itself in accordance with
the procedure laid down in the Criminal Procedure Code 1898 for the trial of summons cases
by Magistrates) 454 (5A0].
The Statement of affairs must be open to inspection by any one stating himself in writing to be
a creditor or contributory. Also he is entitled to a copy thereof or as extract there from. For
both inspection and copy or extract, the prescribed fee is to be paid [Section 454 (6)].
(Note: The expression ‘the relevant date’ in a case where a provisional liquidator is appointed,
is the date of his appointment and in a case where no such appointment is made, the date of
the winding-up)
Section 511A extends the provisions of Section 454 to every voluntary winding-up in the same
way as they are applicable to a winding-up by the Tribunal. For construing these provisions,
references in the Section to (a) the Tribunal shall be omitted; (b) the Official Liquidator or the
provisional liquidator shall be construed as references to the liquidator; (c) the ‘relevant date’
shall be construed as references to the date of commencement of the winding-up.
The afore-mentioned provisions of Section 454 are intended to enable the liquidator to have
information as regards the affairs of a company, so that the liquidator may know something
about the property and the assets of the company, the names, addresses and occupations of
the creditors, the debts due to the company and the persons from whom they ard due. The
statement of affairs of the company is intended to afford facility to the liquidator in his
management of the company’s affairs in discharging the company’s obligations, realising its
assets, and distributing surplus assets (if any) among its members.
9.2.7 Official Liquidators report (Section 445): The Official Liquidator must, as soon as
practicable after the receipt of the statement of affairs under Section 454 but, not later than six
months from the date of the winding- up order or such extended period as may be allowed by
the Tribunal, or where the Tribunal orders that no statement of affairs need be submitted as
soon as practicable, after the date of the order, submit a preliminary report to the Tribunal :
(a) as to the amount of capital issued, subscribed, and paid-up and the estimated amount of
assets and liabilities, giving separately under the heading of assets: particulars of, (i)
cash and negotiable securities; (ii) debts due from contributories (iii) debts due to the
company and securities (if any) available in respect thereof; (iv) movable and immovable
properties belonging to the company; and (v) unpaid calls;
(b) if the company has failed, as to the causes of the failure; and
(c) whether a further inquiry is desirable as to the company’s failure, promotions or formation
or the conduct of the business thereof.
If the Official Liquidator thinks fit, he may make a further report or report, stating the manner in
which the company was promoted or formed and whether in his opinion any fraud has been
committed by any person in its formation or promotion or by any officer of the company in
relation to the company since the formation and any other matters which, in his opinion, it is
desirable to bring to the notice of the Tribunal. Such further report may lead to the public
examination of a person or officer in accordance with Section 478 (Section 455).
A person ordered by the Tribunal to be examined will be entitled to obtain a copy of the report
of the Official Liquidator at his cost and to employ an advocate to enable him to explain or
qualify any answer given by him. The person so charged may apply to the Tribunal to be
exculpated from any charges made or suggested against him and, if he does so, it shall be the
duty of the Official Liquidator to appear on the hearing of the application and call the attention
of the Tribunal to any matters which appears to the Official Liquidator to be relevant [Section
478 (6) & (7) ].
The Preliminary Report mentioned above shall be in Form No. 60 with such variations as may
be necessary [Rule 135, the Companies (Tribunal) Rules].
9.2.8 Final Winding- up: Under Rules 281 of the Companies (Tribunal) Rules, 1959, as soon
as the affairs of the company have been fully wound-up, the Official Liquidator in a winding- up
by the Tribunal shall file his final account (in Form No. 146) in to the Tribunal and apply for
order as to dissolution of the company subject to his final account being passed. The
application must be set down for hearing until the auditor completes the audit of the final
account and files his certificate in relation thereto. Rules 282 provides that upon the hearing of
the application, the Tribunal may, after hearing the Official Liquidator and any other person on
whom notice may have been served by the Tribunal, and upon pursuing the account, as
audited, make such orders as it may think fit as to the dissolution of the company, the
application (subject to the provision of the Act) of the balance in the hands of the Official
Liquidator or the payment thereof into Companies Liquidator Account in the public account of
the Reserve bank and the disposal of books and papers of the company and of the Liquidator.
After the liquidator has filed the statement as aforementioned, showing the affairs of the
company to have been completely wound up or when the Tribunal is of the opinion that the
liquidator cannot proceed with the winding-up of the company for funds and assets or for any
other reason whatsoever and it is just and reasonable in the circumstances of the case that an
order of dissolution should be made, then the Tribunal shall make an order that the company
be dissolved from the date of the order [Section 481 (1)]. A copy of the order must be
forwarded within 30 days from the date of the order by the liquidator to the Registrar who shall
enter in his books a minute of the dissolution of the company and the company shall be
dissolved accordingly [Section 481 (2)].
9.2.9 Committee of Inspection: Either at the time of making an order of the winding- up of a
company or at any time thereafter, the Tribunal may direct that a Committee of Inspection
shall be appointed in order to act with the liquidator. In the event of such a direction being
given, the liquidator is bound to convene a meeting within 2 months from the date of such
direction, of the creditor (ascertained form the company’s books and documents) with a view
to determine who are to be members of the committee (Section 464 (1). Within 14 days from
the date of the creditor’s meeting or such further time as extended by the Tribunal, the
liquidator shall convene a meeting of the contributories so as to consider the decision taken at
the creditor’s meeting in regard to the membership of the committee. This decision may either
be altogether rejected with or without any modifications [Sub- Section (2) If the decision taken
at the first meeting is either rejected or accepted with modification, the liquidator shall be duly
bound to seek the Tribunal’s, direction as regards the composition [sub-section (3)]
A committee of inspection shall consist of not more than 12 members, being the creditors and
contributories or their attorneys. The proportions of the members of the committee; if not
decided upon by the creditors and contributories themselves, shall be determined by the
Tribunal. Its function is to assist the liquidator and to inspect his accounts. The committee
must meet at such times as and may from time to time appoint; the liquidator or any member
may also summon a meeting as an when he thinks necessary. The quorum is 1/3rd of total
numbers of member or two, whichever is er. The committee acts only if there is a quorum and
by a majority of members present. A member of the committee ceases to act; (i) when he
resigns by notice in writing signed by him and delivered to the liquidator; (ii) when he is
adjudged an insolvent or compounds or arranges with his creditors; (iii) when he is absent
from five consecutive meetings of the committee without leave of those members who together
with himself, represent the creditors or contributories; (iv) when he is removed by ordinary
resolution of which 7 day’s notice has been given by the creditors, if he represents the
creditors, or by the contributories, if he represents the contributories.
If any vacancy occurs in the committee, the liquidator must immediately summon a meeting of
the creditors or contributories, as the case may be, to fill the vacancy unless he thinks it
unnecessary to fill in the vacancy and obtains the leave of the Tribunal in regard thereto
(Section 465). A member of the committee of inspecting is in fiduciary position and cannot buy
any of the company’s property from the liquidator (In re Blumer (1937) Ch. 489). Similarly,
where a member of the committee purchases the property of a company, such as purchase
was held to be bad, inasmuch as he occupied a fiduciary position in relation to the company
(Durga Prasad vs. Official Liquidator, Benaras Bank Ltd. A.I.R. 1959 All. 196).
9.3 VOLUNTARY WINDING UP

9.3.0 Introduction : The object of a voluntary winding-up is to enable the members and
creditors to settle their affairs among themselves without seeking assistance of the Tribunal
but they may apply to the Tribunal for any directions or orders if and when necessary (Section
518). A voluntary winding-up does not necessarily, imply that the company’s business has
ceased since such a winding-up may also be necessary in the case of reconstruction or an
amalgamation of a company.
9.3.1 Procedure for voluntary winding-up : A company may be wound-up voluntarily
under Section 484, according to the following procedures:
(a) By passing an ordinary resolution at a general meeting in any of the following
circumstances: (i) When the period (if any) fixed for the duration of the company by its
Articles has expired. (ii) When the Articles provide for the dissolution of the company on
occurrence of an event and the event has occurred e.g. if a company is formed to
construct a particular bridge and tile same has been built.
(b) By a special resolution : When the company for any reason which need not be disclosed,
decides that it should be wound-up voluntarily. A company may be prosperous, yet it may
desire to wind-up its affairs as a matter of convenience. It can do so if it passes a special
resolution to that effect.
The members of a company can not be divested of their right to pass a resolution calling for a
voluntary winding-up by including in the Articles, a special provision in this regard because
such a provision would be repugnant to the express provisions of this Act. Notices of the
meeting where it is intended to propose an ordinary or a special resolution as the case may
be, must be given, and the meeting should be held in the manner laid down by the Act and the
articles of the company. Upon the passing of a resolution for voluntary winding-up, the
company must within 14 days thereof, give notice of the resolution by an advertisement in the
Official Gazette and also in some newspapers circulating in the district where the Registered
Office of the company is situated (Section 485). A printed or typewritten copy of every
winding-up resolution passed in pursuance of Section 484 (duly certified under the signature
of an officer of the company must within thirty days after the passing thereof be riled with the
Registrar who shall record the same (Section 192).
9.3.2 Commencement of voluntary winding-up: Voluntary winding-up is deemed to have
commenced at the time when the resolution for the voluntary winding-up is passed (Section
486). Even if the company is subsequently wound-up by the Tribunal, the commencement of
the winding-up would be taken to be as from the date of the passing of the resolution (Section
441).
9.3.3 Effects of voluntary winding-up: With the commencement of voluntary winding-up, the
following situations arise:
(1) The company ceases to carry on its business except for the purposes of beneficial
winding-up of such business (Section 487). It still maintains its corporate personality and
its corporate power, until it is dissolved (Section 487). This is so even if the Articles
provide to the contrary [Hari Prasad Jayantilal & Co. vs. I.T.O. Ahmedabad.9.LR. (1966)
S.C 148.11. The liquidator represent the company in liquidation and the functions as its
agent for purposes of winding-up [Official Liquidator vs. Commissioner of Income Tax
(1971) 41 Comp. Cas. 226]..
(2) Any transfer of shares made without the sanction of the liquidator is invalid and alteration
in the status of the members made after the commencement of the winding-up is void
(Section 536).
(3) On the appointment of a liquidator under Section 490 or 502, as the case may be, the
powers of the directors, or managing or whole time director, or manager cease except in
so far as the company in general meeting or liquidator, may sanction that the same be
continued or for the purpose of giving notice of liquidator’s appointment to the Registrar
under Section 493. In the event of a creditors’ winding-up, the powers of directors cease
except in so far as the Committee of Inspection, or if there is no such Committee, the
creditors in general meeting may sanction that the same may be continued (Sections 491
& 505).
(4) Every invoice, order for goods, or business letter issued by or on behalf of the company
or a liquidator or a receiver or manager, in which the company’s name appears must
contain a Statement that the company is being wound-up (Section 547).
(5) As to whether a voluntary winding-up discharges the servants of the company, it would
depend upon whether the business of the company has ceased or is being continued.
Thus, it would depend on the facts of each case. A voluntary winding-up coupled with
immediate cessation of the company’s business has been held to operate as a dismissal
of the company’s servants [Reigate vs. Union Mfg. Co. (1981) I.K.B., 592 (Ch.)].
(6) Suits and other legal proceedings against the company are not automatically stayed but
an application may be made by the liquidator or any creditor or contributory to the
Tribunal to determine any question arising in the winding-up, e.g. enforcing of calls,
staying of proceeding or any other matter. Generally, such an application can be made
for exercising all or any of the powers which the Tribunal might exercise, if the company
was being wound-up by the Tribunal (Section 518).
(7) A voluntary winding-up shall not be a bar, enter alia, to the right of any creditor or
contributory to have the company wound-up by the Tribunal; but in the case of such an
application the Tribunal shall have to be satisfied that the rights of the creditors or
contributories or both would be prejudiced by a voluntary winding-up (Section 440).
9.3.4 Position of various parties
9.3.4.1 Shareholders and contributories: A shareholder of a company is liable to pay the full
amount on the shares held by him but nothing more. This liability continues even after
winding-up, but for the purposes of winding-up, he is described by the Act as a contributory.
Prior of a shareholder to the assets of the company is measured by the from membership.
However, winding-up creates a new cause of action for the liquidator and the liquidator can
demand of him the payment of the unpaid calls even if they had become time-barred before
liquidation [Re. East Bengal Sugar Mills Ltd. (1982) 1 Cal. 1321. The liability arises from the
fact that his name appears on the register of members [K.L. Goenka vs. S.R. Majumdar (1958)
28 Comp.. Cas. 536]. According to Section 429, the liability of a contributory shall create a
debt accruing due from him at the time when his liability commenced, but payable at the time
specified in the calls made on him for enforcing that liability (by the liquidator). Thus, the
liability of a contributory, though commencing at the date of the winding-up, is only contingent
during the winding-up, since until a call is made, it is nothing more then a mere liability to
contribute, if necessary, to the company for payment of the debts due to its creditors and
expenses of the winding-up. Such liability, however, creates a debt under Section 429 and it
does not become payable until a call is made. It may be noted that the liability under this
Section stands in striking contrast with the liability of a shareholder under Section 36(2)
according to which all moneys payable by any member, to the company under the
Memorandum or Articles shall be a debt due from him to the company. The debt under
Section 36(2) arises ex-contractu, whereas the debt under Section 429 arises e-x-lege i.e. as
a result of the statute on the company going into liquidation. Thus Section 429 gives the
liquidator a new cause of action which a company itself might not have.
The estate of the deceased shareholder is liable to the same extent as, it would have been if
he had been alive (Section 430). Section 431 lays down that if a contributory becomes
insolvent after the commencement of the winding-up, he becomes a stranger to the company;
although his name remains on the list of contributories, his assignee in insolvency represents
him for all purposes and is to be deemed a contributory. Under Section 432, where a body
corporate which is a contributory in itself is ordered to be wound-up, either before or after it
has been placed on the list of contributories, the liquidator of body corporate shall represent it
for all the purposes of winding-up of the company and shall be deemed a contributory.
A shareholder on the A list of contributories is liable to the extent to which his shares are not
fully paid up. But the liability of a member on the B list arises only in certain specific
circumstances, mentioned in Section 426. The A list comprises the present members and the
B list the past members, who ceased to be members within one year prior to the winding-up.
A past member is liable to contribute only when the present members have been unable to
satisfy the contribution required from them in respect of their shares.
A person who is both a contributory and a creditor of the company (in respect of dividends,
profits or otherwise), cannot set off the debt due and owing from the company against his
liability for call even if there is an express agreement to do so. In other words, the
contributory has to make his contribution to the assets of the company without any right to
claim a set-off in regard to the amount due to him from the company [Pure Milk Supply Co.
Ltd. vs. Hari Singh A.I.R. (1963) Punj 22].
In addition to the aforesaid liabilities, Section 536 imposes a sort of restriction on the
members; namely that in the case of voluntary winding-up, no transfer of share except
transfers made to or with the sanction of the liquidator shall be made and that every alteration
in the status of the members after the commencement of such winding-up shall be void. In the
case of winding-up by or subject to the supervision of the Tribunal, every disposition of the
property including actionable claims of the company and every transfer of shares or alteration
in the status of its members made after the commencement of the winding-up shall be void
unless the Tribunal otherwise directs.
9.3.4.2 Creditors: A company can never be declared insolvent, although it may have become
insolvent in the sense that it is unable to pay its debts. Where it solvent company is being
wound-up all the debts payable on a contingency and claims against the company, present or
future, certain or contingent, ascertained or sounding only in damages, are admissible to proof
against the company. A just estimate should be made of the possible value of such debts or
claims as may be subject to any contingency or may sound only in damages or for some other
reason may not bear a certain value (Section 528). As regards the rights of the creditors,
company which is being wound-up for its inability to pay its debt, the same rules prevail as in
the case of insolvency law in respect of debts provable, the valuation of annuities and future
and contingent liabilities and the respective rights of secured and unsecured creditors (Section
529).
The secured creditor may rely on the security and ignore the liquidation altogether, or value
his security and prove for the balance of his debt, or give-up his security and prove the whole
amount. Unsecured creditors are paid in the order prescribed by Section 530. Preferential
creditors are paid first; liability for dividends is satisfied only if claims of outsiders are fully met.
9.3.4.3 Employees: A winding-up order by a Tribunal operates as a notice of discharge to
employees and officers of the company, except when the business of the company is
continued [Section 445(3)]. A voluntary winding-up which involves a discontinuation of the
business also operates as a discharge, and may also give rise to a claim for damage where
there is an agreement for employment for a fixed time [Reigate vs. Union of Manufacturing
Company (1918) I.K.B. 592].
9.3.5 Types of voluntary winding-up: There are two types of voluntary winding-up, viz.
Members’ voluntary winding-up and Creditors’ voluntary winding-up. Where the directors are
in a position to make the statutory declaration of solvency required under Section 488 of the
Act, the winding-up would be conducted as a Members’ voluntary winding-up and would be
controlled by the members themselves, the creditors would have no voice in the proceedings.
If the directors do not make such a declaration, the winding-up would be conducted as a
creditors voluntary winding-up and the creditors shall have a controlling voice in the
procedure. In both the cases, the process of liquidation would be normally conducted without
reference to the Tribunal; although the Tribunal shall have the power to determine any matter
the liquidator or any creditor or contributory might refer to it.
9.3.5.1 Members’ voluntary winding-up–declaration of solvency: In respect of a members’
voluntary winding-up, two directors, where there are only two directors, and a majority of
directors, where there are more than two, should make a declaration, called ‘declaration of
solvency’, in Form No. 149 pursuant to Rule 313 of the Companies (Tribunal) Rules, 1959
verified by an affidavit. In the declaration, the following matters are required to be stated,
namely, (i) that they have made a full enquiry into the affairs of the company, and (ii) that
having made such enquiry, they have formed the opinion that the company has no debts or
that it will be able to pay its debts in full within a period not exceeding three years from the
commencement of the winding-up. To be effective:
(a) it must have been made and filed with the Registrar within the five weeks immediately
preceding the date of passing of the winding-up resolution; and
(b) it must be accompanied by a copy of the auditor’s report on the profit and loss account of
the company for the period commencing from the date of the company for the last
account to the latest practicable date immediately before the making of the declaration
and the balance sheet of the company made out as on the last-mentioned date and, also,
embodies a statement of the company’s assets and liabilities as at that date. The report
of the auditor must be prepared, as far as circumstances permit, in the manner laid down
by the Act (Section 488). This accompaniment is intended to be an additional safeguard.
Unless the above mentioned conditions are complied with, the resolution passed for voluntary
winding-up would be invalid and the members’ voluntary winding-up cannot be effected [S.P.
Bhargava vs. Rameswar A.I.R. (1952) M.P. 3]
Where the declaration of solvency is made by the directors without any reasonable grounds
that the company will be able to pay its debts in full within the period specified in the
declaration, it would render them liable to imprisonment which may extend to 6 months and or
to pay a fine exceeding Rs. 50,000. If the company is wound-up in pursuance of such a
resolution within a period of 5 weeks after the declaration was made, but its debts are neither
paid off nor provided for in full within the period specified in the declaration, it would be
presumed, till the contrary is shown, that the directors did not have reasonable ground to form
the opinion as to company’s solvency [Section 488(3) & (4)].
9.3.5.2 Creditors’ voluntary winding-up: Where the declaration of solvency, referred to
under members’ voluntary winding-up has not been made by the directors and filed with the
Registrar, the winding-up is known as a Creditor’s voluntary winding-up [Section 488(5)].
9.3.6 Procedure of winding-up: The procedure applicable to the two types of voluntary
winding-up is somewhat different. The provisions under Sections 490 to 498 are applicable to
a members’ voluntary winding-up, whereas Sections 511 to 521 apply to both types of
voluntary winding-up.
9.3.6.1 Procedure of members’ voluntary winding-up: The procedure for a member’s
voluntary winding-up of a company is narrated below:
(i) At the Board’s meeting, the directors have to make a declaration of solvency under
Section 488 of the Companies Act in Form 149 of the Companies (Tribunal) Rules and
Forms. If there are more than 2 directors then the said declaration must be made by a
majority of them. This declaration has to be filed with the Registrar of Companies
together with the auditor’s report on the balance sheet and profit and loss account or
income and expenditure account of the company made upto the date of the Board’s
meeting, the time limit for such filing being 5 weeks before the passing of the resolution
for the winding-up.
(ii) Next, the company has to pass at its general meeting a special resolution called
“resolution for voluntary winding-up” (Section 454). At this very meeting or at any
meeting subsequent thereto, one or more liquidators are to be appointed by the company;
also his or their remuneration, if it is to be given, should be fixed at the said meeting
(Section 490).
(iii) Under Section 485, the aforesaid resolution to wind-up the company voluntarily has to be
published in Official Gazette as also in a newspaper circulating in the district where the
Registered Office of the company is situated. This is required to be made within 14 days
of the passage of the resolution.
(iv) Under Section 493, the company has to give notice of appointment of the liquidator to the
Registrar. The notice is to be given in form No. 36(b) of the Companies (Central
Government’s) General Rules and Forms. The liquidator has also to separately notify the
Registrar, under Section 516, about his appointment.
(v) The liquidator is then required to do the following things, namely, speedy realisation of
assets, preparation of list of creditors, admission of proof, settlement of lists of
contributories. making of such calls as are necessary, payment to secured creditors of

costs including the liquidator’s own remuneration, payment of preferential claims and
distribution of the surplus pro rata amongst the contributories after meeting all the claims
of creditors and after adjusting all rights and claims. For resolving any doubts and
difficulties, application may be made to the Tribunal.
(vi) Duty of liquidator to call general meeting : In the event of a voluntary winding-up being
continued for more than a year, the liquidator shall call a general meeting of the company
at the end of the first year from the commencement of the winding-up and at the end of
each succeeding year within three months from the end of each or such longer period as
the Central Government may allow. Also, he shall lay before the meeting an account of
his acts and dealings and of the conduct of the winding-up during the preceding year
together with a statement in Form No. 153 [pursuant to Rule 328 of the Companies
(Tribunal) Rules 1959] containing stipulated particulars in respect of winding-up
proceedings and the position of the liquidation. Any failure on the part of the liquidator in
complying with these provisions shall render him liable to a fine to the extent of Rs. 100 in
respect of each failure (Section 496). The liquidator has to keep all moneys in a
scheduled bank; he must strictly adhere to the provisions of Section 553 and Rules 324 to
326 of the Companies (Tribunal) Rules.
Where the winding-up of a company is not concluded within one year after its
commencement, Section 551 requires that a statement by the liquidator in Form 153 of
the Companies (Tribunal) Rules, should be filed with the Registrar within 2 months of the
close of such year (if he is not exempted from so doing by the Central Government) and
thereafter until the winding-up is concluded, at intervals of not more than one year or
such shorter interval as may be prescribed. The statement should be audited by a
chartered accountant.
(vii) Final meeting and dissolution : When the winding-up is complete, the liquidator shall,
subject to the provisions contained in Section 498, make-up an account of the winding-up
which must show as to how the winding-up has been conducted and the property of the
company has been disposed of, also he shall call a general meeting of the company to
place before it the account [Form No. 155, pursuant to Rule 329 of the Companies
(Tribunal) Rules]. Such a meeting is required to be called by advertisement which must
specify the time, place and subject and published, not less than one month before the
meeting, in the Official Gazette as well as some newspapers circulating in the district
where the registered office of the company is situated. Besides, he shall, within one
week of the meeting, send to the Registrar and the Official Liquidator a copy of the
account and also a return to each of them as regards the holding of the meeting and of
the date thereof [Section 497(2) & (3)]. Where the meeting is not held for want of
quorum, the liquidator shall, instead of the said return, make a return, to the effect that
the meeting was duly called but no quorum was present thereat [Section 497(4)]. Upon
receiving the account and either of the returns under Sub-section (3) or (4), the Registrar
must immediately register them, with a view to ensuring that the winding-up process of
the companies (which have been voluntarily wound-up should not be conducted in a
manner prejudicial to the interest of the shareholders or of the public.
On receipt of the final statement of accounts and the returns from the liquidator, the Official
Liquidator shall make a scrutiny of the books and papers of the company. For the purpose, he
shall be provided with all reasonable facilities by the liquidator and all officers (past and
present) of the company.
Where the Official Liquidator, after scrutiny of the returns and accounts, reports to the Tribunal
that the affairs of the company have not been conducted in a manner prejudicial to the
interests of its members to public interest, the company is deemed to have been dissolved
from the date of the submission of the report.
If the official Liquidator, on such a scrutiny, reports to the Tribunal that the affairs of the
company have been conducted in a manner prejudicial to the interest of its members or the
public, the Tribunal shall direct the Official Liquidator to make a further investigation into the
affairs of the company, and for that purpose, he shall be invested with all such powers as the
Tribunal may deem fit [Section 497(6A)I. On receipt of the report as regards further
investigation, the Tribunal may either make an order that the company shall stand dissolved
with effect from the date which it shall specify or shall make such other order as the
circumstances of the case might justify [Section 497(6B)].
9.3.6.2 Procedure of creditors’ voluntary winding-up: (1) The creditors of a company would
be mainly concerned if the company arrives at the decision that it should wind-up itself
because of its inability to meet its liabilities. The company in that case must call a meeting of
the creditors to be held on the day or the day next following the next date on which there is to
be held a general meeting of the company at which the resolution for voluntary winding-up is
to be proposed [Section 500 (l)].
(2) Notice of the meeting is to be sent to the creditors and it must also be advertised once at
least in the Official Gazette and in two newspapers circulating in the district where the
registered office of the company is situated [Section 500(2)].
At the meeting of the creditors, the Board of Directors must cause a full statement of the
company’s affairs, and a list of the company’s creditors and the estimated amount of their
claims, to be laid before the meeting of the creditors. The Board of directors also must
appoint one of their members to preside over the said meeting [Section 500(3)].
If the meeting of the company for passing the winding-up resolution, is adjourned and at
the adjourned meeting the resolution is passed, then any resolution passed at the
creditors meeting, though prior in date to that for winding-up would nevertheless be valid
and effective as if it had been passed after the passing of the winding-up resolution
[Section 500(5)1.
The resolution passed at the creditors’ meeting shall be notified by the company to the
Registrar within ten days of the passing thereof (Section 501).
In a creditors voluntary winding-up, the creditors and the members appoint a liquidator in
their respective meetings. If different persons are nominated, the creditors’ nominee shall
become the liquidator. However, any director, member or creditor may, within seven days
after the nomination has been made by the creditors, apply to the Tribunal for an order
that the company’s nominee shall be the liquidator instead of, or jointly with, the nominee
on
(3) If a vacancy occurs by death, resignation or otherwise in the office of a liquidator (other
than the one appointed by or by the direction of the Tribunal) the creditors in general
meeting may fill in the vacancy (Section 306).
(4) The creditors at the first meeting under Section 400, or at a subsequent meeting may
appoint a Committee of Inspection consisting of not more than five persons [Section
5031. The members of the Committee are to be nominated by the company at a general
meeting. If any of the nominees is not acceptable to the creditors, they may by resolution
choose any person in his place. However, the Tribunal is empowered to direct otherwise.
(5) The Committee of Inspection and, if there is no such Committee the creditors, may fix the
remuneration of the liquidator. If they do not fix the remuneration, the Tribunal would do
so (Section 504). Section 465(2) to (10) applicable to Committee of Inspection appointed
in a compulsory winding-up will also apply to the Committee under Section 503, subject to
such rules as may be made by the Central Government [Section 503(5)].
(6) Where the voluntary winding-up continues for more than a year, the liquidator must call a
general meeting of the company, as in the case of members’ winding-up as well as
meeting of the creditors at the end of the first year of the commencement of winding-up
within three months from the end of each year or such longer period as the Central
Government may allow, Such a meeting also must be called at the end of each
succeeding year in the same manner. The liquidator must lay before the meeting an
account of his acts and dealings and of the conduct of the winding-up during the
preceding year and also a statement in Form No. 153 pursuant of Rule 327 of Companies
(Tribunal) Rules (Section 508).
(7) As soon as the affairs of the company have been wound-up, the liquidator shall: (a)
make-up an account of the winding-up showing how the winding-up has been conducted
and the property of the company has been disposed of, in Form No. 155 [pursuant to
Rule 329 of the Companies (Tribunal) Rules] and (b) call a general meeting of the
company and a meeting of the creditors for the purpose of laying the account before the
meeting and giving any explanation thereof.
Note: To provide for the scrutiny of the records of a company which is being wound-up
voluntarily by the creditors, provisions have been made in Sub-sections (5), (6), (6A) and (6B)
of Section 509 which are identical with those contained in the corresponding Sub-sections of
Section 497 which have been discussed earlier in the Study Paper.
9.3.7 Duties and responsibilities of liquidator in creditors’ voluntary winding-up : The
liquidator in a creditors’ voluntary winding-up administers the company is very much the same
way in which the directors administer it before the commencement of winding-up. To that
extent a liquidator can rightly be described as the agent of the company.
The liquidator owes certain duties towards the creditors and contributories under the statute,
including that of administration of the assets of the company. These he holds in trust for
them. To this extent he is trustee and he must discharge his fiduciary duties honestly. If he
neglects these duties, he may be held personally liable by the party prejudiced or for
misfeasance proceedings, under Section 543. Thus the liquidator in a creditor’s voluntary
winding-up has a dual status both as agent and trustee..
Like any other liquidator, it is also his duty to take into his custody or under his control all the
property, effects and actionable claims to which the company is or appears to be entitled. To
discharge this responsibility, it is his duty to take the aid, if need be, if the Chief Presidency
Magistrate or the District Magistrate within whose jurisdiction the aforesaid property, etc. are
found (Section 456).
As regards the distribution, on realisation, of the assets of the company, the liquidator is under
an obligation to apply such assets subject to the provisions of the Act as to preferential
payment, in satisfaction of its liabilities pan passu. He must thereafter distribute the residue
among the members according to their rights and interest in the company (Section 511). For
the purpose, the liquidator has to ascertain the assets and liabilities of the company and draw-
up a scheme of distribution.
It is the liquidator’s duty to compel the directors or the officers of the company in liquidation to
supply him with a statement as to the affairs of the company verified by an affidavit containing
the particulars relating, inter alia, to:
(i) the assets of the company, stating separately the cash balance in hand and at banks and
the negotiable securities held by the company;
(ii) its debts and liabilities;
(iii) names, residence and occupations of all creditors and amounts standing to their credit
together with dates and amounts of securities given therefor; and
(iv) debts due to the company and the amount likely to be realised on their account (Section
511A read with Section 454).
Within 30 days of his appointment, the liquidator is duty-bound to publish his appointment in
the Official Gazette and notify the same in the prescribed form to the Registrar (Section 516).
On the detection of a fraud having been committed by promoters, directors, etc., it is the
liquidator’s responsibility to invoke the aid of Section 519 and apply to the Tribunal for the
public examination of them.
For the determination of any question arising in the winding-up or for getting the rights and
powers of the Tribunal regarding enforcement of calls, staying of proceedings or other matters
exercised by it, it is the responsibility of the liquidator to apply to the Tribunal (Section 518).
Where the voluntary winding-up continues for more than a year, the liquidator must call a
general meeting of the company and a meeting of the creditors at the end of the first year of
the commencement of winding-up and at the end of each succeeding year, or as soon
thereafter as may be convenient within 3 months from end of year or such longer period as the
Central Government may allow. The liquidator must lay before the meetings an account of his
acts and dealings and of the conduct of the winding-up during the preceding year and also a
statement in Form No. 153 pursuant to Rule 327 of Companies (Tribunal) Rules (Section
508).]
As soon as the affairs of the company have been wound-up, the liquidator shall:
(a) make-up an account of the winding-up showing how the winding-up was been conducted
and the property of the company has been disposed of, in Form No. 155 [pursuant to
Rule 329 of Companies Tribunal (Rules)]; and
(b) call a general meeting of the company and a meeting of the creditors for the purpose of
laying the account before the meeting and giving any explanation thereof. Besides, the
liquidator, within one week from the date the meeting is held, must send to the Registrar
and the Official Liquidator a copy of each of the account and also a return to each of them
regarding the holding of the meeting and of the date thereof. Where the meeting is not
held for want of quorum, the liquidator shall, instead of the said return, make a return to
the effect that the meeting was duly called but no quorum was present thereat.
Under Section 512(3), it is the liquidator’s duty to pay the debts of the company and to
adjust the rights of the contributories themselves.
9.3.8 Position of a ‘voluntary’ liquidator: It has been held that a voluntary liquidator is not
an officer of the Tribunal, [Re. Hills Waterfall etc. Co. (196) Ch. 946, 954].- also that he can
more rightly be described as the agent of the company [Knowles Scott (181), I Ch. 717].
The status of a liquidator as an agent of the company can be appreciated if one considers that
in a voluntary winding-up the liquidator is appointed by the shareholders, at a general meeting,
both in the case of members’ and the creditors’ winding-up, the only difference between the
two is that where the person nominated by the creditors at their separate meeting is different
from the one proposed by the members, the nominee of the creditors takes the office of the
liquidator. Further, under Section 512 of the Companies Act, a liquidator can exercise certain
powers, with the sanction of a special resolution of the company, in the case of a members
winding-up and in the case of creditors’ winding-up with the sanction of the Tribunal or the
Committee of Inspection or (if there is no such committee) of the meeting of the creditors’ be
also has the right to exercise a number of powers on his own as the agent of the company’ A
company in voluntary winding-up thus is administered by the liquidator in very-much the same
way as it is done by the directors, before the commencement of winding-up.
It must, how ever, be remembered that the liquidator owes certain duties towards the creditors
and contributories under the statute including that of administration of the assets of the
company. These he holds in trust for them. In so far as this, he is a trustee. If he neglects
these duties, he may be held personally liable by the party prejudiced, or misfeasance
proceedings under Section 543 can be taken against him. Thus the liquidator has a dual
status both of agent and trustee.
9.3.9 Steps to be taken in a case where the company is solvent but the business for
which it was formed has been completed:
(a) Prepare a statement of its assets and-liabilities [Section 488(2)].

(b) Prepare and file with the Registrar of Companies a statutory declaration by directors that
the company will be able to pay its debts in full within such period not exceeding three
years from the commencement of the winding-up as may be specified in the declaration.
This must be done within five weeks before that date of the passing of the winding-up
resolution, and must be delivered to the Registrar before that date. It may be
accompanied by a copy of the report of the auditors of the company on the profit and loss
account of the company (for the period commencing from the date up to which last such
account was prepared and ending with the latest practicable date immediately before the
making of the declaration) and the balance sheet of the company (made out as on the
last-mentioned date). It must also embody a statement of the company’s assets and
liabilities, as at that date [Section 488(3)].
(c) Call a general meeting of the company to pass a resolution for the winding-up of the
company (Section 484). As to resolution, it should be in accordance with the provisions of
Section 189(1).
(d) Hold meeting of shareholders in accordance with notice so as to pass the resolution
referred to in (c) above.
(e) Appoint liquidator for the purpose of winding-up the affairs and distributing the assets of
the company (Section 490).
(f) The company must give notice of appointment of liquidator to the Registrar of Companies
(Section 493).
9.3.10 Provisions applicable to every voluntary winding-up: These provisions are
contained in Sections 510 to 521. These are summarised below:
(a) As regards the distribution, on realisation of the assets of the company in liquidation,
such assets should be applied subject to the provisions of the Act, as to preferential
payment in satisfaction of its liabilities pari passu and the residue will be distributed
among the members according to their rights and interests in the company (Section 511).
For the purpose the liquidator has to ascertain the assets and liabilities of the company
and draw-up a scheme of distribution.
(b) The liquidator in all cases is entitled to be supplied with a statement as to the affairs of
the company verified by a affidavit containing the particulars relating, inter alia, to:
(i) the assets of the company stating separately the balance in hand and at banks, and
the negotiable securities held by the company.
(ii) its debts and liabilities;
(iii) names, residence and occupations of all creditors and amounts standing to their
credit together with dates and amounts of securities given therefor; and
(iv) debts due to the company and the amount likely to be realized on their accounts.
The liquidator can compel one or more directors or other officer of the company to submit
such a statement within 21 days from the date of the commencement of the winding-up.
He may also extend the time up to a maximum period of 3 months from that date (Section
511A read with Section 454).
(c) A body corporate cannot be appointed as a liquidator (Section 513).
(d) If for any reason whatever there is no liquidator to act, the Tribunal may appoint the
Official Liquidator or any other person as a liquidator and appoint in his stead the official
Liquidator. The Registrar is also empowered to apply to the Tribunal tot; such
appointment or removal so that the liquidation proceedings be accelerated and the proper
conduct of the liquidation by a competent liquidator be ensured (Section 515).
(e) Within 30 days of his appointment, the liquidator is required to publish his appointment, in
the Official Gazette and notify the same in the prescribed form to the Registrar (Secton-
516).
(f) Section 518 empowers the liquidator or any contributory or creditor to apply to the
Tribunal to have questions determined or to exercise the powers as specified in the
Section.
(g) Section 519 empowers the liquidator to apply to the Tribunal for public examination of
promoters, directors, etc. on the detection of a fraud having been committed by them.
(h) All costs charges and expenses properly incurred in the winding-up are required to be
paid, subject to the rights of secured creditors, out of the assets of company in priority to
all other claims (Section 520).
9.3.11 Summary procedures for winding-up
9.3.11.1 Members’ voluntary winding-up:
(i) Directors (both where 2 directors majority where more than 2 directors) have to make a
declaration of solvency under Section 488 at the Board Meeting. This declaration
together with the auditors report on the balance sheet and profit and loss account (or
income and expenditure account) of the company made-up to the date of the Board
Meeting shall be filed with the Registrar, the time-limit for such filing being 5 weeks
before the passing of the resolution for winding-up;
(ii) Company has to pass at its meeting a special resolution (Section 484) and appoint one or
more Liquidators, at this or at subsequent meeting and fix remuneration if to be paid
(Section 490);
(iii) Company has to publish the said resolution in the Official Gazette as also in newspaper
circulating in the district where its Registered Office is situated, within 14 days of the
passage of the resolution (Section 485);
(iv) Company is required to give notice of the appointment of Liquidator to the Registrar
(Section 493) and the Liquidator to separately communicate his appointment to the
Registrar under Section 516;
(v) Then the Liquidator has to do the following things e.g., speedy realisation of assets,
preparation of list of creditors, admission of proof, settlement of List of contributories,
making of necessary calls, payment to secured creditors, payment of costs, payment of

preferential claim, etc.;
(vi) Liquidator has to call general meeting at the end of each year under Section 496;
(vii) Liquidator has to file with the Registrar a Statement as required by Section 551, where
the winding-up is not concluded within ODC year after its commencement;
(viii) Liquidator has to call final meeting for the purpose of dissolution of the company, and for
that matter to proceed according to the provisions contained in Sections 497 and 498.
9.3.11.2 Creditors’ voluntary winding-up: The creditors would be mainly concerned if the
company arrives at the decision that it should wind-up itself because of the inability to meet its
liabilities. Therefore:
(i) the company has to call creditors’ meeting to be held on the day or the day next following
the date on which there is to be held a general meeting of the company at which the
resolution for voluntary winding-up is to be proposed [Section 500(1)];
(ii) the company has to send notice of the meeting to creditors and also advertise the notice
in two newspapers circulating in the district of its registered office [Section 500(2)];
(iii) the Board of Directors, in the creditors’ meeting, has to cause a full statement of the
position of the company’s affairs and a list of company’s creditors and the estimated
amount of their claims to the laid [Section 500(3)];
(iv) the company has to notify the resolution passed thereat to Registrar within 10 days of the
passing thereof [Section 501(1)1;
(v) creditors’ nominee as Liquidator to call meeting of the company and of creditors at the
end of each year in compliance with the requirements of Section 508;
(vi) the liquidator has to call the final, meeting in compliance with the provisions of Section
509.
9.4 GENERAL PROVISIONS ON WINDING-UP

Sections 528 to 560 contain provisions applicable to every mode of winding-up. Some of
the important provisions are stated below:
(1) Section 551 prescribes that information as to the pending liquidation, unless
exempted by the Central Government, shall be given by the liquidator within 2 months
of the expiry of the first year and thereafter at intervals of not more than one year, by
filing a statement in the prescribed form [Form No. 153 Companies (Tribunal) Rules];
also that the statement shall be audited by a chartered accountant. The statement
shall have to be riled (a) in the case of a winding-up by or subject to the supervision
of the Tribunal, in the Tribunal; and (b) in case of a voluntary winding-up, with the
Registrar.
N.B. Students should not that this requirement is over and above the requirements
under Sections 497 (in the case of members voluntary winding-up) or 508 and 509 (in
the case of creditors voluntary winding-up).
(2) Debts that are provable: Debts of all descriptions in a winding-up are payable only
when these have been proved. All debts payable on a contingency and claims against
the company, whether present or future, certain or contingent, ascertained or
unascertained, can be proved against a company; when the amount of a debt cannot
be ascertained, a fair estimate thereof may be made for purposes of proof (Section
528). This Section applies to proof of debts when the company is in a solvent state
i.e. when its assets are sufficient to pay all its debts and liabilities and the costs of the
winding-up. Where the company is insolvent, Section 528 would be applicable. In the
winding-up of an insolvent company, the same rules are applicable as regards: (i)
debts provable; (ii) the valuation of annuities and future and contingent liabilities and
(iii) the respective rights of secured and unsecured creditors, as those in the case of
an estate of person adjudged insolvent under the Insolvent Law. [Section 529(1)].
However, the security of every secured creditor shall be deemed to be subject to a
pari passu change in favour of the workmen to the extent of the workmen’s portion
therein, and, where a secured creditor instead of relinquishing his security and
proving his debt, opts to realise his security, then (a) the liquidator shall be entitled to
represent the workmen and enforce such charge; (b) any amount realised by the
liquidator by way of enforcement of such charge shall be applied rateably for the
discharge of workmen’s dues, and (c) so much of the debt due to such secured
creditor as could not be realised by him by virtue of the foregoing provisions of this
proviso or the amount of the workmen’s portion in his security, whichever is less shall
rank pari passu with the workmen’s dues for the purposes of Section 529A [Proviso
added to Sub-section (1) of Section 529 by the Companies (Amendment) Act, 1985].
All persons who in any such case would be entitled to prove for and receive dividends
out of the assets of the company may come in under the winding-up, and make such
claims against the company as they respectively are entitled to make by virtue of this
Section [Sub-section (2)]. If, however, a secured creditor, instead of relinquishing his
security and proving for his debts, proceeds to realise his security, then he shall be
liable to pay his portion of the expenses incurred by the liquidator (including a
provisional liquidator) for the preservation of the of a security before it is realised by
the secured creditor for the purpose of sub-section (2), the portion of expenses which
the secured creditor shall be liable to pay shall be the expenses less an amount which
bears to such expenses the same proportion as the workmen’s portion in relation to
the security bears to the value of the security.
For the purposes of Section 529, Section 529A and Section 530:
(a) [“workmen” in relation to a company, means the employees of the company being
workmen within the meaning of the Industrial Disputes Act, 1947: i.e., any person
(including an apprentice) employed in any industry to do any skilled, manual,
supervisory, technical or clerical work for hire or reward, whether the terms of
employment be express or implied, but does not include any such person:
(i) who is subject to the Army Act, 1950, or the Air Force Act, 1950, or the Navy
(Discipline) Act, 1934; or
(ii) who is employed in the police service or as an officer or other employee of a
prison; or
(iii) who is employed mainly in a management or administrative capacity, or
(iv) who, being employed in a supervisory capacity, draws wages exceeding one
thousand rupees per-mensum or exercise, either by the nature of the duties attached
to the office or by reason of the powers vested in him, functions mainly of a
managerial nature.];
(b) “workmen’s dues” means the aggregate of the following sums due from the company
to its workmen, namely:
(i) all wages, salaries including wages payable for time or piece work and salary
earned wholly or in part by way of commission of any workmen, in respect of services
rendered to the company and any compensation payable to any workman under any
of the provisions of the Industrial Disputes Act, 1947;
(ii) all accrued holiday remuneration becoming payable to any workman, or in the case
of his death to any other person in his right, o the termination of, the winding-up other
or resolutions;
(iii) unless the company is being wound-up voluntarily merely for the purposes of
reconstruction or of amalgamation with another company or unless the company has,
at the commencement of the winding-up, under such a contract with insurers as
mentioned in Section14 of the Workmen’s Compensation Act, 1923, rights capable of
being transferred to and vested in the workman, all amounts due in respect of any
compensation or liability for compensation under the said Act in respect of the death
or disablement of any workman of the company. In other words, in the absence of
alternative circumstances mentioned in the beginning of this clause the provision of
this clause will fall within the provision of the phrase “workmen’s dues”;
(iv) all sums due to any workman from a provident fund, a gratuity fund or any other
fund for the welfare of the workman maintained by the company.
(c) “workmen’s portion”, in relation to the security of any secured creditor of a company,
means the company which bears to the value of the security the same proportion as
the amount of the workmen’s dues bears to the aggregate of (i) the amount of
workmen’s dues, and (ii) the amounts of the debts due to the secured creditors. It has
been exemplified by the following statutory illustration.
Illustration
The value of the security of a secured creditor of a company is Rs. 1,00,000. The total
amount of the workmen’s dues is Rs. 1,00,000. The amount of the debts due from the
company to its secured creditors is Rs. 3,00,000. The aggregate of the amount of
workmen’s dues and of the amounts of debts due to secured creditors is Rs. 4,00,000.
The workmen’s portion of the security is therefore 1/4th of the value of the security, i.e.
25,000, [Sub-section (3) added to Section 529 by the Companies (Amendment) Act,
1985].
Now let us illustrate the significance of the Explanation aforementioned by reference to
the statutory illustration stated above.
The facts given in the above illustration remain the same. The liquidators incur Rs. 10,000
for the preservation of the security before it is realised by the secured creditor. Now what
is the portion of Rs. 10,000 that should be borne by the secured creditors? It is equal to
the following equation:
Workmen ' s portion
Whole of expenses – Whole of expenses ×
Value of the security
10,000 × 25,000
= Rs. 10,000 ×
1,00,000
= Rs. 10,000 – 2,500

= Rs. 7,500. This is the amount to be borne by the secured creditors.
♦ Overriding preferential payment: Under Section 529A (incorporated by the 1985
Amendment Act), notwithstanding anything contained in other provisions of this Act or
any other law for the time being in force in the winding-up of a company – (i)
workmen’s dues and (ii) debts due to secured creditors to the extent such debts rank,
under clause (c) of the proviso to Sub-section (1) of Section 529, pari passu with such
dues, shall be paid in priority to all other debts. These debts payable under (i) and (ii)
above shall be paid in full, unless the assets are insufficient to meet them, in which
the case they shall be paid in equal proportions.
Note: The aforesaid rules of insolvency as contained in Section 529 will be applicable
only in respect of the three matters specified under paragraph (i), (ii) and (iii) but no
further; and they apply except in so far as special provisions are contained in the
Companies Act Italia vs. Free Press Journal (1956) M.L.J. 463. Further Section 529
shall cease to be applicable as soon as it is found that the company in the course of
winding-up is not insolvent [Re. Fine Industrial Commodities Ltd. (1953) 3 A.E.R.
707].
(3) Preferential payments: Subject to the provisions of Section 529A (discussed earlier),
the following debts must, according to provisions contained in Section 530, as
amended by the 1996 Amendment Act, be paid in priority to the claims of unsecured
creditors:
(a) All revenues, taxes, cesses and rates due to the Central or State Government or a
local authority, having become due and payable within the twelve months before the
relevant date;
(b) All wages and salaries of an employee for service rendered for a period not exceeding
four months within the preceding 12 months next before the relevant date, but not
exceeding Rs. 20,000 in any one case;
(c) All accrued holiday remuneration;
In case of (b) and (c) where amount is paid out of money advanced by another person
for that purpose, that person, is subrogated to rights of employee who has been paid
[Section 530(4)];
(d) Unless the winding-up is merely for purposes of amalgamation or of reconstruction
employer’s contribution to the State Insurance Scheme under the Employees’ State
Insurance Act, 1948 payable during 12 months before the relevant date and all
amounts due in respect of any compensation or liability for compensation in respect of
death or disablement compensation under the Workmen’s Compensation Act, 1923;
(e) All sums due to any employee from any fund including a provident, pension or a
gratuity for the welfare of the employees, maintained by the company; and
Expenses payable by any company in respect of an investigation held under Section
235 or 237 of the Act.
For the purposes of Section 530: (i) Any remuneration in respect of a period of holiday
or of absence from work through sickness or other good causes shall be deemed to
be wages in respect of services rendered to the company during that period;
(ii) The expression “accrued holiday remuneration” includes, in relation to any person,
all sums which, by virtue either of his contract of employment or of any enactment
(including any order made or direction given under any enactment), are payable on
account of the remuneration which would, in the ordinary course, have become
payable to him in respect of a period of holiday, had his employment with the
company continued until he became entitled to be allowed the holiday;
(iii) The expression “employee” does not include a workman (added by the Companies
(Amendment) Act, 1985 (w.e.f. 29.5.85); and
(iv) The ‘relevant date’ means in the case of winding-up by the Tribunal:
(a) the date of the appointment of first appointment of a provisional liquidator; or
(b) if no such appointment was made, the date of the winding-up order, Unless, in
either case the company had commenced to be wound-up voluntarily before that date.
In all other cases, it means the date of voluntary winding-up resolution.
If the assets are insufficient to pay the foregoing preferential debts in full they abate in
equal proportions. If necessary, these debts may be paid out of the proceeds of any
assets subject to a floating charge.
The order of priority in paying off debts in a winding-up may be roughly worked out as
follows: (i) Secured creditors (mortgagees); (ii) costs and charges of winding-up [In a
voluntary winding-up automatically this has priority. In a compulsory winding-up. Tribunal
has to give it priority by order (See Section 576 and 520); (iii) preferential debts (Section
530); (iv) floating charges [See Section 530(5)(b)]; and (v) unsecured creditors.
The above does not affect debts that are secured by a fixed charge which have to be paid
up to the value of the property concerned.
If there is any surplus, capital is returned to preference shareholders first and then to
equity shareholders. If there is still any surplus left, it depends on the articles whether
preference shareholders are entitled to share that surplus.
Section 530(1) requires that the revenues, taxes, etc. should have become due and
payable within the period of 12 months immediately preceding the relevant date. The
arrears of sales tax not to be paid preferentially under Section 530 although the same
become ‘recoverable’ as arrears of land revenue under the Sales-tax Act. The words
‘recoverable’ arid ‘payable’ have got completely different connotations. The word
‘revenues’ used in Section 530(1)(a) of the Companies Act means revenues which have
become due and payable as revenues within the next 12 months before the relevant date,
and not revenues which are recoverable as arrears of land revenue. Sales tax, assessed
after winding-up, is not revenue, which has become due and payable within 12 months
next before the relevant date. Therefore, it cannot be paid preferentially under Section
530. [Sales-tax Officer, Kanpur vs. Official Liquidator (1968) 38 Comp. Case 430].
Advance income tax demanded and due under the Income-tax Act is to be paid
preferentially under Section 530(1)(a) of the Companies Act provided it becomes due and
payable within the twelve months next before the relevant date. [Joint Official Liquidator
vs. Comm. Of Income-tax (1954) I.M.L.J. 282 – AIR 1954 Mad. 858]. But the Calcutta
Tribunal has held a contrary view. [Suburban Bank Ltd. AIR (1953) Cal. 487].
Ex-gratia payments to employees of the company are not within the ambit of Section
530(1)(b) [Vijay Card Board Co. Ltd. vs. Collector, District Hyderabad AI (1957) Andhra
Pradesh 725].
Under Section 530(4), the bank which provided an overdraft for making money available
for payment of wages, is entitled to preferential payment for the money so advanced and
paid [Re. Rampgill Mill Ltd. (1967) Comp. L.J. 262].
‘Bonus’ payable to staff appears to be covered by the expression ‘all wages’ occurring in
Section 530(1)(b) and therefore, is to be paid preferentially to tile extent laid down in
Section 530(1)(b) especially if it is due under the Payment of Bonus Act. The company’s
contribution payable to the Employees State Insurance Corporation is, for the purposes of
Section 530, a preferential payment [Re. Bihar Bolts Engineering Works Ltd. Air 1959 Pat.
417].
In the winding-up of a company, an advocate is entitled to preferential payment of his fees
and expenses out of the fruits of a litigation which he had successfully conducted for the
company which are in the hands of the liquidator [Kutti Krishna Menon vs. Cochin
Mercantile Ltd. (1969) 32 Comp. Case 578].
(4) Effect of winding-up on antecedent and other transactions: With a view to
affording better protection to the creditors of a company, the principle of fraudulent
preference as existent in the insolvency laws, has been extended to companies so as
to render void certain categories of transactions entered into within a limited period
before the commencement of winding-up. The detailed provisions in this regard are
contained in Sections 531 to 537 of the Act, which are summarised below:
(i) Fraudulent Preference: All transfers of property, movable or immovable, made by
delivery of goods or payment of money etc., if made by an insolvent person within 3
months before the presentation of insolvency petition, would be held to be a
fraudulent preference of its creditors and would be invalid. Similarly, in the case of a
company all such transfers, if made within 6 months before the commencement of its
winding-up, would be deemed to be a fraudulent preference of its creditors, and would
be invalid (Section 531). For the purpose of proving a fraudulent preference, two
things need be shown, viz.:
(a) that in the case of a winding-up by or subject to the supervision of the Tribunal the
transaction took place within 6 months before the presentation of the petition and in
the case of voluntary winding-up, the transaction took place within 6 months of
passing of resolution for winding-up [Section 531(2)]; and
(b) that the main motive in the mind of the company, acting through its directors, was
to prefer one creditor to the other [In Re. Jackson & Bassford (1906) 2 Ch. 467].
On the basis of the above-mentioned provisions of Section 531, let us examine the
following situation: A company has been running into losses. To one of its creditors it
gives a mortgage on its immovable property on 1st May, 1985. On October 15, 1985,
a winding-up petition is presented to the Tribunal, which passes an order of winding-

up on 30th November, 1985. It is clear from this situation that the transaction of
mortgage on the company’s immovable property took place within 6 months before the
presentation of the petition for winding-up. Now, if it can further be proved that the
dominant motive of the company was to prefer one creditor to other creditors, then the
transaction would be deemed to be fraudulent preference and hence invalid. The real
test is whether the debtor (the company in the said illustration) in making the transfer
is doing what he himself felt bound or compelled to do. If so, the case does not fall
within the purview of fraudulent preference [Nobin Kishori vs. Jugneshwar AIR (1983)
Cal. 809; In re. MIC Trust Ltd. (1933) Ch. 542].
(ii) Avoidance of voluntary transfer: Any transfer of movable or immovable property or
any delivery of goods by a company, save and except a transfer or delivery in the
course of the company’s business in favour of a purchaser or encumbrancer in goods
faith and for valuable consideration, shall be void against the liquidator, if such
transfer or delivery is made within one year before the presentation of the winding-up
petition by or subject to the supervision of the Tribunal or the passing of a resolution
for the voluntary winding-up (Section 531A).
(iii) Void transfer: Any transfer or assignments by a company of all the property to
trustees for the benefit of its creditors are void (Section 532).
(iv) Liabilities of fraudulently preferred persons: If an act done by a company is invalid
under Section 531 as a fraudulent preference of a person interested in property
mortgaged or charged in his favour to secure the company’s debt, the person so
preferred would be liable, as a surety for the debt to the extent of the mortgage (or
the charge) on the property or the value of his interest, whichever is less. The value
of the said person’s interest shall be determined at the date of the transaction
constituting the fraudulent preference and shall be determined as if the interest were
free of all encumbrances other than those to which the mortgage or charge the
company’s debt was then subject (Section 533).
(v) Limitation on rights under a floating charge: There are two major statutory limitations
to rights arising out of a floating charge. First, a floating charge created within 12
months of the commencement of winding-up unless it is proved that the company
immediately after the creation of the charge was solvent, is invalid except up to the
amount of any cash paid to the company at the time or subsequent to the creation of,
and in consideration for, the charge together with interest on the amount at 5% per
annum or other prescribed rate (Section 534). Secondly, preferential debts have also
priority over debts secured by a floating charge (Section 123 and 530) and they must
be paid out of the assets covered by a floating charge to the extent that they cannot
be met out of assets available for payments of unsecured creditors.
(vi) Disclaimer of onerous property: The liquidator may, with the leave of the Tribunal,
disclaim any onerous property within twelve months of the commencement of the
winding-up. If the existence of any disclaimable property does not come to the
knowledge of the liquidator within one month after the commencement of the winding-
up, he can disclaim at any time within 12 months after he has become are fit. The
Tribunal may, however, extend the time.
An onerous property may consist of: (a) land of any tenure, burdened with onerous
covenants (b) shares or stocks in companies; (c) any other property which is
unsaleable or is not readily saleable, being onerous, binding the possessor thereof
either to perform any onerous act or to pay any sum of money; or (d) unprofitable
contracts.
His right to disclaim is lost if, within twenty eight days or such extended period as may
be, allowed by the Tribunal of receiving a demand from any interested person to make
his decision, (he does not give notice that he intends to apply for leave to disclaim).
Any person injured by disclaimer is treated as a creditor of the company to the
amount of compensation or damages payable in respect of the injury, and may prove
in the winding-up to the extent of the injury (Section 535).
(vii) Avoidance of transfers etc.: In the case of a voluntary winding-up, any transfer of
shares in the company which has not been sanctioned by the liquidator, and any
alteration in the status of the members of the company made after the commencement
of the winding-up, is void.
In the case of a winding-up by or subject to the supervision of the Tribunal, all
disposition of properties (including actionable claims) belonging to the company as
well as transfer of shares in the company or alteration in the status of its members
which are made after the commencement of the winding-up are void unless otherwise
ordered by the Tribunal (Section 536).
(viii)Avoidance of certain attachment, etc.: In the case of any company which is being
wound by or subject to the supervision of the Tribunal, (a) any attachment, distress or
execution put in force, without leave of the Tribunal, against the estate or effects of
the company, after the commencement of the winding-up or (b) any sale held, without
leave of the Tribunal, of any of the properties or effects of the company after such
commencement is void. These provisions, however, will not apply to any proceeding
for the recovery of any tax or impost or any dues payable to the Government (Section
537).
In Rajratna Narabhai Mills Co. Ltd. (In liquidation) by its Official Liquidator vs. New
Quality Bobbin Works (1973) 43 Comp. Case 131. Three issues emerged for decision.
These are as follows:
First, where an attachment of the company’s property under Tribunal’s order takes place
prior to the filing of the winding-up petition and the sale of the attachment property takes
place before the issue of the winding-up order, can the liquidator claim the sale proceeds?
It was held that on account of the sale of the property having taken place after the
commencement of the winding-up proceedings, Section 537 of the Act would operate and
the sale of the shares would be void. Where the respondent had derived benefit under a
void contract, he would be under an obligation to return it to the Official Liquidator of the
company in liquidation who would be the only claimant of the benefit. Secondly, if the sale
proceeds were claimable, would be liquidator being required to file a separate suit? It has
been held that the summons for getting the relief under Section 537 by the official
liquidator was maintainable and there was necessity for the liquidator to file a separate
suit. When the official liquidator, if empowered by Section 457(1) of the Act to institute or
defend legal proceedings and in performance of his duty, finds a transaction to be void
against him the transaction becoming void because of the winding-up proceedings – it
would be a question of fact arising in the course of winding-up and the Tribunal would
have the jurisdiction to decide the question. This is the scope and ambit of jurisdiction
conferred upon the Tribunal under Section 446(2) of the Act. Therefore, the liquidator
would not have to file the suit in the Tribunal. Thirdly, whether the application by the
liquidator to the Tribunal for the recovery of the sale proceeds was barred by limitation?
Article 137 of the Limitation Act, 1963 would apply only to application not made under the
Code of Procedure. The liquidator made this application not under the Code of
Procedure but under the Companies Act to the Tribunal on whom jurisdiction is conferred
by Section 10 of the Companies Act. It was, therefore, held that the application was not
barred by limitation.
(5) Offences by officers of companies in liquidation: The Act provides certain
punishments to be inflicted on past or present officers of a company which is in the
course of winding-up (i) who do not disclose to the liquidator all the property of the
company and consideration for which the same has been disposed of, (ii) who conceal
or fraudulently remove any part of the property of the company of value of Rs. 100 or
more within twelve months next before the commencement of the winding-up, (iii) who
make any material omission in their statements about the affairs o the company, (iv)
who are guilty of any false representation or fraud obtaining consent of the creditor to
the agreement relating to the affairs of the company or to a winding-up.
Note: The above is illustrative of offences for which an officer may be punished. For a
complete list of such offences read Section 538(1)(a) to (p).
The officers may be punished on any one of the aforementioned grounds with
imprisonment or with fine or with both.
Offences against the Act: No Tribunal shall take cognizance of any offence against the
Act, except on the complaint in writing made by the Registrar, or a shareholder or a
person authorised by the Central Government in this regard [Section 621(1)]. In spite of
anything contained in the Code of Criminal Procedure if the complainant is either the
Registrar or the Central Government’s deputationist, his personal attendance before the
Tribunal trying the offence shall not be necessary, unless the Tribunal for reasons to be
recorded in writing requires his personal attendance at the trial [Section 621(IA)].
Notwithstanding anything contained in the Code of Criminal Procedure 1973 any offence
punishable under this Act (whether committed by a company or any officer thereof, not
being an offence punishable with imprisonment only or with imprisonment and also with
fine, may, either before or after the institution of any prosecution be compounded by (a)
the Company Law/Board, or (b) where the maximum amount of fine which may be
imposed for such offence does not exceed fifty thousand rupees by the Regional Director
on payment or credit by the company or the officer, as the case may be, to the Central
Government of such sum as that Board or the regional director as the case may be, may
specify but in no case the sum so specified shall exceed the maximum amount of fine
imposed for the offences so compounded. This provision is not applicable in case of an
offence committed by a company or its officer within a period of three years from the date
on which a similar offence committed by it or him was compounded. [Section 621A, as
added by the Companies (Amendment) Act, 1988]. The amount of fine, imposed under the
Act by the Tribunal may be applied, under the direction of the Tribunal in or towards the
payment of the costs of proceedings, or rewarding the person on whose information the
fine is recovered (Section 626). For false statements made in, as well as omissions
intentionally made of, any material fact knowing it to be material, any return, report,
certificate, balance sheet, prospectus, statement or other document, Section 628 renders
the offence punishable with imprisonment extending-up to 2 years as well as with me.
Similarly, under Section 629 an offender is punishable for intentionally giving false
evidence in any examination on oath.
Falsification of books: If with intent to defraud or deceive, any person, any officer or
contributory of a company destroys, mutilates, alters, falsifies, secrets, etc. any books,
papers or securities, or is a party to any of these acts, he will be punishable with
imprisonment for a period extending up to 7 years and fine. He will also be equally
punishable, if he makes or is privy to the making of, any false or fraudulent entry in any
register, books of account, etc. belonging to the company (Section 539).
An auditor, being an officer of the company, if culpable in the circumstance would be
liable to be punished as prescribed. The provisions of this Section can be invoked only
when the company is being wound-up.
Liabilities where proper accounts not kept: If in a winding-up it is found that proper books
of account have not been kept throughout the period of two years preceding the
commencement of winding-up (or the period between the incorporation of the company
and the commencement of the winding-up whichever is shorter) the officers of the
company would be liable to imprisonment for a term extending to one year. They may
however, escape liability, if they can show that they had acted honestly, and that in view
of the circumstances in which the business was carried on, the default was excusable.
Proper books of account will be deemed to have been kept if there have been kept (a),
such books or accounts as are necessary to exhibit and explain the transactions and
financial position of the business of the company, including books containing entries made
from day-to-day in sufficient detail of all cash received and all cash paid, and (b)
statement of annual stock taking with all necessary particulars, where the business of the
company has involved dealings in goods (Section 541).
Liabilities for fraudulent trading: If, in the course of a winding-up, it transpires that the
business has been carried on with the intent to defraud creditors or others, the Tribunal
may, on the application of the Official Liquidator, or the liquidator or any creditor or
contributory, declare that any person who was knowingly a party to such a carrying on of
the business shall be personally liable to on unlimited extent for all or any of the
company’s debts or liabilities, lie may also be called upon to pay fine up to Rs. 50,000 or
sentenced to imprisonment up to two years or with both (Section 542).
Misfeasance: If, in the course of winding-up of a company, it appears that any person who
had taken part in the formation or promotion of the company, or any past or present
director, manager, liquidator or other officer of the company has misapplied or retained or
become liable or accountable for any money or property of the company, or has been
guilty of any misfeasance or breach of trust in relation to the company, the Tribunal may,
on the application of the Official Liquidator, or any creditor or contributory, examine into
the conduct of such person, and compel him to repay or restore the money or property or
make compensation to the company for misfeasance or breach of trust/misapplication etc.
(Section 543).
Now suppose, the Official Liquidator of a company in liquidation institutes misfeasance
proceedings against the director thereof and during the pendency of the proceeding itself
the director passes away. Can the legal representatives of the decreased director be
impleaded and the proceedings continued against them? This question came up for
judicial decision in Official liquidator vs. Pasthasarathi Sinha (1983) 53 Comp. Cases 163
(SC).
Held: The misfeasance proceedings initiated under Section 543 against a director of a
company in winding-up can be continued on his death against his heirs and legal
representatives for the purpose of determining and declaring the loss or damage caused
to the company though no compulsive order may be made in those proceedings under
Section 543 against the heirs and legal representatives. On conclusion of the proceedings
under Section 543 a declaration of liability may be made. Such declaration partakes the
character of a decree in a suit and can be enforced under Section 634 and 635. The
provisions of Section 50 of CPC have to be applied when the person who is made liable
dies and the liability of the legal representatives should be determined accordingly.
Misfeasance is an act or omission, in relation to the company, which causes loss or injury
to the company. Although loss to the company has not been expressly stated in Section
543, nevertheless such ‘loss’ has to be implied in case of misapplication or retainer. Only
such an act of misfeasance as results in the loss to the company will fall within the ambit
of Section 543. It is essential for the liquidator to establish that the respondents are
accountable for some goods or money belonging to the company or that they are guilty of
misapplication, retainer or breach of trust (In re. Vijay Laxmi Sugar Mills Ltd. AIR 1963 All
55). For the creation of liability under Section 543, it must be shown that there has been
dishonesty or fraud or at least gross and culpable negligence Piliai Central Bank vs.
Augusti AIR 196, Ker. 121). An honest mistake, not amounting to culpable negligence or
breach of duty, would not be misfeasance (Ayyangar vs. Official Assignee of Madras, 55
Mad. 153).
Where the person guilty of the offence is a firm or body corporate, the Tribunal may make
the aforesaid order against the individual who was at the relevant time a partner of the
firm or a director of the body corporate (Section 544).
Notes: (i) For the purpose of Section 543 an auditor is an officer [Section 2(30)];
(ii) Section 543 provides for a summary remedy for bringing erring officers of the
company to book and the long-winded remedy by way of suit is always available in
addition;
(iii) Illustrations of misfeasance are: improper payment of dividends; ultra vires
investment; selling his own property to company without disclosure; allotting shares in
contravention of Section 69, etc.; and
(iv) Misfeasance summons would also lie against directors when they have paid dividend
out of capital knowingly allotted shares to infants, etc. Misfeasance lies against the
liquidator when he has negligently admitted a claim.
Misfeasance proceedings can be taken against the auditors under Section 543 of the
Companies Act. If they are found to have been guilty of any misfeasance or breach of
trust in relation to the company. Such a liability may arise due to non-performance or
unsatisfactory performance of duties by an auditor in relation to the account of the
company, as a result of which the company has suffered losses. The liability is a
liability and the Tribunal may call upon the auditor to make good the damages
suffered by the company. But the action against the auditor under the aforementioned
provision of law can be taken only if the business of the company is in the course of
being wound up. The directors of a company while it is functioning can also take an
action against the auditor for negligence in the circumstances similar to those
aforementioned.
The application must be made within 5 years from the date of the order of winding-up
or the first appointment of liquidator or of the misapplication, retainer, misfeasance or
breach of trust as the case may be, whichever is longer.

(6) Power of Tribunal to grant relief to officers against the liability for misfeasance,
breach of duty, etc.: If in any proceedings for misfeasance against an officer of a
company it appears to the Tribunal hearing the case that he is or may be liable in
respect of the misfeasance, negligence, breach of duty, etc. but that he has acted
honestly and reasonably and that having regard to all the circumstances of the case
including those connected with his appointment, he ought fairly to be excused the
Tribunal may relief him either wholly or partly, from his liability on such terms as it
may think fit. But in a criminal proceeding under this Sub-section, the Tribunal is
bereft of any power to grant relief from any liability, which may attach to an officer in
respect of such misfeasance [Section 633(i)].
Where any such officer has reason to apprehend that any proceeding will or might be
brought against him in respect of any misfeasance, etc. he may apply to the Tribunal
for relief and the Tribunal on such application has the same power to relieve him as it
would have had if it had been a Tribunal before which proceedings against that officer
for misfeasance, etc. had been brought under Sub-section 633 [Section 633(2)].
But the relief under Sub-section (1) or Sub-section (2) can be granted to an officer,
only if the relevant Tribunal has, by notice served in the manner specified by it,
required the Registrar or any other person to show cause why such relief should not
be granted [Section 633(1)].
It should be noted that only an officer of the company and not company itself could
apply for relief. But it is for the Tribunal before which the proceeding is pending and
not for Tribunal to grant relief. The Tribunal can grant relief only under Sub-section
(2) against apprehended prosecution.
(7) Prosecution of delinquent officers and members of the company (Section 545): If
it appears to the Tribunal in a winding-up by or subject to the supervision of the
Tribunal that any past or present officer or any member of the company has been
guilty of any offence in relation to the company, the Tribunal may, either on the
application of any person interested in the winding-up or of its own motion direct the
liquidator either himself to prosecute that offender or to refer the matter to the
Registrar. In the latter case, if the Registrar considers it to be a fit case for
prosecution he shall report the matter to the Central Government, which may, after
taking such advice as it thinks fit, direct the Registrar to institute such proceedings for
the purpose. No report shall, however, be made by the Registrar unless an
opportunity is given to an accused person to make a statement to him in writing and of
being heard thereon.
Similarly, if in the course of the voluntary winding-up it appears to the liquidator that
any such person as stated above has been guilty of criminal offence in relation to the
company, then he shall forthwith report to the Registrar. The Registrar may, in this
case, do any of the three viz. (i) he may refer the matter to the Central Government
for further enquiry whereupon they shall investigate the matter and if thought
expedient, may apply to the Tribunal for an order conferring on any person designated
by them, all the case of compulsory winding-up or (ii) if he is of the opinion that the
case is not a fit one for the prosecution, he shall inform the liquidator according and
(iii) the liquidator in the last case if he holds a different opinion may himself take
proceedings against the offender after securing the sanction of the Tribunal. In case,
however, the liquidator does not make a report to the Registrar as he should, the
Tribunal may, on an application of any person interested in the winding-up or of its
own, motion, direct the liquidator to make such report which, on being made shall
dealt with by the Registrar in any one of the three ways mentioned above.
In connection with an every prosecution in pursuance of these provisions, it shall be
the duty of the liquidator and of every officer and an agent of the company, past and
present (other than the defendant in the proceeding) to give to the Registrar all
assistance he is reasonably able to give. ‘Agent’ here includes any banker, legal
advisor or an auditor of the company. In case of default, the Tribunal may, on the
application of the Registrar, direct performance of this duty. Where the liquidator is in
default, the Tribunal may order him to pay the cost of the application personally
unless it appears that the default was due to the liquidator not having in the hands the
sufficient assets of the company.
(8) Disposal of books and papers of the company: In a winding-up by the Tribunal or
subject to the supervision of the Tribunal, the Tribunal will direct how the books and
papers of the company and of the liquidator are to be disposed of.
In the case of members’ voluntary winding-up they are disposed of in such manner as
the company by a special resolution directs and in the case of creditors’ voluntary
winding-up in such a way as the Committee of Inspection and if there is no such
Committee as the creditors of the company may direct.
After the expiry of five years from the dissolution of the company, no responsibility will
rest on the company the liquidator or any person to whom the custody of the books
and papers has been committed, by reason of any books or papers not being
forthcoming for any person claiming to be interested therein (Section 55).
The Central Government may, by rules, prevent for such period (not exceeding 5
years from the dissolution of the company) as the Central Government thinks proper,
the destruction of the books and papers of a company, which has been wound-up, and
of its liquidator. Also it can similarly enable any creditor or contributory of the
company to make representation to the Central Government in respect of the matters
aforementioned and to appeal to the Tribunal from any direction, which may be given
by the Central Government in the matter [Section 540(3)]. If any person acts in
contravention of any such rules or of any direction of the Central Government

thereunder, he shall be punishable with an imprisonment for a term extending to 6
months or with fine extending to Rs. 50,000 or with both [Section 550(4)].
(9) Information as to pending liquidation (Section 551): You may come across a
situation where the winding-up of a company has commenced but it has not been
possible to conclude it within one year since its commencement. In such a case, the
liquidator is required to file in the Tribunal (in case of a winding-up/by or subject to
supervision of the Tribunal or with the Registrar in case of a voluntary winding-tip a
statement in the prescribed form. The statement is to contain the prescribed
particulars and is to be duly audited by a qualified auditor with respect to the
proceedings in and the position of the liquidation. This statement is to be filed within
two months of expiry of such a year. This statement is to be filed at intervals of not
more than one year or such shorter intervals as may be prescribed. The liquidator has
to comply with these requirements unless he is exempted from so doing wholly or
partly by the Central Government [Sub-section (1)].
A copy of the statement filed in the Tribunal as aforesaid has to be simultaneously
filed with the Registrar who shall keep it along with the other records of the company
[Sub-section (2)].
In the case of Government Company in liquidation, copy of the statement shall be
forwarded to the Central Government if it is a member of the Government Company or
to the state Government if that Government is a member or to the Central and the
State Government both, if both are the members of the Government Company [55(2A)
as added by the Companies (Amendment Act), 1988].
The said statement is open to an inspection by any person stating himself in writing to
be a creditor or contributory or his agent at all reasonable times on payment of the
prescribed fee. He may also have a copy of or an extract from, the statement if he so
wants [Sub-section (3)].
The Section provides for the following penalties namely:
(a) fine up to Rs. 5,000 for every day of the liquidator’s failure in complying with the
requirement of the Section.
(b) imprisonment up to six months or fine up to Rs. 10,000 or both for the liquidators
wilful default in causing the statement to be audited by a qualified auditor and
(c) sentence provided in Section 182 of the Indian Penal Code for the person untruthfully
stating himself to be a creditor or contributory of the company for inspecting the
aforementioned statement or receiving copy or an extract thereof [Sub-section (4) &
(5)].
(10) Liquidators’ duty as to the payment into a bank: In terms of Section 552, every
Official Liquidator is bound to pay all moneys which he receives as the liquidator of
the company into the public account of India in the Reserve Bank in such a manner
and as at such times as may be prescribed.
Under Section 553, every other liquidator than the Official Liquidator shall pay such
money into a scheduled bank to the credit of a special bank account. This account is
to be described as “the Liquidation Account of Company ‘Company Limited’/Company
Private Limited”. He has to make this payment into the bank unless the Tribunal for
reasons of an advantage to the creditors or contributories otherwise orders him.
However, he cannot retain with himself any sum in excess of Rs. 500 or such other
amount as the Tribunal may authorise for more than 10 days. If he fails to give any
satisfactory explanation he is obliged to pay interest at 12% per annum and such
other penalty as may be prescribed by the Registrar. He shall be further liable to
disallowance of all or such of his remuneration as the Tribunal may think fit. For the
said stipulated amount and period, he shall also be liable to be out as well as to pay
expenses occasioned by reason of his default.
According to Section 554, neither, the Official Liquidator nor any other liquidator can
pay any money received by him in his capacity as such into any private banking
account.
(11) Unpaid dividend, and undistributed assets to be paid into Company’s
Liquidation Account (Section 555): Where a company is being wound-up, the
liquidator shall forthwith may into the public account of India in the Reserve Bank in a
separate account described as the “Company’s Liquidation Account” all the money
which he has either in his hands or under his control and which represents (a)
dividends payable to any creditor which bad remained unpaid for 6 months after the
declaration thereof; or (b) assets refundable to any contributory, which have remained
undistribution thereof; or (b) assets refundable to any contributory, which have
remained undistributed for 6 months after the date on which they became refundable.
Similarly, on the dissolution of a company the liquidator must pay any unpaid
dividends or undistributed assets in his hands at the date of the dissolution, into the
account aforementioned [Sub-section (2) & (3)].
While making the aforesaid payment, the liquidator shall furnish to such officer as
appointed by the Central Government with a statement in the prescribed form. Such a
statement must set forth the nature of the sums, the names and the last known
addresses of thin persons entitled to participate therein, the amount to which each is
entitled thereto and nature of the claim thereto, and other prescribed particulars.
For the money paid into the Reserve Bank the liquidator is entitled to a receipt from
the former a receipt is an effectual discharge of the liquidator’s obligation in this
regard [Sub-section (4)].
Where the company is being wound-up by the Tribunal the liquidator shall make the
payment mentioned above by transfer from the account referred to in Section 552
[Sub-section (5)].
Visualise situation where the company is being wound-up voluntarily or subject to the
supervision of the Tribunal. In such a case, the liquidator shall, when filing a
statement pursuant to Section 51(1) indicate the sum of money which is payable to
the Reserve Bank under Section 551(1) & (2) as unclaimed dividends or undistributed
assets and which he has not in his hands for 6 months preceding the date to which
the statement is brought down, and pay that sum into the company’s Liquidation
Account within 14 days from the date of filing the statement [Sub-section (6)].
Any person entitled to moneys which had been paid into the company’s Liquidation
Account, may apply to the Tribunal for an order for payment thereof. The Tribunal
may order payments, if it is satisfied that the money is due to the applicant. Prior to
this order being made; the Tribunal shall, however, serve a notice on an officer who
might have been appointed by the Central Government in this connection, asking him
to show cause why the order should not be made [Sub-section (7)]. This provision
clearly shows that the person entitled to participate in the sums so paid up into the
Company’s Liquidation Account do not lose their right forever.
It should, however, be noted that the person may also apply to the Central
Government, instead of the Tribunal as referred to above, for an order for payment of
the money. If no application for such a payment has already been made to the
Tribunal, the Central Government may make the order for payment to that person or
the sum due after taking such security from him as it may think fit) provided it is
satisfied with a certificate to be given in this regard by the liquidator or the Official
Liquidator or otherwise [Sub-section (7)].
It is necessary that if the moneys paid into the company’s liquidation account have
remained unclaimed for fifteen years, those will have to be transferred to the general
revenue account of the Central Government. Even thereafter any person entitled
thereto may apply to the Central Government [Sub-section (8)].
Should the liquidator, instead of putting the money into the company’s Liquidation
Account, retain it, he must: (i) pay interest @ 12% per annum on the sum retained,
subject, however to the Central Government’s power to remit wholly or partly the
amount of interest; (ii) pay any expenses incurred as a result of his default; and (iii)
where the winding-up is by or under the ‘supervision of the Tribunal, be deprived of
his remuneration partly or wholly and be removed from his office [Sub-section (9)].
(12) Dissolution declared void: Within two years of the dissolution of a company, the
Tribunal may, on an application being made by the liquidator or any other person
interested, make an order declaring the dissolution to have been void. A certified copy
of the order must be filed with the Registrar by the person on whose application order
was made, within 30 days (Section 559).
(13) Winding-up unregistered companies: An “unregistered company” includes any
partnership, association or company consisting of more than seven members at the
time when the petition for winding-up the partnership, etc. is presented before the
Tribunal. It does not include, however, a railway company incorporated by an Act of
Parliament or other Indian Law or any Act of Parliament of the United Kingdom, or a
company registered under the Companies Act, 1956 or under any previous
Companies Law (Section 582).
An unregistered company may be wound-up under the Act and all the provisions of the Act
with respect to winding-up apply to an unregistered company with the following exceptions
and additions:
(a) To determine a Tribunal’s jurisdiction in the matter of its winding-up, the principal
place of business is, for all the purposes of the winding-up deemed to be the
Registered Office of the company.
[N.B. The Registered Office of a company is the determining factor for the Tribunal’s
jurisdiction in this regard].
(b) An unregistered company is not to be wound-up under Act voluntarily or subject to
supervision. It is to be wound-up by the Tribunal.
(c) The circumstances in which an unregistered company may be wound-up are as
follows:
(i) if the company has been dissolved, or has ceased to carry on business, or is
carrying on business for the purpose of winding-up its affairs;
(ii) if the company is unable to pay its debts; or
(iii) if the Tribunal is of the opinion that it is just and equitable that the company
should be wound-up.
An unregistered company is deemed to be unable to pay its debts in the following
circumstances:
(i) if a creditors (as assignee or otherwise), to whom a sum exceeding Rs. 500 is due,
has submitted a demand in writing to the company asking it to pay him the sum due
and the company has neglected to pay it or to secure or to compound for it for 3
weeks after the service of the demand;
(ii) if any suit or legal proceedings has been instituted against any member for any debt
or demand due from the company and a notice thereof has been communicated to the
company and the company has not, within 10 days of the service of the notice, paid,
secured or compounded for the debt;
(iii) if the execution or the process against the company has been returned unsatisfied in
whose or in part;
(iv) if it is otherwise proved to the satisfaction of the Tribunal that the company is unable
to pay its debts.
Every person, in the event of an unregistered company being wound-up, who is liable to
pay or to contribute to the payment of (a) any debt or liability of the company, (b) any sum
for the adjustment of the rights of the members among themselves or (c) the costs,
charges and expenses of the winding-up, shall be deemed to be a contributory. He will be
liable to contribute to the assets of the company all sums due from him in respect of any
liability to pay or contribute. If a contributory dies or becomes insolvent, the provision of
the Act as regards legal representatives or assignees shall be applicable (Section 585).
The provisions of the Act with regard to staying and restraining suits and legal proceeding
against a company at any time after the presentation of the petition for winding-up but
before a winding up order is made, in the case of an unregistered company where the
application to stay or restrain is made by a creditor, extent to suits and legal proceedings
against any contributory (Section 586). If, however, a winding-up order has been made,
no suit or legal proceedings can be commenced or proceeded with against a contributory
for the debt of the company with leave of the Tribunal (Section 587).
10
(J) PRODUCER COMPANIES
10.0 INTRODUCTION
(a) Background of the law relating to producer companies
The co-operative movement in India is considered as the backbone of the Indian economy.
The movement was able to make rapid strides in the rural economy, uplifting the standard of
living of the rural masses, which enabled them to sell their produce under an organised
structure and form of organisation. The co-operative businesses in India are a time tested and
successful form of organisation which enabled wider participation of the member constituting it
and today there are many co-operative businesses, which are, not only state oriented but have
become multi-state and national co-operatives. With the on set of reforms in the Indian
economy, a need was felt that such of those producer co-operatives should be able to
corporatise themselves into company form of organisation.
In the back drop of corporatisation of businesses, the Central Government had constituted on
1st November, 1999, a high powered committee under the Chairmanship of Dr. Y.K. Alagh to
examine and make recommendations with regard to the following agenda:
(a) Framing a legislation which would enable incorporation of co-operatives as companies
and conversion of co-operatives into companies;
(b) Ensuring that proposed legislation accommodates the unique principles of co-operative
business within a regulatory framework similar to that of companies.
The Committee submitted its report on 15th March, 2000. On the basis of recommendations of
the committee, the Government introduced in the Lok Sabha on 31st August, 2001, the
Companies (Second Amendment) Bill, 2001. Thereafter, the Bill was renamed as Companies
(Amendment) Bill, 2002 passed by the Lok Sabha on 10th December, 2002, and by the Rajya
Sabha on 17th December, 2002. The Bill was given assent by the President of India on 31st
December, 2002. The Bill finally became an Act, known as the Companies (Amendment) Act,
2002 [No. 1 of 2003]. The Act came into force w.e.f. 6th February, 2003 vide Notification No.
135(E) dated 5th February, 2003.
The main objective of the amendment is to facilitate the formation of co-operative businesses
as companies and to make it possible to convert existing co-operative business into

companies. The option of conversion is purely voluntarily. With the Act coming into force, a
new part Part-IXA has been included. With this, the Act (Companies Act, 1956) contains new
Sections 581A to 581ZT relating to formation of producer companies, their administration and
management, conversion of existing co-operative businesses into produce companies and
matters connected therewith.
(b) Structure of the Companies (Amendment) Act, 2002
Part-IXA introduced by the Amendment Act, 2002 contains the twelve chapters dealing with
the respective matters as shown below:
Chapter-I Definitions
Chapter-II Incorporations of producer companies and other matters.
Chapter-III Management of producer company.
Chapter-IV General Meetings.
Chapter-V Share Capital and Member Rights.
Chapter-VI Finance, Accounts and Audit.
Chapter-VII Loans to Member and Investments.
Chapter-VIII Penalties.
Chapter-IX Amalgamation, Merger or Division.
Chapter-X Resolution of Disputes.
Chapter-XI Miscellaneous Provisions.
Chapter-XII Re-Conversion of producer company into Inter-State
Co-operative Societies.
(c) Over-riding effect
The provisions of Part-IXA shall override other laws (Section 581ZQ). In other words, the
provisions of this part shall have effect notwithstanding anything inconsistent therewith
contained in this Act or any other law for the time being in force or any instrument having
effect by virtue of any such law; but the provisions of any such Act or law or instrument in so
far as the same are not varied by, or are inconsistent with, the provisions of this part shall
apply to the producer company.
(d) Application of provisions relating to private companies (Section 581ZR)
All the limitations, restrictions and provisions of this Act, other than those specified in this part,
applicable to a private company, shall, as far as may be, apply to a producer company, as if it
is a private limited company under this Act in so far as they are not in conflict with the
provisions of this Part. Although, the status of a producer company shall be that of a private
company, strictly speaking, it cannot be construed as a private company in terms of Section
3(1)(iii) of the Companies Act, 1956 which defines a private company. In terms its maximum
Producer Companies 10.3
member as in the case of private company, producer company need not limit the number of
members to 50. In terms of restriction on the transfer of shares, a producer company shall be
restricted as provided in Sections 581ZD(ii) and (iv). Besides, it need not have a minimum
paid up capital of Rs. 1 lakh. It shall also not possible for a producer company to make any
invitation to the public for subscription of any shares or debentures of the company or accept
any invitation of deposits.
(e) Major distinctions between Producer Company and the Private Company
All the provisions of Part-IXA (contained in Sections 581A to 581ZT) relating to producer
companies shall prevail over all the provision of other laws to the extent they are inconsistent
therewith. Similarly, all the limitations, restrictions and prohibitions under Section 3(iii) of the
Act applicable to a private company shall not be applicable to producer company as if it is a
private company to the extent they are not in conflict with the provisions of this part. Given this
contradiction in the formation of producer company, a producer company differ from a private
company as a distinct and different class of company. The distinction varies in the matters
relating to formation, management, administration, finance, accounts, audit and merger,
amalgamation or division of companies. The major distinction between these two classes of
companies are as follows:
Producer Company Private Company
1. Incorporation
The producer company can be formed by Private Company can be formed by two
any 10 or more individuals, each of them individuals or companies. The name of the
being individuals or institutions. Its name private company should bear the words
shall bear the words “Producer Company “private limited” and the liability may be
Ltd.” and the liability of the members shall limited (by shares or by guarantee) and
be limited by the memorandum. The unlimited by the memorandum. The articles
objects of a producer company should be should specifically contain the restrictions as
as specified in 581B, which contain 11 stated in Section 3(iii) and the minimum
items. There need not be any conditions capital should be Rs. 1 lakh. The objects can
attached to articles to state that it is a be main, incidental or ancillary and other
private company. objects.
2. Management
The minimum and maximum number of The minimum number of directors of a private
directors of a producer company is 5 and company is two and the maximum may be
50. Their tenure is for a minimum period of specified by the articles (any increase in the
1 year and the maximum period of 5 years. maximum beyond 12 directors requires
The Board can opt one or more directors or approval of the Central Government). A
additional directors which cannot exceed tenure of directors is not fixed by the law. The
1/5th of the total number of directors. The board can appoint additional, alternate
period of such directors may be for any director and director to fill up casual vacancy.
period. Vacation of the office of directors is An additional director shall hold the office
provided in Section 581Q and the powers upto the date of the next Annual General
have been mentioned in 581R. The matters Meeting. The powers and functions of
to be transacted by the board only at directors are specified in Section 292. There
general meeting are contained in Section is no additional liability for directors as
581S. The liability of directors for their acts provided for directors in a producer company.
then in contravention of the provisions of
the Act shall be joint concern. Further, this
liability shall be in addition to or not in
derogation of a liability imposed under any
other law.
3. General Meetings
The notice of the AGM shall comprise not The first AGM is required to be held within 18
only the agenda but also to include minutes months from the date of incorporation and
of the previous AGM and EGM. It shall also notice of the meeting should be given not
contain the names of candidates for less than 21 days Notice and the accounts
elections of office of the director including a can be sent separately.
statement of their qualifications. The notice
of meeting is required to be given not less
than14 days and the quorum shall be 1/4th
of the total members unless the articles
provide for a higher number. The first AGM
is required to be held within 90 days from
the date of incorporation of the company.
4. Share Capital and Members Rights
The share capital of a producer company Share capital may be equity or preference or
shall consist of equity shares only and a any other class. There is no provision for
member shall hold shares in proportion to holding of shares according to the patronage
the patronage of that company. Active and there is no distinction between members.
members shall have special rights and such Transfer of shares is restricted and
shares are transferable to any other active nomination is voluntarily. There is also no
member. The transferability is subject to provision for cession of membership and their
prior or approval of the board and at par rights. The voting rights shall be generally
value. Nomination facility by members is governed by the manner prescribed by the
mandatory. Circumstances for cession of articles of association.
membership is provided. Irrespective of the
shareholding one member shall have only
one vote.
5. Loans and Investments

Loans to members can be granted only Excepting that of loan to directors a private
after approval by members in the general company cannot provide loan or advance to
meeting. The general reserves of a its members. The provisions of Section 372A
producer company shall be invested in relating to inter-corporate loans and
specified securities. The limit of investment investments are not applicable to a private
in other companies either by the producer company.
or together with its subsidiaries cannot
exceed 30% of the aggregate paid up
capital and free reserves.
10. Finance, Accounts and Audit
Producer companies shall keep proper Proper books of accounts shall be kept in
books of accounts and internal audit shall those companies engaged in industrial
be carried out by a chartered accountant. activity. Internal audit need not be carried out
Apart from the matters provided in Section and auditor’s report shall be subject to the
227, auditor shall report on certain provisions as specified in Section 227. A
additional matters like debts due with bad private company has no restriction for making
debts, verification of cash securities, donations or subscription and it can
donations etc. A producer company may contribute donation to political party or
donate or subscribe to any institution or purpose as specified in Section 293A.
individuals for social and economic welfare
or for promoting mutual assistance
principles. The aggregate amount shall not
exceed 3% of the net profit in the financial
year immediately proceeding the financial
year. It cannot donate directly or indirectly
to any political party or purposes.
7. Penalties
Penalties for contravention of provisions Penalties for contravention of the applicable
relating to producer company are specified provisions is specified in appropriate
generally in Section 581ZA. sections.
8. Amalgamation, Merger or Division
Registrar of Companies shall have a The National Company Law Tribunal shall
jurisdiction over the administration of have the jurisdiction over the matter.
scheme of amalgamation and an appeal
can be preferred to High Court.
9. Resolution of Disputes
Any dispute relating to formation, The resolution of disputes (oppression and
management or business of a producer mis-management are handled by the
company shall be settled by the Arbitration Company Law Board under Sections 397,
and Conciliation Act, 19910. 398 and 399 of the Companies Act, 19510.
10. Miscellaneous Provisions
Striking off the name of a producer Striking of name of company are generally
company shall be done by the Registrar of regulated by Section 560 or any other
Companies in accordance with Section 560 scheme as may be notified by the Central
of the Act. The provisions relating to Government. There is no provision which
producer companies shall have an specifies that the provisions relating to
overriding affect over any such Act or law private company shall have an overriding
for the time being inforce. effect over any other Act or law for the time
being inforce.
11. Reconversion of Companies
A producer company can be converted into Reconversion is possible by converting a
Inter-State Co-operative Society and vice- public company into a private company and
versa. vice-versa.
(f) Power to modify Act in its application to producer companies (Section 581ZT)
(1) The Central Government may, by notification in the Official Gazette, direct that any of the
provisions of this Act (other than those contained in this Part) specified in the said notification:
(a) shall not apply to the producer companies or any class or category thereof; or
(b) shall apply to the producer companies or any class or category thereof with such
exception or adaptation as may be specified in the notification.
(2) A copy of every notification proposed to be issued under sub-section (1), shall be laid in
draft before each House of Parliament, while it is in session, for a total part of thirty days
which may be comprised in one session or in two or more successive sessions, and if, before
the expiry of the session immediately following the session or the successive sessions
aforesaid, both Houses agree in disapproving the issue of the notification or both Houses
agree in making any modification in the notification, the notification shall not be issued or, as
the case may be, shall be issued only in such modified form as may be agreed upon by both
the Houses.
10.1 DEFINITIONS
Section 581A summarises the following definitions:
(a) “active member” means a member who fulfils the quantum and part of patronage of the
producer company as may be required by the articles;
(b) “chief executive” means an individual appointed as such under sub-section (1) of Section
581W;
(c) “limited return” means the maximum dividend as may be specified by the articles;
(d) “member” means a person or producer institution (whether incorporated or not) admitted
as a member of a producer company and who retains the qualifications necessary for
continuance as such;
(e) “inter-State co-operative society” means a Multi-State co-operative society as defined in
clause (p) of Section 3 of the Multi-State Co-operative Societies Act, 2002 (39 of 2002)
and includes any co-operative society registered under any other law for the time being in
force, which has, subsequent to its formation, extended any of its objects to more than
one State by enlisting the participation of persons or by extending any of its activities
outside the State, whether directly or indirectly or through an institution of which it is a
constituent;
(f) “mutual assistance principles” means the principles set out in sub-section (2) of Section
581G;
(g) “officer” includes any director or Chief Executive or Secretary or any person in
accordance with whose directions or instructions part or whole of the business of the
producer company is carried on;
(h) “patronage” means the use of services offered by the producer company to its member
by participation in its business activities;
(i) “patronage bonus” means payments made by a producer company out of its surplus
income to the member in proportion to their respective patronage;
(j) “primary produce” means—
(i) produce of farmers, arising from agriculture (including animal husbandry, horticulture,
floriculture, pisciculture, viticulture, forestry, forest products, re-vegetation, bee raising
and farming plantation products), or from any other primary activity or service which
promotes the interest of the farmers or consumers; or
(ii) produce of persons engaged in handloom, handicraft and other cottage industries;
(iii) any product resulting from any of the above activities, including by-products of such
products;
(iv) any product resulting from an ancillary activity that would assist or promote any of the
aforesaid activities or anything ancillary thereto;
(v) any activity which is intended to increase the production of anything referred to in sub-
clauses (i) to (iv) or improve the quality thereof;
(k) “producer” means any person engaged in any activity connected with or relatable to any
primary produce;
(l) “producer company” means a body corporate having objects or activities specified in
Section 581B and registered as producer company under this Act;
(m) “producer institution” means a producer company or any other institution having only
producer or producers or producer company or producer companies as its member
whether incorporated or not having any of the objects referred to in Section 581B and
which agrees to make use of the services of the producer company or producer
companies as provided in its articles.
(n) “withheld price” means part of the price due and payable for goods supplied by any
member to the producer company; and as withheld by the producer company for payment
on a subsequent date.
10.2 OBJECTS AND FORMATION OF A PRODUCER COMPANY
Producer company means a body corporate having objects or activities specified in Section
581B and registered as a producer company under Companies Act, 19510.
Every producer company should deal basically with the produce of its active member for
carrying out any of its objects. The objects of the producer company, as per Section 581B,
may be relating to all or any of the following matters, namely:
(i) production, harvesting, procurement, grading, pooling, handling, marketing, selling, export
of primary produce of the member or import of goods or services for their benefit:
The producer company may at its option carry on any of the activities specified in this
clause either by itself or through other institution;
(ii) processing including preserving, drying, distilling, brewing, vinting, canning and packaging
of produce of its member;
(iii) manufacture, sale or supply of machinery, equipment or consumables mainly to its
member;
(iv) providing education on the mutual assistance principles to its members and others;
(v) rendering technical services, consultancy services, training, research and development
and all other activities for the promotion of the interests of its members;
(vi) generation, transmission and distribution of power, revitalisation of land and water
resources, their use, conservation and communication relatable to primary produce;
(vii) insurance of producers or their primary produce;
(viii) promoting techniques of mutuality and mutual assistance;
(ix) welfare measures or facilities for the benefit of member as may be decided by the Board;
(x) any other activity, ancillary or incidental to any of the activities referred to in clauses (i) to
(ix) or other activities which may promote the principles of mutuality and mutual
assistance amongst the member in any other manner;
(xi) financing of procurement, processing, marketing or other activities specified in clauses (i)
to (x) which include extending of credit facilities or any other financial services to its
member.
(a) Formation and Registration
The formalities relating to registration of a producer company are similar as applicable for all
companies. However, for registration of a producer company, the requirements of Part-IXA
should also be complied with. [Section 581C(i)].
A producer company can be formed by any ten or more individuals, each of them being a
producer, or any two or more producer institutions, or a combination of ten or more individuals
and producer institutions, desirous of forming a producer company having its objects specified
in Section 581B and otherwise complying with the requirements and provisions of this Act in
respect of registration, may form Company under this Act.
If the Registrar of Companies is satisfied that all the requirements of this Act have been
complied with in respect of registration and matters precedent and incidental thereto, he shall,
within thirty days of the receipt of the documents required for registration, register the
memorandum, the articles and other documents, if any, and issue a certificate of incorporation
under this Act.
After incorporation producer company so formed shall have the liability of its members limited
by the memorandum to the amount, if any, unpaid on the shares respectively held by them
and be termed as company limited by shares. It also becomes a body corporate as if it is a
private limited company to which the provisions contained in this Part apply, without, however,
any limit to the number of members thereof, and the producer company shall not, under any
circumstance, whatsoever, become or be deemed to become a public limited company under
this Act.
The producer company may reimburse to its promoters all other direct costs associated with
the promotion and registration of the company including registration, legal fees, printing of a
memorandum and articles and the payment thereof shall be subject to the approval at its first
general meeting of the member.
The producer company should also be required to submit (a) memorandum and (b) its articles
duly signed by the subscribers to the memorandum, to the Registrar of the State to which the
registered office of the company is to situate [Section 581G(i)].
(b) Effect of incorporation of producer company (Section 581K)
Every shareholder of the inter-state co-operative society immediately before the date of
registration of producer company (hereafter referred to as the transformation date) shall be
deemed to be registered on and from that date as a shareholder of the producer company to
the extent of the face value of the shares held by such shareholder.
(c) Membership and voting rights of members (Section 581D)
A person, who has any business interest which is not conflict with business of the producer
company, shall become a member. On the other hand, a member, who acquires any business
interest which is in conflict with the business of the producer company, shall cease to be a
member and be removed as a member in accordance with articles of the producer company.
The articles of any producer company may provide for the conditions, subject to which a
member may continue to retain his member, and the manner in which voting rights shall be
exercised by the members.
These voting’s rights are:

(a) In a case where the member consists solely of individual member, the voting rights shall
be based on a single vote for every member, irrespective of his shareholding or patronage
of the producer company.
(b) In a case where the member consists of producer institutions only, the voting rights of
such Producer institutions shall be determined on the basis of their participation in the
business of the producer company in the previous year, as may be specified by articles.
Provided that during the first year of registration of a producer company, the voting rights
shall be determined on the basis of the shareholding by such Producer institutions.
(c) In a case where the member consists of individuals and producer institutions, the voting
rights shall be computed on the basis of a single vote for every member. However, a
producer company may, if so authorised by its articles, restrict the voting rights to active
member, in any special or general meeting.
(d) Benefits to member (Section 581E)
The member of the producer company may get benefited in the following ways:
(1) Every member of producer company, subject to provisions in the articles, shall initially
receive only such value for the produce or products pooled and supplied, as the Board of
producer company may determine, and the withheld price may be disbursed later in cash
or in kind or by allotment of equity shares, in proportion to the produce supplied to the
producer company during the financial year to such extent and in such manner and
subject to such conditions as may be decided by the Board.
(2) Every member shall, on the share capital contributed, receive only a limited return.
However, every such member may be allotted bonus shares in accordance with the
provisions contained in Section 581ZJ.
(3) The surplus if any, remaining after making provision for payment of limited return and
reserves referred to in Section 581ZI, may also be disbursed as patronage bonus,
amongst the members, in proportion to their participation in the business of the producer
company, either in cash or by way of allotment of equity shares, or both, as may be
decided by the members at the general meeting.
10.3 MEMORANDUM OF PRODUCER COMPANY (SECTION 581F)

The memorandum of association of every producer company should contain the following:
(a) the name of the company with “producer company Limited” as the last words of the
name of such Company;
(b) the State in which the registered office of the producer company is to situate;
(c) the main objects of the producer company shall be one or more of the objects specified
in Section 581B;
(d) the names and addresses of the persons who have subscribed to the memorandum;
(e) the names, addresses and occupations of the subscribers being producers, who shall act
as the first directors in accordance with sub-section (2) of Section 58IJ.
(f) opposite to the subscriber’s name the number of shares each subscriber takes:
Provided that no subscriber shall take less than one share;
(g) the amount of share capital with which the producer company is to be registered and
division thereof into shares of a fixed amount;
(h) that the liability of its member is limited;
(i) in case the objects of the producer company are not confined to one State, the States to
whose territories the objects extend.
10.4 ARTICLES OF ASSOCIATION (SECTION 581G)

The articles should contain the following provisions, namely:
(a) the qualifications for member, the conditions for continuance or cancellation of member
and the terms, conditions and procedure for transfer of shares;
(b) the manner of ascertaining the patronage and voting right based on patronage;
(c) subject to the provisions contained in sub-section (1) of Section 581N, the manner of
constitution of the Board, its powers and duties, the minimum and maximum number of
directors, manner of election and appointment of directors and retirement by rotation,
qualifications for being elected or continuance as such and the terms of office of the said
directors, their powers and duties, conditions for election or co-option of directors, method
of removal of directors and the filling up of vacancies on the Board, and the manner and
the terms of appointment of the Chief Executive;
(d) the election of the Chairman, term of office of directors and the Chairman, manner of
voting at the general or special meetings of member, procedure for voting, by directors at
meetings of the Board, powers of the Chairman and the circumstances under which the
Chairman may exercise a casting vote.
(e) the circumstances under which, and the manner in which, the withheld price is to be
determined and distributed;
(f) the manner of disbursement of patronage bonus in cash or by issue of equity shares, or
both;
(g) the contribution to be shared and related matters referred to in sub-section (2) of Section
581ZI;
(h) the matters relating to issue of bonus shares out of general reserves as set out in Section
581ZJ;
(i) the basis and manner of allotment of equity shares of the producer company in lieu of the
whole or part of the sale proceeds of produce or products supplied by the member;
(j) the amount of reserves, sources from which funds may be raised, limitation on raising of
funds, restriction on the use of such funds and the extent of debt that may be contracted
and the conditions thereof;
(k) the credit, loans or advances which may be granted to a member and the conditions for
the grant of the same;
(l) the right of any member to obtain information relating to general business of the company;
(m) the basis and manner of distribution and disposal of funds available after meeting
liabilities in the event of dissolution or liquidation of the producer company;
(n) the authorisation for division, amalgamation, merger, creation of subsidiaries and the
entering into joint ventures and other matters connected therewith;
(o) laying of the memorandum and articles of the producer company before a special general
meeting to be held within ninety days of its registration;
(p) any other provision, which the member may, by special resolution recommend to be
included in articles.
The articles should also contain the following mutual assistance principles, namely:
(a) the member shall be voluntary and available, to all eligible persons who, can participate or
avail of the facilities or services of the producer company, and are willing to accept the
duties of member;
(b) each member shall save as otherwise provided in this Part, have only a single vote
irrespective of the share holding;
(c) the producer company shall be administered by a Board consisting of persons elected or
appointed as directors in the manner consistent with the provisions of this Part and the
Board shall be accountable to the member;
(d) save as provided in this Part, there shall be limited return on share capital;
(e) the surplus arising out of the operations of the producer company shall be distributed in
an equitable manner by—
(i) providing for the development of the business of the producer company;
(ii) providing for common facilities; and
(iii) distributing amongst the member, as may be admissible in proportion to their
respective participation in the business;
(f) provision shall be made for the education of member, employees and others, on the
principles of mutuality and techniques of mutual assistance;
(g) the producer company shall actively co-operate with other producer companies (and other
organisations following similar principles) at local, national or international level so as to
best serve the interest of their members and the communities it purports to serve.
(a) Amendment of memorandum (Section 581H)
A producer company shall not alter the conditions contained in its memorandum except in the
cases, by the mode and to the extent for which express provision is made in this Act.
However, a producer company may, by special resolution, not inconsistent with Section 581B,
alter its objects specified in its memorandum.
A copy of the amended memorandum, together with a copy of the special resolution duly
certified by two directors, shall be filed with the Registrar within thirty days from the date of
adoption of resolution. Where as in case of transfer of the registered office of a producer
company from the jurisdiction of one Registrar to another, certified copies of the special
resolution certified by two directors shall be filed with both the Registrars within thirty days,
and each Registrar shall record the same, and thereupon the Registrar from whose jurisdiction
the office is transferred, shall forthwith forward to the other Registrar all documents relating to
the producer company.
The alteration of the provisions of memorandum relating to the change of the place of its
registered office from one State to another shall not take effect unless it is confirmed by the
Company Law Board (Tribunal) on petition.
(b) Amendment of articles (Section 581-I)
Any amendment to the articles should be proposed by not less than two-third of the elected
directors or by not less than one-third of the members of the producer company, and adopted
by the members by a special resolution.
A copy of the amended articles together with the copy of the special resolution, both duly
certified by two directors, should be filed with the Registrar within thirty days from the date of
its adoption.
10.5 INTER-STATE CO-OPERATIVE SOCIETIES

(a) Conversion of Inter-State Co-operative Societies to become producer companies
(Section 581J)
Any inter-State co-operative society having objects for multiplicity for states may make an
application to the Registrar for registration as producer company.
Such application should be accompanied by—
(a) a copy of the special resolution, of not less than two-third of total member of inter-State
co-operative society, for its incorporation as a producer company,
(b) a statement showing—
(i) names and addresses or the occupation of the directors and Chief Executive, if any, by
whatever name called, of such co-operative; and
(ii) list of member of such inter-State co-operative society;
(c) a statement indicating that the inter-State co-operative society is engaged in any one or
more of the objects specified in Section 581B;
(d) a declaration by two or more directors of the inter-State co-operative society certifying that
particulars given in clauses (a) to (c) are correct.
The word “Producer Company Limited” should form part of its name to show its identity.
On compliance with the requirements of the Act, the Registrar shall, within a part of thirty days
of the receipt of application, certify under his hand that the inter-State co-operative society
applying for registration is registered and thereby incorporated as a producer company.
A co-operative society formed by producers, by federation or union of co-operative societies of
producers or co-operatives of producers, registered under any law for the time being in force
which has extended its objects outside the State, either directly or through a union or
federation of co-operatives of which it is a constituent, as the case may be, and any federation
or union of such co-operatives, which has so extended any of its objects or activities outside
the State, shall be eligible to make an application as above to obtain registration as a
producer company under this Part.
The Inter-State Co-operative Society upon its registration, under this section transformed into
a producer company, and thereafter shall be governed by the provisions of this Part to the
exclusion of the law by which it was earlier governed, save in so far as anything done or
omitted to be done before its registration as a producer company, and notwithstanding
anything contained in any other law for the time being in force, no person shall have any claim
against the co-operative institution or the company by reason of such conversion or
transformation.
Upon registration as a producer company, the Registrar of Companies who registers the
company required to intimate the Registrar with whom the erstwhile inter-State co-operative
society was earlier registered for appropriate deletion of the society from its register.
(b) Vesting of undertaking in producer company (Section 581L)
(1) All properties and assets, of, or belonging to, the inter-State co-operative society as on the
transformation date, shall vest in the producer company.
(2) All the rights, debts, liabilities, interests, privileges and obligations of the inter-State co-
operative society as on the transformation date shall stand transferred to, and be the rights,
debts, liabilities, interests, privileges and obligations of, the producer company.
(3) Without prejudice to the provisions contained in sub-section (2), all debts, liabilities and
obligations incurred, all contracts entered into and all matters and things engaged to be done
by, with or for, the society as on the transformation date for or in connection with their
purposes, shall be deemed to have been incurred, entered into, or engaged to be done by,
with or for, the producer company.
(4) All sums of money due to the inter-State co-operative society immediately before the
transformation date, shall be deemed to be due to the producer company.
(5) Every organisation, which was being managed immediately before the transformation date
by the inter-State co-operative society shall be managed by the producer company for such
part, to such extent and in such manner as the circumstances may require.
(6) Every organisation which was getting financial, managerial or technical assistance from the
inter-state co-operative society, immediately before the transformation date, may continue to
be given financial, managerial or technical assistance, as the case may be, by the producer
company, for such part, to such extent and in such manner as that company may deem fit.
(7) The amount representing the capital of the erstwhile inter-State co-operative society shall
form part of the capital of the producer company.
(8) Any reference to the inter-State co-operative society in any law other than this Act or in
any contract or other instrument, shall be deemed to be reference to the producer company.
(9) If, on the transformation date, there is pending any suit, arbitration, appeal or other legal
proceeding of whatever nature by or against the inter-State co-operative society, the same
shall not abate, be discontinued or be in any way prejudicially affected by reason of the
incorporation of the producer company under Section 581C or transformation of the inter-State
co-operative society as a producer company under Section 581J, as the case may be, but the
suit, arbitration, appeal or other proceeding, may be continued, prosecuted and enforced by or
against the producer company in the same manner and to the same extent as it would have,
or may have been continued, prosecuted and enforced by or against the inter-State co-
operative society as if the provisions contained in this Part had not come into force.
(c) Concession, etc. to be deemed to have been granted to producer company (Section
581M)
With effect from the transformation date, all fiscal and other concessions, licences, benefits,
privileges and exemptions granted to the inter-state co-operative society in connection with
the affairs and business of the inter-State co-operative society under any law for the time
being in force shall be deemed to have been granted to the producer company.
(d) Provisions in respect of officers and other employees of Inter-State Co-operative
Society (Section 581N)
(1) All the directors in the inter-State co-operative society before the incorporation of the
producer company shall continue in office for a part of one year from the transformation date
and in accordance with the provisions of this Act.
(2) Every officer or other employee of the inter-State co-operative society (except a director of
the Board, Chairman or Managing Director) serving in its employment immediately before the
transformation date shall, in so far as such officer or other employee is employed in
connection with the inter-State co-operative society which has vested in the producer
company by virtue of this Act, become, as from the transformation date, an officer or, as the
case may be, other employee of the producer company and shall hold his office or service
therein by the same tenure, at the same remuneration, upon the same terms and conditions,
with the same obligations and with the same rights and privileges as to leave, leave travel
concession, welfare scheme, medical benefit scheme, insurance, provident fund, other funds,
retirement, voluntary retirement, gratuity and other benefits as he would have held under the
erstwhile inter-State co-operative society if its undertaking had not vested in the producer
company and shall continue to do so as an officer or, as the case may be, other employee of
(3) Where an officer or other employee of the inter-State co-operative society opts not to be in
employment or service of the producer company, such officer or other employee shall be
deemed to have resigned.
(4) Notwithstanding anything contained in the Industrial Disputes Act, 1947 (14 of 1947) or in
any other law for the time being in force, the transfer of the services of any officer or other
employee of the inter-State co-operative society to the producer company shall not entitle
such officer or other employee to any compensation under this Act or under any other law for
the time being in force and no such claim shall be entertained by any court, tribunal or other
authority.
(5) The officers and other employees who have retired before the transformation date from the
service of the inter-State co-operative society and are entitled to any benefits, rights or
privileges, shall be entitled to receive the same benefits, rights or privileges from the producer
company.
(6) The trusts of the provident fund or the gratuity fund of the inter-State co-operative society
and any other bodies created for the welfare of officers or employees shall continue to
discharge functions in the producer company as was being done hitherto in the inter-State co-
operative society and any tax exemption granted to the provident fund or the gratuity fund
would continue to be applied to the producer company.
(7) Notwithstanding anything contained in this Act or in any other law for the time being in
force or in the regulations of the inter-State co-operative society, no director of the Board,
Chairman, managing director or any other person entitled to manage the whole or substantial
part of the business and affairs of the inter-State co-operative society. The co-operative
society shall be entitled to any compensation against the inter-State co-operative society or
the producer company for the loss of office or for the premature termination of any contract of
management entered into by him with the inter-State co-operative society.
10.6 MANAGEMENT
(a) Number of directors
Every producer company shall have at least 5 directors and not more than 15 directors.
(Section 581O). The proviso to the Section states that in the case of the Inter-State Co-
operative Society incorporated as a producer company, such company may have more than
15 directors for a part of one year from the date of its incorporation as a producer company.
(b) Appointment of Directors (Section 581P)
The members who sign the memorandum and the articles are designated as first directors and
shall govern the affairs of the company until the directors are appointed at the Annual General
Meeting. The Election of Directors shall be conducted within 90 days from the date of
registration of the producer company. In the case of Inter-State Co-operative Society the
election shall be held within a period of 360 days. The period of office of a director shall be not
less than one year and not exceeding 5 years as may be specified in the articles. The
directors retiring by rotation in accordance with the articles shall be eligible for re-appointment
as a director. Normally, the Directors of the Board shall be elected are appointed by the
member in the Annual General Meeting. The Board may also co-opt one or more expert
directors or an additional director. Such directors cannot exceed 1/5th of the total number of
directors. The expert directors shall not have the right to vote in the election of chairman but
shall be eligible to be elected as chairman if it is provided by the articles. The maximum period
for which such directors shall hold, shall not exceed such period as may be prescribed in the
articles.
(c) Vacation of office by directors (Section 581Q)
The office of the director of a producer company shall become vacant if—
(a) he is convicted by a court of any offence involving moral turpitude and sentenced in
respect thereof to imprisonment for not less than six months;
(b) the Producer Company, in which he is a director, has made a default in repayment of any
advances or loans taken from any company or institution or any other person and such
default continues for ninety days;
(c) he has made a default in repayment of any advances or loans taken from the producer
company in which he is a director;
(d) the producer company, in which he is a director—
(i) has not filed the annual accounts and annual return for any continuous three financial
years commencing on or after the 1st day of April, 2002; or
(ii) has filed to, repay its deposit or withheld price or patronage bonus or interest thereon
on due date, or pay dividend and such failure continues for one year or more;
(e) default is made in holding election for the office of director, in the producer company in
which he is a director, in accordance with the provisions of this Act and articles;
(f) the annual general meeting or extraordinary general meeting of the producer company, in
which he is a director, is not called in accordance with the provisions of this Act except
due to natural calamity or such other reason.
The above provisions may also apply to the director of a Producer institution, which is a
member of a producer company.
(d) Powers and functions of Board (Section 581R)
The Board of directors of a producer company shall exercise, subject to articles, all such
powers and to do all such acts and things, as the company is authorised. These powers may
include all or any of the following matters, namely:
(a) determination of the dividend payable;
(b) determination of the quantum of withheld price and recommend patronage to be approved
at general meeting;
(c) admission of new member;

(d) pursue and formulate the organisational policy, objectives, establish specific long-term
and annual objectives, and approve corporate strategies and financial plans;
(e) appointment of a Chief Executive and such other officers of the producer company, as
may be specified in the articles;
(f) exercise superintendence, direction and control over Chief Executive and other officers
appointed by it;
(g) cause proper books of account to be maintained; prepare annual accounts to be placed
before the annual general meeting with the auditor’s report and the replies on
qualifications, if any, made by the auditors;
(h) acquisition or disposal of property of the producer company in its ordinary course of
business;
(i) investment of the funds of the producer company in the ordinary course of its business;
(j) sanction any loan or advance, in connection with the business activities of the producer
company to any member, not being a director or his relative;
(k) take such other measures or do such other acts as may be required in the discharge of its
functions or exercise of its powers.
All the above powers may be exercised by the Board, through a resolution passed at its
meeting on behalf of the producer company. However, a director or a group of directors, who
do not constitute the Board, shall not exercise any of the powers exercisable by it.
(e) Liability of directors (Section 581T)
When the directors vote for a resolution, or approve by any other means, anything done in
contravention of the provisions of this Act or any other law for the time being in force or
articles, they shall be jointly and severally liable to make good any loss or damage suffered by
The producer company is having the right to recover from its director—
(a) where such director has made any profit as a result of the contravention of law or articles,
an amount equal to the profit so made;
(b) where the producer company incurred a loss or damage as a result of the contravention of
law or articles, an amount equal to that loss or damage.
Where as the liability imposed under this section shall be in addition to and not in derogation
of a liability imposed on a director under this Act or any other law for the time being in force.
(f) Committee of directors (Section 581U)

The Board may constitute such number of committees as it may deem fit for the purpose of
assisting the Board in the efficient discharge of its functions. However, the Board shall not
delegate any of its powers or assign the powers of the Chief Executive, to any committee. A
committee may, with the approval of the Board, co-opt such number of persons as it deems fit
as member of the committee. Whereas that the Chief Executive appointed under Section
581W or a director of the producer company shall be a member of such committee. Every
such committee shall function under the general superintendence, direction and control of the
Board, for such duration and in such manner as the Board may direct. The fee and allowances
to be paid to the member of the committee shall be such as may be determined by the Board.
The minutes of each meeting of the committee shall be placed before the Board at its next
meeting.
(g) Meetings of Board and quorum (Section 581V)
A meeting of the Board shall be held not less than once in every three months and at least
four such meetings shall be held in every year. Notice of every meeting of the Board of
directors shall be given in writing to every director for the time being in India, and at his usual
address in India to every other director. The Chief Executive shall give notice as aforesaid not
less than seven days prior to the date of the meeting of the Board and if he fails to do so, he
shall be punishable with fine which may extend to one thousand rupees. However, a meeting
of the Board may be called at shorter notice and the reasons thereof shall be recorded in
writing by the Board. The quorum for a meeting of the Board shall be one-third of the total
strength of directors, subject to a minimum of three. Subject to provisions in the articles,
directors including the co-opted director, may be paid such fees and allowances for
attendance at the meetings of the Board, as may be decided by the member in the general
meeting.
(h) Chief Executive and his functions (Section 581W)
(1) Every producer company shall have a full time Chief Executive, appointed by the Board
from amongst persons other than member.
(2) The Chief Executive shall be ex officio director of the Board and such director shall not
retire by rotation.
(3) Save as otherwise provided in articles, the qualifications, experience and the terms and
conditions of service of the Chief Executive shall be such as may be determined by the Board.
(4) The Chief Executive shall be entrusted with substantial powers of management as the
Board may determine.
The Chief Executive shall manage the affairs of the producer company under the general
superintendence, direction and control of the Board and be accountable for the performance of
the producer company. Without prejudice to the above the Chief Executive may exercise the
powers and discharge the functions, namely:

(a) doing administrative acts of a routine nature including managing the day-to-day affairs of
the producer company;
(b) operating bank accounts or authorise any person, subject to the general or special
approval of the Board in this behalf, to operate the bank account.
(c) making arrangements for safe custody of cash and other assets of the Producer
Company;
(d) signing such documents as may be authorised by the Board, for and on behalf of the
company;
(e) maintaining paper books of account; prepare annual accounts and audit thereof; place the
audited accounts before the Board and in the annual general meeting of the member;
(f) furnishing member with periodic information to appraise them of the operation and
functions of the producer company;
(g) making appointments to posts in accordance with the powers delegated to him by the
Board;
(h) assisting the Board in the formulation of goals, objectives, strategies, plans and policies;
(i) advising the Board with respect to legal and regulatory matters concerning the proposed
and on going activities and take necessary action in respect thereof;
(j) exercising the powers as may be necessary in the ordinary course of business;
(k) discharging such other functions, and exercise such other powers, as may be delegated
by the Board.
(i) Secretary of a producer company (Section 581X)
Every producer company having an average annual turnover exceeding five crore rupees in
each of three consecutive financial years shall have a whole-time secretary, who possesses
membership of the Institute of Company Secretaries of India constituted under the Company
Secretaries Act, 1980 (56 of 1980). If a producer company fails to comply with this, the
company and every officer of the company who is in default, shall be punishable with fine
which may extend to five hundred rupees for every day during which the default continues:
Whereas in any proceedings against a person in respect of an offence, under this section shall
be a defence to prove that all reasonable efforts to comply with the provisions of section were
taken or that the financial position of the company was such that it was beyond its capacity to
engage a whole-time secretary.
10.7 GENERAL MEETINGS

(a) Matters to be transacted at general meeting (Section 581S)
The Board of directors of a producer company shall exercise the following powers on behalf of
the company, and it shall do so only by means of resolutions passed at the annual general
meeting of its member, namely:
(a) approval of budget and adoption of annual accounts of the producer company;
(b) approval of patronage bonus;
(c) issue of bonus shares;
(d) declaration of limited return and decision on the distribution of patronage;
(e) specify the conditions and limits of loans that may be given by the Board to any director;
and
(f) approval of any transaction of the nature as is to be reserved in the articles for approval
by the member.
(b) Quorum (Section 581Y)
Unless the articles require a large number, one-fourth of the total member shall constitute the
quorum at a general meeting.
(c) Voting Rights (Section 581Z)
Subject to Sections 581D, (1)&(3), every member shall have one vote and in the case of
equality of votes, the Chairman or the person presiding shall have a casting vote except in the
case of election of the Chairman.
(d) Annual general meetings (Section 581ZA)
(1) Every producer company shall hold, annual general meeting in a year the time gap
between one annual general meeting to another, should not be more than fifteen months.
(2) In this regard, the Registrar may, for any special reason, permit extension of the time for
holding any annual general meeting (not being the first annual general meeting) by a part not
exceeding three months.
(i) A producer company shall hold its first annual general meeting within a part of ninety days
from the date of its incorporation.
(3) The member shall adopt the articles of the producer company and appoint directors of its
Board in the annual general meeting.
(4) The notice calling the annual general meeting shall be accompanied by the following
documents, namely:
(a) the agenda of the annual general meeting;
(b) the minutes of the previous annual general meeting or the extra-ordinary general meeting;
(c) the names of candidates for election, if any, to the office of director including a statement
of qualifications in respect of each candidate;
(d) the audited balance-sheet and profit and loss accounts of the producer company and its
subsidiary, if any, together with a report of the Board of Directors of such Company with
respect to—
(i) the state of affairs of the producer company;
(ii) the amount proposed to be carried to reserve;
(iii) the amount to be paid as limited return on share capital;
(iv) the amount proposed to be disbursed as patronage bonus;
(v) the material changes and commitments, if any, affecting the financial position of the
producer company and its subsidiary, which have occurred in between the date of the
annual accounts of the producer company to which the balance sheet relates and the date
of the report of the Board;
(vi) any other matter of importance relating to energy conservation, environmental
protection, expenditure or earnings in foreign exchanges;
(vii) any other matter which is required to be, or may be, specified by the Board;
(e) the text of the draft resolution for appointment of auditors;
(f) the text of any draft resolution proposing amendment to the memorandum or articles to be
considered at the general meeting, along with the recommendations of the Board.
(5) The Board of Directors shall, on the requisition made in writing, duly signed and setting out
the matters for the consideration, made by one-third of the member entitled to vote in any
general meeting, proceed to call an extraordinary general meeting in accordance with the
provisions contained in Sections 169 to 186 of this Act.
(6) Every annual general meeting should be held during business hours, on a day that is not a
public holiday and shall be held at the registered office or at some other place within the city,
town or village in which the registered office of the Company is situate.
(7) A general meeting of the producer company shall be called by giving not less than fourteen
days prior notice in writing.
(8) The notice of the general meeting indicating the date, time and place of the meeting shall
be sent to every member and auditor of the producer company.
(9) Unless the articles of the producer company provide for a larger number, one-fourth of the
total number of member of the producer company shall be the quorum for its annual general
meeting.
(10) The proceedings of every annual general meeting along with the Directors’ Report, the
audited balance-sheet and the profit and loss account shall be filed with the Registrar within
sixty days of the date on which the annual general meeting is held, with an annual return
along with the filing fees as applicable under the Act.
(11) In the case where a producer company is formed by Producer institutions, such
institutions shall be represented in the general body through the Chairman or the Chief
Executive thereof who shall be competent to act on its behalf:
Provided that a Producer institution shall not be represented if such institution makes a default
or failure referred to in clauses (d) to (f) of sub-section (1) of Section 581Q.
10.8 SHARE CAPITAL AND MEMBER RIGHTS

(a) Share capital (Section 581ZB)
The share capital of a producer company shall consist of equity shares only. The shares held
by a member in a producer company, shall as far as may be, be in proportion to the patronage
of that company.
(b) Special user rights (Section 581ZC)
The producers, who are active member may, if so provided in the articles, have special rights
and the producer company may issue appropriate instruments to them in respect of such
special rights.
The instruments shall be issued after obtaining approval of the Board in that behalf, be
transferable to any other active member of that producer company. Here special rights means
any right relating to supply of additional produce by the active member or any other right
relating to his produce which may be conferred upon him by the Board.
(c) Transferability of shares and attendant rights (Section 581ZD)
The provisions are as follows:
(1) Save as otherwise provided in sub-sections (2) to (4), the shares of a member of a
producer company shall not be transferable.
(2) A member of a producer company may, after obtaining the previous approval of the
Board, transfer the whole or part of his shares along with any special rights, to an active
member at par value.
(3) Every member within three months of his becoming a member, of Producer Company,
nominate, as specified in articles, a person to whom his shares in the producer company
shall vest in the event of his death.
(4) The nominee shall, on the death of the member, become entitled to all the rights in the
shares of the producer company and the Board of that Company shall transfer the shares
of the deceased member to his nominee:

Provided that in a case where such nominee is not a producer, the Board shall direct the
surrender of shares together with special rights, if any, to the producer company at par
value or such other value as may be determined by the Board.
(5) Where the Board of a producer company is satisfied that—
(a) any member has ceased to be a primary producer; or
(b) any member has failed to retain his qualifications to be a member as specified in
articles, the Board shall direct the surrender of shares together with special rights, if any,
to the producer company at par value or such other value as may be determined by the
Board:
Provided that the Board shall not direct such surrender of shares unless the member has
been served with a written notice and given an opportunity of being heard.
10.9 FINANCE, ACCOUNTS AND AUDIT

(a) Books of accounts (Section 581ZE)
Every producer company has to maintain books of account registered office with respect to—
(a) all sums of money received and expended by the producer company and the matters in
respect of which the receipts and expenditure take place;
(b) all sales and purchase of goods by the producer company;
(c) the instruments of liability executed by or on behalf of the producer company;
(d) the assets and liabilities of the producer company;
(e) in case of a producer company engaged in production, processing and manufacturing, the
particulars relating to utilisation of materials or labour or other items of costs.
The balance sheet and profit and loss account of the producer company shall be prepared, as
far as may be, in accordance with the provisions contained in Section 211 of the Companies
Act, 19510.
(b) Internal audit (Section 581ZF)
Every producer company shall have internal audit of its accounts carried out, at such interval
and in such manner as may be specified in articles, by a chartered accountant as defined in
clause (b) of sub-section (1) of Section 2 of the Institute of Chartered Accountants Act, 1949
(38 of 1949).
(c) Duties of auditor under this Part (Section 581ZG)
Without prejudice to the provisions contained in Section 227, the auditor shall report on the
following additional matters relating to the producer company, namely:—

(a) the amount of debts due along with particulars of bad debts if any;
(b) the verification of cash balance and securities;
(c) the details of assets and liabilities;
(d) all transactions which appear to be contrary to the provisions of this Part;
(e) the loans given by the producer company to the directors;
(f) the donations or subscriptions given by the producer company;
(g) any other matter as may be considered necessary by the auditor.
(d) Donations or subscription by producer company (Section 581ZH)
A producer company may, by special resolution, make donation or subscription to any
institution or individual for the purposes of—
(a) promoting the social and economic welfare of producer member or producers or general
public; or
(b) promoting the mutual assistance principles:
Provided that the aggregate amount of all such donation and subscription in any financial year
shall not exceed three per cent of the net profit of the producer company not more than 3% of
the net profit in the financial year immediately preceding the financial year in which the
donation or subscription was made. Further, no producer company shall make directly or
indirectly to any political part or for any political purpose to any person any contribution or
subscription or make available any facilities including personnel or material.
(e) General and other reserves (Section 581ZI)
Every producer company shall maintain a general reserve in every financial year, in addition to
any reserve maintained by it as may be specified in articles.
In a case where the producer company does not have sufficient funds in any financial year for
transfer to maintain the reserves as may be specified in articles, the contribution to the
reserve shall be shared amongst the member in proportion to their patronage in the business
of that company in that year.
(f) Issue of bonus shares (Section 581ZJ)
Any producer company may, upon recommendation of the Board and passing of resolution in
the general meeting, issue bonus shares by capitalisation of amounts from general reserves
referred to in Section 581ZI in proportion to the shares held by the member on the date of the
issue of such shares.
(g) Loan, etc., to member (Section 581ZK)

The Board may, subject to the provisions made in articles, provide financial assistance to the
member of the producer company by way of—
(a) credit facility, to any member, in connection with the business of the Producer Company,
for a part not exceeding six months;
(b) loans and advances, against security specified in articles to any member, repayable within
a part exceeding three months but not exceeding seven years from the date of
disbursement of such loan or advances. However, that any loan or advance to any
director or his relative shall be granted only after the approval by the member in general
meeting.
(h) Investment in other companies, formation of subsidiaries, etc. (Section 581ZL)
The producer company has to follow the following provisions under this Section.
(1) The general reserves of any producer company shall be invested to secure the highest
returns available from approved securities, fixed deposits, units, bonds issued by the
Government or co-operative or scheduled bank or in such other mode as may be
prescribed.
(2) Any producer company may, for promotion of its objectives acquire the shares of another
producer company.
(3) Any producer company may subscribe to the share capital of, or enter into any agreement
or other arrangement, whether by way of formation of its subsidiary company, joint
venture or in any other manner with any body corporate, for the purpose of promoting the
objects of the producer company by special resolution in this behalf.
(4) Any producer company, either by itself or together with its subsidiaries, may invest, by
way of subscription, purchase or otherwise, shares in any other company, other than a
producer company, specified under sub-section (2), or subscription of capital under sub-
section (3), for an amount not exceeding thirty per cent of the aggregate of its paid-up
capital and free reserves:
Provided that a producer company may, by special resolution passed in its general
meeting and with prior approval of the Central Government, invest in excess of the limits
specified in this section.
(5) All investments by a producer company may be made if such investment are consistent
with the objects of the producer company.
(6) The Board of a producer company may, with the previous approval of member by a
special resolution, dispose of any of its investments referred to in sub-sections (3) and (4).
(7) Every producer company shall maintain a register containing particulars of all the
investments, showing the names of the companies in which shares have been acquired,
number and value of shares; the date of acquisition; and the manner and price at which
any of the shares have been subsequently disposed of.
(8) The register referred to in sub-section (7) shall be kept at the registered office of the
producer company and the same shall be open to inspection by any member who may
take extracts there from.
10.10 PENALTIES
Penalty for contravention (Section 581ZM)
(1) If any person, other than a producer company registered under this part, carries on
business under any name which contains the words “producer company limited”, he shall be
punishable with fine which may extend to ten thousand rupees for every day during which
such name has been used by him.
(2) If a director or an officer of a producer company, who willfully fails to furnish any
information relating to the affairs of the producer company required by a member or a person
duly authorised in this behalf, he shall be liable to imprisonment for a term which may extend
to six months and with fine equivalent to five per cent of the turnover of that company during
preceding financial year.
(3) If a director or officer of a producer company—
(a) makes a default in handing over the custody of books of account and other documents or
property in his custody to the producer company of which he is a director or officer; or
(b) fails to convene annual general meeting or other general meetings, he shall be punishable
with fine which may extend to one lakh rupees, and in the case of a continuing default or
failure, with an additional fine which may extend to ten thousand rupees for every day
during which such default or failure continues.
10.11 AMALGAMATION, MERGER OR DIVISION

Amalgamation, merger or division, etc., to form new producer companies (Section
581ZN)
(1) A producer company may, by a resolution passed at its general meeting,—
(a) decide to transfer its assets and liabilities, in whole or in part, to any other producer
company, which agrees to such transfer by a resolution passed at its general meeting, for
any of the objects specified in Section 581B;
(b) divide itself into two or more new producer companies.
(2) Any two or more producer companies may, by a resolution passed at any general or
special meetings of its members, decide to—

(a) amalgamate and form a new producer company; or
(b) merge one producer company (hereafter referred to as ‘merging company’) with another
producer company (hereafter referred to as ‘merged company’).
(3) Every resolution of a producer company under this section shall be passed at its general
meeting by a majority of total Members with right of vote or two-thirds of its Members present
and voting, whichever is less, and such resolution shall contain all particulars of the case may
be.
(4) Before passing a resolution under this section, the producer company shall give notice
thereof in writing together with a copy of the proposed resolution to all the Members and
creditors who may give their consent.
(5) Notwithstanding anything contained in articles or in any contract to the contrary, any
Member, or any creditor not consenting to the resolution shall, during the period of one month
of the date of service of the notice on him, have the option,
(a) in the case of any such Member, to transfer his shares with the approval of the Board to
any active Member thereby ceasing to continue as a Member of that company; or
(b) in the case of a creditor, to withdraw his deposit or loan or advance, as the case may be.
(6) Any Member or creditor, who does not exercise his option within the period specified in
sub-section (5), shall be deemed to have consented to the resolution.
(7) A resolution passed by a producer company under this section shall not take effect until
the expiry of one month or until the assent thereto of all the member and creditors has been
obtained, whichever is earlier.
(8) The resolution referred to in this section shall provide for—
(a) the regulation of conduct of the producer company’s affairs in the future;
(b) the purchase of shares or interest of any member of the producer company by other
member or by the producer company;
(c) in the case of purchase of shares of one producer company by another producer
company, the consequent reduction of its share capital;
(d) termination, setting aside or modification of any agreement, howsoever arrived between
the company on the one hand and the directors, secretaries and managers on the other
hand, apart from such terms and conditions as may, in the opinion of the majority of
shareholders, be just and equitable in the circumstances of the case;
(e) termination, setting aside or modification of any agreement between the producer
company and any person not referred to in clause (d):
Provided that no such agreement shall be terminated, set aside or modified except after
giving due notice to the part concerned and also no such agreement shall be modified
except after obtaining the consent of the part concerned;
(f) the setting aside of any transfer, delivery of goods, payment, execution or other act
relating to property, made or done by or against the producer company within three
months before the date of passing of the resolution, which would if made or done against
any individual, be deemed in his insolvency to be a fraudulent preference;
(g) the transfer to the merged company of the whole or any part of the undertaking property
or liability of the producer company;
(h) the allotment or appropriation by the merged company of any shares, debentures,
policies, or other like interests in the merged company;
(i) the continuation by or against the merged company of any legal proceedings pending by
or against any producer company;
(j) the dissolution, without winding-up, of any producer company;
(k) the provision to be made for the member or creditors who make dissent;
(l) the taxes if any, to be paid by the producer company;
(m) such incidental, consequential and supplemental matters as are necessary to secure that
the division, amalgamation or merger shall be fully and effectively carried out.
(9) When a resolution passed by a producer company under this section takes effect, the
resolution shall be a sufficient conveyance to vest the assets and liabilities in the transferee.
(10) The producer company shall make arrangements for meeting in full or otherwise
satisfying all claims of the member and the creditors who exercise the option, within the part
specified in sub-section (5), not to continue as the member or creditor, as the case may be.
(11) Where the whole of the assets and liabilities of a producer company are transferred to
another producer company in accordance with the provisions of sub-section (9), or where
there is merger under sub-section (2), the registration of the first mentioned Company or the
merging company, as the case may be, shall stand cancelled and that Company shall be
deemed to have been dissolved and shall cease to exist forthwith as a corporate body.
(12) Where two or more producer companies are amalgamated into a new producer company
in accordance with the provisions of sub-section (2) and the producer company so formed is
duly registered by the Registrar, the registration of each of the amalgamating companies shall
stand cancelled forthwith on such registration and each of the Companies shall thereupon
cease to exist as a corporate body.
(13) Where a producer company divides itself into two or more producer companies in
accordance with the provisions of clause (b) of sub-section (1) and the new producer
companies are registered in accordance with the provisions of sub-section (8), the registration
of the erstwhile producer company shall stand cancelled forthwith and that Company shall be
deemed to have been dissolved and cease to exist as a corporate body.
(14) The amalgamation, merger or division of companies under the foregoing sub-sections
shall not in any manner whatsoever affect the pre-existing rights or obligations and any legal
proceedings that might have been continued or commenced by or against any erstwhile
company before the amalgamation, merger or division, may be continued or commenced by,
or against, the concerned resulting company, or merged company, as the case may be.
(15) The Registrar shall strike off the names of every producer company deemed to have been
dissolved under sub-sections (11 to 14).
(16) Any member or creditor or employee aggrieved by the transfer of assets, division,
amalgamation or merger may, within thirty days of the passing of the resolution, prefer an
appeal to the High Court.
(17) The High Court shall, after giving a reasonable opportunity to the person concerned, pass
such orders thereon as it may deem fit.
(18) Where an appeal has been filed under sub-section (16), the transfer of assets, division,
amalgamation or merger of the producer company shall be subject to the decision of the High
Court.
10.12 RESOLUTION OF DISPUTES

(a) Disputes (Section 581ZO)
Where any dispute relating to the formation, management or business of a producer company
arises—
(a) amongst member, former member or persons claiming to be member or nominees of
deceased member; or
(b) between a member, former member or a person claiming to be a member, or nominee of
deceased member and the producer company, its Board of directors, office-bearers, or
liquidator, past or present; or
(c) between the producer company or its Board, and any director, office-bearer or any former
director, or the nominee, heir or legal representative of any deceased director of the
producer company, such dispute shall be settled by conciliation or by arbitration as
provided under the Arbitration and Conciliation Act, 1996 (26 of 1996) as if the parties to
the dispute have consented in writing for determination of such disputes by conciliation or
by arbitration and the provisions of the said Act shall apply accordingly.
Explanation—For the purposes of this section, a dispute shall include—
(a) a claim for any debt or other amount due;
(b) a claim by surety against the principal debtor, where the producer company has
recovered from the surety amount in respect of any debtor or other amount due to it
from the principal debtor as a result of the default of the principal debtor whether such
debt or amount due be admitted or not;
(c) a claim by producer company against a member for failure to supply produce as
required of him;
(d) a claim by a member against the producer company for not taking goods supplied by
him.
If any question arises whether the dispute relates to formation, management or business
of the producer company, the question shall be referred to the arbitrator, whose decision
thereon shall be final.
(b) Striking off name of producer company (Section 581ZP)
If a producer company fails to commence business within one year of its registration or
ceases to transact business with the member or if the Registrar is satisfied, after making
such inquiry as he thinks fit, that the producer company is not carrying any of its objects
specified in Section 581B, he shall make an order striking off the name of the producer
company, which shall thereupon cease to exist forthwith.
No such order cancelling the registration as aforesaid shall be passed until a notice to
show cause has been given by the Registrar to the producer company with a copy to all
its directors on the proposed action and reasonable opportunity to represent its case has
been given.
Where the Registrar has reasonable cause to believe that a producer company is not
maintaining any of the mutual assistance principles specified, he shall strike its name off
the register in accordance with the provisions contained in Section 560 of this Act.
Any member of a producer company, who is aggrieved by an order made under this
Section, may appeal to the Company Law Board (Tribunal) within sixty days of the order.
After disposing the appeal, if any, the order to striking off the name shall take effect.
(c) Re-conversion of producer company to inter-state co-operative society (Section

581ZS)
The method is as follows:
(1) Any producer company, being an erstwhile inter-State co-operative society, formed
and registered under this Part, may make an application—
(a) after passing a resolution in the general meeting by not less than two-third of its
member present and voting; or
(b) on request by its creditors representing three-fourth value of its total creditors, to
the High Court for its re-conversion to the inter-State co-operative society.
(2) The High Court shall, on the application made under sub-section (1), direct holding
meeting of its member or such creditors, as the case may be, to be conducted in such
manner as it may direct.
(3) If a majority in number representing three-fourths in value of the creditors, or member,
as the case may be, present and voting in person at the meeting conducted in
pursuance of the directions of the High Court under sub-section (2), agree for re-
conversion, if sanctioned by the High Court, be binding on all the member and all the
creditors, as the case may be, and also on the company which is being converted:
Provided that no order sanctioning re-conversion shall be made by the Court unless
the Court is satisfied that the company or any other person by whom an application
has been made under sub-section (1) has disclosed to the Court, by affidavit or
otherwise, all material facts relating to the company, such as the latest financial
position of the company, the latest auditor’s report on the accounts of the company,
the pendency of any investigation proceedings in relation to the company under
Sections 235 to 251, and the like.
(4) An order made by the Court under sub-section (3) shall have no effect until a certified
copy of the order has been filed with the Registrar.
(5) A copy of every such order shall be annexed to every copy of the memorandum of the
company issued after the certified copy of the order has been filed as aforesaid, or in
the case of a company not having a memorandum, to every copy so issued of the
instrument constituting or defining the constitution of the company.
(6) If default is made in complying with sub-section (4), the company, and every officer of
the company who is in default, shall be punishable with fine which may extend to one
hundred rupees, for each copy in respect of which default is made.
(7) The Court may, at any time after an application has been made to it under this
section, stay the commencement or continuation of any suit or proceeding against the
company on such terms as the Court thinks fit, until the application is finally disposed
of.
(8) Every producer company which has been sanctioned re-conversion by the High Court,
shall make an application, under the Multi-State Co-operative Societies Act, 2002 (39
of 2002) or any other law for the time being in force for its registration as multi-State
co-operative society or co-operative society, as the case may be, within six months of
sanction by the High Court and file a report thereof to the High Court and the
Registrar of companies and to the Registrar of the co-operative societies under which
it has been registered as a multi-State co-operative society or co-operative society, as

the case may be.
11
(K) COMPANIES INCORPORATE OUTSIDE INDIA
11.0 FOREIGN COMPANIES
Companies which are incorporated in foreign countries but have offices and places of
business in India are described as foreign companies. They have to comply with certain
provisions of the Act.
11.1 APPLICATION OF SECTIONS 592 TO 602 TO FOREIGN COMPANIES

(SECTION 591)
All these sections will apply to all foreign companies, i.e. companies falling under the
following two classes, namely (a) companies incorporated outside India which after the
commencement of this Act, establish a place of business within India; and (b) companies
incorporated outside India which have, before the commencement of this Act, established
a place of business within India and continue to have an established place of business
within India at the commencement of the Act [sub-section (1)].
It may so happen, that not less than 50% of the paid-up share capital whether equity or
preference or partly equity and partly preference of a foreign company having an
established place of business in India is held by one or more citizens of India or one or
more bodies corporate incorporated in India, whether singly or in the aggregate. In such a
case, the said company shall comply with such of the provisions of the Act as may be
prescribed with regard to the business carried on by it in India, as if it were a company
incorporated in India [sub-section (2) as inserted by the 1974 Amendment Act].
11.2 DOCUMENTS, ETC., TO BE DELIVERED TO THE REGISTRAR BY FOREIGN

COMPANIES
Foreign companies which after April 1, 1956 established a place of business in India
must, within 30 days, from the date, file with the Registrar having jurisdiction over New
Delhi (Section 597) and also with the Registrar of the State in which the principal place of
business of the company is situated:
(a) a certified copy of the charter, statutes or memorandum and articles of the company or
other instruments constituting or defining the constitution of the company, and if the
instrument is not in English language certified translation thereof;
(b) the full address of the registered or principal office of the company;
(c) a list of the directors and secretary of the company, containing the particulars
mentioned in Section 592(2)
In respect of each director (when an individual), this list mush contain his present name
and surname in full, his former name or names or surname or surnames in full, his usual
residential address, his nationality and if that nationality is not the nationality of origin, his
nationality of origin and his business occupation (if any), or if he has no business
occupation but holds any other directorship or directorships, particulars thereof. If the
director is a body corporate, the list must contain its corporate name and registered or
principal office and the full name, address, nationality and the nationality of origin if
different from that nationality or each of its directors. In respect of the secretary or each of
the joint secretaries (if there be any) (when an individual), the list must contain his
present name and surname, and former name(s) or surname(s) and his usual residential
address if the secretary is a body corporate, its corporate name and registered or
principal office;
(d) the name and address or the names and addresses of some one or more persons
resident in India authorised to accept on behalf of the company service of process and
any notices or other documents required to be served on the company, and
(e) the full address of the office of the company in India, which is to be deemed its
principal place of business in India.
Under Rule 16 of the Companies (Central Government’s) General Rules and Forms, 1956,
a copy of any charter, statutes, memorandum and articles, or other instrument constituting
or defining the constitution of a company must be duly certified to be true copy. It must be
certified, in the case of a company incorporated outside the Commonwealth by (a) an
official of the Government to whose custody the original of the document is committed or
(b) a Notary of such country or (c) an officer of the company. The signature and seal of
the official mentioned in (a) or (b) is required to be authenticated by diplomatic and
Consular Officer empowered in this behalf under Section 3 of the Diplomatic and Consular
Officers (Oaths and Fees) Act, 1948, or, where there is no such officer by any one of the
officials mentioned in Section 6 of the Commissioner of Oaths Act, 1889 or in any Act
amending the same). The certificate of the officer of the company referred to above is
required to be signed before a person having authority to administer an oath as provided
Companies Incorporate Outside India 11.3
by Section 3 of the Diplomatic and Consular Officers (Oath and Fees) Act or as the case
may be by Section 3 of the Commissioner of Oaths Act, (the status of the person
administering the oath in the latter case being authenticated by any official specified in
Section 6 of the Commissioner of Oaths Act, or in any Act amending the same).
If the company is incorporated in any part of the Commonwealth, the copy of the above
mentioned document must be certified as true copy by: (a) an official of the Government
to whose custody the original of the document is committed, (b) a Notary in that part of
the Commonwealth, or (c) an officer of the company, on oath before a person having
authority to administer oath in that part of the Commonwealth.
Under Rule 17 (ibid), the English translation of the document to be filed with the Registrar
in pursuance of Sections 592, 593 or 605 must be certified to be correct. If the translation
is made outside India it shall be authenticated by the signature and seal (if any) of the
official having custody of the original or of a Notary of the country (or part of the country)
where the company is incorporated. If the translation is made within India, it shall be
authenticated by an advocate, attorney or pleader entitled to appear before High Court or
by an affidavit of the person having, in the opinion of the Registrar, an adequate
knowledge of the language of the original and of English. The documents pursuant to
Section 592 are to be delivered in Form No. 44.
11.3 RETURN TO BE DELIVERED TO REGISTRAR WHERE DOCUMENTS ARE

ALTERED:
Under Section 593 of the Act, if any alteration is made or occurs in: (a) the charter,
statute or memorandum and articles of a foreign company or other instruments
constituting or defining the constitution of a foreign company, or (b) the registered
principal office of a foreign company; or (c) the name or address of any person authorised
to accept service on behalf of a foreign company; or the directors or secretary of a foreign
company; or (d) the principal place of business of the company in India; then the company
shall within the prescribed time deliver to the Registrar for registration a return containing
the prescribed particulars of the alteration.
Rule 18 of the Companies (Central Government’s) General Rules and Forms, 1956
prescribe the time, within which the particulars of alteration are to be filed. The notice of
alteration in respect of items (a), (b) or (c) above, must be communicated to the Registrar
on or before 31 st January of the year following the year in which alteration was made or
occurred, that in respect of item (d) or (e) within one month from the date of alteration.
11.4 ACCOUNTS OF FOREIGN COMPANY

Under Section 594(I), every foreign company in every calendar year must:
(a) Make out a balance sheet, and profit and loss account relating to his India Business in
such form containing such particulars and including or having annexed thereto such
documents (including in particular, document relating to every subsidiary of the foreign
company) as under the provisions of the Act it would, it had been a company within the
meaning of the Act, have been required to make out and, lay before the company in
general meeting; and
(b) Deliver three copies of those documents to the Registrar.
In regard to foreign company having a branch in India, whose entire or almost the entire
business related to India, to avoid preparation of separate balance sheet and, Profit and
Loss Account in respect of the Indian Business, it has been agreed to by the Department
of Company Law Administration that if the World Balance Sheet, and Profit and Loss
Account prepared by it in the country of Incorporation was recast in the form prescribed in
Schedule VI to the Companies Act, then such statement of accounts would be
accountable in compliance with the provision of Section 594(1).
Under Section 594(3), every foreign company shall send to the Registrar along with the
documents required to be delivered to him under sub-section (1), three copies of a list in
prescribed form of all places of business established by the company in India as at the
date with reference to which the balance sheet referred to in sub-section (1) is made out.
11.5 OBLIGATION TO STATE NAME OF FOREIGN COMPANY
It is also obligatory for every foreign company to, (a) exhibit on the outside of its place of
business in India its name and the country in which it is incorporated and such an
exhibition must be in English as well as in the local language, (b) state, in every
prospectus inviting subscriptions in India, for its shares or debentures the country of
incorporation, (c) cause the name of the company and its country of incorporation to be
stated in legible English characters in all business letters, bill heads, letter papers,
notices, advertisements and other official publications thereof.
If the liability of the members of the company is limited, the notice of the fact also must be
stated in the prospectus, letter heads, letter papers, etc. and to be conspicuously
exhibited on outside of every place where it carries on business in India, in legible English
characters and also in legible characters of the language of the locality in which the office
or place is situated. (Section 595).
11.6 SERVICE ON FOREIGN COMPANY

A necessity may arise for serving on a foreign company certain process, notice or other
document. These would be deemed to have been sufficiently served if these are
addressed to any person (whose name has been delivered to he Registrar under the
foregoing provisions relating to foreign companies) and left or sent by post to, the
address, which has been so delivered. But if such name and address of a person resident
in India has not been given to the Registrar or if at any time all the persons whose names
and addresses have been so delivered are dead or have ceased to reside or refuse to
accept services on behalf of the foreign company, then the document may be served on
the company itself by leaving it at or sending it by post to, any place of business
established by the company in India (Section 596).
11.7 PENALTIES
Section 598 prescribes a penalty for the company and every officer or agent of the
company for non-compliance with any of the requirements mentioned above, extending to
Rs. 10,000 and in the case of a continuing offence, with an additional fine extending to
Rs. 1,000 per day, during which the default continues.
11.8 EFFECT OF COMPANY’S FAILURE TO COMPLY WITH THE PROVISIONS OF

PART XI OF THE COMPANIES ACT RELATING TO COMPANIES INCORPORATED
OUTSIDE INDIA
Under Section 599 if a foreign company fails to comply with any of the foregoing
provisions of Part XI, such a failure will not affect the validity of any contract, dealing or
transaction entered into by the company, it will be liable to be sued in respect thereof. But
it cannot bring any suit, claim any set off, make any counter-claim or institute any legal
proceeding in respect of any such contract, dealing or transaction until it has complied
with the provisions of that Part.
11.9 REGISTRATION OF CHARGES, APPOINTMENT OF RECEIVER AND BOOKS

OF ACCOUNT (SECTION 600)
The provision of Part V of the Companies Act (Sections 124 to 145 shall apply mutatis
mutandis to: (a) charges on properties in India, which were created by foreign company
after 15.1.1937; and (b) charges on property in India which is acquired by any foreign
company after 15.1.1937. Moreover, where a section is created or the completion of the
acquisition of the property takes place outside India, even provisions of Section 125(5)
and the proviso to 127(1) shall have effects as if the property (wherever situated) were
situated outside India.
The provisions of Section 118 (pertaining to the right of debenture holders and members
to have copies of trust-deed) shall apply mutatis mutandis to a foreign company [sub-
section (2)].
The provisions of Section 209 (pertaining to books to be kept by a company) shall be

applicable to a foreign company to the extent of requiring it to keep at its principal place
of business in India, the books of account mentioned in Section 209 with regard to
moneys received and spent, sales and purchases made, and assets and liabilities in the
course of or in relation to its business in India [sub-section (3)(a)].
On and from the commencement of the Companies (Amendment) Act, 1974 (i.e. 1.2.75),
the provisions of Section 159 (relating to Annual Return to be made by company having a
share capital) shall, subject to such modifications or additions as may be made therein by
the rules made under this Act, apply to a foreign company which has an established place
of business in India, as they apply to a company incorporated in India [sub-section
(3)(b)(i) as inserted by the aforesaid Amendment Act]. Further, on and from 1.2.1975, the
provisions of Sections 209, 209A, 233A and 233B (relating to: books of account to be kept
by an indigenous company; inspection of books of account, etc., under Section 209A
inserted a new by the 1974 Amendment Act; special audit; audit of cost accounts in
certain cases) as well as Sections 234 to 246 (relating to: Registrar’s power to call for
information or explanation; seizure of document by Registrar, investigation of company’s
affairs on application by members or report by Registrar; application by members to be
supported by evidence any power to call for security; investigation of company’s affairs in
other cases; prohibition of a firm, body corporate or association from being appointed as
inspectors; power of inspectors to carry out investigation into the affairs of related
companies or associates, etc., production of documents and evidence; seizure of
documents by inspector; Inspector’s report; prosecution, application for winding-up of
company or an order under Section 397 or 398; proceedings for recovery of damages or
property; expenses of investigation and inspectors’ report to be evidence) shall so far as
may apply to the Indian business of a foreign company as they apply to company
incorporated in India [sub-section (3)(ii) as inserted anew by the 1974 Amendment Act].
In applying the aforementioned Sections (viz., 124 to 145, 118 & 209), the Registrar and
the registered office of the foreign company referred to in those Sections, shall be the
Registrar having jurisdiction over New Delhi and its principal place of business in India
respectively.
N.B. The prescribed form for the purpose of Section 600 is Form No. 55 of the
Companies (Central Government’s) Rules and Forms, 1956.
11.10 FEES FOR REGISTRATION OF DOCUMENTS

Such fees as may be prescribed have to be paid to the Registrar for registering any
documents that are required to be filed with the Registrar (Section 601). Rule 20 of the
Companies (Central Government’s) Rules prescribes the fee for registration of any
document relating to a foreign company.
11.11 REGISTRATION OF PROSPECTUS
Section 605 declares that no person shall issue, circulate or distribute in India any
prospectus offering for subscription the shares in or debentures of, a foreign company
incorporated or to be incorporated outside India irrespective of whether or not it has
established or will establish place of business in India, unless:
(i) before its issue, circulating or distributing of the prospectus in India a copy thereof,
certified by the chairman and two other directors of the company as having been approved
by a resolution of the Registrar;
(ii) the prospectus states on the face of it that a copy thereof has been so delivered; and
(iii) there is endorsed on or attached to the copy: (a) the consent of an expert, if any, to
the issue of the prospectus as required by Section 604(b) a copy of any contract needed
by clause 16 of Schedule II to be stated in the prospectus or, in the case of a contract not
reduced into writing, a memorandum giving full particulars thereof; and a statement
setting out the adjustments referred to in clause 32 of the same Schedule. Likewise,
under sub-section (3) of Section 603, a person is prohibited from issuing to any one in
India a form of application for shares in, or debentures of such a company or intended
company, unless the form is issued along with the prospectus.
Students may note that: (i) a prospectus also comprises the document which according to
Section 64, is deemed to be a prospectus and (ii) under Section 608(3) the expression
‘prospectus’, ‘shares’ and debentures, in reference to foreign companies have the same
meaning as when used in relation to a company incorporated under the Act.
11.12 REQUIREMENTS AS REGARDS PROSPECTUS
In so far as foreign companies are concerned the provisions as regards prospectus

requirements have been brought almost in line with the provisions applicable to
companies incorporated in India, subject to minor modifications.
Under Section 603, the prospectus to be issued by an existing or intended foreign

company in India must be dated and contain the following particulars: (a) the instrument
constituting or defining the constitution of the company; (b) the enactments or provisions
under which the company was incorporated; (c) the address of the place in India where
the said instruments, enactments etc., translation thereof in English, if they are in some
other foreign language, can be inspected; (d) the date on which and the country in which
the company was incorporated; and (e) whether there is a place of business in India, and
if so, the address of its principal office. The provisions contained in (a), 9(b) and (c)
above, shall not be applicable, if the prospectus is issued more than 2 years after the
company had become entitled to commence business. As in the case of the prospectus of
a company incorporated in India, the prospectus of a foreign company too, must contain
the matters laid down in Part I of Schedule II and set out the report specified in Part II of
the Schedule subject always to the provisions of Part III of the Schedule.
Furthermore, the penalty prescribed for contravention of any of the provisions contained in
Sections 603, 604 and 605 is imprisonment for a term extending up to 6 months, or fine
up to Rs. 50,000 or both (Section 606). Section 62 relating to civil liability for mis-
statement in a prospectus is applicable also to a prospectus issued, circulated or
distributed in India by a foreign company, with the substitution for references in Sections
62 to Section 60 of this Act, of reference to Section 604 thereof (Section 607).
12
(I) OFFENCES AND PENALTIES
12.0 TYPES OF PENALTIES

There are five types of penalties that have been contemplated under the Companies Act, 1956.
They are
1. Fine only
2. Imprisonment or fine
3. Imprisonment or fine or with both
4. Imprisonment and fine and
5. Imprisonment only
Of the above, the offences referred to in 1 to 3 are compoundable and others are not
compoundable. The application for compounding has to be made in duplicate on plain paper and
there is no filing for it. The application should clearly state the details of offence committed and that
the applicant should admit the offence and plead guilty and seek specifically to compound the
offence.
12.1 OFFENCES – CONTINUING OR NOT
Whether an offence is a continuing offence or not is to be decided by the principles laid down in
Section 472 of the Cr. PC. The said section provides that “in case of continuing offence a fresh
period of limitation shall begin to run at every moment of time during which the offence continues.”
The general understanding of the principle of continuing offence is that if a section in the
Companies Act provides for a fine of say Rs. 50/- per day for the offence, then such an offence can
be treated as a continuing offence. It may be mentioned incidentally that the offence under Section
159 of the Act though provides for fine per day., the Calcutta High Court decided in National Cotton
Mills Case (1984) that the offence under Section 159 is not a continuing offence over-ruling its
own decision in Ajit Kumar Sarkar Vs. AROC (1979) that offence under Section 159 is a continuing
offence.
But what is a continuing offence was decided earlier by Supreme Court in State of Bihar Vs.
Deokaran Nenshi (1973).
In the case of continuing offence there is thus an ingredient of continuance of the offence which is
absent in the case of an offence which takes place when an act or omission is committee once and
for all.”
12.2 NON-COGNIZABLE OFFENCES

Notwithstanding anything in the Code of Criminal Procedure, 1898 (V of 1898), every offence
against this Act shall be deemed to be non-cognizable within the meaning of the said Code
(Section 624).
Offences punishable with compulsory imprisonment cannot be compounded.
Other offences can be compounded by the Regional Director or Company Law Board.
An offence is compoundable by the Regional Director where the maximum a mount of fine is up to
Rs,. 5,000/- or by the Company Law Board where the fine exceeds Rs. 5,000/-.
Application in Duplicate for compounding of offence should be made to the Registrar of companies
who shall forward the same to the Regional Director or to the Company Law Board as the case
may be.
12.3 OFFENCES COMPOUNDABLE – SECTION WISE LIST

The section-wise list of offences which can be compounded and offences which cannot be
compounded are given in Annexure I and II.
Part-A
[Vide sub-section (1) of section 621A]
Section Nature of offence Penalty
11(5) Being a member of a company, association or Fine upto Rs. 10,000
partnership consisting more than specified numbers
22(2) Failure to comply with any direction given by Central Fine upto Rs. 1,000 for
Government to change the name of an existing every day during which
company default continues
25(10) Failure to remove name of Chambers of Commerce Fine upto Rs. 5,000 for
consequent upon revocation of license every day during which
default continues
39(2) Failure to send copies of memorandum, articles or Fine upto Rs. 500 for
agreement to members on demand each offence
40(2) Failure to issue of altered copy of memorandum, Fine upto Rs. 100 for
articles, resolutions or agreements each copy
44(3) Failure to file the prospectus or statement in lieu of Fine upto Rs. 5,000 per
prospectus by a private company on ceasing to be day
private company
49(9) Failure to comply with the provisions of sub-sections (1) Fine upto Rs. 50,000
to (8) relating to investments by a company
56(3) Issue of application form without salient features of Fine upto Rs. 50,000
prospectus or non -supply of copy of prospectus on
demand
Offences and Penalties 12.3
59(1) Issue of prospectus in contravention of section 57 or 58 Fine upto Rs. 50,000

60(5) Issue of prospectus without the copy thereof being filed Fine upto Rs. 50,000
with the Registrar
69(4) Failure to keep application moneys in Scheduled Bank Fine upto Rs. 50,000
70(4) Failure to file statement in lieu of prospectus before Fine upto Rs. 10,000
allotment of shares
72(3) Prohibition for allotment of shares unless the conditions Fine upto Rs. 50,000
as specified in the section are fulfilled
73(2B) Default in repayment of application moneys and interest Fine upto Rs. 50,000
73(3) Failure to keep application moneys in Scheduled Bank Fine upto Rs. 50,000
75(4) Failure to comply with the provisions of section 75 Fine upto Rs. 5,000 per
relating to return of allotment day
75(4), Showing in return shares allotted for cash while in Fine upto Rs. 50,000
proviso actual no cash received for such allotment
76(5) Failure to comply with the provision relating to Fine upto Rs. 5,000
commission and discount
77(4) Contravening provisions on purchase by company or Fine upto Rs. 10,000
loans by company for purchase of its own or its holding
company’s shares
79(4) Omitting to include in prospectus certain particulars Fine upto Rs. 500
relating to the issue of shares at a discount
80(6) Non-compliance with the provisions of the section Fine upto Rs. 10,000
relating to issue of redeemable preference shares
89(3) Non-compliance with the provisions of the sub-section Fine upto Rs. 10,000
relating to termination of disproportionately excessive
voting rights in existing companies
95(3) Failure to give to the Registrar notice of consolidation, Fine upto Rs. 500 per
etc., of share capital in accordance with section 95(1) day
97(3) Failure to file with the Registrar notice of increase of Fine upto Rs. 500 per
capital or of members within thirty days of passing of day
resolution
107(5) Failing to forward to the Registrar a copy of order of the Fine upto Rs. 500
court in regard to variation of shareholders’ rights
111(9) Non-compliance with the order of CLB/Tribunal relating Fine upto Rs. 10,000 &
to registration of transfer/transmission of further fine of Rs. 1,000
share/debenture per day
111(12) 111 Default in complying with the provisions of section 111 Fine upto Rs. 500 per
read with Failure to give effect to orders of CLB/Tribunal day Fine upto Rs.
111(9) 10,000 & further fine of
Rs. 1,000 per day
111A read Failure in complying with any of the provisions of Fine upto Rs. 500 per
with 111(12) section 111A day
113(2) Failure to complete and having ready for delivery share Fine upto Rs. 5,000 per
or debenture certificate within two months of allotment, day
etc.
115(6) Non-compliance with the requirements of section 115 Fine upto Rs. 500 per
relating to entries in the register in respect of share day
warrants
117A(3) Copy of the trust deed not made available for inspection Fine upto Rs. 500 per
day
118(2) Failure to forward a copy of debenture trust deed to Fine upto Rs. 500 and
members or debentureholders within seven days at further fine upto Rs.
their request 200 per day
127(2) Failure to deliver to the Registrar for registration Fine upto Rs. 5,000
particulars of charges on company acquiring property
subject to charge
133(2) Delivering debentures or certificate of debenture stock Fine upto Rs. 10,000
without endorsing on its certificates of registration
137(3) Default in complying with the provisions of section 137 Fine upto Rs. 500 per
regarding appointment of receiver or manager day
142(1) Failure to file with the Registrar for registration Fine upto Rs. 5,000 per
particulars of any charge, etc. day
142(2) Not complying with any of the requirements of the Act Fine upto Rs. 10,000
as to registration with the Registrar of any charge, etc.
143(2) Failure to make entry in register of charges Fine upto Rs. 5,000
144(3) Refusing to allow inspection of copies of instruments Fine upto Rs. 500 and
creating charges and company’s register of charges further fine upto Rs.
200 per day
146(4) Non-compliance with the requirements of section 146 in Fine upto Rs. 500 per
regard to registered office day
147(2) Non-compliance with the provisions of section 147(1)(a) Fine upto Rs. 500 per
or in regard to painting or affixing its name and address day
of registered office outside office or place of business
147(3) Non-compliance with the provisions of section 147(1)(b) Fine upto Rs. 5,000
or (c) in regard to engraving name on seal and
mentioning name and registered office in business
letters, etc.
147(4) Misuse of seal, letterhead, etc. by an Officer Fine upto Rs.5,000
148(2) Non-compliance with the requirements of section 148(1) Fine upto Rs.10,000
regarding publication of authorized as well as
subscribed and paid-up capital
149(2A) Commencement of any new business in contravention of Fine upto Rs. 5,000 per
this sub-section day
149(6) Commencement of business or exercising borrowing Fine upto Rs.5,000 per
powers in contravention of section 149 day
150(2) Failure to maintain register of members Fine upto Rs. 500 per
day
151(4) Committing default in complying with the provisions of Fine upto Rs. 500
sub-sections (1) to (3) relating to index of members
152(3) Committing default in complying with the requirements of Fine upto Rs. 500
subsections (1) and (2) regarding register and index of
debenture-holders
153B(3)(a) Failure to make a declaration by the trustee Fine upto 5,000 and
further fine upto Rs. 100
per day
154(2) Closing register of members or debenture holders Fine upto Rs. 5,000 per
otherwise than in compliance with the provisions of day
section 154(1)
157(3) Failure to file with the Registrar notice of situation of Fine upto Rs. 500 per
office where foreign register is kept day
158(9) Not transmitting to registered office in India copies of Fine upto Rs. 500
entries in foreign register and not keeping at registered
office in India duplicate of foreign register
162(1) Non-compliance with the provisions of section 150, 160 Fine upto Rs. 500 per
or 161 regarding annual return day
163(5) Refusing inspection, making of any extract or sending Fine upto Rs. 500 per
any copy within specified time, of registers, returns, etc. day
165(9) Non-compliance with the provisions relating Fine upto Rs. 5,000
168 Failure to hold annual general meeting in accordance Fine upto Rs. 50,000 and
with section 166 or to comply with any directions of further fine upto Rs.
Central Government under section 167(1) 2,500 per day
176(2) Omitting to state in notice of meeting that a member is Fine upto Rs. 5,000
entitled to appoint proxy and that proxy need not be a
member
176(4) Invitation to appoint proxy specified in the invitation Fine upto Rs. 10,000
issued at Company's expense

187C(5)(a) Failure to file declaration not holding beneficial interest in Fine upto Rs 1,000 per
any share day
187C(5)(b) Failure to file return by the company Fine upto Rs 100 per day
188(8) Non-compliance with the provisions of section 188 Fine upto Rs. 50,000
regarding circulation of members' resolutions
192(5) Failure to file with the Registrar certain resolutions or Fine upto Rs. 200 per
agreements in accordance with section 192(1) day
192(6) Failure to annex copies of certain resolutions or Fine upto Rs. 100 for
agreements to articles or not forwarding to members on each copy in respect of
request copy of certain resolutions or agreements which default is made
192A(6) Failure to comply with section 192A(1)to(4) Fine upto Rs. 50,000
193(6) Non-compliance with the provisions of section 193 Fine upto Rs. 500
regarding minutes of proceedings of general meetings
and of board and other meetings
196(3) Refusing inspection of minutes book of general meetings Fine upto Rs. 5,000 for
or not furnishing to member on request a copy of minutes each default
within specified time
197(2) Circulating or advertising proceedings of general Fine upto Rs. 5,000
meetings without including certain particulars
205A(8) Failure to transfer the amount of accumulated profits to Fine upto Rs. 5,000 per
unpaid dividend account and other provisions of section day
205A
218 Improper issue, circulation or publication of balance sheet Fine upto Rs. 5,000
or profit and loss account
219(3) Failure to send to members, etc., copies of balance- Fine upto Rs. 5,000
sheet, auditors report, etc., twenty-one days before date
of Meeting
219(4) Default in complying with demands for copies of balance Fine upto Rs. 5,000
sheet, etc., within seven days of such demand
220(3) Failure to file with the Registrar copies of balance sheet, Fine upto Rs. 500 per
etc. day
223(4) Non-compliance by certain companies with the provisions Fine upto Rs. 500 per
of section 223 regarding publication of half-yearly day
statement in the specified form
224(4) Failure to give notice to the Central Government within Fine upto Rs. 5,000
seven days where no auditors are appointed at an annual
general meeting
232 Failure of company to comply with the provisions of Fine upto Rs. 5,000
sections 225 to 231 with regard to auditors

233 Failure of auditor to comply with sections 227 and 229 Fine upto Rs. 10,000
233A(5) Failure to provide information to special auditor Fine upto Rs. 5,000
234(4) Failure to furnish information or explanation or production Fine upto Rs. 5,000 and
of books and papers further fine of Rs. 500
per day
250(10) Otherwise contravening the restrictions imposed by the Fine upto Rs. 50,000
Central Government/ during investigation of ownership of
shares and debentures
269(6) Failure to vacate office where not approved by Central Fine upto Rs. 5,000 per
Government day on officer in default
269(10) Order of Tribunal/CLB declaring that contravention of Fine upto Rs. 50,000
requirement of Schedule XIII has taken place against the company and
fine of Rs.1,00,000 on
the officers in default and
fine of Rs.1,00,000 on
the person appointed
272 Acting as director without holding qualification shares Fine upto Rs. 500 per
day
279 Acting as a director of more than 15 companies Fine upto Rs.50,000
283(2A) Functioning as a director after vacation of office on Fine upto Rs. 5,000 per
account of any disqualification day
286(2) Default in giving notice of Board meetings Fine upto Rs. 1,000
294(8) Neglecting or refusing to furnish information required by Fine upto Rs. 50,000 and
Central Government or to produce any books and papers, further fine not less than
etc. Rs. 500 per day
299(4) Failure to disclose interest in a contract by the Director Fine upto Rs. 50,000
300(4) Participation in Board meeting by interested director Fine upto Rs. 50,000
301(4) Non-compliance with the provisions of section 301(1), (2) Fine upto Rs. 5,000
and (3) in regard to register of contracts, companies and
firms in which directors are interested
301(5)/ 163(5) Failure to maintain register of contracts Fine upto Rs. 500 per
day
302(5) Failure to disclose the members director's interest in Fine upto Rs. 10,000
contract appointing manager/managing director
303(3) Failure to keep register of directors or to file with the Fine upto Rs. 500 per
Registrar return of directors, managing director, manager day
and secretary
304(2) Refusing inspection to any member of register kept under Fine upto Rs. 500
section 303
305(1) Failure by a director to inform change of his particulars Fine upto Rs. 5,000
307(7) Failure to produce at annual general meeting register of Fine upto Rs. 5,000
directors' shareholdings
307(8) Failure to comply with the provisions of section 307(1) Fine upto Rs. 50,000 and
and (2) in regard to register of directors' shareholdings further fine upto Rs. 200
per day
320(3) Failure to secure particulars regarding payment to Fine upto Rs. 2,500
directors stipulated in sub-section (1)
322(3) Default in giving notice under this section Fine upto Rs. 10,000 and
damages
372A(10) Failure to maintain the Register of inter-corporate loans, Fine upto Rs. 5000 and
investments and guarantees further fine upto Rs. 500
for every day during
which default continues
374 Contravening section 372 [excluding sub-sections (6) and Fine upto Rs. 50,000
(7)] or 373 in regard to investments made in shares and
debentures of companies in the same group
383A(1A) Failure to appoint whole-time secretary Fine upto Rs. 500 per
day
391(5) Failing to annex to the copy of memorandum certified Fine upto Rs. 100 for
copy of court's order sanctioning any compromise or each copy
arrangement with creditors and members
393(4) Failure to comply with the requirements of section 393 in Fine upto Rs. 50,000
regard to compromises or arrangements with creditors
and members
393(5) Failure to give information by directors relating to Fine upto Rs. 5,000
compromise or arrangement with creditors or members
394(3) Failure to file with the Registrar a certified copy of the Fine upto Rs. 500
order of the court on application for sanctioning of a
compromise or arrangement
395(4A)(6) Issue of circular containing or recommending acceptance Fine upto Rs. 5,000
of offer for transfer of shares which has not been
registered
404(4) Failure to file with the Registrar a certified copy of the Fine upto Rs. 50,000
altered memorandum of articles
416(3)(b) Non-compliance with the requirements of section 416 in Fine upto Rs. 2,000
regard to contract by agents of company in which
company is undisclosed principal

423 Non-compliance with the requirements of sections 421 Fine upto Rs. 2,000
and 422 in regard to receivers
441F Non-payment of cess payable under section 441A Upto ten times the
amount in arrears
445(1) Default by petitioner and the company to file with the Fine upto Rs. 1,000 for
Registrar, a certified copy of the order on the making of a each day of default
winding up order
481(3) Default in forwarding to the Registrar a copy of the Fine upto Rs. 500 for
Court/Tribunal's order dissolving the company within each day of default
fourteen days of the order
485(2) Default in giving notice of the resolution for voluntary Fine upto Rs. 500 for
winding up in the Official Gazette, within 14 days and also each day of default
in some newspaper, circulating in the district where the
registered office of the company is situate
493(3) Default in giving notice to the Registrar, of the Fine upto Rs. 1,000 for
appointment of liquidator or liquidators under section 490, each day of default
of every vacancy occurring in the office of liquidator and
of the name of the liquidator or liquidators appointed to fill
every such vacancy under section 492 within 10 days of
the event to which it relates
495(2) Failure to summon a meeting of the creditors in case of Fine upto Rs. 5,000
insolvency and to lay before the meeting a statement of
the assets and liabilities of the company
496(2) Failure to call a general meeting of the company at the Fine upto Rs. 1,000 in
end of the first year from the commencement of the respect of each failure
winding up and at the end of each succeeding year or as
soon thereafter but within 3 months from the end of the
year or such longer period as the Central Government
may allow; and to lay before the meeting an account of
the liquidator's acts and dealings and of the conduct of
the winding up during the preceding year together with
the statement containing the requisite particulars relating
to the proceedings and the position of the liquidation
497(3) Default in sending to the Registrar a copy of the accounts Fine upto Rs. 500 for
and return within one week of the holding of the meeting each day of default
497(7) Failure to call a general meeting of the company as Fine upto Rs. 5,000
required by section 497
500(6) Default in complying with the provisions relating to the Fine upto Rs. 10,000
calling of meeting of creditors, etc., and advertising the
notice of the meeting of the creditors in the Official
Gazette and at least in two newspapers

501(2) Default by company in giving notice to the Registrar of Fine upto Rs. 500 for
any resolution passed at a creditors' meeting under each day of default
section 500
508(2) Default by liquidator in calling a general meeting of the Fine upto Rs. 1,000
company and a meeting at the end of the first year from
the commencement of winding up and at the end of each
succeeding year, and failure to lay before the meeting an
account of his acts and dealings with respect to the
proceedings and position of the winding up
509(3) Default by liquidator in sending to the Registrar a copy of Fine upto Rs. 500 for
the accounts and returns of the holding of the meetings each day of default
and of the date or dates on which they were held
509(7) Failure of the liquidator to call a final general meeting of Fine upto Rs. 5,000
the company or creditors
513(3) Appointment of a body corporate as liquidator Fine upto Rs. 10,000
514 Giving, agreeing, or offering to give, to any member or Fine upto Rs. 10,000
creditor of company any gratification with a view to
securing his own appointment or nomination as the
company's liquidator, or securing or preventing the
appointment or nomination of some person other than
himself
516(2) Failure by liquidator to publish in the Official Gazette and Fine upto Rs. 500 for
deliver to the Registrar for registration a notice of his each day of default
appointment in the prescribed Form
547(2) Default by a company which is being wound up, whether Fine upto Rs. 5,000
by the Court/Tribunal or voluntarily, to make a mention of
the fact that the company is being wound up in every
invoice, order for goods or business letter, issued by or
on behalf of the company or a liquidator of the company
or a receiver or manager of the property of the company
in which the name of the company appears
551(5) Default by liquidator to comply with any of the Rs. 5,000 for each day of
requirements of the section relating to information as to default
pending liquidations
559(2) Default by any person, on whose application the Fine upto Rs. 500 for
Court/Tribunal passes an order declaring the dissolution each day of default
to be void, to file within 21 days after making of the order
or such further time as the Court/Tribunal may allow a
certified copy of the order with the Registrar
581ZM(1) Any person, other than a Producer Company registered Fine upto Rs. 10,000 for
under this Part, carries on business under any name every day during which
which contains the words "Producer Company Limited" such name has been
used by him
581ZM (3)(a) A director or officer of producer company defaults in Fine upto Rs. 1 lakh and
handing over the custody of books of account and other if the default continues
documents or property in his custody to the producer an additional fine of Rs.
company 10,000 for everyday
during which such
default continues
581ZM (3)(b) A director or officer of producer company fails in Fine upto Rs. 1 lakh and
convening AGM or other general meeting if the default continues
an additional fine of Rs.
10,000 for everyday
during which such
default continues
598 Failure by any foreign company to comply with sections Fine upto Rs. 10,000 and
591 to 597 further fine up to Rs.
1,000 for each day of
default
630(1) Wrongfully withholding or wrongfully taking possession of Fine upto Rs. 10,000
property of the company by an officer
APPENDIX-II
List of Offences punishable with imprisonment or with fine or both, compound-able with the
permission of the Court under section 621 A(6)(a) of the Act
Name of offence Penalty

Section
44(4) Filing with the Registrar prospectus or statement Imprisonment upto two years or
in lieu of prospectus containing any untrue fine upto Rs. 50,000 or both
statement
63(1) Issuing a prospectus which includes any untrue Imprisonment upto two years or
statement fine upto Rs. 50,000 or both
68 Fraudulently inducing persons to invest money Imprisonment upto five years or
fine upto Rs. 1,00,000 or both
70(5) Delivery to the Registrar statement in lieu of Imprisonment upto two years or
prospectus which includes any untrue statement fine upto Rs. 50,000 or both
77A(11) Default in complying with the buy-back provisions Imprisonment upto two years or
contained in section 77A fine upto Rs. 50,000 or both
84(3) Fraudulently renewing or issuing of duplicate Company liable to fine upto Rs.
share certificates 10,000 and officer in default

liable to imprisonment upto six
months or fine up to Rs.
1,00,000 or both
108-I(2) Failure to comply with section 108B Fine upto Rs. 50,000 in case of
body corporate and
imprisonment upto three years
or fine upto Rs. 50,000 or both
against officer in default
108-I(3) Failure to comply with section 108C Fine upto Rs. 50,000 in case of
body corporate and
imprisonment upto three years
against officer in default
108-I(4)(b) Contravention of section 108B or 108D Fine upto Rs. 50,000 on
company and officer in default
punishable with imprisonment
for a term upto three years and
with fine upto Rs. 50,000 or both
192A(5) Defacing or destroying postal ballot or declaration Imprisonment upto 6 months or
of identity of shareholder fine or both
202(1) Discharging functions of a director by an Imprisonment upto two years or
undischarged insolvent with fine upto Rs. 50,000 or with
both
203(7) Acting as a director in contravention of an order of Imprisonment upto two years or
the Court or the Tribunal fine upto Rs. 50,000 or both
209(5)/(7) Failure to keep proper books of account, etc. Imprisonment upto six months
210(5) Failure to lay balance sheet and profit and loss Imprisonment upto six months
account at the AGM or fine upto Rs. 10,000 or both
210(6) Person charged with to comply with section 210 Imprisonment upto 6 months or
fine upto Rs. 10,000 or both for
each offence
211(7)/(8) Failure to prepare balance sheet and profit and Imprisonment upto six months
loss account showing a true and fair view or fine upto Rs. 10,000 or both
212(9)/(10) Failure to attach the accounts of subsidiary Imprisonment upto six months
company, etc. or fine upto Rs. 10,000 or both
217(5)/(6) Failure to take reasonable step relating to Board's Imprisonment upto six months
report or fine upto Rs. 20,000 or both
221(4) Failure to disclose certain payments, to the Imprisonment upto six months
company or fine upto Rs. 50,000 or both

233B(11) Failure to comply with the provisions of section Fine upto Rs. 5,000 on company
233B regarding audit of cost accounts and imprisonment upto three
years; or fine upto Rs. 50,000 or
both to officer in default
240(3) Disobedience to the order of court directing Imprisonment upto six months
production of books before inspector or fine up to Rs. 20,000 or both
and further fine upto Rs. 2,000
per day
250(9) Exercise of right in respect of shares and Imprisonment upto six months
debentures in violation of restrictions imposed by or fine upto Rs. 50,000 or both
CLB/Tribunal
292A(11) Failure to comply with section Imprisonment upto one year or
fine upto Rs. 50,000 or both
295(4) Loans to directors, etc. without approval of Fine upto Rs. 50,000 or
Central Government imprisonment upto six months
308(3) Failure to make disclosure of shareholdings by a Imprisonment upto two years or
director fine upto Rs. 50,000 or both
371(1) Contravention of the provisions of section 369, Fine upto Rs. 50,000 or
370 or 370A in regard to loans to companies imprisonment upto six months
372A(9) Default in complying with subsections (1) to (4) Imprisonment upto two years or
and (6) to (8) of section 372A fine upto Rs. 50,000
407(2) Acting as a director in contravention of section Imprisonment upto one year or
407(1) fine upto Rs. 50,000 or both
420 Failure to collect provident fund payment of Imprisonment upto six months
contribution to the trust and or fine upto Rs. 10,000
424L Violation of provisions of Part VI relating to revival Simple imprisonment upto three
and rehabilitation of sick industrial companies or years or fine upto Rs.10,00,000
any scheme or any order of the Tribunal/Appellate
Tribunal or making a false statement or giving
false evidence to the Tribunal/ Appellate Tribunal
and attempting to tamper the records of reference
or appeal filed under the Act.
454(5) Default in complying with the provisions of section Imprisonment upto two years or
454 fine upto Rs. 1,000 per day or
both
454(7) Untruthfully stating himself to be a member or a Penalty as provided under
creditor of a company section 182 of Indian Penal
Code (IPC). Section 182 of IPC
imposes imprisonment of either
description for a term which may

extend to 6 months or fine which
may extend to Rs. 1,000 or both
488(3) Making of a declaration of solvency under section Imprisonment upto six months
488 without having reasonable grounds for the or fine upto Rs. 50,000, or both
opinion that the company will be able to pay its
debts in full, within the period specified in the
declaration
538(1) Committing any offences mentioned sub-section Imprisonment upto two years or
(1) of section 538 except those stated in clauses in fine, or both
(m),(n),(o) thereof within 12 months before the
commencement of the winding up or at any time
thereafter
538(1)(m) Obtaining on credit, for and on behalf of the Imprisonment upto five years or
(n)and(o) company, by any false representation or other fine or both
fraud, any property which the company does not
subsequently pay for; or obtaining on credit, for or
on behalf of the company under the false
pretence that the company is carrying on its
business, any property which the company does
not subsequently pay for; or pawning, pledging or
disposing of any property of the company which
has been obtained on credit and has not been
paid for unless such pawning, pleading or
disposing is in the ordinary course of the business
of the company, within 12 months before the
thereafter
538(2) Taking in pawn or pledge or otherwise receiving Imprisonment upto three years
the property, within 12 months before the or fine, or both
thereafter, knowing it to be pawned, pledged or
disposed of in circumstances which amount to an
offence under clause (o) of sub-section (1)(c)
539 Destroying, mutilating, altering, falsifying or Imprisonment upto seven years
secreting any books, papers or securities or being and fine
a privy to the commission of such offences or
being a privy to the making of any false or
fraudulent entry in any register, books of account
or document belonging to the company with intent
to defraud any officer or contributory of a
company or other person when the company is
being wound up
542(3) Knowingly being a party to the carrying on of any Imprisonment upto two years or
business of a company, when it is being wound fine upto Rs. 50,000, or both
up with intent to defraud creditors of the company
or any other persons or for any fraudulent
purpose
550(4) Acting in contravention of any rule of any direction Imprisonment upto six months
of the Central Government under sub-section (1) or or fine upto Rs. 50,000, or
concerning the disposal of books and papers of a both
company
551(4) Any person untruthfully stating himself to be a Penalty as provided under
creditor or a contributory for the purpose of the section 182 of Indian Penal
section Code (IPC). Section 182 of IPC
imposes imprisonment of either
description for a term which may
extend to 6 months or fine which
may extend to Rs.1,000orboth
551(5) Wilful default by liquidator in causing statement to Imprisonment upto six months
be audited or fine upto Rs. 10,000 or both
606 Contravention of the provisions of sections 603, Imprisonment upto six months
604 and 605 relating to prospectus of foreign or fine upto Rs. 50,000 or both
companies
614A(2) Failure to file document with the Registrar as Imprisonment upto six months
directed by the Court or fine or both
615(6) Failure to furnish information or statistics, etc., Imprisonment upto three months
required by the Central Government or fine upto Rs. 10,000 or both
621A(5) Failure to comply with order of Central Imprisonment upto six months
Government for filing any document, return, etc. or with fine upto Rs. 50,000 or
both
APPENDIX-III
List of Non-Compoundable Offences punishable with imprisonment only
Section Offence Prescribed penalty

68A(1) Personation for acquisition, etc., of shares Imprisonment upto 5 years
541(1) Failure to maintain proper books of account by a Imprisonment upto one
company throughout the period of two years year
immediately preceding the commencement of the
winding up, or the period between the incorporation of
the company and the commencement of the winding
up, whichever is shorter
625(4) Failure on the part of a shareholder to pay Imprisonment upto 2
compensation months
630(2) Default in delivering or refunding within a time fixed by Imprisonment upto 2 years
Court, any property wrongfully withheld or knowingly
misapplied by an officer or employee upon trial under
this section
APPENDIX-IV
List of Non-Compoundable Offences, i.e. offences punishable with imprisonment and fine under
section 621A(7)(b) of the Act
Section Offence Prescribed
penalty
58A(5) Omission to make repayment of deposit Company liable to fine not less
or acceptance of deposit in contravention than twice the amount of deposit
of rules not repaid and officer in default
liable for imprisonment upto 5
years and also fine
58A(6) (a)(i) Acceptance of deposit in excess of Company liable to fine not less
prescribed limits or in contravention of than the amount of deposit and
manner of condition prescribed under officer in default liable for
subsection (1) or in contravention of sub- imprisonment upto 5 years and
section (2) also fine
58A(6)(a)(ii) Invitation of deposits in excess of Company liable to fine upto Rs.
prescribed limits and contrary to rules 10,00,000 but not less than Rs.
50,000 and officer in default liable
for imprisonment up to 5 years
and also fine.
58A(10) Failure to comply with the order of Imprisonment upto 3 years and
CLB/Tribunal also fine not less than Rs. 500 per
day
58AA(9) Failure to comply with provisions of Imprisonment upto 3 years and
section 58AA fine not less than Rs. 500 per day
73(2B) Failure to make repayment of Fine upto Rs. 50,000 and also
application money within six months imprisonment upto one year
from the expiry of the eighth day
80A(3) (a) & (b) Failure to comply with section 80A Company shall be liable to fine
upto Rs.10,000 per day and officer
in default liable to imprisonment
upto 3 years and fine
108-1 (4)(a) Contravention of section 108B or 108D Imprisonment upto five years and
fine
116 Personation of shareholder Imprisonment upto 3 years and

also fine
117C(5) Default in complying with order of Imprisonment upto three years
Tribunal/CLB and also fine not less than Rs. 500
per day
153B(3)(b) Declaration by a trustee as stated in Imprisonment upto 2 years and
section 153(3)(o) also fine
207 Not distributing dividend within thirty Imprisonment upto 3 years and
days also fine upto Rs. 1,000 per day
209A(8) Failure to comply with section 209A Fine not less than Rs. 50,000 and
also imprisonment upto one year
269(11) Contravention of section 269(10) Imprisonment upto 3 years and

also fine upto 500 rupees per day
293A(5) Political contribution made contrary Company liable to fine upto three
to section 293A times the amount contributed and
officer in default liable to
imprisonment upto 3 years and
also fine
446A Failure of directors and other officers to Imprisonment upto one year and
complete the books of account and get fine not exceeding one lakh
them audited up-to date of winding up rupees
order made by Court /Tribunal and
submitted to the Court/Tribunal
540 Being an officer of a company which is Imprisonment upto two years and
subsequently ordered to be wound up by also fine
the Court/ Tribunal or which later passes
a resolution for voluntary winding up by
false pretences or by means of any other
fraud, inducing any person to give credit
to the company, or with intent to defraud
creditors of the company, making or
causing to be made any gift or transfer of
or charges on or causing or conniving at
the levying of any execution against the
property of the company, or (c) with intent
to defraud creditors of the company,
concealing or removing any part of the
property of the company since the date of
any unsatisfied judgment or order for
payment of money obtained against the
company, within two months before that
date
541(1) Failure to maintain proper books of Imprisonment upto one year.

account by a company throughout the
period of two years immediately
preceding the commencement of the
winding up, or the period between the
incorporation of the company and the
commencement of the winding up,
whichever is shorter
581ZM(2) A director or an officer of producer pany Imprisonment upto six months
willfully failing to furnish any information com-and fine equivalent to 5 per
relating to the affairs of the Producer cent of the turnover of producer
Company required by Member or a company during preceding
person duly authorized in this behalf financial year
628 False statements as mentioned in section Save as otherwise provided in the

628 Act, imprisonment upto 2 years
and also fine
629 False evidence given as stated in Imprisonment upto 7 years and
section 629 also fine
13
(M) E-GOVERNANCE
13.0 MCA 21 PROJECT

This is an innovative project and initiative of the Ministry of Company Affairs carried out under
the national e-governance Programme of the Government with a comprehensive online portal
to enable e-filing. This project covers all the services provided by the Registrar of Companies
(ROC) starting from the incorporation of a new company. The project would provide e-
services including names such, registration of new companies, filing of various returns and
statutory documents under the Companies Act, 1956. The system would also enable on filing
and access for statutory documents like memorandum of association, articles of association,
certificate of incorporation etc.
The project serves the interest of all the key stake holders and the public at large. Also
professionals need no longer to visit the officers of ROC and would be able to interact with the
Ministry using MCA 21 portal from their offices or home or going to the facilitation centers
which have been set up. The services of the Ministry of Company Affairs with the introduction
of MCA 221 will be e-form driven. Form filing will be done using freely downloadable software
and it can be done offline. The prerequisite for using the MCA 21 portal will be P-4 computer
with printer, windows 2000 / XP, internet explorer 6.0 version, Adobe Acrobat Reader 7.05
version and digital signature certificate.
To know better about how MCA 21 will function, one need to know about the set up of the
Ministry of Company Affairs
13.1 SET UP OF MCA
MCA has a three tier organizational set-up:
♦ Headquarters at New Delhi
♦ Regional Directors (RD) at Mumbai, Kolkata, Chennai and Noida
♦ Registrar of Companies (RoC) in States and Union Territories
MCA Headquarters handles cases that require approval of the GoI for citizen related functions.
RD supervises the functioning of RoCs and handles the matters delegated by GoI while the
RoC offices handle the bulk of citizen facing functions.
The Official Liquidators (OL) attached to various High Courts functioning in the country are
also under the overall administrative control of the MCA. Its headquarters at Delhi also
includes two Directors of Inspection and Investigation and Director of Research and Statistics.
13.2 MCA 21 PROGRAM

Ministry of Company Affairs (MCA), Government of India (GoI) has initiated MCA 21 program,
for easy and secure access to MCA services in a manner that best suits the businesses and
citizens.
The program goals have been set as follows keeping in mind stakeholders' needs:
♦ Business enabled to register a company and file statutory documents quickly and easily
♦ Public to get easy access to relevant records and effective grievances redressal
♦ Professionals to be able to offer efficient services to their client companies
♦ Financial Institutions to easily find charges registration and verification
♦ Employees to ensure proactive and effective compliance of relevant laws and corporate
governance
MCA 21 is envisioned to provide anytime and anywhere services to businesses. It is a
pioneering program being the first mission mode e-governance project being undertaken in the
country. This program builds on the GoI vision to introduce a Service Oriented Approach in the
design and delivery of Government services, establish a healthy business ecosystem and
make the country globally competitive.
13.3 PROGRAM SCOPE
MCA 21 program will provide for anytime anywhere electronic services with speed and
certainty to all the stakeholders. It will include:
♦ Design and development of application system
♦ Setting up of IT infrastructure
♦ Setting up the Digital Signature/PKI delivery mechanisms and associated security
requirements
♦ Setting up of Physical Front Offices (PFOs)
♦ Setting up of temporary FOs for the peak periods to meet with the requirements and
subsequent shutdown of temporary FOs at the end of such peak periods
♦ Migrating legacy data and digitization of paper documents to the new system
♦ Providing MCA services to all MCA 21 stakeholders in accordance with the Service
Oriented Approach
♦ Providing user training at all levels and all offices (Front and Back Offices)
The MCA 21 is designed to automate processes related to the proactive enforcement and
compliance of the legal requirements under the Companies Act, 1956. However, it does not
include processes related to OL.
13.4 FRONT OFFICE
The implementation of Front Offices (FO) is done in two ways. These can be called as Virtual
Front Office (VFO) and Physical Front Office (PFO).
The VFO is what the citizen has in front while accessing the MCA 21 portal. The PFO will be a
replacement to the existing RoC counters. The PFO will also accept paper documents.
E-Governance 13.3
However, these will be converted into electronic documents by customer service agents
manning PFO. Also, the authorised person(s) will have to sign these documents digitally.
Consequently the authorised signatories for a given document will need to appear in person at
the PFO for the purpose of digitally signing the document.
The user can avail the following services on MCA 21 portal
♦ eFiling
♦ Viewing public document
♦ Requesting certified copies
♦ Registering investor complaint
♦ Tracking transaction status
13.5 BACK OFFICE
The back office is what MCA employee has in front which accessing back office portal. The
back office process relates to:
♦ Dynamic routing of documents that have been electronically filed to the concerned
official within MCA based on the type of service request.
♦ Electronic workflow systems to support speed and certainty in service delivery
♦ Supporting all routine tasks such as registrations and approvals
♦ Storing of all approved documents of companies as part of electronic records, including
provision of access to electronic records for the stakeholders
♦ Enhancing identification of defaulters
♦ Increasing efficiency of Technical Scrutiny
♦ Ensuring close follow-up on matters related to compliance management including
prosecutions
♦ Enabling quicker responses to investor grievances
♦ Providing alerts when the tasks are not carried out within stipulated period
13.6 KEY BENEFITS
MCA 21 seeks to fulfill the requirements of the various stakeholders. The key benefits of MCA
21 project are the back office process relates to:
♦ Expeditious incorporation of companies
♦ Simplified and ease of convenience in filing of Forms/ Returns
♦ Better compliance management
♦ Total transparency through e-Governance
♦ Customer centric approach
♦ Increased usage of professional certificate for ensuring authenticity and reliability of the
Forms / Returns
♦ Building up a centralised database repository of corporate operating
♦ Enhanced service level fulfillment

♦ Inspection of public documents of companies anytime from anywhere
♦ Registration as well as verification of charges anytime from anywhere
♦ Timely redressal of investor grievances
♦ Availability of more time for MCA employees for monitoring and supervision
13.7 SOME FAQ’S ON E-FILING

1. What are the steps for offline eFiling?
1. Select a category to download an eForm from the MyMCA portal (with or with out the
instruction kit.
2. At any time, you can read the related instruction kit to uthorized yourself with the
procedures (you can download the instruction kit with eform or view it under Help menu).
3. You have to fill the downloaded e-Form.
4. You have to attach the necessary documents as attachments.
5. You can use the Prefill button in eForm to populate the greyed out portion by connecting
to the Internet.
6. The applicant or a representative of the applicant needs to sign the document using a
digital signature.
7. You need to click the Check Form button available in the eForm. System will check the
mandatory fields, mandatory attachment(s) and digital signature(s).
8. You need to upload the eForm for pre-scrutiny. The pre-scrutiny service is available
under the Services tab or under the eForms tab by clicking the Upload eForm button.
The system will verify (pre-scrutinise) the documents. In case of any inadequacies, the
user will be asked to rectify the mistakes before getting the document ready for execution
(signature).
9. The system will calculate the fee, including late payment fees based on the due date of
filing, if applicable.
10. Payments will have to be made through appropriate mechanisms – electronic (credit
card, Internet banking) or traditional means (at the bank counter through challan).
(a) Electronic payments can be made at the Virtual Front Office (VFO)or at PFO
(b) If the user selects the traditional payment option, the system will generate 3 copies
of pre-filled challan in the prescribed format. Traditional payments through cash,
cheques can be done at the designated network of banks using the system
generated challan. There will be five banks with estimated 200 branches uthorized
for accepting challan payments.
E-Governance 13.5
11. The payment will be exclusively confirmed for all online (Internet) payment transactions
using payment gateways.
12. Acceptance or rejection of any transaction will be explicitly communicated to the
applicant (including facility to print a receipt for successful transactions).
13. MCA 21 will provide a unique transaction number, the Service Request Number (SRN)
which can be used by the applicant for enquiring the status pertaining to that transaction.
14. Filing will be complete only when the necessary payments are made.
15. In case of a rejection, helpful remedial tips will be provided to the applicant.
16. The applicants will be provided an acknowledgement through e-mail or alternatively they
can check the MCA portal.
2. What are the steps for online eFiling?
1. When the business or the registered users access the MyMCA portal, they enter their
username and authentication details – Password/ Digital Certificate.
2. The user will be shown a list of eForms category-wise under eForms tab .
3. At any time, the users can read the related instruction kit, available under Help menu, to
uthorized themselves with the procedures.
4. The users can then fill the appropriate eForm for the service required. There is an option
of pre-fill facility in the eForms, where the static details such as name and address of the
company will be pre-filled by the system automatically on entering the Corporate Identity
Number (CIN).
5. The users attach the necessary documents to the eForm.
6. The users may avail the pre-scrutiny service of the eForm. The documents will be verified
(pre-scrutinised) by the system. In case of any inadequacies, for example, if a mandatory
column in the eForm is not filled in, the user will be asked to rectify before the document
is ready for execution (signature).
7. The applicant or a representative of the applicant will then submit the duly signed
documents electronically.
8. The system will calculate the fee, including late payment fees, if applicable.
9. Payments will have to be made through appropriate mechanisms – electronic (credit
card, Internet banking) or traditional means (at the bank counter).
(a) Electronic payments can be made at the Virtual Front Office (VFO).
(b) If the user selects the traditional payment option, the system will generate a pre-filled
challan in the prescribed format. Traditional payments through cash, cheques can be
done at the designated network of banks using the system generated challan. There will
be five banks with estimated 200 branches uthorized for accepting challan payments.
10. The payment will be exclusively confirmed for all online (Internet) payment transactions
using payment gateways.
11. Acceptance or rejection of any transaction will be explicitly communicated to the
applicant (including facility to print a receipt for successful transactions).
12. MCA 21 will provide a unique transaction number, which can be used by the applicant for
enquiring status pertaining to that transaction.
13. Filing will be complete only when the necessary payments are made.
14. In case of a rejection, helpful remedial tips will be provided to the applicant.
15. The applicants will be provided an acknowledgement through e-mail or alternatively they
can check the MCA portal.
3. How can I apply for a Company Name?
File eForm1 A by logging in the portal along with a payment of fees of Rs. 500/- and attaching
the digital signature of the applicant proposing to incorporate the company. If proposed name
is not available apply for a fresh name on the same application.
4. Can I apply for a Company Name Online?
Yes, You can avail this service at MCA portal.
5. What is the validity period of the Name approved?
The approved name is valid for a period of 6 months from the date of approval. The Applicant
can renew the name within 6 months by submitting a fresh Name application (Form-1A) along
with the fees of Rs. 500/-, by mentioning that the application is for renewal of the name
already approved. Names inadvertently allowed or which are against the guidelines, which
have subsequently come to the notice, may be withdrawn by the RoC before or after
incorporation of the company.
6. What is the minimum number of directors required to form a company?
Minimum no. of directors for Private Limited Company: Two. For Public Limited Company:
Three.
7. What is the minimum number of subscribers required for registration of a company?
Minimum no. of subscribers for Private Limited Company: Two. For Public Limited Company:
Seven.
8. What is the minimum Paid-up Capital at the time of registration of a company?
The minimum paid up capital for Private Limited Company: Rs. 1,00,000/- For Public Limited
Company: Rs. 5,00,000/- This limit is not applicable to company having licence under section
25.
E-Governance 13.7
9. What are the documents to be filed with RoC every year?

Invariably, the Balance Sheet and Annual Return have to be filed every year. Other
documents such as, Return of Allotment (Form-2), Change of Registered office (Form-18),
Change among the Directors (Form-32), Charges (Form-8, 10, 17, 13)etc., have to be filed
within the due date from the events taking place in the company as per the Companies Act,
1956.
10. How do I find SRN for form 1A filed before MCA 21 project?
You may find SRN by entering NIC issued name approval reference number in the “Name
Approval Reference Number” service available after logging into MyMCA portal.
13.8 DETAILS OF NEW FORMS AND FEES

S. Old Form No. Corresponding Subject Category Modalities
No. revised e-Form No. for fee
computation
(incl.
additional
fees)
1 Form 1 Form 1 Application Company Existing
and Registration Practice of
declaration for levying fee.
incorporation
of a company
2 Form 1A Form 1A Application Company Rs. 500/-
form for Registration/
availability or Change
change of services
name
3 Form 1AA, 1AC Form 1AA Particulars of Informational Existing
person(s) or services Practice of
director(s) or levying fee.
charged or
specified for
the purpose of
clause (f) or
(g) of section
5
4 Form 1AD Form 1AD Application for Approval Rs. 500/-
confirmation services -
by Regional Regional
Director for Director
change of
registered
office of the
company
within the
state from the
jurisdiction of
one Registrar
to the
jurisdiction of
another
Registrar
5 Form 1B (For Form 1B Application for Approval As Per
Conversion of approval of services - Companies
public company the Central Registrar of (Fees On
to private Government companies/ Application)
company) for change of Change Rules, 1968
name or services
conversion of
a public
company into
a private
company
6 Form 2 Form 2 Return of Compliance Existing
allotment related filing Practice of
levying fee.
7 Form 3 Form 3 Particulars of Compliance Existing
contract related filing Practice of
relating to levying fee.
shares allotted
as fully or
partly paid-up
otherwise than
in cash
8 Form 4 Form 4 Statement of Compliance Existing
amount or rate related filing Practice of
percent of the levying fee.
commission
payable in
respect of
shares or
debentures
and the
number of
shares or
debentures for
which persons
have agreed
for a
commission to
subscribe for
absolutely or
E-Governance 13.9
conditionally
9 Form 4C Form 4C Return in Compliance Existing
respect of buy related filing Practice of
back of levying fee.
securities
10 Form 5 Form 5 Notice of Change Existing
consolidation, services Practice of
division, etc. levying fee.
or increase in
share capital
or increase in
number of
members
11 Form 8, 13, 55, Form 8 Particulars for Charge Existing
56, 59 creation or management Practice of
modification of levying fee in
charges (other respect of
than those Form 8
related to
debentures)
12 Form 10, 13, 57, Form 10 Particulars for Charge Existing
59 registration of management Practice of
charges for levying fee in
debentures respect of
Form 10.
13 Form 15, 16, 13 Form 15 Appointment Charge Existing
or cessation of management Practice of
receiver or levying fee in
manager respect of
Form 15.
14 Form 17, 13, 60 Form 17 Particulars for Charge Existing
satisfaction of management Practice of
charges levying fee in
respect of
Form 7/60..
15 Form 18 Form 18 Notice of Company Existing
situation or Registration/ Practice of
change of Change levying fee.
situation of services
registered
office
16 Form 19 Form 19 Declaration of Company Existing
compliance Registration Practice of
with the levying fee.
provisions of
section
149(1)(a), (b)
and (c) of the

Companies
Act, 1956
17 Form 20 Form 20 Declaration of Company One Fee For
compliance Registration Form 20 And
with the another on
provisions of SLP-
section Schedule. III-
149(2)(b) of as per
the existing
Companies practice.
Act,1956
18 Form 20A Form 20A Declaration of Company Existing
compliance Registration Practice of
with the levying fee.
provisions of
section
149(2A) or of
section
149(2B)
19 None Form 20B [Refer Form for filing Compliance As One
Section 159 of the annual return related filing Document
Companies Act, 1956] of a company Filing Fee
having a share
capital
20 Form 21 Form 21 Notice of the Informational Existing
court or the services Practice of
company law levying order
board fee.
21 Form 21A Form 21A Particulars of Compliance Existing
annual return related filing Practice of
for the levying fee.
company not
having share
capital
22 Form 22 Form 22 Statutory Compliance Existing
Report related filing Practice of
levying fee.
23 None Form 22B Form of return Informational Existing
to be filed with services Practice of
the Registrar Form 3 for
fee.
24 Form 23 Form 23 Registration of Informational Existing
resolution(s) services Practice of
and levying fee.
agreement(s)
E-Governance 13.11
25 Form 23AA Form 23AA Notice of Informational Existing

address at services Practice of
which books levying fee.
of account are
maintained
26 None Form 23AAA Application to Approval As per
Central services- Companies (
Government Head Fees on
for Quarters Application
modification in Rules 1999)
the matters to
be stated in
the company’s
balance sheet
or profit and
loss account
27 None Form 23AAB Application for Approval - DO-
exemption services -
from attaching Head
the annual Quarters
accounts of
the subsidiary
companies
28 None Form 23AAC Application to Approval -DO-
Central services-
Government Head
for not Quarters
providing
depreciation
29 None Form 23AC Form for filing Compliance As One
balance sheet, related filing Document
profit and loss Filing Fee
account and
other
documents
with the
Registrar
30 Form 23B Form 23B Information by Compliance Existing
auditor to related filing Practice- No
Registrar Fee
31 Form 23C Form 23C Form of Approval Existing
application to services - Practice of
the Central Head levying fee.
Government Quarters
for
appointment
of cost auditor
32 Form 24 Form 24 Form of Provisions Existing

application to relating to Practice of
the Central managerial levying fee.
Government personnel
for increase in
the number of
directors of
the company
33 Form 24A Form 24A Form for filing Approval Existing
application to services - Practice of
Central Regional levying fee.
Government Director
(Regional
Director)
34 None Form 24AB Form for filing Approval As per
application for services - Companies (
giving loan, Head Fees on
providing Quarters Application
security or Rules 1999)
guarantee in
connection
with a loan
35 Form 24B Form 24B Form of Approval As per
application to services - Existing
the Central Head practice
Government Quarters
for obtaining
prior consent
for holding of
any office or
place of profit
in the
company by
certain
persons
36 Form 25A, 26 Form 25A Form of Provisions As per
application to relating to Existing
the Central managerial practice of
Government personnel levying fee
for approval of on F-25 A
appointment
and
remuneration
or increase in
remuneration
or waive for
excess or over
payment to
E-Governance 13.13
managing or
whole - time
director(s) or
manager
37 Form 25B Form 25B Form of Provisions As per
application to relating to Existing
the Central managerial practice
Government personnel
for approval to
amendment of
provisions
relating to
managing,
whole - time or
non -
rotational
directors
38 Form 25C Form 25C Return of Compliance Existing
appointment related filing Practice of
of managing levying fee.
director or
whole - time
director or
manager
39 Form 32, 29 Form 32 Particulars of Company Existing
appointment Registration/ Practice of
of managing Change levying fee.
director, services
directors,
manager and
secretary and
the changes
among them
or consent of
candidate to
act as a
managing
director or
director or
manager r
secretary of a
company and/
or undertaking
to take and
pay for
qualification
shares
40 None Form 32 Addendum Particulars of Company No fee
appointment Registration/ applicable

of managing Change
director, services
directors,
manager and
secretary and
the changes
among them
or consent of
candidate to
act as a
managing
director or
director or
manager o
secretary of a
company and/
or undertaking
to take and
pay for
qualification
shares -
addendum to
Form 32.
41 Form 35A Form 35A Information to Informational Existing
be furnished in services Practice of
relation to any levying fee.
offer of a
scheme or
contract
involving the
transfer of
shares or any
class of sares
in the
transferor
company to
the transferee
42 Form 36 Form 36 Receiver_s or Charge Existing
manager_s Management Practice of
abstract of levying fee.
receipt and
payments
43 Form 37, 38 Form 37 Application by Company Existing
an existing Registration Practice of
joint stock levying fee.
company or by
an existing
E-Governance 13.15
company (not
being a joint
stock
company) for
registration as
a public
limited or
private limited
or an unlimited
company
44 Form 39, 40, 41, Form 39 Registration of Company Existing
42 an existing Registration Practice of
company as a levying fee.
limited
company
45 Form 44 Form 44 Documents Company Existing
delivered for Registration Practice of
registration by levying fee
a foreign
company
46 Form 49 Form 49 Return of Change Existing
alteration in services Practice of
the charter, levying fee
statute or
memorandum
and articles of
association,
address of the
registered or
principal office
and directors
and secretary
of a foreign
company
47 Form 52 Form 52 Notice of (A) Change Existing
alteration in services Practice of
names and levying fee
addresses of
persons
resident in
India
authorized to
accept service
on behalf of a
foreign
company (B)
alteration in
the address of
principal place
of business in
India of a
foreign
company (C)
list of places
of business
established by
a foreign
company (D)
cessation to
have a place
of business in
India
48 None Form 61 Form for filing Approval Application
an application services - Fee As per
with Registrar Registrar of Companies (
of Companies companies Fees On
Application)
Rules 1968.
49 Form 4A, Return Form 62 Form for Compliance Each event
of Deposits, submission of related filing as separate
Liquidation forms documents document &
(Voluntary), with the separate
Compliance Registrar Filing Fee as
Certificate form Existing
Practice
50 None Form 63 Form for filing Approval As per
application for services - Central
declaration as Head Government
Nidhi company Quarters Rules
51 None Form 64 Form for filing Approval As per
application for services - Central
opening Regional Government
branch(s) by a Director Rules
nidhi company
52 Application as Form 65 Form for filing Approval As per the
prescribed under application or services - present
Companies documents Head practice of
with Central Quarters levying fee in
Government regard to the
form
attached.
(Application for Extension of Time or Exemption under Sub - section (8) of Section 58A) Rules,
1979. For other application None
53 Form II [Pursuant Form II [Pursuant to Form of Approval Existing
to Rule 2 of the Rule 2 of the application for services - Practice of
E-Governance 13.17
Companies Companies approval of Head levying fee

(Appointment of (Appointment of Sole the Central Quarters
Sole Agents) Rules Agents) Rules, 1975] Government
for the
appointment
of sole buying
agent by a
company
54 Form DD - B Form DD - B Return by a Compliance Existing
[Pursuant to [Pursuant to section public related filing Practice of
section 274(1)(g) 274(1)(g) read with company levying fee
read with rule 5 of rule 5 of Companies
Companies (Disqualification of
(Disqualification of Directors under
Directors under section 274(1)(g) of
section 274(1)(g) of the Companies Act,
the Companies Act, 1956) Rules, 2001]
1956) Rules, 2001]
55 Form I [Pursuant to Form I [Pursuant to Form of Approval Existing
Rule 2 of the Rule 2 of the application for services - Practice of
Companies Companies approval of Head levying fee
(Appointment of (Appointment of Sole the Central Quarters
Sole Agents) Rules Agents) Rules, 1975] Government
for the
appointment
of sole selling
agents by the
company
56 None Form DD - C Form of Provisions As per fee on
[Pursuant to section application for relating to application
274 read with removal of managerial Rules
Companies disqualification personnel
(Disqualification of of directors
Directors under
section 274(1)(g) of
the Companies Act,
1956) Rules, 2001]
57 None Form [Pursuant to the Form of Approval As per fees
Companies application for services - on
(Declaration of approval for Head application
Dividend out of declaration of Quarters Rules.
Reserve) Rule 1975 dividend out of
for approval for reserves
Declaration of Reserves)
Dividend of Reserve Rules, 1975]
Rules, 1975
58 Part II - Form Form [Pursuant to Form of Compliance Existing
[Pursuant to section 159 of the annual return related filing Practice of
section 159 of the Companies Act, 1956 of a foreign levying fee

Companies Act, and rule 3 of company
1956 and rule 3 of Application of section having a share
Application of 159 to Foreign capital
section 159 to Companies Rules,
Foreign Companies 1975]
Rules, 1975]
59 Form 1 [Pursuant Form 1 [Pursuant to Statement of Compliance Existing
to Rule amounts related filing Practice of
credited to levying fee
investor
education and
protection
fund
Rule 3 of Investor Education and Protection Fund 3 of Investor Education and Protection Fund
(Awareness and Protection of Investors) Rules (Awareness and Protection of Investors)
Rules, 2001]
60 Cost Audit Report Form [Pursuant to Form for filing Compliance Existing
section 233B(4), cost audit related filing Practice of
600(3)(b) of the report and levying fee
Companies Act, 1956 other
and rule 2(c) and rule documents
4 of the Cost Audit with the
(Report) Rules, 2001] Central
Government
61 None Investor Complaint Investor Investor No fee
Form Complaint services
Form
14
(N) OTHER RELEVANT MISCELLANEOUS
PROVISIONS OF THE COMPANIES ACT, 1956
14.0 APPLICATION OF THE COMPANIES ACT, 1956 TO COMPANIES FORMED OR

REGISTERED UNDER PREVIOUS COMPANIES ACT
(1) The provisions of the Act of 1956 shall apply to all companies whether limited by
shares or by guarantee or unlimited which were formed and Registered under any of
the previous Indian Companies Acts and were in existence on 1st April, 1956. But
Table A of Schedule I shall not apply to a company registered of under the Acts of
1857, 1860, 1868 and 1882. The date of registration of such companies will be the
actual date on which they were incorporated (Section 561).
(2) The Act of 1956 shall apply to every company registered but not formed under any
previous companies law, e.g. formed under a Deed of settlement but registered under
any of the Companies Acts. This application shall be in the same manner as the
provisions of Part IX i.e. Sections 565 to 581 to be discussed later on, of the 1956 Act
have been made applicable to companies registered but not formed under this Act
(Section 562). Date of registration of companies will be the actual date on which they
were incorporated.
(3) The Act of 1956 shall apply to every unlimited company registered as a limited
company in pursuance, of any previous Company Law, in the same manner as it
applies to an unlimited company. However, the date of registration of such companies
will be the actual date on which they were incorporated (Section 563).
(4) Transfer of shares of the companies registered under the Act of 1857 and/or the Act
of 1860 will be in accordance with the practice existing in these companies or in the
manner as the general meeting may direct [Section 564].
14.1 COMPANIES AUTHORISED TO REGISTER UNDER THE ACT

♦ Companies capable of being registered (Section 565): Barring certain exceptions,
any company consisting of 7 or more members, formed by an Act of the U.K.

Parliament or Letters Patent in force in India or according to any law in India for other
than the Companies Act, 1956, may be registered under the Companies Act, 1956 as
a company limited by shares, limited by guarantees or as an unlimited company. Such
registration shall not be invalid by reason only that it has taken place with a view to
the company’s being wound up.
The exceptions referred above are:
(i) a company registered under Indian Companies Act 1882 or 1913;
(ii) a limited liability company formed by any Act of India or Act of the UK not being a joint
stock company;
(iii) a limited liability company formed under any of the previous Act as an unlimited
company or as a company limited by guarantee;
(iv) a company that is not registered as a joint stock company as defined in Section 566
under any of the previous Acts. That is to say, these companies are not registered
under this Act.
As regards the procedure for registration in pursuance of this Section, a resolution passed
by a majority in person, or where proxy allows proxies, at a general meeting summoned
for the purpose is a condition precedent to registration. It is not the majority of those
voting but the majority of those present. Where an unlimited company is about to register
as a limited company, a resolution has to be passed by 75% of the members present (not
75% of the voting) before the company can be registered. Where a company is about to
register itself as a company limited by guarantee, the assent to its being so registered
shall be accompanied by a resolution declaring that each member undertakes to
contribute a specified amount, in case the company goes into liquidation. In computing the
said majority at the meeting, when a poll is demanded, regard must be had to the number
of votes to which each member is entitled according to the regulations of the company.
♦ Definition of “joint stock company” (Section 566): For the purposes of Part IX of
the Act, a joint stock company means a company having:
(a) a permanent paid-up or nominal share capital of a fixed amount,
(b) divided into shares also of fixed amount or held and transferable as stock, or
(c) divided and held partly in shares and partly in stocks and
(d) the members are the holders of these shares or stocks.
When such a company is registered under the Companies Act, 1956, then it shall be
deemed to be a company limited by shares.
♦ Requirements for registration of joint-stock companies (Section 567): Prior to the
registration of a joint-stock company (under Part IX), the following documents have to
Some Relevant Miscellaneous Provisions of the Companies Act, 1956 14.3
be delivered to the Registrar:

(a) a list of names, addresses and occupations of all persons who on a day named
in the list (not being more than 6 clear days before the day of registration) were
members of the company. The list also embodies the shares or stock held by
them respectively, distinguishing, in cases where the shares are numbered,
each share by its member.
(b) a copy of any Act of Parliament or other Indian Law, Act of Parliament of the
U.K., Royal Charter, Letters Patent, Deed of Settlement, Deed of Partnership or
other instrument constituting or regulating the company; and
(c) if the company is intended to be registered as limited company, a statement
specifying such particulars as:
(i) the nominal share capital of the company and the number of shares into
which it is divided or the amount of stock of which it consists,
(ii) the number of shares taken and the amount paid on each share,
(iii) the name of the company with the addition of the word “Limited” or
“Private Limited” as the last word or words; and
(iv) in the case of a company intended to be registered as a company limited
by guarantee, a copy of the resolution declaring the amount of the
guarantee.
The application to the Registrar of Companies should be in Form 37. The list of
numbers should be in Form No. 39. Particulars of capital should be in Form No. 40.
♦ Requirements for registration of companies not being joint-stock companies
(Section 568): This section lays down the procedure for registration of companies
other than joint-stock companies. Prior to registration, the following documents have
to be delivered to the Registrar, namely (i) a list showing the names, addresses and
occupation of the directors, and the manager, if any; (ii) a copy of any Act of
Parliament or other Indian Laws, Acts of the U.K. Parliament, Letters Patent, Deed of
Settlement, Deed of Partnership or other instrument constituting or regulating the
company; and (iii) in the case of a company intended to be registered as a company
limited by guarantee, a copy of the resolution declaring the amount of the guarantee.
The application for the registration of companies should be in Form No. 38 and the
particulars of directors or managers or secretaries etc. in Form No. 42.
♦ Authentication of statements of existing companies (Section 569): The
documents to be filed with the Registrar of Companies (mentioned above) have got to
verify by the declaration of at least 2 directors or other principal officers of the
company.
♦ Power of the Registrar to require evidence as to nature of the company (Section

570): The Registrar has the discretion to call for such evidence as he thinks
necessary for the purpose of satisfying himself, whether any company proposing to be
registered is or is not a joint-stock company within the meaning of Section 566.
The Registrar has the discretion to refuse registration of a company, but he must not
exercise this discretion arbitrarily. Against refusal by the Registrar, an application
under Article 226 of the Constitution would lie in the High Court.
♦ Change of name for purposes of registration (Section 572): It is open to the
Registrar of Companies to refuse registration of a company if its name is undesirable.
In such a situation, the company may, with the approval of the Central Government
signified in writing, change its name with effect from the date of its registration (under
Part IX). However, for changing the name as aforesaid, a resolution has to be passed
at a meeting of the members comprising the same. The passage of such resolution
must be by a majority as specified in Section 5614.
♦ Addition of “Limited” or “Private Limited” to name: Under Section 573, on
registration (under Part IX), every company must have the word “Limited” or “Private
Limited”, in its name. However, such a company may obtain a license under Section
25 for the omission of the word “Limited” or “Private Limited”.
♦ Certificate of Registration of existing companies (Section 574): On compliance
with the requirements as to registration and on payment of such fees (if any) as are
payable under Schedule X, the Registrar shall issue a certificate of incorporation.
According to Section 35, the issue of the said certificate is conclusive evidence that
all the requirements of the Act have been complied with and the company is duly
registered.
♦ Vesting of property on registration: In terms of Section 575, on registration of a
company under this Act, all movable and immovable properties (including actionable
claims) of the old company automatically vest in the new company. It has been held
that no separate conveyance or deed is necessary in this regard.
Section 576, which is supplementary to Section 575, provides that rights and liabilities
in respect of any debt or obligation incurred or contracts entered into by the old
company shall automatically stand transferred to and vested in or against the new
company without being affected in any way.
♦ Continuation of pending legal proceedings: By virtue of Section 577, any suits or
legal proceedings pending on the date of registration against the company or any
public officer or member of the company any continue as before even after
registration, without amending the pleadings. But in practice, the pleadings are
amended to bring the altered situation on record.
A decree obtained in any such proceeding shall not be executed against any
individual member; it may be realised from the company and in default the company
may be wound up.
♦ Effect of registration under Part IX (Section 578): When a company is registered
under this Part, some of the provisions of its constitution shall be treated as contained
in a registered memorandum: the rest of the provisions would be deemed to be
contained in the registered articles. These provisions may be contained in any Act of
Parliament: in any Indian law or any instrument constituting or regulating this
company or in any resolution of such a company. On registration, those conditions,
which are, in all propriety, to be deemed to be in the memorandum can be altered in
the same manner as a condition in the memorandum can be altered in the case of
company incorporated under this Act. As regards the residue provisions, they will be
treated, as having been incorporated in the articles and alteration of any such
provision shall be governed by the provisions for alteration of articles of a company
incorporated under this Act.
All the provisions of this Act shall apply to the company, its member’s contributories and
creditors thereof, in the same manner in all respects as if it has been formed under this
Act. But there are certain exceptions to the rule, which are as follows:
(i) Table A in Schedule I shall not apply unless and except in so for as it is adopted by
special resolution.
(ii) The provisions of the Act relating to numbering of shares shall not apply to any joint-
stock company whose shares are not numbered.
(iii) The company shall not have power to alter any provisions contained in any Act of
Parliament or other Indian Law relating to the company except to the extent permitted
by Section 578.
(iv) Except permitted by this Section, the company shall not have power, without the
sanction of the Central Government, to alter any provision contained in U.K., Royal
Charter or Letters Patent, relating to the company.
(v) The company cannot alter its objects if contained in any Act of Parliament or other
Indian Law or in any Act of the U.K., Parliament, Royal Charter or Letters Patent.
(vi) Every person who would have been liable to pay the company’s debt and liabilities
and to contribute for adjustment of rights among the members before registration
under the Companies Act, 1956, shall also be liable to the same extent in the event of
the company being wound up. The legal representative of a deceased contributory will
also be liable in respect of the liability of the contributory.
The provisions of this Act with respect to (i) registration of an unlimited company as
limited company and on such registration (ii) the power to increase the nominal amount of
share capital (iii) the power of a limited company to determine that a portion of its share
capital shall not be capable of being called up except in the event of winding-up, will have
the effect even though there are restrictions in any other Act or instrument constituting or
regulating the company.
Any provision contained in any Act or instrument constituting or regulating the company
which would have been required to be contained in the memorandum and could not have
been altered by the company, if the company had originally been formed under this Act,
then, on registration, such provisions cannot also be altered.
It may be noted that the expression “instrument” includes Deed of Settlement, Deed of
Partnership, Act of U.K., Parliament, Royal Charter and Letters Patent.
♦ Power to substitute Memorandum and Articles for Deed of Settlement (Section
579): A company registered in pursuance of Part IX may by a special resolution, alter
the form of its constitution, memorandum or articles for a deed of settlement (i.e., any
Deed of Partnership, Act of U.K., Parliament, Royal Charter and Letters Patent or
other instrument constituting or regulating the company. But the term does not include
any Indian Act).
The provisions of Sections 17, 18 and 19 regarding alteration of the objects, shall so
far as applicable apply to any alteration under this Section with the following
modifications:
(a) There shall be substituted for the printed copy of the altered memorandum
required to be filed with the Registrar a printed copy of the substituted
memorandum and articles; and
(b) on the registration of the alteration being certified by the Registrar, the
substituted memorandum and articles shall apply to the company in the same
manner, as if it were a company registered under this Act with that
memorandum and those articles, and company’s deed of settlement shall cease
to apply to the company.
♦ Power of Court to stay or restrain proceedings (Section 580): After the

presentation of a petition for winding-up but before the order of winding-up is made,
the Court may, on an application made under Section 442, stay any suit or legal
proceedings already pending and may restrain any person from filing a suit or taking
legal proceedings against the company. Under Section 580, the same jurisdiction of
the Court may be exercised.
The company, a contributory and a creditor may apply for stay of any suit or legal
proceedings against the company. A suit or legal proceedings pending against a
contributory, who might have been previously personally liable for company’s debts,
can be stayed only on the application of the creditor Section 586 [discussion in
Chapter 9] makes a similar provision in respect of unregistered companies.
N.B: (i) Section 422 applies to companies within the meaning of the Companies Act,
1956.
(ii) Section 580 applies to companies not incorporated under this Act but are allowed
to be registered under the Act.
(iii) Section 586 can be invoked when an Indian Court is winding-up an “unregistered
company” including a foreign company.
♦ Suits stayed on winding-up order (Section 581): The provisions of this Section are
similar to those of Section 446. No person can file or proceed with any suit or legal
proceeding against the company or any contributory of the company except by leave
of the court. This provision applies when a winding up order has been made or a
provisional liquidator has been appointed and the company is registered under Part IX
of the Act.
14.2 GUARANTEE COMPANY

It is a company, which has two features in common with other companies. These are:
(i) The company has a legal personality;
(ii) The liability of the members is limited. In the case of a company having share capital,
it is limited by the nominal amount of shares held by each member and in case of a
company not having share capital, by amounts of guarantees undertaken by the
members, i.e., the amounts they shall contribute in the event of the company being
wound up, for repayment of its debts.
It is a convenient form of organisation for associations such as clubs, chambers of
commerce, trade associations, societies set-up for carrying on charitable work, made
under Section 25 may be permitted by the Government not to have the word or words
“Private Limited” or “Limited” as a part of its name.
The advantage of guarantee company is as follows:
(i) It becomes a separate entity and can own property, enter into contracts, sue or be
sued in regard to its contracts and transactions, etc.
(ii) In respect of the transactions of the company, no personal liability is incurred by the
members of the company or its Board of directors or Committee of the management. If
at all, their liability arises only on winding up.
The form of memorandum and articles of association of a guarantee company not having
a share capital as well as of a guarantee company having a share capital are contained-in
Tables C & D of Schedule I respectively. They may adopt these forms either in toto or as
near thereto as the circumstances warrant (Section 29). According to the proviso to
Section29 nothing shall be deemed to prevent a company from including any additional
matters in its articles in so for as they are not inconsistent with the provisions contained in
the Form in any of the Tables C & D adopted by the company.
Whereas a company having a share capital can, according to Section 125, create a
charge on its uncalled capital, a guarantee company cannot create a charge on the
amount, which can be called up from its members only in the event of winding up [Re Irish
Club Co. (1953) W.N. 127].
A guarantee company having a share capital may issue redeemable preference shares if
authorised by its articles (Section 80); also share warrants to bearer if authorised by the
articles but with the previous approval of the Central Government (Section 114).
As in the case of any other limited company, the memorandum of a guarantee company, if
it has a share capital, must also contain the amount of the share capital with which the
company proposes to be registered and division thereof into shares of a fixed amount
[Section 13(4)].
It is incumbent upon a guarantee company to register its articles along with the
memorandum (Section 26). If it has share capital it may adopt Table D. Its articles must
state the number of member with which it is proposed to be registered [Section 27(2)]. It is
an index to the creditors of the company as regards the amount of guarantee on which
they can rely as a security. If the number of members is increased, a notice of the
increase is given to the Registrar within 30 days after the passing of resolution authorising
the increase (Section 97).
By construction of Section 165(1), a guarantee company, not having a share capital need
not hold statutory meeting or forward the statutory report to the members. It is obligatory
on the part of a guarantee company to keep a register of members and a register and
index of debenture holders (Sections 150 & 151), a register of directors etc. (Section 303)
as well as a register of charges (Section 125). It must give notice to the Registrar of
special resolution passed by the company (Section 192).
The forms of an annual return to be filed by a company not having a share capital and that
to be filed by a company having a share capital differ in certain respects; the particulars
thereof are contained in Sections 159 and 160.
In the case of a company not having a share capital, an extraordinary general meeting
can be convened on the requisition of members not having less than one-tenth of the total
voting power of all the members, who have the right to vote at a general meeting. If on the
other hand, the guarantee company has been formed with a share capital, the requisition
must be made by such of the requisitionists as represent either a majority in value of the
paid-up share capital held by all of them or not less than 1/10 of the paid-up capital
carrying the right to vote at the general meeting [Section 169(4)].
Section 37 prohibits a guarantee company not having a share capital and registered on or
after 1.4.1914 from giving any person a right to participate in the divisible profits of the
company otherwise than as a member. For the purpose any provision in the articles or
memorandum or in any resolution of a company purporting to divide the undertaking into
shares or interest will be treated as a provision for a share capital notwithstanding that the
nominal amount or the number of shares or interests is not specified thereby.
For investigation of the affairs of the guarantee company not having a share capital, the
application must be made to the Central Government by not less than 1/5th of the persons
on the Company’s register of members [Section 235(2)(b)]. In the case of guarantee
company having a share capital for the same purpose, the application must be made by
not less than 200 members or by members holding not less than 1/10th of the total voting
power [Section 235(2)(a)].
The restrictions on the appointment or advertisement of directors do not apply to a

guarantee company not having a share capital (Section 266). The provisions of Sections
171, 176 and 188 also are related to such companies.
14.3 GOVERNMENT COMPANIES

Section 617 of the Act defines a Government company as any company in which, not less
than fifty-one percent of the paid-up capital is held by the Central Government and partly
by any State Government or Government or partly by the Central Government and partly
by one or more State Governments. It also includes a company, which is a subsidiary of a
Government company as thus defined.
♦ Audit of Government Companies: Under Section 619(2), the auditor of a
Government company shall be appointed or re-appointed by the Central Government
on the advice of the Comptroller and Auditor General of India. Even when the
Government holding is only State Government or Governments, the Central
Government will appoint the auditor.
You have read in connection with Sections 224(1B) & (1C) in one of your Study
papers in Auditing: (i) that on or from the financial year next to following the
commencement of Companies (Amendment) Act, 1974, the appointment or re-
appointment of any person or firm as auditor of a company is legally banned, if he or
it is already holding the audit of either 20 companies, each of which has a paid-up
share capital of less than 25 lakhs or maximum 10 companies each of which has a
paid-up share capital of Rs. 25 lakhs or more or plus 10 other companies, each of
which having a paid-up share capital of not less than Rs. 25 lakhs (in all the numbers
being 20 in this case as well); and (ii) that is the number of such holding of company
audit exceeds the aforesaid limit of 20 companies immediately before the
commencement of the Amendment Act of 1974, the person or the firm concerned must
intimate to the concerned company or companies his or its unwillingness to be re-

appointed as auditor from the financial year next following the commencement of the
Amendment Act, within 60 days from the commencement; also he or it must
simultaneously intimate the Registrar the names of the companies of which he or it
willing to be re-appointed as the auditor and forward a copy of the intimation of such
companies.
According to the proviso newly added to Section 619(2) of the Act by the Companies
Amendment Act of 1974 the aforesaid limits also apply in relation to the appointment
or reappointment of an auditor of a Government Company by the Central Government
on the advice of the Comptroller and Auditor-General of India.
The Comptroller and Auditor-General of India has power to direct the manner in which
the accounts of Government companies are to be audited and to issue instructions to
the auditor in regard to any matter relating to the performance of his duties and
functions (Guru Gobinda Basu vs. Sankari Parasad Ghosal I.S.C.J.). The Comptroller
and Auditor General is empowered to conduct a supplementary or test audit of the
company’s accounts through any person or persons whom he may authorise for the
purpose of such audit the C. & A.G., may require information or additional information
to be furnished to any person or persons so authorised on any matter generally or
specially directed for.
The auditor of Government company must submit a copy of his report to the
Comptroller and Auditor General who has the right to either comment on or
supplement the audit report in a manner he thinks fit. Thereafter, the audit report shall
be placed before the annual general meeting of the company at the same time and in
the same manner as the audit report.
The aforementioned provisions relating to audit also are applicable if the Government
subsequently acquires 51% or more of the share capital in a company which
previously was formed by private enterprise and the shares of which had been
subscribed for by the public and the promoters in the first instance.
♦ Annual Report on Government Companies (Section 619A): The Central
Government, where it is a member of a Government company, shall cause an annual
report on the working and affairs of that company to be prepared within 3 months of
its annual general meeting whereas, the audit report is placed under Section 619(5).
As soon as this annual report is prepared the Central Government shall also cause to
be laid before both Houses of Parliament together with the copy of the audit report
and comments on, or supplement to the audit report made by the Comptroller and
Auditor General.
Where, in addition to the Central Government, any State Government is also member
of the Government company, that State Government shall cause a copy of the annual
report (prepared as aforementioned) to be placed before the House or both Houses of

the State Legislature, together with a copy of the audit report and the comments
thereon or supplement thereto.
Where the Central Government is not a member of a Government company, every
State Government which is a member of that company, or where only one State
Government is a member of the company that State Government shall cause an
annual report on the working and affairs of the company to be prepared within the
time mentioned above. As soon as the annual report is prepared, the State
Government concerned must cause it to be laid before the House or both Houses of
the State Legislature with a copy of the audit report and comments or supplement
referred to above.
The provisions of this section shall so far as may be apply to a Government company
in liquidation as they apply to any other Government [Section 619A(4) as added by
the Companies (Amendment) Act, 1988].
♦ Provisions of Section 619 of apply to certain companies: These provisions shall
apply to a company in which not less than 51% (impliedly, may be more) of the paid
up share capital is held by one or more of the following or any combination thereof, as
if it were a Government company: (a) the Central Government and one or more
Government companies (b) and State Government(s) and one or more Government
companies; (c) the Central Government, one or more State Governments and one or
more Government companies; (d)the Central Government and one or more
corporations owned or controlled by the Central Government; (e) the Central
Government, one or more State Governments and one or more corporations owned
and controlled by the Central Government; (f) one or more corporations owned or
controlled by the Central Government or the State Government; (g) more that one
Government company [Section 619B inserted by the 1974 Amendment Act].
♦ Application of the Act to Insurance, Banking, Electricity Supply and other
companies governed by the Special Acts: The provisions of the Companies Act
shall apply (a) to insurance companies, except in so far as the said provisions are
inconsistent with the provisions of the Insurance Act, 1938; (b) to banking companies,
except in so far as the said provisions are inconsistent with the provisions of the
Banking Regulation Act, 1949; (c) to 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 (Supply) Act,; (d) to any other company governed by any
special Acts, for the time being in force except in so far as the said provisions are
inconsistent with the provisions of such special Acts; and (e) to such body corporate
incorporated by any Act for the time being in force as the Central Government may, by
notification in the Official Gazette specify in this behalf, subject to such exceptions
modifications or adaptations as may be specified in the notification [Section 616(a) to
(e) – the last clause viz., (e) being added to the Section by the 1974 Amendment Act].
♦ Power of the Central Government to modify the Act relating to Government
Companies (Section 620): The Central Government may, by notification in the
Official Gazette, direct that any of the provisions of the Act, (with the exceptions of
Sections 618, 619 and 619A) either shall not at all, or shall, subject to such
exceptions, modifications and adaptations as maybe specified, apply to a Government
company.
But the power of the Central Government aforementioned is not an unfettered one; it
is subject to the control of Parliament. A copy of every notification proposed to be
issued under sub-section (1), shall be laid in draft before each House of Parliament,
while it is in session, for a total period of thirty days which may be comprised in one
session, or two or more successive sessions, and if, before the expiry of the session
immediately following the session or the successive sessions aforesaid, both Houses
agree in disapproving the issue of the notification or both Houses agree in making any
modifications in the notification, the notification shall not be issued or, as the case
may be, shall be issued only in such modified form as may be agreed upon by both
the Houses. (As amended from 24.12.77).
♦ Government Company not a Public Body or Public Authority: The mere fact that
company is wholly Government owned does not clothe it with the character of a
“Public body’ or ‘Public authority’. Therefore, it cannot exercise any authority as a
public body; it does not become, and cannot be regarded as a public body (Lakshmi
vs. Neyveli Lignite Corporation Ltd. 1966, 6 Comp. Cas. 197). It was held in that case
that where an employee was placed under a suspension on the basis of a
departmental enquiry conducted by the employee of a defendant Corporation, it was
not feasible for such an employee to apply for a writ of certiorari against the
Corporation, in as much as such a Corporation is not a public authority and
proceedings, thus, were only a domestic tribunal of a private body. As such, this could
not be challenged under Article 226 of the Constitution of India.
14.4 PROVISIONS FOR REMOVAL OF ADMINISTRATIVE DIFFICULTIES

1. Protection of acts done in good faith: No suit, prosecution or other legal
proceedings shall lie against the Government or any officer thereof or any other
person in respect of anything which is done in good faith or is intended to be done in
pursuance of the Act or any rules or orders made thereunder, or in respect of the
publication by or under the authority of the Government or such officer of any report,
paper or proceedings. The objective of such a protection is to indemnify persons
acting in good faith, pursuant to the Act, who may not be Government officers and in
respect of publication made by or under the authority of Government or such officers
of such report, paper or proceeding (Section 635A).
2. Exemption from disclosure of information in certain cases (Section 635AA): The

Registrar, any officer of the Government or any other person cannot be forced under
any circumstances to disclose to any Court or other authority when he got any
information which has led the Central Government to direct a special audit under
Section 233A or to order an investigation under Sections 235, 237, 247, 248 or 249 or
which is or has been material or relevant in connection with such special audit or
investigation.
It is a provision intended to ensure that the flow of information is not obstructed by the
identify of the sources being revealed.
3. Power of the Central Government or Company Law Board to accord approval on
application, etc. subject to conditions and payment of prescribed fees (Section
637A): When the Central Government or Company Law Board is required or
authorised by any provision of the Act (i) to accord approval, sanction, confirmation or
recognition to any matter, or (ii) to give any direction in relation to any matter, or (iii)
to grant exemption in relation to any matter, then the Government or Company Law
Board may in the absence of anything to the contrary contained in such or any other
Provisions of the Act, do so, subject to such conditions and limitations as it may think
fit to impose. If however, such conditions and limitations are contravened, the Central
Government or the Company Law Board may rescind or withdraw them.
Every application made for any of the aforesaid purposes must be accompanied by
such fee not exceeding Rs. 500 as may be prescribed. The Government and the
Company Law Board are authorised to prescribe fees for application in respect of
different matters or in the case of applications made by companies for applications by
different classes of companies.
All the aforementioned powers are contingent in the sense that the Central
Government can exercise them only if these are required under any Provisions of the
Act for according approval, etc., to or in relation to the matter at hand. Unless such an
authority exists, these powers cannot be exercised. For instance, information as
regards income received by director from other companies and the earning of the
members of his family are not matters considered relevant for the purpose of inquiry
against a company. The Government thus cannot authorise their collection. [Canara
Workshops Ltd. vs. The Union of India (1966) 36 Comp. Cas. 63]. Unconditional
orders cannot be rescinded, since those do not fall within the purview of Section
637A. [Nava Samaj Ltd. vs. Registrar of Companies (1965) 1 Comp. L.J 339].
4. Power of Central Government to fix a limit with regard to remuneration:
According to Section 637AA the Central Government may while according its approval
to any appointment or re-appointment of managing or whole-time director under

Section 269 or to any appointment or to any remuneration under Section 309 or
Section 310 or Section 387 fix the remuneration of the person so appointed or the
remuneration, as the case may be, within the limits specified in this Act at such
amount or percentage of profits of the company, as it may deem fit. But while fixing
this remuneration, the Central Government shall have to take into account the
following factors, (a) the financial position of the company, (b) the remuneration or
commission drawn by the individual concerned in any other capacity, including his
capacity as a sole selling agent, (c) the remuneration or commission drawn by him
from any other company, (d) professional qualifications and experience of the
individual concerned, (e) public policy relating to the removal of disparities in income.
14. Power to condone delays: The Central Government may condone the delay in filing
a document for reasons to be recorded in writing. For example, delay in the case of
failure to make application or file document required to be made to or filed with the
Government or with the Registrar (Section 637B).
6. Composition of certain offences: Section 621A inserted by the Companies
(Amendment) Act, 1988 provides that notwithstanding anything contained in the Code
of Criminal Procedure, 1973 any offence punishable under this act, not being an
offence punishable with imprisonment only, or with imprisonment and also with fine
may, either before or after the institution of any prosecution be compounded by (i) the
Company Law Board (ii) the Regional Director, where the fine imposed for such
offence does not exceed Rs. 5,000 on payment or credit of such sum, as may be
specified.
7. Jurisdiction to try offences: An offence against the Act shall be tried at least by the
Court of Presidency Magistrate or a magistrate of the First Class (Section 622).
In as much as a company is judicial person, it can be prosecuted like any other
individual also it can be convicted and fined, if it is found guilty. Suppose an offence
is punishable under the Act only by fine and nothing else. In such a situation, if the
offence were committed within Presidency town, it would be punishable upon
summary conviction by any Presidency Magistrate of that town (Section 623).
8. Compensation in the case of frivolous and vexations prosecution: For the
institution of frivolous and vexatious prosecution against a company or an officer
thereof by a share holder, he may be ordered by the trying Magistrate to pay to the
aggrieved party by way of compensation an amount not exceeding Rs. 1,000. In case
of default in payment of the said amount the shareholder may be ordered to undergo
a simple imprisonment for a maximum period of two months. The shareholder,
however, shall have the right to appeal against such order (Section 625).
9. Power of the Central Government to alter Table and Forms in the Schedules
except Schedules XI & XII and to alter or amend the forms: The power of the
Central Government in this regard is limited only by the provision that the alterations
made must be first published in the official Gazette. Only after notification, the
alterations become effective. Moreover, every such alteration must be laid before
each House of Parliament (Section 641).
10. Companies not entitled to fundamental rights under the Constitution: A company
not being a citizen, no petition under Article 32 or 226 of Constitution can be
entertained for any infraction of any fundamental right of citizen of India, which the
company claims. The doctrine of piercing the veil of the Corporation does not apply to
such a case. As a result, it cannot be argued that it is in fact the shareholders, but not
the company, who have moved the Court under Article 32. A company cannot be
indirectly allowed by relying on the doctrine of lifting the veil to achieve a thing, which
it cannot directly do. [Tata Engineering and Locomotive Co. Ltd. vs. The State of
Bihar (1964) I.S.C.J. 666; State Trading Corporation of India Ltd. vs. Commercial Tax
Officer, 1963, 2 S.C.J. 605].
11. Power of the Central Government to appoint Company Prosecutors and to
appeal against orders of acquittal: For the conduct of prosecution arising in the
administration of the Act, the Central Government may appoint generally or in any
case or for any specified class of cases in any local area, one or more persons as
company prosecutors. Such prosecutors will have the same powers and privileges as
those enjoyed by public prosecutors under the *Code of Criminal Procedure, 1898
(Section 624A).
The Central Government also may direct any company prosecutor appointed in the
circumstances aforementioned or authorise any other person either by name or by
virtue of his office, to present an appeal from an order of acquittal passed by any
Court other than a High Court. Such an appeal will be deemed to have been validly
presented to the Appellate Court (Section 624B).
14.5 POWERS OF THE CENTRAL GOVERNMENT

Under the Act, extensive and wide powers have been vested in the Central Government in
regard to several matters. As such, the success of the joint stock enterprise largely
depends upon how the Central Government performs its administrative functions. These
powers may be considered under the following heads:
1. Power to alter Schedules: By notification in the Official Gazette, the Central

Government may alter any regulation, rules, tables, forms and other provisions
contained and any of the Schedules to the Act except Schedules XI and XII. Any such
alterations will come into force from the date of notification and will have the same
effect as the Act itself. Any alteration in Table A of Schedule I will not however apply
to any company registered before the date of such alteration [Section 641(1) and (2)].
Furthermore, every alteration aforesaid must be laid before each House of Parliament
(while it is in session) for a total period of 30 days which may be comprised in one
session or in two or more successive sessions if, before the expiry of the session in
which it is so laid or the session immediately following, both Houses either agree to
any modification made in the alteration aforesaid or agree that the alteration should
not be made, the alteration shall thereafter have effect only in such modified form or
be of no effect, as the case may be. But such modification or annulment shall be
without prejudice to the validity of anything previously done in pursuance of that
alteration [Section 641(3) as amended by the Companies (Amendment) Act, 1974].
2. Power to make Rules: In addition to the powers conferred by Section 641 discussed
above the Central Government is empowered to make rules, by notification in the
Official Gazette. These are the rules for all or any of the matters which, under this
Act, are to be, or may be, prescribed by the Central Government, and generally for
carrying out the purpose of the Act [Section 642(1)]. Any such rule may provide that a
contravention thereof, shall be liable to be punished with a fine extending up to Rs.
500 and if the contravention continues, a further penalty up to Rs. 50 per day shall be
imposed. As regards the submission of every such rule to Parliament, the same
requirements will have to be complied with, as those discussed above under Section
641(3) [Sections 642(2) and (3)].
3. Power to delegate functions (Section 637): By notification in the Official Gazette
and subject to such conditions and restrictions and limitations as may be specified in
the notifications the Central Government may delegate: (a) any of its powers or
functions under Act (other than the power to make rules and the power to appoint a
person as public trustee under Section 153A, to such authority or officer as may be
specified in the notification save and except those mentioned below. The Central
Government is debarred from delegating the same under the following provisions, viz.,
Sections 10, 81, 89(4), 211(3) and (4), 212, 213, 235, 237, 239, 241, 242, 243, 245,
247, 248, 249, 259, 260, 268, 269, 274(2), 295, 300, 310, 311 349, 372, 396, 399(4)
and (5), 208, 410, 411(b), 448, 609, 613, 620, 638, 641 and 642.
A copy of the notification shall, as soon as possible after it has been issued, be
placed before both Houses of Parliament.
4. Power to accord approval, etc. (Section 637A): Read the earlier discussion.
5. Fixation of remuneration: Read the earlier discussion.
6. Power to call for statistics (Section 615): The Central Government is empowered to
require companies generally, or any class of companies, or any company, to furnish
such information or statistics, with regard to their or its constitution or working. An
order addressed to companies generally, or to any class of companies, shall be
published in the Official Gazette or in such other manner as the Government may
think fit. But on the other hand, such an order addressed to a particular company must
be served on it as any document is served on a company under Section 51.
In order to be satisfied that the information or statistics furnished by a company is
correct and complete the Central Government may require the company to produce
records or documents in its possession of control for inspection before an officer,
specified by the Government. For these purposes and in the case of company’s failure
to comply with these requirements, the Government may direct an enquiry to be made
by any person or persons who shall have such powers as may be prescribed.
In the case of a body corporate incorporated outside India but having a place of
business in India, the powers conferred by Section 615 may be enforced with
reference to the business carried on in India.
7. Other powers: Certain other powers are granted to the Central Government vide
different Sections of the Act like power to condone delays, power to allow for
composition of certain offences etc.
14.6 GENERAL PROVISIONS

♦ Contracts by agents where a company is an undisclosed principal: Section 416
prescribes a special rule with regard to contracts entered into on behalf of a public
company (or a private company which is a subsidiary of a public company) by the
manager or other agent, in which the company is an undisclosed principal. It provides
that any such person, when entering into such a contract, must draw up a
memorandum of the terms of the contract, at the time of contract is entered into,
specifying the names of the persons with whom it has been done. The memorandum
must be placed in the record of the company and the copies thereof must be sent to
all the directors. Subsequently, the memorandum should be placed before the Board
at its next following meeting. In case of default, the contract, at the option of the
company, shall be voidable as against the company, and the person who had entered
into the contract or every officer of the company in default, as the case may be, would
be liable to penalty, which may extend to Rs. 200/-. However, the Central Government
may grant relief under Section 633 to an officer in default, if it appears to it that the
person has acted honestly and reasonably and that having regard to all the
circumstances of the case, he ought fairly to be excused. The relief may be granted
either wholly or partially.
♦ Employees’ Security and Provident Funds: Sections 417-420 of the Companies
Act, 1956 deal with the Employees’ Securities and Provident Funds. They provide as
follows:
(a) Any money or security deposit made by an employee of a company under the terms of
his contract of services, must be kept or deposited by the company within 15 days
from the date of deposit in a Post Office Savings Bank Account or in a special account
to be opened with the State Bank of India or a Scheduled Bank or, where the
company itself is a Scheduled Bank, in a special account to or be opened by it at or
with the State Bank of India or any other Scheduled Bank.
The Company must not utilise any portion of such moneys or securities except for the
purposes agreed to, in the contracts of service (Section 417).
(b) Where a provident fund has been constituted by a company for its employees or nay
class of its employees, all money contributed to such fund (whether by the company
or by the employees) or received or accruing by way of interest or otherwise to such
fund, within 15 days from the date of contribution, receipt or accrual should be
deposited in a Post Office Savings bank Account or in a special account in a
Scheduled Bank or in the State Bank of India, or where the company itself is a
Scheduled Bank in, a special account to be opened either in itself or in the State Bank
of India, or in any other Scheduled Bank or suitably invested in securities mentioned
or referred to in Sections 20(a) to (e) to the Indian Trusts Act, 1882 [Section 418(1)].
(c) In no case will an employee be entitled to receive an interest in respect of the amount
standing to his credit at a rate in excess of that yielded by the investment made in
accordance with the requirements aforementioned [Section 418(2)].
(d) An employee may obtain advances from the fund or with draw money standing to his
credit in the fund, if the fund is a recognised provident fund within the meaning of
Section 58A(a) of the Income Tax Act, 1922 or if the rules of the fund contain
provisions corresponding to the rules 4 to 9 of the Income-tax (Provident Funds
Relief) Rules [Section 418(3)].
Tutorial Note: Section 2(38) of the Income Tax Act, 1961 defines a recognised
provident fund and the relevant rules thereto are provided in Part XII (Rules 67 to 81)
of the Income-tax Rules, 1962.

(e) If a trust has been created by the company with regard to any provident fund, the
company must collect and pay the employee’s contributions together with its own
contributions to the trustees within 16 days from the date of their collection.
Thereafter the trustees will be obliged to comply with the aforesaid requirements as
regards their investment [Section 418(4)].
An employee, on making request to the company or to the trustees, as the case may
be, may look into the receipts issued by banks for provident fund money and
securities deposited with them as well as the bonds or securities in respect of
investments in trust securities (Section 419). But such a right can be exercised only
by an existing employee and not by an ex-employee or past employee or a person
whose service has been terminated. [The State vs. Girdhari Bajaj, 63 Bom. L.R. 743].
Any contravention of the provisions of Sections 417, 418 & 419 by an officer of the
company or by a trustee of the provident fund will render him punishable with
imprisonment for a period extending up to six months or with fine extending to Rs.
1,000 (Section 410).
The status of Trust continues even though the balance in the Fund has been
misapplied. Even if the balance standing to the credit of the provident fund, or the
amounts deposited by the employees, is wrongfully invested and profits accrue to the
company out of these wrongful investments the character of trust attaching to the fund
is not altered. Neither would such a use have the effect of converting it into a loan. It
will continue to remain a fund irrespective of the fact that the employees knew that the
company had wrongfully employed the fund in its own business. It would not preclude
the employees from claiming the funds from the company when it is in liquidation, as
preferential creditors. This is because the company shall continue to be the trustee in
respect of these funds and will not become mere debtor. [Alliance Bank of Simla Ltd.
(1924) 21 C.W.N. 721, Re. Bengal Zamindari and Banking Co. (1937) 2 Cal. 305].
♦ Receivers and Managers: A receiver of the property of a company should furnish the
Registrar of Companies once in every half year while he remains in possession and
also on his ceasing to act as receiver an abstract of receipts and payments during the
period to which the abstract relates in Form No. 36 of the Companies (Central
Government’s) Rules and Forms, 1956. Moreover, on the appointment of the
Receiver, an entry to this effect should appear in every invoice, order for goods or
business letter issued by or on behalf of the company or the receiver. In the event of
these provisions being contravened, the company and every officer thereof, who is in
default, shall be liable to pay a fine of Rs. 200 (Sections 421-423).
♦ Security for costs by Limited Company: When a limited company is the plaintiff of
petitioner in a suit or in any other legal proceedings, if the Court having the
jurisdiction in the matter has reason to believe that the company will not be able to
pay the cost of the defendant, if he is successful in his defence, it may require the
company to furnish sufficient security for costs, and may stay all proceedings until the
security is provided (Section 632). It has however been held that it is open to a
company to sue in forma pauperise. In such a case, the question of payment of
security into Court will not arise.
♦ Modification of the Act in its application to Nidhis and Mutual Benefit Societies:
Nidhi or Mutual Benefit Society means a company which the Central Government may
by notification in the Official Gazette, declare to be a Nidhi or Mutual Benefit Society,
as the case may be, and direct that any of the provisions of the Act specified in the
notification: (1) shall not apply to any Nidhi or Society; or (2) shall apply to any Nidhi
or Society with such exceptions, modifications and adaptations as are specified in the
notifications. A copy of such a notification must be placed before each House of
Parliament at the earliest, subsequent to its issue (Section 620A).
Tutorial Note: Nidhis or Mutual Benefit Societies are companies registered with
objects to enable the members to save money, to invest their savings and to secure
loans at favourable rates.
♦ Penalty where no specific provision has been made elsewhere in the Act: When
a company or any other person transgresses any provision of the Act, and for such
transgression no punishment has been provided elsewhere in the Act the company
and every officer thereof who is in default, shall be punishable with fine extending up
to Rs. 500 and where the contravention is a continuing one, with a further fine
extending up to Rs. 50 for every day during which the contravention continues. A
similar punishment will also ensue for contravention of any condition, limitation or
restriction subject to which any approval, sanction comment, confirmation,
recognition, direction or exemption in relation to any matter has been accorded, given
or granted (Section 629A).
♦ Enforcement of duty of a company to make returns etc. to Registrar: Where a
company is required under the Act to file or register any return, account or other
document or notice, and the company defaults in doing so for a period of 14 days,
then any member or creditor of the company or the Registrar may make an application
to the Company Law Board for such compliance. On such an application, the
Company Law Board may direct the company and any officer thereof to make good
the default within such time as may be specified in the order. But this provision does
not affect the levying of any penalty on the company or its officers in respect of any
such default (Section 614).
♦ Power of the Court trying offences under the Act to direct the filing of
documents with Registrar: Any Court trying an offence for a default in compliance
with any provisions of the Act, which requires a company or its officers to file or
register with or deliver or send to the Registrar any return, account or other
document, may, at the time of sentencing, acquitting or discharging the accused, as
the case may be, compel such compliances by order on payment of the fee including
the additional fee required to be paid under Section 611 within the time specified in
the order. If such an order is not complied with, the defaulting officer or employee of
the company shall be liable to be punished with imprisonment for a maximum period
of 6 months or with fine, or with both (Section 614A). Further, if a director fails to
comply with the order of the Court under the Companies Act to submit a return to the
Registrar within the stipulated time, he shall be guilty of contempt of Court and the
High Court has power to punish the direct or for contempt of the Court [State of U.P.
vs. Tikka Ram Uniyal (1964) 34 Comp. Cas. 5].
♦ Enforcement of orders: Any order made by a Court under the Companies Act is
enforceable in the same manner as a decree made by the Court in a suit pending with
it (Section 634).
♦ Enforcement of orders of Company Law Board: Section 634A which has been
added by the Companies (Amendment) Act, 1977 and as amended by the Companies
(Amendment) Act, 1988 provides that any order made by the Company Law Board
may be enforced by the Board in the same manner as if it were a decree by a Court in
a suit pending therein and it shall be lawful for that Board to send in the case of its
inability to execute such order, to the Court within the local limits of whose
jurisdiction: (a) in the case of an order against a company the registered office of the
company is situated; or (b) in the case of an order against any other person, the
person concerned voluntarily resides or carries on business or personally works for
gain.
♦ Enforcement of orders of one Court by other Court: Where the order of the
Company Court, which is deemed to be decree, is to be executed outside its
jurisdiction, a certified copy of the order has to be produced before the other Court
[Section 635(1)]. The production of such certified copy shall be sufficient evidence of
the order. Upon the production of such certified copy of the Court shall take the
requisite steps for enforcing the order, in the same manner as if it had been made by
itself [Sections 635(2) & (3)]. Where, any order made by the Company Law Board
required to be enforced by a Court a certified copy of the order shall be produced to

the proper officer of the Court required to enforce the order and the provisions of sub-
sections (2) & (3) shall, as far as may be, apply to every such order in the same
manner and to the same extent as they apply to an order made by a Court [Section
635(4) added by the Amendment Act, 1977 as amended by the Companies
(Amendment) Act, 1988].
15
CORPORATE SECRETARIAL PRACTICE – DRAFTING OF
RESOLUTION, MINUTES, NOTICES AND REPORTS
A company secretary is one of the principal officers responsible for the secretarial work and
management of the business of a company as per the policy and instructions laid down by
the Board of Directors.
15.0 DEFINITION
Section 2(45) of the Companies Act, 1956 provides that, “secretary means company
secretary within the meaning of Section 2(1)(c) of the Companies Secretaries Act, 1980 and
includes any other individual possessing the prescribed qualifications and appointed to
perform the duties which may be performed by a secretary under this Act and any other
ministerial or administrative duties”.
This definition reveals three important facts. Firstly, only an individual may be appointed as
a company secretary and any firm or body corporate can not be so appointed. Secondly the
company secretary should either be a person who is a member of the Institute of Company
Secretaries of India or has requisite qualifications prescribed by the Central Government.
Thirdly the duties of the secretary are ministerial or administrative, they are not managerial
since he is not entrusted with the direction, control or management of the affairs of the
company.
The Companies Act, however, does not prevent a company from appointing a secretary
enjoying – limited executive powers of management delegated by the Board of Directors in
addition to his routine secretarial duties.
15. 1 CERTAIN COMPANIES TO HAVE SECRETARIES

Section 383A, provides that every company having a paid up share capital not less than
prescribed limit (presently the limit being Rs. 2 crores ∗) shall have a wholetime secretary
∗
GSR 419(E) dated 11th June, 2002.
and such secretary should possess the qualification that may be prescribed by the Central
Government. Further, no individual can hold the office of secretary in more than one such
company. The companies which have paid-up share capital of less than rupees two crores
have no obligation to appoint any secretary at all or a qualified secretary or a whole-time
secretary. However, they may voluntarily appoint a secretary.
A director may be appointed as a Secretary in addition to his post as director but where the
Board of Directors of a company has only two directors, neither of them can be appointed as
secretary of the company. Obviously, this restriction is meaningful in case of private
companies as the minimum number of directors prescribed for a public company is three.
This means, in a company, which has three or more directors, a director can also act as
secretary [Section 383A(1)].
It is further provided that if a company fails to comply with the above provisions, the
company and every officer of the company who is in default, shall be punishable with fine
which may extend to fifty rupees for every day during which the default continues. However,
when any proceedings against a person in respect of the above offence are taken, he may
defend himself by proving that all reasonable efforts were made to comply with the above
provisions that the financial position of the company was such that it was beyond its
capacity to engage a whole time secretary. [Section 383A(1A)]
15.2 QUALIFICATIONS OF SECRETARY

For companies required to appoint a company secretary in accordance with the provisions
of Section 383A, the person to be so appointed must be a member of the Institute of
Company Secretaries of India constituted under the Companies Secretaries Act, 1980.
However, the qualifications possessed by a person holding the office of whole time
secretary of company immediately before 30th October, 1980, in terms of the second proviso
to clause (a) of rule 2 of the Companies (Secretaries Qualifications) Rules, 1975, shall be
deemed to be the qualifications which he is required to possess in order to be eligible to
continue as whole time secretary in that company. If a company which is not required to
appoint a company secretary as per the provisions of Section 383A of the Act (i.e. company
having a paid up capital of less than Rs. 2 crores Notification No. GSR 419(E) dt. 11.6.2002
DCA) voluntarily appoints a person as its secretary, he must possess one or more of the
following qualifications namely:
(i) membership of the Institute of Company Secretaries of India constituted under the
Company Secretaries Act, 1980 (56 of 1980);
(ii) pass in the Intermediate examination conducted either by the Institute of Company
Secretaries of India constituted under the Company Secretaries Act, 1980 (No. 56 of
1980), of by the earlier Institute of Company Secretaries of India incorporated on 4th
October, 1968, under the Companies Act, 1956 (1 of 1956) and licensed under Section
25 of that Act;
Corporate Secretarial Practice- Drafting of Resolution, Minutes, Notice and Report 15.3
(iii) post graduate degree in commerce or corporate secretaryship granted by any university
in India;
(iv) degree in law granted by any university;
(v) membership of the Institute of Chartered Accountants of India constituted under the
Chartered Accountants Act, 1949 (38 of 1949);
(vi) membership of the Institute of Cost and Works Accountants of India constituted under
the Cost and Works Accountants Act, 1959 (23 of 1959);
(vii) post graduate degree or diploma in management sciences, granted by any university or
the Institute of Management, Ahmedabad, Kolkata, Bangalore or Lucknow;
(viii)post graduate diploma in company secretaryship granted by the Institute of Commercial
Practice under the Delhi Administration or Diploma in Corporate Laws and Management
granted by the Indian Institute, New Delhi.
(ix) postgraduate diploma in company law and secretarial practice granted by the University
of Udaipur; or
(x) membership of the Association of Secretaries and Managers, Calcutta, registered under
the West Bengal Registration of Societies Act, 1961 (XXVI of 1961):
Provided that where the paid up share capital of such company is increased to Rs. 50 lakhs
or more, the company shall, within a period of one year from the date of such increase,
appoint a company secretary as is required to be appointed as per Section 383A.
15.3 POSITION OF SECRETARY

Though the Companies Act, 1956 does not define the legal position of a company secretary,
yet his position may be assessed and described from the nature of the duties he is required
to discharge pursuant to his agreement with the company and in conformity with the statute.
You have already read the statutory definition of the Secretary in Section 2(45) of the
Companies Act. You should also note that according to Section 2(30) of the Act, the
Secretary is the officer of the company, and his legal position is determined accordingly. For
instance, he may be held liable for default in holding the statutory meeting and filing the
statutory report under Section 165, for default in registering certain resolutions and
agreements as required under Section 192. The Secretary, like any other officer of a
company will be punishable with imprisonment if he falsifies the books of the company or if
he wilfully and knowingly makes a material false statement in the balance sheet or in certain
returns, reports, certificates, or other documents of a company which is being would up
(Sections 539 to 541). Misfeasance proceedings may also be taken against him in a winding
up if he has misapplied any money or property of the company or has been guilty of breach
of trust (Section 543).
Being a mere servant, he has no authority to represent anything at all. An agreement

between him and the company does not prevent the company from appointing a general
manager (Krishna vs. Indo Union ASS Limited, 1944).
The Secretary has no authority to summon a general meeting himself. He has also no
authority to strike-out a name from the register or to register a transfer before it is passed by
the Board. The secretary of a company has no general authority to make representations to
induce persons to take share in the company so that a person who is induced to take shares
in then company by a fraudulent misrepresentation secretary of the company (not
authorised by the officers of the company entitled to make the representation), is not
entitled to maintain an action against the company for the recession of the contract or for
damages for such misrepresentation (Diwan Chand vs. Gurjanwalla Sugar Mills 1937).
In no circumstances can a Secretary of a company discharge the functions of the Board or
act, on behalf of the company in matters of policy or take substantial steps which are not of
an administrative or ministerial nature. He can not give consent on behalf of the company
under Section 399 to the filing of the petitions under Sections 397 and 398 (Mohan Lal Mittal
vs. Universal Wires Limited 1983). He cannot also file a suit on behalf of the company,
unless authorised to do so. So also the Secretary cannot issue notice without the Board’s
authority or commence litigation in the company’s name without authority from the.
However, the position of Company Secretary has undergone, a big change in modern times.
He is now recognised as an important executive officer of a company with managerial duties
and responsibilities. The Companies Act also permits the Board of Directors to delegate
administration powers of management to the Company Secretary in addition to his routine
managerial duties and responsibilities.
He is no longer a mere clerk. He regularly makes representation on behalf of the company
and enters into contracts on its behalf which come within the day to day running of the
company’s secretariat. All such matters come within the ostensible authority of a Company
Secretary. An accomplished Secretary acts as the brain of the company. His ability, his
contacts with the commercial world and his administrative control over the whole office
enable the Secretary to vitally influence the management. In all matters of policy and
administration, the directors consult an experienced and well conversant Secretary. He is
bestowed with ample discretionary powers which he can exercise without intervention of the
Board of Directors. The Secretary, vis-à-vis the administrative set-up of a company, is in
some cases next to the managing director. He, as an executive head, is empowered to
supervise and control the secretarial and share department or other departments and may
even have the powers to appoint and dismiss the staff working under him, depending upon
the Board’s decisions in this respect. The Board, may, however delegate to him various
other duties.
15.4 APPOINTMENT OF SECRETARY

The first Secretary of a company may be named in the Articles. He may be called upon to
assist the promoters in all preliminary work before the incorporation such as holding the
meetings, keeping the minutes the meetings, preparation of various documents and
statements required for registration of the company. But a clause in the Articles naming the
Secretary does not constitute a contract between the Secretary and the company. Articles
constitute a contract between the members and the company. Outsides have nothing to do
with the Articles. Even if the Articles say that Mr. A.B. shall be the first Secretary of the
company for a fixed salary and a definite period, the secretary would not be able to sue the
company if the directors appointed another Secretary after incorporation. Hence, the
Secretary who has been acting-pro-tem in the preliminary stages of the company’s
existence whether named in the Articles or nor, must immediately after incorporation, get his
appointment confirmed by a Board resolution and should preferably enter into a separate
service agreement with the promoters regarding his remuneration and guarantee of its
payment; but all the work done by him in the pre-incorporation stage is in his unofficial
status as the company itself is non existing and it cannot appoint any person as its secretary
or solicitor. If he is associated with the promoters from the beginning he will get an
opportunity to familiarise himself with the contents of the memorandum and the articles of
association in view of his active participation in their drafting and preparation. He will also
be familiar with the financial position of the company and its potentialities regarding future
prospects and development.
The resolution of appointment of secretary may be in the following form:
RESOLVED that Mr. P.R. Anandgiri be, and is hereby, appointed the Secretary of the Nav
Bharat Engineering Works Limited, the appointment to be subject to six months notice on
either side and the terms of salary and allowances will be as follows:
1. Rs. 60,000 per month salary, 2. Rs. 6,000/- per month as dearness allowance, 3. Rs.
6,000/- per month as house rent allowance, 4. Rs. 8,000/- per month as car allowance, 5.
Rs. 20,000 per year as leave travel allowance, 6. Free medical help upto Rs. 20,000 per
year and 7. Rs. 10,000 per month on company’s expense account.
In addition to this resolution, he should enter into a written service agreement which will
deal great length with the terms and conditions of service, such as period of appointment
and probation, if any period notice of termination of service, mode of remuneration,
provident fund or pension benefits, etc., it may be noted that his remuneration is not taken
into account for purposes of calculating over all managerial remuneration under Section
198.
The Secretary’s appointment has to be entered in the Register of Directors, etc., and it is
also necessary to send a notice of his appointment to the Registrar (Section 303).
FORM NO. 1
Agreement for the Appointment of a Secretary
An agreement made on the………. day of…… 20….. between…………. Ltd. (hereinafter
called the Company) of the one part, and Mr………… of the other part whereby it is agreed
as follows:
(1) The said Mr…………. shall be the Secretary of the Company for a term of ten years
from the date hereof.
(2) There shall be paid by the Company to the said Mr…………. as such secretary as
aforesaid a salary at the rate of Rs. ……….. per month beginning from 1st December,
1999.
(3) Mr………….. shall, unless prevented by ill health, throughout the said term devote the
whole of his time, attention and abilities to the business of the Company shall obey the
orders from time to time of the Board of Directors of the Company and in all respects
conform to and comply with the directions and regulations made by such Board and
shall serve the Company well and faithfully use his utmost endeavours to promote the
interests thereof.
(4) The said Mr……………. shall, during the tenure of his office, be entitled to leave of
absence for a period……………. in each year not exceeding one month and the said
salary of Mr…………… shall continue not withstanding such leave of absence.
(5) Either of the parties hereto may at any time after the………….. day of……….. 20…..
determine their agreement by giving to the other not less than three calendar months
notice in writing and upon expiration of the period specified in such notice the said
Mr………… shall cease to be secretary to the Company.
As Witness Etc. Day and Date Sd/- 1.
Director
1…………. 2.
Director
2…………. Seal 3.
(appointee)
A director can also act as secretary. But we must have special resolution for such an
appointment as it will be an office of profit. However, if a company has only two directors,
none of them shall act as a Company Secretary.
15.5 DUTIES OF A COMPANY SECRETARY

The duties of a Company Secretary are multifarious and these vary from company to
company depending upon various factors, such as the size of the company, the nature of its
business and the exact positions that he enjoys in the company. In a large concern, he is
charged with the duty of ensuring that the affairs of the company are conducted in
accordance with the provision of the Companies Act, the company’s articles and generally in
accordance with the law. There the function as the head of the secretarial department. In
small concerns the secretary may, in addition to his purely secretarial duties, be much more
involved in the company’s administrative operations, organisation and control of the office
and its staff. However, the duties of a Company Secretary can be broadly grouped under the
following heads:
1. Statutory duties.
2. Duties towards directors.
3. Duties towards shareholders.
4. Duties towards public.
5. Duties towards the office and staff.
1. Statutory duties: The statutory duties of a Company Secretary are to ensure that the
affairs of the company are conducted in accordance with the provisions of the Companies
Act and other statutes pertaining to company management such as the Income tax Act, the
Indian Stamp Act, the Monopolies and Restrictive Trade Practice Act, etc. The most
important part of the statutory duties of a Company Secretary is concerned with the
compliance of the provisions of the Companies Act, 1956 which are:
(a) Maintenance of the statutory books and/or registers of the company.
(b) Preparation, authentication and filing of resolutions, agreements, documents and return
with the Registrar of Companies.
(c) Attending the meetings and recording their proceedings.
(d) Allowing the members of the company to inspect the statutory books and to take copy
there of and to make all necessary communication to the members.
(e) Assisting the directors in respect of the issue, allotment, transfer, transmission and
forfeiture of shares and debentures.
(f) Keeping the common seal of the company in safe custody and using it where so
authorised by the articles or the Board of Directors.
Some example of statutory duties are given as follows:
(i) Filing with the Registrar a return in the prescribed form [Section 5(g)].
(ii) Statutory declaration as to compliance in respect of incorporation (Section 33).
(iii) To file Return of Allotment with the Registrar of Companies (Section 75).
(iv) Giving notice to the Registrar of an increase of share capital (Section 97).
(v) Issuing Certificates of Shares, Debentures and Debenture Stock (Section 113).
(vi) Allowing inspection of the Debenture Register (Section 118).
(vii) Delivering particulars of mortgages and charges for registration (Sections 125 to 127).
(viii) Making the statutory declaration for commencement of business (Section 149).
(ix) To maintain the Register of Members with prescribed particulars (Section 150).
(x) To maintain Register of Debenture holders (Section 152).
(xi) To sign the Annual Return and certify the documents annexed thereto and file it with
the Registrar (Sections 159 to 162).
(xii) To Allow inspection of and furnish copies of Register of Members (Section 163).
(xiii) To file copies of certain Resolutions and Agreements with the Registrar (Section 192).
(xiv) To maintain minutes of general and board meetings (Section 193).
(xv) To file three copies of the Balance Sheet and Profit & Loss Account with the Registrar
(Section 220).
(xvi) To file the certificate as to compliance of requirements of Schedule XIII (Section 269).
(xvii) To maintain Register of Directors, etc., with prescribed particulars (Section 303).
(xviii) To allow inspection of the Register of Directors (Section 304).
(xix) To maintain a Register of Directors, etc., with prescribed particulars (Section 307).
(xx) Where a director’s liability is made unlimited, to give the notice required to be given to
him (Section 322).
(xxi) To assist in the making of the Statement of Affairs of the company in a winding up
(Section 454).
Under the Income-tax Act, he is required to deduct income tax from the salaries of the
employees and officers of the company and from dividends and interest and deposit the
same with the Government within the prescribed time. He must also furnish a certificate of
income tax deducted at source to every shareholder receiving the dividend and to every
debenture holder receiving interest. He is also required to submit a return of the income of
the company to the income tax authorities in time.
Under the Indian Stamp Act, it is the duty of the company secretary to see that documents
such as letters of allotment, share certificates, share warrants, debentures, transfer forms
mortgages and charges, etc., which are issued from his office, are affixed with stamps of
requisite amount as required under the Act.
Under the other allied laws, the Company Secretary is principal officer and is responsible to
give notice and verify statements relating to various forms of expansion, establishment of
new undertaking, merger and amalgamation and registration of an undertaking.
Under the Sales Tax Act, he must endure timely submission of returns and payment of tax.
In addition, the Secretary must see that the provisions of the Foreign Exchange Regulation
Act, Industries (Development and Regulation) Act, Securities and Exchange Board of India
Act are duly complied with by the company. In the case of a manufacturing company, he
must see that the provisions of the Factors Act, Payment of Wages Act, Minimum Wages
Act, Industrial Disputes Act, and other industrial laws, are duly complied with.
2. Duties towards directors: In the eyes of law, the Company Secretary is no more than a
mere servant of the Board. He should, therefore, carry out the instructions of the Board. He
acts under authority of the Board which may be either express or implied.
He is also responsible for providing necessary information to the Board for the formation of
its policies. He should also advise the directors in respect of legal matters pertinent to
company’s affairs.
As the directors cannot act without a meeting, the Secretary has to arrange Board meeting,
issue notices and prepare agenda of such meeting in consultation with the directors. He has
also to record the minutes of the proceedings in consultation with the directors. He has also
to record the minutes of the proceedings of their meetings. He acts as the mouthpiece of the
Board and communicates its decisions to staff, shareholders and outsiders dealing with the
company. He also deals with all correspondence in which the directors are interested and
maintains all important files and records for them. He generally prepares the draft of the
directors’ report at their instance to be presented before the annual general meeting. In
addition, he keeps the common seal of the company and uses it as directed by the Board.
It has been rightly said that “while the directors are the brains of the company the Secretary
is its eyes, ears and hands.”
3. Duties towards shareholders: A Company Secretary serves as a link between the
company and the shareholders. As the shareholders are the owners of the company, he
owes to them the highest courtesy and consideration. It is the duty of the Company
Secretary to safeguard the interests of shareholders as between themselves, as also vis-à-
vis the company. He communicates the decisions of the Board to the shareholders. He also
deals with all correspondence between the company and the shareholders and looks into
their grievances and complaints. The shareholders will frequently seek from his information
as to the company’s affairs and the Secretary should satisfy them with reasonable replies.
His other duties towards shareholders are with regard to the following:
(i) Issuing a prospectus.
(ii) Receiving applications and allotment of shares.
(iii) Issuing letter of allotment, share certificates and shares warrants.

(iv) Sending all notices.
(v) Transfer and transmission of shares.
(vi) Payment of dividends.
(vii) Sending notices of meetings of shareholders.
(viii)Making arrangements for such meetings.
(ix) Recording proceedings of the meetings in minutes book.
(x) Allowing shareholders to inspect various books and registers as permissible under the
Act.
(xi) Supplying information and copies of documents to shareholders on demand as
permissible under the Act.
The Secretary is in possession of certain confidential information and it is his duty to see
that such information is not disclosed prematurely to a section of the shareholders thus
prejudicing the rights of others. Such information should be released simultaneously to all
the parties interested in the information.
4. Duties towards public: The Company Secretary acts as a liaison officer between the
company and the general public consisting of debenture holders, bankers, creditors,
customers, suppliers prospective investors and the public at large. He should be in constant
touch with them, keep them informed of the company’s policies and programmes and supply
necessary explanations and clarifications to the queries raised by them. His attitude towards
them should be one of courtesy, tact and integrity. It is the Secretary who negotiates with
third parties and the outside public in regard to settlement of contracts and bargains, etc. He
is to look after the interests of creditors and debenture holders of the company. He has also
to entertain the complaints of customers and suppliers and satisfy them. He should not
divulge confidential information to the public prematurely, thus affecting the public opinion
about the company.
5. Duties towards the office and the staff: The Company Secretary is the executive head
at the registered office of the company and is solely responsible to the Managing Director or
Manager and Directors for the smooth running of office work. In fact, the Company
Secretary is the pivot around which the whole corporate machinery revolves. All the heads
of various departments into which office is organised, viz., the share department,
correspondence department, filing and records department, are directly responsible to the
Secretary. It is the Secretary’s duty to see that these departments are properly organised,
supervised, coordinated and adequately staged.
15.6 COMPANY CORRESPONDENCE & REPORTS

1. Company Correspondence
Correspondence in company matters is dealt with by or in the name of the Company
Secretary these matters cover a wise range of subjects broadly, such correspondence may
be classified as follows:
♦ Correspondence with members: The Secretary is the organ of the Board of Directors
and a vital link between the company and its members or the public. Being authorised
by the Board, he has to convene meetings, notify declaration of dividends, deal with the
issue, transfer, transmission and allotment of shares or debentures, further issue of
shares, bonus issue, etc., and disclose the position of the company as required by the
Companies Act. The Secretary’s correspondence with members relates mostly to
statutory and formal matters. But, in special circumstances he is also required to reply
letters of inquiries relating to prospectus of the company, rate of dividend, any
irregularity on proceedings of meetings, loans and investments, any question arising out
of transmission of shares, loss of share certificates or dividend warrants, any court
proceedings, etc. In all statutory or formal correspondence, the Secretary acts as the
agent of the company or the Board as well as one subservient to the Act and the
company’s articles. In other types of correspondence, he can, however, exercise some
amount of discretion. But in view of his fiduciary relationship vis-à-vis the company
and the general body of shareholders, he should exercise his discretion in the larger
interest of the company.
♦ Correspondence with directors: The Secretary is the servant of the company under
the control of the Board. He is required deal with all the correspondence in connection
with the directors and record their deliberations and decisions. He must maintain written
records of his dealings and communications with the directors. His dealing with them
needs the utmost tact. His language should be polite and at the same time firm. He
must observe decency and decorum in communicating with the directors to furnish or
withhold any information or draw their attention to any matter in the interest of the
company.
♦ Correspondence with the Public: In this connection, his dealings as mainly with
customers, brokers, other companies or public bodies, creditors, etc. He must be
courteous, tactful and must guard against disclosure of secrets or favouring anyone
unduly, e.g. by disclosing some new development. His letters must be firm, dignified
and convey a good impression, about the company.
2. Drafting and Preparation of Reports
A report is a statement containing an assessment of a situations and/or facts and data
relevant thereto. It is based on one’s knowledge and a systematic style of the situation. For
example, the marketing manager may prepare a report to the decline of sales in a particular
area. The report may or may not contain the comments or conclusions of the writer. It is
intended to enable the interested persons to form their judgement to take suitable action
thereon.
The success of a reporter depends upon the extent of his knowledge of the matter reported
and his capacity to pick out from the mixed facts and figures the important significant and
relevant ones, the ability to marshall the facts with lucidity, his capacity to see the picture as
a whole and above all, his ability think logically. Preparation of a variety of statutory and
non-statutory reports falls within the domain of the company secretary.
With reference to the Companies Act, the following are some of the important statutory
reports:
(a) Statutory report prepared under Section 165 and sent to the members along with the
notice of statutory meeting as well as to the Registrar of Companies.
(b) Auditors’ reports placed before the annual general meeting.
(c) Director’s reports placed before the annual general meeting.
(d) Annual returns submitted by the company to the Registrar. The returns as regards
allotment, statement in lieu of prospectus too are in the nature of reports.
(e) Inspector’s reports submitted after investigation into the affairs of the company
concerned.
(f) Registrar’s report relating to unsatisfactory affairs of the company.
(g) Liquidator’s report in winding-up proceedings.
Non-statutory report, through beyond legal requirements, are nonetheless compiled in
special circumstances by a director, secretary or accountant, committee or sub-committee
or a special body with a view to aiding authorities in taking decisions. The following are
some of the non-statutory reports:
(a) Report of a committee of directors to be submitted to the Board after enquiring into the
exigencies of the business situation.
(b) Report of the Board of Directors to shareholders, beyond the legal requirements.
(c) Chairman’s speech at the annual general meeting.
(d) Reports of special committees-standing or ad hoc-constituted by the Board, e.g. finance
committee report, share allotment committee report, project committee reports, etc. The
reports of the ad hoc committee may relate to a special problems such as opening or
closing a branch office, raising of additional capital, introduction to certain office routine
or method, etc.
(e) Report to stock exchange.

(f) Circular reports issued to customers, clients and general public.
(g) Report of individual experts, or departmental managers or officers of the company such
as secretary, accountant, commercial manager, sales manager, works manager,
personnel manager and the like.
♦ GENERAL HINTS ON DRAFTING REPORTS: Reports are too numerous to be
governed by precise rules. However, a few general hints for drafting them are given
below:
(a) Collection of material or data being the foundation on which the report stands; the writer
must collect them by referring to office records, interviewing people, visiting different
places, etc., as may be necessary.
(b) The material collected as aforesaid has to be marshalled in a logical sequence so that
the report, when made out, may read like a narrative.
(c) The report should have a leading and a preface explaining its purpose and nature.
(d) Its language has to be simple, clear and unequivocal short sentences are to be
preferred to long ones. It should be drafted in an impersonal manner, making use of
‘third person’.
(e) If the report is likely to be lengthy, it should be divided into parts and appropriate sub-
heading should be used. The report must then contain a summary also. Many people
adopt the practice of giving the gist in one page and the matter in detail later in the
report.
(f) Where the directors are not technical persons, technical phraseology should be
eschewed, yielding place to plain and simple phraseology, the idea being to make the
report, as far as practicable, easily understandable by those for whom it is meant.
(g) The conclusions put forward should be founded on the material or data collected; also
these should be unbiased in character.
3. Specimen Directors’ Report of ‘Maruti Ltd.’ is given hereunder
The Directors have pleasure in presenting the 13 th Annual Report together with the audited
accounts of Company for the year ended 31st March, 2006.
♦ Highlights of 2005-06: Your company concluded another year of growth in all areas of
operation setting several new records. The millionth vehicle was produced on 25 th
March, 2006. The profit for the year before tax increased to Rs. 1367 million (previous
year Rs. 366 million) after providing depreciation of Rs. 730 million (previous year Rs.
364 million) and interest of Rs. 747 million (previous year Rs. 528 million).
Production increased from 128138 vehicles in 1994-95 to record of 158109 vehicles

representing an increase of 23%. Total income for the year was 29215 million as
against Rs. 22195 million in the previous year.
In continuation of our efforts to provide convenient and quality after sales service to our
customers 5 dealer workshops and 55 Maruti Authorised Service Stations were added
during the year. 100 Free Inspection Camps were organised for specialised check-up.
As in the previous year All India Skill Competition was organised to motivate dealers’
mechanics in enriching their knowledge and diagnostic ability.
During the year the company successfully cleared the COP audit as per EEC regulatory
requirement.
♦ Outlook for 2005-06: The company expects to increase production to a 2,00,000
vehicles in the coming year. The new assembly shop and paint shop for the expansion
of production would be operational during the year.
♦ Dividend: The directors recommend a dividend of 10% amounting to Rs. 132 million
(previous year 6% amounting to Rs. 76 million) on equity shares, subject to deduction of
tax.
♦ Exports: A total of 17187 vehicles (previous year 14566 vehicles) representing an
increase of 18% over 2004-05 valued at Rs. 1982 million (previous year Rs. 1474
million) were exported during the year. In recognition of export performance in 1994-95
the company was awarded the status of Trading House by the Government of India.
During the year 20 new markets for exports were developed. The sample units of new
model ‘Alto’ were sent for obtaining homologation and national type approval in E.E.C.
This model was also launched in the Geneva Motor Show. The company is actively
pursuing further growth in exports.
♦ Conservation of Energy, Technology Absorption and Foreign Exchange Earnings
and Outgo: A statement giving details of conservation of energy, technology absorption
and foreign exchange earnings and outgo in accordance with the Companies
(Disclosure of Particulars in the Report of the Board of Directors) Rules,1988, is
annexed.
♦ Particulars of employees: The information required as per Section 127(2A) of the
Companies Act, 1956 read with Companies (Particulars of Employees) Rules, 1975
forming part of this Report is enclosed.
♦ Environment: Modification of the existing effluent treatment plant was undertaken to
take care of additional effluents generated due to capacity expansion. Data on non-
methane hydro-carbons in Paint Shop and Engine Testing Shop, ambient air quality,
stack emissions and effluents are being regularly monitored and the parameters are
maintained well within prescribed limits. Development of green belt around gasturbine
and R&D areas was further augmented by plantation of 3000 additional saplings.
♦ Directors: Suzuki Motor Corporation nominated Mr. Y. Kakei as part-time director on
the Board in place of Mr. S. Nakanishi w.e.f. 21.7.2006. The Board placed on record its
deep appreciation of the valuable contribution and services rendered by Mr. S.
Nakanishi as director of the company and otherwise to the company.
♦ Auditors: M/s Price Waterhouse, retire as auditors and being eligible, offer themselves
for reappointment.
♦ Cost Auditors: The Central Government have issued a direction in regard to audit of
cost accounts maintained by the Company pertaining to motor vehicles for the year
ended 31.3.2006 and for every financial year thereafter. Accordingly, the company
appointed M/s R.J. Goel & Co., as Cost Auditors for auditing cost accounts of the
company for the year ended 31st March, 2006 with the approval of the Central
Government.
♦ Acknowledgement: The Board of Directors would like to express its sincere thanks for
the co-operation and advice rendered by various ministries of the Government of India,
including the Department of Heavy Industry, and also the Haryana State Government
and its concerned departments. The Board also expresses its gratitude to the statutory
auditors, cost auditors and bankers for the co-operation and assistance rendered by
them. Your directors also take this opportunity to place on record their appreciation for
the valuable support and co-operation received from Suzuki Motor Corporation, Japan
as well as from its employees including the Japanese staff, dealers, vendors and other
suppliers, without which it would not have been possible for Maruti to achieve all-round
progress.
For and on behalf of Board of Directors
New Delhi (A.R. Halasyam) (R.C. Bhargava)

29th July, 2002 Director-Finance Managing Director
15.7 RECORD MAINTENANCE AND FILING OF DOCUMENTS

Maintenance of different kinds of registers: A company secretary being administrative
incharge of the company is responsible for the maintenance of registers, books of accounts
and other documents required to be kept by the company as per statutory norms. A list of
such documents is as follows:
Registers to be Maintained by the Company
Section(s) Registers
301(1) & (5) Register of contracts (referred to in Sections 297 and 299), with
companies and firms in which the directors are interested containing
particulars mentioned in Section 301 to be kept at the registered office.
303 Register of directors, managing director manager and secretary
containing particulars mentioned in the section to be kept at the
registered office.
307 Registers of director’s shareholdings and debenture-holdings
containing particulars mentioned in the section to be kept at the
registered office.
372(5) & (8) Register of investments made by the company in any shares or
debentures of bodies corporate in the same group showing in respect
of each investment, the particulars required by the section to be kept at
the registered office.
Section(s) Books of accounts or other documents
209 Books of accounts containing the particulars required under the section
which must be kept at the registered office.
302(6) All contracts entered into by a company appointment of a manager,
managing director, managing agent or secretaries and treasurers, the
which must be kept at the registered office.
The following documents must also be kept or maintained by a company (This follows from
the provisions).
1. Copies of balance sheet and profit and loss account, and the documents to be annexed
or attached thereto (Sections 210, 212, 216 & 217).
2. Statements to be published by limited banking companies, insurance companies and
deposit provident or benefit societies (Section 223 & Form F in Schedule 1).
Notice of Board meeting

Notice of Board meeting is required pursuant to Section 286(1). The length and form of
notice of the Board meeting which have not been prescribed under the Companies Act
usually follow such directions as are prescribed in the articles of the company. Table ‘A’ of
Schedule I to the Act in clause 73(2) provides the procedure and authority competent to
issue notice. Under the said clause, a director may, and the manager or secretary, on the
requisition of a director, shall, at any time summon a meeting of the Board.
Specimen notice
Board Meeting
Section 286: ‘Notice’ convening a Board Meeting
Akash & Company Limited
Palkaji,
Bombay-900
012.
Dated the..……
20….
To
Shri ABC,
Nagpur-440 012.
Dear Sir,
Notice is hereby given that a meeting of the Board of Director which will be held at the
registered office of the company at Palkaji, Bombay- 400 012 on……………… the……………
20……… at….….a.m./p.m.
You are requested to make it convenient to attend the meeting.
A copy of the agenda of the businesses which are likely to be transacted at the meeting is
enclosed for your perusal.
Yours faithfully
For AKASH & COMPANY LIMITED
Secretary
(each director should be individually addressed
with a copy of agenda of the meeting)
Agenda
The various items of business to be transacted constitute the agenda, literally “things to be
done” for the meeting. Though it is common practice to send to directors or members an
agenda or a list of items of business proposed to be transacted at the meeting, the Act does
not lay down any such requirement. The current practice is, to lay down the agenda
preferably in the form of proposed resolutions. It is usually prepared by the secretary but
issued however, after it has been approved by the managing director or an executive of an
equal rank.
Preparation of agenda: The preparation of agenda requires considerable care. An ideal
agenda is the one which is so worded that only by altering a few words of an item to convert
it into past tense, it would form the minutes. It may be, and is often drawn up on loose
sheets of foolscap Paper. However, it is also preferable to write in bond book specially kept
for that purpose. The order in which various items appear in the agenda is generally the
order in which the business is to be transacted at the meeting. As it is customary to discuss
routine matters first such items as relate to it come first in the agenda. They are followed by
important items which, it is expected would provoke discussion among members. At the end,
the item which require only to be noted by the members listed. Such an order generally has
the merit of dividing equitably the time of the meeting among various items according to
their importance. It must be added, however, that the chairman has the discretion to take up
item for consideration by the meeting in the order he considers convenient for the disposal
of the business. The various items listed on he agenda are numbered serially for
convenience of recording minute and for future reference.
AGENDA for the Board Meeting
Summary Form
Agenda for Board Meeting to be held at………. one..…… day, the……. 20…….
at………… [a.m.]
……………………………………….. Ltd.
1. The Chairman to announce that the quorum for the meeting is present.
2. The Chairman to address the meeting, and to move that, with the permission of the
members present, the notice of the meeting and the Directors’ Report be taken as read,
and to call on the Secretary to read the Auditors’ Report.
3. The Chairman to make a statement commenting upon the working of the company.
4. The Chairman to propose:
“Resolved that the audited Balance Sheet as at…………….. 20…… at the Profit and
Loss Account for the year ending…………….. 20……… together with the Directors’
Report and Auditors’ Report thereon, be and the same are hereby received and
adopted”.
Mr…………….. to second.
The Chairman to invite members to put questions regarding working of the company
under review. After the members have spoken and their queries answered, put motion
to meeting and declare result.
5. Mr…………… a Director to propose:

“Resolved that pursuant to the recommendation of the directors, divided at the rate of
Rupees……………… per share on the equity share capital of the company for the year
ended……………… 20…… be and is hereby declare out of the current profits [or out of
the accumulated profits] of the company and that the same be paid, after deduction of
income-tax at source, to those shareholder whose names appear on the company’s
register of members on……………… 20…… and that divided warrants be posted within
30 days hereof only to those shareholders who are entitled to receive payment”.
Mr.…………… to second.
Put motion to meeting and declare result.
6. Mr……………… a Director to propose:
“Resolved that Mr……………… who retires by rotation and is eligible for re-appointment,
be and is hereby re-appointment a Director of the Company”.
Mr……………… to second.
7. Mr……………… a member to propose:
“Resolved that the retiring Auditors, Messrs……………… Chartered Accountants, be
and they are hereby re-appointed Auditors of the company to hold office till the
conclusion of the next Annual General Meeting at a remuneration of Rs………………”.
Mr……………… another member to second.
8. Mr………………, who has given notice proposing candidature of Mr……………… for the
office of Director under Section 257 of the Companies Act, 1956, to propose:
“Resolved that, due notice in writing signifying the intention of a member to propose:
Mr……………… as a Director having been received pursuant to Section 257 of the
Companies Act, 1956, Mr……………… be and is hereby appointed as a Director of the
company liable to retire by rotation”.
Mr……………… to second.
9. The Chairman to propose as a special resolution:
“Resolved that pursuant to the provisions of Sections 294 and 294AA and all other
provisions, if any, of the Companies Act, 1956, and subject to the approval of the
Central Government, the company hereby approves the appointments of the following
as sole selling agents of the company for a period not exceeding five years commencing
from the dates of appointment and for the products and the areas respectively set out
against each in the table appended below on the terms and conditions recorded in the
relative draft agreement submitted to this meeting and initialed by the Chairman hereof
for purposes of identification, and that the Board of Directors be and is hereby
authorised to effect such modifications in the terms and conditions of the said draft
agreement as may be approved by the Central Government and agreed to by the Board
the said sole selling agents.”
Name of the Agent Areas Period Products Commission
Mr…………….. to second.
10. The Chairman to declare the meeting closed.
Resolutions
A meeting is an important instrument in the corporate decision-making process. The
business at a meeting is preceded by a notice containing the agenda. The resolution is the
event that takes place in the meeting.
Dictionary meaning of the word ‘resolution’, is ‘a formal proposal put before a public
assembly or the formal determination of such proposal on any matter’. Derived from this
meaning, a resolution is a formal agreement as to adoption of proposal put before an
assembly of persons or meeting. In the context of company management, it is either a
Board meeting or a General meeting of the members. The passing of a resolution should be
construed as the manner in which a meeting formally acts expressing the intent and purpose
of the meeting and if it is a meeting of members, it means the will of the company, and if it is
a meeting of the Board of directors, it means the exposition of the intent of the executive
action initiated or to be initiated subject to the limiting and regulatory force of the different
statute.
Hints on drafting of resolution
While framing resolution, it is to be ensured that:
(i) They should be express clearly and in precise terms, and not vaguely, whether they
embody the decisions of the directors or are those passed at general meeting.
(ii) All identification of instruments, persons, etc., referred to in the resolution are properly
made.
(iii) If the resolution is being passed in pursuance to the provisions of the Act, it refers to
relevant section or sections.
(iv) If the resolution is such as requires the approval of the Central Government/Company
Law Board or confirmation of the Court, it states that effect.
(v) If the resolution is to be effective immediately, it is drawn to show that effect.
(vi) The resolution is confined to one subject matter.
Wherever possible, lengthy resolutions should be divided into paragraphs and arranged in
their logical order having regard to the subject matter of the resolution.
Members’ resolution
Resolution that may be passed by a company are of two kinds:
(i) Ordinary resolution and (ii) Special resolutions
Specimen General Meeting Resolutions-Ordinary
Section 269: Appointment/re-appointment of Managing/Whole-time Director-General
Meeting-Ordinary Resolution
I. “Resolved that Shri ABC who fulfills the conditions specified in Parts I and Part II of
Schedule XII to the Companies Act, 1956 be and is hereby appointed as the Managing
Director/Whole-time Director/ Manager of the company for a period of five years effective
from……………….. and that he may be paid remuneration by way of salary, commission and
perquisites in accordance with Part II of Schedule XIII of the Act.
Resolved further that in the event of loss or inadequacy of profit the salary payable to him
shall be subject to the limits specified in Schedule XIII”.
II. Resolved that Shri ABC be and is hereby appointed as Managing Director/Whole-time
Director/ Manager of the company subject to the approval of the Central Government for a
period of five years effective from……………….. and that he may be paid remuneration as
follows:
(i) Salary
(ii) Commission
(iii) Perquisites:
Housing, Medical reimbursement, Leave Travel Concession, Club fee Personal Accident
Insurance, Gratuity, Provident Fund etc.
Resolved further that the secretary of the company be and is hereby authorised to make an
application to the Central Government seeking their approval to the above appointment.
Section 433: Winding up by Court-Ordinary Resolution
Whereas the company has been incurring continued losses for the past several years and
WHEREAS the assets of the company are insufficient to meet the liabilities and WHEREAS
it is no longer possible to run the company except at a loss. Now therefore it is Resolved
that the company be wound up by the Tribunal at Bombay, which will become effective from
the date the Court declares the company to be wound up by such Court and that the Board
of Directors be and is hereby authorised to make necessary applications therefor and take
action for the winding up of the company by the said Court”.
Section 394: Approval of scheme of arrangement between company and class of
shareholders – Special resolution
Resolved that, subject to sanction by the Tribunal at……………….., a scheme of
arrangement in terms of the draft laid before this meeting and for the purpose of
identification signed by the Chairman thereof, or with such alteration or modification thereof
as may be directed by the said Tribunal, between the company and the holders of the
promoters shares and the holders of the equity shares for the purpose of eliminating
existing……………….. promoters shares of Rs…………… each by converting them
into……………….. equity shares of Rs……………… be and is hereby approved.
Section 433(a): Winding up of the company by the Court – General Meeting – Special
Resolution
“Resolved that consent of the company be and is hereby accorded to the Board of Directors
of the company to present a petition to the Tribunal of Delhi for winding up the company by
the Court from such date as it may determine.”
Directors’ Resolutions
Resolutions passed in a Board meeting.
As a general rule, the directors act exercise their powers by resolutions passed at Board
meetings. These resolutions may be resolution requiring:
Adoption by majority: The articles usually provides (Articles 74 of table A) for a simple
majority of votes to secure adoption of directors’ resolution.
Unanimous adoption: The resolution must be passed unanimously where the Act as requires
for example, Section 316(2) proviso and Section 372(5).
It is not essential to the validity of directors’ resolution that the determination should be
embodied in a formal resolution. Further, decision of the directors need not in all cases be
formally recorded in writing and their intention may be incurred from conduct [H.L. Belton &
Co. vs. T.J. Graham & Sons (1956)].
Resolution by circulation
Sometimes it becomes impracticable to call a meeting of the board to discuss matters on
which decisions are needed. To enable the directors to do so, the articles usually provide
(Regulation 81 of Table A) that a resolution in writing, signed by all the members of the
Board entitled to receive notice of a Board meeting, shall be valid and effective as if it were
passed at a duly convened meeting. Such resolutions are called resolutions passed by
circulation. When a resolution is passed by circulation, it should be recorded in the minutes
of the next Board meeting to ensure its authenticity.
Section 289 provides that no resolution shall be deemed to have been duly passed by
circulation unless:
(a) the resolution has been circulated in draft together with the necessary papers to all the
directors in India at their usual address, and
(b) it has been approved by all or majority of them as are entitled to vote on the resolution.
Specimen Board Resolutions passed in the meeting
Section 316: Appointment of Managing Director or a person who is already Managing
Director of another company-Board Resolution
“Resolved that subject to the approval of the Central Government to Sub-section (4) of
Section 316, Mr. X.Y.Z. who is already the Managing Director of two companies, namely M/s
ABC Limited and M/s BCD Limited, be and is hereby appointed as Managing Director of the
company for a period of five years commencing from 1 st October, 2002, with the consent of
all the Directors present at the meeting of which meeting and the resolution to be moved
there at specific notice was given to all the directors then in India, on the terms and
conditions in the draft agreement tabled before the meeting and initialled by the Chairman
for purposes of identification and that Shri SPM, the Secretary of the company be and is
hereby authorised to apply to the Central Government for seeking their approval.
Resolved further that Shri LMD, Director and Shri SPM the Secretary of the company be and
are hereby authorised to execute the said agreement subject to such
modifications/alterations made by the Central Government while giving their approval and to
affix the common seal of the company thereon.”
Section 318: Compensation for loss of office – Board Resolution
“WHEREAS Mr. NBS was employed for period of three years the Managing Director of the
company from……………….. 20….. and Whereas the company wanted to dispense with the
series of the said Managing Director, and WHEREAS the company has duly served notice to
the said Managing Director in terms of clause……… of the agreement between the company
and the said Mr. NBS governing his terms and condition as the Managing Director’ of the
company, in term of clause……… of the agreement between the company and the said Mr.
NBS, NOW THEREFORE IT IS HERE BY RESOLVED that an amount of Rs…………., be
paid to Mr. NBS as compensation for the loss of his office the Managing Director of the
company.”
Section 372A: Purchase of shares etc., of other companies – Board Resolution

“Resolved that pursuant to Section 372A of the Companies Act, 1956, the company do
purchase 3,50,000 equity shares of Rs. 10 each to M/s MPC & Company Limited (not being
under the same management as this company) and that the resolution be passed by all the
directors present unanimously.
Resolved further that Mr……………….., a Director of the company, be and is hereby
authorised to sign/ execute the necessary documents in this connection.”
Regulation 31 of Table A of Schedule I: Forfeiture of shares – Notice of default
pursuant to articles – Board resolution
Resolved that pursuant to article…….. of the Company’s articles the undermentioned shares
in the capital of the Company be and are hereby, forfeited for non-payment of the final call
of Rs………… per share payable on or before………… 19….. due notice of which had been
served upon the defaulting shareholders on…………… 19…..
Shares Nos. Registered holders

……………………………….... ……………….………………...
……………….………………...
……………………………….... ……………….………………...
……………….………………...
……………………………….... ……………….………………...
……………….………………...
Specimen Board Resolution – Passed by Circulation

………………..Ltd.
To
Mr………………., Director
……………….……………
(Address in India only).
Dear Sir,
The following resolution, which is intended to be passed as a resolution by circulation as
provided in Section 289 of the Companies Act, 1956, is circulated herewith as per the
provisions of the said section.
If only you are Not Interested in the resolution, you may please indicate by appending your
signature in the space provided beneath the resolution appearing herein below as a
separate perforated slip if you are in favour or against the said resolution. The perforated
slip may please be returned if and when signed within……………….. days of this letter.
However, it need not be returned if you are interested in the resolution.
Yours faithfully,
(Secretary)
………………..Ltd.
Resolution by circulation passed by the directors as per
circulation effected………… 19…..
Resolved
that………………..………………..………………..………………..………………..………………..
[Set out the resolution intended to passed]
*For/Against
Signature
*Strike off whichever is inapplicable.
Minutes
The minute in a literal sense means a note to preserve the memory of anything. The
minutes of a meeting are a written record of the business transacted, decisions and
resolutions arrived at the meeting. Section 193 of the Act imposes a statutory obligation on
every company to cause minutes of all proceedings of general meetings, board meetings
and meetings of the committee of the board to be recorded. Section 194 of the Companies
Act provides that minutes of meeting kept in accordance with the provisions of Section 193
shall be evidence of the proceedings recorded therein. This proceedings recorded therein.
This provision dies not mean that minuted are conclusive evidence of proceeding and can
not be questioned but it means that they will be accepted as evidence in any legal
proceedings. The statutory requirements relating to keeping of the minutes of meeting are:
(1) There shall be separate minute books for Board, Committee and General meetings.
(2) The pages of the minute books must be consecutively numbered.
(3) The entries in the minute book must be made within 30 days of every meeting.
(4) Each page shall be initialled or signed and the last page of the record of each meeting
shall be dated and signed.
(5) For Board or committee meetings, the chairman of the same or the next succeeding
meeting shall sign the minutes and for general meetings, the chairman of the same
meeting must sign within 30 days of the meeting.

(6) Minutes of a meeting in no case be attached to the book by pasting or otherwise.
Minutes of Board meeting may be recorded in a loose-leaf binder or in a bound book.
Pages of the loose-leaf minute book must be serially numbered and duly typed and the
loose leaves should be bound at reasonable intervals not exceeding six months. If
minutes are maintained on loose-leaf binders appropriate safeguards against
interpolation of the leaves in the books should be taken.
(7) In the case of minutes of Board meetings, besides the names of those present, the
names of directors who refrained from voting on matters in which they were interested,
should also be given.
Apart from these general considerations, Section 193 provides that:
(a) the minutes of each meeting must contain a fair and correct summary of the
proceedings;
(b) all appointments of officers made at the meeting must be included in the minutes;
(c) in the case of a meeting of the board of directors or a committee thereof, the minutes
must also state:
(i) the names of the directors present at the meeting; and
(ii) in the case of a resolution passed at the meeting, the names of those directors
who did not concur in the resolution.
It is also provided that certain details will not be included in the minutes if, in the opinion of
the chairman of the meeting, any of them:
(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.
Drafting of minutes: The minutes may be drafted in a tabular form or they may be drafted
in the form of a series of paragraphs, numbered consecutively and with relevant headings.
However, all minutes whether of general meetings, or board meetings, should contain the
following particulars:
Particulars of the Meeting
(1) Name of the meeting.
(2) Place, date and time of meeting.
(3) How the meeting was constituted:
Constitution of the Meeting - Present
(a) name of person in the Chair.
(b) names of directors and Secretary.

(c) names of persons in attendance……. Solicitor,……….auditor (in a board meeting).
(d) together with number of members (in general meeting).
Contents of minutes
(4) Serial number of the minute.
(5) Brief subject heading or index of each minute.
(6) Full terms of resolutions adopted.
(7) All statistical figures, amounts, dates, rate of interest, disti. Nos. of Shares, etc.
(8) Specific business upon which decisions were taken.
(9) All appointments of officers, salaries, etc.
(10) Financial and contractual transactions considered by the meeting.
(11) In the case of special resolution number of votes for and against.
(12) Objections and protests raised by members together with the Chairman’s rulings when
members insist on their recording in the minutes, e.g., Mr. A objected to the proposed
motion on the ground that it was ultra vires, the Chairman ruled that the motion was in
order.
(13) Names of directors dissenting or not concurring with any resolution passed at a Board
Meeting.
(14) Reference about interested directors abstaining from voting is necessary.
(15) The Chairman’s signature and date of verification of minutes as correct.
Specimen Minutes
Minutes of……………….. meeting of the Board of Directors of ABC Limited, Kanpur
held on……………….. the……………….. 2002, at New Delhi
Present:
1. ……………….. Chairman
2. ……………….. Director
3. ……………….. Director
In attendance Secretary
Item No. 1: Leave of absence:
Leave of absence was granted to Saravashri……………….. directors.
Item No. 2: Confirmation of minutes of the……………….. Board meeting:

The minutes of the……………….. meeting of the Board of Directors held on………………..
were considered and confirmed.
Item No. 3: Appointment of Managing Director:
The Board noted the appointment of Shri……………….. director of the company as the
Managing Director of the company. In this connection, the following resolutions were
passed:
“Resolved that Shri……………….. who fulfils the conditions specified in Parts I and II of
Schedule XIII to the Companies Act, 1956, be and is here by appointed as the Managing
Director of the company for a period of five years effective from……………….. and that he
may be paid remuneration by way of salary, commission and perquisites in accordance with
Part II of Schedule XIII of the Act.
RESOLVED FURTHER that in the event of loss or inadequacy of profit the salary payable to
him shall be subject to a cut of 10%.
Resolved further that the Secretary of the company be and is hereby directed to file the
necessary returns with the Registrar of Companies and to all acts and things as may be
necessary in this connection.”
Item No. 4: Statement of lieu of prospectus:
Secretary informed the Board that pursuant to the provisions of Section 70 of the
Companies Act, 1956, the company has to file a statement in lieu of prospectus with the
Registrar of Companies so that the company may allot shares to the collaborators. The draft
of statement in lieu of prospectus placed before the meeting was perused and approved by
the Board. The following resolutions were passed:
“Resolved that the draft of the statement in lieu of prospectus placed before the Board and
duly initialled by the Chairman for purpose of identification be and is hereby approved.
Resolved further that the Secretary of the company be and is hereby authorised to file the
statement in lieu of prospectus duly signed by the Directors with the Registrar of
companies.”
Item No. 5: Approval of the Statutory Report:
The Board was informed that the Statutory Meeting under Section 165 of the Companies
Act, 1956, has to be held within six months from the date the company was entitled to
commence business. The draft of the Statutory Report placed before the Board was
approved. In this connection the following resolution were passed:
Resolved that subject to the approval of the shareholders pursuant to the provisions of
Section 165 of the Companies Act, 1956, the draft of the Statutory Report placed before the
Board and duly initialled by the Chairman for the purposes of identification be and is hereby
approved.
Resolved further that the Statutory Report be certified as correct on behalf of the Board by
Shri……………….. Managing Director and Shri……………….. Director of the company for
submission to the company’s Auditors for their report thereon.
“Resolved further that the Statutory Meeting of the share holders of the company be
convened on……………….. at………………….. the registered office of the company
on…………………………….. the……………….. at……… hours.
Resolved further that the Secretary of the company be and is hereby authorised to issue
notice calling the Statutory Meeting of the shareholders of the company and circulate the
Statutory Report along with the notice of the meeting to all the shareholders of the company
and deliver a certified copy of the Statutory Report to the Registrar of Companies forthwith
after sending copies thereof to the shareholders of other company for registration.”
Item No. 6: Opening of a Branch Office:
The Board was informed that for sale of the company’s products, it was suitable site for
setting up the company’s plant, measuring 5000 sq. mt. Near Gurgaon. The owner of the
land is willing to sell the same to the company at a total price of Rs. 10 lakhs. The site plan
of the said plot of land placed before the Board was perused by the Board. The matter was
considered by the Board and the following resolution was passed in this connection:
“Resolved that Shri SPM, Director of the company be and is hereby authorised to finalise
the deal with the owner of the land a total value of Rs. 10 lakhs and arrange registration and
mutation of the title to such land in favour of the company.”
Item No. 7: Next Board Meeting:
The next meeting of the Board will be held on……………….. the……………….. 19…… at the
registered office of the company. The meeting ended with a vote of thanks to the chair.
PROCEDURES
Main task of a company secretary is to ensure that for doing any business company fulfils
requirements of Companies Act and the rules thereunder and of any other relevant law in
force so that the validity of the business transacted cannot be objected. On this line
procedures for some important businesses to be untaken by a company are discussed
hereunder:
Extension of Financial Year
This can be done by a company in order to make its financial year end with its holding or
subsidiary company under Section 213(1) or by any other company (irrespective of whether
the company is a holding company or subsidiary or not) under Section 210(4). The
procedure to be followed by the company in this regard is as follows:
(1) Call a Board meeting of the company and at the meeting adopt a new financial year and
approve preparation of next accounts for the new period which may be more or less
than a year.
(2) Make an application to the concerned Registrar of companies on plain paper giving full
details.
(3) Attach an application to the concerned Registrar of companies on plain paper giving full
details.
(a) A certified true copy of the last balance sheet and profit and loss account of the
company and its subsidiary or holding company.
(b) A certified true copy of the Memorandum and Articles of Association of the
company and its subsidiary or holding company.
(c) A certified true copy of the resolution passed by the Board of Directors.
(4) Obtain the permission of the concerned Registrar of Companies.
(5) Obtain, if necessary, the approval of the concerned Registrar of companies to the
extension of time for holding the Annual General Meeting beyond fifteen months.
Step to be taken to make loans to other body corporates
The Board’s power to make loans is governed by Section 292.
1. Verify that the Memorandum of Association contains the power to lend the funds to the
Company. If not, then amend it accordingly.
2. If the loan is to be given to bodies corporate under the same management under
Section 370, then get the approval of the General meeting by special resolution.
3. If the aggregate of loans given to all bodies corporate, whether under the same
management or not, exceeds 30% of the aggregate of the subscribed capital of lending
company and its free reserves, obtain prior approval of the Central Govt.
4. If a special resolution is passed for making the loan, then file it alongwith explanatory
statement in Form No. 23 with the Registrar within 30 days of its passing alongwith
prescribed fee.
5. If approval of the Central Govt. is required for loan, then:
(a) make an application to the Central Govt. in Form No. 34AA.
(b) Alongwith the application, the following documents should be furnished:
(i) A certified true copy of the special resolution.
(ii) A certified true copy of the Board’s resolution.
(iii) A certified true copy of each of the Memorandum and Articles of Association
of the lending company and the borrowing company.

(iv) Certified true copies of annual reports and annual accounts of both the
lending and the borrowing company for the last three financial years.
(v) A receipt evidencing the payment of prescribed fee.
6. Forward three copies of the notice of General meeting in which said special resolution is
passed and a copy of the proceedings of the same to the concerned stock exchange.
7. For giving loans in other cases, place the proposal in the Board meeting, get it
approved by passing a resolution in the meeting.
8. Deliver simultaneously a copy of the application made to the Central Govt. alongwith
copy of each of the documents annexed to it.
9. Maintain a register to record particulars of every loan, guarantee or security within 3
days of the making of such loan, giving of such guarantee or the provision of such
security.
Steps to be taken to borrow funds
1. Convene the Board meeting and place the proposal in it and get it approved by way of
resolution passed in the meeting.
2. If such borrowing exceeds the paid-up share capital and free reserves of the borrowing
company, then get it approved in the General meeting. [Section 293(1)(d)]
3. File the above resolution in Form No. 23 within 30 days of its passing with the Registrar
alongwith the requisite fee. [Section 192(4)(ee)(i)]
4. Forward three copies of notice and a copy of the proceedings of the General meeting to
the concerned stock exchange.
5. In case of a public company, check up whether the provisions of Sub-sections (4) to
(7) of Section 81 are applicable. It so, comply with them.
Procedure to make investments in shares of other companies
1. See whether the investments in shares are to be made by the following:
(a) a private company, unless it is a subsidiary of a public company;
(b) any banking or insurance company;
(c) any company established with the object of financing whether by way of making
loans or advances to, or subscribing to the capital or, private industrial enterprises
in India in any case where the Central Government has made or agreed to make
to the company a special advance for the purpose or has guaranteed or agreed to
guarantee the payment of moneys borrowed by the company from any institution
outside India.
(d) by a holding company to its subsidiary other than a subsidiary within the meaning
of clause (a) of Sub-section (1) of Section 4. [Section 372(14)(e)];
(e) any company in rights shares offered under Section 81(1) [Proviso to Section
372(4)].
2. Convene a Board meeting after giving notice to all the directors of the company as per
Section 286 and place the proposal in a Board meeting and get it approved by passing
a resolution. This power may also be delegated to others in accordance with Section
292.
3. In cases other than those mentioned in item 1 above, where the investment in shares is
within (a) thirty per cent of the subscribed equity share capital of the company or (b)
thirty percent of the aggregate of the paid-up equity and preference capital of the other
company; (c) thirty percent of the aggregate of the subscribed capital and free reserves
of your company together with all other investments already made; or (d) within thirty
percent of the aggregate of the subscribed capital and free reserves of your company in
respect of the investments both in shares and debentures in companies in the same
group together with all such other investments already made (not applicable to an
investment company)/then do the following:
(i) Convene a Board meeting after giving notice to all the directors of the company as
per Section 286 by giving specific notice of the meeting and the resolution to be
proposed in this regard in writing to every director in India and at his usual
address in India to every other director;
(ii) Pass the resolution with the consent of all the directors present at the meeting
and entitled to vote [Sections 372(2) & (5)] after paying requisite filing fee as
prescribed under Schedule X of the Companies Act, 1956.
4. Where investments are made by a company together with its one or more subsidiary
companies, the percentage specified in (a) and (b) of item 3 should be computed with
reference to the aggregate of the investments made by the company and its
subsidiaries.
5. In case other than those mentioned in items 1 and 3 above, where the investments in
shares exceed the limits specified in item 3 above:
(i) Convene a Board meeting after giving notice to all the directors of the company as
per Section 286 to approve the investment and to fix up date, place and agenda
for a General meeting to pass an ordinary resolution there at in this regard,
subject to approval of the Central Government [Section 372(4)].
(ii) Issue notice at least twenty-one days before the date of the general meeting
proposing the ordinary resolution with suitable explanatory statement [Section
17(1) read with Section 173(2)];
(iii) Hold the General meeting and pass the resolution;
(iv) Apply to the Central Government in Form No. 34B and enclose thereto the
following:
(a) A copy of the resolution passed by the company in General meeting
together with a copy of the resolution of the Board approving the

investments;
(b) A copy of the memorandum and articles of association of the company and
of the other body corporate;
(c) Copies of balance sheets of both of the company and the other body
corporate for the last three financial years;
(d) A copy of balance sheets of both of the company and the other body
corporate for the last three financial years;
(e) Receipt of treasury challan or demand draft evidencing payment of the
requisite fees.
6. Deliver simultaneously a copy of application and other documents mentioned in item 5
(iv) to the concerned ROC.
7. Forward to the concerned Stock Exchange, 3 copies of the notice and a copy of the
proceedings of the General meeting mentioned in item 5.
8. On receipt of the approval from the Central Government, make necessary investment.
Procedure for entering into contract with interested parties
As the paid-up share capital of the company is more than Rs. 1 crore, it is necessary to get
prior approval of the Central Government under proviso to Section 297(1), besides
complying with the other provisions of Sections 297, 299, 300 and 301 of the Companies
Act, 1956. Further:
1. Hold a Board meeting and place the terms of the contract for consideration. The
interested director(s) must disclose the nature of their interest as required under
Section 299.
2. Make an application to the Central Government in Form No. 24A and attach the
following documents with the application:
(i) Certified copy of the Board resolution approving the contract.
(ii) Certified copy of the agreement containing particulars of the contract.
(iii) Challan for payment of prescribed fees.
3. If the contract entered into is for cash purchase on prevailing market price or the private
company with whom the contract is entered into regularly deals with such raw materials,
then no consent of the Board or the Central Government will be necessary provided that
the value of such transaction does not exceed Rs. 5,000 in aggregate in any year
comprising the period of contract or contracts [Section 297(2)].
4. It may be noted that the consent of the Board under Section 297(1) must be accorded
only by a resolution passed at the meeting of the Board and not otherwise [Section
297(4)].
5. It must also be ensured that the interested director do not take part in discussion and
vote in respect of the contract in which he is interested (Section 300). Such an
interested or concerned director will not also be counted in quorum (Section 303).
6. The particulars of the contract must be entered in the register maintained under Section
301 of the Companies Act, 1956.
Procedure for amalgamation of companies – Refer to C & AL - Chapter 1(f)

Procedure for voluntary winding up (Members’ as well as creditors’) – Refer to C &
AL- Chapter 1 (i)
Steps to be taken in case of compulsory winding up of the company:
(1) A petition for winding up is to be made by any of the persons and in the manner as
mentioned in Section 439. If the petition is presented by the company, see that every
contributory or creditor of the company is furnished with a copy of the petition within 24
hours of his requiring the same on payment of the prescribed charges.
(2) See that the petition is advertised in the prescribed form at least 14 days before the
dated fixed for hearing in the Official Gazette and in a daily newspaper in English and in
the regional language circulating in this State or Union Territory concerned.
(3) Apply to the concerned Tribunal with a affidavit showing sufficient grounds for the
appointment of a provisional Liquidator and obtain the order of the concerned Tribunal
appointing Official Liquidator as the provisional Liquidator.
(4) The Tribunal will issue winding up order and on receipt of such order it should be
advertised within 14 days in a newspaper in the English language and in the regional
language in circulating in the State or the Union Territory concerned.
(5) File with the concerned ROC a certified copy of the winding up order within 30 days
alongwith the prescribed fee.
(6) Forward promptly to the concerned stock-exchange 3 copies of the petition advertised.
(7) A statement of the affairs of the company must be submitted in duplicate to the Official
Liquidator within 21 days from his appointment or from the date of winding up order.
Such time can be extended up to the maximum of 3 months.
(8) The winding proceedings will be carried out and the Official Liquidator will report the
Tribunal regarding dissolution of the company. The company shall be deemed to be
dissolved at the date on which the order dissolving the company has been reported by
the Liquidator.
SECTION B
ALLIED LAWS
16
THE SECURITIES AND EXCHANGE
BOARD OF INDIA (SEBI) ACT, 1992 ∗
UNIT I
16.0 INTRODUCTION
The capital market has witnessed tremendous growth in recent times characterised
particularly by the increasing participation of the public. Investors confidence in the capital
market can be sustained largely by ensuring investors protection. With this end in view,
the Government decided to vest SEBI immediately with statutory powers required to deal
effectively with all matters relating to capital market.
It was felt by the Government that by transferring the powers of the Controller of Capital
Issues to an independent body it would enable it to effectively regulate, promote and
monitor the working of Stock Exchanges in the country.
Earlier, the regulation of the securities market was being done through the office of
Controller of Capital Issues under the Capital Issues (Control) Act, 1947 which has been
since repealed.
Accordingly, SEBI has been set up under the SEBI Act, 1992. The CCI Act has now
ceased to have any application and stands withdrawn from the law w.e.f. 216.5.1992. The
Securities and Exchange Board of India Act was passed by the Parliament as Act No. 15
of 1992 and received the assent of the President on 4th April, 1992.
16.1 PURPOSE OF THE ACT

The purpose of the SEBI Act is to provide for the establishment of a Board called
Securities and Exchange Board of India (SEBI, for short). The Preamble to the Act
provides for the establishment of a Board to:
(i) Protect the interests of investors in securities,
∗
Updated as per SEBI (Amendment) Act,2002
(ii) Promote the development of the securities market,

(iii) To regulate the securities market, and
(iv) For matters connected therewith or incidental thereto.
The statement, of objects and reasons appended to SEBI Bill, 1992 states that SEBI
which was first established in 1988 through a Government resolution to promote orderly
and healthy growth of the securities market and for investors' protection has been
monitoring the activities of stock exchanges, mutual funds and merchant bankers etc., to
achieve these goals.
16.2 HISTORY OF THE LEGISLATION

The Securities and Exchange Board of India was set up to achieve the following
objectives:
(i) To promote fait dealings by the issuers of securities and ensure a market place
where they can raise funds at a relatively low cost.
(ii) To provide' a degree of protection to the investors and safeguard their rights and
interests so that there is a steady flow of savings into the market.
(iii) To regulate and develop a code of conduct and fair practices by intermediaries like
brokers, merchant bankers, etc., with a view to making them competitive and professional.
With the coming into force of the SEBI Act, 1992, the Securities and Exchange Board of
India administratively set up by the Government in 1988 has been replaced by the
statutory SEBI. All the assets and liabilities of the Securities and Exchange Board of India
have been transferred to SEBI by virtue of Section 10 of the SEBI Act.
Securities 'legislation in any country has two objectives, namely, regulation of stock
exchanges (where securities are traded) and protection of the interests of the investors
(those who subscribe to securities). Whenever share markets have crashed 'in any
country, the Governments have enacted and enforced the Securities and Exchange Acts
to tighten the controls, and ensure fair play in the securities business. This happened in
the United States after the Black Thursday crash of October 29, 1929 and the Securities
Exchange Act, 1934 was passed by the U.S. Congress. Similarly, in the United Kingdom
the Financial Services Act, 1986 was passed after the severe crash of October 27, 1986.
The law relating to securities in India is contained in different enactments like Companies
Act, 1956, Securities Contracts (Regulation) Act, 1956 and the Capital Issues (Control)
Act, 1947 (which has now been repealed).
It was found that the legislation in this regard was scattered in different laws and the
administrative agencies did not have proper manpower or expertise to ensure a fair deal
to investors. There was no monitoring or prosecuting machinery to check malpractices,
The SEBI Act, 1992 16.3
insider trading, uncontrolled market pricing etc.

There was also a need to regulate mutual funds and venture capital. Realising the need to
promote a healthy and growth - oriented securities market the Government of India in
1988 constituted an interim body, the Securities and Exchange Board of India by a
resolution of the Department of Economic Affairs in the. Ministry of Finance. It was
proposed that this administrative body would be a precursor to the statutory Board (SEBI)
with which it would be ultimately merged.
16.3 SHORT TITLE, EXTENT AND COMMENCEMENT

The Securities and Exchange Board of India Act, 1992 (hereinafter to be called SEBI Act)
extends to the whole of India and shall be deemed to have come into force on the 30th of
January, 1992. Even though the Act received, the assent of the President on 4th April,
1992, the Act was deemed to have come into force on the 30th of January, 1992 on which
date SEBI Ordinance was promulgated by the President of India as Parliament was not in
session. This Act has further been amended by the Securities Laws (Amendment) Act,
1995 which was enacted on 25th March, 1995 and further amended by SEBI (Amendment)
Act, 2002 [59 of 2002] which came into force on 29th October, 2002.
16.4 DEFINITIONS
The important words and expressions used in the Act are as follows:
(a) "Board" means the Securities and Exchange Board of India established under
Section 3;
(b) "Chairman" means the Chairman of the Board;
(c) "Existing Securities and Exchange Board" means the Securities and Exchange Board
of India constituted under the Resolution of the Government of India in the Department of
Economic Affairs No. 1 (44)/SE/86 dated on 12th day of April, 1988;
(d) "Fund" means the Fund constituted under Section 14;
(e) "Member" means a member of the Board and includes the Chairman;
(f) "Notification" means a notification published in the Official Gazette;
(g) "Prescribed" means prescribed by rules made under this Act;
(h) "Regulations" means the regulations made by the Board under this Act;
(i) "Securities" has the meaning assigned to it in Section 2 of the Securities Contracts
(Regulation) Act, 1956.
(j) “Reserve Bank” means the Reserve Bank of India constituted under section 3 of the
Reserve Bank of India Act, 1934 (2 of 1934).

It has further been provided that the words and expressions used in the Act but not define
there in but have been defined in the Securities Contracts (Regulation) Act, 1956 (42 of
1956) shall have the meanings respectively assigned to them in that Act.
16.5 ESTABLISHMENT OF SEBI (BOARD)

SEBI (hereinafter called 'the Board') has been established as a body corporate by
notification of the Central Government for the purpose of the Act in pursuance to Section
3 of the SEBI Act (hereinafter called as the Act). The Board is a body corporate and has
perpetual succession and common seal, with powers to acquire, hold and dispose of
property, both movable and immovable, and to contract as also to sue or be sued by the
name of SEBI. The head office of the Board is at Bombay (Mittal Court, B- Wing, 224
Nariman Point, Bombay 400 021) with offices at other places in India.
♦ Management of the Board [Section 4] : The Board shall consist of the following
members, Viz.:
(a) a Chairman;
(b) two members from amongst the officials of the Ministry of the Central Government
dealing with Finance and administration of the Companies Act, 1956 (1 of 1956);
(c) one member from amongst the officials of the Reserve Bank;
(d) five other members of whom at least three shall be the whole-time members.
The Chairman and members referred to in clauses (a) and (d) shall be appointed by the
Central Government and the members referred to in clauses (b) and (c) shall be
nominated by the Central Government and the Reserve Bank respectively [Section 4(4)].
The Chairman and the other members referred to in clauses (a) and (d) above shall be
persons of ability, integrity and standing who have shown capacity in dealing with
problems relating to securities market or have special knowledge or experience of law,
finance; economics, accountancy, administration or in any other discipline which, in the
opinion of the Central Government, shall be useful to the Board [Section 4(5)].
The general superintendence, direction and management of the affairs of the Board shall
vest in a Board of Members, which may exercise all powers and do all acts and things,
which may be exercised or done by the Board. These powers also vest in and can be
exercised by the Chairman except as otherwise provided by regulations.
♦ Term of Office of Chairman and Members of the Board [Section 5]: The term of
office and other conditions of service of Chairman and other Members of the Board as are
appointed by the Central Government shall be as may be prescribed by rules made under
the Act. The Central Government will have the right to terminate the services of the
Chairman or other members appointed to the Board (other than its own officials or of the
Reserve Bank on the Board) at any time before the expiry of their tenure by giving three
months notice in writing or salary and allowance in lieu thereof. The Chairman and other
members shall equally have the right to relinquish office at any time before the expiry of
their tenure by giving a notice of three months in writing to the Central Government.
♦ Removal of Members of the Board [Section 6]: The Central Government shall have
the power to remove a member or the Chairman appointed to the Board, if he:
(a) at any time has been adjudicated as insolvent
(b) has been declared by a competent court to be of unsound
(c) has been convicted of an offence involving moral turpitude in the opinion of the
Central Government.
(d) has so abused his position as to render his continuance in office detrimental to the
public interest .
Before removing a member or the Chairman, he will be given a reasonable opportunity of
being heard in the matter.
♦ Meetings of the Board [Section 7]: The Board shall meet at such times and places
and shall observe such rules of procedure in regard to the transaction of business at its
meetings (including quorum at such meetings) as may be provided by regulations made
under Section' 30 of the Act.
In the absence of the Chairman, for any reason, any member chosen by the other
members present from amongst themselves shall be decided by majority vote of the
members present and the Chairman or the presiding member will have a second or
casting vote.
"7A Member not to participate in meetings in certain cases: Any member, who is a director
of a company and who as such director has any director indirect pecuniary interest in any
matter coming up for consideration at a meeting of the Board, shall, as soon as possible
after relevant circumstances have come to his knowledge, disclose the nature of his
interest at such meeting and such disclosure shall be recorded in the proceedings of the
Board, and the member shall not take any part in any deliberation or decision of the Board
with respect to that matter."
Any vacancy (other than casual) in the Board (Section 8) shall not invalidate any of its
acts or proceedings. Similarly, any defect in the constitution of the Board/or in the
appointment of any person or member of the Board or any irregularity in the procedure of
the Board shall not invalidate the merits of a case before the Board.
16.6 POWERS & FUNCTIONS OF SEBI [SECTION 11]

♦ Section 11: This section relates to the functions of the Board, which are as follows:
(1) Subject to the provisions of this Act, it shall be the duty of the Board to protect the
rule rest of investors in securities and to promote the development of, and to regulate the
securities market, by such measures as it thinks fit.
(2) (a) regulating the business in stock exchanges and any other securities markets;
(b) registering and regulating the working of stock brokers, sub - brokers, share transfer
agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant
bankers, underwriters, portfolio managers, investment advisers and such other
intermediaries who may be; associated with securities markets in any manner;
(ba) registering and regulating the working of the depositories, participants, custodians of
securities, foreign institutional investors, credit rating agencies and such other
intermediaries as the Board may, by notification, specify in this behalf.
(c) registering and regulating the working of venture capital funds and collective
investment schemes, including mutual funds;
(d) promoting and regulating self-regulatory organisations;
(e) prohibiting fraudulent and unfair trade practices relating to securities markets;
(f) promoting investors' education and training of intermediaries' of securities markets;
(g) prohibiting insider trading in securities;
(h) regulating substantial acquisition of shares and take-over of companies;
(i) calling for information from, undertaking inspection, conducting inquiries and audits
of the stock exchanges, mutual funds, other persons associated with the self-regulatory
organisation in the securities market;
(ia) calling for information and record from any bank or any other authority or board or
corporation established or constituted by or under any Central, State or Provincial Act in
respect of any transaction in securities which is under investigation or inquiry by the
Board;”
(j) performing such functions and exercising such powers under the provisions of the
Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the Central
Government.
(k) levying fees or other charges for carrying out the purposes of this section.
(l) conducting research for the above purposes;
(Ia) calling from or furnishing to any such agencies, as may be specified by the Board,
such information as may be considered necessary by it for the efficient discharge of its
functions.
(m) performing such other functions as may be prescribed.
(2A) Without prejudice to the provisions contained in sub-section (2), the Board may take
measures to undertake inspection of any book, or register, or other document or record of
any listed public company or a public company (not being intermediaries referred to in
section 12) which intends to get its securities listed on any recognised stock exchange
where the Board has reasonable grounds to believe that such company has been
indulging in insider trading or fraudulent and unfair trade practices relating to securities
market.
(3) Notwithstanding anything contained in any other law for the time being in force while
exercising the powers under clause (i) or clause (ia) of sub-section (2) or sub-section
(2A), the Board shall have the same powers as are vested in a civil court under the Code
of Civil Procedure, 1908 (5 of 1908) while trying a suit, in respect of the following matters,
namely:
(i) the discovery and production of books of account and other documents, at such
place and such time as may be specified by the Board;
(ii) summoning and enforcing the attendance of persons and examining them on oath;
(iii) inspection of any books, registers and other documents of any person referred to in
Section 12, at any place.
(iv) inspection of any book, or register, or other document or record of the company
referred to in sub-section (2A);
(v) issuing commissions for the examination of witnesses or documents.
(4) Without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3)
and section 11B, the Board may, by an order, for reasons to be recorded in writing, in the
interests of investors or securities market, take any of the following measures, either
pending investigation or inquiry or on completion of such investigation or inquiry,
namely:—
(a) suspend the trading of any security in a recognised stock exchange;
(b) restrain persons from accessing the securities market and prohibit any person
associated with securities market to buy, sell or deal in securities;
(c) suspend any office-bearer of any stock exchange or self-regulatory organisation from
holding such position;
(d) impound and retain the proceeds or securities in respect of any transaction which is
under investigation;
(e) attach, after passing of an order on an application made for approval by the Judicial
Magistrate of the first class having jurisdiction, for a period not exceeding one month, one
or more bank account or accounts of any intermediary or any person associated with the
securities market in any manner involved in violation of any of the provisions of this Act,
or the rules or the regulations made thereunder :
Provided that only the bank account or accounts or any transaction entered therein, so
far as it relates to the proceeds actually involved in violation of any of the provisions of
this Act, or the rules or the regulations made thereunder shall be allowed to be attached;
(f) direct any intermediary or any person associated with the securities market in any
manner not to dispose of or alienate an asset forming part of any transaction which is
under investigation:
Provided that the Board may, without prejudice to the provisions contained in sub-section
(2) or sub-section (2A), take any of the measures specified in clause (d) or clause (e) or
clause (f), in respect of any listed public company or a public company (not being
intermediaries referred to in section 12) which intends to get its securities listed on any
recognised stock exchange where the Board has reasonable grounds to believe that such
company has been indulging in insider trading or fraudulent and unfair trade practices
relating to securities market :
Provided further that the Board shall, either before or after passing such orders, give an
opportunity of hearing to such intermediaries or persons concerned.
♦ Additional functions of SEBI under the Securities Contracts (Regulation) Act,
1956: By virtue of the SEBI Act, 1992, certain provisions contained in the Securities
Contracts (Regulation) Act, 1956 have been amended with a view to giving power to SEBI
to regulate and prevent undesirable transactions in securities by regulating the business
of dealing therein, by prohibiting options and by providing for certain other matters
connected therewith. The Securities Contracts (Regulation) Act, 1956 (SCRA) which was
enacted to prevent undesirable transactions in securities and to regulate the business of
securities had given certain powers to the Central Government, under the provisions of
that Act. The functions of the Central Government under that Act have been granted to
SEBI. These functions are:
(a) Power to call for periodical returns or direct enquiries to be made (Section 16):
SEBI will receive from every recognised Stock Exchange such periodical returns relating
to its affairs as may be prescribed by SCRA rules. It shall be open to SEBI to inspect at all
reasonable times books of accounts and other documents to be maintained by the Stock
Exchanges for periods not exceeding five years as may be prescribed in the public
interest and in the interest of trade by the Central Government. It shall also be open to
SEBI to call upon recognised stock exchanges or any member thereof to furnish in writing
such information or explanation relating to the affairs of the Stock Exchange or of the
member in relation to the stock exchange as may be required by SEBI in the interest of
trade or in the public interest. It shall also be open to SEBI to appoint, by order in writing,
one or more persons to make an inquiry in the prescribe manner in relation to the affairs
of the governing body of stock exchange or the affairs of any of the members of the stock
exchange in relation to the stock exchange and submit a report of the result of such
enquiry to SEBI within the time as, specified in the order. In the case of affairs of any of
the members/ of a stock exchange, SEBI can direct the governing body of such stock
exchange to make an inquiry and submit its report. Every director, manager, secretary or
other officer of such stock exchange, every member of such stock exchange and every
constituent or agent of such member if it is a firm and every other person or body of
persons having dealings with any of these persons whether directly or indirectly shall be
bound to produce before SEBI or other enquiry officer, all books of accounts and other
documents in his custody or power relating to the subject matter of the enquiry. This has
to be done within the time specified and as may be required by the enquiry authority.
(b) Power to approve the bye-laws of stock exchanges: Section 9 of SCRA provides
that any recognised stock exchange may make bye-laws for the regulation and control of
contracts with the previous approval of SEBI. Such bye- laws may provide for submission
of periodical settlements carried out by clearing houses to SEBI or publication of such
particulars by clearing houses subject to SEBI's directions. Such bye-laws have to be
published for public comments and after approval by SEBI shall have to be published in
the Gazette of India and also in the Official Gazette of the State unless SEBI, by written
order with reasons dispense with the condition of previous publication.
(c) Power of SEBI to make or amend bye-laws of recognised stock exchanges
(Section 10, SCRA): SEBI may either on a request in writing received by it in this behalf
from the governing body of a recognised stock exchange or on its own motion make bye-
laws on matters specified in Section 9 of SCRA or amend any bye-laws made by such
stock exchange. SEBI will have to be satisfied, after consultation with the governing body
of the stock exchange, that it is necessary or expedient to make or amend the bye-laws
and record its reasons also. The bye-laws so made or amended will have to be published
in the Gazette of India and also in the Official Gazette of the State in which the principal
office of the recognised stock exchange is situated and upon such publication, the bye-
laws so made or amended shall hive effect. It has also been provided that where the
governing body of a recognised stock exchange objects to any bye-laws made or
amended by SEBI on its own motion, it may within months of the publication in the
Gazette, apply to SEBI for revision thereof and SEBI may, after giving an opportunity to
the governing body to be heard in the matter, revise- the bye-laws so made and amended.
After such revision, the same shall have to be published in the Gazette. The obligation to
publish the amendments or revisions of the bye-laws in the Gazette is mandatory unless
SEBI is satisfied in any case that in the interest of trade or public interest, the condition of
previous publication may be dispensed with which may be ordered in writing specifying
the reasons therefor.
(d) Licensing of dealers in securities in certain areas (Section 17 SCRA): SEBI has
been empowered to grant a Iicence to any person for the business of dealing in securities
in any State or area to which Section 13 of SCRA has not been declared to apply. Section
13 of SCRA deals with contracts in notified areas to be illegal in certain circumstances.
Under Section 13, the Central Government having regard to the nature or volume of
transactions in securities in any State or area may by notification in the Official Gazette,
declare Section 13 to apply to such State or area and thereupon every contract in such
State or area which is entered into after the date of the notification otherwise than
between members and recognised stock exchanges in the said State or area or through or
with such member shall be illegal. It has also been provided that licensing would not be
necessary if the Central Government is satisfied that the manner in which securities are
being dealt with in a State or area is neither undesirable nor inexpedient. It has also been
provided that the restrictions as to licensing shall not apply to the doing of any thing by or
on behalf of a member of any recognised stock exchange in relation to dealings in
securities.
(e) Power to compel listing of securities by public companies: By Section 21 of
SCRA, SEBI has been empowered to require any company, after giving it an opportunity
of being heard, to comply with such requirements as may be prescribed with respect to
the listing of its securities on any recognised stock exchange. This power can be
exercised by SEBI after it is satisfied, having regard to the nature of securities issued by
the public company or to the dealings in them, that it is necessary or expedient in the
interest of trade or in the public interest to require it to have the listing of securities done
on any recognised stock exchange.
(f) Power to punish: Section 23(2) of SCRA lays down that any person who enters into
any contract in contravention of the provisions contained in Section 15 (members not to
act as principals in certain circumstances) of SCRA or who fails to comply with the orders
of SEBI under Section 21 (power to compel listing of securities by public companies) of
SCRA shall, on conviction be punishable with fine which may extend to one thousand
rupees.
(g) Power to delegate: Section 29A has been introduced in SCRA, 1956 to provide that
the Central Government shall have power, by order published in the Official Gazette, to
direct that the powers exercisable by it under any provision of the SCRA shall, in relation
to such matters and subject to such regulations as may be specified in the order, be
exercisable also by SEBI. Accordingly, vide Notification S.O. 573 of Ministry of Finance,
Department of Economic Affairs F.No. 1(27) 8E/92 dated 30.7.1992 and a further
notification dated 13.16.94 published in the Gazette of India Extraordinary it has been
notified by the Central Government that the powers exercisable by it under Sections 4(5),
7, 8, 11, 12, 16 and 3, 4 (1) to (4), 5, 7 A(2), 13, 18(2), 22 and 28(2) of the said Act shall
also be exercisable by SEBI. These are:
Sec.3 - relating to submission of applications for the recognition of
stock exchanges.
Sec.4(1) to (4) - relating to grant of recognition to stock exchanges.
Sec.4(5) - relating to amendment of the rules of recognised stock
exchange.
Sec.5 - relating to the withdrawal of recognition of a stock

exchange.
Sec.7 - relating to the annual reports to be furnished by a stock
exchange.
Sec.7A (2) - relating to making or amending rules or articles of
association of a stock exchange regarding voting rights of
members of a stock exchange at any meeting.
Sec.8 - relating to direction to stock exchanges for making rules.
Sec.11 - relating to the exercise of power to supersede governing
bodies of recognised stock exchanges.
Sec.12 - relating to the exercise of power to suspend business of
recognised stock exchanges.
Sec.13 - relating to the issue of notification declaring this section to apply
to an area, consequent upon which contracts issued in that area
otherwise than between members of a recognised stock
exchange or through or with such member shall be illegal.
Sec.16 - relating to the exercise of power to prohibit contract in certain
cases.
Sec.18(2) - relating to regulation and control of the business of dealing in
spot delivery contracts.
Sec.2 - relating to hearing appeals submitted by companies against
refusal of a stock exchange to test their securities.
Sec.28(2) - relating to issue of a notification specifying any class of contracts
as contracts to which the Act or any provision contained therein
shall not apply.
♦ More Powers for SEBI: Certain additional powers have been conferred on SEBI with
regard to certain provisions under the Companies Act. The sections of the Companies Act
the violation of which can be tried by SEBI include:
Section 56(3) : Which entails that every application form must be accompanied by a
memorandum containing salient features of a prospectus.
Sections 57 and 58 : According to which the expert mentioned in the prospectus should be
unconnected with the formation or the management of company. Also, the consent of the
expert to the issue of the prospectus containing statement by him is necessary.
Section 516. : It contains penal provisions in respect of violations under Sections 57 and
58.
Section 63. : It deals with criminal liability for mis-statement in prospectus.

Section 68. : It contains penal provisions for fraudulently inducing persons to invest
money.
Section 73(2) : Which deals with the provision that over subscription money be returned
within a specified time can also be tried directly by SEBI.
Section 113(1) : Which entails that the shares be 'issued within 3 months of their
allotment and the shares be transferred within two months of their lodgement. SEBI can
'low prosecute the companies for these violation.
Section 207: It deals with the remittance of dividends within 42 days of the declaration
thereof to the shareholders.
♦ Insertion of new Sections 11A and 11B :

♦ Board to regulate or prohibit issue of prospectus, offer document or
advertisement soliciting money for issue of securities [Section 11A]:
(1) Without prejudice to the provisions of the Companies Act, 1956 (1 of 1956), the
Board may, for the protection of investors,—
(a) specify, by regulations—
(i) the matters relating to issue of capital, transfer of securities and other matters
incidental thereto; and
(ii) the manner in which such matters shall be disclosed by the companies;
(b) by general or special orders—
(i) prohibit any company from issuing prospectus, any offer document, or advertisement
soliciting money from the public for the issue of securities;
(ii) specify the conditions subject to which the prospectus, such offer document or
advertisement, if not prohibited, may be issued.
(2) Without prejudice to the provisions of section 21 of the Securities Contracts
(Regulation) Act, 1956 (42 of 1956), the Board may specify the requirements for listing
and transfer of securities and other matters incidental thereto.”.
♦ Power to issue directions[Section 11B]: Save as otherwise provided in Section 11,
if after making or causing to be made an enquiry, the Board is satisfied that it is
necessary:
(i) in the interest of investors, or orderly development of securities market; or
(ii) to prevent the affairs of any intermediary or other persons referred to in Section 12
being conducted in a manner detrimental to interest of investors or securities market; or
(iii) to secure the Proper management of any such intermediary or persons, it may issue
such directions
(a) to any person or class of persons referred to I in Section 12, or associated with the
securities market; or
(b) to any company in respect of matters specified in Section II-A, as may be appropriate
in the interests of investors in securities and the securities market".
♦ Investigation [Section 11C]: (1) Where the Board has reasonable ground to believe
that—
(a) the transactions in securities are being dealt with in a manner detrimental to the
investors or the securities market; or
(b) any intermediary or any person associated with the securities market has violated
any of the provisions of this Act or the rules or the regulations made or directions issued
by the Board there under, it may, at any time by order in writing, direct any person
(hereafter in this section referred to as the Investigating Authority) specified in the order
to investigate the affairs of such intermediary or persons associated with the securities
market and to report thereon to the Board.
(2) Without prejudice to the provisions of sections 235 to 241 of the Companies Act,
1956 (1 of 1956), it shall be the duty of every manager, managing director, officer and
other employee of the company and every intermediary referred to in section 12 or every
person associated with the securities market to preserve and to produce to the
Investigating Authority or any person authorised by it in this behalf, all the books,
registers, other documents and record of, or relating to, the company or, as the case may
be, of or relating to, the intermediary or such person, which are in their custody or power.
(3) The Investigating Authority may require any intermediary or any person associated
with securities market in any manner to furnish such information to, or produce such
books, or registers, or other documents, or record before him or any person authorised by
it in this behalf as it may consider necessary if the furnishing of such information or the
production of such books, or registers, or other documents, or record is relevant or
necessary for the purposes of its investigation.
(4) The Investigating Authority may keep in its custody any books, registers, other
documents and record produced under sub-section (2) or sub-section (3) for six months
and thereafter shall return the same to any intermediary or any person associated with
securities market by whom or on whose behalf the books, registers, other documents and
record are produced:
Provided that the Investigating Authority may call for any book, register, other document
and record if they are needed again:
Provided further that if the person on whose behalf the books, registers, other
documents and record are produced requires certified copies of the books, registers,
other documents and record produced before the Investigating Authority, it shall give
certified copies of such books, registers, other documents and record to such person or
on whose behalf the books, registers, other documents and record were produced.
(5) Any person, directed to make an investigation under sub-section (1), may examine
on oath, any manager, managing director, officer and other employee of any intermediary
or any person associated with securities market in any manner, in relation to the affairs of
his business and may administer an oath accordingly and for that purpose may require
any of those persons to appear before it personally.
(6) If any person fails without reasonable cause or refuses—
(a) to produce to the Investigating Authority or any person authorised by it in this behalf
any book, register, other document and record which is his duty under sub-section (2) or
sub-section (3) to produce; or
(b) to furnish any information which is his duty under sub-section (3) to furnish; or
(c) to appear before the Investigating Authority personally when required to do so under
sub-section (5) or to answer any question which is put to him by the Investigating
Authority in pursuance of that sub-section; or
(d) to sign the notes of any examination referred to in sub-section (7), he shall be
punishable with imprisonment for a term which may extend to one year, or with fine, which
may extend to one crore rupees, or with both, and also with a further fine which may
extend to five lakh rupees for every day after the first during which the failure or refusal
continues.
(7) Notes of any examination under sub-section (5) shall be taken down in writing and
shall be read over to, or by, and signed by, the person examined, and may thereafter be
used in evidence against him.
(8) Where in the course of investigation, the Investigating Authority has reasonable
ground to believe that the books, registers, other documents and record of, or relating to,
any intermediary or any person associated with securities market in any manner, may be
destroyed, mutilated, altered, falsified or secreted, the Investigating Authority may make
an application to the Judicial Magistrate of the first class having jurisdiction for an order
for the seizure of such books, registers, other documents and record.
(9) After considering the application and hearing the Investigating Authority, if
necessary, the Magistrate may, by order, authorise the Investigating Authority—
(a) to enter, with such assistance, as may be required, the place or places where such
books, registers, other documents and record are kept;
(b) to search that place or those places in the manner specified in the order; and
(c) to seize books, registers, other documents and record, it considers necessary for the
purposes of the investigation:
Provided that the Magistrate shall not authorise seizure of books, registers, other
documents and record, of any listed public company or a public company (not being the
intermediaries specified under section 12) which intends to get its securities listed on any
recognised stock exchange unless such company indulges in insider trading or market
manipulation.
(10) The Investigating Authority shall keep in its custody the books, registers, other
documents and record seized under this section for such period not later than the
conclusion of the investigation as it considers necessary and thereafter shall return the
same to the company or the other body corporate, or, as the case may be, to the
managing director or the manager or any other person, from whose custody or power they
were seized and inform the Magistrate of such return:
Provided that the Investigating Authority may, before returning such books, registers,
other documents and record as aforesaid, place identification marks on them or any part
thereof.
(11) Save as otherwise provided in this section, every search or seizure made under this
section shall be carried out in accordance with the provisions of the Code Criminal
Procedure, 1973 (2 of 1974) relating to searches or seizures made under that Code.
♦ Cease and desist proceedings [Section 11D]: If the Board finds, after causing an
inquiry to be made, that any person has violated, or is likely to violate, any provisions of
this Act, or any rules or regulations made thereunder, it may pass an order requiring such
person to cease and desist from committing or causing such violation :
Provided that the Board shall not pass such order in respect of any listed public company
or a public company (other than the intermediaries specified under section 12) which
intends to get its securities listed on any recognised stock exchange unless the Board has
reasonable grounds to believe that such company has indulged in insider trading or
market manipulation.”
♦ Section 12: This Section relates to the registration of stock-brokers, subbrokers,
share transfer agents etc. which are as follows:
(1) No stock broker, sub-broker, share transfer agent, banker to an issue, trustee of trust
deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment
adviser and such other intermediary who may be associated with securities market shall
buy, sell or deal in securities except under, and in accordance with, the conditions of a
certificate of registration obtained from the Board in accordance with the regulations made
under this Act.
Provided that a person buying or selling securities or otherwise dealing with the securities
market as a stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of

trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager,
investment adviser and such other intermediary who may be associated with securities
market immediately before the establishment of the Board for which no registration
certificate was necessary prior to such establishment, may continue to do so for a period
of three months from such establishment or, if he has made an application for such
registration within the said period of three months, till the disposal of such application.
"Provided further that any certificate of registration, obtained immediately before the
colJ1mencement of the Securities Laws (Amendment) Act, 1995, shall be deemed to have
been obtained from the Board in accordance with the regulations providing for such
registration".
(IA) No depository, participant, custodian of securities, foreign institutional investor, credit
rating agency, or any other intermediary associated with the securities market as the
Board may by notification in this behalf specify, shall buy or sell or deal in securities
except under and in accordance with the conditions of a certificate of registration obtained
from the Board in accordance with the regulations made under this Act;
Provided that a person buying or selling securities or otherwise dealing with the securities
market as a depository, participant, custodian of securities, foreign institutional investor
'or credit rating agency immediately before the commencement of the Securities Laws
(Amendment) Act, 1995, for which no registration certificate was required prior to such
commencement, may continue to buy or sell securities or otherwise deal with the
securities market until such time regulations are made under clause (d) of sub-section (2)
of Section 30; (IB) No person shall sponsor or cause to be sponsored or carry on or
caused to be carried on any venture capital funds and collective investment scheme
including mutual funds, unless he obtains certificate of registration from the Board in
accordance with the regulations. .
Provided that any person sponsoring or causing to be sponsored, carrying or causing to
be carried on any venture capital funds or collective investment scheme operating in the
securities market immediately before the commencement of the Securities Laws
(Amendment) Act, 1995, for which no registration certificate was required prior to such
commencement, may continue to operate till such time regulations are made under clause
(d) of sub-section (2) of Section 30.
(2) Every application for registration shall be in such manner and on payment of such
fees as may be determined by regulations.
(3) The Board may, by order, suspend or cancel a certificate of registration in such
manner as may be determined by regulations; Provided that no order under this sub-
section shall be made unless the person concerned has been -given II reasonable
opportunity of being heard.
♦ Prohibition of manipulative and deceptive devices, insider trading and

substantial acquisition of securities or control [Section 12A]: No person shall directly
or indirectly—
(a) use or employ, in connection with the issue, purchase or sale of any securities listed
or proposed to be listed on a recognised stock exchange, any manipulative or deceptive
device or contrivance in contravention of the provisions of this Act or the rules or the
regulations made thereunder;
(b) employ any device, scheme or artifice to defraud in connection with issue or dealing
in securities which are listed or proposed to be listed on a recognized stock exchange;
(c) engage in any act, practice, course of business which operates or would operate as
fraud or deceit upon any person, in connection with the issue, dealing in securities which
are listed or proposed to be listed on a recognized stock exchange, in contravention of the
provisions of this Act or the rules or the regulations made thereunder;
(d) engage in insider trading;
(e) deal in securities while in possession of material or non-public information or
communicate such material or non-public information to any other person, in a manner
which is in contravention of the provisions of this Act or the rules or the regulations made
thereunder;
(f) acquire control of any company or securities more than the percentage of equity
share capital of a company whose securities are listed or proposed to be listed on a
recognized stock exchange in contravention of the regulations made under this Act.
16.7 PENALTIES
♦ Penalty for failure to furnish information, return, etc. (Section 15A) : If any
person who, is required under this Act or any rules or regulations made thereunder.
(a) to furnish any document, return or report to the Board, fails to furnish the same, he
shall be liable to a penalty of one lakh rupees for each day during which such failure
continues or one crore rupees, whichever is less.
(b) to file any return or furnish any information, books or other documents within the time
specified therefor in the regulations, fails to file return or furnish the same, he shall be
liable to a penalty of one lakh rupees for each day during which such failure continues or
one crore rupees, whichever is less.
(c) to maintain books of accounts or records, fails to maintain the same, he shall be
♦ Penalty for failure by any person to enter into agreement with clients (Section
15B): If any person who, is registered as an intermediary and is required under this Act or
any rules or regulations made thereunder, to enter into an agreement with his client, fails
to enter into such agreement, he shall be liable to a penalty of one lakh rupees for each
day during which such failure continues or one crore rupees, whichever is less.
♦ Penalty for failure to redress investors’ grievances (Section15C): If any listed
company or any person who is registered as an intermediary, after having been called
upon by the Board in writing, to redress the grievances of investors, fails to redress such
grievances within the time specified by the Board, such company or intermediary shall be
♦ Penalty for certain defaults in case of mutual funds (Section 15D): If any person
who is:
(a) required under this Act or any rules or regulations made thereunder to obtain a
certificate' of registration from the Board for sponsoring or carrying on any collective
investment scheme, including mutual funds, Sponsors or carries on any collective
investment scheme, including mutual funds, without obtaining such certificate of
registration, he shall be liable to a penalty of one lakh rupees for each day during which
he sponsors or carries on any such collective investment scheme including mutual funds,
or one crore rupees, whichever is less,
(b) registered with the Board as a collective investment scheme, including mutual funds,
for sponsoring or carrying on any investment scheme, fails to comply with the terms and
conditions of certificate of registration, he shall be liable to a penalty of one lakh rupees
for each day during which such failure continues or one crore rupees, whichever is less;
(c) registered with the Board as a collective investment scheme including mutual funds,
fails to make an application for listing of its schemes as provided for in the regulations
governing such listing, he shall be liable to penalty not exceeding five thousand rupees for
each day during which such failure continues or one crore rupees, whichever is less;
(d) registered as a collective investment scheme including mutual funds fails to despatch
unit certificates of any scheme in the manner provided in the regulation governing such
despatch shall be liable to a penalty of one lakh rupees for each day during which such
failure continues or one crore rupees, whichever is less,
(e) registered as a collective investment scheme, including mutual funds or fails to
refund the application monies paid by the investors within the period specified in the
regulations, he shall be liable to a penalty of one lakh rupees for each day during which
such failure continues or one crore rupees, whichever is less;
(f) registered as a collective investment scheme including mutual funds fails to invest
money collected by such collective investment schemes in the manner or within the period
specified in the regulations, he shall be liable to a penalty of one lakh rupees for each day
during which such failure continues or one crore rupees, whichever is less;
♦ Penalty for failure to observe rules and regulations by an asset management
company (Section I5E): Where any asset management company of a mutual fund
registered under this Act, fails to comply with any of the regulations providing for
restrictions on the activities of the asset management companies, such asset
management company shall be liable to a penalty of one lakh rupees for each day during
which such failure continues or one crore rupees, whichever is less.
♦ Penalty for default in case of stock brokers (Section 15F) : If any person who, is
registered as a stock broker under this Act
(a) fails to issue contract notes in the form and in the manner specified by the stock
exchange of which such broker is a member, he shall be liable to a penalty not exceeding
five times the amount for which the contract note was required to be issued by that broker;
(b) fails to deliver any security or fails to make payment of the amount due to the
investor in the manner or within the period specified in the regulations, he shall be liable
to a penalty of one lakh rupees for each day during which such failure continues or one
crore rupees, whichever is less;
(c) charges an amount of brokerage which is in excess of the brokerage may be
specified in the regulations, he shall be liable to a penalty of one lakh rupees or five times
the amount of brokerage charged in excess of the specified brokerage, whichever is
higher.
♦ Penalty for insider trading (Section 15G) : If any insider who:
(i) either on his own behalf or on behalf of any other person, deals in securities of
corporate on any stock exchange on the basis of any unpublished price sensitive
information; or
(ii) communicates any unpublished price sensitive information to any person, with or
without his request for such information except as required in the ordinary course of
business or under any law; or
(iii) counsels, or procures for, any other person to deal in any securities of any body
corporate on the basis of unpublished price sensitive information, shall be liable to a
penalty twenty-five crore rupees or three times the amount of profits made out of insider
trading, whichever is higher.
♦ Penalty for non-disclosure of acquisition of shares and takeovers (Section 15H):
If any person who, is required under this Act or any rules or regulations made thereunder
fails to,
(i) disclose the aggregate of his shareholding in the body corporate before he acquires
any shares of that body corporate; or
(ii) make a public announcement to acquire shares at a minimum price, he shall be liable
to a penalty twenty-five crore rupees or three times the amount of profits made out of such
failure, whichever is higher.
(iii) make a public offer by sending letter of offer to the shareholders of the concerned
company; or
(iv) make payment of consideration to the shareholders who sold their shares pursuant to
letter of offer,
♦ Penalty for fraudulent and unfair trade practices.(Section 15HA)—If any person
indulges in fraudulent and unfair trade practices relating to securities, he shall be liable to
a penalty of twenty-five crore rupees or three times the amount of profits made out of such
practices, whichever is higher.
♦ Penalty for contravention where no separate penalty has been provided.(Section

15HB)—Whoever fails to comply with any provision of this Act, the rules or the regulations
made or directions issued by the Board thereunder for which no separate penalty has
been provided, shall be liable to a penalty which may extend to one crore rupees.
♦ Power to adjudicate (Section 15-I):
(1) For the purpose of adjudging under Sections 15A, 15B, 15C, 150, 15E, 15F, 15G
15H, 15HA and 15HB, the Board shall appoint any of its officers not below the rank of
Division Chief to be an adjudicating officer for holding an inquiry in the prescribed manner
after giving any person concerned a reasonable opportunity of being heard for the
purpose of imposing any penalty.
(2) While holding an inquiry, the adjudicating officer shall have power to summon and
enforce the attendance of any person acquainted with the facts and circumstances of the
case to give evidence or to produce any document which in the opinion of the adjudicating
officer, may be useful for or relevant to the subject matter of the inquiry, and if on such
inquiry, he is satisfied that the person has failed to comply with the provisions of sections
specified in sub-section (1), he may impose such penalty as he thinks fit in accordance
with the provisions of any of those sections.
♦ Factors to be taken into account by the adjudicating officer (Section 15J) : While
adjudging the quantum of penalty under Section 151, the adjudicating officer shall have
due regard to the following factors, namely:
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made
as a result, of the default;
(b) the amount of loss caused to an investor or group of investors as a result of the
default;
(c) the repetitive nature of the default.

♦ Crediting sums realised by way of penalties to Consolidated Fund of India.
(Section 15JA) All sums realised by way of penalties under this Act shall be credited to
the Consolidated Fund of India.
16.8 GUIDELINES, REGULATIONS AND RULES UNDER THE SEBI ACT

For performing the functions mentioned in Section 11 of the SEBI Act,1992, SEBI has
issued some guidelines and their clarifications for protection of investors from time to
time. Till date the Board has issued guidelines for disclosure and investor protection and
fourteen clarifications thereof. Guidelines to development financial institutions for investor
protection have been issued separately as the general guidelines can not apply to
financial institutions engaged mainly in industrial or agricultural financing. These
guidelines and clarifications have been covered by this study paper.
SEBI is empowered under Section 30, to make regulations consistent with this Act and
rules made thereunder by the Central Government for the purposes of this Act, with the
previous appeal of the Central Government. In pursuance of this power SEBI has made
some regulations till November 1993 (Annexure I contains list of regulations).
Apart from SEBI the Central Government is empowered to make rules for carrying out the
purposes of this Act under Section 29 the SEBI Act. List of the rules made by the Central
Government in exercise of it power is given in Annexure-II.
Annexure I
Regulations:
1. SEBI (Stock Brokers and Sub-brokers) Regulations, 1992 [G.S.R. 780(E), dated
23.10.92].
2. SEBI (Insider Trading) Regulations, 1992 [F.No. LE/6308/92, dated 116.11.92].
3. SEBI (Mutual Fund) Regulations, 1993 [F.No. LE/SEBI/IV/93, dated 20.1.93].
4. SEBI (Merchant Bankers) Regulations, 1992 [JENO, LE/11.12/92, dated 22.12.92].
5. SEBI (Protfolio Manager) Regulations, 1993 [SEBI/LE/92/III, dated 7.1.93].
6. SEBI (Registrars to an Issue and Share Transfer Agents) Regulations, 1993
[SEBI/LE/5/93, dated 31.5.93].
7. SEBI (Underwriters) Regulations, 1993 [F.No. LE/10/93 dated 8.10.93].
8. SEBI (Debenture Trustees) Rules, 1993 [F.No. SEBI/LE-12/93, dated 216.12.93].
16. SEBI (Bankers to an issue) Regulations, 1994 [F.No. LE/7/94, dated 14.7.94].
10. SEBI (Substantial acquisition of shares and take over) Regulations, 1994 [E.No. S.O.
800(E) dated 4.11.1994].
11. SEBI (Prohibition of fraudulent and unfair trade practices relating to securities markets)
Regulations, 1995.
Annexure II
Rules:
1. SEBI (Merchant Bankers) Rules, 1992 [GSR 937(E), dated 22.12.92].
2. SEBI (Portfolio Managers) Rules, 1993 [GSR 4(E), dated 7.1.93].
3. SEBI (Appeal to Central Government) Rules, 1993 [E.No. 20/21/SE-92, dated 2.4.93].
4. SEBI (Registrars to an Issue and Share Transfer Agents) Rules, 1993 [GSR 436(E),
dated 31.5.93].
5. SEBI (Underwriters) Rules, 1993 [SO 766(E), dated 8.10.93].
6. SEBI (Debenture Trustees) Rules, 1993 [E.No. 20(3), SE/93 dated 216.12.93].
7. SEBI (Terms and Conditions of Service of Chairman and Members) Amendment Rules,
1994 [E.No. 20(26) CM/93; dated 7.2.94].
8. SEBI (Annual Report) Rules, 1994 [F.No. 20(23) SE/93 dated 7.4.94].
16. SEBI (Form of Annual Statement of Accounts and Records) Rules, 1994 [F.No.
20/23/SE/92 dated 20.5.94].
10. SEBI (Bankers to an Issue) Rules, 1994 [GSR 585, dated 14.7.94].
UNIT II
SEBI (DISCLOSURE AND INVESTOR PROTECTION) GUIDELINES, 2000
CONTENTS
CHAPTERS
Chapter I : Preliminary
Chapter II : Eligibility Norms for Companies Issuing Securities
Chapter III : Pricing by Companies Issuing Securities
Chapter VIIIA : Green Shoe Option
Chapter XI : Guidelines on Book Building

CHAPTER I
PRELIMINARY
1(1.1) Short title, commencement, etc.
(a) These Guidelines have been issued by the Securities and Exchange Board of India
under Section 11 of the Securities and Exchange Board of India Act, 1992.
(b) These Guidelines may be called the Securities and Exchange Board of India
(Disclosure and Investor Protection) Guidelines, 2000.
(c) These Guidelines shall come into force from the date specified by the Board.
1.2 Definitions
1.2.1 In these Guidelines, unless the context otherwise requires;
(i) “Abridged Prospectus” means the memorandum as prescribed in Form 2A under
Sub-section (3) of Section 56 of the Companies Act, 1956;
(ii) “Act” means the Securities and Exchange Board of India Act, 1992 (15 of 1992);
(iii) “Advertisement” includes notices, brochures, pamphlets , circulars, show cards,
catalogues, hoardings, placards, posters, insertions in newspaper, pictures, films, cover
pages of offer documents or any other print medium, radio, television programmes
through any electronic medium;
(iv) “Board” means the Securities and Exchange Board of India established under
provisions of Section 3 of the Act;
(v) “Book Building” means a process undertaken by which a demand for the securities
proposed to be issued by a body corporate is elicited and built up and the price for such
securities is assessed for the determination of the quantum of such securities to be issued
by means of a notice, circular, advertisement, document or information memoranda or
offer document;
(vi) “Collection Centre” means a place where the application for subscribing to the
public or rights issue is collected by the Banker to an Issue on behalf of the issuer
company;
(vii) “Company” means the Company defined in Section 3 of the Companies Act, 1956;
(viii) “Composite Issues” means an issue of securities by a listed company on a public
cum rights basis offered through a single offer document wherein the allotment for both
public and rights components of the issue is proposed to be made simultaneously;
(ix) “Credit Rating Agency” means a body corporate registered under Securities and
1 Renumbered clause 1 as “clause 1.1”, vide SEBI Circular No. SEBI/CFD/DIL/DIP/14/2005/25/1 dated January 25, 2005.
Exchange Board of India (Credit Rating Agencies) Regulations, 1999;

(x) “Designated Financial Institution” means the public financial institution included in
or notified under Section 4A of the Companies Act, Industrial Development Corporation
established by State Governments and financial institutions approved under Section
36(1)(viii) of Income Tax Act, 1961;
(xi) “Debt-Instrument” means an instrument which creates or acknowledges
indebtedness, and includes debenture, stock, bonds and such other securities of a body
corporate, whether constituting a charge on the assets of the body corporate or not;
(xii) “Depository” means a body corporate registered under Securities and Exchange
Board of India (Depositories and Participants) Regulations, 1996;
2(xii-a) “Designated Stock Exchange” means a stock exchange in which securities of
the company are listed or proposed to be listed and which is chosen by the company for
purposes of a particular issue under these guidelines.
Provided that where any of such stock exchanges have nationwide trading terminals, the
company shall choose one of them as the designated stock exchange.
Provided further that the company may choose a different exchange as a designated
stock exchange for any subsequent issue, subject to the above clause.)
3(xiib) “Employee” means
(a) a permanent employee of the company working in India or out of India; or
(b) a director of the company, whether a whole time director, part time director or
otherwise;
(c) an employee as defined in sub-clauses (a) or (b) of a subsidiary, in India or out of
India, or of a holding company of the company.)
(xiii) “Firm Allotment” means allotment on a firm basis in public issues by an issuing
company made to Indian and Multilateral Development Financial Institutions, Indian
Mutual Funds, Foreign Institutional Investors including non-resident Indians and overseas
corporate bodies and permanent/ regular employees of the issuer company.
4(xiii-a) “Green Shoe Option” means an option of allocating shares in excess of the
shares included in the public issue and operating a post-listing price stabilizing
mechanism in accordance with the provisions of Chapter VIII-A of these Guidelines, which
is granted to a company to be exercised through a Stabilising Agent.)
(xiv) “Guidelines” means Securities and Exchange Board of India (Disclosure and
2 Inserted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003.

3 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/13/2004/28/5 dated May 28, 2004.
Investor Protection) Guidelines, 1999 and includes instructions issued by the Board.
(xv) “Infrastructure Company” means, a company wholly engaged in the business of
developing, maintaining and operating infrastructure facility.
(xvi) “Infrastructure Facility” means the “infrastructure facility” within the meaning of
Section 10(23G)(c) of Income Tax Act, 1961.
(xvii) “Issuer Company” means a company which has filed offer documents with the
Board for making issue of securities in terms of these guidelines.
(xviii) “Listed Company” means a company which has any of its securities offered
through an offer document listed on a recognised stock exchange and also includes Public
Sector Undertakings whose securities are listed on a recognised stock exchange.
(xix) “Merchant Banker” means an entity registered under Securities and Exchange
Board of India (Merchant Bankers) Regulations, 1992;
5(xix-a) “Mutual fund” means a mutual fund registered with the Board under the SEBI
(Mutual Funds) Regulations, 1996.)
6(xix-b) 7“Networth”
means aggregate of value of the paid up equity capital and free
reserves (excluding reserves created out of revaluation) reduced by the aggregate value
of accumulate d losses and deferred expenditure not written off (including miscellaneous
expenses not written off) as per the audited balance sheet.)
(xx) “Offer Document” means Prospectus in case of a public issue or offer for sale and
Letter of Offer in case of a rights issue.
(xxi) “Offer for Sale” means offer of securities by existing shareholder(s) of a company to
the public for subscription, through an offer document.
(xxii) “Preferential Allotment” means an issue of capital made by a body corporate in
pursuance of a resolution passed under Sub-section (1A) of Section 81 of the Companies
Act, 1956.
(xxiii) “Public Issue” means an invitation by a company to public to subscribe to the
securities offered through a prospectus;
(xxiv) “Public Financial Institutions” means institutions included in or notified for the
purposes of Section 4A of the Companies Act, 1956.
5 Inserted vide SEBI/CFD/DIL/DIP/ 16/200 5/19/9 dated September 19, 2005.

6 Renumbered sub-clause (xix a) as “sub -clause (xix b)”, vide SEBI Circular No. SEBI/CFD/DIL/DIP/16/2005/19/9 dated
September 19, 2005.
7 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following:
“"networth" means aggregate of value of the paid up equity capital and free reserves (excluding reserves created out of
revaluation) reduced by the aggregate value of accumulated losses and deferred expenditure not written off (including
miscellaneous expenses not written off)”.
Initially inserted vide SEBI Circular No. DIP (Compendium) Circular No. 3 dated August 04, 2000.
8(xxiva) “Retail Individual Investor” means an investor who applies or bids for
securities of or for a value of not more than 9(Rs.1,00,000/-).)
(xxv) “Rights Issue” means an issue of capital under Sub -section (1) of Section 81 of the
Companies Act, 1956, to be offered to the existing shareholders of the company through a
Letter of Offer.
(xxvi) “Schedule ” means schedule annexed to these Guidelines.
10(xxvia) “Shelf Prospectus” means a shelf prospectus within the meaning of clause (b)
of the Explanation to Section 60A of the Companies Act, 1956.)
(xxvii) “Stock Exchange” means a stock exchange which is for the time being
recognised under Section 4 of the Securities Contracts (Regulation) Act, 1956.
(xxviii) “Underwriting” means an agreement with or without conditions to subscribe to
the securities of a body corporate when the existing shareholders of such body corporate
or the public do not subscribe to the securities offered to them.
(xxix) “Unlisted Company” means a company which is not a listed company.
11(1.3)All other words and expressions used but not defined in these Guidelines, but
defined in the Act or in the Companies Act, 1956 or in Securities Contracts (Regulation)
Act, 1956 and/or the Rules and the Regulations made thereunder, shall have the
meanings respectively assigned to them in such Acts or the Rules or the Regulations
made thereunder or any statutory modification or re-enactment thereto, as the case may
be.
1.4 Applicability of the Guidelines
(i) These Guidelines shall be applicable to all public issues by listed and unlisted
companies, all offers for sale and rights issues by listed companies whose equity share
capital is listed, except in case of rights issues where the aggregate value of securities
offered does not exceed Rs.50 lacs.
12(Provided that in case of the rights issue where the aggregate value of the securities
offered is less than Rs.50 Lakhs, the company shall prepare the letter of offer in
accordance with the disclosure requirements specified in these guidelines and file the
same with the Board for its information and for being put on the SEBI website.)
(ii) Unless otherwise stated, all provisions in these guidelines applicable to public issues

9 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/15/2005/29/3 dated March 29, 2005 for the letters and figures “Rs.
50,000/-”
10 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/12/2004/8/4 dated April 8, 2004.
11 Renumbered “clause 1.3.1” as “clause 1.3”, vide SEBI Circular No. SEBI/CFD/DIL/DIP/14/2005/25/1 dated January 25,
2005.
by unlisted companies shall also apply to offers for sale to the public by unlisted
companies.
CHAPTER II
ELIGIBILITY NORMS FOR COMPANIES ISSUING SECURITIES
2.0 Conditions for issue of securities
13(The companies issuing securities offered through an offer document shall satisfy the
following at the time of filing the draft offer document with SEBI and also at the time of
filing the final offer document with the Registrar of Companies/ Designated Stock
Exchange:)
2.1 Filing of offer document
2.1.1 No company shall make any issue of a public issue of securities, unless a draft
prospectus has been filed with the Board, through an eligible Merchant Banker, atleast 21
days prior to the filing of Prospectus with the Registrar of Companies (ROCs).
Provided that if, within 21 days from the date of submission of draft Prospectus, the
Board specifies changes, if any, in the draft Prospectus (without being under any
obligation to do so), the issuer or the Lead Merchant banker shall carry out such changes
in the draft prospectus before filing the prospectus with ROCs.
2.1.2 14(No listed company shall make any issue of security through a rights issue where
the aggregate value of securities, including premium, if any, exceeds Rs.50 lacs, unless
the letter of offer is filed with the Board, through an eligible Merchant Banker, at least 21
days prior to the filing of the Letter of Offer with Regional Stock Exchange (RSE).
Provided that if, within 21 days from the date of filing of draft letter of offer, the Board
specifies changes, if any, in the draft letter of offer, (without being under any obligation to
do so), the issuer or the Lead Merchant banker shall carry out such changes before filing
the draft letter of offer with RSE.)
2.1.3 Companies barred not to issue security
No company shall make an issue of securities if the company has been prohibited from
accessing the capital market under any order or direction passed by the Board.
“The companies issuing securities offered through an offer document, shall, satisfy the following:”
“No listed company shall make any issue of security through a rights issue where the aggregate value of securities, including
premium, if any, exceeds Rs.50 lacs, unless the letter of offer is filed with the Board, through an eligible Merchant Banker, at
least 21 days prior to the filing of the Letter of Offer with Regional Stock Exchange (RSE).
Provided that if, within 21 days from the date of filing of draft letter of offer, the Board specifies changes, if any, in the draft
letter of offer, (without being under any obligation to do so), the issuer or the Lead Merchant banker shall carry out such
changes before filing the draft letter of offer with RSE.”
2.1.4 Application for listing

No company shall make any public issue of securities unless it has made an application
for listing of those securities in the stock exchange (s).
2.1.5 Issue of securities in dematerialised form
2.1.5.1 No company shall make public or rights issue or an offer for sale of securities,
unless:
(a) the company enters into an agreement with a depository for dematerialisation of
securities already issued or proposed to be issued to the public or existing shareholders; and
(b) the company gives an option to subscribers/ shareholders/ investors to receive the
security certificates or hold securities in dematerialised form with a depository.
Explanation:
A “depository” shall mean a depository registered with the Board under the Securities and
Exchange Board of India (Depositories and Participants) Regulations, 1996.
2.2 15(Initial Public Offerings by Unlisted Companies)
2.2.1 16(An unlisted company may make an initial public offering (IPO) of equity shares or
any other security which may be converted into or exchanged with equity shares at a later
date, only if it meets all the following conditions:
(a) The company has net tangible assets of at least Rs. 3 crores in each of the preceding 3
full years (of 12 months each), of which not more than 50% is held in monetary assets:
Provided that if more than 50% of the net tangible assets are held in monetary assets,
the company has made firm commitments to deploy such excess monetary assets in its
business/project;
“Public Issue by Unlisted Companies”.
“2.2.1 An unlisted company shall make a public issue of any equity shares or any security convertible into equity shares at a
later date subject to the following:-
(i) It has a pre-issue networth of not less than Rs.1 crore in three (3) out of preceding five (5) years, with a minimum networth to
be met during immediately preceding two (2) years; and
(ii) It has a track record of distributable profits in terms of section 205 of the Companies Act, 1956, for at least three (3) out of
immediately preceding five (5) years.
Provided that the issue size (i.e. offer through offer document + firm allotment + promoters’ contribution through the offer
document) does not exceed five (5) times its pre-issue networth as per the last available audited accounts, either at the time
of filing draft offer document with the Board or at the time of opening of the issue”.
Prior to the above, substituted vide SEBI Circular No. DIP (Compendium) Circular No. 3 dated August 04, 2000 for the
following:
"2.2.1 No unlisted company shall make a public issue of any equity share or any security convertible at a later date into
equity share unless the company has;-
(i) a track record of distributable profits in terms of section 205 of Companies Act, for at least three (3) out of immediately
preceding five (5) years; and
(ii) a pre-issue networth of not less than Rupees One crore in three (3) out of preceding five (5) years, with the minimum
networth to be met during immediately preceding two (2) years.”
(b) The company has a track record of distributable profits in terms of Section 205 of the
Companies Act, 1956, for at least three (3) out of immediately preceding five (5) years;
Provided further that extraordinary items shall not be considered for calculating
distributable profits in terms of Section 205 of Companies Act, 1956;
(c) The company has a net worth of at least Rs. 1 crore in each of the preceding 3 full years
(of 12 months each);
(d) In case the company has changed its name within the last one year, atleast 50% of the
revenue for the preceding 1 full year is earned by the company from the activity suggested by
the new name; and
(e) The aggregate of the proposed issue and all previous issues made in the same financial
year in terms of size (i.e., offer through offer document + firm allotment + promoters’
contribution through the offer document), does not exceed five (5) times its pre-issue networth
as per the audited balance sheet of the last financial year.)
2.2.2 17(An unlisted company not complying with any of the conditions specified in Clause
17 Substituted vide SEB I/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following:
“2.2.2 An unlisted company can make a public issue of equity shares or any security convertible into equity shares at a later
date, only through the book -building process if,
(i) it does not comply with the conditions specified in clause 2.2.1 above, or,
(ii) its proposed issue size exceeds five times its pre-issue networth as per the last available audited accounts either at the time
of filing draft offer document with the Board or at the time of opening of the issue
Provided that sixty percent (60%) of the issue size shall be allotted to the Qualified Institutional Buyers (QIBs),failing which
the full subscription monies shall be refunded.
Explanation 1:
(i) Profits emanating only from the information technology business or activities of the company, shall be considered for the
purposes of computation of the track record of distributable profits in following cases:
a. for companies in "Information Technology" sector or proposing to raise moneys for projects in "information technology"
sector,
b. for companies whose name suggests that they are engaged in information technology activities / business, etc. viz. the
company’s name containing the words ‘software, hardware, info, infotech, .com, informatics, technology, computer,
information, etc.;
(ii) In case of partnership firms which have since been converted into companies, the track record of distributable profits of the
firm shall be considered only if the financial statements of the partnership business for the said years conform to and are
revised in the format prescribed for companies under the Companies Act, 1956 and also comply with the following:
a. adequate disclosures are made in the financial statements as required to be made by the companies as per Schedule VI
of the Companies Act, 1956;
b. the financial statements shall be duly certified by a Chartered Accountant stating that:
I. the accounts as revised or otherwise and that the disclosures made are in accordance with the provisions of Schedule VI
of the Companies Act, 1956; and
II. the accounting standards of the Institute of Chartered Accountants of India(ICAI) have been followed and that the financial
statements present a true and fair picture of the firm’s accounts.
(iii) the lead merchant banker shall also verify and confirm that the financial statements furnished on behalf of the partnership
firm are in accordance with the Accounting Standards prescribed by the ICAI.
(iv) In case of an unlisted company formed out of a division of an existing company, the track record of distributable profits of the
division spun off shall be considered only if the requirements regarding financial statements as specified for partnership firms
in clause (ii) above are complied with.
Explanation 2: For the purposes of clause 2.2 above, the term –

(i) "Three years out of immediately preceding five years", shall mean that at least three (3) audited accounts for a period of not
less than thirty six (36) months are available for computation of the minimum track record of three (3) years of distributable
profits.
(ii) "Qualified Institutional Buyer" shall mean –

a. public financial institution as defined in section 4A of the Companies Act, 1956;
b. scheduled commercial banks;
c. mutual funds;
d. foreign institutional investor registered with SEBI;
e. multilateral and bilateral development financial institutions;
f. Venture capital funds registered with SEBI.)
g. 17(Foreign Venture capital investors registered with SEBI.)
h. 17(State Industrial Development Corporations)
(iii) "Information Technology" shall comprise the following activities:
a. Production of computer software i.e. any representation of instruction, data, sound or image including source code and
object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by
means of an automatic data processing machine.
b. Information technology services i.e. any service which results from the use of any information technology software over a
system of information technology products for realizing value addition and will consist of (I) IT software including data
processing services (II) Consumer systems, communication and network services and (III) other IT related services.
c. manufacturing of information technology hardware
d. Manufacturing of information technology products i.e. computer systems, communications and network products and
peripherals and subsystems.
e. Manufacturing of information technology components i.e. active and passive electronic components, plastic, metal, non-
metal, parts and sub assemblies of IT products.
f. computer education and training
g. computer maintenance
h. computer consultancy
i. e-commerce / internet related activities.”
Prior to the above, sub-clauses (g) and (h) of sub-clause (ii) of Explanation 2 were inserted vide SEBI Circular No. RMB
(Compendium) Series Circular No. 1 (2001- 2002) dated July 17, 2001 for the following:
“(g) Foreign Venture Capital investors registered with SEBI
(h) State Industrial Development corporations”
Prior to the above, clause 2.2.2 was substituted vide SEBI Circular No. DIP (Compendium) Circular No. 3 dated August 04,
2000 for the following:
“2.2.2 An unlisted company which does not satisfy the requirement specified in Clause 2.2.1 above, can make a public issue
of equity share capital or any security convertible at later date into equity share capital, provided a public financial institution
or a scheduled commercial bank:-
(a) has appraised the project to be financed through the proposed offer to the public; and ;
(b) not less than 10% of the project cost is financed by the said appraising bank or institution by way of loan, equity, participation
in the issue of security in the proposed issue or combination of any of them.
(c) the appraising bank or institution shall bring in the minimum specified contribution at least one day before the opening of the
public issue.
Explanation:
For the purpose of the term 'track record':
(A) At least three (3) audited accounts shall be available comprising not less than thirty six (36) months for determining the
minimum track record of three (3) years,
(B) In case of companies in the information technology sector, the track record of distributable profits shall be considered for the
purpose of eligibility requirements only if the profits are emanating from the information technology business or activities.
(C) In case of partnership firms which have since been converted into companies, the track record of distributable profits of the
firm shall be considered for the purpose of eligibility requirements if, the financial statements for the respective years
pertaining to partnership business conform to and are revised in a format identical to that required for companies and also
comply with the following:
(i) adequate disclosures are made in the financial statements similar to that of c ompanies as specified in Schedule VI of the
Companies Act, 1956, and the financial statements shall be duly certified by a Chartered Accountant stating unequivocally
that:
(a) the accounts as revised or otherwise and disclosures made are in line with the provision of Schedule VI of the Companies
Act, 1956; and
(b) the accounting standards of the Institute of Chartered Accountants of India (ICAI) have been followed and that the financial
statements present a true and fair picture of the firm's accounts,
2.2.1 may make an initial public offering (IPO) of equity shares or any other security which
may be converted into or exchanged with equity shares at a later date, only if it meets
both the conditions (a) and (b) given below:
(a) (i) The issue is made through the book-building process, with at least 18(50% of net
offer to public) being allotted to the Qualified Institutional Buyers (QIBs), failing which the
full subscription monies shall be refunded.
OR
(a) (ii) The “project” has at least 15% participation by Financial Institutions/Scheduled
Commercial Banks, of which at least 10% comes from the appraiser(s). In addition to this,
at least 10% of the issue size shall be allotted to QIBs, failing which the full subscription
monies shall be refunded
AND
(b) (i) The minimum post-issue face value capital of the company shall be Rs. 10
crores.
OR
(b) (ii) There shall be a compulsory market-making for at least 2 years from the date of
listing of the shares , subject to the following:
19(a)
Market makers undertake to offer buy and sell quotes for a minimum depth of
300 shares;
20(b)
Market makers undertake to ensure that the bid -ask spread (difference between
quotations for sale and purchase) for their quotes shall not at any time exceed 10%:
21(c)
The inventory of the market makers on each of such stock exchanges, as on the
date of allotment of securities, shall be at least 5% of the proposed issue of the company.)
22(2.2.2A An unlisted public company shall not make an allotment pursuant to a public
issue or offer for sale of equity shares or any security convertible into equity shares
unless, in addition to satisfying the conditions mentioned in Clause 2.2.1 or 2.2.2 as the
case may be, the prospective allottees are not less than one thousand (1000) in number.)
(ii) the lead merchant banker shall also conform that the financial statements furnished on behalf of the Partnership firms are in
accordance with accounting standards prescribed by the ICAI.
(D) In case of an unlisted company formed out of a division of an exiting company, the track record of distributable profits of the
division spun off shall be considered for the purpose of eligibility criteria if the requirements regarding financial statements as
specified for partnership firms in clause (C) above are complied with."
18 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/16/2005/ 19/9 dated September 19, 2005 for the letters and figures
“50% of the issue size”.
19 Numbered the bulleted sub-clause, vide SEBI Circular No. SEBI/CFD/DIL/DIP/14/2005/25/1 dated January 25, 2005.
23(2.2.2B For the purposes of clauses 2.2.1 and 2.2.2 above:

(i) “Net Tangible Assets” shall mean the sum of all net assets of the company, excluding
‘intangible assets’, as defined in Accounting Standard 26 (AS 26) issued by the Institute of
Chartered Accountants of India.
(ii) “Project” means the object for which the monies proposed to be raised to cover the
objects of the issue.
(iii) In case of partnership firms which have since been converted into companies, the track
record of distributable profits of the firm shall be considered only if the financial statements of
the partnership business for the said years conform to and are revised in the format
prescribed for companies under the Companies Act, 1956 and also comply with the following:
a. adequate disclosures are made in the financial statements as required to be made by
the companies as per Schedule VI of the Companies Act, 1956;
b. the financial statements shall be duly certified by a Chartered Accountant stating
that:
I. the accounts as revised or otherwise and the disclosures made are in accordance
with the provisions of Schedule VI of the Companies Act, 1956; and
II. the accounting standards of the Institute of Chartered Accountants of India (ICAI)
have been followed and that the financial statements present a true and fair picture of the
firm’s accounts.
(iv) In case of an unlisted company formed out of a division of an existing company, the
track record of distributable profits of the division spun off shall be considered only if the
requirements regarding financial statements as specified for partnership firms in sub-
clause (iv) above are complied with.
(v) “Qualified Institutional Buyer” shall mean:
a. public financial institution as defined in section 4A of the Companies Act, 1956;
b. scheduled commercial banks;
c. mutual funds;
d. foreign institutional investor registered with SEBI;
e. multilateral and bilateral development financial institutions;
f. venture capital funds registered with SEBI;
g. foreign venture capital investors registered with SEBI;
h. state industrial development corporations;

i. insurance companies registered with the Insurance Regulatory and

Development Authority (IRDA);
j. provident funds with minimum corpus of Rs. 25 crores ;
k. pension funds with minimum corpus of Rs. 25 crores).
2.2.3 Offer for sale
2.2.3.1 24(An offer for sale shall not be made of equity shares of a company or any other
security which may be converted into or exchanged with equity shares of the company at
a later date, unless the conditions laid down in clause
2.2.1 or 2.2.2, as the case may be and in clause 2.2.2A, are satisfied.)
2.2.4 Offer for sale can also be made if provisions of clause 2.2.2 are complied at the time
of submission of offer document with Board.
2.3 Public Issue by Listed Companies
2.3.1 25(A listed company shall be eligible to make a public issue of equity shares or any
other security which may be converted into or exchanged with equity shares at a later
date:
Provided that the aggregate of the proposed issue and all previous issues made in the
same financial year in terms of size (i.e., offer through offer document + firm allotment +
promoters’ contribution through the offer document), issue size does not exceed 5 times
its pre-issue networth as per the audited balance sheet of the last financial year.
Provided 26(further) that in case there is a change in the name of the issuer company
“A company, whose equity shares or any security convertible at later date into equity shares are offered through an offer for
sale, shall comply with the provisions of Clause 2.2.”.
following:
"A company, whose equity share or any security convertible at later date into equity shares are offered through an offer for
sale, has to comply with the provisions of Clause 2.2.1 or Clause 2.2.2".
“A listed company shall be eligible to make a public issue of equity shares or any security convertible at later date into equity
share.
Provided that the issue size (i.e. offer through offer document + firm allotment + promoters’ contribution through the offer
document) does not exceed five (5) times its pre-issue networth as per the last available audited accounts either at the time
of filing draft offer document with the Board or at the time of opening of the issue.”
following:
"2.3.1 A listed company shall be eligible to make a public issue of equity shares or any security convertible at later date into
equity share.
Provided that, if as a result of the proposed issue, networth of the company becomes more than five times the networth prior
to the issue, the company shall satisfy either the provisions of Clause 2.2.1 or Clause 2.2.2, before it can make the proposed
public issue.
26 Inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/14/2005/25/1 dated January 25, 2005.
within the last 1 year (reckoned from the date of filing of the offer document), the revenue
accounted for by the activity suggested by the new name is not less than 50% of its total
revenue in the preceding 1 full-year period.)
2.3.2 27(A listed company which does not fulfill the conditions given in the provisos to
Clause 2.3.1 above shall be eligible to make a public issue, subject to complying with the
conditions specified in clause 2.2.2 .)
2.3.3 28(Deleted)
2.4 Exemption from Eligibility Norms
2.4.1 The provisions of clauses 29(2.2 and 2.3) shall not be applicable in case of:
(i) a banking company including a Local Area Bank (hereinafter referred to as Private
Sector Banks) set up under sub-section (c) of Section 5 of the Banking Regulation Act,
1949 and which has received license from the Reserve Bank of India ; or
(ii) a corresponding new bank set up under the Banking Companies (Acquisition and
Transfer of Undertaking) Act, 1970 Banking Companies (Acquisition and Transfer of
Undertaking) Act, 1980, State Bank of India Act 1955 and State Bank of India (Subsidiary
Banks) Act, 1959 (hereinafter referred to as “public sector banks”);
(iii) an infrastructure company:
(a) 30(whose project has been appraised by a Public Financial Institution (PFI) or
“A listed company which does not fulfill the condition given in the proviso to clause 2.3.1 above, shall be eligible to make a
public issue only through the book building process.
Provided that sixty percent (60%) of the issue size shall be allotted to the Qualified Institutional Buyers (QIBs), failing which
the full subscription monies shall be refunded.”
following:
“2.3.2 Public issue by listed companies which has changed its name to indicate as if it was engaged in the business /
activities in information technology sector during a period of three years prior to filing of offer document with the Board, shall
be eligible to make a public issue of equity share or securities convertible at a later date into equity share, if;
(a) (i) it has a track record of distributable profits in terms of Section 205 of Companies Act, for at least three (3) out of
immediately preceding five (5) years from the information technology business / activities, and
(ii) it has a pre-issue networth of not less than Rs.One Crore in three (3) out of preceding five (5) years, with the minimum
networth to be met during immediately preceding two (2) years.
(b) if the company does not satisfy the requirements specified in clause (a) above, it can make a public issue provided that it
satisfies the requirements laid down in sub-clauses (a), (b) and (c ) of clause 2.2.2."
28 Omitted the following vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003:
“A listed company which has changed its name so as to indicate that it is a company in the information technology sector as
defined in Clause ‘iii’ of Explanation 2 of Clause 2.2.1, during a period of three years prior to filing of offer document with the
Board, shall comply with the requirements of Clause 2.2 for unlisted companies, before it can make a public issue of equity
shares or securities convertible at a later date into equity shares.”
29 Substituted vide SEBI Circular No. DIP (Compendium) Circular No. 3 dated August 04, 2000 for "2.2.1, 2.2.2 and 2.3.1".
“whose project has been appraised by a Public Financial Institution or Infrastructure Development Finance Corporation
(IDFC) or Infrastructure Leasing and Financing Services Ltd. (IL&FS) and”.
Infrastructure Development Finance Corporation (IDFC) or Infrastructure Leasing and

Financing Services Ltd. (IL&FS) or a bank which was earlier a PFI; and)
(b) not less than 5% of the project cost is financed by any of the institutions referred to
in sub-clause (a), jointly or severally, irrespective of whether they appraise the project or
not, by way of loan or subscription to equity or a combination of both;
(iv) rights issue by a listed company.
Explanation: 31(Deleted)
2.5 Credit Rating for Debt Instruments
32(2.5.1A No issuer company shall make a public issue or rights issue of debt instruments
(whether convertible or not), unless the following conditions are also satisfied, as on date
of filing of draft offer document with SEBI and also on the date of filing a final offer
document with ROC/ Designated Stock Exchange:
(i) credit rating of not less than investment grade is obtained from not less than two
credit rating agencies registered with SEBI and disclosed in the offer document;
(ii) The company is not in the list of willful defaulters of RBI;
(iii) The company is not in default of payment of interest or repayment of principal in
respect of debentures issued to the public, if any, for a period of more than 6 months.
2.5.1B An issuer company shall not make an allotment of non-convertible debt instrument
pursuant to a public issue if the proposed allottees are less than fifty (50) in number. In
such a case the company shall forthwith refund the entire subscription amount received. If
there is a delay beyond 8 days after the company becomes liable to pay the amount, the
company shall pay interest @15% p.a. to the investors.)
2.5.2 33(Where credit ratings are obtained from more than two credit rating agencies, all
the credit rating/s, including the unaccepted credit ratings, shall be disclosed.)
2.5.3 34(Deleted.)
31 Omitted the following explanation vide SEBI Circular No. DIP (Compendium) Circular No. 3 dated August 04, 2000 for the
following:
"For the purposes of Clauses 2.2.1 and 2.3.1, “networth” shall mean aggregate of value of the paid up Equity capital and
Free Reserves (excluding reserves created out of revaluation) reduced by the aggregate value of accumulated losses and
deferred Expenditure not written off including miscellaneous expenses not written off)".
“2.5.1 No public or rights issue of debt instrument (including convertible instruments) irrespective of their maturity or
conversion period shall be made unless credit rating from a credit rating agency is obtained and disclosed in the offer
document.”
“Where credit rating is obtained from more than one credit rating agencies, all the credit rating/s, including the unaccepted
credit ratings, shall be disclosed.”
34 Omitted the following vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003:
2.5.4 All the credit ratings obtained during the three (3) years preceding the pubic or
rights issue of debt instrument (including convertible instruments) for any listed security of
the issuer company shall be disclosed in the offer document.
2.6 Outstanding Warrants or Financial Instruments
2.6.1 No unlisted company shall make a public issue of equity share or any security
convertible at later date into equity share, if there are any outstanding financial
instruments or any other right which would entitle the existing promoters or shareholders
any option to receive equity share capital after the initial public offering.
2.7 Partly Paid-up Shares
2.7.1 No company shall make a public or rights issue of equity share or any security
convertible at later date into equity share, unless all the existing partly paid-up shares
have been fully paid or forfeited in a manner specified in clause 8.6.2.
35(2.8 Means of Finance
No company shall make a public or rights issue of securities unless firm arrangements of
finance through verifiable means towards 75% of the stated means of finance, excluding
the amount to be raised through proposed Public/ Rights issue, have been made.)
CHAPTER III
PRICING BY COMPANIES ISSUING SECURITIES
3.0 The companies eligible to make public issue can freely price their equity shares or any
security convertible at later date into equity shares in the following cases:
3.1 Public/ Rights Issue by Listed Companies
3.1.1 A listed company whose equity shares are listed on a stock exchange, may freely
price its equity shares and any security convertible into equity at a later date, offered
through a public or rights issue.
3.2 Public Issue by Unlisted Companies
3.2.1 An unlisted company eligible to make a public issue and desirous of getting its
securities listed on a recognised stock exchange pursuant to a public issue, may freely
price its equity shares or any securities convertible at a later date into equity shares.
36(3.2A) Infrastructure company
37(3.2A.1) An eligible infrastructure company shall be free to price its equity shares,
“For a public and rights issue of debt-securities of issue size greater than or equal to Rs.100 crores, two ratings from two
different credit rating agencies shall be obtained.”
36 Numbered vide SEBI Circular No . SEBI/CFD/DIL/DIP/14/2005/25/1 dated January 25, 2005.
subject to the compliance with the disclosure norms as specified by SEBI from time to
time.
3.3 Initial public Issue by Banks
3.3.1 The banks (whether public sector or private sector) may freely price their issue of
equity shares or any securities convertible at a later date into equity share, subject to
approval by the Reserve Bank of India.
3.4 Differential Pricing
3.4.1 Any unlisted company or a listed company making a public issue of equity shares or
securities convertible at a later date into equity shares, may issue such securities to
applicants in the firm allotment category at a price different from the price at which the net
offer to the public is made , provided that the price at which the security is being offered
to the applicants in firm allotment category is higher than the price at which securities are
offered to public.
Explanation:
The net offer to the public means the offer made to the Indian public and does not include
firm allotments or reservations or promoters’ contributions.
3.4.2 A listed company making a composite issue of capital may issue securities at
differential prices in its public and rights issue.
3.4.3 In the public issue which is a part of a composite issue, differential pricing as per
sub-clause 3.4.1 above is also permissible.
3.4.4 Justification for the price difference shall be given in the offer document for sub-
clauses 3.4.1 and 3.4.2.
3.5 Price Band
3.5.1 Issuer company can mention a price band of 20% (cap in the price band should not
be more than 20% of the floor price) in the offer documents filed with the Board and actual
price can be determined at a later date before filing of the offer document with ROCs.
3.5.2 If the Board of Directors has been authorised to determine the offer price within a
specified price band such price shall be determined by a Resolution to be passed by the
Board of Directors.
3.5.3 38(The Lead Merchant Bankers shall ensure that in case of the listed companies, a
48 hours notice of the meeting of the Board of Directors for passing resolution for
37 Renumbered clause “3.2.3” as 3.2A.1, vide SEBI Circular No. SEBI/CFD/DIL/DIP/14/2005/25/1 dated January 25, 2005.
“The Lead Merchant Bankers shall ensure that in case of the listed companies, a 48 hours notice of the meeting of the Board
of Directors for passing resolution for determination of price is given to the regional Stock Exchange.”
determination of price is given to the Designated Stock Exchange.)

3.5.4 The final offer document shall contain only one price and one set of financial
projections, if applicable.
3.6 Payment of Discounts/ Commissions, etc.
3.6.1 No payment, direct or indirect in the nature of a discount, commission, allowance or
otherwise shall be made either by the issuer company or the promoters in any public
issue, to the persons who have received firm allotment in such public issue.
3.7 Freedom to determine the denomination of shares for public / rights issues and
to change the standard denomination
3.7.1 39(An eligible company shall be free to make public or rights issue of equity shares in
any denomination determined by it in accordance with Sub-section (4) of Section 13 of the
Companies Act, 1956 and in compliance with the following and other norms as may be
specified by SEBI from time to time:
(i) In case of initial public offer by an unlisted company,
a. if the issue price is Rs . 500/- or more, the issuer company shall have a discretion to
fix the face value below Rs. 10/- per share subject to the condition that the face
value shall in no case be less than Rs. 1 per share;
b. if issue price is less than Rs. 500 per share, the face value shall be Rs. 10/- per
share;
(ii) The disclosure about the face value of shares (including the statement about the issue
price being “X” times of the face value) shall be made in the advertisement, offer documents
and in application forms in identical font size as that of issue price or price band.)
3.7.2 The companies which have already issued shares in the denomination of Rs.10/- or
Rs.100/- may change the standard denomination of the shares by splitting or
consolidating the existing shares.
3.7.3 The companies proposing to issue shares in any denomination or changing the
standard denomination in terms of clause 3.7.1 or 3.7.2 above shall comply with the
following:
(a) the shares shall not be issued in the denomination of decimal of a rupee;
(b) the denomination of the existing shares shall not be altered to a denomination of decimal
of a rupee;
39 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/13/2004/28/5 dated May 28, 2004 for the following:
“An eligible company shall be free to make public or rights issue of equity shares in any denomination determined by it in
accordance with sub-section (4) of section 13 of the Companies Act, 1956 and in compliance with the norms as specified by
SEBI in circular no.SMDRP/POLICY/CIR-16/99 dated June 14, 1999 and other norms as may be specified by SEBI from
time to time.”
(c) at any given time there shall be only one denomination for the shares of the company;
(d) the companies seeking to change the standard denomination may do so after amending
the Memorandum and Articles of Association, if required;
(e) the company shall adhere to the disclosure and accounting norms specified by SEBI from
time to time.
40(CHAPTER VIII-A
GREEN SHOE OPTION
8A.1 (a) 41(An issuer company making a public offer of equity shares can avail of the
Green Shoe Option (GSO) for stabilizing the post listing price of its shares, subject to the
provisions of this Chapter.)
(b) A company desirous of availing the option granted by this Chapter, shall in the
resolution of the general meeting authorizing the public issue, seek authorization also for
the possibility of allotment of further shares to the ‘stabilizing agent’ (SA) at the end of the
stabilization period in terms of clause 8A.15.
8A.2 The company shall appoint one of the 42(merchant bankers or Book Runners, as the
case may be, from amongst) the issue management team, as the “stabilizing agent” (SA),
who will be responsible for the price stabilization process, if required. The SA shall enter
into an agreement with the issuer company, prior to filing of offer document with SEBI,
clearly stating all the terms and conditions relating to this option including fees charged /
expenses to be incurred by SA for this purpose.
8A.3 43((a) The SA shall also enter into an agreement with the promoter(s) or pre-issue
shareholders who will lend their shares under the provisions of this Chapter, specifying
the maximum number of shares that may be borrowed from the promoters or the
shareholders, which shall not be in excess of 15% of the total issue size.)
8A.4 The details of the agreements mentioned in clause 8A.2 and 8A.3 shall be disclosed
in 44(the draft prospectus,) the draft Red Herring prospectus, Red Herring prospectus and
the final prospectus. The agreements shall also be included as material documents for
40 Inserted Chapter, vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003.

“(a) In case an issuer company is making an initial public offer of equity shares through the book building mechanism, the
company can avail of the Green Shoe option (GSO) for stabilizing the post listing price of its shares, subject to the provisions
of this Chapter“.
42 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/13/2004/28/5 dated May 28, 2004 for “Lead book runners, amongst”.
43 Substituted vide circular no SEBI/CFD/DIL/DIP/13/2004/28/5 dated May 28, 2004 for the following:
“The SA shall also enter into an agreement with the promoter(s) who will lend their shares for the purpose of clause 8A.5,
specifying the maximum number of shares that may be borrowed from the promoters, which shall not be in excess of 15% of
the total issue size. “
public inspection in terms of 45(clause 6.15.1).

8A.5 46(Lead merchant banker or the) Lead Book Runner, in consultation with the SA,
shall determine the amount of shares to be overallotted with the public issue, subject to
the maximum n umber specified in clause 8A.3.
8A.6 The 47(draft prospectus,) draft Red Herring prospectus, the Red Herring prospectus
and the final prospectus shall contain the following additional disclosures:
a. Name of the SA
b. The maximum number of shares (as also the percentage vis a vis the proposed issue
size) proposed to be over-allotted by the company.
c. The period, for which the company proposes to avail of the stabilization mechanism,
d. The maximum increase in the capital of the company and the shareholding pattern post
issue, in case the company is required to allot further shares to the extent of over-allotment in
the issue.
e. The maximum amount of funds to be received by the company in case of further
allotment and the use of these additional funds, in final document to be filed with RoC
f. Details of the agreement/ arrangement entered in to by SA with the promoters to
borrow shares from the latter which inter-alia shall include name of the promoters, their
existing shareholding, number & percentage of shares to be lent by them and other
important terms and conditions including the rights and obligations of each party.
g. The final prospectus shall additionally disclose the exact number of shares to be
allotted pursuant to the public issue, stating separately therein the number of shares to be
borrowed from the promoters and overallotted by the SA, and
the percentage of such shares in relation to the total issue size.
8A.7 48((a) In case of an initial public offer by a unlisted company, the promoters and pre-
issue shareholders and in case of public issue by a listed company, the promoters and
pre-issue shareholders holding more than 5% shares, may lend the shares subject to the
provisions of this Chapter.
(b) The SA shall borrow shares from the promoters or the pre-issue shareholders of the
issuer company or both, to the extent of the proposed over-allotment.
Provided that the shares referred to in this clause shall be in dematerialized form only.)
45 Substituted vide circular SEBI Circular No. SEBI/CFD/DIL/DIP/14/2005/25/1 dated January 25, 2005, for “clause 6.19.15”.
“The SA shall borrow shares from the promoters of the company to the extent of the proposed over-allotment. These shares
shall be in dematerialized form only. For the purposes of this clause, promoter means a promoter as defined in Explanation I
to clause 6.4.2.1.”
8A.8 The allocation of these shares shall be pro-rata to all the applicants.
8A.9 The stabilization mechanism shall be available for the period disclosed by the
company in the prospectus, which shall not exceed 30 days from the date when trading
permission was given by the exchange(s).
8A.10 The SA shall open a special account with a bank to be called the “Special Account
for GSO proceeds of _____ company” (hereinafter referred to as the GSO Bank account)
and a special account for securities with a depository participant to be called the “Special
Account for GSO shares of company” (hereinafter referred to as the GSO Demat
Account).
8A.11 The money received from the applicants against the overallotment in the green
shoe option shall be kept in the GSO Bank Account, distinct from the issue account and
shall be used for the purpose of buying shares from the market, during the stabilization
period.
8A.12 The shares bought from the market by the SA, if any during the stabilization period,
shall be credited to the GSO Demat Account.
8A.13 The shares bought from the market and lying in the GSO Demat Account shall be
returned to the promoters immediately, in any case not later than 2 working days after the
close of the stabilization period.
8A.14 The prime responsibility of the SA shall be to stabilize post listing price of the
shares. To this end, the SA shall determine the timing of buying the shares, the quantity
to be bought, the price at which the shares are to be bought etc.
8A.15 On expiry of the stabilization period, in case the SA does not buy shares to the
extent of shares over-allotted by the company from the market, the issuer company shall
allot shares to the extent of the shortfall in dematerialized form to the GSO Demat
Account, within five days of the closure of the stabilization period. These shares shall be
returned to the promoters by the SA in lieu of the shares borrowed from them and the
GSO Demat Account shall be closed thereafter. The company shall make a final listing
application in respect of these shares to all the Exchanges where the shares allotted in
the public issue are listed. The provisions of Chapter XIII shall not be applicable to such
allotment.
8A.16 The shares returned to the promoters under clause 8A.13 or 8A.15, as the case
may be, shall be subject to the remaining lock in period as provided in the proviso the
clause 4.14.1.
8A.17 The SA shall remit an amount equal to (further shares allotted by the issuer
company to the GSO Demat Account) * (issue price) to the issuer company from the GSO
Bank Account. The amount left in this account, if any, after this remittance and deduction
of expenses incurred by the SA for the stabilization mechanism, shall be transferred to the
investor protection fund(s) of the stock exchange(s) where the shares of issuer company
are listed, in equal parts if the shares are listed in more than one exchanges. The GSO
Bank Account shall be closed soon thereafter.
8A.18 The SA shall submit a report to the stoc k exchange(s) on a daily basis during the
stabilization period. The SA shall also submit a final report to SEBI in the format specified
in Schedule XXIX. (Flag B)This report shall be signed by the SA and the company. This
report shall be accompanied with a depository statement for the “GSO Demat Account”
for the stabilization period, indicating the flow of the shares into and from the account.
The report shall also be accompanied by an undertaking given by the SA and
countersigned by the depository(ies) regarding confirmation of lock-in on the shares
returned to the promoters in lieu of the shares borrowed from them for the purpose of the
stabilization, as per the requirement specified in 8A.16.
8A.19 The SA shall maintain a register in respect of each issue having the green shoe
option in which he acts as a SA. The register shall contain the following details of:
49(a) in respect of each transaction effected in the course of the stabilizing action, the price,
date and time
50(b) the details of the promoters from whom the shares are borrowed and the number of
shares borrowed from each; and
51(c) details of allotments made under clause 8A.15.
8A.20 The register must be retained for a period of at least three years from the date of
the end of the stabilizing period.”
8A.21 52(For the purpose of the Chapter VIII-A,
(a) promoter means a promoter as defined in Explanation I to clause 6.4.2.1of these
guidelines.”
(b) Over allotment shall mean as an allotment or allocation of shares in excess of the
size of a public issue, made by the SA out of shares borrowed from the promoters or the
pre -issue shareholders or both, in pursuance of a green shoe option exercised by the
company in accordance with the provisions of this Chapter.))
“For the purpose of the Chapter VIII-A, Over allotment shall be defined as an allocation of shares in excess of the size of a
public issue, made by the SA out of shares borrowed from the promoters, in pursuance of a green shoe option exercised by
the company in accordance with the provisions of the said Chapter.”
CHAPTER XI
53(GUIDELINES ON BOOK BUILDING)
11.1 An issuer company proposing to issue capital through book building shall comply
with the following:
(A) 75% Book Building Process
11.2 In an issue of securities to the public through a prospectus the option for 75% book
building shall be available to the issuer company subject to the following:
(i) The option of book-building shall be available to all body corporate which are
otherwise eligible to make an issue of capital to the public.
(ii) (a) The book-building facility shall be available as an alternative to, and to the
extent of the percentage of the issue which can be reserved for firm allotment, as per
these Guidelines.
(b) The issuer company shall have an option of either reserving the securities for firm
allotment or issuing the securities through book-building process.
(iii) The issue of securities through book-building process shall be separately identified /
indicated as 'placement portion category', in the prospectus.
(iv) (a) The securities available to the public shall be separately identified as 'net offer
to the public'.
(b) The requirement of minimum 25% of the securities to be offered to the public shall
also be applicable.
(v) In case the book-building option is availed of, underwriting shall be mandatory to the
extent of the net offer to the public.
(vi) The draft prospectus containing all the information except the information regarding
the price at which the securities are offered shall be filed with the Board.
(vii) One of the lead merchant banker to the issue shall be nominated by the issuer
company as a Book Runner and his name shall be mentioned in the prospectus.
(viii) (a) The copy of the draft prospectus filed with the Board may be circulated by the
Book Runner to the institutional buyers who are eligible for firm allotment and to the
intermediaries eligible to act as underwriters inviting offers for subscribing to the
securities.
(b) The draft prospectus to be circulated shall indicate the price band within which the
securities are being offered for subscription.
53 Inserted heading of the Chapter vide SEBI Circular No. SEBI/CFD/DIL/DIP/14/2005/25/1 dated January 25, 2005.
(ix) The Book Runner on receipt of the offers shall maintain a record of the names and
number of securities ordered and the price at which the institutional buyer or underwriter
is willing to subscribe to securities under the placement portion.
(x) The underwriter(s) shall maintain a record of the orders received by him for
subscribing to the issue out of the placement portion.
(xi) (a) The underwriter(s) shall aggregate the offers so received for subscribing to the
issue and intimate to the Book Runner the aggregate amount of the orders received by
him.
(b) The institutional investor shall also forward its orders, if any, to the book runner.
(xii) On receipt of the information, the Book Runner and the issuer company shall
determine the price at which the securities shall be offered to the public.
(xiii) The issue price for the placement portion and offer to the public shall be the same.
(xiv) On determination of the price of the underwriter shall enter into an underwriting
agreement with the issuer indicating the number of securities as well as the price at which
the underwriter shall subscribe to the securities.
Provided that the Book Runner shall have an option of requiring the underwriters to the
net offer to the public to pay in advance all monies required to be paid in respect of their
underwriting commitment.
(xv) On determination of the issue price within two day, thereafter the prospectus shall be
filed with the Registrar of Company.
(xvi) The issuer company shall open two different accounts for collection of application
moneys, one for the private placement portion and the other for the public subscription.
(xvii) One day prior to the opening of the issue to the public, Book Runner shall collect
from the institutional buyers and the underwriters the application forms along with the
application moneys to the extent of the securities proposed to be allotted to them /
subscribed by them.
(xviii) (a) Allotments for the private placement portion shall be made on the second
day from the closure of the issue.
(b) However, to ensure that the securities allotted under placement portion and public
portion are pari passu in all respects, the issuer company may have one date of allotment
which shall be the deemed date of allotment for the issue of securities through book
building process.
(xix) In case the Book Runner has exercised the option of requiring the underwriter to the
net offer to the public to pay in advance all moneys required to be paid in respect of their
underwriting commitment by the eleventh day of the closure of the issue the shares
allotted as per the private placement category shall be eligible to be listed.

(xx) (a) Allotment of securities under the pubic category shall be made as per the
Guidelines.
(b) Allotment of securities under the public category shall be eligible to be listed.
(xxi) (a) In case of undersubscription in the net offer to the public spillover to the extent
of under subscription shall be permitted from the placement portion to the net offer to the
public portion subject to the condition that preference shall be given to the individual
investors.
(b) In case of under subscription in the placement portion spillover shall be permitted
from the net offer to the public to the placement portion.
(xxii) The issuer company may pay interest on the application moneys till the date of
allotment or the deemed date of allotment provided that payment of interest is uniformly
given to all the applicants.
(xxiii) (a) The Book Runner and other intermediaries associated with the book
building process shall maintain records of the book building process.
(b) The Board shall have the right to inspect such records.
(B) 54(Offer to Public Through Book Building Process)
11.3 55(An issuer company may, subject to the requirements specified in this chapter,
make an issue of securities to the public through a prospectus in the following manner:
(a) 100% of the net offer to the public through book building process, or
(b) 75% of the net offer to the public through book building process and 25% at the price
determined through book building.)
11.3.1 (i) 56(Deleted)
(ii) Reservation or firm allotment to the extent of percentage specified in these Guidelines
shall not be made to categories other than the categories mentioned in sub-clause (iii) below.
(iii) Book Building shall be for the portion other than the promoters contribution and the
allocation made to:
54 Substituted vide SEBI Circular No. RMB (Compendium) Series Circular No. 2 (2001-2002) dated November 29, 2001 for
words "100% BOOK BUILDING PROCESS".
55 Substituted vide SEBI Circular No. RMB (Compendium) Series Circular No. 2 (2001-2002) dated November 29, 2001 for the
following:
"In an issue of securities to the public through a prospectus option for 100% Book Building shall be available to any issuer
company subject to the following:"
56 Omitted the following words vide SEBI Circular No. RMB (Compendium) Series Circular No. 1 (2001-2002) dated July 17,
2001:
"Issue of capital shall be Rs.25 crores and above."
(a) ‘permanent employees of the issuer company and in the case of a new company the
permanent employees of the promoting companies';
(b) ‘shareholders of the promoting companies in the case of a new company and
shareholders of group companies in the case of an existing company’ either on a ‘competitive
basis’ or on a ‘firm allotment basis’.
57((c) persons who, on the date of filing of the draft offer document with the Board, have
business association, as depositors, bondholders and subscribers to services, with the issuer
making an initial public offering, provided that allotment to such persons shall not exceed 5%
of the issue size.
Provided further that no reservation shall be made for the issue management team,
syndicate members, their promoters, directors and employees and for the group/associate
companies of issue management team and syndicate members and their promoters, directors
and employees.)
(iv) The issuer company shall appoint an eligible Merchant Banker(s) as book runner(s) and
their name(s) shall be mentioned in the draft prospectus.
58((iv)(a) The issuer company shall enter into an agreement with one or more of the Stock
Exchange(s) which have the requisite system of on-line offer of securities. The agreement
shall specify inter-alia, the rights, duties, responsibilities and obligations of the company
and stock exchange (s) inter se. The agreement may also provide for a dispute resolution
mechanism between the company and the stock exchange.
(iv) (b) The company may apply for listing of its securities on an exchange other than
the exchange through which it offers its securities to public through the on-line system.)
(v) 59(The Lead Merchant Banker shall act as the Lead Book Runner.)
60((v) (a) In case the issuer company appoints more than one 167(merchant banker(s)),
the names of all such (merchant bankers(s)) who have submitted the due diligence
certificate to SEBI, may be mentioned on the front cover page of the prospectus. A
disclosure to the effect that " the investors may contact any of such (merchant
bankers(s)), for any complaint pertaining to the issue" shall be made in the prospectus,
after the "risk factors”.)
61((v)(b) The lead book runner/issuer may designate, in any manner, the other Merchant
Banker(s), subject to the following:
57 Inserted vide SEBI Circular No. RMB (Compendium) Series Circular No. 4 (2001-2002) dated March 06, 2002.
58 Inserted sub-clauses (iv)(a) and (iv) (b) vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003.
59 Substituted vide SEBI Circular No. RMB (Compendium) Series Circular No. 4 (2001-2002) dated March 06, 2002 for the
following:
"The Lead Merchant Banker shall act as the Lead Book Runner and the other eligible Merchant Banker(s), so appointed by
the Issuer, shall be termed as Co-Book Runner(s)."
60 Inserted vide SEBI Circular No. RMB (Compendium) Series Circular No. 1 (2001-2002) dated November 29, 2001.
61 Substituted the words "merchant banker (s)" for the words "book runner (s)" in Clause (v) (a), wherever they appear, vide
SEBI Circular No. RMB (Compendium) Series Circular No. 4 (2001-2002) dated March 06, 2002.
1. the inter-se allocation of responsibilities amongst the merchant bankers shall be

disclosed in the prospectus on the page giving the details of the issue management
team;
2. a co-ordinator shall be appointed amongst the lead book runners, for the purpose of co-
ordination with SEBI.
3. the names of only those merchant bankers who have signed the inter-se allocation of
responsibilities shall be mentioned in the offer document on the page where the details of
the issue management team is given.)62
(vi) The primary responsibility of building the book shall be that of the Lead Book Runner.
(vii) The Book Runner(s) may appoint those intermediaries who are registered with the
Board and who are permitted to carry on activity as an ‘Underwriter’ as syndicate
members.
63((vii)(a) The Book Runner(s)/syndicate members shall appoint brokers of the
exchange, who are registered with SEBI, for the purpose of accepting bids, applications and
placing orders with the company and ensure that the brokers so appointed are financially
capable of honouring their commitments arising out of defaults of their clients/investors, if
any.)
64((vii)(b) For the purposes of this Chapter, the brokers, so appointed accepting
applications and application monies, shall be considered as ‘bidding/collection centres’.)
65((vii)(c) The broker/s so appointed, shall collect the money from his/their client for
every order placed by him/them and in case the client/investors fails to pay for shares
allocated as per the Guidelines, the broker shall pay such amount.)
66((vii)(d) The company shall pay to the broker/s a commission/fee for the services
rendered by him/them. The exchange shall ensure that the broker does not levy a service fee
on his clients/investors in lieu of his services.)
(viii) The draft prospectus containing all the disclosures as laid down in Chapter VI except that
of price and the number of securities to be offered to the public shall be filed by the Lead
Merchant Banker with the Board.
Provided that the total size of the issue shall be mentioned in the draft prospectus.
(viii) (a) 67(The red herring prospectus shall disclose, either the floor price of the securities
offered through it or a price band along with the range within which the price can move, if any.)
64 Inserted vide SEBI/CFD/DIL/DI P/Circular No. 11 dated August 14, 2003.
“The red herring prospectus shall disclose, only the floor price of the securities offered through it and shall not mention the
maximum price or the indicative price band”
Initially inserted vide SEBI Circular No. RMB (Compendium) Series Circular No. 1 (2001-2002) dated November 29, 2001.
68(Provided that in case of a further public issue of a class of securities which is already
listed on a recognised stock exchange, it shall not be necessary to disclose the floor price
or price band in the red-herring prospectus if the same is disclosed by way of an
announcement made by the issuer or the merchant banker at least one day before the
opening of the bid in all those newspapers where pre-issue advertisement was released.
Provided further that where the issuer opts not to make the disclosure of the price band
or floor price in the red-herring prospectus in terms of the foregoing proviso, the following
shall be additionally disclosed in the red-herring prospectus:
(a) a statement that the floor price or price band, as the case may be, shall be disclosed
one before the opening of the bid;
(b) a statement that the investors may be guided in the meantime by the secondary
market prices;
(c) names and editions of the newspapers where the announcement of the floor price or
price band would be made;
(d) names of websites (with address), journals or other media in which the said
announcement will be made.)
69((viii)
(b) In case the red herring prospectus discloses the price band, the lead book
runner shall ensure compliance with the following conditions:
(a) The cap of the price band should not be more than 20% of the floor of the band; i.e cap
of the price band shall be less than or equal to 120% of the floor of the price band;
(b) The price band can be revised during the bidding period in which case the maximum
revision on either side shall not exceed 20% i.e floor of price band can move up or down
to the extent of 20% of floor of the price band disclosed in the red herring prospectus and
the cap of the revised price band will be fixed in accordance with Clause (a) above;
(c) Any revision in the price band shall be widely disseminated by informing the stock
exchanges, by issuing press release and also indicating the change on the relevant
website and the terminals of the syndicate members.
(d) In case the price band is revised, the bidding period shall be extended for a further
period of three days, subject to the total bidding period not exceeding thirteen days.
(e) The manner in which the shortfall, if any, in the project financing, arising on account of
lowering of price band to the extent of 20% will be met shall be disclosed in the red
herring prospectus. It shall also be disclosed that the allotment shall not be made unless
the financing is tied up.)
(ix) (a) In case of appointment of more than one Lead Merchant Banker or Book Runner for
book building, the rights, obligations and responsibilities of each should be delineated.
68 Inserted provisos vide SEBI Circular No. SEBI/CFD/DIL/DIP/15/2005/29/3 dated March 29, 2005.
(b) In case of an under subscription in an issue, the shortfall shall have to be made good by
the Book Runner(s) to the issue and the same shall be incorporated in the interse allocation of
responsibility given in Schedule II.
(x) (a) The Board within 21 days of the receipt of the draft prospectus may suggest
modifications to it.
(b) The Lead Merchant Banker shall be responsible for ensuring that the modifications / final
observations made by the Board are incorporated in the prospectus.
(xi) (a) 70(Deleted)
(b) 71(The issuer company shall circulate the application forms to the Brokers)
(xii) 72(Deleted)
(xiii) The pre-issue obligations and disclosure requirements as specified in Chapter V and
VI respectively of these Guidelines, shall be applicable to issue of securities through book
building unless stated otherwise in this Chapter.
(xiv) The Book Runner(s) and the issuer company shall determine the issue price based
on the bids received through the ‘syndicate members’.
73((xiv)(a) Retail individual investors may bid at "cut off" price instead of their writing
the specific bid prices in the bid forms.)
(xv) On determination of the price, the number of securities to be offered shall be
determined (issue size divided by the price which has been determined).
(xvi) Once the final price (cut-off price) is determined all those bidders whose bids have
70 Omitted the following clause vide SEBI Circular No. SEBI/CFD/DIL/DIP/14/2005/25/1 dated January 25, 2005:
“(xi) (a)The issuer company shall after receiving the final observations, if any, on the offer document from the Board, make
an advertisement in an English National daily with wide circulation, one Hindi National newspaper and a Regional language
newspaper with wide circulation at the place where the registered office of the Issuer company is situated, containing the
salient features of the final offer document as specified in Form 2A of the Companies Act circulated along with the application
form. The advertisement in addition to other required information, shall also contain the following:
i. the date of opening and closing of the issue
ii. the method and process of application and allotment
iii. the names, addresses and the telephone numbers of the stock brokers and centres for bidding”.
Prior to the above, the clause was substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the
following:
“The issuer company shall after receiving the final observations if any on the offer document from the Board make an
advertisement in an English National daily with wide circulation, one Hindi National newspaper and a Regional language
newspaper with wide circulation at the place where the registered office of the Issuer company is situated”.
“The advertisement so issued shall contain the salient features of the final offer document as specified in Form 2A of the
Companies Act circulated along with the application form.”
72 Omitted the following clause vide SEBI Circular No. RMB (Compendium) Series Circular No. 1 (2001-2002) dated November
29, 2001:
“The issuer company shall compulsorily offer an additional 10% of the issue size offered to the public through the
prospectus."
been found to be successful (i.e. at and above the final price or cut-off price) shall
become entitle for allotment of securities.
(xvii) No incentive, whether in cash or kind, shall be paid to the investors who have
become entitled for allotment of securities.
(xvii) (a) 74(The broker may collect an amount to the extent of 100% of the application
money as margin money from the clients/investors before he places an order on their
behalf. The margin collected from categories other than Qualified Institutional Buyers shall
be uniform across the book runner(s)/syndicate members, for each such category.)
75((xvii) (aa) The broker/syndicate member shall collect an amount of not less than ten
percent of the application money as margin money in respect of bids placed by qualified
institutional buyers.)
(xvii) (b) 76(Bids for securities beyond the investment limit prescribed under relevant laws
shall not be accepted by the syndicate members/brokers from any category of clients/
investors.)
77((xvii)(c) The lead book runner may reject a bid placed by a qualified institutional
buyer for reasons to be recorded in writing provided that such rejection shall be made at
the time of acceptance of the bid and the reasons therefor shall be disclosed to the
bidders. Necessary disclosures in this regard shall also be made in the offer document.)
(xviii) On determination of the entitlement under sub-clause (xvi), the information
regarding the same (i.e. the number of securities which the investor becomes entitled)
shall be intimated immediately to the investors.
(xviii)(a) 78(Renumbered)
(xix) The final prospectus containing all disclosures as per these Guidelines including the
price and the number of securities proposed to be issued shall be filed with the Registrar of
Companies.
(xx) Arrangement shall be made by the issuer for collection of the applications by appointing
“The margin collected from categories other than Qualified Institutional Buyers shall be uniform across the book
runner(s)/syndicate members, for each such category”.
Initially inserted vide SEBI Circular No. RMB (Compendium) Series Circular No. 1 (2001-2002) dated November 29, 2001.
75 Inserted sub-clause, vide SEBI Circular No. SEBI/CFD/DIL/DIP/16/2005/19/9 dated September 19, 2005 .
“Bids for securities beyond the investment limit prescribed under relevant laws shall not be accepted by the syndicate
members from any category of investors.”
Initially inserted as sub-clause (xvii)(a) vide circular dated November 29, 2001 and renumbered as (xvii)(b) vide SEBI
Circular No. RMB (Compendium) Series Circular No. 4 (2001-2002) dated March 06, 2002.
77 Inserted sub-clause, vide SEBI Circular No. SEBI/CFD/DIL/DIP/16/2005/19/9 dated September 19, 2005.
78 Inserted vide SEBI Circular No. RMB (Compendium) Series Circular No. 1 (2001-2002) dated November 29, 2001 and later
renumbered as (xvii) (b) vide SEBI Circular No. RMB (Compendium) Series Circular No. 4 (2001-2002) dated March 06,
2002.
mandatory collection centres as per these Guidelines.

79((xx) (a) The online, real time graphical display of demand and bid prices at the bidding
terminals, shall be made. The book running lead manager shall ensure the availability of
adequate infrastructure for data entry of the bids on a real time basis.)
(xxi) The investors who had not participated in the bidding process or have not received
intimation of entitlement of securities may also make an application.
11.3.2 Additional Disclosures
Apart from meeting the disclosure requirements as specified in these Guidelines, the
following disclosures shall be suitably made:
(i) 80(The particulars of syndicate members, brokers, registrars, bankers to the issue,
etc.)
(ii) The following statement shall be given under the 'basis for issue price':-
"The issue price has been determined by the Issuer in consultation with the Book
Runner(s), on the basis of assessment of market demand for the offered securities by way
of Book-building."
(iii) 81(The following accounting ratios shall be given under the basis for issue price for
each of the accounting periods for which the financial information is given:
1. EPS, pre -issue, for the last three years (as adjusted for changes in capital).
2. P/E pre-issue.
3. Average return on net-worth in the last three years.
4. Net-Asset value per share based on last balance sheet.
5. Comparison of all the accounting ratios of the issuer company as mentioned above
with the industry average and with the accounting ratios of the peer group (i.e. companies
of comparable size in the same industry. (Indicate the source from which industry average
and accounting ratios of the peer group has been taken).
6. The accounting ratios disclosed in the offer document shall be calculated after giving
79 Inserted vide SEBI Circular No. RMB (Compendium) Series Circular No. 1 (2001-2002) dated November 29, 2001.
“The particulars of syndicate members along with the details of registrars, bankers to the issue, etc.”
“The following accounting ratios shall be given under the basis for issue price for each of the accounting periods for which
the financial information is given:
1. EPS, pre-issue, for the last three years (as adjusted for changes in capital).
2. P/E, pre-issue and comparison thereof with industry P/E where available (giving the source from which industry P/E has
been taken).
3. Average return on net-worth in the last three years.
4. Net-Asset value per share based on last balance sheet.
5. The accounting ratios disclosed in the offer document shall be calculated after giving effect to the consequent increase of
capital on account of compulsory conversions outstanding, as well as on the assumption that the options outstanding, if any,
to subscribe for additional capital shall be exercised.
effect to the consequent increase of capital on account of compulsory conversions

outstanding, as well as on the assumption that the options outstanding, if any, to
subscribe for additional capital shall be exercised).
(iv) 82(Deleted)
83((v) the
proposed manner of allocation among respective categories of investors, in the
event of under subscription.)
11.3.3 Underwriting
(i) 84(In case the issuer company is making an issue of securities:
a. under sub clause (a) of clause 11.3, 100% of the net offer to the public;
b. under sub clause (b) of clause 11.3, the book built portion - 75% of the net offer to
the public, shall be compulsorily underwritten by the syndicate members/book runner(s).
85(Provided that nothing contained in sub-clause (i) shall apply to 50% of the net offer to
the public, mandatorily to be allotted to the Qualified Institutional Buyers under proviso to
clause 2.2.2 or clause 2.3.2 of these guidelines, in case the company is making an issue
of securities under clause 2.2.2 or clause 2.3.2, as the case may be.)
(ii) (a) The ‘syndicate members’ shall enter into an underwriting agreement with the
Book Runner(s) indicating the number of securities which they would subscribe at the
predetermined price.
(b) The Book Runner(s) shall in turn enter into an underwriting agreement with the
Issuer company.
(iii) In the event of the syndicate members not fulfilling their underwriting obligations the
Book Runner(s) shall be responsible for bringing in the amount devolved.
(iv) 86(Deleted)
82 Omitted the following sub-clause, vide SEBI Circular No. SEBI/CFD/DIL/DIP/16/2005/19/9 dated September 19, 2005:
“the broad parameters on which allocation is proposed to be made to QIBs.”
The sub-clause was initially inserted vide SEBI Circular No. SEBI/CFD/DIL/DIP/15/2005/29/3 dated March 29, 2005.
83 Inserted sub-clause, vide SEBI Circular No. SEBI/CFD/DIL/DIP/15/2005/29/3 dated March 29, 2005.
following:
"The entire offer other than to the categories referred to in clause 11.3 (iii) above shall be fully underwritten by the ‘syndicate
members’/ Book Runner(s)".
“Provided that nothing contained in sub -clause (i) shall apply to 60% of the net offer to the public, mandatorily to be allotted
to the Qualified Institutional Buyers under proviso to clause 2.2.2 or clause 2.3.2 of these guidelines, in case the company is
making an issue of securities under clause 2.2.2 or clause 2.3.2).”
86 Omitted the following clause vide SEBI Circular No. RMB (Compendium) Series Circular No. 1 (2001-2002) dated November
29, 2001:
"There shall not be any undersubscription in the category reserved for persons applying upto 10 tradeable lots as the
Underwriters shall bring in the amount devolved subject to the fulfillment of the minimum shareholders criterion."
11.3.4 Procedure for bidding:

11.3.4.1 The method and process of bidding shall be subject to the following:
(i) 87(Bid shall be open for atleast 88(three working days) and not more than
89(seven working days), which may be extended to a maximum of 90(ten working days ) in
case the price band is revised in accordance with clause 11.3.1.)

(ii) The advertisement mentioned at clause 11.3.1(xi) shall also contain the following:
(a) the date of opening and closing of the bidding(not less than 5 days).
(b) the names and addresses of the syndicate members as well as the bidding terminals
for accepting the bids.
(c) the method and process of bidding.
(iii) Bidding shall be permitted only if an electronically linked transparent facility is used.
(iv) The ‘syndicate members’ shall be present at the bidding centres so that at least one
electronically linked computer terminal at all the bidding centres is available for the
purpose of bidding.
(v) (a) 91(The number of bidding centres, in case 75% of the net offer to the public is
offered through the book building, process shall not be less than the number of mandatory
collection centres as specified in these regulations. In case 100% of the net offer to the
public is made through book building process, the bidding centres shall be at all the
places, where the recognised stock exchanges are situated.)
(b) The same norms as applicable for collection centres shall be applicable for the
bidding centres also.
(vi) 92(Individual as well as qualified institutional buyers shall place their bids only
through the ‘brokers’ who shall have the right to vet the bids. The applicant shall enclose
the proof of DP ID and Client ID along with the application, while making bid)
87 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for “ Bid shall be open for atleast 5 days.”
88 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/15/ 2005/29/3 dated March 29, 2005 for the words and figure “5 days”.
89 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/15/2005/29/3 dated March 29, 2005 for the words and figure “10
days”.
90 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/15/2005/ 29/3 dated March 29, 2005 for the words and figure “13
days”.
following:
"The number of bidding centres shall not be less than the number of mandatory collection centres specified in these
Guidelines."
“Individual as well as 198(qualified institutional buyers) shall place their bids only through the ‘syndicate members’ who shall
have the right to vet the bids.”
Prior to the above, the words “institutional investors” were substituted by “qualified institutional buyers” vide SEBI Circular
No. RMB (Compendium) Series Circular No. 1 (2001-2002) dated November 29, 2001
93((vi) (a) During the period the issue is open to the public for bidding, the applicants
may approach the brokers of the stock exchange/s through which the securities are
offered under on-line system, to place an order for bidding to the securities. Every broker
shall accept orders from all clients/investors who place orders through him.)
(vi) (b) 94
(vi) (c) 95
(vi) (d) 96
(vii) 97(The investors shall have the right to revise their bids provided that Qualified
Institutional Buyers shall not be allowed to withdraw their bids after the closure of the
bidding.)
(viii) Bidding Form
(a) There shall be a standard bidding form to ensure uniformity in bidding and accuracy.
(b) The bidding form shall contain information about the investor, the price and the
number of securities that the investor wishes to bid.
(c) The bidding form before being issued to the bidder shall be serially numbered at the
bidding centres and date and time stamped.
(d) The serial number may be system generated or stamped with an automatic
numbering machine.
(e) The bidding form shall be issued in duplicate signed by the investor and
countersigned by the syndicate member, with one form for the investor and the other for
the syndicate member(s)/Book Runner(s).
(ix) At the end of each day of the bidding period the demand shall be shown graphically
on the terminals for information of the syndicate members as well as the investors.

94 Inserted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 the following clause, which has been deferred vide
press release no. PR No.246/2003 dated October 13, 2003:
“The broker shall collect the client registration form duly filled up and signed from the applicants before placing the order in
the system as per "Know your client rule" as specified by SEBI and as may be modified from time to time.”
“The broker shall, thereafter, enter the buy order in the system, on behalf of the clients and enter important details including
the name, address, telephone number, and category of the applicant, the number of shares applied for, amount paid,
beneficiary ID, DP code and Bid-cum Application Form number, Bid price, etc., and give an order number/order confirmation
slip to the investor.”
“The broker shall open a separate bank account [Escrow Account] with the clearing house bank for primary market issues
and the amount collected by the broker from his clients/investors as margin money shall be deposited in this account.”
97 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for “The investors shall have the right to revise
their bids”
98((x) The
identities of the Qualified Institutional Buyers making the bidding, shall not be
made public)
(xi) 99
100((xii) The stock exchanges shall display data pertaining to book built issues in a
uniform format, interalia giving category wise details of bids received Indicative format is
given in Schedule XXX. The data pertaining to an issue shall be displayed on the site for a
period of atleast three days after closure of bids.)
11.3.5 Allocation / Allotment Procedure
(i) 101(In case an issuer company makes an issue of 100% of the net offer to public
through 100% book building process :
(a) not less than 102(35%) of the net offer to the public shall be available for allocation to
retail individual investors;
(b) not less than 103(15%) of the net offer to the public shall be available for allocation to
non institutional investors i.e. investors other than retail individual investors and Qualified
Institutional Buyers;
(c) not more than 50% of the net offer to the public shall be available for allocation to
Qualified Institutional Buyers.
Provided that, 104(50% of net offer to public) shall be mandatorily allotted to the Qualified

“The Stock exchange shall, by the end of each day while the issue is open for subscription, send the order data to the
Registrar to the Issue and Lead Managers / Book Runners. This data shall consist of only valid orders (excluding those that
are cancelled). On the date of closure of the issue, the final status of orders received shall be sent to the Registrar to the
issue and Lead Managers / Book Runners”
100 Inserted sub-clause, vide SEBI Circular No. SEBI/CFD/DIL/DIP/15/2005/29/3 dated March 29, 2005.
“In case an issuer company makes an issue of 100% of the net offer to public through 100% book building process-
(a) not less than 25% of the net offer to the public shall be available for allocation to retail individual investors i.e. investors
applying for upto 1000 securities;
(b) not less than 15% of the net offer to the public shall be available for allocation to non institutional investors i.e. investors
applying for more than 1000 securities;
(c) not more than 60% of the net offer to the public shall be available for allocation to Qualified Institutional Buyers.”
Initially substituted vide SEBI Circular No. RMB (Compendium) Series Circular No. 1 (2001-2002) dated November 29, 2001
for the following:
"Atleast 15% of the issue size shall be reserved for allocation to individual investors applying upto 10 tradeable lots through
the syndicate member."
102 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/15/2005/29/3 dated March 29, 2005 for the figures “25%”.
103 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/15/2005/29/3 dated March 29, 2005 for the figures “25%”.
104 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/16/2005/19/9 dated September 19, 2005 for the letters and figures
Institutional Buyers, in case the issuer company is making a public issue under Clause
2.2.2 and 2.3.2 of these guidelines)
105(Provided further that, in respect of issues made under Rule 19(2)(b) of Securities
Contract (Regulation) Rules 1957, with 60% mandatory allocation to Qualified Institutional
Buyers , the percentage allocation to retail individual investors and non institutional
investors in terms of clause 11.3.5(i)(a) shall be 30% and 10% respectively.)
(ii) 106(In case an issuer company makes an issue of 75% of the net offer to public
through book building process and 25% at the price determined through book building –
a. in the book built portion, not less than 25% of the net offer to the public, shall be
available for allocation to non Qualified Institutional Buyers and not more than 50% of the
net offer to the public shall be available for allocation to Qualified Institutional Buyers.
b. the balance 25% of the net offer to the public, offered at a price determined through book
building, shall be available only to retail individual investors who have either not
participated or have not received any allocation, in the book built portion.
Provided that, 107(50% of net offer to public) shall be mandatorily allotted to the Qualified
Institutional Buyers, in case the issuer company is making a public issue under Clause
2.2.2 and 2.3.2 of these guidelines)
108((ii-a) Out of the portion available for allocation to qualified institutional buyers under
sub clause (i) or (ii) or any proviso thereof, as the case may be, 5% shall be allocated
proportionately to mutual funds. Mutual fund applicants shall also be eligible for
proportionate allocation under the balance available for Qualified Institutional Buyers as
illustrated in Schedule XIX-A.)
105 Inserted 2nd proviso vide SEBI Circular No. SEBI/CFD/DIL/DIP/15/2005/29/3 dated March 29, 2005.
“In case an issuer company makes an issue of 75% of the net offer to public through book building process and 25% at the
price determined through book building –
a. in the book built portion, not less than 15% of the net offer to the public, shall be available for allocation to non institutional
investors and not more than 60% of the net offer to the public shall be available for allocation to Qualified Institutional
Buyers.
b. the balance 25% of the net offer to the public, offered at a price determined through book building, shall be available only
to retail individual investors who have either not participated or have not received any allocation, in the book built portion.
Provided that, 60% of the issue size shall be allotted to the Qualified Institutional Buyers, in case the issuer company is
making a public issue under Clause 2.2.2 or clause 2.3.2 of these guidelines.” Initially substituted Vide circular dated
November 29, 2001 for "10% of the issue size offered to the public through the prospectus shall be reserved for allocation to
individual investors who had not participated in the bidding process or have not received an intimation for entitlement of
securities under clause 11.3 (xix)."
107 Substituted vide SEBI Circular No. SEBI/CFD/DIL/DIP/16/2005/19/9 dated September 19, 2005 for the letters and figures
108 Inserted sub-clause, vide SEBI Circular No. SEBI/CFD/DIL/DIP/16/2005/19/9 dated September 19, 2005.
(iii) 109(Allotment to retail individual investors, non -institutional investors and qualified
institutional buyers shall be made proportionately as illustrated in Schedule XVIII. )
(iv) 110(In the event of under subscription in any category, the undersubscribed portion
shall be allocated to the bidders as per disclosures made in terms of clause 11.3.2(v).
Provided that, the unsubscribed portion in the "Qualified Institutional Buyer" category,
shall not be available for subscription to other categories, in case the issuer company has
made an issue of securities under clause 2.2.2 or clause 2.3.2 of these guidelines.)
(v)(a) 111(Deleted)
(b) 112(Deleted)
(vi) 113(Allotment shall be made not later than 15 days from the closure of the issue failing
which interest at the rate of 15% shall be paid to the investors.)
109 Substituted the sub-clause vide SEBI Circular No. SEBI/CFD/DIL/DIP/16/2005/19/9 dated September 19, 2005 for the
following:
“Allotment to (retail individual investors and non institutional investors.), shall be made on the basis of the proportionate
allotment system as specified in Schedule XVIII.”
Of the above, the words “retail individual investors and non institutional investors” w ere initially substituted for the words
“investors under sub-clauses (i) and (i) of this clause” vide SEBI Circular No. RMB (Compendium) Series Circular No. 1
(2001-2002) dated November 29, 2001
110 Substituted the sub-clause vide SEBI Circular No. SEBI/CFD/DIL/DIP/15/2005/29/3 dated March 29, 2005 for the following:
“In case of under subscription in any category, the undersubscribed portion may be allocated to the bidders in the other
categories.
Provided that, the unsubscribed portion in the "Qualified Institutional Buyer" category, shall not be available for subscription
to other categories, in case the issuer company has made an issue of securities under clause 2.2.2 or clause 2.3.2 of these
guidelines.”
Prior to the above substitution, the sub-clause was substituted vide SEBI Circular No. RMB (Compendium) Series Circular
No. 1 (2001-2002) dated November 29, 20 01 for the following:
“In case of undersubscription in the category referred to in clause (ii) of this clause, the Issuer company has the option to
allocate it to whichever category it deems fit or let the undersubscribed portion lapse."
111 Omitted the following sub-clause, vide SEBI Circular No. SEBI/CFD/DIL/DIP/16/2005/19/9 dated September 19, 2005:
“The allocation to QIBs shall be made as per disclosures made in terms of clause 11.3.2(iv).”
The above sub-clause was earlier substituted for the following sub-clause, vide SEBI Circular No. SEBI/CFD/DIL/
DIP/15/2005/29/3 dated March 29, 2005:
“The allocation to the Qualified Institutional Buyers) shall be determined by the Book Runner(s) based on prior commitment,
investor quality, price aggression, earliness of bids, etc.”
Prior to the above substitution, the sub-clause was substituted vide SEBI Circular No. RMB (Compendium) Series Circular
No. 1 (2001-2002) dated November 29, 2001 for the following:
"For the class of investors other than those mentioned at clauses (i) and (ii) of this clause, the allocation".
112 Omitted vide SEBI Circular No. RMB (Compendium) Series Circular No. 1 (2001-2002) dated November 29, 2001the
following sub-clause, which has been wrongly numbered as sub-clause (v) (a) instead of sub-clause (v) (b):
"The minimum shareholders criterion shall not be applicable to this category."
113 Substituted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 for the following clause and the aforesaid
substituted clause has been deferred vide press release no. PR No.246/2003 dated October 13, 2003:
“After finalisation of basis of allocation, the Registrar to the Issue/company shall send the computer file containing the
allocation details i.e. the allocation numbers, allocated quantity of successful applicants, etc. along with broker -wise funds
pay-in obligation, to the Broker to the Issue and the stock exchange (s).”
(vii) 114(Schedule XX may be referred to for Clarificatory Examples for issue size and
allocation has been specified in Schedule XX.)
(viii) 115(Model Time Frame for Book Building is specified in Schedule XXI.)
(ix) 116(The broker shall refund the margin money collected earlier, within 3 days of
receipt of basis of allocation, to the applicants who did not receive allocation)
117((x))
118((xi))
“The Company, Lead Manager / Book Runner shall announce the pay-in day and intimate the same to Brokers and stock
exchange. It shall be responsibility of the broker to deposit the amount in the Escrow Account to the extent of allocation to
his clients on the pay-in date”
“On receipt of the basis of allocation data, the brokers shall immediately intimate the fact of allocation to their client
/applicant. The broker shall ensure that each successful client/applicant pays submits the duly filled-in and signed application
form to him along with the amount payable towards the application money by the pay-in date. Amount already paid by the
applicant as margin money shall be adjusted towards the total allocation money payable. The broker shall, thereafter, hand
over the application forms of the successful applicants who have paid the application money, to the exchange, which shall
submit the same to the Registrar to Issue/company for their records”
“In case the issuer company has made an issue of 75% of the net offer to public through book building process and 25% at
the price determined through book building –
a. the offer of 25% of the net offer to the public, made at a price determined through book building, shall open within 15 days
from the date of closure of bidding ;
b. the offer for subscription to the public, shall remain open for a period of atleast 3 working days after completing all the
requirements of advertisement and despatch of issue material to all the stock exchanges ;
c. during the time when the offer is open, the investors who have received an intimation of entitlement of securities under sub
clause (xviii) of clause 11.3.1, shall submit the application forms along with the application moneys ;
d. the other retail individual investors who had not participated in the bidding process or have not received intimation of
entitlement of securities under sub clause (xviii) of clause 11.3.1 may also make an application.”
Initially substituted vide SEBI Circular No. RMB (Compendium) Series Circular No. 1 (2001-2002) dated November 29, 2001
for the following clause:
"(a) The offer shall remain open for subscription from the public for a period of atleast 3 working days after completing all the
requirements of advertisement and despatch of issue material to all the stock exchanges.
(b) During the time when the offer is open, the investors who have received an intimation of entitlement of securities under the
clause (xviii) shall submit the application forms along with the application moneys.
(c) The other individual investors who had not participated in the bidding process or have not received intimation of entitlement
of securities under clause (xviii) may also make an application."
The brokers shall give details of the amount received from each client/investors and the names of clients/investors who have
not paid the application money to Registrar / Book Runner the exchange. The brokers shall also give soft copy of this data to
the exchange.
“In the event of the successful applicants failing to pay the application money, the broker through whom such client placed
orders, shall bring in the funds to the extent of the client’s default. If the broker does not bring in the funds, he shall be
declared as a defaulter by the stock exchange and action as prescribed under the Bye-Laws of the stock exchange shall be
119((xii))
120((xiii))
121((xiv))
122((xv))On payment and receipt of the sum payable on application for the amount
towards minimum subscription, the company shall allot the shares to the applicants as per
these Guidelines.
123((xvi))
124((xvii))
125((xviii))
126((xix))
initiated against him. In such an event, the Book Runners in case of issues through book building process, who have
underwritten the issue, shall bring-in the shortfall.
On pay-in date, the clearing house shall, without any instruction from the broker, debit the escrow account of each broker to
the extent of allocation made to his clients/investors and credit the amount so collected from each broker to the ‘Issue
Account’.
The concerned Exchange shall not use the Settlement/Trade Guarantee Fund of the Exchange for honoring brokers
commitments in case of failure of broker to bring in the funds.
121 Inserted vide SEBI/CFD/DIL/DIP/Circular No. 11 dated August 14, 2003 the following clause and the aforesaid inserted
clause was deferred vide press release no. PR No.246/2003 dated October 13, 2003:
“The broker shall open an ‘Escrow Securities Account’ with any depository for the purpose of receiving credit of securities on
behalf of the clients.
“After the allotment, the Registrar to the issue shall post the share certificates to the investors or, instruct the depository to
credit the Escrow Securities Account of each Broker, as the case may be.
“On receipt of the credit of securities to the Escrow Securities Account, the Broker shall transfer the shares to the
clients’/applicants’ depository account, after receipt of confirmation of full payment from the clients/applicants. For this
purpose broker shall be considered as Agent of the client/applicant. Broker shall confirm to the Book -runner/Registrar to the
issue that shares have been credited to the account of clients /applicants not later than the day of commencement of trading,
in case full payment had been received.”
“Any cases of dispute, amongst the broker and the clients, would be referred to arbitration as per the by-laws / regulations of
the stock exchange”
127((xx))
128((xxi))
129((xxii))
130((xxiii)) In
case the issuer company has made an issue of 75% of the net offer to public
through book building process and 25% at the price determined through book building:
(a) the offer of 25% of the net offer to the public, made at a price determined through
book building, shall open within 15 days from the date of closure of bidding;
(b) the offer for subscription to the public, shall remain open for a period of atleast 3
working days after completing all the requirements of advertisement and despatch of
issue material to all the stock exchanges;
(c) during the time when the offer is open, the investors who have received an intimation
of entitlement of securities under sub clause (xviii) of clause 11.3.1, shall submit the
application forms along with the application moneys;
(d) the other retail individual investors who had not participated in the bidding process or
have not received intimation of entitlement of securities under sub clause (xviii) of clause
11.3.1 may also make an application.”
11.3.6 Maintenance of Books and Records
(i) A final book of demand showing the result of the allocation process shall be
maintained by the book runner/s.
(ii) The Book Runner/s and other intermediaries in the book building process associated
shall maintain records of the book building prices.
“The Allotment details shall be put on the website (if available) of the Registrar to the issue and the issuer. Further, online
messaging facility of NSDL/CDSL or of stock exchanges may be used to communicate the Allotment details to Brokers, as
an alternative of physical Confirmation of Allocation Note”
“Trading shall commence within 6 days from the closure of the issue failing which interest at the rate of 15% p.a. shall be
paid to the investors.”
“Schedule XX may be referred to for Clarificatory Examples for issue size and allocation has been specified in Schedule XX.”
press release no. PR No.246/2003 dated October 13, 2003.
“Model Time Frame for Book Building is specified in Schedule XXI.”
(iii) The Board shall have the right to inspect the records, books and documents relating
to the Book building process and such person shall extend full cooperation.
17
SECURITIES CONTRACTS (REGULATION)
ACT, 1956∗
17.0 INTRODUCTION
Stock market plays a significant role in development of the Economy. Stock market facilities
mobilisation of funds from small savings of investors and channelises these resources into
various development needs of various sectors of the Economy. Stock market also provides
mechanism for trading of securities thus ensuring liquidity to the investment of investors.
Thus, stock market facilities transactions in securities.
In order to prevent undesirable transactions in securities, promote healthy stock market. The
Securities Contracts (Regulation) Act, 1956 was enacted by Parliament vide Act No. 42.
This Act applies to whole of India.
17.1 ABOUT CORPORATISATION & DEMUTUALISATION OF STOCK EXCHANGES

Traditionally, the stock exchanges in India were organizations formed generally on not-for
profit and the trading members besides rendering various services were also owning,
controlling and managing the stock exchanges. They were essentially not corporatised and
working on mutual basis. This type of system had its own merits and inherent limitations.
However with the passage of time and events occurring at the various stock exchanges, a
thought was contemplated as why they should not be allowed to corporatised and work on
de-mutualisation basis. The advantage of the new system is that the public interest
becomes a dominant factor and therefore the interest of the private interest is relegated to
the background.
Essentially, the Securities Contracts (Regulation) Act, 1956 permitted different types of
organizational structure for the stock exchanges to operate and it is for this reason we saw
some stock exchanges were association of persons, some were company limited by shares
and some others were company limited by guarantee. The Securities Contract (Regulation)
∗
Updated as per the Securities Laws (Amendement) Act, 2004 [No. 1 of 2005] dated 6.1.2005.
Act 1956 was amended by the Government through promulgating an ordinance to

corporatise and demutualise the stock exchanges. This ordinance, which came into effect
on 12th October 2004, was moved in the Lok Sabha as the Securities Laws (Amendment)
Bill, 2004 and it was subsequently passed as an Act [1 of 2005} wef 6th January, 2005.The
purpose of this legislation is to provide for corporatising and demutalisation of all recognized
stock exchanges, delisting of securities, appeals against orders of the Securities Appellate
Tribunal, penalties for failure to furnish information, return etc. and other related matters.
Background
The Joint Parliamentary Committee on the stock market scam of 2001 made
recommendations for the Demutualisation - separating the ownership, voting rights and
management from the right of access to trading in the stock exchanges. It was also
observed that the existing systems of mutualised exchanges have not been protecting the
investors’ interest. Hence, the Government initiated this process of Corporatisation &
Demutualisation of the stock exchanges on the recommendations of expert group
constituted by SEBI under the chairmanship of justice M.H. Kania.
Corporatisation & Demutualisation
The Corporatisation intends to make a stock exchange as a corporate entity limited by
shares. In the new legislation under Section 2 (aa) the term corporatisation has been
defined as “the succession of a recognised stock exchange, being a body of individuals or a
society registered under the Societies Registration Act, 1860, by another stock exchange,
being a company incorporated for the purpose of assisting, regulating or controlling the
business of buying, selling or dealing in securities carried on by such individuals or society”.
Further, Demutualisation is the process of separating ownership, trading and management
in a stock exchange. This process shall prevent conflict of interests, which may arise when
stockbrokers involved in the management of the stock exchanges. It is defined under
section 2(ab) as “the segregation of ownership and management from the trading rights of
the members of a recognised stock exchange in accordance with a scheme approved by the
Securities and Exchange Board of India”. Until the legislation came into effect only two
exchanges i.e., National Stock Exchange and OTCEI in our country were in demutualised
structure.Very recently the Bombay Stock Exchange (BSE) got the approval of SEBI for its
corporatisation and demutualisation.
17.2 HIGHLIGHTS OF NEW LEGISLATION ON SECURITIES LAWS.

The following are the salient features of the new legislation which amended the Securities
Contracts (Regulation) Act, 1956:
• New definition on Corporatisation and De-mutualisation and Procedure for the same.
• The definitions of securities now include units or any such instrument issued to the
Securities Contracts (Regultion) Act, 1956 17.3
investors under any mutual fund scheme.

• The definition of securities to include swap, options and hybrid instruments and other
contracts for differences.
• Central Government to regulate spot transactions.
• De-listing of securities subject to prior approval of the holders of securities.
• Establishment of a Clearing Corporation instead of clearing house as at present.
• Assets of the client to be dealt by the intermediary as directed by the investor.
• Empowers SEBI to restrict the voting rights of the shareholders who are also
stockbrokers of the recognised stock exchange.
• SEBI can restrict the right of shareholders or a stockbroker of the recognised stock
exchange to appoint representatives on the Governing Board.
• Further, SEBI can restrict the maximum number of representatives of the broker of the
recognised stock exchange to be appointed on the governing board of the stock
exchange (i.e., one-fourth).
• Every stock exchange, whose scheme for Corporatisation and Demutualisation has
been approved by SEBI, should ensure that at least 51% of its equity share capital is
held, within 12 months of the SEBI order by the - public other than shareholders having
trading rights.
• Stock exchanges are allowed to make fresh issue of equity shares to the pubic or
subject to SEBI regulations in any other manner can increase its equity share capital to
fulfill the above norm.
• New Scheme for Penalty
The new legislation thus intends to convert stock exchanges, which were set up as
association of persons or as companies limited by guarantee, into companies limited by
shares. The focus is to encourage retail investors as a driving force by increasing their
participation in the stock market. Further, under new legislation all stock exchanges would
be required to submit a scheme within a time frame as may be specified for Corporatisation
and Demutualisation to the capital market regulator, the securities and exchange Board of
India after it is notified by the Central Government. Thus by all accounts, the new legislation
is ushering a new era in the profile of stock exchanges and its functioning.
17.3 DEFINITIONS (SECTION 2)

In this Act, unless the context otherwise requires—
(a) “Contract” means a contract for or relating to the purchase or sale of securities:
‘(aa) “corporatisation” means the succession of a recognised stock exchange, being a
body of individuals or a society registered under the Societies Registration Act,
1860, by another stock exchange, being a company incorporated for the purpose
of assisting, regulating or controlling the business of buying, selling or dealing in
securities carried on by such individuals or society;
(ab) “demutualisation” means the segregation of ownership and management from the
trading rights of the members of a recognised stock exchange in accordance with
a scheme approved by the Securities and Exchange Board of India;
(ac) “derivative” includes—
(A) a security derived from a debt instrument, share, loan whether secured or
unsecured, risk instrument or contract for differences or any other form of
security;
(B) a contract, which derives its value from the prices, or index of prices, of
underlying securities;
(b) “Government security” means a security created and issued, whether before or after
the commencement of this Act, by the Central Government or a State Government for
the purpose of raising a public loan and having one of the forms specified in clause (2)
of Section 2 of the Public Debt Act 1944 (18 of 1944);
(c) “member” means a member of a recognised stock exchange;
(d) “option in securities” means a contract for the purchase or sale of a right to buy or sell,
or a right to buy and sell, securities in future, and includes a teji, a mandi, a teji mandi,
a galli, a put, a call or a put and call securities;
(e) “prescribed” means prescribed by rules made under this Act;
(f) “recognised stock exchange” means a stock exchange which is for the time being
recognised by the Central Government under Section 4;
(g) “rules”, with reference to the rules relating in general to the constitution and
management of a stock exchange, includes, in the case of a stock exchange which is
an incorporated association, its memorandum and articles of association;
‘(ga) “scheme” means a scheme for corporatisation or demutualisation of a recognised
stock exchange which may provide for-
(i) the issue of shares for a lawful consideration and provision of trading rights
in lieu of membership cards of members of a recognised stock exchange;

(ii) the restrictions on voting rights;
(iii) the transfer of property, business, assets, rights, liabilities, recognitions,
contracts of the recognised stock exchange, legal proceedings by, or
against, the recognised stock exchange, whether in the name of the
recognised stock exchange or any trustee or otherwise and any permission
given to, or by, the recognised stock exchange;
(iv) the transfer of employees of a recognised stock exchange to another
recognised stock exchange;
(v) any other matter required for the purpose of, or in connection with, the
corporatisation or demutualisation, as the case may be, of the recognised
stock exchange;’;
(gb) “Securities Appellate Tribunal” means a Securities Appellate Tribunal established
under sub-section (1) of section 15K of the Securities and Exchange Board of
India Act, 1992 (15 of 1992);
(h) “Securities” include—
(i) Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other body
corporate;
(ia) derivative;
(ib) units or any other instruments issued by any collective investment scheme to the
investors in such schemes;
(ic) Security receipt as fefined in clause(2g) under section 2 of the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security interest Act,
2002.
(id) units or any other such instrument issued to the investors under any mutual fund
scheme;
(ii) rights or interests in securities;
(i) “spot delivery contract” means a contract which provides for—
(a) actual delivery or securities and the payment of a price therefor either on the
same day as the date of the contract or on the next day, the actual period taken
for the despatch of the securities or the remittance of money therefor through the
post being excluded from the computation of the period aforesaid if the parties to
the contract do not reside in the same town or locality;
(b) transfer of the securities by the depository from the account of a beneficial owner
to the account of another beneficial owner when such securities are dealt with by
a depository;
(j) “stock exchange” means –
(a) any body of individuals, whether incorporated or not, constituted before
corporatisation and demutualisation under sections 4A and 4B, or
(b) a body corporate incorporated under the Companies Act, 1956 whether under a
scheme of corporatisation and demutualisation or otherwise, for the purpose of
assisting, regulating or controlling the business of buying, selling or dealing in
securities;’
17.4 RECOGNITION OF STOCK EXCHANGES

Dealing in securities can be provided for only by recognised Stock Exchanges. As of date
there are 24 recognised Stock Exchanges in the country including OTCEI and Inter
connected Stock Exchange, NSE and BSE are two leading Stock Exchanges having nation
wide presence. Power to recognise Stock Exchange vests with Central Government.
However, Central Government has delegated these powers to SEBI vide its notification No.
F.No. 1/57/SE/93 dated 13.9.94.
Application for recognition (Section 3)
Any Stock Exchange desirous of being recognised may make an application to SEBI in the
prescribed manner.
Application must be accompanied with Bye-Laws, Rules, Regulations which must contain
specific details on:
(1) The governing body of Stock Exchange, its constitution and powers of management
and manner in which its business is transacted.
(2) Powers and duties of office bearers of the Stock Exchange.
(3) Various classes of members, qualification for membership and the exclusion,
suspension, expulsion and re-admission, suspension, expulsion and readmission of
members.
(4) The procedure for registration of Partnerships as members to stock exchange and
rules to nomination of authorised representatives.
Currently constitution of Stock Exchanges is not uniform. A few of the Exchanges are
registered as companies while some exchanges are constituted as “Association of persons”
and rest of the Exchanges are constituted as guarantee companies. Taking clue from global
happenings ‘SEBI’ is currently working on Guidelines for demutualisation of Exchanges
where in ownership would be segregated from trading.

Membership provisions, composition of Board, Powers of governing Board are defined in the
Articles of the Exchange. Rules governing listing, trading and settlement, penalties and
prohibitions, disciplinary and defaults are defined in Bye-laws of the Exchange.
17.5 GRANTING OF RECOGNITION (SECTION 4)

(1) Central Government/SEBI after making inquiry and obtaining confirmation from the
applicant that:
(a) Rules and Bye-Laws are in conformity with the conditions prescribed.
(b) Stock Exchange is willing to comply with any condition that SEBI may impose for
carrying out the object of this Act (fair dealing and investors protection).
(c) The recognition would be in the interest of trade and also in public interest may
grant recognition to stock exchange subject to the conditions that it may impose.
(2) The conditions imposed may include
(i) qualification for membership of stock exchange.
(ii) manner in which contracts shall be entered into and enforced as between
members.
(iii) representation of Central Government on Board of Exchanges.
(iv) maintenance of accounts of members and their audit.
(3) Grant of recognition shall be published in Gazette of India and also in official gazette of
State in which stock exchange is located.
(4) No application can be refused unless an opportunity of being heard is given to the
Stock Exchange. Reason for refusal will be communicated in writing.
Corporatisation and demutualisa-tion of stock exchanges (Section 4A)
On and from the appointed date, all recognised stock exchanges (if not corporatised and
demutualised before the appointed date) shall be corporatised and demutualised in
accordance with the provisions contained in section 4B:
Provided that the Securities and Exchange Board of India may, if it is satisfied that any
recognised stock exchange was prevented by sufficient cause from being corporatised and
demutualised on or after the appointed date, specify another appointed date in respect of
that recognised stock exchange and such recognised stock exchange may continue as such
before such appointed date.
Explanation. For the purposes of this section, “appointed date” means the date which the
Securities and Exchange Board of India may, by notification in the Official Gazette, appoint
and different appointed dates may be appointed for different recognised stock exchanges:
Procedure for corporatisation and demutualisation.(Section 4B)
It provides (1) All recognised stock exchanges referred to in section 4A shall, within such
time as may be specified by the Securities and Exchange Board of India, submit a scheme
for corporatisation and demutualisation for its approval:
Provided that the Securities and Exchange Board of India may, by notification in the Official
Gazette, specify name of the recognised stock exchange, which had already been
corporatised and demutualised, and such stock exchange, shall not be required to submit
the scheme under this section.
(2) On receipt of the scheme referred to in sub-section (1), the Securities and Exchange
Board of India may, after making such enquiry as may be necessary in this behalf and
obtaining such further information, if any, as it may require and if it is satisfied that it would
be in the interest of the trade and also in the public interest, approve the scheme with or
without modification.
(3) No scheme under sub-section (2) shall be approved by the Securities and Exchange
Board of India if the issue of shares for a lawful consideration or provision of trading rights
in lieu of membership card of the members of a recognised stock exchange or payment of
dividends to members have been proposed out of any reserves or assets of that stock
exchange.
(4) Where the scheme is approved under sub-section (2), the scheme so approved shall be
published immediately by –
(a) the Securities and Exchange Board of India in the Official Gazette;
(b) the recognised stock exchange in such two daily newspapers circulating in India, as
may be specified by the Securities and Exchange Board of India,
and upon such publication, notwithstanding anything to the contrary contained in this Act or
any other law for the time being in force or any agreement, award, judgment, decree or
other instrument for the time being in force, the scheme shall have effect and be binding on
all persons and authorities including all members, creditors, depositors and employees of
the recognised stock exchange and on all persons having any contract, right, power,
obligation or liability with, against, over, to, or in connection with, the recognised stock
exchange or its members.
(5) Where the Securities and Exchange Board of India is satisfied that it would not be in the
interest of the trade and also in the public interest to approve the scheme under sub-section
(2), it may, by an order, reject the scheme and such order of rejection shall be published by
it in the Official Gazette:
Provided that the Securities and Exchange Board of India shall give a reasonable
opportunity of being heard to all the persons concerned and the recognised stock exchange
concerned before passing an order rejecting the scheme.
(6) The Securities and Exchange Board of India may, while approving the scheme under
sub-section (2), by an order in writing, restrict-
(a) the voting rights of the shareholders who are also stock brokers of the recognised
stock exchange;
(b) the right of shareholders or a stock broker of the recognised stock exchange to appoint
the representatives on the governing board of the stock exchange;
(c) the maximum number of representatives of the stock brokers of the recognised stock
exchange to be appointed on the governing board of the recognised stock exchange,
which shall not exceed one-fourth of the total strength of the governing board.
(7) The order made under sub-section (6) shall be published in the Official Gazette and on
the publication thereof, the order shall, notwithstanding anything to the contrary contained in
the Companies Act, 1956, or any other law for the time being in force, have full effect.
(8) Every recognised stock exchange, in respect of which the scheme for corporatisation or
demutualisation has been approved under sub-section (2), shall, either by fresh issue of
equity shares to the public or in any other manner as may be specified by the regulations
made by the Securities and Exchange Board of India, ensure that at least fifty-one per cent.
of its equity share capital is held, within twelve months from the date of publication of the
order under sub-section (7), by the public other than shareholders having trading rights:
Provided that the Securities and Exchange Board of India may, on sufficient cause being
shown to it and in the public interest, extend the said period by another twelve months.’
Withdrawal of Recognition (Section 5)
If Central Government is of the opinion that recognition given to an Exchange must be
withdrawn, it may withdraw the recognition after serving due notice on governing Board of
the Exchange. Withdrawal however will not affect validity of Contracts entered into before
the date of withdrawal notification. (Sub-section 1).
Sub-section 2 provides that, Where the recognised stock exchange has not been
corporatised or demutualised or it fails to submit the scheme referred to in sub-section (1) of
section 4B within the specified time therefore or the scheme has been rejected by the
Securities and Exchange Board of India under sub-section (5) of section 4B, the recognition
granted to such stock exchange under section 4, shall, notwithstanding anything to the
contrary contained in this Act, stand withdrawn and the Central Government shall publish,
by notification in the Official Gazette, such withdrawal of recognition:
Provided that no such withdrawal shall affect the validity of any contract entered into or
made before the date of the notification, and the Securities and Exchange Board of India
may, after consultation with the stock exchange, make such provisions as it deems fit in the
order rejecting the scheme published in the Official Gazette under sub-section (5) of section
4B.”
Power to call for Information (Section 6)
1. Every Stock Exchange should furnish periodical returns to SEBI in the prescribed
format. These Returns contains information on current affairs of the Exchange
including volume and value of transactions, short deliveries, important decisions taken
by Board etc.
2. Every Stock Exchange has to maintain books of accounts for a period of 5 years and
these books may be inspected by SEBI at any point of time.
3. SEBI may by order in writing call for information or explanation relating to affairs of an
Exchange or its member. SEBI also has the power to appoint one or more inquiry
officers who may submit their report to SEBI.
4. Every Director, Manager, Secretary or officer of the Exchange is bound to provide
information to Enquiry officer or SEBI representative who are looking into the affairs of
the Exchange.
SEBI carries out regular inspection of all Exchanges at periodical intervals. Apart from this if
market condition warrants it carries out special investigation into the affairs of the
Exchange/s.
Annual Report (Section 7)
Every Stock Exchange is required to furnish a copy of Annual Report to SEBI as well as
Central Government.
Rules Restricting Voting Rights (Section 7A)
A Stock Exchange is empowered to amend rules to provide for all or any of the following
matters:
(a) restriction of voting rights to members only.
(b) regulation of voting rights by specifying that each member is entitled to one vote only
irrespective of number of shares held.
(c) restriction on right of member to appoint proxy.
Currently all exchanges provide for one member one vote. Only member can be appointed
as proxy. Any amendment should be duly approved by Central Government and such
amendment becomes effective only after such approval.
17.6 POWER OF CENTRAL GOVERNMENT TO MAKE RULES (SECTION 8)

Central Government after consultation with Stock Exchange may by order in writing direct
Stock Exchange/s to make or amend rules within two months from the date of such order. If
an Exchange fails to comply with order Central Government on its own may make or amend
the rules.
Clearing corporation (Section 8A)
(1) A recognised stock exchange may, with the prior approval of the Securities and
Exchange Board of India, transfer the duties and functions of a clearing house to a clearing
corporation, being a company incorporated under the Companies Act, 1956, for the purpose
of –
(a) the periodical settlement of contracts and differences thereunder;
(b) the delivery of, and payment for, securities ;
(c) any other matter incidental to, or connected with, such transfer.
(2) Every clearing corporation shall, for the purpose of transfer of the duties and functions of
a clearing house to a clearing corporation referred to in sub-section (1), make bye-laws and
submit the same to the Securities and Exchange Board of India for its approval.
(3) The Securities and Exchange Board of India may, on being satisfied that it is in the
interest of the trade and also in the public interest to transfer the duties and functions of a
clearing house to a clearing corporation, grant approval to the bye-laws submitted to it
under sub-section (2) and approve transfer of the duties and functions of a clearing house to
a clearing corporation referred to in sub-section (1).
(4) The provisions of sections 4, 5, 6, 7, 8, 9, 10, 11 and 12 shall, as far as may be, apply
to a clearing corporation referred to in sub-section (1) as they apply in relation to a
recognised stock exchange.”.
17.7 POWER TO STOCK EXCHANGE TO MAKE BYE-LAWS (SECTION 9)

(1) Any recognised stock exchange may, subject to the previous approval of the Securities
and Exchange Board of India, make bye-laws for the regulation and control of
contracts.
(2) In particular, and without prejudice to the generality of the foregoing power, such bye-
laws may provide for:
(a) the opening and closing of markets and the regulation of the hours of trade;
(b) a clearing house for the periodical settlement of contracts and differences
thereunder, the delivery of and payment of securities, the passing on of delivery
orders and the regulation and maintenance of such clearing house;
(c) the submission to the Securities and Exchange Board of India by the clearing
house as soon as may be after each periodical settlement of all or any of the
following particulars as the Securities and Exchange Board of India may, from
time to time, require, namely:
(i) the total number of each category of security carried over from one
settlement period to another;
(ii) the total number of each category of security, contracts in respect of which
have been squared up during the course of each settlement period;
(iii) the total number of each category of security actual delivered at each
clearing;
(d) the publication by the clearing house of all or any of the particulars submitted to
the Securities and Exchange Board of India under clause (c) subject to the
directions, if any, issued by the Securities and Exchange Board of India in this
behalf;
(e) the regulation or prohibition of blank transfers;
(f) the number and classes of contracts in respect of which settlements shall be
made or differences paid through the clearing house;
(g) the regulation, or prohibition of budlas or carry-over facilities;
(h) the fixing, altering or postponing of days for settlements;
(i) the determination and declaration of market rates, including the opening, closing,
highest and lowest rates for securities;
(j) the terms, conditions and incidents of contracts, including the prescription of
margin requirements, if any, and conditions relating thereto, and the forms of
contracts in writing.
(k) the regulation of the entering into, making, performance, rescission and
termination, of contracts, including contracts between members or between a
member and his constituent or between a member and a person who is not a
member, and the consequences of default or insolvency on the part of a seller or
buyer or intermediary, the consequences of a breach or omission by a seller or
buyer and the responsibility of members who are not parties to such contracts;
(l) the regulation of taravani business including the placing of limitation thereon;
(m) the listing of securities on the stock exchange, the inclusion of any security for the
purpose of dealings and the suspension or withdrawal of any such securities, and
the suspension or prohibition of trading in any specified securities;
(n) the method and procedure for the settlement of claims or disputes, including
settlement by arbitration;
(o) the levy and recovery of fees, fines and penalties;
(p) the regulation of the course of business between parties to contracts in any
capacity;
(q) the fixing of a scale of brokerage and other charges;
(r) the making, comparing, settling and costing of bargains;
(s) the emergencies in trade which may arise, whether as a result of pool or
syndicated operations or cornering or otherwise, and the exercise of powers in
such emergencies including the power to fix maximum and minimum prices for
securities;
(t) the regulation of dealing by members for their own account;
(u) the separation of the functions of jobbers and brokers;
(v) the limitations on the volume of trade done by any individual member in
exceptional circumstances;
(w) the obligation of members to supply such information or explanation and to
produce such documents relating to the business as the governing body may
require.
(3) The bye-laws made under this section may:
(a) specify the bye-laws, the contravention of which shall make a contract entered
into otherwise than in accordance with the bye-laws void under sub-section (1) of
section 14;
(b) provide that the contravention of any of the bye-laws shall render the member
concerned liable to one or more of the following punishments, namely:
(i) fine
(ii) expulsion from membership
(iii) suspension from membership for a specified period
(iv) any other penalty of a like nature not involving the payment of money.
(4) Any bye-laws made under this section shall be subject to such conditions in regard to
previous publication as may be prescribed and, when approved by the Securities and
Exchange Board of India shall be published in the Gazette of India and also in the
Official Gazette of the State in which the principal office of the recognised Stock
Exchange is situate, and shall have effect as from the date of its publication in the
Gazette of India:
Provided that if the Securities and Exchange Board of India is satisfied in any case that in
the interest of the trade or in the public interest any bye-laws should be made immediately,
it may, by order in writing specifying the reasons therefor, dispense with the condition of
previous publication.
17.8 POWER OF SEBI (SECTION 10)

SEBI on its own in consultation with Board of Exchange or on request of Exchange
may amend any Bye-law relating to matters covered under Section 9 above after
recording reasons for so doing. Amended law should be published in Gazette
notification.
If an Exchange has objection to the amendments made by SEBI, it may within 2 months
apply to SEBI for revision. All amendments come into effect from date of Gazette
notification. However, in respect of amendments by Exchange keeping public interest in
mind SEBI in its discretion may specifically waive the condition of pre publication.
Superseding of Stock Exchange (Section 11)
SEBI/Central Government are vested with power to supersede the Board of Stock Exchange
after serving on governing body a notice in writing and after giving opportunity to the
governing Board to be heard in the matter. SEBI may by notification in official gazette
declare governing Board of an Exchange as superseded and may appoint person/s to
perform and exercise all powers of Board.
Power to suspend business of Recognised Stock Exchange (Section 12)
Central Government if it deems it is vested with power to suspend business for period not
exceeding 7 days by notification in gazette. Central Government also have power to extend
this period by a like notification.
Power to issue directions (Section 12A)
If, after making or causing to be made an inquiry, the Securities and Exchange Board of
India is satisfied that it is necessary –
(a) in the interest of investors, or orderly development of securities market; or
(b) to prevent the affairs of any recognised stock exchange, or, clearing corporation, or
such other agency or person, providing trading or clearing or settlement facility in respect of
securities, being conducted in a manner detrimental to the interests of investors or
securities market; or
(c) to secure the proper management of any such stock exchange or clearing corporation or
agency or person, referred to in clause (b),
it may issue such directions, -
(i) to any stock exchange or clearing corporation or agency or person referred to in clause
(b) or any person or class of persons associated with the securities market; or
(ii) to any company whose securities are listed or proposed to be listed in a recognised
stock exchange,
as may be appropriate in the interests of investors in securities and the securities market.”
Contracts in notified Area (Section 13)
Central Government may declare applicability of this Section to a State or States or area
whereupon every contract entered into between members of a recognised stock exchange
or recognised stock exchanges will only be legal. Contracts entered into between persons
other than members of a recognised stock exchange or recognised stock exchanges will be
illegal. However, this provision would not be applicable to spot delivery transaction.
“Provided that any contract entered into between members of two or more recognised stock
exchanges in such State or States or area, shall–
(i) be subject to such terms and conditions as may be stipulated by the respective stock
exchanges with prior approval of Securities and Exchange Board of India;
(ii) require prior permission from the respective stock exchanges if so stipulated by the
stock exchanges with prior approval of Securities and Exchange Board of India.”.
Establishment of Additional Stock Exchange (Section 13A)
According to Section 13A of the Securities Contracts (Regulation) Act, 1956, a Stock
Exchange may establish additional trading floor with the prior approval of the Securities
Exchange Board of India in accordance with the terms and conditions stipulated by the said
Board.
For the purpose of this section ‘Additional Trading Floor’ means a trading ring or trading
facility offered by a recognized stock exchange outside its area of operation to enable the
investor to buy and sell securities through such trading floor under the regulatory frame
work of that Stock Exchange.
Members not to act as Principals
Members of Stock Exchange normally carry out transactions on behalf of investor and
hence, principal agent relationship exists. Member can enter into transaction as principal
with another member of the Exchange only. If he desires to enter into contract as principal
with a non member then he has to get written consent from such person to act as principal.
Contract note should indicate that member is acting as Principal. ‘Spot delivery’ contracts
would be outside the previous of this section.
Contracts in ‘derivative’
Contracts in derivative shall be legal if such contracts are
(a) traded on stock exchange.

(b) settled on clearing house of the Exchange in accordance with Rules and Bye-Laws of
the Exchange.
Prohibition on non-recognised Stock Exchanges (Section 19)
No person except with the permission of Central Government shall organise or assist in
organising or be a member of unrecognised Stock Exchange for the purpose of carrying out
transaction in securities.
Listing of Securities
When shares are issued to public through public issue listing of Securities with recognised
Stock Exchange is mandatory.
Section 21 of SCRA provides that where company has applied for listing, Company has to
comply with provisions of Listing Agreement. Conditions for listing of Securities are
specified in detail in Securities Contracts (Regulation) Rules, 1957.
Delisting of securities(Section 21A)
(1) A recognised stock exchange may delist the securities, after recording the reasons
therefor, from any recognised stock exchange on any of the ground or grounds as may be
prescribed under this Act:
Provided that the securities of a company shall not be delisted unless the company
concerned has been given a reasonable opportunity of being heard.
(2) A listed company or an aggrieved investor may file an appeal before the Securities
Appellate Tribunal against the decision of the recognised stock exchange delisting the
securities within fifteen days from the date of the decision of the recognised stock exchange
delisting the securities and the provisions of sections 22B to 22E of this Act, shall apply, as
far as may be, to such appeals:
Provided that the Securities Appellate Tribunal may, if it is satisfied that the company was
prevented by sufficient cause from filing the appeal within the said period, allow it to be filed
within a further period not exceeding one month.”
Refusal of Listing & Appeal (Section 22)
When Stock Exchanges refuses listing to a company it has to furnish reasons for refusal to
the company. Section 73(1) of Companies Act specifies the time period within which stock
exchange has to grant listing permission. If Exchange fails to do so within the time limit or
refuses to list, Company may within 15 days make an appeal to the Central Government.
The Central Government may after hearing the Stock Exchange vary or set aside the
decision of the Stock Exchange or grant permission for listing. No appeal under this section
shall be allowed after commencement of Securities Laws (Second Amendment) Act, 1999,
since appeal before Securities Appellate Tribunal is permitted under Section 22A.
Appeal before Securities Appellate Tribunal (Section 22A)
Where a Stock Exchange refuses listing or is unable to grant listing within time frame
prescribed, company is entitled to appeal to Securities Appellate Tribunal (SAT). SAT after
hearing the Exchange may vary or set aside Exchange’s order or grant or refuse
permission.
Powers of SAT (Section 22B)
SAT shall have power to regulate their own procedures and will be vested with power vested
in Civil Court under Code of Civil Procedure 1908 in respect of following matters:
(a) summoning and enforcing attendance of any person and examing him on oath;
(b) requiring discovery and product of documents;
(c) receiving evidence on affidavits;
(d) issuing commissions for the examination of witnesses or documents;
(e) reviewing its decisions;
(f) dismissing an application for default or deciding it ex parte;
(g) setting aside any order of dismissal of any application for default or any order passed
by it ex parte; and
(h) any other matter which may be prescribed.
Legal Representation (Section 22C)
Appellant may appear in person or authorise one or more CAS, CS or ICWA or Legal
practitioners to represent the case.
Appeal to High Court (Section 22F)
Any person aggrieved by any decision or order of the Securities Appellate Tribunal may file
an appeal to the Supreme Court within sixty days from the date of communication of the
decision or order of the Securities Appellate Tribunal to him on any question of law arising
out of such order:
Provided that the Supreme Court may, if it is satisfied that the appellant was prevented by
sufficient cause from filing the appeal within the said period, allow it to be filed within a
further period not exceeding sixty days.”.
17.9 PENALTIES (SECTION 23)

(1) Any person who—
(a) without reasonable excuse (the burden of proving which shall be on him) fails to
comply with any requisition made under sub-section (4) of section 6; or
(b) enters into any contract in contravention of any of the provisions contained in
section 13 or section 16; or
(c) contravenes the provisions contained in section 17 or section 19; or
(d) enters into any contract in derivative in contravention of section 18A or the rules
made under section 30; or
(e) owns or keeps a place other than that of a recognised stock exchange which is
used for the purpose of entering into or performing any contract in contravention
of any of the provisions of this Act and knowingly permits such place to be used
for such purposes; or
(f) manages, controls, or assists in keeping any place other than that of a recognised
stock exchange which is used for the purpose of entering into or performing any
contracts in contravention of any of the provisions of this Act or at which contracts
are recorded or adjusted or rights or liabilities arising out of contracts are
adjusted, regulated or enforced in any manner whatsoever; or
(g) not being a member of a recognised stock exchange or his agent authorised as
such under the rules or bye-laws of such stock exchange or not being a dealer in
securities licensed under section 17, canvasses, advertises or touts in any
manner either for himself or on behalf of any other person for any business
connected with contracts in contravention of any of the provisions of this Act; or
(i) joins gathers or assists in gathering at any place other than the place of business
specified in the bye-laws of a recognised stock exchange any person or persons
for making bids or offers or for entering into or performing any contracts in
contravention of any of the provisions of this Act;
shall, without prejudice to any award of penalty by the Adjudicating Officer under this
Act, on conviction, be punishable with imprisonment for a term which may extend to
ten years or with fine, which may extend to twenty-five crore rupees, or with both.
(2) Any person who enters into any contract in contravention of the provisions
contained in section 15 or who fails to comply with the provisions of section 21 or section
21A or with the orders of the Central Government under section 22, (or with the orders of
the Securities Appellate Tribunal) shall, without prejudice to any award of penalty by the
Adjudicating Officer under this Act, on conviction, be punishable with imprisonment for a
term which may extend to ten years or with fine, which may extend to twenty-five crore
rupees, or with both.
Penalty for failure to furnish information, return, etc (Section 23A)
Any person, who is required under this Act or any rules made thereunder, -
(a) to furnish any information, document, books, returns or report to a recognised stock
exchange, fails to furnish the same within the time specified therefore in the listing
agreement or conditions or bye-laws of the recognised stock exchange, shall be liable to a
penalty of one lakh rupees for each day during which such failure continues or one crore
rupees, whichever is less for each such failure;
(b) to maintain books of account or records, as per the listing agreement or conditions, or
bye-laws of a recognised stock exchange, fails to maintain the same, shall be liable to a
penalty of one lakh rupees for each day during which such failure continues or one crore
rupees, whichever is less.
Penalty for failure by any person to enter into an agreement with clients (Section 23B)
If any person, who is required under this Act or any bye-laws of a recognised stock
exchange made thereunder, to enter into an agreement with his client, fails to enter into
such an agreement, he shall be liable to a penalty of one lakh rupees for each day during
which such failure continues or one crore rupees, whichever is less for every such failure.
Penalty for failure to redress Investors’ grievances (Section 23C)
If any stock broker or sub-broker or a company whose securities are listed or proposed to
be listed in a recognised stock exchange, after having been called upon by the Securities
and Exchange Board of India or a recognised stock exchange in writing, to redress the
grievances of the investors, fails to redress such grievances within the time stipulated by the
Securities and Exchange Board of India or a recognised stock exchange, he or it shall be
Penalty for failure to segregate securities or moneys of client or clients (Section 23D)
If any person, who is registered under section 12 of the Securities and Exchange Board of
India Act, 1992 as a stock broker or sub-broker, fails to segregate securities or moneys of
the client or clients or uses the securities or moneys of a client or clients for self or for any
other client, he shall be liable to a penalty not exceeding one crore rupees.
Penalty for failure to comply with provision of listing conditions or delisting
conditions or grounds (Section 23E)
If a company or any person managing collective investment scheme or mutual fund, fails to
comply with the listing conditions or delisting conditions or grounds or commits a breach
thereof, it or he shall be liable to a penalty not exceeding twenty-five crore rupees.
Penalty for excess dematerialisation or delivery of unlisted securities (Section 23F)

If any person dematerialises securities more than the issued securities of a company or
delivers in the stock exchanges the securities which are not listed in the recognised stock
exchange or delivers securities where no trading permission has been given by the
recognised stock exchange, he shall be liable to a penalty not exceeding twenty-five crore
rupees.
Penalty for failure to furnish periodical returns, etc (Section 23G)
If a recognised stock exchange fails or neglects to furnish periodical returns to the
Securities and Exchange Board of India or fails or neglects to make or amend its rules or
bye-laws as directed by the Securities and Exchange Board of India or fails to comply with
directions issued by the Securities and Exchange Board of India, such recognised stock
exchange shall be liable to a penalty which may extend to twenty-five crore rupees.
Penalty for contravention where no separate penalty has been provided (Section 23H)
Whoever fails to comply with any provision of this Act, the rules or articles or bye-laws or
the regulations of the recognised stock exchange or directions issued by the Securities and
Exchange Board of India for which no separate penalty has been provided, shall be liable to
a penalty which may extend to one crore rupees.
Power to adjudicate(Section 23- I)
(1) For the purpose of adjudging under sections 23A, 23B, 23C, 23D, 23E, 23F, 23G and
23H, the Securities and Exchange Board of India shall appoint any officer not below the
rank of a Division Chief of the Securities and Exchange Board of India to be an adjudicating
officer for holding an inquiry in the prescribed manner after giving any person concerned a
reasonable opportunity of being heard for the purpose of imposing any penalty.
(2) While holding an inquiry, the adjudicating officer shall have power to summon and
enforce the attendance of any person acquainted with the facts and circumstances of the
case to give evidence or to produce any document, which in the opinion of the adjudicating
officer, may be useful for or relevant to the subject-matter of the inquiry and if, on such
inquiry, he is satisfied that the person has failed to comply with the provisions of any of the
sections specified in sub-section (1), he may impose such penalty as he thinks fit in
accordance with the provisions of any of those sections.
Factors to be taken into account by the adjudicating officer (Section 23 J)
While adjudging the quantum of penalty under section 23-I, the adjudicating officer shall
have due regard to the following factors, namely: -
(a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as
a result of the default;
(b) the amount of loss caused to an investor or group of investors as a result of the default ;
(c) the repetitive nature of the default.

Crediting sum realised by way of penalties to Consolidated Fund of India (Section
23K)
All sums realised by way of penalties under this Act shall be credited to the Consolidated
Fund of India.
Appeal to Securities Appellate Tribunal (Section 23L)
(1) Any person aggrieved, by the order or decision of the recognised stock exchange or the
adjudicating officer or any order made by the Securities and Exchange Board of India under
section 4B, may prefer an appeal before the Securities Appellate Tribunal and the
provisions of sections 22B, 22C, 22D and 22E of this Act, shall apply, as far as may be, to
such appeals.
(2) Every appeal under sub-section (1) shall be filed within a period of forty-five days from
the date on which a copy of the order or decision is received by the appellant and it shall be
in such form and be accompanied by such fee as may be prescribed:
Provided that the Securities Appellate Tribunal may entertain an appeal after the expiry of
the said period of forty-five days if it is satisfied that there was sufficient cause for not filing
it within that period.
(3) On receipt of an appeal under sub-section (1), the Securities Appellate Tribunal may,
after giving the parties to the appeal, an opportunity of being heard, pass such orders
thereon as it thinks fit, confirming, modifying or setting aside the order appealed against.
(4) The Securities Appellate Tribunal shall send a copy of every order made by it to the
parties to the appeal and to the concerned adjudicating officer.
(5) The appeal filed before the Securities Appellate Tribunal under sub-section (1) shall be
dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of
the appeal finally within six months from the date of receipt of the appeal.
Offences (Section 23M)
(1) Without prejudice to any award of penalty by the adjudicating officer under this Act, if
any person contravenes or attempts to contravene or abets the contravention of the
provisions of this Act or of any rules or regulations or bye-laws made thereunder, for which
no punishment is provided elsewhere in this Act, he shall be punishable with imprisonment
for a term which may extend to ten years, or with fine, which may extend to twenty-five crore
rupees or with both.
(2) If any person fails to pay the penalty imposed by the adjudicating officer or fails to
comply with any of his directions or orders, he shall be punishable with imprisonment for a
term which shall not be less than one month but which may extend to ten years, or with fine,
which may extend to twenty-five crore rupees, or with both.
Composition of certain offences (Section 23N)

Notwithstanding anything contained in the Code of Criminal Procedure, 1973, any offence
punishable under this Act, not being an offence punishable with imprisonment only, or with
imprisonment and also with fine, may either before or after the institution of any proceeding,
be compounded by a Securities Appellate Tribunal or a court before which such proceedings
are pending.
Power to grant immunity (Section 23 O)
(1) The Central Government may, on recommendation by the Board, if the Central
Government is satisfied, that any person, who is alleged to have violated any of the
provisions of this Act or the rules or the regulations made thereunder, has made a full and
true disclosure in respect of alleged violation, grant to such person, subject to such
conditions as it may think fit to impose, immunity from prosecution for any offence under this
Act, or the rules or the regulations made thereunder or also from the imposition of any
penalty under this Act with respect to the alleged violation:
Provided that no such immunity shall be granted by the Central Government in cases where
the proceedings for the prosecution for any such offence have been instituted before the
date of receipt of application for grant of such immunity:
Provided further that the recommendation of the Securities Exchange Board of India under
this sub-section shall not be binding upon the Central Government.
(2) An immunity granted to a person under sub-section (1) may, at any time, be withdrawn
by the Central Government, if it is satisfied that such person had, in the course of the
proceedings, not complied with the condition on which the immunity was granted or had
given false evidence, and thereupon such person may be tried for the offence with respect
to which the immunity was granted or for any other offence of which he appears to have
been guilty in connection with the contravention and shall also become liable to the
imposition of any penalty under this Act to which such person would have been liable, had
not such immunity been granted.
17.10 OFFENCES BY COMPANIES (SECTION 24)

(1) Where an offence has been committed by a company, every person who, at the time
when the offence was committed, was incharge of, and was responsible to, the
company for the conduct of the business of the company as well as the company, shall
be deemed to be guilty of the offence, and shall be liable to be proceeded against and
punished accordingly.
Provided that nothing contained in this sub-section shall render any such person liable
to any punishment provided in this Act, if he proves that the offence was committed
without his knowledge or that he exercised all due diligence to prevent the commission
of such offence.
(2) Notwithstanding anything contained in sub-section (1), where an offence under this Act
has been committed by a company and it is proved that the offence has been
committed with the consent or connivance of, or is attributable to any gross negligence
on the part of any director, manager, secretary or other officer of the company, such
director, manager, secretary or other officer of the company, shall also be deemed to
be guilty of that offence and shall be liable to be proceeded against and punished
accordingly.
Explanation.—For the purpose of this section—
(a) “company” means any body corporate and includes a firm or other association of
individuals, and
(b) “director”, in relation to—
(i) a firm, means a partner in the firm;
(ii) any association of persons or a body of individuals, means any member
controlling the affairs thereof.
(3) The provisions of this section shall be in addition to, and not in derogation of the
provisions of Section 22A.
Cognizance of offences by courts (Section 26)
(1) No court shall take cognizance of any offence punishable under this Act or any rules or
regulations or bye-laws made thereunder, save on a complaint made by the Central
Government or State Government or the Securities and Exchange Board of India or a
recognised stock exchange or by any person.
(2) No court inferior to that of a Court of Session shall try any offence punishable under this
Act.
17.11 TITLE TO DIVIDENDS (SECTION 27)

(1) It shall be lawful for the holder of any security whose name appears on the books of
the company issuing the said security to receive and retain any dividend declared by
the company in respect thereof for any year, notwithstanding that the said security has
already been transferred by him for consideration, unless the transferee who claims the
dividend from the transferor has lodged the security and all other documents relating to
the transfer which may be required by the company with the company for being
registered in his name within fifteen days of the date on which the dividend became
due.
Explanation.—The period specified in this section shall be extended—

(i) in case of death of the transferee, by the actual period taken by his legal
representative to establish his claim to the dividend;
(ii) in case of loss of the transferee, by the actual period taken for the replacement
thereof; and
(iii) in case of delay in the lodging of any security and other documents relating to the
transfer due to causes connected with the post, by the actual period of the delay.
(2) Nothing contained in sub-section (1) shall affect—
(a) the right of a company to pay any dividend which has become due to any person
whose name is for the time being registered in the books of the company as the
holder of the security in respect of which the dividend has become due; or
(b) the right of the transferee of any security to enforce against the transferor or any
other person his rights, if any, in relation to the transfer in any case where the
company has refused to register the transfer of the security in the name of the
transferee.
17.12. RIGHT TO RECEIVE INCOME FROM COLLECTIVE INVESTMENT SCHEME

(SECTION 27A)
(1) It shall be lawful for the holder of any securities, being units or other instruments
issued by collective investment scheme, whose name appears on the books of the
collective investment scheme, issuing the said security to receive and retain any
income in respect of units or other instruments issued by the collective investment
scheme in respect thereof for any year, outwithstanding that the said security, being
units or other instruments issued by collective investment scheme, has already been
transferred by him for consideration, unless the transferee who claims the income in
respect of units or other instruments issued by collective investment scheme from the
transfer or has lodged the security and all other documents relating to the transfer
which may be required by the collective investment scheme with the collective
investment scheme for being registered in his name within fifteen days of the date on
which the income in respect of units or other instruments issued by the collective
investments scheme became due.
Explanation: The period specified in this section shall be extended—
(i) in case of death of the transferee, by the actual period taken by his legal
representative to establish his claim to the income respect of units or other
instrument issued by collective investment scheme;
(ii) in case of loss of the transfer deed by theft or any other cause beyond the control
of the transferee, by the actual period taken for the replacement thereof; and
(iii) in case of delay in the lodging of any security, being units or other instruments
issued by the collective investment scheme and other documents relating to the
transfer due to causes connected with the post, by the actual period of the delay.
(2) Nothing contained in sub-section (1) shall affect—
(a) the right of a collective investment scheme to pay any income from units or other
instruments issued by collective investment scheme which has become due to any
person whose name is for the time being registered in the books of the collective
investment scheme as the holder of the security being units or other instruments
issued by collective investment scheme in respect of which the income in respect
of units or other instruments issued by collective scheme has become due; or
(b) the right of transferee of any security, being units or other instruments issued by
collective investment scheme, to enforce against the transferor or any other
person his rights, if any, in relation to the transfer in any case where the company
has refused to register the transfer of the security being units or other instruments
issued by the collective investment scheme in the name of the transferee.
Right to receive income from mutual fund (Section 27B)
(1) It shall be lawful for the holder of any securities, being units or other instruments issued
by any mutual fund, whose name appears on the books of the mutual fund issuing the said
security to receive and retain any income in respect of units or other instruments issued by
the mutual fund declared by the mutual fund in respect thereof for any year, notwithstanding
that the said security, being units or other instruments issued by the mutual fund, has
already been transferred by him for consideration, unless the transferee who claims the
income in respect of units or other instruments issued by the mutual fund from the transferor
has lodged the security and all other documents relating to the transfer which may be
required by the mutual fund with the mutual fund for being registered in his name within
fifteen days of the date on which the income in respect of units or other instruments issued
by the mutual fund became due.
Explanation.- The period specified in this section shall be extended –
(i) in case of death of the transferee, by the actual period taken by his legal representative
to establish his claim to the income in respect of units or other instrument issued by the
mutual fund;
(ii) in case of loss of the transfer deed by theft or any other cause beyond the control of
transferee, by the actual period taken for the replacement thereof; and
(iii) in case of delay in the lodging of any security, being units or other instruments issued by
the mutual fund, and other documents relating to the transfer due to causes connected with
the post, by the actual period of the delay.

(2) Nothing contained in sub-section (1) shall affect-
(a) the right of a mutual fund to pay any income from units or other instruments
issued by the mutual fund which has become due to any person whose name is for
the time being registered in the books of the mutual fund as the holder of the security
being units or other instruments issued by the mutual fund in respect of which the
income in respect of units or other instruments issued by mutual fund has become
due; or
(b) the right of transferee of any security, being units or other instruments issued by the
mutual fund, to enforce against the transferor or any other person his rights, if any, in
relation to the transfer in any case where the mutual fund has refused to register the
transfer of the security being units or other instruments issued by the mutual fund in the
name of the transferee.”.
17.13 ACT NOT TO APPLY IN CERTAIN CASES (SECTION 28)

(1) The provisions of this Act shall not apply to—
(a) the Government, the Reserve Bank of India, any local authority or any corporation
set up by a special law or any person who has effected any transaction with or
through the agency of any such authority as is referred to in this clause;
(b) any convertible bond or share warrant or any option or right in relation thereto, in
so far as it entities the person in whose favour any of the foregoing has been
issued to obtain at his option from the company or other body corporate, is during
the same or from any of its shareholders’ or duly appointed agents, share of the
company or other body corporate whether by conversion of the bond or warrant or
otherwise, on the basis of the price agreed upon when the same was issued.
(2) Without prejudice to the provisions contained in sub-section (1), if the Central
Government is satisfied that in the interest of trade and commerce or the economic
development of the country it is necessary or expedient so to do, it may, by notification
in the Official Gazette, specify any class of contracts as contracts to which this Act or
any provision contained therein shall not apply, and also the conditions, limitations, or
restrictions, if any, subject to which it shall not so apply.
17.14 POWER TO MAKE RULES (SECTION 30)

(1) The Central Government may, by notification in the Official Gazette make rules for the
purpose of carrying into effect the objects of this Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such rules
may provide for,
(a) the manner in which applications may be made, the particulars which they should
contain and the levy of a fee in respect of such applications;
(b) the manner in which any inquiry for the purpose of recognizing any stock
exchange may be made, the conditions which may be imposed for the grant of
such recognition, including conditions as to the admission of members if the stock
exchange concerned is to be the only recognised stock exchange in the area; and
the form in which such recognition shall be granted;
(c) the particulars which should be contained in the periodical returns and annual
reports to be furnished to the Central Government;
(d) the documents which should be maintained and preserved under section 6 and
the periods for which they should be preserved;
(e) the manner in which any inquiry by the governing body of a stock exchange shall
be made under section 6;
(f) the manner in which the bye-laws to be made or amended under this Act shall
before being so made or amended be published for criticism;
(g) the manner in which applications may be made by dealers in securities for
licences under section 17, the fee payable in respect thereof and the period of
such licences, the conditions subject to which licences may be granted, including
conditions relating to the forms which may be used in market contracts, the
documents to be maintained by licensed dealers and the furnishing of periodical
information to such authority as may be specified and the revocation of licences
for breach of conditions;
(h) the requirements which shall be complied with—
(A) by public companies for the purpose of getting their securities listed on any
stock exchange;
(B) by collective investments scheme for the purpose of getting their units listed
on any stock exchange;
(ha) the grounds on which the securities of a company may be delisted from any
recognised stock exchange under sub-section (1) of section 21A;
(hb) the form in which an appeal may be filed before the Securities Appellate
Tribunal under sub-section (2) of section 21A and the fees payable in
respect of such appeal;
(hc) the form in which an appeal may be filed before the Securities Appellate
Tribunal under section 22A and the fees payable in respect of such appeal;
(hd) the manner of inquiry under sub-section (1) of section 23-I;
(he) the form in which an appeal may be filed before the Securities Appellate
Tribunal under section 23L and the fees payable in respect of such appeal;
(i) any other matter which is to be or may be prescribed.
17.15 POWER OF SEBI TO MAKE REGULATIONS (SECTION 31)

(1) Without prejudice to the provisions contained in section 30 of the Securities and
Exchange board of India Act, 1992 (15 of 1992), the Securities and Exchange Board of
India may, by notification in the Official Gazette, make regulations consistent with the
provisions of this Act and the rules made thereunder to carry out the purposes of this
Act.
(2) In particular, and without prejudice to the generality of the foregoing power, such
regulations may provide for the manner in which at least fifty-one per cent of equity
share capital of a recognized stock exchange is held within twelve months from the
date of publication of the order under sub-section (7) of section 4B by the public other
than the shareholders having trading rights under sub-section (8) of that section.
(3) Every regulation made under this Act shall be laid, as soon as may be after it is made,
before each House of Parliament, while it is in session for a total period of thirty days
which may be comprised in one session or in two or more successive sessions, and if,
before the expiry of the session immediately following the session or the successive
sessions aforesaid, both Houses agree in making any modification in the regulation
shall thereafter have effect only in such modified form or be of no effect, as the case
may be; so, however, that any such modification or annulment shall be without
prejudice to the validity of anything previously done under that regulation”.
18
FOREIGN EXCHANGE MANAGEMENT ACT, 1999
18.0 INTRODUCTION
Since, 1993 significant developments have taken palace relating to foreign trade and
investments. The liberalisation of foreign investments and the globalisation of foreign
trade called for a closer interaction with the world economy and as a result the
Government took initiatives to review the FERA in 1993 and several amendments were
enacted in that Act as a part of ongoing process. However, in the light of subsequent
developments, the Government thought that a better course would be to repeal the old Act
by enacting a new legislation. As you all aware that the Foreign Exchange Regulation
Act, 1973 (FERA) has now been repealed by anew Act called the Foreign Exchange
Management Act, 1999 (FEMA). The FEMA was passed by the Lok Sabha in October,
1999, received the assent of the President of India in December, 1999 and came into
force with effect from 1st June, 2000.
The enactment, its passing and coming into force marks a “transition from the era of
regulation, control and prohibition” to a “new era for consolidation and management of
foreign exchange reserves for the country.” FERA in a broader sense was a law mostly
governed by notifications and circulars and it was considered rigorous and draconian. A
thorough review of the objects and outlook of the old Act, would reveal that it was meant
only for prohibition of foreign exchange transactions with a view to conserve and properly
utilise the foreign exchange keeping in view the interest of economic development of the
country. Since the changing of the economic scenario with world trade free across the
globe, the necessity of inviting foreign exchange resources for the country was felt
imminent. What is needed is to facilitate trade and maintain orderly development of
foreign exchange market in India. The review exercise by the Government with the above
objective resulted in the new Act.
18.1 BROAD STRUCTURE OF FEMA

Now let us have a glance at the broad structure the new Act. The Act consists of 7
Chapters dealing with following areas:
18.2 Corporate and Alllied Laws
CHAPTERS MATTERS SECTIONS

I Preliminary, Preamble and Definitions 1–2
II Regulation and Management of Foreign Exchange 3–9
III Authorised Persons 10 – 12
IV Contravention and Penalties 13 – 15
V Adjudication and Procedure for Appeal 16 – 35
VI Directorate of Enforcement 36 – 38
VII Miscellaneous Provisions 39 – 49
18.2 FEMA, 1999 AND FERA, 1973 A COMPARISON

F.E.M.A., 1999 F.E.R.A., 1973
A. PREAMBLE
An Act to consolidate and amend the law An Act to control, regulate, restrict or
relating to foreign exchange with the prohibit foreign exchange transactions
objective of with a view of conservation, proper
¾ Facilitating external trade and utilization of foreign exchange keeping
payments and in view the interest of economic
¾ Promoting orderly development and development of the country.
maintenance of forex market in India.
B. STRUCTURE/CONTENT
A consolidated, shorter, re-defined Act The Act contained 81 Sections of which
containing only 49 Sections of which 12 32 Sections related to operational part
Sections relate to operational part and and rest deal with contravention penalty,
the rest deal with penal provisions, etc. adjudication, appeals etc.
C. NATURE OF THE ACT
Basically a Civil Law. Law was considered as draconian,
severe and harsh.
D. PROHIBITION/RELAXATION
Only specified Acts relating to foreign All acts are normally controlled and
exchange are regulated. In other words, regulated and no person can do the
everything and anything is not controlled. transactions without general/special
Under Section 5 of the Act, all current permission of the RBI. Notifications were
account transactions are permitted issued for granting permission. If there
though RBI may regulate by issuing are no notifications, it is presumed that
notifications/circulars. If there are no permission cannot be taken for granted.
notifications, transaction relating to
current account is permitted.
Foreign Exchange Management Act, 1999 18.3
E. APPLICABILITY
The Act applies to all branches, offices The Act applied to all citizens of India
and agencies outside India owned or outside India and to branches and
controlled by a person resident in India agencies outside India of companies or
and also to any contravention thereunder bodies corporate, registered or
committed outside India by any person to incorporated in India.
whom this Act applies.
In other words, FEMA does not any more In other words, FERA applied to citizens
apply to citizens of India who are outside of India who were outside India, and
India, unless they are residents of India. whether or not they were residents in
India.
F. IMPORTANT CHANGES IN THE
DEFINITION – PERSON RESIDENT IN
INDIA
Citizenship is irrelevant for determining For determining the status among other
the status. Definition has been aligned to criteria, the emphasis was not only on
that of similar definition provided in the citizenship but also on the intention of
Income-tax Act, 1961 i.e. to be a resident the person to stay outside India for an
in India, an individual has to be present in uncertain period.
India for more than 182 days in the
preceding financial year.
G. NEW TERMS
Capital account transactions, current These terms were not defined.
account transactions, persons, service
etc. are introduced.
H. AUTHORISATION BY RBI – TO WHOM?
Section 10 empowers RBI to appoint The Act empowered RBI to appoint
authorised person to deal in foreign authorised dealers/Moneychangerer to
exchange/or in foreign securities. deal in foreign
exchange/securities/currencies as the
case may be.
I. CONTRAVENTION
Contravention of provisions of FEMA or Contravention of provisions of the Act,
notifications, etc., issued thereunder notifications, regulations issued
would attract only a fine and not attracted severe fines and imprisonment
imprisonment too.
Imprisonment only on default/defiant
refusal or payment of fine
J. PENALTY
Limited to 3 times the sum involved Five times the sum involved +
provided it is quantifiable. If it is not the imprisonment in most of the cases.
quantifiable limit is upto Rs. 2 lac. If it is
a continuing offence, further penalty upto
Rs. 5000/- per day after the first day.
K. COMPOUNDING OF OFFENCES
Section 15 of the Act seeks to vest No such powers were present.

Directorate of Enforcement the power to
compound offences in accordance with
the rules framed by the Central
Government.
L. RIGHT TO TAKE PERSON FOR LEGAL

ASSISTANCE
Under Section 32 of the Act, the The Act did not contain any such
appellant has the right to take the express provision.
assistance of legal practitioner or a
chartered accountant.
M. POWER OF SEARCH, SEIZURE ETC.
The powers are restricted as contained in These powers were so blanket that a
Sections 37 and 38 of the Act. police officer not below the rank of
Deputy Superintendent of Police can do
so.
N. PRESUMPTION OF MENS-REA
No such presumption of guilty of mind Accused has to prove that he had no

unless the prosecution proves so. guilty mind.
18.3 PREAMABLE, EXTENT, APPLICATION AND COMMENCEMENT OF FEMA, 1999
(A) Preamble: This Act aim to consolidate and amend the law relating to foreign
exchange with the objective of —
(i) Facilitating external trade and payments.
(ii) Promoting orderly development and maintenance of foreign exchange market in India.
(B) Extent and Application [Sections 1(2 & 3)]: FEMA, 1999 extends to the whole of
India in addition it shall also applied to all branches, offices and agencies outside India
owned or controlled by a person resident in India and also to any contravention
thereunder committed outside India by any person to whom this Act applies.
From this proviso, FEMA does not apply to citizens of India who are outside India unless
they are resident of India. The scope of the new Act has been further extended to include
branches, offices and agencies outside India. The scope is thus wider because of the
emphasis is on the words “Owned or Controlled”. Even contravention of the FEMA
committed outside India by a person to whom this Act applies will also be covered by
FEMA.
(C) Commencement: The Act, 1999 came into force with effect from 1 st June, 2000
G.S.R. 371(E), dated 1.5.2000 (See the relevant text of notification given at the end of
this chapter). Provided that the different dates may be appointed for different provisions
of the Act and any reference in any such provision to the commencement of the Act shall
be construed as a reference to the coming into force of that provision.
18.4 DEFINITION (SECTION 2)

In this Act, unless the context otherwise requires:
(a) “Adjudicating Authority” means an officer authorised under subsection (1) of Section
16:
(b) “Appellate Tribunal” means the Appellate Tribunal for Foreign Exchange established
under Section 18;
(c) “Authorised person” means an authorised dealer, money changer, authorised under
sub-section (1) of Section 10 to deal in foreign exchange or foreign securities;
(d) “Bench” means a Bench of the Appellate Tribunal;
(e) “Capital Account Transaction” means a transaction, which alters the assets or
liabilities, including contingent liabilities, outside India of persons resident in India or
assets or liability in India of persons resident outside India, and includes transactions
referred to in sub-section (3) of Section 6;
(f) “Chairperson” means the Chairperson of the Appellate Tribunal;
(g) “Chartered Accountant” shall have the meaning assigned to it in clause (b) of sub-
section (1) of Section 2 of the Chartered Accountants Act, 1949 (38 of 1949};
(h) “Currency” includes all currency notes, postal notes, postal orders, money orders,
cheques, drafts, travellers cheques, letters of credit, bills of exchange and promissory
notes, credit cards or such other similar instruments, as may be notified by the
Reserve Bank;
(i) “Currency Notes” means and includes cash in the form of coins and bank notes;
(j) “Current Account Transaction” means a transaction other than a capital account
transaction and without prejudice to the generality of the foregoing such transaction
includes,
(i) payments due in connection with foreign trade, other current business, service,
and short-term banking and credit facilities in the ordinary course of business.
(ii) payments due as interest on loans and as net income from investments.
(iii) remittances for living expenses of parents, spouse and children residing abroad,
and
(iv) expenses in connection with foreign travel, education and medical care of
parents, spouse and children;
(k) “Director of Enforcement” means the Director of Enforcement appointed under sub-
section (1) of Section 36;
(l) “Export”, with its grammatical variations and congnate expressions means;
(i) the taking out of India to a palace outside India and goods.
(ii) provision of services from India to any person outside India;
(m) “Foreign Currency” means any currency other than Indian currency;
(n) “Foreign Exchange” means foreign currency and includes:
(i) deposits, credits and balances payable in any foreign currency,
(ii) drafts, travellers cheques, letters of credit or bills of exchange expressed or
drawn in Indian currency but payable in any foreign currency,
(iii) drafts, travellers cheques, letters of credit or bills of exchange drawn by banks,
institutions or persons outside India, but payable in Indian currency;
(o) “Foreign Security” means any security, in the form of shares, stocks, bonds,
debentures or any other instrument denominated or expressed in foreign currency and
includes securities expressed in foreign currency, but where redemption or any form
of return such as interest or dividends is payable in Indian currency;
(p) “Import”, with its grammatical variations and cognate expressions, means bringing into
India any goods or services;
(q) “Indian Currency” means currency which is expressed or drawn in Indian rupees but
does not include special bank notes and special one rupee notes issued under
Section 28A of the Reserve Bank of India Act, 1934 (2 of 1934);
(r) “Legal Practitioner” shall have the meaning assigned to it in clause (i) of sub-section
(1) of Section 2 of the Advocates Act, 1961 (25 of 1961);
(s) “Member” means a Member of the Appellate Tribunal and includes the Chairperson
thereof;
(t) “Notify” means to notify in the Official Gazette and the expression “notification” shall
be construed accordingly;
(u) “Person” includes:
(i) an individual,
(ii) a Hindu undivided family,
(iii) a company,
(iv) a firm,
(v) an association of persons or a body of individuals, whether incorporated or not,
(vi) every artificial juridical person, a body of individuals, whether incorporated or
not;
(vii) any agency, office or branch owned or controlled by such person;
(v) “Person resident in India” means:
(i) a person residing in India for more than one hundred and eighty-two days during
the course of the preceding financial year but does not include—
(A) a person who has gone out of India or who stays outside India, in either
case—
(a) for on taking up employment outside India, or
(b) for carrying on outside India a business or vocation outside India, or
(c) for any other purpose, in such circumstances as would indicate his
intention to stay outside India for an uncertain period;
(B) a person who has come to or stays in India, in either case, otherwise than:
(a) for or on taking up employment in India, or
(b) for carrying on in India a business or vocation in India, or
(c) for any other purpose, in such circumstances as would indicate his
intention to stay in India for an uncertain period;
(ii) any person or body corporate registered or incorporated in India,
(iii) an office, branch or agency in India owned or controlled by a person resident
outside India,
(iv) an office, branch or agency outside India owned or controlled by a person
resident in India;
(w) “Person Resident Outside India” means a person who is not resident in India;
(x) “Prescribed” means prescribed by rules made under this Act;
(y) “Repatriate in India” means bringing into India the realised foreign exchange and
(i) the selling of such foreign exchange to an authorised person in India in
exchange for rupees, or

(ii) the holding of realised amount in an account with an authorised person in India
to the extent notified by the Reserve Bank, and includes use of the realised
amount for discharge of a debt or liability denominated in foreign exchange and
the expression “repatriation” shall be construed accordingly;
(z) “Reserve Bank” means the Reserve Bank of India constituted under sub-section (1) of
Section 3 of the Reserve Bank of India Act, 1934 (w.e.f. 1934);
(za) “Security” means shares, stocks, bonds and debentures. Government securities as
defined in the Public Debt Act, 1944 (18 of 1944), savings certificates to which the
Government Saving Certificates Act, 1959 (46 of 1959) applies, deposit receipts in
respect of deposit of securities and units of the Unit Trust of India established under
sub-section (1) of Section 3 of the Unit Trust of India Act, 1963 (52 of 1963) or of any
mutual fund and includes certificates of title to securities, but does not include bills of
exchange or promissory notes other than Government promissory notes or any other
instruments which may be notified by the Reserve Bank as security for the purposes
of this Act;
(zb) “Service” means service of any description which is made available to potential users
and includes the provision of facilities in connection with banking, financing,
insurance, medical assistance, legal assistance, chit fund, real estate, transport,
processing, supply of electrical or other energy, boarding or lodging or both,
entertainment, amusement or the purveying of news or other information, but does not
include the rendering of any service free of charge or under a contract of personal
service;
(zc) “Special Director (Appeals)” means an officer appointed under Section 18;
(zd) “Specify” means to specify by regulations made under this Act and the expression
“specified” shall be construed accordingly;
(ze) “Transfer” includes sale, purchase, exchange, mortgage, pledge, gift, loan or any
other form of transfer of right, title, possession or lien.
18.5 ANALYSIS OF IMPORTANT DEFINITIONS

(A) Authorised Person: Earlier in the FERA, 1973 there were two separate categories of
persons namely authorised dealers and money changers who were licensed to deal in
foreign exchange. Now, in the new Act these terms have been clubbed together under the
definition of the authorised person, which shall also include off-share banking unit. The
term “off share banking unit” has not been defined in the Act.
(B) Capital and current account transactions: The definitions of “Capital Accounts
Transactions” and its counter part “current accounts transactions contained in clauses (e)
and (j) of Section 2. These transactions broadly outline the basics and whole approach of
the Act. Basically these two transactions have to be understood as a concept of items
relating to the profit and loss account (relating to current account transactions) and of
Balance Sheet items (of those relating to capital account transactions). “A transaction
which alters the assets or liabilities including contingent liabilities outside India of persons
resident in India or assets or liabilities in India of persons resident outside India would be
a capital account transaction.” Capital Accounts Transaction in India can be carried out
only to the extent permitted because Indian Rupee is not yet full convertible. Capital and
current account transactions are intended to be mutually exclusive. Also the concept of
capital account transaction mean different for residents and non-residents. A transaction
which alters the asset or liabilities outside India of non-residents fall under the category of
capital account and as far as residents are concerned transactions which alter the
contingent liabilities are also capital transactions. The Reserve Bank of India may by
Regulations place restrictions on various specified transactions for transactions deemed
to be considered as capital in nature.
Current account transaction means a transaction other than a capital account
transaction. In other words the current account transactions are the counterpart of capital
account transactions and those transactions that are capital account in nature are not
current account transactions and vice-versa.
(C) ‘Person’ and ‘Person resident in India’: The definitions are drafted in a manner with
wordings of similar definitions contained in the Income-tax Act, 1961. The term ‘person’
includes entities such as companies, firms, individuals, HUF, AOP, artificial juridical
persons agencies, offices and branches. The reason for including the agencies, offices
and branches is that they do not have independence status separate from its owner.
As far as the definition of the term ‘person resident in India’ is concerned, the person
should have resided in India in the preceding financial year for more than 182 days. This
is an important change in the definition compared to the old Act. Citizenship is not the
criteria for determining whether or not a person is resident in India. However, the
definition raises some points:
(i) The residence of a person is calculated not with reference to his stay in India during
that year but with reference to his stay in an earlier financial year. Therefore, a person
may come into India in a financial year and stay for that year only but still, for that
year he would not be resident in India. He would have to wait for the end of the year
and on the commencement of the next year he would be become resident in India.
(ii) Also, there may be situations where person may stay in India are more than 182 days,
leave and India thereafter. In the next year, he may be out of India for that whole year
still he would be treated as resident in India since in the preceding financial year he
was in India for more than 182 days. Therefore, a person may have to wait for upto
one and a half-year to become a resident.
If that person has gone out of India or who stays outside India in either case for taking up
employment, or for carrying on business or vocation or for any other purpose which would
indicate his intention to stay outside India for an uncertain period he would be treated as
resident outside India. From this, it is understood that this condition would apply only to
individuals. It has not been specifically provided whether HUF, AOP or agencies etc.,
would also come with the ambit of the definition. These entities like HUF and AOP are not
required to be registered or incorporated like corporate entities nor the definition can be
far stretched to cover by applying the criteria of ‘owned or controlled’.
(D) ‘Service’: The term ‘service’ includes a variety of provision of facilities. However, it
does not include service under contract of free charge or of personal service. The term
‘transfer’ as contrast with the FERA includes transfer from the point of view of the seller
and the purchaser.
Practical Problems
(1) Mr. A had resided in India during the financial year 1999-2000 for less than 183
days. He had come to India on April 1, 2000 for employment. What would be his
residential status during the financial year 2000-2001?
Answer: Mr. A had come to India for taking up employment. However, during the financial
year 1999-2000, he was in India for less than 183 days. Since he has not fulfilled the
condition of staying in India for more than 182 days, he cannot be considered as person
resident in India during the financial year 2000-2001 not withstanding the purpose or
duration of his stay.
(2) Mr. X had resided in India during the financial year 1999-2000 for less than 183
days. He had come to India on April 1, 2000 for business. He intends to leave the
business on April 30, 2001 and leave India on June 30, 2001. What would be his
residential status during the financial year 2000-2001 and during 2001-2002 up to the
date of his departure?
Answer: Mr. X cannot be considered ‘person resident in India’ during the financial year
2000-2001 not withstanding the purpose or duration of his stay. As regards financial year
2000-2001, Mr. X would have been in India in the proceeding financial year (2000-2001)
for a period exceeding 182 days. Accordingly, he would be ‘resident’ in India during
financial year 2001-2002. However, if he leaves India for the purpose of taking up
employment in business/vocation outside India, or for any other purpose as
business/vocation outside India, or for any other purpose as would indicate his intention to
stay outside India for an uncertain period, he would cease to be person resident in India
from the date of his departure. It may be noted that even if Mr. X is a foreign citizen, if he
has not left India for any these purposes, he would be considered, ‘person resident in
India’ during the financial year 2001-2002.
(3) Mr. Z had resided in India during the financial year 1999-2000. He left India on 1st
August, 2000 for United States for pursuing higher studies for 3 years. What would
be his residential status during financial year 2000-2001 and during 2001-2002?
Answer: Mr. Z had resided in India during financial year 1999-2000 for more than 182
days. Further, he has gone to USA for higher studies. In otherwords, he has not gone out
of, or stayed outside India for or on taking up employment, or for carrying a business or
any other purpose, in not circumstances as would indicate his intention to stay outside
India for an uncertain period. Accordingly he would be ‘person resident in India’ during the
financial year 2000-2001.
For the financial year 2001-2002, he would not have been in India in the preceding
financial year (2000-2001) for period exceeding 182 days. Accordingly, he would not be
‘person resident in India’ during the financial year 2001-2002.
(4) Toy is a Japanese company having several business units all over the world. It
has a robotic unit with its head quarter in Mumbai and has a branch in Singapore.
Headquarter at Mumbai controls the branch of robotic unit. What would be the
residential status of robotic unit in Mumbai and that of the Singapore branch?
Answer: Toy being a Japanese company would be a person resident outside India.
[Section 2(w)]. Section 2(u) defines ‘person’. Under clause (viii) thereof person would
include any agency, office or branch owned or controlled by such ‘person’. The term such
‘person’ appears to refer to a person who is included in clauses (i) to (vi). Accordingly
robotic unit in Mumbai, being a branch of a company, would be a ‘person’.
Section 2(v) defines ‘person resident in India’. Under clause (iii) thereof ‘person resident
in India’ would include an office, branch or agency in India owned or controlled by a
person resident outside India. Robotic unit in Mumbai is owned or controlled by a person
‘resident outside India’. Hence, it would be ‘person resident in India’.
However, robotic unit in Mumbai, though not ‘owned’ controls Singapore branch, which is
a person resident in India. Hence prima facie, it may be possible to hold a view that the
Singapore branch is ‘person resident in India’.
(5) Miss is an airhostess with the British Airways. She flies for 12 days in a month
and thereafter a break for 18 days. During the break, she is accommodated of ‘base’,
which is normally the city where the airways are headquartered. However, for
security considerations, she was based on Mumbai. During the financial year, she
was accommodated at Mumbai for more than 182 days. What would be her
residential status under FEMA?
Answer: Miss stayed in India at Mumbai ‘base’ for more than 182 days in the preceding financial
year. The issue here is whether staying can be considered to ‘residing’. While the FERA
emphasised ‘stay’, FEMA emphasises ‘residing’. ‘Stay’ is a physical attribute, while ‘residing’
denotes permanency. Thus, while Miss may be a stayed in India for more than 182 days, it is
doubtful whether he can be said to her ‘resided’ in India for more than 182 days.
Further under section 2(v)(a), she would become resident only if she has come to or
stayed in India for employment. It would be doubtful and debatable, whether by staying at
Mumbai base during the break, Miss can be said to have come to a stayed in India for or
on taking up employment. Hence Miss would continue to be non-resident.
18.6 REGULATIONS AND MANAGEMENT OF FOREIGN EXCHANGE
Dealing in foreign exchange, etc.

Section 3 prohibits the following transactions, namely,
♦ dealing in foreign exchange
♦ dealing in foreign securities
♦ transfer of foreign exchange to any person not being an authorised person
♦ transfer of foreign exchange in any person not being an authorised person
♦ making any payment to or for the credit of a non-resident in any manner
♦ receiving otherwise been through an authorised person any payment by order or on
behalf of a non-resident in any manner
♦ receiving through an authorised person any payment by order or on behalf of a non-
resident without a corresponding inward remittance from any place outside India
♦ entering into specified financial transactions, which involve a transaction in India
having a counterpart transaction outside India, which apparently is to cover what are
popularly known as hawala transactions.
There are two explanations to this section. As per the first explanation, it is necessary that
when a person receives a payment without corresponding inward remittance, then he shall
be deemed to have received the payment, otherwise than through an authorised person.
In case, any payment is received outside India without corresponding inward remittance,
then the recipient shall be deemed to have violated the provisions of FEMA.
The second explanation with reference to definition of financial transaction referred in
clause (d) of the section. “Financial Transaction” means making any payment to, or for the
credit of any person, or receiving any payment for, by order or on behalf of any person, or
drawing, issuing or negotiating any bill of exchange or promissory note, or transferring
any security or acknowledging any debt.
In pursuance of provisions of Section 3 of FEMA, the Reserve Bank has granted general
permission to any person to receive any payment – made in rupees by order or on behalf
of a person resident outside India during his stay in India by converting the foreign
exchange into rupees by sale to an authorised person,
♦ Made by means of a cheque drawn on a bank outside India or a bank draft or
travellers cheques issued outside India or made in foreign currency notes directly,
from out of India provided the cheques, drafts or foreign currency is sold to an
authorised person within seven days of its receipt;
♦ By means of a postal order or postal money order issued by a post office outside
India;
♦ Reserve Bank has also granted general permission to a person resident in India to
make payment in rupees:
• for extending hospitality to a person resident outside India;
• to a person resident outside India for purchase of gold or silver imported by such
person in accordance with the provisions of any order issued by Central
Government under the Foreign Trade (Development and Regulation) Act, 1992 or
under any law or rules or regulations in force.
General permission has also been granted to a company in India to make payment of
sitting fees or commission or remuneration or travel expenses to and from or within India
to its whole time director who is on a visit to India for company’s work subject to the terms
and conditions mentioned elsewhere in the notification.
Holding of foreign exchange (Section 4)

No person resident in India shall acquire, but, own, possess or transfer any foreign
exchange, foreign security or any immovable property situated outside India.
This section restricts a resident in India from acquiring, holding, owing, possessing or
transferring in any manner foreign exchange, foreign security or any immovable property
situated outside India. However the acquisition such immovable property outside India on
lease for a period not exceeding five years is permissible provided such transactions are
not specifically prohibited.
In terms of regulations relating to acquisition and transfer of immovable property outside
India, such acquisition by a person resident in India would require prior approval of
Reserve Bank except in the following cases:
♦ Property held outside India by a foreign citizen resident in India;
♦ Property acquired by a person on or before 8th July, 1947 and held with the
permission of Reserve Bank;
♦ Property acquired by way of gift or inheritance from persons referred to in above;

♦ Property purchased out of funds held in RFC account.
Current account transactions (Section 5)

Any person may sell or draw foreign exchange to or from an authorised person if not sale
or drawal is a current account transaction. Provided that the Central Government may, in
the public interest and in consultation with the Reserve Book, impose such reasonable
restrictions for current account transactions as may be prescribed.
From the section, the intention is to permit receipts and payments freely on current
account, though the Central Government may impose such reasonable restrictions. On
further analysis of the (Section 5) two aspects have to be considered:
1. the section states that any person may sell or draw foreign exchange to or from an
authorised person,
2. if such sale or drawal is a current account transaction. The wording implies that the
section does not intend to permit a person to carry out a current account transaction
freely. If a current account transaction involve dealing with foreign exchange and
other provisions of the Act also get attracted, then the concerned person have to take
necessary approvals under the Rules and Regulations etc.
As per rules, drawal of foreign exchange for certain current account transactions is
prohibited, a few need permission of appropriate Govt. of India authority and some other
transactions would require RBI permission if they exceed a certain ceiling. The three
categories are:
(a) Transactions for which drawal of foreign exchange is prohibited: (1) Remittance of
interest income on funds held in Non-Resident Special Rupee (NRSR) Account
Scheme. (2) Travel to Nepal or Bhutan. (3) Transaction with a person resident in
Nepal or Bhutan (unless specifically exempted by RBI by general/special order). (4)
Remittance out of lottery winnings. (5) Remittance of income from racing/riding etc.,
or any other hobby. (6) Remittance for purchase of lottery tickets, banned/prescribed
magazines, football pools, etc. (7) Payment of commission on exports made towards
equity investment in joint ventures/wholly owned subsidiaries abroad of Indian
companies. (8) Remittance of dividend by any company to which the requirement of
dividend balancing is applicable. (9) Payment of commission on exports under Rupee
State Credit Route. (10) Payment related to ‘Call Back Services’ of telephones.
(b) Transactions, which require prior approval of the Government of India for, drawal of
foreign exchange: (1) Cultural tours. (2) Advertisement abroad by any PSU/State and
Central Govt. Dept. (3) Remittance of freight of vessel chartered by a PSU. (4)
Remittance under technical collaboration agreements where payment of royalty

exceeds 5% on local sales and 8% on exports and lumpsum payment exceeds USD 2
Million. (5) Remittance of prize money/sponsorship of sports activity abroad by a
person other than International/National/State level sports bodies, if the amount
involved exceeds USD 1,00,000/-. (6) Payment for securing insurance for health from
a company abroad. (7) Payment for import by a Govt. Dept. or PSU on CIF basis. (8)
Multi-modal transport operators making remittances to their agents abroad. (9)
Remittance of hiring charges of transponders. (10) Remittance of container detention
charges exceeding the rate prescribed. (11) Remittance for membership of P&I club.
(c) Transactions which require RBI’s prior approval for drawal of foreign exchange: (1)
Release of foreign exchange exceeding USD 10,000 or its equivalent in one calendar
year, for one or more private visits to any country (except Nepal and Bhutan). (2) Gift
remittance exceeding USD 5,000 per beneficiary per annum. (3) Donations exceeding
USD 10,000 per annum per beneficiary (4) Exchange facilities exceeding USD
1,00,000 for person going abroad for employment. (5) Exchange facilities for
emigration exceeding USD 5,000 for person going abroad for employment. (5a)
Exchange facilities for emigration exceeding USD 1,00,000 or amount prescribed by
country of emigration. (6) Remittance for maintenance of close relatives abroad
exceeding USD 1,00,000 per year per recipient. (7) Release of foreign exchange,
exceeding USD 25,000 to a person, irrespective of period of stay, for business travel,
or attending a conference or specialised training or for maintenance expenses of a
patient going abroad for medical treatment or check-up abroad, or for accompanying
as attendant to a patient going abroad for medical treatment/check-up. (8) Release of
exchange for studies abroad exceeding the estimates from the institution abroad or
USD 1,00,000 whichever is higher. (9) Commission to agents abroad for sale of
residential flats/commercial plots in India, exceeding 5% of the inward remittance.
(10) Remittance for use and/or purchase of trade mark/franchise in India, etc. (11)
Short-term credit to overseas offices of Indian companies. (12) Remittance for
advertisement on foreign television by person having export earnings less than Rs. 10
lacs in preceding 2 years. (13) Remittance of royalty and payment of lumpsum fee
under technical collaboration agreement, which has not been registered with RBI. (14)
Remittance exceeding USD 1,00,000/- for architectural/consultancy services procured
from abroad. (15) Release of exchange for meeting expenses for medical treatment
abroad exceeding the estimate from the doctor in India or hospital/doctor abroad. (16)
Remittance by artiste e.g. Dancer, entertainer etc., with exceptions to few categories.
Remittances for transactions included in item (c) above can be permitted by AP upto the
ceilings prescribed therein. Before release of foreign exchange, the Authorised Person
should ensure compliances of (a), (b) & (c) above. The rules under (b) & (c) do not apply
where the payment is made out of funds held in Resident Foreign Currency (RFC)
Account for Exchange Earner’s Foreign Currency (EEFC) Account of the remitter.
Capital account transactions (Section 6)
(1) Subject to the provisions of sub-section (2), any person may sell or draw foreign
exchange to or from an authorised person for a capital account transaction.
(2) The Reserve Bank may, in consultation with the Central Government, specify:
(a) any class or classes of capital account transactions, which are permissible;
(b) the limit up to which foreign exchange shall be admissible for such transactions;
Provided that the Reserve Bank shall not impose any restriction on the drawal of
foreign exchange for payments due on account of amortisation of loans or of
depreciation of direct investments in the ordinary course of business.
(3) Without prejudicial to the generality of the provision of sub-section (2), the Reserve
bank may, by regulations, prohibit, restrict or regulate the following:
(a) transfer or issue of any foreign security by a person resident in India;
(b) transfer or issue of any security by a person resident in India;
(c) transfer or issue of any security or foreign security by any branch, office or
agency in India of a person resident outside India;
(d) any borrowing or lending in foreign exchange in whatever form or by whatever
name called;
(e) any borrowing or leading in rupees in whatever form or by whatever name called
between a person resident in India and a person resident outside India;
(f) deposits between persons resident in India and persons resident outside India;
(g) export, import or holding of currency or currency notes;
(h) transfer of immovable property outside India, other than a lease not exceeding
five years, by person resident in India;
(i) acquisition or transfer of immovable property in India, other than a lease not
exceeding five years by a person resident outside India;
(j) giving of a guarantee or surety in respect of any debt, obligation or other liability
incurred:
(i) by a person resident in India and owed to a person resident outside India;
or
(ii) by a person resident outside India.
(4) A person resident in India may hold, own, transfer or invest in foreign currency,
foreign security or any immovable property situated outside India if such currency,
security or property was acquired, held or owned by such person when he was
resident outside India or inherited from a person who was resident outside India.
(5) A person resident outside India may hold, own, transfer or invest in Indian currency,
security or any immovable property situated in India if such currency, security or
property was acquired, held or owned by a such person when he was resident in India
or inherited from a person who was resident in India.
(6) Without prejudice to the provisions of this section, the Reserve Bank may, by
regulation, prohibit, restrict, or regulate establishment in India of a branch, office or
other place of business by a person resident outside India, for carrying on any activity
relating to such branch, office or other place of business.
A capital account transaction as said earlier is a transaction, which alters the assets or
liabilities, including contingent liabilities, outside India of persons resident in India or
persons resident outside India, and includes transactions referred to in sub-section (3).
The section gives a liberty by providing that any person may sell or draw foreign
exchange to or from an authorised person for capital account transactions. However, the
liberty to do so is subject to the provisions of sub-section (2), which states that the
Reserve Bank may in consultation with the Central Government specify class or classes of
capital account transactions, which are permissible, and the limit upto, which the foreign
exchange shall be admissible for such transactions.
Capital account transaction is basically split into the following categories:
(a) transaction, which are permissible in respect of persons resident in India and outside
India.
(b) transaction on which restrictions cannot be imposed; and
(c) transactions, which are prohibited.
Permissible Transactions
Under Sub-section (2) of Section 6, the RBI has issued the Foreign Exchange
Management (Permissible Capital Account Transactions) Regulations, 2000. The
Regulations specify the list of transaction, which are permissible in respect of persons
resident in India in Schedule-I and the classes of capital account transactions of persons
resident outside India in Schedule-II:
(a) Investment by a person resident in India in foreign securities.
(b) Foreign currency loans raised in India and abroad by a person resident in India.
(c) Transfer of immovable property outside India by a person resident in India.

(d) Guarantees issued by a person resident in India in favour of a person resident outside
India.
(e) Export, import and holding of currency/currency notes.
(f) Loans and overdrafts (borrowings) by a person resident in India from a person
resident outside India.
(g) Maintenance of foreign currency accounts in India and outside India by a person
resident in India.
(h) Taking out of insurance policy by a person resident in India from an insurance
company outside India.
(i) Loans and overdrafts by a person resident in India to a person resident outside India.
(j) Remittance outside India of capital assets of a person resident in India.
(k) Sale and purchase of foreign exchange derivatives in India and abroad and
commodity derivatives abroad by a person resident in India.
The list of permissible classes of transactions made by persons resident outside India is:
(a) Investment in India by a person resident outside India, that is to say,
(i) issue of security by a body corporate or an entity in India and investment therein
by a person resident outside India; and
(ii) investment by way of contribution by a person resident outside India to the
capital of a firm or a proprietorship concern or an association of a person in
India.
(b) Acquisition and transfer of immovable property in India by a person resident outside
India.
(c) Guarantee by a person resident outside India in favour of, or on behalf of, a person
resident in India.
(d) Import and export of currency/currency notes into/from India by a person resident
outside India.
(e) Deposits between a person resident in India and a person resident outside India.
(f) Foreign currency accounts in India of a person resident outside India.
(g) Remittance outside India of capital assets in India of a person resident outside India.
Transactions with no restriction
They are:
(1) For amortisation of loan and
(2) For depreciation of direct investments in ordinary course of business.

Also, restrictions cannot be imposed when drawal is of the purpose of repayments of loan
instalments.
Prohibited Transactions
On certain transactions, the Reserve Bank of India imposes prohibition. The person
resident outside India is prohibited from making investments in India in any form, in any
company, or partnership firm or proprietary concern or any entity whether incorporated or
not which is engaged or proposes to engaging:
♦ In the business of chit fund;
♦ A Nidhi company;
♦ Agricultural or plantation activities;
♦ Real estate business (the term shall not include developments of townships,
construction of residential or commercial premises, roads or bridges) or construction
of farm houses; or
♦ Trading in Transferable Development Rights (TDRs).
Export of goods and services (Section 7)
(1) Every exporter of goods shall:
(a) furnish to the Reserve Bank or to such other authority a declaration in such form
and in such manner as may be specified, containing true and correct material
particulars, including the amount representing the full export value or, if the full
export value of the goods is not ascertainable at the time of export, the value
which the exporter, having regard to the prevailing market conditions, expects to
receive on the sale of the goods in a market outside India;
(b) furnish to the Reserve Bank such other information as may be required by the
Reserve Bank for the purpose of ensuring the realisation of the export proceeds
by such exporter.
(2) The Reserve Bank may, for the purpose of ensuring that the full export value of the
goods or such reduced value of the goods as the Reserve Bank determines, having
regard to the prevailing market conditions, is received without any delay, direct any
exporter to comply with such requirements as it deems fit.
(3) Every exporter of services shall furnish to the Reserve Bank or to such other
authorities a declaration in such form and in such manner as may be specified,
containing the true and correct material particulars in relation to payment for such
services.
Section 7 read with Section 8 imposes on an exporter to make appropriate declaration of

the value of the goods being exported and he is also required to repatriate the foreign
exchange due to India in respect of such export to India in the manner and within the time
as may be prescribed. Under Section 8, the exporter is under an obligation to realise and
repatriate to India such foreign exchange. However, if there is a delay in the receipt of
export proceeds, it will not be a violation, which shall be publishable. Section 8 applies to
a resident who shall take all the reasonable steps. Therefore, the word ‘all reasonable
steps’ would depend upon facts and circumstances of each case.
The major changes introduced in the regulations relating to export of goods and services
are:
(a) RBI has prescribed the following forms for declaration of goods/software:
(1) Form GR (2) Form SDF (3) Form PP (4) Form SOFTEX except that the
declaration/ undertaking to be furnished by the exporter has been suitably modified.
Form VP/COD has been dispensed with.
(b) Categories of exports for which a declaration need not be completed. The
exemptions, among others, include:
(1) export of goods/software not exceeding Rs. 25,000 in value.
(2) export by way of gift not exceeding Rs. 1 lac in value.
(3) export of goods not exceeding USD 1000 or its equivalent per transaction to
Myanmar under Barter Trade Agreement.
Realisation and repatriation of foreign exchange (Section 8)

Where any amount of foreign exchange is due or has accrued to any person resident in
India, such person shall take all reasonable steps to realise and repatriate to India such
foreign exchange within such period and in such manner as may be specified by the
Reserve Bank.
A person resident in India to whom any amount of foreign exchange is due or has accrued
shall, save as otherwise provided under the provisions of the Act, or the rules and
regulations made thereunder, or with the general or special permission of the Reserve
Bank take all reasonable steps to realise and repatriate to India such foreign exchange,
and shall in no case do or refrain from doing anything, or take or refrain taking any action,
which has the effect of securing:
(a) that the receipt by him of the whole or part of that foreign exchange is delayed; or
(b) that the foreign exchange ceases in whole or in part to be receivable by him.
On realisation of foreign exchange due, a person shall repatriate the same to India,
namely bring into, or receive in, India and—
(a) sell it to an authorised person in India in exchange for rupees; or

(b) retain or hold it in account with an authorised dealer in India to the extent specified by
the Reserve Bank; or
(c) use it for discharge of a debt or liability denominated in foreign exchange to the extent
and in the manner specified by the Reserve Bank.
A person shall be deemed to have repatriated the realised foreign exchange to India when
he receives in India payment in rupees from the account of a bank or an exchange house
situated in any country outside India, maintained with an authorised dealer.
A person shall sell the realised foreign exchange to an authorised person within 7 days if
he has received such exchange as due or accrued remuneration for services rendered,
whether in or outside India, or in settlement of any lawful obligation or an income on
assets held outside India, or as inheritance, settlement or gift and in all other cases within
90 days of its receipt.
A person shall also surrender such unused portion of foreign exchange to an authorised
person within 60 days from the date of its acquisition or purchase by him. Also any
unspent balance on foreign exchange acquired for the purpose of foreign travel should be
surrendered within 90 days from the date of return of the travel to India if the unspent
amount is in the form of foreign currency notes and coins and within 180 days if it is in the
form of travellers’ cheque.
Exemption from realisation and repatriation in certain cases (Section 9)

The provisions of Sections 4 and 8 shall not apply to the following, namely:
(a) possession of foreign currency or foreigners coins by any person up to such limit as
the Reserve Bank may specify;
(b) foreign currency account held or operated by such person or class of persons and the
limit up to which the Reserve Bank may specify;
(c) foreign exchange acquired or received before the 8th day of July, 1947 or any income
arising or accruing there on which is held outside India by any person in pursuance of
a general or special permission granted by the Reserve Bank;
(d) foreign exchange held by a person resident in India up to such limit as the Reserve
Bank may specify, if such foreign exchange was acquired by way of gift or inheritance
from a person referred to in clause (c), including any income arising there from;
(e) foreign exchange acquired from employment, business, trade, vocation, service,
honorarium, gifts, inheritance or any other legitimate means up to such limit as the
Reserve Bank may specify; and
(f) such other receipts in foreign exchange as the Reserve Bank may specify.
For the purposes of clauses (a) and (e) of Section 9 of the Act, the Reserve Bank
specified the following limits for possession or retention of foreign currency or foreign
coins, namely:
(i) possession without limit of foreign currency and coins by an authorised person within
the scope of his authority;
(ii) possession without limit of foreign coins by any person;
(iii) retention by a person resident in India of foreign currency notes, bank notes and
foreign currency traveller’s cheques not exceeding USD 2,000 or its equivalent in
aggregate, provided that such foreign exchange in the form of currency notes, bank
notes and travellers cheques:
(a) was acquired by him while on a visit to any place outside India by way of
payment for services not arising from any business in or anything done in India;
or
(b) was acquired by him, from any person not resident in India and who is on a visit
to India, as honorarium or gift or for services rendered or in settlement of any
lawful obligation; or
(c) was acquired by him by way of honorarium or gift while on a visit to any place
outside India; or
(d) represents unspent amount of foreign exchange acquired by him from an

authorised person for travel abroad. However a person resident in India but not
permanently resident therein may possess without limit foreign currency in the
form of currency notes, bank notes and traveller's cheques, if such foreign
currency was acquired, held or owned by him when he was resident outside
India and, has been brought into India in accordance with the regulations made
under the Act. “Not permanently resident” means a person resident in India for
employment of a specified duration (irrespective of length thereof) or for a
specific job or assignment, the duration of which does not exceed three years.
Possession and Retention of Foreign Exchange

The Reserve Bank of India has specified the following persons with the limits for
possession and retention of foreign currency by a person resident in India:
♦ Authorised Persons in accordance with the limits advised by the Reserve Bank;
♦ Any person may possess foreign coins without no restriction;
♦ Any person resident in India is permitted to retain in aggregate foreign currency no

exceeding USD2,000 or its equivalent in the form of currency notes/bank notes or
travellers cheques acquired by him;
♦ A person resident in India but not permanently resident therein is permitted without
limit, if the foreign currency was acquired when he was resident outside India and was
brought into India and declared to the Customs Authorities.
18.7 AUTHORISED PERSON (SECTION 10)

(1) The Reserve Bank may, on an application made to it in this behalf, authorise any
person to be known as authorised person to deal in foreign exchange or in foreign
securities, as an authorised dealer, money changer or off-shore banking unit or in any
other manner as it deems fit. [Sub-section (1)].
(2) An authorisation under this section shall be in within and shall be subject to the
conditions laid down therein [Sub-section (2)].
(3) An authorisation granted under sub-section (1) may be revoked by the Reserve Bank
at any time if the Reserve Bank is satisfied that:
(a) it is in public interest so to do; or
(b) the authorised person has failed to comply with the condition subject to which
the authorisation was granted or has contravened any of the provisions of the
Act or any rule, regulation, notification, direction order made thereunder;
Provided that no such authorisation shall be revoked on any ground referred to in
clause (b) unless the authorised person has been given a reasonable opportunity of
making a representation in the matter.
(4) An authorised person shall, in all his dealings in foreign exchange or foreign security,
comply with such general or special directions or orders as the Reserve Bank may,
from time to time, think fit to give, and, except with the previous permission of the
Reserve Bank, an authorised person shall not engage in any transaction involving any
foreign exchange or foreign security which is not in conformity with the terms of his
authorisation under this section.
(5) An authorised person shall, before undertaking any transaction in foreign exchange
on behalf of any person, require that person to make such declaration and to give
such information as will reasonable satisfy him that the transaction will not involve,
and is not designed for the purpose of any contravention or evasion of the provisions
of this Act or of any rule, regulation, notification, direction or order made thereunder,
and where the said person refuses to comply with any such requirement or makes
only unsatisfactory compliance therewith, the authorised person shall refuse in writing
to undertake the transaction and shall, if he has reason the believe that any such
contravention or evasion as aforesaid is contemplated by the person, report the
matter to the Reserve Bank.
(6) Any person, other than an authorised person, who has acquired or purchased foreign
exchange for any purpose mentioned in the declaration made by him to authorised
person under sub-section (5) does not use it for such purpose or does not surrender it
to authorised person within the specified period or uses the foreign exchange so
acquired or purchased for any other purpose for which purchase or acquisition of
foreign exchange is not permissible under the provisions, of the Act or the rules or
regulations or direction or order made thereunder shall be deemed to have committed
contravention of the provision of the Act for the purpose of this section.
Reserve Bank’s powers to issue directions to authorised person (Section 11)

(1) The Reserve Bank may, for the purpose of securing compliance with the provisions of
this Act and of any rules, regulations, notifications or directions made thereunder,
give to the authorised persons any direction in regard to making of payment or the
doing or desist from doing any act relating to foreign exchange or foreign security.
(2) The Reserve Bank may, for the purpose of ensuring the compliance with the
provisions of this Act or of any rule, regulating, notification direction or order made
thereunder, direct any authorised person to furnish such information, in such manner,
as it deems fit.
(3) Where any authorised person contravenes any direction given by the Reserve Bank
under this Act or fails to file any return as directed by the Reserve Bank, the Reserve
Bank may, after giving reasonable opportunity of being head, impose on the
authorised person a penalty which may extend to ten thousand rupees and in the case
of continuing contraventions with an additional penalty which may extend to two
thousand rupees for every day during which such contravention continues.
Power of Reserve Bank to inspect authorised person (Section 12)

(1) The Reserve Bank may, at any time, cause an inspection to be made by any officer of
the Reserve Bank specially authorised in writing by the Reserve Bank in this behalf,
of the business of any authorised person as may appear to it to be necessary or
expedient for the purpose of:
(a) verifying the correctness of any statement, information or particulars furnished
to the Reserve Bank;
(b) obtaining any information or particulars which such authorised person has failed
to furnish on being called upon to do so;
(c) securing compliance with the provisions of this Act or of any rules, regulations,
directions or orders made thereunder.

(2) It shall be the duty of every authorised person, and where such person is a company
or a firm, every director, partner or other officer of such company or firm, as the case
may be, to produce to any officer making an inspection under sub-section (1), such
books, accounts and other documents in his custody or power and to furnish any
statement or information relating to the affairs of such person, company or firm as the
said officer may require within such time and in such manner as the said officer may
direct.
18.8 CONTRAVENTIONS AND PENALTIES IN BRIEF
Section Contravention Quantum of Penalty

No.
Section 11 Of any direction by the authorised ¾ Upto Rs. 10,000.
person or failure to file any return as ¾ If continuing offence additional
directed by RBI penalty upto Rs. 2,000 per day.
Section 13 Of any provision of the Act, or any ¾ Upto three times, the sum
rule, regulation notification, direction involved, if it is quantifiable.
or order or of any condition subject ¾ If not quantifiable upto Rs. 2
to which an authorisation issued lacs.
¾ If continuing, further penalty
upto Rs.5,000 per day after first
day.
Section 14 Failure to pay penalty as above Civil imprisonment.
– where demand is of an amount ¾ Upto 3 years
exceeding Rs. 1 crore. ¾ Upto 6 months.
– in any other case
Penalties (Section 13)

(1) If any person contravenes any provisions of this Act, or contravenes any rule,
regulation, notification, direction or order issued in exercise of the powers under this
Act, or contravenes any condition subject to which an authorisation is issued by the
Reserve Bank, he shall, upon adjudication, be liable to a penalty up to thrice the
sum involved in such contravention where such amount is quantifiable, or up to
two lakh rupees where the amount is not quantifiable, and where such
contravention is a continuing one, further penalty which may extend to five
thousand rupees for every day after the first day which the contravention
continues.
(2) Any Adjudicating Authority adjudging any contravening under sub-section (1), may, if
he thinks fit in addition to any penalty which he may impose for such contravention
direct that any currency, security or any other money or property in respect of which
the contravention has taken place shall be confiscated to the Central Government and
further direct that the foreign exchange holdings, if any of the person committing the
contraventions or any part thereof, shall be brought back into India or shall be
retained outside India in accordance with directions made in this behalf.
Explanation: For the purposes of this sub-section, “property” in respect of which
contravention has taken place, shall include:
(a) deposits in a bank, where the said property is converted into such deposits;
(b) Indian currency, where the said property is converted into that currency; and
(c) any other property, which has resulted out of the conversion of that property.
Enforcement of the orders of Adjudicating Authority (Section 14)

(1) Subject to the provisions of sub-section (2) of Section 19, if any person fails to
make full payment of the penalty imposed on him under Section 13 within a
period of ninety days from the date on which the notice for payment of such
penalty is served on him, he shall be liable to civil imprisonment under this
section.
(2) No order for the arrest and detention in civil prison of a defaulter shall be made
unless the Adjudicating authority has issued and served a notice and to show cause
why he should not be committed to the civil prison, and unless the Adjudicating
Authority, for reasons in writing, is satisfied:
(a) that the defaulter, with the object or effect of obstructing the recovery of penalty,
has after the issue of notice by the Adjudicating Authority, Dishonestly
transferred concealed, or removed may part of his property, or
(b) that the defaulter has, or has had since the issuing of notice by the Adjudicating
Authority, the means to pay the arrears or some substantial part thereof and
refuses or neglects or has refused or neglected to the same.
(3) Notwithstanding anything contained in sub-section (1), a warrant for the arrest of the
defaulter may be issued by the Adjudicating Authority if the Adjudicating authority is
satisfied, by affidavit or otherwise, that with the object or effect of delaying the
execution of the certificate the defaulter is likely to abscond or leave the local limits
of the jurisdiction of the Adjudicating Authority.
(4) Where appearance is not made pursuant to a notice issued and served under sub-
section (1), the Adjudicating Authority may issue a warrant for the arrest of the
defaulter.
(5) A warrant of arrest issued by the Adjudicating Authority under sub-section (3) or sub-
section (4) may also be executed by any other adjudicating authority within whose
jurisdiction the defaulter may for the time being be found.
(6) Every person arrested in pursuance of a warrant of arrest under this section shall be
brought before the Adjudicating Authority issuing the warrant as soon as practicable
and in any event within twenty-four hours of his arrest (exclusive of the time required
for the journey);
Provided that, if the defaulter pays the amount entered in the warrant of arrest as
due and the costs of the arrest to the officer arresting him, such officer shall at once
release him.
Explanation: For the purposes of this sub-section, where the defaulter is a Hindu
undivided family, the karta thereof shall be deemed to be the defaulter.
(7) When a defaulter appears before the Adjudicating Authority pursuant to a notice to
show cause or is brought before the Adjudicating Authority under this Section, the
Adjudicating Authority shall give the defaulter an opportunity showing cause when he
should not be committed to the civil prison.
(8) Pending the conclusion of the inquiry, the adjudicating Authority may, in his direction,
order the defaulter to be detained in the custody of such officer as the Adjudicating
Authority may think fit or release him on his furnishing the security to the satisfaction
of the Adjudicating Authority for his appearance as and when required.
(9) Upon the conclusion of the inquiry, the Adjudicating Authority may make an order for
the detention of the defaulter in the civil prison and shall in that event cause him to
be arrested if he is not already under arrest:
Provided that in order to give a defaulter an opportunity of satisfying the arrears, the
Adjudicating Authority may, before making the order of detention, leave the defaulter
in the custody of the officer arresting him or of any other officer for a specified period
not exceeding fifteen days, or lease him on his furnishing security to the satisfaction
of the adjudicating authority or his appearance at the expiration of the specified
period if the arrears are not satisfied.
(10) When the Adjudicating Authority does not make an order of detention under sub-
section (9), he shall, if the defaulter is under arrest, direct his release.
(11) Every person detained in the civil prison in execution of the certificate may be so
detained:
(a) where the certificate is for a demand of an amount exceeding rupees one crore, up to
three years, and
(b) in any other case, up to six months:
Provided that he shall be released from such detention on the amount mentioned in
the warrant for his detention being paid to the officer-in-charge of the civil prison.
(12) A defaulter released from detention under this Section shall not, merely by reason of
his release, be discharged from his liability for the arrears, but he shall not be liable
to be arrested under the certificate in execution of which he was detained in the civil
prison.
(13) A detention order may be executed at any place in India in the manner provided for
the execution of warrant of arrest under the Code of Criminal Procedure, 1973 (2 of
1974).
COMPOUNDING OF OFFENCES IN BRIEF
Section 15 authorises the Reserve Bank and the Enforcement Directorate to compound
contraventions of the provisions of Sections 7, 8, 9 and transactions relating to current
account.
The Reserve Bank is empowered to compound contravention of the provision as follows:
Sum involved in contravention By whom?
Rs. 5 lakhs or below AGM
More than 5 lakhs but less than 20 lakhs DGM
Rs. 20 lakhs or more but less than 50 lakhs GM
Rs. 50 lakhs or more Chief GM
The power of enforcement directorate to compound contraventions is as follows:

Sum involved in contravention By whom?
Rs. 5 lakhs or below Deputy Director
More than 5 lakhs but less than Rs. 10 lakhs Additional Director
Rs. 20 lakhs or more but less than Rs. 50 lakhs Special Director
Rs. 50 lakhs or more but less than Rs. 1 crore Special Director with
Deputy Legal Advisor
Rs. 1 crore or more Director of Enforcement with
Special Director
No contravention shall be compounded unless the amount involved in such contravention

is quantifiable.
(1) Any contravention under Section 13 may, on an application made by the person
committing such contravention, be compounded within on hundred and eighty days
from the date of receipt of application by the Director of Enforcement or such other
officers of the Directorate of Enforcement and Officers of the Reserve Bank as may be
authorised in this behalf by the Central Government in such manner as may be
prescribed.
(2) Where a contravention has been compounded under sub-section (1), no proceeding or
further proceeding, as the case may be, shall initiated or continued, as the case may
be, against the person committing such contravention under that Section, in respect of
the contravention so compounded.
Process and Procedure for Compounding

(a) An application for compounding of a contravention under the FEMA may be
submitted to the compounding authority (CA) either on beng advised of a
contravention under FEMA either through a memorandum or suo motu on being
made or becoming aware of the contravention or suo motu on being made or
becoming aware of the contravention. The application should be as per format given
in the Foreign Exchange (Compounding Proceedings) Rules.
(b) Application for compounding any contravention in prescribed form together with a
copy of the memoradum, hwereever applicable, with the prescribed fee has to be
submitted with the relevant facts and supporting documents to the Compounding
Authority [Cell for Effective Implementation of FEMA (CEFA)], Foreign Exchange
Department, 11 th Floor, Central Office Building, S.B.Singh Road, Fort, Mumbai 400
001.
(c) The compounding authority may call for any information, record or any other
documents relevant to the compounding proceedings.
(d) Where additional information/document is called for, such additional
information/document shall be submitted within 30 days or such additional period as
may be given by the compounding authority from the date of the said letter. In case
the contravener fails to submit the additional information/documents called for within
the specified period, the application for compounding will be liable for rejection.
(e) On receipt of the application for compounding, the proceedings would be concluded
and order issued by the CA within 180 days from the date of the receipt of
application for compounding.
(f) The sum for which the contravention has been compounded shall be paid within
fifteen days from the date of order of compounding.
(g) The payment towardsapplication fee and the sum for which contravention has been
compounded shall be paid by demand draft in favour of the Compounding Authority
ie. Reserve Bank of India amd payable at Mumbai.
18.9 ADJUDICATION AND APPEAL

Time limits
Section No. Obligation Time Limit
Section 14 Penalty to be paid Within 90 days from the date on
which notice for payment of penalty
is served.
Section 15 Compounding of Contravention Within 180 days of receipt of
application by Directorate of
Enforcement.
Section 16 Complaint under Section 16(1) to be Within 1 year of receipt of
dealt by Adjudicated Authority complaint.
Section 17 Appeal to Special Director (Appeals) Within 45 days from receipt of
order.
Section 19 Appeal to Appellate Tribunal Within 45 days from receipt of
order.
Section Appeal to be dealt with by Appellate Will try to dispose off the appeal
19(5) Tribunal within 180 days from receipt of
appeal.
Section 35 Appeal to High Court Within 60 days of communication of
order or decision.
Appointment of Adjudicating Authority (Section 16)

(1) For the purpose of adjudication under Section 13, the Central Government may, by an
order published in the Official Gazette, appoint as many officers of the Central
Government as it may think fit, as the Adjudicating Authorities for holding an inquiry in
the manner prescribed after giving the person alleged to have committed
contravention under Section 13, against whom a complaint has been made under sub-
section (2) (hereinafter in this section referred to as the said person) a reasonable
opportunity of being heard for the purpose of imposing any penalty:
Provided that where the Adjudicating Authority is of opinion that the said person is
likely to abscond or is likely to evade in any manner, the payment of penalty, if levied,
it may direct the said person to furnish a bond or guarantee for such amount and
subject to such conditions as it may deem fit.
(2) The Central Government shall, while appointing the Adjudicating Authorities under
sub-section (1), also specify in the order published in the Official Gazette, their
respective jurisdictions.
(3) No Adjudicating Authority shall hold an enquiry under sub-section (1) except upon a
complaint in writing made by any officer authorised by a general or special order by
(4) The said person may appear either in person or take the assistance of a legal
practitioner or a chartered accountant of his choice for presenting his case before the
Adjudicating Authority.
(5) Every Adjudicating authority shall have the same powers of a civil court which are
conferred on the Appellate Tribunal under sub-section (2) of Section 28 and:
(a) All proceedings before it shall deemed to be judicial proceedings within the
meaning of sections 193 and 228 of the Indian Penal Code (45 of 1860);
(b) shall be deemed to be a civil court for the purposes of Sections 345 and 346 of
the Code of Criminal Procedure, 1973 (2 of 1974).
(6) Every Adjudicating Authority shall deal with the complaint under sub-section (2) as
expeditiously as possible and endeavour shall be made to dispose of the complaint
finally within one year from the date of receipt of the complaint:
Provided that where the complaint cannot be disposed off within the said period, the
Adjudicating Authority shall record periodically the reason in writing or not disposing
off the complaint within the said period.
Appeal to Special Director (Appeals) (Section 17)

(1) The Central Government shall, by notification, appoint one or more Special Directors
(Appeals) to hear appeals against the orders of the Adjudicating Authorities under this
Section and shall also specify in the said notification the matter and places in relation
to which the Special Director (Appeals) may exercise jurisdiction.
(2) Any person aggrieved by an order made by the Adjudicating Authority, being an
Assistant Director of Enforcement or a Deputy Director of Enforcement, may prefer an
appeal of the Special Director (Appeals).
(3) Every appeal under sub-section (1) shall be filed within forty-five days from the date
on which the copy of the order made by the Adjudicating Authority is received by the
Aggrieved person and it shall be in such form, verified in such manner and be
accompanied by such fee as may be prescribed:
Provided that the Special Director (Appeals) may entertain an appeal after the expiry
of the said period of forty-five days, if he is satisfied that there was sufficient cause
for not filing it within that period.
(4) On receipt of an appeal under sub-section (1), the Special Director (Appeals) may
after giving the parties to the appeal an opportunity of being heard, pass such order
thereon as he thinks fit confirming, modifying or setting aside the order appealed
against.
(5) The Special Director (Appeals) shall send a copy of every order made by him to the
parties to appeal and to the concerned Adjudicating Authority.
(6) The Special Director (Appeals) shall have the same powers of a civil court which are
conferred on the Appellate Tribunal under sub-section (2) of Section 28 and:
(a) all proceedings before him shall be deemed to be judicial proceedings within the
meaning of Sections 193 and 228 of the Indian Penal Code (45 of 1860);
(b) shall be deemed to be a civil court for the purpose of Sections 345 and 346 of
the Code of Criminal Procedure, 1973 (2 of 1974).
Establishment of Appellate Tribunal (Section 18)

(1) The Central Government shall, by notification, establish an Appellate Tribunal to be
known as the Appellate Tribunal for Foreign Exchange to hear appeals against the
orders of the Adjudicating Authorities and the Special Director (Appeals) under this
Act.
Appeal to Appellate Tribunal (Section 19)

(1) The Central Government or any person aggrieved by an order made by an
Adjudicating Authority, other than those referred to sub-section (1) of Section 17, or
the Special Director (Appeals), may prefer an appeal to the Appellate Tribunal:
Provided that any person appealing against the order to the Adjudicating Authority or
the Special Director (Appeals) levying any penalty, shall while filing the appeal,
deposit the amount of such penalty with such authority as may be notified by the
Central Government.
Provided further that where in any particular cause, the Appellate Tribunal is of the
opinion that the deposit of such penalty would cause undue hardship to such person,
the Appellate Tribunal any dispense with such deposit subject to such conditions as it
may deem fit to impose so as to safeguard the realisation of penalty.
(2) Every appeal under sub-section (1) shall be filed within a period of forty-five days
from the date on which a copy of the order made by the Adjudicating Authority or the
Special Director (Appeals) is received by the aggrieved person or by the Central
Government shall be in such form, verified in such manner and be accompanied by
such fee as may be prescribed.
Provided that the Appellate Tribunal may entertain an appeal after the expiry of the
said period of forty-five days if it is satisfied that there was sufficient cause for not
filing it within that period.
(3) On receipt of an appeal under sub-section (1), the Appellate Tribunal may, after giving
the parties to the appeal an opportunity of being heard, pass such orders thereon as it
thinks fit, confirming, modifying or setting aside the order appealed against.
(4) The Appellate Tribunal shall send a copy of every order made by it to the parties to
the appeal and to the concerned Adjudicating Authority or the Special Director
(Appeals), as the case may be.
(5) The appeal filed before the Appellate Tribunal under sub-section (1) shall be dealt
with by it as expeditiously as possible and endeavour shall be made by it to dispose
of the appeal finally within one hundred and eighty days from the date of receipt of the
appeal:
Provided that where any appeal could not be disposed of within the said period of
one hundred and eighty days, the Appellate Tribunal shall record its reasons in writing
for not disposing of the appeal within the said period.
(6) The Appellate Tribunal may, for the purpose of examining the legality propriety or
correctness of any order made by the Adjudicating Authority under Section 16 in
relation to any proceedings, on its own motion or otherwise, call further records of
such proceedings and make and such order in the case as it thinks fit.
Composition of Appellate Tribunal (Section 20)

(1) The Appellate Tribunal shall consist of a chairperson and such number of Members as
the Central Government may deem fit.
(2) Subject of the provisions of this Act:
(a) the jurisdiction of the Appellate Tribunal may be exercised by Benches thereof;
(b) a Bench may be constituted by the Chairperson with one or more Members as
the Chairperson may deem fit;
(c) the Benches of the Appellate Tribunal shall ordinarily sit at New Delhi and at
such other places as the Central Government may, in consultation with the
Chairperson, notify;
(d) the Central Government shall notify the areas in relation to which each Bench of
the Appellate Tribunal may exercise jurisdictions.
(3) Notwithstanding anything contained in sub-section (2), the Chairperson may transfer a
Member from one Bench to another Bench.
(4) If at any stage of the hearing of any case or matter it appears to the Chairperson or a
Member that the case or matter is of such a nature that it ought to be heard by a
Bench consisting of two Members, the case or matter may be transferred by the
Chairperson or, as the case may be, referred to him for transfer, to such Bench as the
Chairperson may deem fit.
Qualifications for appointment of Chairperson, Member and Special Director

(Appeals) (Section 21)
(1) A person shall not be qualified for appointment as the Chairperson or a Member
unless he:
(a) in the case of Chairperson, is or has been, or is qualified to be, a Judge of a
High Court; and
(b) in the case of a Member, is or has been, or is qualified to be, a District Judge.
(2) A person shall not be qualified for appointment as a Special Director (Appeals) unless
he:
(a) has been a member of the Indian Legal Service and has held a post in Grade I
of that Service; or
(b) has been a member of the Indian Revenue Service and has held a post
equivalent to a Joint Secretary to the Government of India.
Term of Office (Section 22)

The Chairperson and every other Member shall hold office as such for a term of five years
from the date on which he enters upon his office:
Provided that no Chairperson or other members shall hold office as such after he has
attained:
(a) in the case of the Chairperson, the age of sixty-five years;
(b) in the case of any other Member, the age of sixty-two years.
Terms and conditions of service (Section 23)

The salary and allowances payable to and the other terms and conditions of service of the
Chairperson, other Member and the Special Director (Appeals) shall be such as may be
prescribed.
Provided that neither the salary and allowances nor the other terms and conditions of
service of the Chairperson or a Member shall be varied to his disadvantage after
appointment.
Vacancies (Section 24)

If, for reason other than temporary absence, any vacancy occurs in the office of the
Chairperson or a Member, the Central Government shall appoint another person in
accordance with the provisions of this Act to fill the vacancy and the proceedings may be
continued before the Appellate Tribunal from the stage at such at which the vacancy is
filled.
Resignation and removal (Section 25)

(1) The Chairperson or a Member, may, by notice in writing under his hand addressed to
the Central Government, resign his office:
Provided that the Chairperson or a Member shall, unless he is permitted by the
Central Government to relinquish his office sooner, continue to hold office until the
expiry of three months from the date of receipt of such notice or until a person duly
appointed as his successor enters upon his office or until the expiry of term of office,
whichever is the earliest.
(2) The Chairperson or a Member shall not be removed from his office except by an order
by the Central Government on the ground of proved misbehaviour or incapacity after
an inquiry made by such person as the President may appoint for this purpose in
which the Chairperson or a Member concerned has been informed of the charges
against him and given a reasonable opportunity of being heard in respect of such
charges.
Member to act as Chairperson in certain circumstances (Section 26)

(1) In the event of the occurrence of any vacancy in the office of the Chairperson by
reason of his death, resignation or otherwise, the senior most Members shall act as
the Chairperson until the date on which a new Chairperson, appointed in accordance
with the provisions of this Act to fill such vacancy, enters upon his office.
(2) When the Chairperson is unable to discharge his function owing to absence, illness or
any other cause, the senior most Member shall discharge the function of the
Chairperson until the date on which the Chairperson resumes his duties.
Staff of Appellate Tribunal and Special Director (Appeals) (Section 27)

(1) The Central Government shall provide the Appellate Tribunal and the Special Director
(Appeals) with such officers and employees as it may deem fit.
(2) The officers and employees of the Appellate Tribunal and office of the Special
Director (Appeals) shall discharge their functions under the general superintendence
of the Chairperson and the Special Director (Appeals), as the case may.
(3) The salaries and allowances and other conditions of service of the officers and
employees of the Appellate Tribunal and office of the Special Director (Appeals) shall
be such as may be prescribed.
Procedure and powers of Appellate Tribunal and Special Director (Appeals)

(Section 28)
(1) The Appellate Tribunal the Special Director (Appeals) shall not be bound by the
procedure laid down by the Code of Civil Procedure, 1908 (5 of 1908) but shall be
guided by the principles of natural justice and, subject to the other provisions of this
Act, the appellate Tribunal and the Special Director (Appeals) shall have powers to
regulate its own procedure.
(2) The Appellate Tribunal and the Special Director (Appeals) shall have, for the
purposes of discharging its functions under this Act, the same powers as are vested in
a civil court under the Code of Civil Procedure, 1908 (5 of 1908); while trying a suit, in
respect of following matters, namely:
(a) summoning and enforcing the attendance of any person and examining him on
oath;
(b) requiring the discovery and production of documents;
(d) subject to the provisions of Sections 123 and 124 of the Indian Evidence Act,
1872 (1 of 1872); requisitioning any public record or document or copy of such
record or document from any office;
(e) issuing commissions for the examinations of witnesses or documents;
(f) reviewing its decisions;
(g) dismissing a representation of default or deciding it expert;
(h) setting aside any order of dismissal of any representation for default or any
order passed by it expert; and
(i) any other matter which may be prescribed by the Central Government.
(3) An order made by the Appellate Tribunal or the Special Director (Appeals) under this
Act shall be executable by the Appellate Tribunal or the Special Director (Appeals) as
a decree of civil court and, for this purpose, the Appellate Tribunal and the Special
Director (Appeals) shall have all the powers of a civil court.
(4) Notwithstanding anything contained in sub-section (3), the Appellate Tribunal or the
Special Director (Appeals) may transmit any order made by it to a civil court having
local jurisdiction and such civil court shall execute the order as if it were a decree
made by that court.

(5) All proceedings before the Appellate Tribunal and the Special Director (Appeals) shall
be deemed to be judicial proceedings within the meaning of Sections 193 and 228 of
the Indian Penal Code (45 of 1860) and the Appellate Tribunal shall be deemed to be
a civil court for the purposes of Sections 345 and 346 of the Code of Criminal
Procedure, 1973 (2 of 1974).
Distribution of business amongst Benches (Section 29)

Where Benches are constituted, the Chairperson may, from time to time, by notification,
make provisions as to the distribution of the business of the Appellate Tribunal amongst
the Benches and also provide for the matters, which may be dealt with by each Bench.
Power of Chairperson to transfer cases (Section 30)

On the application of any of the parties and after notice to the parties, and after hearing
such of them as he may desire to be heard, or on his own motion without such notice, the
Chairperson may transfer any case pending before one Bench, for disposal, to any other
Bench.
Decision to be by majority (Section 31)

If the Members of a Bench consisting of two Members differ in opinion on any point, they
shall state the point or points on which they differ, and make a reference to the
Chairperson who shall either hear the point or more of the other Members of the Appellate
Tribunal and such point or points shall be decided according to the opinion of the majority
of the Members of the Appellate Tribunal who have heard the case, including those who
first heard it.
Right of appellant to take assistance of legal practitioner or charter accountant

and of Government, to appoint presenting officers (Section 32)
(1) A person preferring an appeal to the Appellate Tribunal or the Special Director
(Appeals) under this Act may either appear in person take the assistance of a legal
practitioner or a chartered accountant of his choice to present his case before the
Appellate Tribunal or the Special Director (Appeals), as the case may be.
(2) The Central Government may authorise one or more legal practitioners or chartered
accountants or any of its officers to act as presenting officers and every person so
authrised may present the case with respect to any appeal before the Appellate
Tribunal or the Special Director (Appeals), as the case may be.
Member, etc. to be public servants (Section 33)

The Chairperson, Members and other officers and employees of the Appellate Tribunal,
the Special Director (Appeals) and the Adjudicating Authority shall be deemed to be public
servants within the meaning of Section 21 of the Indian Penal Code (45 of 1860).
Civil court not to have jurisdiction (Section 34)

No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any
matter which an Adjudicating Authority or the Appellate Tribunal or the Special Director
(Appeals) is empowered by or under this Act to determine and no injunction shall be
granted by any court or other authority in respect of any action taken or to be taken in
pursuance of any power conferred by or under this Act.
Appeal to High Court (Section 35)

Any person aggrieved by any decision or order of the Appellate Tribunal may file an
appeal to the High Court within sixty days from the date of communication of the decision
or order of the Appellate Tribunal on any question of question of law arising out of such
order:
Provided that the High Court may, if it is satisfied that the appellant was prevented by
sufficient cause from filing the appeal within the said period, allow it to be filed within a
further period not exceeding sixty days.
Explanation: In this section “High Court” means:
(a) the High Court within the jurisdiction of which the aggrieved party ordinarily resides or
carries on business or personally works for gain; and
(b) where the Central Government is the aggrieved party, the High Court within the
jurisdiction of which the respondent, or in a case where there are more than one
respondent, any of the respondents, ordinarily resides or carries or carries on
business or personally works for gain.
18.10 DIRECTORATE OF ENFORCEMENT

Directorate of Enforcement (Section 36)
(1) The Central Government shall establish a Directorate of Enforcement with a Director
and such other officer or class of officers as it thinks fit, who shall be called officers of
Enforcement, for the purposes of this Act.
(2) Without prejudice to provisions of sub-section (1), the Central Government may
authorise the Director of Enforcement or an Additional Director of Enforcement or a
Special Director of Enforcement or a Deputy Director of Enforcement to appoint
officers of Enforcement below the rank of an Assistant Director of Enforcement.

(3) Subject to such conditions and limitations as the Central Government may impose, an
officer of Enforcement may exercise the powers and discharge the duties conferred or
imposed on him under this Act.
Power of search, seizure, etc. (Section 37)

(1) The Director of Enforcement and other officers of Enforcement, not below the rank of
an Assistant Director, shall take up for investigation the contravention referred to in
Section 13.
(2) Without prejudice to the provisions of sub-section (1), the Central Government may
also, by notification, authorise any officer of class of officers in the Central
Government, State Government or the Reserve Bank, not below the rank of an Under
Secretary to the Government of India to investigate any contravention referred to in
Section 13.
(3) The officers referred to in sub-section (1) shall exercise the like powers which are
conferred on income-tax authorities under the Income-tax Act, 1961 (43 of 1961) and
shall exercise such powers, subject to such limitations laid down under that Act
(Section 38).
Empowering other officers (Section 38)

(1) The Central Government may, by order and subject to such conditions and limitations
as it thinks fit to impose, authorise any officer of customs or any central excise officer
or any police officer or any other officer of the Central Government to a State
Government to exercise such of the powers and discharge such of the duties of the
Director of Enforcement or any other officer of Enforcement under this Act as may be
state in the order.
(2) The officers referred to in sub-section (1) shall exercise the like powers which are
conferred on the income-tax authorities under the Income-tax Act, 1961 (43 of 1961),
subject to such conditions and limitations as the Central Government may impose.
18.11 MISCELLANEOUS
Presentation as to documents in certain cases (Section 39)
Where any document:
(i) is produced or furnished by any person or has been seized from the custody or
control of any person, in either case, under this Act or under any other law; or
(ii) has been received from any place outside India (duly authenticated by such authority
or person and in such manner as may be prescribed in the course of investigation of
any contravention under this Act alleged to have been committed by any person, and
such document is tendered in any proceedings under this Act in evidence against him,
or against him and any other person who is proceeded against jointly with him, the
court or the Adjudicating Authority, as the case may be, shall:
(a) presume, unless the contrary is proved, that the signature and every other part
of such document which purports to be in the handwriting of any particular
person or which the court may reasonably assume to have been signed by, or to
be in the handwriting of, a document executed or attested, that it was executed
or attested by the person by whom it purports to have been so executed or
attested;
(b) admit the document in evidence notwithstanding that it is not duly stamped, if
such document is otherwise admissible in evidence;
(c) in a case falling under clause (i), also presume, unless the contrary is proved,
the truth of the contents of such document.
Suspension of operation of this Act (Section 40)

(1) If the Central Government is satisfied that circumstances have arisen ordering it
necessary that any permission granted or restriction imposed by this Act should cease
to be granted or imposed, or if it considers necessary or expending so to do in public
interest, the Central Government may, by notification, suspend or relax to such extent
either indefinitely or for such period as may be notified, the operation of all or any of
the provisions of this Act.
(2) Where the operation of any provision of this Act has under sub-section (1) been
suspended or relaxed indefinitely, such suspension or relaxation may, at any time
while this Act remains in force, be removed by the Central Government by notification.
(3) Every notification issued under this section shall be laid, as soon as may be after it
issued, before each House of Parliament, while it is in session, for a total period of
thirty days which may be comprised in one session or in two or more successive
recessions, and if, before the expiry of the session immediately following the session
or the successive sessions aforesaid, both Houses agree in making any modification
in the notification or both Houses agree that the notification should not be issued, the
notification shall there after have effect only in such modified form or be of no effect,
as the case may be; so, however, that any such modification or annulment shall be
without prejudice to the validity of anything previously done under that notification.
Power of Central Government to give directions (Section 41)

For the purposes of this Act, the Central Government may, from time to time, give to the
Reserve bank such general or special directions as it thinks fit, and the Reserve bank
shall, in the discharge of its functions under this Act, comply with any such directions.
Contravention by companies (Section 42)

(1) Where a person committing a contravention of any of the provisions of this Act or of
any rule, direction or order made thereunder is a company, every person who, at the
time the contravention was committed, was in charge of, and was responsible to, the
company for the conduct of the business of the company as well as the company,
shall be deemed to be guilty of the contravention and shall be liable to be proceeded
against the punished accordingly [Sub-section (1)].
Provided that nothing contained in this sub-section shall render any such person
liable to punishment if he proves that the contravention took place without his
knowledge or that he exercised due diligence to prevent such contravention.
(2) Notwithstanding anything contained in sub-section (1), where contravention of any of
the provisions of this Act or of any rule, directions or order made thereunder has been
committed by a company and it is proved that the contravention has taken place with
the consent or connivance of, or is attributable to any neglect on the part of, any
director, manager, secretary or other officer of the company, such director, manager
secretary or other officer of the company, such director, manager, secretary or other
officer shall also be deemed to be guilty of the contravention and shall be liable to be
proceed against and punished accordingly.
Explanation: For the purpose of this Section—

(i) “Company” means any body corporate and includes a firm or other association of
individuals; and
(ii) “Director” in relation to a firm, means a partner in the firm.
Death or insolvency in certain cases (Section 43)

Any right, obligation, liability, proceedings or appeal arising in relation to the provision of
Section 13 shall not abate by reason of death or insolvency of the person liable under that
section and upon such death or insolvency such rights and obligations shall devolve on
the legal representative of such person or the official receiver or the official assignee, as
the case may be:
Provided that a legal representative of the deceased shall be liable only to the extent of
the inheritance or estate of the deceased.
Bar Legal proceedings (Section 44)

No suit, prosecution or other legal proceeding shall lie against the Central Government or
the Reserve Bank or any officer of that Government or of the Reserve Bank or other
person exercising any power or discharging any functions or performing any duties under
this Act, for anything in good faith done or intended to be done under this Act or any rule,
regulation, notification, direction or order made the under.
Removal of difficulties (Section 45)
(1) If any difficulty arises in giving effect to the provisions of this Act, the Central
Government may, by order, do anything not inconsistent with the provisions of this Act
of the purpose of removing the difficulty;
Provided that no such order shall be made under this section after the expiry of two
years from the commencement of this Act.
(2) Every order made under this Section shall be laid, as soon as may be after it is made,
before each House of Parliament.
Power to make rules (Section 46)
(1) The Central Government may, by notification, make rules to carry out the provisions
of this Act.
(2) Without prejudice to the generality of the foregoing power, such rules may provide for:
(a) the imposition to reasonable restrictions on current account transactions under
Section 5;
(b) the manner in which the contravention may be compounded under sub-section
(1) of Section 15;
(c) the manner of holding an inquiry by the Adjudicating Authority under sub-section
(1) of Section 16;
(d) the form of appeal and fee for filing such appeal under Sections 17 and 19;
(e) the salary and allowances payable to and the other terms and conditions of
service of the Chairperson and other Members of the Appellate Tribunal and the
Special Director (Appeals) under Section 23;
(f) the salaries and allowances and other conditions of service of the officers and
employees of the Appellate Tribunal and the office of the Special Director
(Appeals) under sub-section (3) of Section 27;
(g) the additional matters in respect of which the Appellate Tribunal and the Special
Director (Appeals) may exercise the powers of the civil court under clause (i) of
sub-section (2) of Section 28;
(h) the authority or person and the manner in which any document may be
authenticated under clause (ii) of Section 39; and
(i) any other matter which is required to be, or any be, prescribed.
Power to make regulations (Section 47)

(1) The Reserve Bank may, by notification, make regulations to carry out the provisions
of this Act and the rules made thereunder.
(2) Without prejudice to the generality of the foregoing power, such regulations may
provide for:
(a) the permissible classes of capital account transactions, the limits of admissibility
of foreign exchange for such transactions, and the prohibition, restriction or
regulation of certain capital account transactions under Section 6;
(b) the manner and the form in which the declaration is to be furnished under
clause (a) of sub-section (1) of Section 7;
(c) the period within which and the manner of repatriation of foreign exchange
under Section 8;
(d) the limit up to which any person may posses foreign currency or foreign coins
under clause (a) of Section 9;
(e) the class of persons and the limit up to which foreign currency account may be
held or operated under clause (b) of Section 9;
(f) the limit up to which foreign exchange acquired may be exempted under clause
(d) of Section 9;
(g) the limit up to which foreign exchange acquired may be retained under clause
(e) of Section 9;
(h) any other matter which is required to be, or may be specified.
Rules and regulations to be laid before Parliament (Section 48)
Every rule and regulations made under this Act shall be laid, as soon as may be after it is
made, before each House of Parliament, while it is in session for a total period of thirty
days which may be comprised in one session or in two or more successive sessions, and
if, before the expiry of the session immediately following the session, or the successive
sessions aforesaid, both Houses agree in making any modification in the rule or
regulation, or both Houses agree that the rule or regulation should not be made, the rule
or regulation shall thereafter have effect only in such modified form or be of no effect, as
the case may be; so, however, that any such modification or annulment shall be without
prejudice to the validity of anything previously done under that rule or regulation.
Repeal and saving (Section 49)
(1) The Foreign Exchange Regulation Act, 1973 (46 of 1973) is hereby repealed and the
Appellate Board constituted under sub-section (1) of Section 52 of the said Act
(hereinafter referred to as the repealed Act) shall stand dissolved.
(2) On the dissolution of the said Appellate Board, the person appointed as Chairman of
the appellate Board and every other person appointed as Member and holding office
as such immediately before such date shall vacate their respective offices and no
such Chairman or other person shall be entitled to claim any compensation for the
premature termination of the term of his office or of any contract of service.
(3) Notwithstanding anything contained in any other law for the time being in force, no
court shall take cognizance of an offence under the repealed Act and no adjudicating
officer shall take notice of any contravention under Section 51 of the repealed Act
after the expiry of a period of two years from the date of the commencement of this
Act.
(4) Subject to the provisions of sub-section (3) all offences committed under the repealed
Act shall continue to be governed by the provisions of the repealed Act as if that Act
had not been repealed.
(5) Notwithstanding such repeal:
(a) anything done or any action taken or purported to have been done or taken
including any rule, notification, inspection, order or notice made or issued or any
appointment, confirmation or declaration made or any licence, permission,
authorisation or exemption granted or any document or instrument executed or
any direction given under the Act hereby repealed shall, in so far as it is not
inconsistent with the provisions of this Act, be deemed to have been done or
taken under the corresponding provisions of this Act.
(b) any appeal preferred to the Appellate Board under sub-section (2) of Section 52
of the repealed Act but not disposed of before the commencement of this Act
shall stand transferred to and shall be disposed of by the Appellate Tribunal
constituted under this Act.
(c) every appeal from any decision or order of the Appellate Board under sub-
section (3) or sub-section (4) of Section 52 of the repealed Act shall, if not filed
before the commencement of this Act, be filed before the High Court within a
period of sixty days of such commencement:
Provided that the High Court may entertain such appeal after the expiry of the said
period of sixty days if it is satisfied that the appellant was prevented by sufficient
cause from filing the appeal within the said period.
(6) Save as otherwise provided in sub-section (3), the mention of particular matters in
sub-sections (2), (4) and (5) shall not be held to prejudice or affect the general
applications of Section 6 of the General Clauses Act, 1897 (10 of 1897) with regard to
the effect of repeal.
Students may note that though they are not expected to know the details of all the
Rules/ Regulations/Clarifications/Notifications issued by various authorities from
time. However, they should familiarise with such Notifications and other significant
rules/regulations having a bearing on such provisions of the Act and which are
covered as part of the Study Material and Revisionary Test Papers published from
time to time.
19
THE COMPETITION ACT 2002
19.0 INTRODUCTION
Globalisation and progressive liberalization of trade during the last decade opened a
widening atmosphere giving rise to certain inevitable tasks and challenges for every
country around the globe. It therefore became imperative for many countries to have a
new line of rethinking on the existing pattern of policies on trade, customs and usages.
The World Trade Organisation’s (WTO) treaties and agreements, their implications on
trade and commerce have already compelled many countries to review their
competitiveness of trade and economic policies not only within their economy but across
the frontiers of other countries also. In India, in the recent years, the corporate and
economic reforms and policies had pervasive effects on the structure of domestic trade
and competition. The law which was originally enacted to deal with market and
competition (i.e., the Monopolies and Restrictive Trade Practices Act, 1969) addressed
the problems concerning Monopolistic, Restrictive and Unfair Trade Practices only. There
was no genesis to a comprehensive competition policy since then. Given the fact that the
structure of world economy and trade has taken rapid strides and undergone vast
changes, India has been taking adequate steps for integrating itself with the new changes
and challenges thereby market functioning, positioning becomes effective and
competitive. In this regard, Government constituted a High Level Committee on
Competition Policy and Law on 15.19.1999 under the Chairmanship of Mr. S.V.S.
Raghavan, to recommend a legislative framework relating to Competition Law including
mergers and demergers. The Committee submitted its report on 22 nd May 2000. The
Government, after considering the report and suggestions from various organizations,
institutions and general public, introduced the Competition Bill in the Parliament. This Bill
became an Act after receiving assent from the President on 13 th January 2003 and a few
sections of the Act have already come into force by virtue of two separate Government
notifications [i.e., S.O.340 (E) dated 31 st March, 2003 and S.O.715 (E) dated 19 th June,
2003]. This Act extends to the whole of India except the State of Jammu and Kashmir.
19.1 WHY MRTP ACT NEEDED A FRESH LOOK?

In the process of liberalization and globalisation of Indian economy, the provisions of the
MRTP Act, 1969 became obsolete and therefore needed a fresh look and called for
appropriate changes due to the following reasons:
• To reflect post reforms scenario.
• To lay emphasis on substance of competition than on the size.
• To address abuse of dominant position in the market rather than dominance in terms
of size etc.
• To be proactive to market competition rather than reactive.
• To provide for effective mechanism to promote competitive markets.
• To address unfair trade practices separately.
19.2 WHAT IS COMPETITION?
A broad definition of Competition is “a situation in a market in which firms or sellers
independently strike for the buyers’ patronage in order to achieve a particular business
objective, for example profit, sales or market share” (World Bank, 1999). A pre-requisite
for a good competition is trade, trade is the unrestricted liberty of every man to buy, sell
and barter, when, where and how, of whom and to whom he pleases. For a free market to
be in existence the handicap is that for a given distribution of income of those who can
pay the highest price will most be able to purchase the goods regardless their relative
needs. However, the real culprit is income distribution system and not the competitive
system. In an unregulated free market, in certain circumstances it could be of greater
benefit to the owner to withhold goods from market in order to extract a higher price.
Despite the efforts to regulate prices which have been unsuccessful, the caution in a free
market as compared to the problems in an unregulated market can be overcome by
posturing competition by which the ultimate raison de’ etre of competition, namely the,
interest of the consumer can be protected.
19.3 COMPETITION POLICY AND LAW

The Competition Policy is regarded as genus, of which, the Competition Law is specie.
Competition Law provides necessary powers to the commission to enforce and implement
the Competition Policy. The central economic goal of the Competition Policy is the
preservation and promotion of the competitive process. It is a symbolic process, which
encourages efficiency in the production and allocation of goods and services over a
period of time through its effects on innovation and adjustment to technological change.
In conditions of effective competition, competitors will be having equal opportunities to
compete for their own economic interest and therefore the quality of their outputs and
The Competition Act 2002 19.3
resource deployment will be given top priority in order to sustain and succeed in the
market by meeting consumers’ demand at the lowest possible cost.
19.4 COMPETITION LAWS IN UK AND US

There are three major federal anti-trust laws in United States namely the Sherman Anti-
trust Act, the Clayton Act and the Federal Trade Commission Act.
The Sherman Act passed in 1890 was the first Federal Anti-Trust Laws. The Act aimed at
restraint of trade and monopolisation of Inter-State and Foreign Commerce.
The Clayton Act is a civil statute (carrying no criminal penalties, was passed in 1914 and
significantly amended in 1950). The Act is the result of failure of the Sherman Act to stop
the trend towards concentration in the American economy. It attempts to nip monopolise
in the bud by specifying practices that monopolists used to gain monopoly power.
The Federal Trade Commission Act, 1914 prohibits unfair methods of competition in Inter-
State Commerce but carries no criminal penalties. However, there was Federal Trade
Commission to monitor violations of the Act. Thus, in US basically anti-trust laws protect
competition by ensuring free and open competition, which bring benefits to consumers by
way of lower prices, new and better products.
The UK Competition Act, 1988 which came into force in March 1, 2000 is based upon the
Competition Law of the European Commission. The Act prohibited agreements, which
have the object of preventing, restricting or distorting competition which directly or
indirectly fix prices, trading conditions, limit or control production, markets or sources of
supply.
The Enterprise Act introduced the next major reform of UK Competition Law, 2002 which
concentrated on a new regime for the assessment of mergers and markets in the UK. The
third and final stage of reform process in the UK Competition Law will be the
implementation of European Commission, which is a radical modernisation of UK’s
Competition Policy. To regulate the competition and its practices, most of the countries
have the competition authority commonly known as the Competition Commission.
19.5 COMPETITION ACT, 2002

The Competition Act, 2002 intends to provide, keeping in view of the economic
development of the country, for the establishment of a Commission to prevent practices
having adverse effect on competition, to promote and sustain competition in markets, to
protect the interests of consumers and to ensure freedom of trade carried on by other
participants in markets, in India, and for matters connected therewith or incidental thereto.
The renewed efforts of the Government in implementing a Competition Act, 2002 is a
laudable step in the right direction and a new beginning in the frontiers of India’s
Competition Policy towards harmonizing international trade and policy.
19.6 MRTP ACT, 1969 & COMPETITION ACT, 2002

The following are the basic differences between MRTP and Competition Act:
S.No. The MRTP Act, 1969 The Competition Act, 2002
1. It is based on the pre-liberalization and It is based on the post-reforms
globalisation era. scenario.
2. The objective of the Act is to prevent The objective of the Act is prevent
concentration of economic power to practices having adverse effect on
common detriment to control of competition and to promote as well as
monopolies, prevention of monopolistic sustaining the competition to protect
and restrictive trade practices. consumer interests at market place
and ensuring freedom of trade.
3. It lists out 14 offences, which are It recognizes only four offences, which
against the principle of natural justice. are deemed to be against the principle
of natural justice.
4. MRTP Commission has the power to The Competition Commission can pass
pass only “Cease” and “desist” orders. an order to prevent and punish such of
those activities, which abuses
competition.
5. The MRTP Act did not provide for the The Competition Act provides
formation of fund for its activities. competition fund for promotion of
competition advocacy and creation of
awareness about competitive issues
and training as may be prescribed in
its rules.
6. Entity having status of dominant The entity having dominant position is
position is itself considered as bad. not considered as bad. Whereas abuse
of dominant position affecting
consumer interest is considered as
immoral.
7. In general registration of agreements It does not lay down any such
was mandatory. requirement for registration of
agreements.
8. The definition of ‘group’ was wider. The ‘group’ definition has been
simplified.
9. The size of the firm, is the factor for It focuses on the firm’s structure not
determing dominance etc., on size factor.

19. MRTP Commission role was only Competition Commission can initiate
advisory. suo motu proceedings and levy
penalties.
11. MRTP Commission dealt with the unfair The cases relating to unfair trade
trade practices. practices will be transferred to
Consumer Courts.
12. Focussed on consumer interest at Focuses on public at large.
large.
13. The Chairman of the MRTP The Chairman of the Commission will
Commission was appointed by Central be appointed by a committee
Government. consisting of retired judiciary, person
having professional expertise in
various fields of trade commerce,
industry, finance etc.
19.7 MAIN INGREDIENTS OF COMPETITION LAW

The focus of the new law is towards the following areas affecting competition namely:
(a) Prohibition of certain agreements, which are considered to be anti-competitive in
nature. Such agreements [namely tie in arrangements, exclusive dealings (supply
and distribution), refusal to deal and resale price maintenance] shall be presumed as
anti-competitive if they cause or likely to cause an appreciable adverse effect on
competition within India.
(b) Abuse of dominant position by imposing unfair or discriminatory conditions or limiting
and restricting production of goods or services or indulging in practices resulting in
denial of market excess or through in any other mode are prohibited.
(c) Regulation of combinations which cause or likely to cause an appreciable adverse
affect on competition within the relevant market in India is also considered to be void.
19.8 DEFINITIONS
Acquisition [Section 2(a)]
"Acquisition" means, directly or indirectly, acquiring or agreeing to acquire—
(i) shares, voting rights or assets of any enterprise; or
(ii) control over management or control over assets of any enterprise;

Agreement [Section 2(b)]
"Agreement" includes any arrangement or understanding or action in concert,—
(i) whether or not, such arrangement, understanding or action is formal or in writing; or
(ii) whether or not such arrangement, understanding or action is intended to be
enforceable by legal proceedings;
The objective of the Competition Policy is to promote efficiency and maximising the
welfare of nation and to create a contusive business environment, which promotes healthy
market competition. An agreement which prohibits an enterprise or person or their
association for entering into an agreement in respect of production, supply, distribution,
storage, acquisition or control of boosts or services, which causes are likely to cause an
appreciable adverse affect on competition. Such agreements entered in contravention of
the above are void. These agreements are presumed to have an appreciable adverse
affect on competition.
Agreements may be horizontal agreements and vertical agreements. Horizontal
agreements referred to agreements among competitors and vertical agreements to an
actual or potential relationship buying or selling to each other. Horizontal agreements
relating to prices quantities, bids and market sharing are particularly anti-competitive.
Vertical agreements like tie in arrangements; exclusive supply/distribution agreements
and refusal to deal are also generally anti-competitive. Section 3 of the Competition Act,
2002 regulates and prohibits all types of agreements, which have the effect to restrict
competition, and prevents those, which have such likely effect.
Here horizontal agreements are those agreements among competitors operating at the
same level in the economic process i.e. enterprises engaged in the same activity. For
example, the agreements between producers or between whole sellers or between
retailers, dealing in similar kind of products.
Vertical agreements are those agreements between Non-competiting undertakings
operating at different levels of manufacturing and distribution process. For example, the
agreements between manufacturers of components, manufacturers of products, between
producers and whole-sellers or between producers, whole-sellers and retailers.
Horizontal agreements or agreement between two or more enterprises that are at the
same stage of the production chain and in the same market. Horizontal agreements and
membership of cartels lead to unreasonable restrictions of competition and may be
presumed to have an appreciable adverse effect on competition.
Vertical agreements are agreements between enterprises that are at different stages or
levels of the production change and therefore in different markets. An example of this
would be an agreement between a producer and a distributor. This includes, Tie in

arrangements, Exclusive Supply Agreements, Exclusive Distribution Agreements, Refusal
to Deal and Resale Price Maintenance (RPM).
Cartel [Section 2(c)]
"Cartel" includes an association of producers, sellers, distributors, traders or service
providers who, by agreement amongst themselves, limit, control or attempt to control the
production, distribution, sale or price of, or, trade in goods or provision of services;
The term cartel like agreement has been given an inclusive meaning. Thus an association
for the welfare of the trade or formed for any other purpose not mentioned in the aforesaid
definition will not be a cartel. It is only when an association, by agreement amongst
themselves, limits control or attempts to control the production, distribution, sale or price
of, or, trade in goods or provision of services, that it will be a cartel.
Chairperson [Section 2(d)]
"Chairperson" means the Chairperson of the Commission appointed under sub-section (1)
of section 8;
Commission [Section 2(e)]
"Commission" means the Competition Commission of India established under sub-section
(1) of section 7;
Consumer [Section 2(f)]
"Consumer" means any person who—
(i) buys any goods for a consideration which has been paid or promised or partly paid
and partly promised, or under any system of deferred payment and includes any user
of such goods other than the person who buys such goods for consideration paid or
promised or partly paid or partly promised, or under any system of deferred payment
when such use is made with the approval of such person, whether such purchase of
goods is for resale or for any commercial purpose or for personal use;
(ii) hires or avails of any services for a consideration which has been paid or promised
or partly paid and partly promised, or under any system of deferred payment and
includes any beneficiary of such services other than the person who hires or avails of
the services for consideration paid or promised, or partly paid and partly promised, or
under any system of deferred payment, when such services are availed of with the
approval of the first-mentioned person whether such hiring or availing of services is
for any commercial purpose or for personal use;
It is noteworthy that the definition of consumer is substantially the same has given to the
expression under Section 2(d) of the consumer protection Act, 1986. The difference is
that under clause (i), in the Competition Act, it uses the words “whether such purchase of
goods is for the resale of for any commercial purpose or for personal use” in places of the
words “but does include a person who obtains such goods for resale of for any
commercial purpose”, as in the Consumer Protection Act. Likewise, in clause (ii), the
words used in the Competition Act are “whether such hiring or availing of services is for
any commercial purpose or for personal use” in place of the words “but does not include a
person who avails of such services for any commercial purpose” as in the Consumer
Protection Act. Thus, the interpretation of “consumer” in the Consumer Protection Act will
be the same as in Competition Act. In the latter, “consumer” will also include a person
who purchases goods for resale or for any commercial purpose or for personal use.
Director General [Section 2(g)]
"Director General" means the Director General appointed under sub-section (1) of section
16(1) and includes any Additional, Joint, Deputy or Assistant Directors General appointed
under that section;
Enterprise [Section 2(h)]
"Enterprise" means a person or a department of the Government, who or which is, or has
been, engaged in any activity, relating to the production, storage, supply, distribution,
acquisition or control of articles or goods, or the provision of services, of any kind, or in
investment, or in the business of acquiring, holding, underwriting or dealing with shares,
debentures or other securities of any other body corporate, either directly or through one
or more of its units or divisions or subsidiaries, whether such unit or division or subsidiary
is located at the same place where the enterprise is located or at a different place or at
different places, but does not include any activity of the Government relatable to the
sovereign functions of the Government including all activities carried on by the
departments of the Central Government dealing with atomic energy, currency, defence
and space.
For the purposes of this clause,—
(a) "activity" includes profession or occupation;
(b) "article" includes a new article and "service" includes a new service;
(c) "unit" or "division", in relation to an enterprise, includes—
(i) a plant or factory established for the production, storage, supply, distribution,
acquisition or control of any article or goods;
(ii) any branch or office established for the provision of any service;
Here, the Departments of Central Government is also considered as an enterprise.
Hence, it can sue and sued by others as a juristic person for its right and legal remedies.
However, such Central Government Departments having sovereign functions of the
Government, which includes activities relating to atomic energy, currency, defence and
space, are excluded from this definition of an enterprise.
Goods [Section 2(i)]

"Goods" means goods as defined in the Sale of Goods Act, 1930 (8 of 1930) and
includes—
(A) products manufactured, processed or mined;
(B) debentures, stocks and shares after allotment;
(C) in relation to goods supplied, distributed or controlled in India, goods imported into
India;
Section 2(7) of the Sale of Goods Act, 1930 defines goods as “every kind of movable property
other than actionable claims and money; and include stock and shares, growing crops, grass
and things attached to or forming part of the land which are agreed to be served before sale or
under the contract of sale”,
Member [Section 2(j)]
"Member" means a Member of the Commission appointed under sub-section (/) of section
8 and includes the Chairperson;
Notification [Section 2(k)]
"Notification" means a notification published in the Official Gazette;
Person [Section 2(l)]
"Person" includes—
(i) an individual;
(ii) a Hindu undivided family;
(iii) a company;
(iv) a firm;
(v) an association of persons or a body of individuals, whether incorporated or not, in
India or outside India;
(vi) any corporation established by or under any Central, State or Provincial Act or a
Government company as defined in section 617 of the Companies Act, 1956 (1 of
1956);
(vii) any body corporate incorporated by or under the laws of a country outside India;
(viii) a co-operative society registered under any law relating to cooperative societies;
(ix) a local authority;
(x) every artificial judicial person, not falling within any of the preceding sub-clauses;
Practice [Section 2(m)]
"Practice" includes any practice relating to the carrying on of any trade by a person or an
enterprise;
Prescribed [Section 2(n)]
"Prescribed" means prescribed by rules made under this Act;
Price [Section 2(o)]
"Price", in relation to the sale of any goods or to the performance of any services,
includes every valuable consideration, whether direct or indirect, or deferred, and includes
any consideration, which in effect relates to the sale of any goods or to the performance
of any services although ostensibly relating to any other matter or thing;
Public [Section 2(p)]
"Public financial institution" means a public financial institution specified under section 4A
of the Companies Act, 1956 (1 of 1956) and includes a State Financial, Industrial or
Investment Corporation;
Regulations [Section 2(q)]
"Regulations" means the regulations made by the Commission under section 64;
Relevant Market [Section 2(r)]
"Relevant Market" means the market, which may be determined by the Commission with
reference to the relevant product market or the relevant geographic market or with
reference to both the markets;
It includes all reasonable substitutable goods or services of all competitors. The
determination of the relevant market is a crucial aspect. In wider sense relevant market
means that the Government or a private have greater difficulty in demonstrating expected
anti-competitive affect from a challenged merger.
Relevant Geographic Market [Section 2(s)]
"Relevant Geographic Market" means a market comprising the area in which the
conditions of competition for supply of goods or provision of services or demand of goods
or services are distinctly homogenous and can be distinguished from the conditions
prevailing in the neighbouring areas;
The Relevant Geographic Market is not a broad in sense. It could be drawn as narrowly
as one metropolitan area or as broad as the nation as a whole. It is the geographic area
in which a sole supplier of the product could profitably increase its price without causing
outside suppliers to sell in that particular area.
Relevant Product Market [Section 2(t)]

"Relevant Product Market" means a market comprising all those products or services
which are regarded as interchangeable or substitutable by the consumer, by reason of
characteristics of the products or services, their prices and intended use;
It is an area in which the sellers of particular product or service providers operate. This
type of market may be local, national, or international. It involves identification of
geographical areas within which competition take place.
Service [Section 2(u)]
"Service" means service of any description which is made available to potential users and
includes the provision of services in connection with business of any industrial or
commercial matters such as banking, communication, education, financing, insurance, chit
funds, real estate, transport, storage, material treatment, processing, supply of electrical
or other energy, boarding, lodging, entertainment, amusement, construction, repair,
conveying of news or information and advertising;
Shares [Section 2(v)]
"Shares" means shares in the share capital of a company carrying voting rights and
includes—
(i) any security which entitles the holder to receive shares with voting rights;
(ii) stock except where a distinction between stock and share is expressed or implied;
Statutory Authority [Section 2(w)]
"Statutory authority" means any authority, board, corporation, council, institute, university
or any other body corporate, established by or under any Central, State or Provincial Act
for the purposes of regulating production or supply of goods or provision of any services
or markets therefor or any matter connected therewith or incidental thereto;
Trade [Section 2(x)]
"Trade" means any trade, business, industry, profession or occupation relating to the
production, supply, distribution, storage or control of goods and includes the provision of
any services;
Turnover [Section 2(y)]
"Turnover" includes value of sale of goods or services;
Words and Expressions [Section (z)]
"Words and Expressions" used but not defined in this Act and defined in the Companies
Act, 1956 (1 of 1956) shall have the same meanings respectively assigned to them in that
Act.
CHAPTER II
PROHIBITION OF CERTAIN AGREEMENTS, ABUSE OF DOMINANT POSITION AND
REGULATION OF COMBINATIONS
Anti competitive agreements (Section 3)
It shall not be lawful for any enterprise or association of enterprises or person or
association of enterprises or persons or association of persons to 'enter' into an
agreement in respect of production, supply, storage, distribution, acquisition or control of
goods or provision of service, which causes or is likely to cause an appreciable adverse
effect on competition within India. All such agreements entered into in contravention of
the aforesaid prohibition shall be void.
Any agreement entered into between enterprises or associations of enterprises or persons
or associations of persons or between any person and enterprise or practice carried on, or
decision taken by, any association of enterprises or association of persons, including
cartels, engaged in identical or similar trade of goods or provision of services, shall be
presumed to have an appreciable adverse effect on Competition, which—
(a) directly or indirectly determines purchase or sale prices;
(b) limits or controls production, supply, markets, technical development, investment or
provision of services;
(c) shares the market or source of production or provision of services by way of
allocation of geographical area of market, or type of goods or services, or number of
customers in the market or any other similar way;
(d) directly or indirectly results in bid rigging or collusive bidding.
However, any agreement entered into by way of joint ventures, if such agreement
increases efficiency in production, supply, distribution, storage, acquisition or control of
goods or provision of services, shall not be considered to be an anti-competitive
agreement.
Bid-rigging
"Bid rigging" means any agreement, between enterprises or persons engaged in identical
or similar production or trading of goods or provision of services, which has the effect of
eliminating or reducing competition for bids or adversely affecting or manipulating the
process for bidding.
Agreement at different stages in different markets
Any agreement amongst enterprises or persons at different stages or levels of the
production chain in different markets, in respect of production, supply, distribution,
storage, sale or price of, or trade in goods or provision of services shall be a void
agreement causes or is likely to cause an appreciable adverse effect on Competition in

India including—
(a) tie-in arrangement - includes any agreement requiring a purchaser of goods, as a
condition of such purchase, to purchase some other goods;
(b) exclusive supply agreement - includes any agreement restricting in any manner the
purchaser in the course of his trade from acquiring or otherwise dealing in any goods
other than those of the seller or any other person;
(c) exclusive distribution agreement- includes any agreement to limit, restrict or
withhold the output or supply of any goods or allocate any area or market for the
disposal or sale of the goods;
(d) refusal to deal - includes any agreement which restricts, or is likely to restrict, by any
method the persons or classes of persons to whom goods are sold or from whom
goods are bought;
(e) resale price maintenance - includes any agreement to sell goods on condition that
the prices to be charged on the resale by the purchaser shall be the prices stipulated
by the seller unless it is clearly stated that prices lower than those prices may be
charged.
Restriction of rights under some Acts
Nothing contained in this section shall restrict the right of any person to restrain any
infringement of, or to impose reasonable conditions, as may be necessary for protecting
any of his rights which have been or may be conferred upon him under—
(a) the Copyright Act, 1957 (14 of 1957);
(b) the Patents Act, 1970 (39 of 1970);
(c) the Trade and Merchandise Marks Act, 1958 (43 of 1958) or the Trade Marks Act,
1999 (47 of 1999);
(d) the Geographical Indications of Goods (Registration and Protection) Act, 1999 (48 of
1999);
(e) the Designs Act, 2000 (16 of 2000);
(f) the Semi-conductor Integrated Circuits Layout-Design Act, 2000 (37 of 2000);
Prohibition of export of rights
Noting contained in this section shall restrict the right of any person to export goods from
India to the extent to which the agreement relates exclusively to the production, supply,
distribution or control of goods or provision of services for such export.
Abuse of dominant position (Section 4)

The sub-section 1, prohibits abuse of dominant position by any enterprise. Such abuse of
dominant position, inter alia, includes -
(a) directly or indirectly, imposes unfair or discriminatory—
(i) condition in purchase or sale of goods or service; or
(ii) price in purchase or sale (including predatory price) of goods or service,
"predatory price" means the sale of goods or provision of services, at a price which is
below the cost, as may be determined by regulations, of production of the goods or
provision of services, with a view to reduce competition or eliminate the competitors.
The unfair or discriminatory condition in purchase or sale of goods or service referred to
in sub-clause (i) and unfair or discriminatory price in purchase or sale of goods (including
predatory price) or service referred to in sub-clause (ii) shall not include such
discriminatory condition or price which may be adopted to meet the competition; or
(b) limits or restricts—
(i) production of goods or provision of services or market therefore; or
(ii) technical or scientific development relating to goods or services to the prejudice
of consumers; or
(c) indulges in practice or practices resulting in denial of market access; or
(d) makes conclusion of contracts subject to acceptance by other parties of
supplementary obligations which, by their nature or according to commercial usage,
have no connection with the subject of such contracts; or
(e) uses its dominant position in one relevant market to enter into, or protect, other
relevant market. Dominant position means a position of strength, enjoyed by an
enterprise, in the relevant market, in India, which enables it to—
(i) operate independently of competitive forces prevailing in the relevant market; or
(ii) affect its competitors or consumers or the relevant market in its favour;
Combination (Section 5)
The Section 5 deals with combination of enterprises and persons. The acquisition of one
or more enterprises by one or more persons or merger or amalgamation of enterprises
shall be a combination of such enterprises and persons or enterprises, if—
(a) any acquisition where—
(i) the parties to the acquisition, being the acquirer and the enterprise, whose control,
shares, voting rights or assets have been acquired or are being acquired jointly
have,—
(A) either, in India, the assets of the value of more than rupees one thousand crores or
turnover more than rupees three thousand crores; or
(B) in India or outside India, in aggregate, the assets of the value of more than five
hundred million US dollars or turnover more than fifteen hundred million US dollars;
or
(ii) the group, to which the enterprise whose control, shares, assets or voting rights have
been acquired or are being acquired, would belong after the acquisition, jointly have
or would jointly have,—
(A) either in India, the assets of the value of more than rupees four thousand crores or
turnover more than rupees twelve thousand crores; or
(B) in India or outside India, in aggregate, the assets of the value of more than two
billion US dollars or turnover more than six billion US dollars; or
(b) acquiring of control by a person over an enterprise when such person has already
direct or indirect control over another enterprise engaged in production, distribution
or trading of a similar or identical or substitutable service, if:-
(i) the enterprise over which control has been acquired along with the enterprise over
which the acquirer already has direct or indirect control jointly have,-
(A) either in India, the assets of the value of more than rupees one thousand crores
or turnover more than rupees three thousand crores; or
hundred million US dollars or turnover more than fifteen hundred million dollars;
or
(ii) the group, to which enterprise whose control has been acquired, or is being
acquired would belong after the acquisition, jointly have or would jointly have,-
(A) either in India the assets of the value of more than rupees four thousand crores
or turnover more than rupees twelve thousand crores; or
(B) in India or outside India, in aggregate, the assets of the value of more than two
billion US dollars or turnover more than six billion US dollars; or
(c) any merger or amalgamation in which—
(i) the enterprise remaining after merger or the enterprise created as a result of the
amalgamation, as the case may be, have,—
(A) either in India, the assets of the value of more than rupees one thousand crores
or turnover more than rupees, three thousand crores; or
hundred million US dollars or turnover more than fifteen hundred million US
dollars; or
(ii) the group, to which the enterprise remaining after the merger or the enterprise
created as a result of the amalgamation, would belong after the merger or the
amalgamation, as the case may be, have or would have,—
(A) either in India, the assets of the value of more than rupees four-thousand crores
or turnover more than rupees twelve thousand crores; or
(B) in India or outside India, the assets of the value of more than two billion US
dollars or turnover more than six billion US dollars.
Explanations:
(a) Control
"control" includes controlling the affairs or management by—
(i) one or more enterprises, either jointly or singly, over another enterprise or
group;
(ii) one or more groups, either jointly or singly, over another group or enterprise;
(b) Group
"group" means two or more enterprises which, directly or indirectly, are in a position
to —
(i) exercise twenty-six per cent. or more of the voting rights in the other enterprise;
or
(ii) appoint more than fifty percent, of the members of the board of directors in the
other enterprise; or
(iii) control the management or affairs of the other enterprise;
(c) Determination of value of Assets-
the value of assets shall be determined by taking the book value of the assets as
shown, in the audited books of account of the enterprise, in the financial year
immediately preceding the financial year in which the date of proposed merger falls,
as reduced by any depreciation, and the value of assets shall include the brand
value, value of goodwill, or value of copyright, patent, permitted use, collective mark,
registered proprietor, registered trade mark, registered user, homonymous
geographical indication, geographical indications, design or layout-design or similar
other commercial rights, if any, referred to in section 3(5).
Regulation of combinations (Section 6)

As per this section, no person or enterprise shall enter into a combination which causes or
is likely to cause an appreciable adverse effect on competition within the relevant market
in India and such a combination shall be void. (Sub-section 1).
Any person or enterprise, who or which proposes to enter into a combination, may, at his
or its option, give notice to the Commission, in the form as may be specified, and the fee
which may be determined, by regulations, disclosing the details of the proposed
combination, within seven days of—
(a) approval of the proposal relating to merger or amalgamation, referred to in section
5(c), by the board of directors of the enterprises concerned with such merger or
amalgamation, as the case may be;
(b) execution of any agreement or other document for acquisition referred to in section
5(a) or acquiring of control referred to in Section 5(b).
The Commission shall, after receipt of notice deal with such notice in accordance with the
provisions contained in sections 29, 30 and 31. (Sub-section 3).
The provisions of this section shall not apply to share subscription or financing facility or
any acquisition, by a public financial institution, foreign institutional investor, bank or
venture capital fund, pursuant to any covenant of a loan agreement or investment
agreement. (Sub-section 4).
The public financial institution, foreign institutional investor, bank or venture capital fund,
shall, within seven days from the date of the acquisition, file, in the form as may be
specified by regulations, with the Commission the details of the acquisition including the
details of control, the circumstances for exercise of such control and the consequences of
default arising out of such loan agreement or investment agreement, as the case may be.
(Sub-section 5).
Explanations.—
(a) "foreign institutional investor" has the same meaning as assigned to it in clause
(a) of the Explanation to section 115AD of the Income-tax Act, 1961(43 of 1961)
which is as under:
The expression "Foreign Institutional Investor" means such investor as the Central
Government may, by notification in the official gazette specify in this behalf.
(b) "venture capital fund" has the same meaning as assigned to it in clause (b) of the
Explanation to clause (23 FB) of section 10 of the Income-tax Act, 1961(43 of 1961)
which is as follows:
"venture capital fund" means such fund-
(i) operating under a trust deed registered under the provisions of the Registration
Act, 1908 (16 of 1908) or operating as a venture capital scheme made by the
Unit Trust of India established under the Unit Trust of India Act, 1963 (52 of
1963);
(ii) which has been granted a certificate of registration under the Securities and
Exchange Board of India Act, 1992 (15 of 1992), and regulations made
thereunder;
(iii) which fulfils the conditions as may be specified, with the approval of the Central
Government, by the Securities and Exchange Board of India, by notification in
the Official Gazette, in this behalf;"
CHAPTER III
COMPETITION COMMISSION OF INDIA
Establishment of Commission (Section 7)
The Section 7, provides for the establishment of the Competition Commission of India.
The Commission shall be a body corporate by the aforesaid name having perpetual
succession and a common seal with power to acquire, hold and dispose of property and to
contract and shall sue or be sued. The place of head office of the Commission shall be
decided by the Central Government. Further, the Commission may establishment offices
at other places in India.
Composition of Commission (Section 8)
The Commission shall consist of the Chairperson and not less than two and not more than
ten other Members, as may be specified by the Central Government. However, the
Central Government shall appoint the Chairperson and a member during first year of the
establishment of the Commission. Further, this section also provides, the Chairperson
and other Members shall be whole-time members and persons of ability, integrity and
standing. A person who is or has been or is qualified to be a Judge of a High Court or is
having special knowledge of, and professional experience in, not less than fifteen years in
international trade, economics, business, commerce, law, finance, accountancy,
management, industry, public affairs, administration or in any other matter which in the
opinion of the Central Government, may be useful to the Commission.
Selection of Chairperson and other Members (Section 9)
The Chairperson and other Members shall be selected in the manner as may be
prescribed.
Term of office of Chairperson and other Members (Section 10)
The Chairperson and every other Member shall hold office for a term of five years from
the date on which he enters upon his office and shall be eligible for re-appointment.
However, no Chairperson or other Member shall hold office as such after he has
attained,—
(a) in the case of the Chairperson, the age of sixty-seven years;
(b) in the case of any other Member, the age of sixty-five years.
As per sub-section 2, any vacancy caused by the resignation or removal of the
Chairperson or any other Member under section 11 or by death or otherwise shall be filled
by fresh appointment in accordance with the provisions of sections 8 and 9.
The Chairperson and every other Member shall, before entering upon his office, make and
subscribe to an oath of office and of secrecy in such form, manner and before such
authority, as may be prescribed (sub-section 3).
In the event of the occurrence of a vacancy in the office of the Chairperson by reason of
his death, resignation or otherwise, the senior-most Member shall act as the Chairperson,
until the date on which a new Chairperson, appointed in accordance with the provisions of
this Act to fill such vacancy, enters upon his office (Sub-section 4).
When the Chairperson is unable to discharge his functions owing to absence, illness or
any other cause, the senior-most Member shall discharge the functions of the Chairperson
until the date on which the Chairperson resumes the charge of his functions (Sub-section
5).
Resignation, removal and suspension of Chairperson and other members (Section
11)
The Chairperson or any other Member may, by notice in writing under his hand addressed
to the Central Government, resign his office. However, the Chairperson or a Member
shall, unless he is permitted by the Central Government to relinquish his office sooner,
continue to hold office until the expiry of three months from the date of receipt of such
notice or until a person duly appointed as his successor enters upon his office or until the
expiry of his term of office, whichever is the earliest (Sub-section 1).
As per Sub-section 2, the Central Government may, by order, remove the Chairperson or
any other Member from his office if such Chairperson or Member, as the case may be,—
(a) is, or at any time has been, adjudged as an insolvent; or
(b) has engaged at any time, during his term of office, in any paid employment, or
(c) has been convicted of an offence which, in the opinion of the Central Government,
involves moral turpitude; or
(d) has acquired such financial or other interest as is likely to affect prejudicially his
functions as a Member; or
(e) has so abused his position as to render his continuance in office prejudicial to the
public interest; or
(f) has become physically or mentally incapable of acting as a Member.
According to Sub-section 3, no Member shall be removed from his office on the ground
specified in clause (d) or clause (e) of sub-section 2, unless the Supreme Court, on a
reference being made to it in this behalf by the Central Government, has, on an inquiry,
held by it in accordance with such procedure as may be prescribed in this behalf by the
Supreme Court, reported that the Member, ought on such ground or grounds to be
removed.
Restriction on employment of Chairperson and other Members in certain cases
(Section 12)
The Chairperson and other Members shall not, for a period of one year from the date on
which they cease to hold office, accept any employment in, or connected with the
management or administration of, any enterprise which has been a party to a proceeding
before the Commission.
However, nothing contained in this section shall apply to any employment under the
Central Government or a State Government or local authority or in any statutory authority
or any corporation established by or under any Central, State or Provincial Act or a
Government company as defined in section 617 of the Companies Act, 1956.
Financial and administrative powers of Member Administration (Section 13)
The Central Government shall designate any Member as Member Administration who shall
exercise such financial and administrative powers as may be vested in him under the
rules made by the Central Government. The Member Administration shall have authority
to delegate such of his financial and administrative powers as he may think fit to any other
officer of the Commission subject to the condition that such officer shall, while exercising
such delegated powers continue to act under the direction, superintendence and control of
the Member Administration.
Salary and allowances and other terms and conditions of service of Chairperson
and other Members (Section 14)
The salary, and the other terms and conditions of service, of the Chairperson and other
Members, including travelling expenses, house rent allowance and conveyance facilities,
sumptuary allowance and medical facilities shall be such as may be prescribed and the
same shall not be varied to their disadvantage after their appointment.
Vacancy, etc. not to invalidate proceedings of Commission (Section 15)
Any act or proceeding of the Commission shall not be invalidated merely on the ground
of:-
(a) any vacancy in, or any defect in the constitution of, the Commission; or
(b) any defect in the appointment of a person acting as a Chairperson or as a Member;

or
(c) any irregularity in the procedure of the Commission not affecting the merits of the
case.
Appointment of Director General, etc. (Section 16)
The Central Government is empowered to appoint a Director General, Additional, Joint,
Deputy or Assistant Directors General or such other advisers, consultants or officers, as it
may think fit, for the purposes of assisting the Commission in conducting inquiry into
contravention of any of the provisions of this Act and for the conduct of cases before the
Commission and for performing such other functions as are, or may be, provided by or
under this Act (Sub-section 1). Every Additional, Joint, Deputy and Assistant Directors
General or such other advisers, consultants and officers, shall exercise his powers, and
discharge his functions, subject to the general control, supervision and direction of the
Director General (Sub-section 2).
The salary, allowances and other terms and conditions of service of the Director General
etc. shall be such as may be prescribed by the Central Government (Sub-section 3). The
Director General and Additional, Joint, Deputy and Assistant Directors General or such
other advisers, consultants or officers shall be appointed from amongst persons of
integrity and outstanding ability and who have experience in investigation, and knowledge
of accountancy, management, business, public administration, international trade, law or
economics and such other qualifications as may be prescribed (Sub-section 4).
Registrar and officers and other employees of Commission (Section 17)
The Commission may appoint a Registrar and other officers and employees, as it
considers necessary for the efficient performance of its functions under this legislation.
The salary and allowances payable to such officers and employees and other terms and
conditions of their service shall be determined by rules made by the Central Government.
CHAPTER IV
DUTIES, POWERS AND FUNCTIONS OF COMMISSION
Duties of Commission (Section 18)
This section provides that it shall be the duty of the Commission to eliminate practices
having adverse effect on competition, to promote and sustain competition in markets in
India, to protect the interests of consumers a nd to ensure freedom of trade carried on by
other participants in markets in India. The Commission may for the purpose of
discharging its duties or performing its functions under this Act, enter into any
memorandum or arrangement, with the prior approval of the Central Government, with any
agency of any foreign country.
Inquiry into certain agreements and dominant position of enterprise (Section 19)
The Commission is empowered into any alleged contravention of the provisions contained
in section 3(1) or section 4(1) either on its own motion or on:—
(a) receipt of a complaint, accompanied by such fee as may be determined by
regulations, from any person, consumer or their association or trade association; or
(b) a reference made to it by the Central Government or a State Government or a
statutory authority.
Powers and Functions of the Commission
1. Appreciable Adverse effect: The Commission shall, while determining whether an
agreement has on competition under section 3, have due regard to all or any of the
following factors, namely:—
(a) creation of barriers to new entrants in the market;
(b) driving existing competitors out of the market;
(c) foreclosure of competition by hindering entry into the market;
(d) accrual of benefits to consumers;
(e) improvements in production or distribution of goods or provision of services;
(f) promotion of technical, scientific and economic development by means of
production or distribution of goods or provision of services.
2. Dominant position of enterprise: The Commission shall, while inquiring whether an
enterprise enjoys a dominant position or not under section 4, have due regard to all
or any of the following factors, namely:—
(a) market share of the enterprise;
(b) size and resources of the enterprise;
(c) size and importance of the competitors;
(d) economic power of the enterprise including commercial advantages over
competitors;
(e) vertical integration of the enterprises or sale or service network of such
enterprises;
(f) dependence of consumers on the enterprise;
(g) monopoly or dominant position whether acquired as a result of any statute or by
virtue of being a Government company or a public sector undertaking or
otherwise;
(h) entry barriers including barriers such as regulatory barriers, financial risk, high
capital cost of entry, marketing entry barriers, technical entry barriers,
economies of scale, high cost of substitutable goods or service for consumers;
(i) countervailing buying power;
(j) market structure and size of market;
(k) social obligations and social costs;
(/) relative advantage, by way of the contribution to the economic development, by
the enterprise enjoying a dominant position having or likely to have an
appreciable adverse effect on competition;
(m) any other factor which the Commission may consider relevant for the inquiry.
(3) Relevant Market: For determining whether a market constitutes a "relevant market"
for the purposes of this Act, the Commission shall have due regard to the "relevant
geographic market'' and "relevant product market".
(4) Relevant Geographic Market: The Commission shall, while determining the
"relevant geographic market", have due regard to all or any of the following factors,
namely:—
(a) regulatory trade barriers;
(b) local specification requirements;
(c) national procurement policies;
(d) adequate distribution facilities;
(e) transport costs;
(f) language;
(g) consumer preferences;
(h) need for secure or regular supplies or rapid after-sales services.
(5) Relevant Product Market: While determining the "relevant product market", the
Commission shall have due regard to all or any of the following factors, namely:—
(a) physical characteristics or end-use of goods;
(b) price of goods or service;
(c) consumer preferences;
(d) exclusion of in-house production;
(e) existence of specialised producers;
(f) classification of industrial products.

Inquiry into combination by Commission (Section 20)
The Commission may, upon its own knowledge or information relating to acquisition
referred to in section 5(a) or acquiring of control referred to in section 5(b) or merger or
amalgamation referred to in clause (c) of that section, inquire into whether such a
combination has caused or is likely to cause an appreciable adverse effect on competition
in India.
Further, the Commission shall not initiate any inquiry after the expiry of one year from the
date on which such combination has taken effect.
The Commission shall, on receipt of a notice under section 6(2) or upon receipt of a
reference under section 21(2), inquire whether a combination referred to in that notice or
reference has caused or is likely to cause an appreciable adverse effect on competition in
India.
Notwithstanding anything contained in section 5, the Central Government shall, on the
expiry of a period of two years from the date of commencement of this Act and thereafter
every two years, in consultation with the Commission, by notification, enhance or reduce,
on the basis of the wholesale price index or fluctuations in exchange rate of rupee or
foreign currencies, the value of assets or the value of turnover, for the purposes of that
section.
For the purposes of determining whether a combination would have the effect of or is
likely to have an appreciable adverse effect on competition in the relevant market, the
Commission shall have due regard to all or any of the following factors, namely:—
(a) actual and potential level of competition through imports in the market;
(b) extent of barriers to entry into the market;
(c) level of combination in the market;
(d) degree of countervailing power in the market;
(e) likelihood that the combination would result in the parties to the combination being
able to significantly and sustainable increase prices or profit margins;
(f) extent of effective competition likely to sustain in a market;
(g) extent to which substitutes are available or arc likely to be available in the market;
(h) market share, in the relevant market, of the persons or enterprise in a combination,
individually and as a combination;
(i) likelihood that the combination would result in the removal of a vigorous and effective
competitor or competitors in the market;
(j) nature and extent of vertical integration in the market;

(k) possibility of a failing business;
(l) nature and extent of innovation;
(m) relative advantage, by way of the contribution to the economic development, by any
combination having or likely to have appreciable adverse effect on competition;
(n) whether the benefits of the combination outweigh the adverse impact of the
combination, if any.
Reference by statutory authority (Section 21)
It provides that in the course of a proceeding before any statutory authority an issue is
raised by any party that any decision which such statutory authority has taken or proposes
to take is or would be, contrary to any of the provisions of this Act, then such statutory
authority may make a reference in respect of such issue to the Commission. Further, the
Commission shall, after hearing the parties to the proceedings, give its opinion to such
statutory authority which shall thereafter pass such order on the issues referred to in that
sub-section as it deems fit. However, the Commission shall give its opinion under this
section within sixty days of receipt of such reference.
Benches of Commission (Section 22)
This section contains provisions relating to constitution of Benches of the Commission
and exercise of the jurisdiction, powers and authority of the Commission by such
Benches. Sub-sections (2) and (3) stipulate that each Bench shall consist of two
Members of which at least one Member shall be Judicial Member. A Judicial Member
shall be a Member who is or has been or is qualified to be a Judge of a High Court. Sub-
section (4) provides that the Bench over which the Chairperson presides shall be the
Principal Bench and the other Benches shall be known as Additional Benches. Sub-
section (5) empowers the Chairperson to constitute one or more Benches to be called
Mergers Benches, which will exclusively deal with matters referred to in sections 5 and 6
of the Act. Sub-section (6) empowers the Central Government to specify, by notification,
the places at which the Principal Bench and other Benches shall sit.
Distribution of business of Commission amongst Benches (Section 23)
Where any Benches are constituted, the Chairperson may, from time to time, by order,
make provisions as to the distribution of the business of the Commission amongst the
Benches and specify the matters, which may be dealt with by each Bench.
If any question arises as to whether any matter falls within the purview of the business
allocated to a Bench, the decision of the Chairperson thereon shall be final.
The Chairperson may—
(i) transfer a Member from one Bench to another Bench; or

(ii) authorise the Members of one Bench to discharge also the functions of the Members
of other Bench:
Provided that the Chairperson shall transfer, with the prior approval of the Central
Government, a Member from one Bench situated in one city to another Bench situated in
another city.
The Chairperson may, for the purpose of securing that any case or matter which, having
regard to the nature of the questions involved, requires or is required in his opinion or
under the rules made by the Central Government in this behalf, to be decided by a Bench
composed of more than two Members, issue such general or special orders as he may
deem fit.
Procedure for deciding a case where Members of a Bench differ in opinion (Section
24)
It provides that if the Members of a Bench differ in opinion on any point, they shall state
the point or points on which they differ, and make a reference to the Chairperson who
shall either hear the point or points himself or refer the case for hearing on such point or
points by one or more of the other Members and such point or points shall be decided
according to the opinion of the majority of the Members who have heard the case,
including those who first heard it.
Jurisdiction of Bench (Section 25)
An inquiry shall be initiated or a complaint be instituted or a reference be made under this
Act before a Bench within the local limits of whose jurisdiction—
(a) the respondent, or each of the respondents, where there are more than one, at the
time of the initiation of inquiry or institution of the complaint or making of reference,
as the case may be, actually and voluntarily resides, or carries on business, or
personally works for gain; or
(b) any of the respondents, where there are more than one, at the time of the initiation of
the inquiry or institution of complaint or making of reference, as the case may be,
actually and voluntarily resides or carries on business or personally works for gain
provided that in such case either the leave of the Bench is given, or the respondents
who do not reside, or carry on business, or personally work for gain, as aforesaid,
acquiesce in such institution; or
(c) the cause of action, wholly or in part, arises.
A respondent, being a person referred to in sub-clause (iii) or sub-clause (vi) or sub-
clause (vii) or sub-clause (viii) of clause (l) of section 2, shall be deemed to carry on
business at its sole or principal place of business in India or at its registered office in India
or where it has also a subordinate office at such place.

Procedure for inquiry on complaints under Section 19 (Section 26)
This section lays down the detailed procedure for any inquiry initiated suo motu by the
Commission and various complaints and references referred to in section 19 of the Act.
The detailed procedure is as follows:
On receipt of a complaint or a reference from the Central Government or a State
Government or a statutory authority or on its own knowledge or information, under section
19, if the Commission is of the opinion that there exists a prima facie case, it shall direct
the Director General to cause an investigation to be made into the matter (Sub-section 1).
The Director General shall, on receipt of direction under sub-section (1), submit a report
on his findings within such period as may be specified by the Commission (Sub-section 2).
Where on receipt of a complaint under clause (a) of sub-section (1) of section 19, the
Commission is of the opinion that there exists no prima facie case, it shall dismiss the
complaint and may pass such orders as it deems fit, including imposition of costs, if
necessary (Sub-section 3).
The Commission shall forward a copy of the report referred to in sub-section (2) to the
parties concerned or to the Central Government or the State Government or the statutory
authority, as the case may be (Sub-section 4).
If the report of the Director General relates on a complaint and such report recommends
that there is no contravention of any of the provisions of this Act, the complainant shall be
given an opportunity to rebut the findings of the Director General (Sub-section 5).
If, after hearing the complainant, the Commission agrees with the recommendation of the
Director General, it shall dismiss the complaint (Sub-section 6).
If, after hearing the complainant, the Commission is of the opinion that further inquiry is
called for, it shall direct the complainant to proceed with the complaint (Sub-section 7).
If the report of the Director General relates on a reference made under sub-section (1)
and such report recommends that there is no contravention of the pro visions of this Act,
the Commission shall invite comments of the Central Government or the State
Government or the statutory authority, as the case may be, on such report and on receipt
of such comments, the Commission shall return the reference if there is no prima facie
case or proceed with the reference as a complaint if there is a prima facie case (Sub-
section 8).
If the report of the Director General referred to in sub-section (2) recommends that there
is contravention of any of the provisions of this Act, and the Commission is of the opinion
that further inquiry is called for, it shall inquire into such contravention in accordance with
the provisions of this Act (Sub-section 9).
Orders by Commission after inquiry into agreements or abuse of dominant position

(Section 27)
Where after inquiry the Commission finds that any agreement referred to in section 3 or
action of an enterprise in a dominant position, is in contravention of section 3 or section 4,
as the case may be, it may pass all or any of the following orders, namely:—
(a) direct any enterprise or association of enterprises or person or association of
persons, as the case may be, involved in such agreement, or abuse of dominant
position, to discontinue and not to re-enter such agreement or discontinue such
abuse of dominant position, as the case may be;
(b) impose such penalty, as it may deem fit which shall be not more than ten per cent. of
the average of the turnover for the last three preceding financial years, upon each of
such person or enterprises which are parties to such agreements or abuse:
Provided that in case any agreement referred to in section 3 has been entered into
by any cartel, the Commission shall impose upon each producer, seller, distributor,
trader or service provider included in that cartel, a penalty equivalent to three times
of the amount of profits made out of such agreement by the cartel or ten per cent of
the average of the turnover of the cartel for the last preceding three financial years,
whichever is higher;
(c) award compensation to parties in accordance with the provisions contained in section
34;
(d) direct that the agreements shall stand modified to the extent and in the manner as
may be specified in the order by the Commission;
(e) direct the enterprises concerned to abide by such other orders as the Commission
may pass and comply with the directions, including payment of costs, if any:
(f) recommend to the Central Government for the division of an enterprise enjoying
dominant position;
(g) pass such oilier order as it may deem fit.
Division of enterprise enjoying dominant position (Section 28)
The Central Government, on recommendation under of section 27(f), may, notwithstanding
anything contained in any other law for the time being in force, by order in writing, direct
division of an enterprise enjoying dominant position to ensure that such enterprise does
not abuse its dominant position.
The order may provide for all or any of the following matters, namely:—
(a) the transfer or vesting of property, rights, liabilities or obligations;
(b) the adjustment of contracts either by discharge or reduction of any liability or

obligation or otherwise;
(c) the creation, allotment, surrender or cancellation of any shares, stocks or securities;
(d) the payment of compensation to any person who suffered any loss due to dominant
position of such enterprise;
(e) the formation or winding up of an enterprise or the amendment of the memorandum
of association or articles of association or any other instruments regulating the
business of any enterprise;
(f) the extent to which, and the circumstances in which, provisions of the order affecting
an enterprise may be altered by the enterprise and the registration thereof;
(g) any other matter which may be necessary to give effect to the division of the
enterprise.
Notwithstanding anything contained in any other law for the time being in force or in any
contract or in any memorandum or articles of association, an officer of a company who
ceases to hold office as such in consequence of the division of an enterprise shall not be
entitled to claim any compensation for such cesser.
Procedure for investigation of combination (Section 29)
(1) Notice to parties: Where the Commission is of the opinion that a combination is
likely to cause, or has caused an appreciable adverse effect on competition within
the relevant market in India, it shall issue a notice to show cause to the parties to
combination calling upon them to respond within thirty days of the receipt of the
notice, as to why investigation in respect of such combination should not be
conducted. (Sub-section 1).
(2) Directions to parties to publish details: The Commission, if it is prima facie of the
opinion that the combination has, or is likely to have, an appreciable adverse effect
on competition, it shall, within seven working days from the date of receipt of the
response of the parties to the combination, direct the parties to the said combination
to publish details of the combination within ten working days of such direction, in
such manner, as it thinks appropriate, for bringing the combination to the knowledge
or information of the public and persons affected or likely to be affected by such
combination (Sub-section 2).
(3) Invitation to affected party: The Commission may invite any person or member of
the public, affected or likely to be affected by the said combination, to file his written
objections, if any, before the Commission within fifteen working days from the date
on which the details of the combination were published.
(4) Additional information: The Commission may, within fifteen working days from the
expiry of the period specified before, call for such additional or other information as it
may deem fit from the parties to the said combination. The additional or other
information called for by the Commission shall be furnished by the parties to the
combination within fifteen days from the expiry of the above specified period. After
receipt of all information and within a period of forty-five working days from the expiry
of the period for additional information, the Commission shall proceed to deal with
the case of accordance within the provisions contained in Section 31.
Inquiry into disclosures under section 6 (Section 30)
Where any person or enterprise has given a notice under 6(2), the Commission shall
inquire—
(a) whether the disclosure made in the notice is correct;
(b) whether the combination has, or is likely to have, an appreciable adverse effect on
competition.
Orders of Commission on certain combinations (Section 31)
The Commission can issue orders on certain combinations.
(1) Approval of combination (Sub-section 1): Where the Commission is of the opinion
that any combination does not, or is not likely to, have an appreciable adverse effect
on competition, it shall, by order, approve that combination including the combination
in respect of which a notice has been given of section 6(2) (Sub-section 1).
(2) Direction: Where the Commission is of the opinion that the combination has, or is
likely to have, an appreciable adverse effect on competition, it shall direct that the
combination shall not take effect (Sub-section 2).
(3) Modification: Where the Commission is of the opinion that the combination has, or is
likely to have, an appreciable adverse effect on competition but such adverse effect
can be eliminated by suitable modification to such combination, it may propose
appropriate modification to the combination, to the parties to such combination (Sub-
section 3). The parties, who accept the modification proposed by the Commission
under sub-section (3), shall carry out such modification within the period specified by
the Commission (Sub-section 4).
If the parties to the combination, who have accepted the modification, fail to carry out
the modification within the period specified by the Commission, such combination
shall be deemed to have an appreciable adverse effect on competition and the
Commission shall deal with such combination in accordance with the provisions of
this Act (Sub-section 5).
(4) Amendment to modification

If the parties to the combination do not accept the modification proposed by the
Commission under sub-section (3), such parties may, within thirty working days of
the modification proposed by the Commission, submit amendment to the modification
proposed by the Commission under that sub-section (6). If the Commission agrees
with the amendment submitted by the parties under sub-section (6), it shall, by order,
approve the combination (Sub-section 7). If the Commission does not accept the
amendment submitted under sub-section (6), then, the parties shall be allowed a
further period of thirty working days within which such parties shall accept the
modification proposed by the Commission under Sub-section (3) (Sub-section 8).
(5) Consequence of non-acceptance of the modification
If the parties fail to accept the modification proposed by the Commission within thirty
working days as referred above or within a further period of thirty working days
referred to in sub-section (8) the combination shall be deemed to have an
appreciable adverse effect on competition and be dealt with in accordance with the
provisions of this Act (Sub-section 9).
As per Sub-section 10 where the Commission has directed under sub-section (2) that
the combination shall not take effect or the combination is deemed to have an
appreciable adverse effect on competition under sub-section (9), then, without
prejudice to any penalty which may be imposed or any prosecution which may be
initiated under this Act, the Commission may order that—
(a) the acquisition referred to in clause (a) of section 5; or
(b) the acquiring of control referred to in clause (b) of section 5; or
(c) the merger or amalgamation referred to in clause (c) of section 5,
shall not be given effect to the Commission may, if it considers appropriate, frame a
scheme to implement its order.
(6) Deemed approval by Commission
If the Commission does not, on the expiry of a period of ninety working days from the
date of publication referred to in sub-section (2) section 29(2), pass an order or issue
direction in accordance with the provisions of sub-section (1) or (2) or (7), the
combination shall be deemed to have been approved by the Commission. For the
purpose of determining the period of ninety working days specified in this sub-
section, the period of thirty working days specified in sub-section (6) and a further
period of thirty working days specified in sub-section (8) shall be excluded. Where
any extension of time is sought by the parties to the combination, the period of ninety
working days shall be reckoned after deducting the extended time granted at the
request of the parties (Sub-section 12).

(7) Consequence of a combination declared void by Commission
Where the Commission has ordered a combination to be void, the acquisition or
acquiring of control or merger or amalgamation referred to in section 5, shall be dealt
with by the authorities under any other law for the time being in force as if such
acquisition or acquiring of control or merger or amalgamation had not taken place
and the parties to the combination shall be dealt with accordingly (Sub-section 13).
As in Sub-section 14, nothing contained in this Chapter shall affect any proceeding
initiated or which may be initiated under any other law for the time being in force.
Acts taking place outside India but having an effect on competition in India (Section
32)
The Commission shall, notwithstanding that,—
(a) an agreement referred to in section 3 has been entered into outside India; or
(b) any party to such agreement is outside India; or
(c) any enterprise abusing the dominant position is outside India; or
(d) a combination has taken place outside India; or
(e) any party to combination is outside India; or
(f) any other matter or practice or action arising out of such agreement or dominant
position or combination is outside India;
have power to inquire into such agreement or abuse of dominant position or combination if
such agreement or dominant position or combination has, or is likely to have, an
appreciable adverse effect on competition in the relevant market in India.
Power to grant interim relief (Section 33)
Where during an inquiry before the Commission, it is proved to the satisfaction of the
Commission, by affidavit or otherwise, that an act in contravention of sub-section (1) of
section 3 or sub-section (1) of section 4 or section 6 has been committed and continues to
be committed or that such act is about to be committed, the Commission may, by order,
grant a temporary injunction restraining any party from carrying on such act until the
conclusion of such inquiry or until further orders, without giving notice to the opposite
party, where it deems it necessary.
Where during the inquiry before the Commission it is proved to the satisfaction of the
Commission by affidavit or otherwise that import of any goods is likely to contravene sub-
section (1) of section 3 or subsection (1) of section 4 or section 6, it may, by order, grant
a temporary injunction restraining any party from importing such goods until the
conclusion of such inquiry or until further orders, without giving notice to the opposite
party, where it deems it necessary and a copy of such order granting temporary injunction
shall be sent to the concerned authorities.
Applicability of the provisions of Code of Civil Procedure: The provisions of rules 2A
to 5 (both inclusive) of Order XXXIX of the First Schedule to the Code of Civil Procedure,
1908 (5 of 1908) shall, as far as may be, apply to a temporary injunction issued by the
Commission under this Act, as they apply to a temporary injunction issued by a civil court,
and any reference in any such rule to a suit shall be construed as a reference to any
inquiry before the Commission.
Power to award compensation (Section 34)
(1) Application: Without prejudice to any other provisions contained in this Act, any
person may make an application to the Commission for an order for the recovery of
compensation from any enterprise for any loss or damage shown to have been
suffered, by such person as a result of any contravention of the provisions of Chapter
II, having been committed by such enterprise (Sub-section 1).
(2) Compensation: The Commission may, after an inquiry made into the allegations
mentioned in the application made under sub-section (1), pass an order directing the
enterprise to make payment to the applicant, of the amount determined by it as
realisable from the enterprise as compensation for the loss or damage caused to the
applicant as a result of any contravention of the provisions of Chapter II having been
committed by such enterprise (Sub-section 2).
(3) Application in representative capacity: Where any loss or damage referred to in
sub-section (1) is caused to numerous persons having the same interest, one or
more of such persons may, with the permission of the Commission, make an
application under that sub-section for and on behalf of, or for the benefit of, the
persons so interested, and thereupon, the provisions of rule 8 of Order 1 of the First
Schedule to the Code of Civil Procedure,1908 (5 of 1908), shall apply subject to the
modification that every reference therein to a suit or decree shall be construed as a
reference to the application before the Commission and the order of the Commission
thereon (Sub-section 3).
Appearance before Commission (Section 35)
A complainant or defendant or the Director General may either appear in person or
authorise one or more chartered accountants or company secretaries or cost accountants
or legal practitioners or any of his or its officers to present his or its case before the
Commission.
For the purposes of this section,—
(a) "chartered accountant" means a chartered accountant as defined in clause (b) of
sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949) and
who has obtained a certificate of practice under sub-section (1) of section 6 of that
Act;
(b) "company secretary" means a company secretary as defined in clause (c) of sub-
section (1) of section 2 of the Company Secretaries Act, 1980 (56 of 1980) and who
has obtained a certificate of practice under sub-section (1) of section 6 of that Act;
(c) "cost accountant" means a cost accountant as defined in clause (b) of sub-section
(1) of section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959) and who
has obtained a certificate of practice under sub-section (1) of section 6 of that Act;
(d) "legal practitioner" means an advocate, vakil or an attorney of any High Court, and
includes a pleader in practice.
Power of Commission to regulate its own procedure (Section 36)
The Commission shall not be bound by the procedure laid down by the Code of Civil
Procedure, 1908 (5 of 1908), but shall be guided by the principles of natural justice and,
subject to the other provisions of this Act and of any rules made by the Central
Government, the Commission shall have powers to regulate its own procedure including
the places at which they shall have their sittings, duration of oral hearings when granted,
and times of its inquiry.
The Commission shall have, for the purposes of discharging its functions under this Act,
the same powers as are vested in a civil court under the Code of Civil Procedure, 1908(5
of 1908), while trying a suit, in respect of the following matters, namely:—
(a) summoning and enforcing the attendance of any person and examining him on oath;
(b) requiring the discovery and production of documents;
(d) issuing commissions for the examination of witnesses or documents;
(e) subject to the provisions of sections 123 and 124 of the Indian Evidence Act, 1872 (1
of 1872), requisitioning any public record or document or copy of such record or
document from any office;
(f) dismissing an application in default or deciding it ex parte;
(g) any other matter which may be prescribed.
Every proceeding before the Commission shall be deemed to be a judicial proceeding
within the meaning of sections 193 and 228 and for the purposes of section 196 of the
Indian Penal Code (45 of 1860) and the Commission shall be deemed to be a civil court
for the purposes of section 195 and Chapter XXVI of the Code of Criminal Procedure,
1973 (2 of 1974).
The Commission may call upon such experts, from the fields of economics, commerce,
accountancy, international trade or from any other discipline as it deems necessary, to
assist the Commission in the conduct of any inquiry or proceeding before it.
The Commission may direct any person—
(a) to produce before the Director General or the Registrar or an officer authorised by it,
such, books, accounts or other documents in the custody or under the control of such
person so directed as may be specified or described in the direction, being
documents relating to any trade, the examination of which may be required for the
purposes of this Act;
(b) to furnish to the Director General or the Registrar or any officer authorised by it, as
respects the trade or such other information as may be in his possession in relation
to the trade carried on by such person, as may be required for the purposes of this
Act.
If the Commission is of the opinion that any agreement referred to in section 3 or "abuse
of dominant position referred to in section 4 or the combination referred to in section 5
has caused or is likely to cause an appreciable adverse effect on competition in the
relevant market in India and it is necessary to protect, without further delay, the interests
of consumers and other market participants in India, it may conduct an inquiry or
adjudicate upon any matter under this Act after giving a reasonable oral hearing to the
parties concerned.
Review of orders of Commission (Section 37)
Any person aggrieved by an order of the Commission from which an appeal is allowed by
this Act but no appeal has been preferred, may, within thirty days from the date of the
order, apply to the Commission for review of its order and the Commission may make
such order thereon as it thinks fit: However, the Commission may entertain a review
application after the expiry of the said period of thirty days, if it is satisfied that the
applicant was prevented by sufficient cause from preferring the application in time.
Further, no order shall be modified or set aside without giving an opportunity of being
heard to the person in whose favour the order is given and the Director General where he
was a party to the proceedings.
Rectification of orders (Section 38)
With a view to rectifying any mistake apparent from the record, the Commission may
amend any order passed by it under the provisions of this Act.
Subject to the other provisions of this Act, the Commission may make—
(a) an amendment under sub-section (1) of its own motion;
(b) an amendment for rectifying any such mistake which has been brought to its notice
by any party to the order.
However, the Commission shall not, while rectifying any mistake apparent from record,
amend substantive part of its order passed under the provisions of this Act.
Execution of orders of Commission (Section 39)
Every order passed by the Commission under this Act shall be enforced by the
Commission in the same manner as if it were a decree or order made by a High Court or
the principal civil court in a suit pending therein and it shall be lawful for the Commission
to send, in the event of its inability to execute it, such order to the High Court or the
principal civil court, as the case may be, within the local limits of whose jurisdiction,—
(a) in the case of an order against a person referred to in sub-clause (iii) or sub-clause
(vi) or sub-clause (vii) of clause (l) of section 2, the registered office or the sole or
principal place of business of the person in India or where the person has also a
subordinate office, that subordinate office, is situated;
(c) in the case of an order against any other person, the place, where the person
concerned voluntarily resides or carries on business or personally works for gain, is
situated;
and thereupon the court to which the order is so sent shall execute the order as if it were
a decree or order sent to it for execution.
Appeal (Section 40)
Any person aggrieved by any decision or order of the Commission may file an appeal to
the Supreme Court within sixty days from the date of communication of the decision or
order of the Commission to him on one or more of the grounds specified in section 100 of
the Code of Civil Procedure, 1908 (5 of 1908). However, the Supreme Court may, if it is
satisfied that the appellant was prevented by sufficient cause from filing the appeal within
the said period, allow it to be filed within a further period not exceeding sixty days.
Further, no appeal shall lie against any decision or order of the Commission made with
the consent of the parties.
CHAPTER V
DUTIES OF DIRECTOR GENERAL
Director General to investigate contravention (Section 41)
The Director General shall, when so directed by the Commission, assist the Commission
in investigating into any contravention of the provisions of this Act or any rules or
regulations made thereunder. The Director General shall have all the powers as are
conferred upon the Commission under section 36(2). Without prejudice to the provisions
of sections 240(2) and 240A of the Companies Act, 1956 (1 of 1956), so far as may be,
shall apply to an investigation made by the Director General or any other person
investigating under his authority, as they apply to an inspector appointed under that Act.
CHAPTER VI
PENALTIES
Contravention of orders of Commission (Section 42)
Without prejudice to the provisions of this Act, if any person contravenes, without any
reasonable ground, any order of the Commission, or any condition or restriction subject to
which any approval, sanction, direction or exemption in relation to any matter has been
accorded, given, made or granted under this Act or fails to pay the penalty imposed under
this Act, he shall be liable to be detained in civil prison for a term which may extend to
one year, unless in the meantime the Commission directs his release and he shall also be
liable to a penalty not exceeding rupees ten lakhs.
The Commission may, while making an order under this Act, issue such directions to any
person or authority, not inconsistent with this Act, as it thinks necessary or desirable, for
the proper implementation or execution of the order, and any person who commits breach
of. or fails to comply with, any obligation imposed on him under such direction, may be
ordered by the Commission to be detained in civil prison for a term not exceeding one
year unless in the meantime the Commission directs his release and he shall also be
liable to a penalty not exceeding rupees ten lakhs.
Penalty for failure to comply with directions of Commission and Director General
(Section 43)
If any person fails to comply with a direction given by—
(a) the Commission under of section 36(5); or
(b) the Director General while exercising powers referred to in sub-section (2) of section
41(2);
the Commission shall impose on such person a penalty of rupees one lakh for each
day during which such failure continues.
Penalty for making false statement or omission to furnish material information (Section 44)
If any person, being a party to a combination,—
(a) makes a statement which is false in any material particular, or knowing it to be false;
or
(b) omits to state any material particular knowing it to be material,
such person shall be liable to a penalty which shall not be less than rupees fifty lakhs but
which may extend to rupees one crore, as may be determined by the Commission.
Penalty for offences in relation to furnishing of information (Section 45)
Without prejudice to the provisions of section 44, if any person, who furnishes or is
required to furnish under this Act any particulars, documents or any information,—
(a) makes any statement or furnishes any document which he knows or has reason to
believe to be false in any material particular; or
(b) omits to state any material fact knowing it to be material; or
(c) wilfully alters, suppresses or destroys any document which is required to be
furnished as aforesaid,
the Commission shall impose on such person a penalty which may extend to rupees ten
lakhs.
the Commission may also pass such other order as it deems fit.
Power to impose lesser penalty (Section 46)
The Commission may, if it is satisfied that any producer, seller, distributor, trader or
service provider included in any cartel, which is alleged to have violated section 3, has
made a full and true disclosure in respect of the alleged violations and such disclosure is
vital, impose upon such producer, seller, distributor, trader or service provider a lesser
penalty as it may deem fit, than leviable under this Act or the rules or the regulations.
However, lesser penalty shall not be imposed by the Commission in cases where
proceedings for the violation of any of the provisions of this Act or the rules or the
regulations have been instituted or any investigation has been directed to be made under
section 26 before making of such disclosure.
Further, lesser penalty shall be imposed by the Commission only in respect of a producer,
seller, distributor, trader or service provider included in the cartel, who first made the full,
true and vital disclosures under this section.
Provided also that the Commission may, if it is satisfied that such producer, seller,
distributor, trader or service provider included in the cartel had in the course of
proceedings,—
(a) not complied with the condition on which the lesser penalty was imposed by the
Commission; or
(b) had given false evidence; or
(c) the disclosure made is not vital;
and thereupon such producer, seller, distributor, trader or service provider may be tried
for the offence with respect to which the lesser penalty was imposed and shall also be
liable to the imposition of penalty to which such person has been liable, had lesser
penalty not been imposed.
Crediting sums realised by way of penalties to Consolidated Fund of India (Section
47)
All sums realised by way of penalties under this Act shall be credited to the Consolidated
Fund of India.
Contravention by companies (Section 48)
Where a person committing contravention of any of the provisions of this Act or of any
rule, regulation, order made or direction issued thereunder is a company, every person
who, at the time the contravention was committed, was in charge of, and was responsible
to the company for the conduct of the business of the company, as well as the company,
shall be deemed to be guilty of the contravention and shall be liable to be proceeded
against and punished accordingly:
Provided that nothing contained in this sub-section shall render any such person liable to
any punishment if he proves that the contravention was committed without his knowledge
or that he had exercised all due diligence to prevent the commission of such
contravention.
Where a contravention of any of the provisions of this Act or of any rule, regulation, order
made or direction issued thereunder has been committed by a company and it is proved
that the contravention has taken place with the consent or connivance of, or is attributable
to any neglect on the part of, any director, manager, secretary or other officer of the
company, such director, manager, secretary or other officer shall also be deemed to be
guilty of that contravention and shall be liable to be proceeded against and punished
accordingly.
For the purposes of this section,—
(a) "company" means a body corporate and includes a firm or other association of
individuals: and
(b) "director", in relation to a firm, means a partner in the firm.
CHAPTER VII
COMPETITION ADVOCACY
Competition advocacy (Section 49)
In formulating a policy on competition (including review of laws related to competition), the
Central Government may make a reference to the Commission for its opinion on possible
effect of such policy on competition and on receipt of such a reference, the Commission
shall, within sixty days of making such reference, give its opinion to the Central
Government, which may thereafter formulate the policy as it deems fit. Sub-section 1).
The opinion given by the Commission under sub-section (1) shall not be binding upon the
Central Government in formulating such policy. The Commission shall take suitable
measures, as may be prescribed, for the promotion of competition advocacy, creating
awareness and imparting training about competition issues.
CHAPTER VIII
FINANCE, ACCOUNTS AND AUDIT
Grants by Central Government (Section 50)
The Central Government may, after due appropriation made by Parliament by law in this
behalf, make to the Commission grants of such sums of money as the Government may
think fit for being utilised for the purposes of this Act.
Constitution of Fund (Section 51)
There shall be constituted a fund to be called the "Competition Fund" and there shall be
credited thereto—
(a) all Government grants received by the Commission;
(b) the monies received as costs from parties to proceedings before the Commission;
(d) the fees received under this Act;
(e) the interest accrued on the amounts referred to in clauses (a) to (c).
The Fund shall be applied for meeting:—
(a) the salaries and allowances payable to the Chairperson and other Members and the
administrative expenses including the salaries, allowances and pension payable to
the Director General, Additional, Joint, Deputy or Assistant Directors General, the
Registrar and" officers and other employees of the Commission;
(b) the other expenses of the Commission in connection with the discharge of its
functions and for the purposes of this Act.
The Fund shall be administered by a committee of such Members of the Commission as
may be determined by the Chairperson. The committee appointed under sub-section (3)
shall spend monies out of the Fund for carrying out the objects for which the Fund has
been constituted.
Accounts and Audit (Section 52)

The Commission shall maintain proper accounts and other relevant records and prepare
an annual statement of accounts in such form as may be prescribed by the Central
Government in consultation with the Comptroller and Auditor-General of India.
The accounts of the Commission shall be audited by the Comptroller and Auditor-General
of India at such intervals as may be specified by him and any expenditure incurred in
connection with such audit shall be payable by the Commission to the Comptroller and
Auditor-General of India.
However, the orders of the Commission, being matters appealable to the Supreme Court,
shall not be subject to audit under this section.
The Comptroller and Auditor-General of India and any other person appointed by him in
connection with the audit of the accounts of the Commission shall have the same rights,
privileges and authority in connection with such audit as the Comptroller and Auditor-
General of India generally has, in connection with the audit of the Government accounts
and, in particular, shall have the right to demand the production of books, accounts,
connected vouchers and other documents and papers and to inspect any of the offices of
the Commission.
The accounts of the Commission as certified by the Comptroller and Auditor-General of
India or any other person appointed by him in this behalf together with the audit report
thereon shall be forwarded annually to the Central Government and that Government shall
cause the same to be laid before each House of Parliament.
Furnishing of returns, etc., to Central Government (Section 53)
The Commission shall furnish to the Central Government at such time and in such form
and manner as may be prescribed or as the Central Government may direct, such returns
and statements and such particulars in regard to any proposed or existing measures for
the promotion of competition advocacy, creating awareness and imparting training about
competition issues, as the Central Government may, from time to time, require.
The Commission shall prepare once in every year, in such form and at such time as may
be prescribed, an annual report giving a true and full account of its activities during the
previous year and copies of the report shall be forwarded to the Central Government. A
copy of the report received shall be laid, as soon as may be after it is received, before
each House of Parliament.
CHAPTER IX
MISCELLANEOUS
Power to exempt (Section 54)
The Central Government may, by notification, exempt from the application of this Act, or
any provision thereof, and for such period as it may specify in such notification—
(a) any class of enterprises if such exemption is necessary in the interest of security of
the State or public interest;
(b) any practice or agreement arising out of and in accordance with any obligation
assumed by India under any treaty, agreement or convention with any other country
or countries;
(c) any enterprise which performs a sovereign function on behalf of the Central
Government or a State Government:
Provided that in case an enterprise is engaged in any activity including the activity
relatable to the sovereign functions of the Government, the Central Government may
grant exemption only in respect of activity relatable to the sovereign functions.
Power of Central Government to issue directions (Section 55)
Without prejudice to the foregoing provisions of this Act, the Commission shall, in exercise
of its powers or the performance of its functions under this Act, be bound by such
directions on questions of policy, other than those relating to technical and administrative
matters, as the Central Government may give in writing to it from time to time:
However, the Commission shall, as far as practicable, be given an opportunity to express
its views before any direction is given under this sub-section. The decision of the Central
Government whether a question is one of policy or not shall be final.
Power of Central Government to supersede Commission (Section 56)
As per sub-section 1, if at any time the Central Government is of the opinion—
(a) that on account of circumstances beyond the control of the Commission, it is unable
to discharge the functions or perform the duties imposed on it by or under the
provisions of this Act; or
(b) that the Commission has persistently made default in complying with any direction
given by the Central Government under this Act or in the discharge of the functions
or performance of the duties imposed on it by or under the provisions of this Act and
as a result of such default the financial position of the Commission or the
administration of the Commission has suffered; or
(c) that circumstances exist which render it necessary in the public interest so to do, the
Central Government may, by notification and for reasons to be specified therein,
supersede the Commission for such period, not exceeding six months, as may be
specified in the notification:
Provided that before issuing any such notification, the Central Government shall give a
reasonable opportunity to the Commission to make representations against the proposed
super session and shall consider representations, if any, of the Commission.
Sub-section 2 provides upon the publication of a notification under sub-section (1)
superseding the Commission,—
(a) the Chairperson and other Members shall as from the date of super session, vacate
their offices as such;
(b) all the powers, functions and duties which may, by or under the provisions of this Act,
be exercised or discharged by or on behalf of the Commission shall, until the
Commission is reconstituted under sub-section (3), be exercised and discharged by
the Central Government or such authority as the Central Government may specify in
tins behalf;
(c) all properties owned or controlled by the Commission shall, until the Commission is
reconstituted under sub-section (3), vest in the Central Government.
According to Sub-section 3, on or before the expiration of the period of super session
specified in the notification issued under subsection (1), the Central Government shall
reconstitute the Commission by a fresh appointment of its Chairperson and other
Members and in such case any person who had vacated his office under clause (a) of
sub-section (2) shall not be deemed to be disqualified for re-appointment.
Sub-section 4 provides the Central Government shall cause a notification issued under
sub-section (1) and a full report of any action taken under this section and the
circumstances leading to such action to be laid before each House of Parliament at the
earliest.
Restriction on disclosure of information (Section 57)
No information relating to any enterprise, being an information which has been obtained
by or on behalf of the Commission for the purposes of this Act, shall, without the previous
permission in writing of the enterprise, be disclosed otherwise than in compliance with or
for the purposes of this Act or any other law for the time being in force.
Members, Director General, Registrar, officers and other employees, etc. of
Commission to be public servants (Section 58)
The Chairperson and other Members and the Director General, Additional, Joint, Deputy
or Assistant Directors General and Registrar and officers and other employees of the
Commission shall be deemed, while acting or purporting to act in pursuance of any of the
provisions of this Act, to be public servants within the meaning of section 21 of the Indian
Penal Code (45 of 1860).
Protection of action taken in good faith (Section 59)
No suit, prosecution or other legal proceedings shall lie against the Central Government
or Commission or any officer of the Central Government or the Chairperson or any
Member or the Director-General, Additional, Joint, Deputy or Assistant Directors General
or Registrar or officers or other employees of the Commission for anything which is in
good faith done or intended to be done under this Act or the rules or regulations made
thereunder.
Act to have overriding effect (Section 60)
The provisions of this Act shall have effect notwithstanding anything inconsistent
therewith contained in any other law for the time being in force.
Exclusion of jurisdiction of civil courts (Section 61)
This section provides no civil court shall have jurisdiction to entertain any suit or
proceeding in respect of any matter which the Commission is empowered by or under this
Act to determine and no injunction shall be granted by any court or other authority in
respect of any action taken or to be taken in pursuance of any power conferred by or
under this Act.
Application of other laws not barred (Section 62)
This section seeks to provide that the provisions of this legislation shall be in addition to,
and not in derogation of, the provisions of any other law for the time being in force.
Power to make rules (Section 63)
The Central Government may, by notification, make rules to carry out the provisions of
this Act.
In particular, and without prejudice to the generality of the foregoing power, such rules
may provide for all or any of the following matters, namely:-—
(a) the manner in which the Chairperson and other Members shall be selected under
section 9;
(b) the form and manner in which and the authority before whom the oath of office and of
secrecy shall be made and subscribed to under sub-section (3) of section 10;
(c) the financial and administrative powers which may be vested in the Member
Administration under section 13;
(d) the salary and the other terms and conditions of service including travelling
expenses, house rent allowance and conveyance facilities, sumptuary allowance and
medical facilities to be provided to the Chairperson and other Members under sub-
section (1) of section 14;
(e) the salary, allowances and other terms and conditions of service of the Director
General, Additional, Joint, Deputy or Assistant Directors General or such other
advisers, consultants or officers under sub-section (3) of section 16;
(f) the qualifications for appointment of the Director General, Additional, Joint, Deputy or
Assistant Directors General or such other advisers, consultants or officers under sub-
(g) the salaries and allowances and other terms and conditions of service of the
Registrar and officers and other employees payable, and the number of such officers
and employees under sub-section (2) of section 17;
(h) for securing any case or matter which requires to be decided by a Bench composed
of more than two Members under sub-section (4) of section 23;
(i) any other matter in respect of which the Commission shall have power under clause
(g) of sub-section (2) of section 36;
(j) the promotion of competition advocacy, creating awareness and imparting training
about competition issues under sub-section (3) of section 49;
(k) the form in which the annual statement of accounts shall be prepared under sub-
(l) the time within which and the form and manner in which the Commission may furnish
returns, statements and such particulars as the Central Government may require
under sub-section (1) of section 53;
(m) the form in which and the time within which the annual report shall be prepared under
sub-section (2) of section 53;
(n) the manner in which the monies transferred to the Central Government shall be dealt
with by that Government under the fourth proviso to sub-section (2) of section 66;
(o) any other matter which is to be, or may be, prescribed, or in respect of which
provision is to be, or may be, made by rules.
Every notification issued under sub-section (3) of section 20 and section 54 and every rule
made under this Act by the Central Government shall be laid, as soon as may be after it is
made, before each House of Parliament, while it is in session, for a total period of thirty
days which may be comprised in one session, or in two or more successive sessions, and
if, before the expiry of the session immediately following the session or the successive
sessions aforesaid, both Houses agree in making any modification in the notification or
rule, or both Houses agree that the notification should not be issued or rule should not be
made, the notification or rule shall thereafter have effect only in such modified form or be
of no effect, as the case may be; so, however, that any such modification or annulment
shall be without prejudice to the validity of anything previously done under that notification
or rule, as the case may be.
Power to make regulations (Section 64)
The Commission may, by notification, make regulations consistent with tills Act and the
rules made thereunder to carry out the purposes of this Act.
In particular, and without prejudice to the generality of the foregoing provisions, such
regulations may provide for all or any of the following matters, namely:—
(a) the cost of production to be determined under clause (b) of the Explanation to
section 4;
(b) the form of notice as may be specified and the fee which may be determined under
(c) the form in which details of the acquisition shall be filed under sub-section (5) of
Section 6;
(d) the fee which may be determined under clause (a) of sub-section (1) of section 19;
(e) any other matter in respect of which provision is to be, or may be, made by
regulations.
Every regulation made under this Act shall be laid, as soon as may be after it is made.
before each House of Parliament, while it is in session, for a total period of thirty days
before the expiry of the session immediately following the session or the successive
sessions aforesaid, both Houses agree in making any modification in the regulation, or
both Houses agree that the regulation should not be made, the regulation shall thereafter
have effect only in such modified form or be of no effect, as the case may be; so,
however, that any such modification or annulment shall be without prejudice to the validity
of anything previously done under that regulation.
Power to remove difficulties (Section 65)
If any difficulty arises in giving effect to the provisions of this Act, the Central Government
may, by order published in the Official Gazette, make such provisions, not inconsistent
with the provisions of this Act as may appear to it to be necessary for removing the
difficulty:
However, no such order shall be made under this section after the expiry of a period of
two years from the commencement of this Act.
Every order made under this section shall be laid, as soon as may be after it is made,
before each House of Parliament.
Repeal and saving (Section 66)
As per Sub-section 1, the Monopolies and Restrictive Trade Practices Act, 1969 is hereby
repealed and the Monopolies and Restrictive Trade Practices Commission shall stand
dissolved.
On the dissolution of the Monopolies and Restrictive Trade Practices Commission, the
person appointed as the Chairman of the Monopolies and Restrictive Trade Practices
Commission and every other person appointed as Member and Director General of
Investigation and Registration, Additional, Joint, Deputy, or Assistant Directors General of
Investigation and Registration and any officer and other employee of that Commission and
holding office as such immediately before such dissolution shall vacate their respective
offices and such Chairman and other Members shall be entitled to claim compensation not
exceeding three months' pay and allowances for the premature termination of term of their
office or of any contract of service:
Provided that the Director General of Investigation and Registration, Additional, Joint,
Deputy or Assistant Directors General of Investigation and Registration or any officer or
other employee who has been, immediately before the dissolution of the Monopolies and
Restrictive Trade Practices Commission appointed on deputation basis to the Monopolies
and Restrictive Trade Practices Commission, shall, on such dissolution, stand reverted to
his parent cadre, Ministry or Department, as the case may be.
Provided further that the Director General of Investigation and Registration, Additional,
Joint, Deputy or Assistant Directors General of Investigation and Registration or any
officer or other employee who has been, immediately before the dissolution of the
Monopolies and Restrictive Trade Practices Commission, employed on regular basis by
the Monopolies and Restrictive Trade Practices Commission, shall become, on and from
such dissolution, the officer and employee, respectively, of the Central Government with
the same rights and privileges as to pension, gratuity and other like matters as would
have been admissible to him if the rights in relation to such Monopolies and Restrictive
Trade Practices Commission had not been transferred to, and vested in, the Central
Government and shall continue to do so unless and until his employment in the Central
Government is duly terminated or until his remuneration, terms and conditions of
employment are duly altered by that Government.
Provided also that notwithstanding anything contained in the Industrial Disputes Act,
1947(14 of 1947), or in any other law for the time being in force, the transfer of the
services of any Director General of Investigation and Registration, Additional, Joint,
Deputy or Assistant Directors General of Investigation and Registration or any officer or
other employee, employed in the Monopolies and Restrictive Trade Practices
Commission, to the Central Government shall not entitle such Director General of
Investigation and Registration, Additional, Joint, Deputy or Assistant Directors General of
Investigation and Registration or any officer or other employee any compensation under
this Act or any other law for the time being in force and no such claim shall be entertained
by any court, tribunal or other authority: Provided also that where the Monopolies and
Restrictive Trade Practices Commission has established a provident fund,
superannuation, welfare or other fund for the benefit of the Director General of
Investigation and Registration, Additional, Joint, Deputy or Assistant Directors General of
Investigation and Registration or the officers and other employees employed in the
Monopolies and Restrictive Trade Practices Commission, the monies relatable to the-
officers and other employees whose services have been transferred by or under this Act
to the Central Government shall, out of the monies standing, on the dissolution of the
Monopolies and Restrictive Trade Practices Commission to the credit of such provident
fund, superannuation, welfare or other fund, stand transferred to, and vest in, the Central
Government and such monies which stand so transferred shall be dealt with by the said
Government in such manner as may be prescribed.
All cases pertaining to monopolistic trade practices or restrictive trade practices pending
before the Monopolies and Restrictive Trade Practices Commission on or before the
commencement' of this Act, including such cases, in which any unfair trade practice has
also been alleged, shall, on such commencement, stand transferred to the Competition
Commission of India and shall be adjudicated by that Commission in accordance with the
provisions of the repealed Act as if that Act had not been repealed (Sub-section 3).
As per Sub-section 4, Subject to the provisions of sub-section (3), all cases pertaining to
unfair trade practices other than those referred to in clause (x) of sub-section (1) of
section 36A of the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969) and
pending before the Monopolies and Restrictive Trade Practices Commission on or before
the commencement of this Act shall, on such commencement, stand transferred to the
National Commission constituted under the Consumer Protection Act, 1986 (68 of 1986)
and the National Commission shall dispose of such cases as if they were cases filed
under that Act.
Provided that the National Commission may, if it considers appropriate, transfer any case
transferred to it under this sub-section, to the concerned State Commission established
under section 9 of the Consumer Protection Act, 1986 (68 of 1986) and that State
Commission shall dispose of such case as if it was filed under that Act.
According to Sub-section 5, all cases pertaining to unfair trade practices referred to in
clause (x) of sub-section (1) of section 36A of the Monopolies and Restrictive Trade
Practices Act, 1969 (54 of 1969) and pending before the Monopolies and Restrictive
Trade Practices Commission on or before the commencement of this Act shall, on such
commencement, stand transferred to the Competition Commission of India, and the
Competition Commission of India shall dispose of such cases as if they were cases filed
under that Act.
Sub-section 6, provides that all investigations or proceedings, other than those relating to
unfair trade practices, pending before the Director General of Investigation and
Registration on or before the commencement of this Act shall, on such commencement,
stand transferred to the Competition Commission of India, and the Competition
Commission of India may conduct or order for conduct of such investigation or
proceedings in the manner as it deems fit.
As per Sub-section 7, all investigations or proceedings, relating to unfair trade practices,
other than those referred to in clause (x) of sub-section (1) of section 36A of the
Monopolies and Restrictive Trade Practices Act, 1969(54 of 1969) and pending before the
Director General of Investigation and Registration on or before the commencement of this
Act shall, on such commencement, stand transferred to the National Commission
constituted under the Consumer Protection Act, 1986 (68 of 1986) and the National
Commission may conduct or order for conduct of such investigation or proceedings in the
manner as it deems fit.
Sub-section 8 that all investigations or proceedings relating to unfair trade practices
referred to in clause (x) of subsection (1) of section 36A of the Monopolies and Restrictive
Trade Practices Act, 1969(54 of 1969), and pending before the Director General of
Investigation and Registration on or before the commencement of this Act shall, on such
commencement, stand transferred to the Competition Commission of India and the
Competition Commission of India may conduct or order for conduct of such investigation
in the manner as it deems fit.
According to Sub-section 9, save as otherwise provided under sub-sections (3) to (8), all
cases or proceedings pending before the Monopolies and Restrictive Trade Practices
Commission shall abate.
As per Sub-section 10, matters referred to in sub-sections (3) to (8) shall not be held to
prejudice or affect the general application of section 6 of the General Clauses Act, 1897
(10 of 1897) with regard to the effect of repeal.
STUDENTS MAY KINDLY NOTE THAT THE FOLLOWING PROVISIONS OF THE ACT
HAVE SO FAR COME INTO FORCE
Published in the Gazette of India - Part-II, section 3, sub-section (ii), extraordinary on
19.06.2003 ministry of finance (department of company affairs) notification New Delhi, the
19 th June, 2003
S.O. 715(E). - In exercise of the powers conferred by the sub-section (3) of section 1 of
the Competition Act, 2002 (12 of 2003), the Central Government hereby appoints the 19 th
June, 2003, as the date on which the following sections of the said Act, shall come into
force, namely: -
Section 2 except clauses (d), (g), (j), (k), (i) and (n); 7, 11; 12; 13;15, 22 ,23, 36, 49, 50,
51, 52, 53, 54, 55, 56, 57, 58, 59, 60, 61, 62, 63 except clause (a), (b), (d), (e), (f), (g) and
(n) 0f sub-section (2), 64 and 65.
[F.no.1/8/2003-CL.V]
20
OVERVIEW OF BANKING REGULATION ACT, 1949, THE
INSURANCE ACT, 1938, THE INSURANCE REGULATORY
AND DEVELOPMENT AUTHORITY ACT, 1999, THE
SECURITISATION AND RECONSTRUCTION OF FINANCIAL
ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT,
2002
THE BANKING REGULATION ACT, 1949
20.0 INTRODUCTION
The Banking Companies Act, presently known as Banking Regulation Act was enacted
owing to safeguard the interest of the depositors, control abuse of powers by some bank
personnel controlling the banks in particular and to the interest of Indian economy in
general. However, it should be remembered that this Act does not supersede the provision
of Companies Act or any other law for the time being in force in respect of banking
business. In other words, the application of other laws e.g. Negotiable Instrument Act or
say companies Act or any other law are expressly saved. For instance, section 11(1) of
Companies Act 1956 which lays down that no companies, association or partnership with
more than 10 persons can be formed for the purpose of banking business unless it is
registered as a company. Hence, the Act deals with banking companies and corporations
mainly as a regulatory one and does not purport to codify the law of banking.
Since, some historic events took place in Indian Banking System, detailed discussion on
the various provision of the Act would leave some scope of incompleteness without
mentioning those developments. The Social Control Act of 1968 under the leadership of
the then Deputy Prime Minister ,Mr. Morarji Desai was an amending act of the Banking
Regulation Act. The followings were the main provision of this amending Act:-
• Bigger banks have to be managed by whole time chairman possessing special

knowledge and practical experience of the working of a banking company or of
finance, economics or business administration
• The majority of the directors had to be persons with special knowledge or practical
experience in any of the areas such as accountancy, agriculture& rural economy,
banking, co-operative, economics, finance, law, small scale industries
• At least two directors had to possess special knowledge and practical experience in
respect of agriculture, rural economy and co-operation.
• The banks were also prohibited from making any loans or advances, secured or
unsecured to their directors or to any companies in which they have substantial
interest.
But, considering the social control measure as inadequate one, the Government of India
took another historic decision of Nationalization of 14 Indian banks through an ordinance
under the leadership of the then Prime Minister Mrs. Indira Gandhi and, accordingly, with
effect from 19 th , July, 1969 those 14 banks were taken over by the Govt. of India under
the Banking Companies(Acquisition & Transfer of Undertakings) Act of 1969. Again in
1980 another six banks were taken over on 14 th March, 1980 under the Banking
Companies(Acquisition and Transfer of Undertakings Act)1980. No foreign banks were
nationalized.
On the other hand, well before these nationalization State Bank of India Act 1955 was
enacted to convert Imperial bank of India to SBI and in 1959 “ State Bank of
India(Subsidiary) Act was passed and eight Indian banks were made subsidiaries to state
bank of India. As a result in Indian Banking System, the no of public sector banks figured
to 29(20 nationalized & 9 banks comprising SBI & 8 subsidiaries). However, at present no
of public sector banks is 27 after merging of nationalized bank “New Bank of India” with
“Punjab National Bank” in 1993 and amalgamation of two subsidiaries of SBI viz. State
Bank of Bikaner and State Bank of Jaipur into one as “State Bank of Bikaner & Jaipur”.
Besides these, in Indian Banking system there indigenous old private banks, new
generation private banks and foreign banks. Moreover, Regional Rural Banks, Co-
operative banks, Land Development Banks are in existence besides a few industrial or
Development Bank.
20.1 DIFFERENT PROVISIONS OF BANKING REGULATION ACT 1949

The Banking Regulation Act,1949 has ten parts, each dealing with a specific topic. The
following is the at a glance picture of the same.
Serial No Part Topic Sections covered
1. I Preliminary 1 to 5A
Overview of Banking & Insurance Laws 20.3
2. II Business of Banking Companies 6 to36A

3. IIA Control over Management 36AA to 36AC
4. IIB Prohibition of certain activities in 36 AD
relation to banking companies
5. IIC Acquisition of the undertakings of 36AE to 36 AJ
Banking Companies in certain cases
6. III Suspension of business and winding 36B to 45
up of Banking Companies
7. IIIA Special provision for speedy disposal 45A to 45X
of Winding up proceedings
8. IIIB Provision Relating to certain operation 45Y to 45 ZF
of Banking Companies
9. IV Miscellaneous 46 to 55A
10. V Application of the Act to Cooperative 56
Banks
The Act as it stands now provides for the following controls:-

1. Minimum Paid-up Capital
2. Classification of Companies into Banking and Non-Banking Companies
3. Licensing of Banking Companies
4. Restriction on Branch Banking
5. Maintenance of Cash Reserves
6. Maintenance of Assets in India
7. Minimum Liquid Asset Ratio
8. Prohibition of Common Directors
9. Restriction on Payment of Dividend and Transfer of a certain percentage of profit to
the Reserve Fund
10. Restriction on Nature of Subsidiary Company
11. Accounts and Balance Sheet
12. Inspection of Banking Companies
13. Suspension of Business and Winding up
14. Schemes for Arrangement and Amalgamation
15. Compulsory Amalgamation of Banking Company
20.2 APPLICABILITY OF THE BANKING REGULATION ACT, 1949

This Act applies to following categories of Banks:-
1. Nationalized Banks
2. Non-Nationalized Banks
Co-operative Banks
20.3 BUSINESS OF BANKING COMPANIES

Section 6:- It provides a list of activities which a Banking Company may engage in:-
Main Functions:-
The
a. Agent for any government or local authority or persons but not as a managing agent or
secretary and treasure of a company;
b. May effect, insurance/ guarantee/underwrite, participate in managing or carrying out of
any issue of loans or any other securities made by state,local body,company,corporation
,association and may also lent for the purpose;
c. May carry on or transact every kind of guarantee or indemnity business;
d. May manage sell and realize any property which may come its possession in satisfaction
of its claims;
e. May acquire , hold and deal with any property or any right title or entrust therein which
forms the security for any loans or advances sanctioned;
f. May undertake and execute trust;
g. May undertake the administration of estates as executor, trustee or otherwise;
h. May establish and support or aid in the establishment of associations, institutions, funds ,
trusts and conveniences for the benefit of its present or past employees and their
dependence and may grant or guarantee moneys for charitable purposes;
i. May acquires, construct, maintain and alter any building or works necessary for its
purposes;
j. May sell, improve, manage, develop, exchange, lease, mortgage dispose off or otherwise
deal with any of its properties and rights;
K. May takes over and undertakes the whole or any part of the business of any person or
company when such business is of a nature described above;
l. May do all such other things as are incidental or conducive to the promotion or
advancement of its business;
m. May engage in any other form of business which the Central Govt. specifies to be lawful
The above list of activities is exhaustive but not comprehensive. Of the several kinds of
services listed above both under main business as well as ancillary business, some are
“agency services “and some are general utility services.
Agency Services:-
Carrying on and transacting guarantee or indemnity business on behalf of its clients,
collection of bills, pro-notes, hundies, cheques, cheques, securities etc, issuing on
commission and underwriting of stocks, shares, funds etc, purchasing and selling of
shares, G.P.Notes, bonds, debenture, etc. on behalf of constituents, negotiating of loans
and advances, remittance of money by drafts, mail transfer, telegraphic transfer,
electronic fund transfer (EFT) etc, granting and issuing letter of credit / letter of
guarantee, buying and selling of foreign exchanges including foreign bank notes under
Forex business, acting as an agent for any Govt. local authority etc.contracting for private
and public notes, undertaking or executing trusts, undertaking the administration of
estates as executor, trustees, or otherwise. The above mentioned agency services can be
grouped as under:-
1. Non-fund Business (issuing Letter of Credit/ Letter of Gurantee
2. Collection of instruments and securities on behalf of customers
3. Portfolio Management or Merchant Banking (Acting as Issue manage, lead manager,
underwriting of any issue etc)
4. Facility of remittance of funds
5. Money Exchange business as Authorized Dealer under Foreign Exchange Business
6. Other Agency Business on behalf of Govt. / Local Body etc.
7. Factoring Services( Indigenous Receivable Administration on behalf of clients)
8. Forfeiting Services ( Export Receivable Administration on behalf of clients)
9. Special Purpose Vehicle (SPV) services for Securitization of assets under Securitization
& Reconstruction of Financial Assets and Enforcement of Security Interest Act
10. Collection of taxes on behalf of the beople
11 collection different dues/ cess/ duty of the people say, telephone/ electricity,
municipal taxes etc.
General Utility Services:-
1. Providing Safe-custody facility to its Customers for keeping their valuables
2. Providing the facility of Safe Deposit Vault (Locker) under lease agreement to its
customers for keeping their valuables
3. A many of technology based general utility services like Tele-banking, phone-banking,
on-line banking, Home Banking, Single window banking, Demat Services for securities
trading, ATM services, Credit Card services etc
4. Consultancy Services
5. ECS services for payment of different dues of the people
6. Payment of pension
7. Payment of salaries of employees of schools etc.
8. Payment of salaries etc.
9. Many others
{Note:- Some of the activities mentioned both under agency services & general utility
services are of new generation activities particularly after reforms measures in financial
sector and growing adoption of technology based banking.)
20.4 Reserve Fund (Section 17) – Every Banking Company incorporated in India must
create a Reserve Fund and transfer a sum equal to not less than 20 % of its net profits.
However, Central Govt. is empowered to exempt from this requirement on the
recommendation of the RBI. Such exemption will be allowed only:-
_ when the amounts in the reserve fund and the share premium account are equal to the
paid-up capital of the banking company
_ when the Central Govt. feel that its paid-up capital and reserves are adequate to safe
guard the interest of the depositors
If a banking company appropriates any sum from the Reseve fund or the share premium
account, it must be reported to RBI within 21 days explaining the circumstances leading to
such appropriation
20.5 RBI’s power to control loans & advances granted by banking company
(Section 20.5) – RBI is empowered to issue directives to a banking company to determine
the policy in relation to loans and advances. Such direction may relate to:
i) Purpose for which loan may or may not be made
ii) Margin stipulation
iii) Maximum amount of advances to any company, firm, individual or association of
persons( popularly known as exposure norms which is at present 15 % for individual
borrower without infrastructure project, if infrastructure project it may go by additional
10%, 40% for group borrower and for infrastructure project of group borrower it may be
upto 50 % of bank’s capital and reserve (presently tier-I & Tier-II capital from capital
adequacy point of view)
iv) Maximum amount of guarantee liability on behalf of any individual/ firm/ company
(above exposure norm includes non-fund facilities like bank guarantee/ letter of credit etc)
v) The rate of interest and other terms and condition on which such advances are made or
guarantee given
(It may be noted that at present, in this deregulated interest rate regime RBI gives
directives on for loans and advances with sanctioned limit upto Rs. 2.00 lakhs where rate
of interest should not exceed individual bank’s Benchmark Prime Lending Rate(BPLR),
BPLR is fixed by Bank’s Board, Rate of interest for advances with sanctioned limit above
Rs. 2 lakhs is determined according to credit rating exercise done by bank,
{RBI’s stipulation on this score is rate of interest should not exceed BPLR+4) RBI exercise
its power through its selective credit control though under selective credit control list, at
present no item except sugar for buffer stock is kept. More}
[Moreover, with credit policy measures of RBI Cash Reserve Ratio, Bank Rate and Repo
& Reverse Rate is announced on which Bank’s BPLR is somehow depended]
Section 21A:- Rate of interest charged by banking company on the basis of loan contract
between the bank and debtor is not to be subject to scrutiny by the court
20.6 - Accounts and Balance Sheet (Section 29) – Every Banking Company
incorporated in India, in respect of all business transacted by it and through its branches
in India, shall prepare a balance sheet and profit & loss account as on the last working
day of the Accounting year (which was earlier calendar year, now April to March i.e. 31 st
March) in the Form “A” and “B” given in the third schedule of the Act. The amalgamated
Balance Sheet and Profit Loss should be signed by the CMD and at least three Directors
where there are more than three directors or where there are not more than three
directors , by all the directors. In case of banking companies incorporated outside India by
the principal officer of the Company in India.
The provisions of the Companies Act, 1956, relating to the balance sheet and profit and
loss account of a company shall also be applicable to the profit and loss account and
balance sheet of a banking company, in so far as they are not inconsistent with the
provision of the Act.
( Banks also prepare balance sheet and profit & loss as of half year ending 30 th ,
September which are not subject to Audit)
20.7 Audit - Balance sheet & profit & loss account as prepared in terms of sec 29 are
subject to audit by a person duly qualified under any law for the time being in force to be
an auditor for auditing such balance sheet and profit & loss accounts. (These Auditors are
known as Statutory Auditors for the said purpose and appointment /reappointment or
removal is subject to prior approval of the RBI. Under these Statutory Auditors there are
numbers of External Auditors who conduct audit operation of the branch accounts)
Further Reserve Bank can for special Audit of Banking Company, if it is of the opinion that
it is in the public interest or in the interest of the depositors. The auditors shall comply
with the directions given by the RBI and shall submit a report of the audit to RBI and also
to the bank. The auditor shall have the powers and exercise the functions as specified in
section 227 of the Indian Companies Act, 1956.
Apart from the above, the auditor is required to state in his report:
• Whether or not the information and explanation required by him have been found to
be satisfactory
• The transactions of the bank which have come to his notice have been within the
powers of the bank or not
• The return received from branch offices have been found adequate for the purpose of
his audit
• Whether the profit and loss account shows a true balance of profit or loss for the
period covered by such account
• Any other matter which he considers should be brought to the notice of the share
holders of the company
{In addition to what have been stated here-in-above auditors are also required to audit
and certify the statement of advances as prepared in terms of prudential accounting
norms, required to certify some other returns viz. Friday figure of 12 odd dates, utilization
of govt. subsidies, payment of premium of deposit insurance& credit guarantee scheme,
Long Form Audit Report , 3CB &3CD Return as applicable and many others}
Section 31:- Submission of Balance Sheet & P&L :- Three copies of such returns along
with auditors report shall be published in prescribed manner and submit to RBI within
three months from the end of the period which they refer. The RBI may extend the period
by a further of not exceeding three months.
Section 32:- Three copies of such accounts and balance sheet along with auditor’s report
shall be sent by the banking company to the ROC, at the same time while sending the
same to RBI.
Section 35:- Power of RBI to inspect banks:- RBI is empowered to conduct inspection of
any bank and to give them direction as it deems fit. All banks are bound to comply with
such directions. Every directors or other officer of the bank shall produce all such books,
documents as required by the inspector. The inspector may examine on oath any director
or other officers
RBI shall supply the bank a copy of such inspection. RBI submits report to Central Govt.
and the latter, on scrutiny , if is of the opinion that the affairs of the bank are being
conducted detrimental to the interest of its depositors, it may, after giving an opportunity
of being heard, to the bank, may order in writing prohibiting the bank from receiving fresh
deposits, direct the RBI to apply section 38 for winding up of the bank
Apart from inspection under section 35 RBI is empowered to undertake inspection of a
bank in terms/ for the purposes of the following sections:-
Section 11 Requirement as to maintaining paid-up capital & reserve

Section 22 Licensing of banks
Section 23 Restrictions on opening new and transfer of existing places of business
Section 37 Suspension of business
Section 38 Winding up by High Court
Section 44 Power of High Court in voluntary winding-up
Section 44A Procedure for Amalgamation of banking companies
Section 45 Power of RBI to apply to Central Govt. for suspension of business by a
bank and prepare scheme of reconstitution or amalgamation
Section 35A:- Power of RBI to give directions:-

1. where the RBI is satisfied that-
in the public interest or in the interest of banking policy or to prevent the affairs of any
bank conducted in a manner detrimental to the interest of the depositors or in a manner
prejudicial to the interest of the bank or to secure the proper management.
2. RBI may, on representation made to it or on its own motion, modify or cancel any
direction issued under Sub-section (1), and in so modifying or canceling any direction may
impose such condition as it thinks fit, subject to which the modification or cancellation
shall have effect.
Section 35B:- Amendments of provisions relating to appointments of Managing Directors,
etc., to be subject to prior approval of the RBI:-
Amendments relating to no. of directors, remuneration, appointment, reappointment,
removal etc, of chairman, managing director or any other director or any other chief
executive shall not have effect unless approved by RBI. Similarly, appointment, re-
appointment, removal of any such officials shall have effect only with prior approval of
RBI.
Section 36:- Further powers and function of RBI:- The RBI may-
i) caution or prohibit banks generally or particularly to any bank(s) against entering into
any particular transaction or class of transaction and generally give advice to any bank
ii) may assist, subject to provision of this Act,on a written request of a bank, in proposal
for amalgamation of such bank
iii) give assistance to any bank by means of grant of loan or advances (known as
Refinance/ rediscounting of bills), in terms of the provision of RBI Act 1934.
iv) in case where it is satisfied that in the public interest or in the interest of banking policy
or preventing the affairs of the banking company, being conducted in a manner
detrimental to the interest of the bank or its depositors, it is necessary to do so, by order
in writing and on such terms and condition as may be specified, require the banking
company:-
a) to call a meeting of its directors for the purpose of considering any matter
b) to require an officer to discuss any matter with an officer of RBI
c) to depute one or more of its officers to watch the proceedings of any meeting of the
board of directors or of any committee or of any other body constituted by it. The officers
so deputed shall have to be given to be heard at such meeting, and they shall send a
report to the RBI ( Generally in bank’s Board RBI nominated director look after these
things)
d) to depute officer to observe the affairs of even the branches and make a report thereon
e) to require the bank to make such changes in the management and within such time as
RBI deem fit
The RBI shall make an Annual Report and submit the same to Govt. of India on the trend
and progress of banking in the country with particular reference to activities under clause
2 of section 17 of RBI Act 1934. The RBI may appoint such persons at such places as it
may feel necessary, to scrutinize the statements and information furnished by the banking
company and also to ensure efficient performance of its function under the Act. { As an
requirement of banking Sector Reforms for better supervision on banks by RBI besides
on-site inspection a system of off-site surveillance has been introduced where RBI
officials scrutinize the DSB returns submitted by banks and if necessary, percolates down
to on-site supervision.)
Section 36AA:- RBI can terminate any chairman, Director, Chief Executive, other officials
or any employee of the bank where it considers desirable to do so particularly when RBI is
of the opinion that conduct of such persons is detrimental to the interest of the depositors
or for secure proper management of the banking company. Before such termination
concerned person should be given opportunity to be heard of. Such terminated officials
can make appeal to the Central Govt. within 30 days from the date of communication of
such termination order. The decision of the Central Govt. can not be called into question.
In case an order is issued pursuant to this section the concerned person shall cease to
hold his office for a period of not exceeding 5 years as may be specified in the order.
Contravention of the above provision shall be punishable with a fine, which may extend to
Rs 250 per day.
Any such order shall be valid for a period not exceeding three years or such further
periods of not exceeding three years at a time as RBI may specify.
Section 36AB:- RBI is empowered to appoint additional Directors for the banking company
with effect from the date to be specified in the order, in the interest of the bank or that of
depositors. Such additional directors shall hold office for a period not exceeding three
years or such further periods not exceeding three years at a time.
Section 36AE:- Power of Central Govt. to acquire the undertaking of Banking Companies
in certain cases:- If Central Govt. is of the opinion that the Banking Co has failed to
comply with the direction given to it by RBI relating to policy matters under section 21 and
35A and/ or the affairs of the bank being managed in a manner is detrimental to the
interest of the depositors or that of to the banking policy, or for better provision of credit
generally or of credit to any particular section of the community or in any particular area; it
is necessary to acquire the undertaking of such banking company, it (Central Govt) may
after consultation with RBI as it thinks fit, by notified order, acquire the undertaking of
such banking company with effect from such date as may be specified in this behalf by the
Central Govt. In case of such a notification, on the specified date the undertaking of the
acquired bank and its assets & liabilities shall stand transferred to, and vests in Central
Govt. Before acquiring the undertaking of any banking company, the Central Govt. shall
give a reasonable opportunity to the banking company proposed to be acquired of
showing cause against the proposed action.
Section 36AF:- Power of Central Govt. to make a scheme for the acquired bank in
consultation with RBI :- The scheme may provide for transfer of assets & liabilities of the
acquired bank, constitution of the first Board of Management and incidental matters, the
service condition of the employees, compensation payable to the shareholders of the
acquired bank and such other incidental, consequential and supplemental, as may be
necessary to complete the transfer.
Section 36AG:-Compensation to shareholders of the acquired bank:- compensation to be
paid to the registered shareholders in accordance with the principle provided in section 5
of the Act. Any shareholder aggrieved with the amount of compensation may request the
Central Govt. to refer the matter to tribunal to be constituted under section 36 AH. If the
no. of representation received is not less than one-fourth of the of the no of shareholders
holding not less than one-fourth of the paid-up share capital of the acquired bank, the
Central Govt. shall constitute a Tribunal for the purpose.
Section 36AH:- Constitution of the Tribunal:- The Tribunal shall consist of a Chairman and
two other members. Chairman shall be a person who is or has been a judge of the High
Court or the Supreme Court. Of the two other members, one shall be a person, who in the
opinion of the Central Govt. has had commercial banking experience and the other shall
be a person who is a Chartered Accountant
Section 36 AI :- Tribunal to have power of a civil court:- The tribunal shall enjoy the power
of a civil court, while trying a suit, under CPC 1908, in respect of the following matters:-
i)Summoning and enforcing attendance of any person and examining him on oath. ii)
discovery & production of documents, iii) receiving evidence on affidavits, iv) issuing
commission for examination of witnesses or documents. However, tribunal can not compel
Central Govt. or RBI to produce any books or documents which the latter(s) consider
confidential, to make any such documents part of the records of the proceedings, to give
inspection of any such books to any party before it or to any other person.
Section 36AJ:- procedure of the tribunal:- enjoys the power to regulate its own procedure,
may hold the whole or any part of its inquiry in camera, any mistake arising out of
accidental slip or omission may, at any time, be corrected by the tribunal either of its own
motion or at the request of any other parties.
20.8 SOME IMPORTANT RECENT CHANGES:-

• Foreign direct investment in private sector banks will be 74%
• In terms of sec 17(1) and 11 (1) (b) (ii) transfer of balance of profit to reserve fund
which was earlier 20% but w.e.f., 31-03-2001 advised to 25 % for all scheduled
commercial banks including foreign banks operating in India
• Any appreciation from reserve fund or the share premium account has to be reported
within 21 days along with explanation
• Cabinet gave its ex-post facto approval for modifying the banking companies Bill
2005 to allow the RBI to recommend a person other than an officer of RBI for
appointment as a director in the Board of PSB.
20.9 CONCLUSION
Any attempt to cover all the aspects of regulatory measures in banking within the limited
scope of this write-up is not possible but an effort has been made to narrate all the
important provisions of Banking Regulation Act 1949. Moreover, Banking in India is a
perfect mixture of Law and Practices since legislation of banking activities has an age old
practices. During post reforms era, banking in India has got a paradigm shift to make it
viable in the present competition particularly where the existence of private banks, foreign
banks, and new generation private banks have parallel existence with the public sector
banks. A number of policy measures have been implemented as part of the first
generation and second generation reforms and all attempts are being made to make the
Indian Banking System a Global Standard. The profitability is the sole criteria for
sustainable solvency of any Industry and the banking industry is not an exception to it.
But, on the contrary, banking industry being the backbone of the financial system, public
sector banks are to play an important role for the development of the rural economy. The
prudential accounting norms, capital adequacy norms, disclosure norms etc have become
the yardstick of the banks’ performance vis-à-vis its survival. The challenge which the
Indian banking system in general and public sector banks particular is facing is the
forthcoming bussel accord II for which all banks have to be ready for arranging capital
either making more and more profits or by raising capital from the market. A many of the
banks have already gone to the market since 1994 when banking laws was amended
allowing the public sector bank to dilute govt. stake to the extent of 49 % . But in terms of
the recommendation of Narashimam Committee, 67 % of the govt. stake is supposed to
be diluted to accept the future challenge which could not be implanted due to strong
opposition from the trade union as well as leftists. As a result Govt. is planning and
framing come out with suitable alternatives to face the challenge of Bussel II.. Govt has
allowed banks to raise capital through innovative perpetual debt which would be eligible
for inclusion as capital for the purpose of capital adequacy. On the other hand, corp[orate
Governance is revamped in banks through changes in the composition of boards through
inclusion of shareholder directors, increasing whole time director from 2 to 4 through
amending Banking Companies(Acquisition & Transfer of Undertaking) Act 1970, & 1980.
Moreover, attempt of merger and amalgamation of the banks to tap wide market vis-a-vis
increase volume of business is the headline of the dailies. Last but not least removal of
minimum & maximum range in CRR & SLR maintenance will make provide a level playing
field to classes of the banks.
All these initiatives are effected through amendments of relevant acts pertaining to
banking industry that may be Banking Regulation Act or SBI Act or SBI Subsidiary Act ir
Banking Company (Transfer & Acquisition of Undertakings) Act. Through which greater
functional autonomy is provided to the banks and road maps are prepared to make the
industry a global standard.
THE INSURANCE ACT, 1938
20.10 INTRODUCTION:
Under British dominion, the first Act on Insurance was enacted in 1912, which was called
Act 5 of 1912 which regulates Provident Insurance Societies Act 6 of 1912 and Act 20 of
1928. The former being related to Life Insurance business and the later being dealt with
statistical matters concerning non-life Insurance business by the external entities. With
the increase in the volume of insurance business in India, a need arose for more
exhaustive legislation. As a result, a Bill was prepared on 1925. The Act 6 of 1912 was
based on Insurance Company Act 1909. The amending of the 1909 Act became
imperative and Government of India was awaiting the result of the amendment of 1909
Act. But such wait became too long. In the meantime, another legislation was passed in
1928. The Government of India in 1935 took the initiative to reform Insurance business
and deputed Mr. S.C. Sen to look into the probable deficiencies and lacunnaes in the
insurance industry. In 1936, the companies Act 1913 was amended. Mr. Sen
recommendations regarding insurance business was submitted to the Government.
The recommendations among other things stressed overall supervision of the insurance
industry with special emphasis on operations conducted by indigenous entities as well as
foreign companies. The deposit money for Life Insurance business was increased to the
net sum of Rs. 50,000 so as to discourage financially weak companies to enter into the
insurance business. Restrictions and controls imposed on external companies. The
process of winding up of insurance companies along with amalgamation and transfer of
business schemes were revamped. Managing agents are prohibited to do any business in
future, in the insurance sector. Insurance agents were provided with licences. The post of
Superintendent of Insurance was established under whose control and direction the
business was conducted, who was normally the Government Actuary.
It was decided that effective supervision of Insurance industry is necessary to see
whether they operate under sound business principle. The schemes proposed by any
company was expected to be transperent and unsound schemes was not accepted. The
books of accounts and documents were thoroughly scrutinised. Investment policies on
assets of the companies are changed for better protection of the interests of the insured.
The Insurance Bill was passed on 26th February, 1938 and came into effect on 1st July,
1938 vide Notification No. 589 – 1 (4) / 38 as The Insurance Act 1938 (4of 1938). Till
2005, 25 amendments regarding this Act has been made.
20.11 IMPORTANT DEFINITIONS:

Actuary: Section 2 (1): “Actuary” means an actuary possessing such qualifications as may
be specified by the regulations made by the authority.
Authority: Section 2 (1A): “Authority” means the Insurance Regulatory and Development
Authority established under sub-section (1) of Section 3 of the Insurance Regulatory and
Development Authority Act 1999.
Policy Holder: Section 2 (2): “Policy holder” includes a person to whom the whole of the
interest of policy holder in the policy is assigned one and for all, but does not include an
assignee there of whose interest in the policy is defeasible or is for the time being subject
to any condition.
Banking Company: Section 2 (4A): “Banking Company” and “Company” shall have the
meaning respectively assigned to them in clauses (c) and (d) of subsection (1) of sections
of the Banking Companies Act, 1949 (10 of 1949).
Controller of Insurance: Section 2 (5B): “Controller of Insurance”, means the officer
appointed by the Central Government under section 2B to exercise all the powers,
discharge the functions and perform the duties of the Authority under this Act or the Life
Insurance Corporation Act, 1956 (31 of 1956) or the General Insurance Business
(Nationalisation) Act 1972 (57 of 1972) or the Insurance Regulatory and Development
Authority Act 1999.
Court: Section 2 (6): “Court” means the Principal Civil court of original jurisdiction in a
district, and includes the High Court in exercise of its ordinary original civil jurisdiction.
General Insurance Business: Section2 (6B): “General insurance business” means fine,
or miscellaneous insurance business, whether carried or singly or in combination with one
or more of them.
Government Security: Section 2 (7) “Government Security” means a Government Security
as defined in the Public Debt Act 1944 (18 of 1944).
Insurance Company: Section 2 (8): “Insurance Company” means any insurer being a
company, association or partnership which may be round up under the companies Act
1956 (1 of 1956) or to which the Indian Partnership Act, 1932 (9 of 1932) applies.
Insurance Company: Section 2 (10A): “Investment Company” means a company whose
principal whose principal business is the acquisition of shares. Stocks, debentures or
other securities.
National Company Law Tribunal: Section 2 (13 BA): “National Company Law Tribunal”
constituted under section 10 FB of the companies Act 1956 (1 of 1956).
20.12 PROVISIONS RELATED TO INSURANCE:

From the expiry of one year from Insurance (Amendment) Act 1950, a person intending to
carry on insurance business should be either a public company or a society under
cooperative Societies Act 1912 or body corporate incorporated outside India but not a
private company. But after IRDA Act 1999, no foreign company can begin any insurance
business. Any Indian insurance company may carry on insurance business in SEZ under
SEZ Act 2005.
The Central Government by notification may exempt any Indian Company from application
of SEZ Act 2005. The liabilities of Insurance Company are dealt under this Act.
In every class of Insurance business, there is separate class of scheme for registration
and articulate of registration is obtained from the Authority for such specified class.
The documentation for registration shall be made according to the regulations made by
the Authority.
After the enactment of IRDA Act 1999, the insurer should get their registration renewed
annually before 31st March of every year and such application for renewal should reach
the Authority before 31st December of the proceeding year accompanied by prescribed
fee, which is Rs. 50,000 (minimum).
The Authority will certify the soundness of life insurance business. A insurer shall not use
any name which is existing at that time. A capital base by insurer is to be provided which
is Rs. 100 crores (minimum) for life insurance and general Insurance. And also Rs. 200
crores (minimum) for starting re-insurance business. A public company may start life
insurance business provided the Central Government has approved their scheme. A public
company limited by shares can convert it into company limited by guarantee after the
Central Government approves their scheme. The insurer after 31st March 2000, has to
make deposits with the R.B.I. which is 1% and 3% of gross premium with respect to life
insurance and general insurance business. And Rs. 20 crores for re-insurance business.
But when the insurer decided to cease business, he can apply to the court for refund of
the deposit money. The accounts of each class of insurance business are to be
maintained following prescribed rules and it is to be signed by insurer or responsible
officer authenticating it and should be audited properly. In case of insurer operating life
insurance business, he has provide Actuarial Report and abstract as per provisions of
Part I and II of former schedule and Part II of the fifth schedule of the Act. The insurer has
to file Annual Returns with the Authority within six months from the end of the period,
supported with all necessary documents and abstracts and also with prescribed number of
copies. The Authority has a right to make evaluation if the report submitted by insurer
doesn’t show correct state of affairs of its business. Every document submitted by the
insurer has to be certified by the Authority. Every insurer has to keep at all times
invested assets as per provisions 27, 27A 27B, 27C, 27D, 28, 28A and 28B. Insurer
can grant loans or a advances only within surrender value in case life policies.
The assets of the insurer should be kept either with RBI or a with authorities specified
under Section 31. Manager cannot be appointed from expiry of one year after or on which
date Insurance (Amendment) Act 1950 came into force. The Authority keeps watch on rate
of remuneration paid to any person by the insurer. There is limit as per this Act regarding
employing managing agents and also relevant provisions of companies Act 1913 should
also be complied with. The insurer has a commitment as well as responsibility towards the
social and unorganised sector. The authority can order investigation if it is satisfied that
the insurer is not properly conducting the insurance business. The authority can appoint
staff for administrative functions. The Authority can issue directions to the insurer who
was held guilty of or apprehension was expressed about his business dealings or for
public interest. Regarding appointment reappointment of M.D. or whole time Director or of
manager, be made subject to Insurance Amendment Act, 1968 and prior approval of the
authority. The Authority can remove managerial personnel if they acting against the
interest of the policyholders. Additional Directors may be appointed by the Authority if it is
in public interest and also in the interest of the insurer. All the decisions of the Authority
should be made in writing only. The Authority may order closure of foreign business on
the suspicion of unfair trading which may harm the interest of policyholders or for public
interest. The officer appointed by the Authority has a right to search and seize any
documents, books, vouchers and reports if there is apprehension of concealment of any
mischief on the part of the insurers. All schemes of amalgamation and transfer of exist or
not. And to make this happen every policyholder should be notified by the Authority of the
proposal schemes. After the scheme has been approved and after the scheme of
amalgamation or transfer is complete then the new insurer has to furnish within three
months all necessary documents and paper as prescribed by law, to the Authority. In the
interest of public or policyholders or insurance industry, the Authority may suo motu
prepare schemes for amalgamation or transfer of business. A transfer or assignment of
life policy with or without consideration may be effected through endorsement on the
instrumental itself or on a separate instrument, duly attested by at least one witness.
Nomination is made automatically as a consequence or transfer of policy. Transferee may
be held liable for monitory claim by the nominee and not the insurer. From 31st December
1950, no insurance agent shall receive any commission or remuneration vide any
agreement from any policyholders or any other person, exceeding the amount prescribed
by section 40A. Sections 40B and 40C deals with limitations with respect to management
expresses in Life Insurance and general insurance business respectively. No agent should
receive rebates except under the Law. The Authority or the officer appointed by the
Authority can issue licences to insurance agents or payment of prescribed fee but the
agent should be not a minor or insure person. Other formalities are also looked into before
the issue of licence. The principal agent, chief agent and special agent are registered with
the Authority on payment of a minimal fee. The employment of chief agents and special
agents are regulated by Authority as well as relevant provisions of Insurance Amendment
Act 1950 and Cooperative Societies Act 1912. The commission, brokerage or fee payable
to intermediary or insurance intermediary should not exceed 30% of the premium payable
as specified by the regulations. There should be a Register of insurance agents. For
ensuring compliance, The Authority can notify any person involved with the insurance
business as per sections 40A, 40B, 40C, 42B and 42C. No Life insurance policy effected
before the enactment of this Act be called for question on the ground of misstatement
after two years. All questions relating to insurance business as India should be heard and
decided as per provisions of Law applicable to India. If the insurer is not sure about the
claim of the policyholder, then he can pay the amount of matured policy into the count of
law, which has to be acknowledged by the latter for legitimate discharge of the claim. In
case of shall life insurance policies, the Authority is the final arbitrator in the case of any
dispute between claimant and the insurer. An insurance agent cannot become Director
except as per provision of Insurance Amendment Act 1946. And for life insurance policies,
there cannot be a common director between two insurers. Regarding payment of dividend
and bonus by the insurer provisions of section 15 of the Act or section 11 is the Life
Assurance Companies Act 1912 to be adhered. The insurer can notify the policyholder
options available to him in case of non-payment of premiums. The Life policyholders has
the right to seek for medical reports procured by the insurer. No insurer can from the date
of commencement of the Act or three years from that period be allowed to practice
dividing principle towards the policyholders. By keeping the doctrine of Natural Justice,
the Authority can appoint Administrator for administering insurance business if the insurer
indulges in any malpractice. The Administrator has a right to attach properties of
delinquent policyholders.
The Administrator can cancel or terminate any contract entered by the insurer with any
other person. Any documents which the insurer wilfully withholds liable for punishment
which may include a prison term not exceeding six months. The Central Government can
terminate the appointment of the Administrator and its decision is final and cannot be
challenged in a court of law.
The power of the Central Government regarding appointment and termination of
Administrator cannot be questioned. The Central Government also can undertakings of
the insurer in certain cases. It can also lay down schemes for their working. A tribunal can
also be appointed by the Central Government for the purposes of Sections 52H to 52J,
which got the powers of a civil court. The Tribunal may order winding up of the insurance
company under relevant permission of the companies Act 1956. A voluntary winding up
procedure can entertained only in case of amalgamation or reconstruction cases only.
There are special provisions for partly winding up and winding up of secondary
companies.
The Central Government may impose counter measures against any foreign insurance
company if their native country imposes any similar sanctions against Indian insurance
companies. Within three months, every insurance company registered outside India or
domiciled outside India, has to submit with the Authority proper documentation. All Indian
companies doing business outside India has to maintain proper books and relevant
papers.
20.13 INSURANCE ASSOCIATION OF INDIA, COUNCIL OF ASSOCIATION AND

COMMITTEE
All insurance and Provident Fund Societies carrying on insurance business as per
provisions of Insurance Amendment Act 1950 and which should be notified by the Central
Government through official gazette. A register is to be maintained for this purpose. Two
councils namely life insurance council and general insurance council are established of
the Insurance Association, which operate through Executive Committee and they
(Committees) are referred as authorities. The Authority can fill up the casual vacancy in
case of any contingency. The executive committee is for three years duration. The Life
Insurance Council can conduct examination of their agents. The above councils enjoys
advisory role on various operational matters and in controlling expenses. The General
Insurance Council also functions in a similar way.
The Executive Committees of life insurance and general insurance order certain
circumstances can act together at the behest of the Central Government. The councils
also have a supervisory role in order to control the operations of the insurer. The Central
Government may remove difficulties and may exempt and insurer(s) from operation of this
Act.
20.14 TARIFF ADVISORY COMMITTEE AND CONTROL OF TARIFF RATES:

The Tariff Advisory Committee (TAC) to be established as per Amendment Act 1968 to
control and regulate the rates and terms offered by insurers in general insurance
business. TAC comprised of sixteen members including the chairman and vice chairman.
Ten members represent Indian companies and rest represents in trust of foreign
companies. The Authority by notification makes relations for TAC. TAC with prior approval
of Authority also eligible in framing new regulations. TAC can regulate rates but such
regulation should any way put the business of the insurer into jeopardy or leads to any
form of discrimination. Their actions are validated by the Authority. Before any stipulations
being introduced or enhanced, views of the other party need to be heard. The controller of
insurance usually be the chairman of the TAC but with the enactment of IRDA Act 1999,
chairperson of the Authority shall become the chairman of the Advisory Committee. The
Advisory Committee can seek information and other documents from the insurer and the
latter has comply with those requisitions. The assets and liabilities of the General
Insurance Committee can not ignore its duty to honour them. All the whole time employee
employed before commencement of Amendment Act 1968 shall henceforth after
enactment, become employee of the Advisory Committee. The Advisory Committee has a
power to install regional committees. The Authority can issue licences to surveyors and
loss assessors as per relevant provisions of IRDA Act 1999.
20.15 SOLVENCY MARGIN, ADVANCE PAYMENT OF PREMIUM AND RESTRICTIONS

ON THE OPENING OF A NEW PLACE OF BUSINESS
Assets are valued as per their market or realisable values with few exemptions. Liabilities
are to be properly valued including share capital, general revenue and revenues. The
insurers at all times has to maintain surplus of assets order liabilities which is not less
than amount arrived as per Section 64VA (i) and (ii) , subject to rates framed by IRDA Act
1999. Along with various relevant provisions of Insurance Amendment Act 1968 and
Cooperative Societies Act 1912 are also to be complied with no insurer shall assure risk in
India in respect of any insurance business unless he receives the premium either in cash /
cheque / PMO. Payment of premium to insurance agent not always leads to contract
between the assured and the insurer.
No insurer shall be allowed to open new office unless prior permission for the same has
not been obtained from the Authority. Place of business includes a branch, sub branch,
inspectorate, organisation office and any other office by whatever name called.
20.16 PROVIDENT SOCIETY:

“Provident Society” means, a person who, or a body of persons (whether corporate or
unincorporate, which not being an insurer registered for the time being under Part II of
this Act, causes on the business of insuring the payment or the happening of any of the
contingencies mentioned in subsection (2) of
(a) and annuity of or equivalent to Rs. 100 or less payable for an uncertain period.
(b) a gross sum of Rs. 1000 or less whether paid or payable in a lump sum or in two or
more instalments over a certain period, exclusively in both cases (a) and (b) of any
profit or bonus not being a granted profit or bonus.
There is restriction in doing business by Provident Society other than public company or
society registered under 1912 Act or body corporate incorporated in India. The name of
such society should bear words like ‘Provident’ or ‘life’.
No Provident Society should carry on any business on the principle of division among
policyholders. Prior to IRDA Act 1999, prior approval of the Authority is necessary, in case
of registration certificate being issued to insurer. Section 70 to deals with registration of
Provident Society.
The registration of certificate is renewed every year from 30.06.1942. All supplementary
information and reports of alteration in particular laws furnished with the application for
registration, within the period of three months, from the commencement of the Insurance
(Amendment) Act 1941.
No provident fund society can be registered until it maintains a healthy working capital
exclusive of expenses incurred and statutory deposits. No provident society can name
itself with a existing name. The Provident Society can formulate rules for its efficient
functioning. The rules can be amended and each member of the society is eligible for
receiving a copy of the amended rules. Every Provident Society must have a registration
office. It has to maintain proper books of accounts, Annual Statements, Revenue account,
Actuarial Report and abstract. Returns shall be submitted to the Authority within six
months from the end of the period to which it relates. Actuary has to certify schemes. The
funds of the society has to be kept as per provision of section 85. The Authority can order
inspection of books and the Authority can order enquiry in act of misfeasance or in (any)
kind of mischief.
The insurance business of the provident society can be transferred and its transfer should
be made in such a way that which provides basic ingredients and the sanction of the
Authority is mandatory . A Society can be dissolved within agreed by the provident
society members, creditors or contributories. The court may order winding up of the
provident society as per provisions of various companies Acts depending upon which the
society has been incorporated and that should be based on same reasonable grounds.
The court may make an order reducing the amount of the insurance contracts of a
provident fund society upon such terms and conditions which the court thinks fit. A
Liquidator can be appointed as per provision of Companies Act 1913 and it has a right to
initiate legal proceedings, investigate claim, issue directions, issue summons to the
attendance of witnesses, etc.
20.17 INSURANCE COOPERATIVE SOCIETIES:

Every insurance cooperative society shall be deemed to be an insurer for the purpose of
this Act. The provisions of the Act applies fully to the Insurance cooperative society,
subject to discretion of the Authority to exempt such society from applicability of some
provisions of the Act.
All such notifications proposed to be issued be put before the Parliament for a period of
thirty days in draft form, so that honourable members can modify certain terms if they feel
that should be done.
20.18 MUTUAL INSURANCE COMPANIES AND COOPERATIVE LIFE INSURANCE

SOCIETIES:
Mutual Insurance Company:
See 95 (a) : “ Mutual Insurance Company” means an insurer, being a company
incorporated under the Indian companies Act 1913, or under Indian Companies Act 1982
or under the Indian companies Act 1866 or any Act, repealed thereby, which has no share
capital and of which by its constitution only and all policyholders are members.
Corporate Life Insurance Society: Sec 95 (b) : “Cooperative Life Insurance Society”
means an insurer being a society registered under the cooperative societies Act 1912 or
under an Act of a State Legislature governing the registration of cooperative societies

which carries on the business of life insurance and which has no share capital on which
dividend or bonus is payable and of which by its constitution only original members on
whose application society is registered and all policyholders are members. Provided
that any cooperative life insurance society in existence at the commencement of this Act
shall be allowed a period of one year to comply with the provisions of this Act.
Sections 6,7 and 20 (2) of the Act does not apply to the about tow societies. A sum of Rs.
15000 (minimum) be kept as working capital by this societies exclusive of the deposits
made and preliminary expenses incurred during their formation. The cooperative life
insurance society has to deposits with RBI, cash deposit or approved securities of Rs.
200000 (min) which can be made in instalments. However the first instalment should be of
at least Rs. 25,000.
The notices and essential documents has to be published in a English newspaper from
time to time.
20.19 RE-INSURANCE:
Every insurer has to reinsure with Indian re-insurer of a percentage of sum assumed as
decided by the Authority, with previous approval of the Central Government, as per
provision of section 101A (2). The terms and conditions are to be decided after
consultation with the Advisory Committee constituted under section 101B.
“Policy” means a policy issued or renewed on or after the 1st day of April 1961. In respect
of general insurance business transacted in India and does not include a re-insurance
policy.
“Indian re insurer” means an Indian insurance company, which has been granted a
certificate of registration under sub-section (2A) of section 3 by the Authority to carry on
exclusively the reinsurance business in India. The Authority may at any time, call upon the
insurer to examine, his principal place of business; examine any other on oath; seek any
documents ,only certified from the insurer.
20.20 MISCELLANEOUS MATTERS:

The Act provides penal provisions for any defaulter or lawbreaker of any provisions of the
Act. It stipulates monetary fine of Rs. 500000 (max) or prison term of 3 years (max) for
any person guilty of disobeying directions, values, regulations and provisions of Sections
3.7 and 98. There are also penal provisions for contravening sections 104, 105, 105A,
105B and 105C.
The aggrieved can seek the intervention of the court for restoration of the property
either on the application of the Authority or insurer or policyholders or liquidator or any
member of the insurance company. The offence may prima-facie in the form of mischief,
misfeasance, breach of trust, etc.

Prior approval of the Advocate General is necessary for initiating any legal proceedings
against the insurer or any member of the insurance company.
The chairman, director, auditor, manager and any other employee of the insurer will be
deemed as public servant as per Indian Penal Code. The court can grant relief both
criminal or civil in respect of a case brought before it. The trial of such case should be
made by a first class Magistrate. The court can also entertain an appeal against various
orders made by the insurers or any members of the insurance company. There is a
provision for delegation of powers and duties of the chairman of the Authority. All
documents should be signed by the chairperson or his authorised staff. The chairman can
seek for any information form the insurer. The Central Government can constitute a
Consultative Committee consisting of the Chairman of the Authority acting as a
Chairperson of such committee. An appeal may lie to the Central government against the
order of the Authority and that should be made within 30 days from the date of such order.
The Central Government may, subject to certain conditions, make rules to carry out the
various purposes of this Act. The Central Government, by notification in the Official
Gazette, exempt any insurer from the applicability of some provisions of the Act.
Before the IRDA Act 1999, came into force, the Central Government may require any
insurer to submit returns, summary of accounts, balance sheets, abstract, etc.
The fifth schedule deals with regulations for preparing statements of business in force and
requirements applicable to such statements, contained in Part I and Part II contains
provisions regarding requirements for statements applicable to life insurance.
The schedule consists of three parts. Part A consists of terms deemed to be included in
every contract between an insurer carrying on General Insurance business and a principal
agent. Part B consists terms deemed to be included in every contract between an insurer
carrying on life insurance business and a special agent or between a chief agent and a
special agent.
The seventh schedule consists of the rule in relation to valuation of liabilities of the
insurer in insolvency or liquidation.
The eighth schedule consists of Principles of valuation regarding compensation assessed
or valued on different assets and liabilities.
20.21 CONCLUSION:
The Insurance Act 1938 is a consolidating Act of various Acts including Life Assurance
Companies Act of 1912 and Provident Insurance Societies Act 1922, specifically dealing
with Life Insurance business. The need for a comprehensive Act incorporating the entire
gamut of insurance was need of the hour at that time. The need arose, to safeguard the
interest of policyholders and public in general as well as to the industry itself. This was
also a knee jerk reaction to unfair trade practices made by certain section of private
insurer at that time. This Act later led to enactment of life insurance Act 1956 and General
Insurance Business (Nationalisation) Act 1972. As a result through the Act of Parliament,
LIC and GIC came into existence. These legislation no doubt have to a large extent
reduced the rampant and often discriminately practices prevalent prior to their
enactments.
Our economy got liberalised form early 1990’s and as a result, certain amendments to the
Insurance Act 1938 became imperative. The Insurance Act 1938 was amended vide
section 30 of IRDA Act 1999, stated in the first schedule. The Amendments deals with
certain words, phrases and expressions. Beside this the amendment also dealt with
requirement as to capital, divesting shareholders funds, investments in India or abroad,
business in rural sector, licence issues, and various penal provisions.
But with these amendments, the desired out come of the legislators are still awaited. The
Insurance sector got a boost with the enactment of Special Zones Act 2005 by amending
Insurance Act 1938.
All these measures are meant to uplift the Indian insurance industry from its embryonic
stage to full professional class. The IRDA Act 1999 is a stark reminder of that. The law
can not be static and it has to change in line with current economic situation and social
scenario.
THE INSURANCE REGULATORY AND DEVELOPMENT

AUTHORITY ACT, 1999
20.22 INTRODUCTION
Before the IRDA Act 1999, came into being, Controller of Insurance appointed under
section 2B of Insurance Act 1938 performs the function of superintendence, control and
management of all kinds of Insurance companies. But after nationalisation of Life
Insurance in 1956 and General Insurance in 1972, the role of the Controller became
dormant, until 1999. After Indian economy got liberalised during early 1990’s,
competitions from private Indian companies became imperative. As a result a high
powered committee was set up under the chairmanship of former R.B.I. Governor, Shri
R.N. Malhotra, examine the current status of Indian Insurance Industry and recommend
changes, if any for efficient and economical functioning of it, keeping in view the Indian
financial system. The Committee later recommended establishment of a regulatory
framework to oversee the proper functioning of the Indian Insurance Industry. The
importance of such a framework was highlighted by the former Finance Minister Shri
Yaswant Sinha while moving the Finance Bill of 1998 – 99. Later the Insurance Regulatory
and Development Authority Act 1999 (Act No. 41 of 1999) became operative from 29th
December ,1999 after recieving Presidential assent.
20.23 IMPORTANT DEFINITIONS

Appointed Day: Sec – 2 (a) : Appointed day means the date on which the Authority is
established under sub – section (1) of Sec – 3.
Authority: Sec 2 (b) : “ Authority” means the Insurance Regulatory and Development
Authority established under Sub – section (1) of Sec – 3.
Chairperson: Sec – 2 (c): “Chairperson” means the Chairperson of the Authority.
Fund: Sec – 2 (d): “Fund” means the Insurance Regulatory and Development Authority
Fund constituted under Sub – Section (1) of Section 16.
Interim Insurance Regulatory Authority: Sec – 2 (e): “Interim Insurance Regulatory
Authority” means that Insurance Regulatory Authority set up by the Central Government
through Resolution No. 17 (2) /94 Ins – V, dated , the 23rd January, 1996.
Intermediary or Insurance Intermediary: Sec 2 (f): “ Intermediary or Insurance
Intermediary” includes insurance brokers, reinsurance brokers, Insurance Consultants,
Surveyors and loss assessors.
Members: Sec – 2 (g) “Member” means a whole time or part-time member of the
“Authority” and includes the Chairperson.
20.24 INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY : (SECTIONS 3-12)

The Central Government by notification appoint such ‘Authority’ in the nature of body
corporate enjoying all the characteristics of such entity along with contractual powers.
The Head Office of such ‘Authority’ is to be decided by the Central Government.
The members of such ‘Authority appointed by the Central Government depending upon
their expertise and experience in the field of Insurance, Law, Economic Accountancy, etc.
The member consists of: (a) Chairman.
(b) Five Whole Time members (maximum)
(c) Four Part – Time members (maximum)
One of these members should have knowledge in Life Insurance, General Insurance and
Actuarial Science.
The Chairperson shall hold office for a term of five years until he reaches sixty five years.
And he is eligible for re – appointment. A whole time member however can hold office for
up to sixty-two years.
Moreover a member can relinquish his membership by giving three month prior notice to
the Central Government or he can be removed from office under provision of Sec – 6. A
member may be removed from office if he became insolvent or insane or convicted for
offence involving moral turpitude or illegally established financial interest in the ‘Authority’
or acting contrary to public interest.
The remuneration for each member shall be as per prescribed Law.
The chairperson and the Whole – time member shall within two years from the date of
appointment, cannot hold office under Central Government or State Government or any
Insurance Sector.
All decisions regarding administrative matters are taken by the Chairperson.
The procedural aspect of the meetings of the ‘Authority’ may be determined by
regulations, Resolutions are passed by simple majority and chairperson may use casting
vote in case of a tie. In case, chairperson unable to attend any meeting then members
attending may appoint chairperson among themselves. Any act of the ‘Authority’ cannot
be invalidated simply because of any defect in appointing a member or procedural
irregularity.
From time to time, authority may appoint employees and officers for efficiency in their
work.
20.25 TRANSFER OF ASSETS, LIABILITIES, ETC. OF INDIAN INSURANCE

REGULATORY AUTHORITY (IIRA) TO INSURANCE REGULATORY DEVELOPMENT
AUTHORITY (IRDA) (SECTION 13)
On any appointed day, all assets and liabilities shall stand transferred from IIRA to IRDA.
Here, the assets may be movable or immovable. Along with it also includes attached
rights and powers. Before this, books of accounts, documents and other papers are also
included.
All contractual obligations entered by IIRA with third parties till before the appointed day
shall automatically transferred to IRDA.
Similarly all debts owed to IIRA also stands transferred to IRDA.
Also, legal proceedings including suits whether instituted by or against IIRA shall stand
transferred to IRDA.
20.26 DUTIES, POWERS AND FUNCTIONS OF AUTHORITY: SEC – 14

The Authority shall have the duty to regulate, control, promote and ensure healthy
development of insurance and re – insurance business. The powers and functions of the
Authority includes inter-alia:
(i) Issue, modify, cancel, etc, of Registration certificate to the applicant.
(ii) Safeguarding the interests of the policyholders like insurable interests, settlement of
claim, surrender value of the policy, etc.
(iii) Specifying code of conduct of the Surveyors.
(iv) Determining qualifications and training aspect of agents and intermediary.
(v) Levying fees and charges for their work.
(vi) Conducting investigations and enquiries relating to issues concerning insurance
business.
(vii) Regulating and controlling business not controlled by Tariff Advisory committee
under section 64 of Insurance Act 1938.
(viii) Regulatory investment funds by the Insurance Companies.
(ix) Regulating maintenance of margin of solvency.
(x) Adjudicating and settling disputes between intermediaries and insurers.
(xi) Supervising the functioning of Tariff Advisory Committee.
20.27 FINANCE, ACCOUNTS AND AUDIT: SECTIONS 15 – 17

The Central Government grants funds necessary for such Authority.
The fund shall be called as “IRDA Fund”. And it includes__

(i) Governmental Grants, fees and charges.
(ii) Money renewed by the ‘Authority’ from other sources specified by the Central
Government.
(iii) Premium income received from the insurer.
The above funds shall applied for__
(a) meeting salaries and allowances of members, officers and employees of the
authority.
(b) meeting other legitimate expenses of the authority.
The ‘Authority’ has to maintain Books of Accounts and prepare Annual Financial
Statements as per norms prescribed by Central Government in consultation with CAG.
The accounts of the ‘Authority’ shall be audited by the CAG according to their schedule
and the expenditure required for such audit has to be borned by the ‘Authority’.
Any other person appointed by CAG may enjoy same privileges and have assess to
books, documents and other relevant papers.
The certified accounts of the ‘Authority’ whether audited by CAG or person appointed by
CAG, to be put forward to the Central Government and the same be laid before the
Parliament by such Union Government.
20.28 OTHER MATTERS: SECTIONS 18 – 32

The ‘Authority is bound by the action of the Central Government regarding policy matters.
However, the Authority has the leverage of operating independently relating to technical
and administrative matters.
The Central Government may if situation warrants like, the Authority persistently
defaulting directions of them or in public interest, may supercede the Authority for not
more than six month duration, through notification and appointing a person as controller of
Insurance under section 2B of the Insurance Act 1938. However, while prior to such
notification, doctrine of Natural Justice has to be observed.
From the date of publication of the notification, the chairperson and other members cease
to hold office and all powers, functions and duties vests on the Central Government. And
also all properties shall vests on the Central Government.
The Central Government then appoint fresh chairperson and other members before the
expiration of the term of the super session. The notification and the Action Taken Report
has to be placed before the Parliament at the earlier possible opportunity.
From time to time the Authority has to furnish returns, statements and other particulars
regarding to any existing or proposed programme, to the Central Government.
The members and employees of the Authority shall be deemed to be public servants
under section 21 of IPC while discharging their official duties. And their actions while
performing their official duties are insulated from any legal proceedings, provided they
have acted in good faith.
The Authority may by prior notification, can establish Insurance Advisory Committee. This
Committee consists of twenty-five members (maximum) excluding existing members.
The chairperson shall be the ex-officio chairperson and other existing members shall be
ex-officio members of Insurance Advisory Committee. The Committee advices the
Authority on various matters, including under Section 26.
The ‘Authority’ may be general or special order delegate powers and functions to any of
its members or officers or employees.
The Central Government, by notification make rules relating to ,salary and allowances of
the members, Annual Statements of Accounts, matters relating to furnishing of documents
under Section 20 (1) and also matters relating to Insurance Advisory Committee under
Section 25 (1).
The Authority may after consulting the committee by notification, make regulations
particularly addressing the procedural aspect in conducting meetings, determining terms
and conditions of the services of the officers and employees, delegating powers to the
committee and other miscellaneous matters.
Each rule and regulation made under this Act to be placed before Upper House and Lower
House of Parliament for thirty days, while the Parliament is in session.
Each rule or regulation shall be subjected to any modification or amendment within such
period.
This act supplements all existing Acts made with relation Insurance Business.
The Central Government has right to remove any difficulties or impediments by making
notification in the Official Gazette within two years from the appointed day.
Section 30 deals with various amendments made with respect to Insurance Act 1938
stated in the First Schedule.
Section 31 deals with amendments made with respect to Life Corporation of India Act
1956 and which is specified in the Second Schedule.
Section 32 deals with various amendments made in General Insurance Business
(Nationalisation) Act 1972 which were specified in the Third Schedule.
THE SECURITISATION AND RECONSTRUCTION OF

FINANCIAL ASSETS AND ENFORCEMENT OF
SECURITY INTEREST ACT, 2002
20.29 INTRODUCTION
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002 came into force on the 21 st day of June, 2002. The Central Government
had used the Ordinance mode to bring the law in force. Later on the bill was presented
before the Lok Sabha on 21 st November, 2002 and thereafter, before the Rajya Sabha on
25 th November, 2002. It extends to the whole of India. The preamble to the Act provides
that it is an Act to regulate securitisation and reconstruction of financial assets and
enforcement of security interest and for matters connected therewith or incidental thereto.
The legal framework for securitisation in India emerged with the above enactment. Its
purpose is to promote the setting up of asset reconstruction/securitisation companies,
which are supposed to take over the Non Performing Assets (NPA) accumulated with the
banks and public financial institutions. Special powers under the Act have been given to
lenders and securitisation/ asset reconstruction companies, to enable them to take over
assets of borrowers without first resorting to courts.
20.30 IMPORTANT DEFINITIONS

In order to understand, the object of this Act it is important to first understand the alien
terms (alien as of now only). So let us look at the definitions contained in Section 2 of the
Act. The order of definitions as given below is not in accordance with the order given in
the Act, but in the order of preference such that a familiarity is developed with the alien
terms. Definitions contained in serial nos. 1 – 21 will help you understand the significant
terms while definitions contained in serial nos. 22 – 36 are mostly self explanatory in
nature and hence does not require any specific explanation
1. "asset reconstruction" means acquisition by any securitisation company or
reconstruction company of any right or interest of any bank or financial institution
in any financial assistance for the purpose of realization of such financial
assistance. [Section 2(b)]
2. "borrower" means any person who has been granted financial assistance by
any bank or financial institution or who has given any guarantee or created any
mortgage or pledge as security for the financial assistance granted by any bank
or financial institution and includes a person who becomes borrower of a
securitisation company or reconstruction company consequent upon acquisition by

it of any rights or interest of any bank or financial institution in relation to such
financial assistance [Section 2(f)]
3. "default" means non-payment of any principal debt or interest thereon or any
other amount payable by a borrower to any secured creditor consequent upon
which the account of such borrower is classified as non-performing asset in
the books of account of the secured creditor in accordance with the directions
or guidelines issued by the Reserve Bank [Section 2(j)]. Directions or guidelines
issued by the Reserve Bank in this regard are contained in RBI’s Master Circular –
Prudential norms on income recognition, asset classification and provisioning
pertaining to the advances portfolio, dated 4th July, 2002. One must go through the
present of policy of RBI on NPA classification very carefully. The definition of
default is of prime significance because most of the law is applicable only in case of
default. Hence the event of default is very crucial for the applicability of the
provisions of this law.
4. "financial asset" means debt or receivables and includes-
(i). a claim to any debt or receivables or part thereof, whether secured or
unsecured; or
(ii). any debt or receivables secured by, mortgage of, or charge on,
immovable property; or
(iii). a mortgage, charge, hypothecation or pledge of movable property; or
(iv). any right or interest in the security, whether full or part underlying such
debt or receivables; or
(v). any beneficial interest in property, whether movable or immovable, or in
such debt, receivables, whether such interest is existing, future,
accruing, conditional or contingent; or
(vi). any financial assistance [Section 2(l)]
5. The use of the word ‘future’ in clause (v) of Section 2(l) means that the term financial
asset includes a future debt also. It must be noted that a future debt does not refer to
debt payable in future. In case of a debt repayable in future, the debt exists today but
is payable in future, for example a loan given by the lender to the borrower. But in
case of a future debt, the debt does not exist today. It seems difficult to imagine as to
how one can transfer a future debt (which does not exist today). This becomes easy
when we understand the principle used in the case of Bharat Nidhi Limited v.
Takhatmal (1969) AIR SC 313. In case of a future debt, what exists today is an
agreement to transfer and it will be possible to transfer the future debt when it
actually arises, for example sales that will occur in future. In case of conditional
receivable, the receivable is transformed into a financial asset after the fulfillment of
the relevant conditions. Clause (vi) of Section 2(l) mentions ‘any financial assistance’.
The term financial assistance has already been defined in Section 2(k) supra.
6. "non-performing asset" means an asset or account of a borrower, which has
been classified by a bank or financial institution as sub-standard, doubtful or
loss asset, in accordance with the directions or under guidelines relating to
asset classifications issued by the Reserve Bank [Section 2(o)]
11. "reconstruction company" means a company formed and registered under
the Companies Act, 1956 (1 of 1956) for the purpose of asset reconstruction
[Section 2(v)]
12. "scheme" means a scheme inviting subscription to security receipts proposed to
be issued by a securitisation company or reconstruction company under that
scheme; [Section 2(y)]
20.31 REGULATION OF SECURITISATION AND RECONSTRUCTION OF FINANCIAL

ASSETS OF BANKS AND FINANCIAL INSTITUTIONS
Chapter II of the Act, comprising of Sections 3 – 12 provides for regulation of
securitisation and reconstruction of financial assets of banks and financial institutions.
(a) Registration of securitisation companies or reconstruction companies.
(Section 3)
Such a company can commence or carry on the business of securitisation or asset
reconstruction only after obtaining a certificate of registration granted under this
section and having the owned fund of not less than two crore rupees or such other
amount not exceeding fifteen per cent of total financial assets acquired or to be
acquired by the securitisation company or reconstruction company, as the Reserve
Bank may, by notification, specify. The Reserve Bank may, by notification, specify
different amounts of owned fund for different class or classes of securitisation companies
or reconstruction companies. However, the term ‘owned fund’ is not defined in the Act and
hence we have to the definition of ‘net owned fund’ as mentioned in the explanation to
Section 45I of the Reserve Bank of India Act. Every securitisation company or
reconstruction company shall make an application for registration to the Reserve Bank in
such form and manner as it may specify. A securitisation company or reconstruction
company, existing on the commencement of this Act, was required to make an
application for registration to the Reserve Bank before the expiry of six months from
such commencement and it was allowed to carry on the business of securitisation or
asset reconstruction until a certificate of registration is granted to it or, as the case
may be, rejection of application for registration is communicated to it.
The Reserve Bank may, for the purpose of considering to grant its approval for the
application for registration of a securitisation company or reconstruction company
to commence or carry on the business of securitisation or asset reconstruction, as the
case may be, require to be satisfied, by an inspection of records or books of such
securitisation company or reconstruction company, or otherwise, that the following
conditions are fulfilled, namely:-
(a) that the securitisation company or reconstruction company has not incurred losses in
any of the three preceding financial years;
(b) that such securitisation company or reconstruction company has made adequate
arrangements for realisation of the financial assets acquired for the purpose of
securitisation or asset reconstruction and shall be able to pay periodical returns and
redeem on respective due dates on the investments made in the company by
the qualified institutional buyers or other persons;
(c) that the directors of securitisation company or reconstruction company have
adequate professional experience in matters related to finance, securitisation and
reconstruction;
(d) that the board of directors of such securitisation company or reconstruction
company does not consist of more than half of its total number of directors who
are either nominees of any sponsor or associated in any manner with the sponsor
or any of its subsidiaries;
(e) that any of its directors has not been convicted of any offence involving moral
turpitude;
(f) that a sponsor, is not a holding company of the securitisation company or
reconstruction company, as the case may be, or, does not otherwise hold any
controlling interest in such securitisation company or reconstruction company;
(g) that securitisation company or reconstruction company has complied with or is in a
position to comply with prudential norms specified by the Reserve Bank.
A certificate of registration is thereafter granted to the securitisation company or the
reconstruction company to commence or carry on business of securitisation or asset
reconstruction, and it must be noted that the Reserve Bank may also prescribe any other
conditions, which it may consider, fit to impose. In case the Reserve Bank is of the
opinion that the above conditions are not satisfied then it may reject the application, after
the applicant is given a reasonable opportunity of being heard.
Once a company is registered as a securitisation company or reconstruction company, it
must obtain prior approval of the Reserve Bank for the following purposes:-
(a) any substantial change in its management
(b) change of location of its registered office
(c) change in its name
The decision of the Reserve Bank, whether the change in management of a securitisation
company or a reconstruction company is a substantial change in its management or not,
shall be final and binding. The expression "substantial change in management" means the
change in the management by way of transfer of shares or amalgamation or transfer of
the business of the company.
(b) Cancellation of certificate of registration (Section 4)
The Reserve Bank may cancel a certificate of registration granted to a securitisation
company or a reconstruction company, if such company-
(a) ceases to carry on the business of securitisation or asset reconstruction; or
(b) ceases to receive or hold any investment from a qualified institutional buyer; or
(c) has failed to comply with any conditions subject to which the certificate of
registration has been granted to it; or
(d) at any time fails to fulfil any of the conditions referred to in clauses (a) to (g) of sub-
section (3) of section 3; or
(e) fails to-comply with any direction issued by the Reserve Bank under the provisions
of this Act; or
(i) maintain accounts in accordance with the requirements of any law or any direction
or order issued by the Reserve Bank under the provisions of this Act; or
(ii) submit or offer for inspection its books of account or other relevant documents
when so demanded by the Reserve Bank; or
(iii) obtain prior approval of the Reserve Bank required under sub-section (6) of
section 3:
Before canceling a certificate of registration on the ground that the securitisation

company or reconstruction company has failed to comply with the provisions of clause
(c) or has failed to fulfill any of the conditions referred to in clause (d) or sub-clause (iv)
of clause (e), the Reserve Bank, unless it is of the opinion that the delay in cancelling the
certificate of registration granted under sub-section (4) of section 3 shall be prejudicial
to the public interest or the interests of he investors or the securitisation company
or the reconstruction company, shall give an opportunity to such company on such terms
as the Reserve Bank may specify for taking necessary steps to comply with such
provisions or fulfilment of such conditions.
In case the securitisation company or reconstruction company is aggrieved by the order of
rejection of application for registration or cancellation of certificate of registration by the
Reserve Bank, then it may prefer an appeal, within a period of thirty days from the date on
which such order of rejection or cancellation is communicated to it, to the Central
Government (Secretary, Ministry of Finance, Government of India) . The Central
Government must also give such company a reasonable opportunity of being heard before
rejecting the appeal.
It must be noted that a securitisation company or reconstruction company, which is
holding investments of qualified institutional buyers and whose application for grant
of certificate of registration has been rejected or certificate of registration has been
cancelled shall, notwithstanding such rejection or cancellation be deemed to be a
securitisation company or reconstruction company until it repays the entire investments
held by it (together with interest, if any) within such period as specified by the Reserve
Bank.
(c) Acquisition of rights or interest in financial assets (Section 5)
Notwithstanding anything contained in any agreement or any other law for the time
being in force, any securitisation company or reconstruction company may acquire
financial assets of any bank or financial institution-
(a.) by issuing a debenture or bond or any other security in the nature of debenture, for
consideration agreed upon between such company and the bank or financial
institution, incorporating therein such terms and conditions as may be agreed upon
between hem; or
(b.) by entering into an agreement with such bank or financial institution for the
transfer of such financial assets to such company on such terms and conditions as
may be agreed upon between them.
Debenture is we commonly know, is an acknowledgement of debt. Bond also refers to the

same nature of instrument as a debenture. Both of them acknowledge a debt and hence
an obligation to pay.
In case the bank or financial institution is a lender in relation to any financial assets
acquired by the securitisation company or the reconstruction company, then such
securitisation company or reconstruction company shall, on such acquisition, be
deemed to be the lender and all the rights of such bank or financial institution shall vest
in such company in relation to the subject financial assets.
Unless otherwise expressly provided by this Act, all contracts, deeds, bonds,
agreements, powers-of-attorney, grants of legal representation, permissions,
approvals, consents or no-objections under any law or otherwise and other instruments
of whatever nature which relate to the said financial asset and which are subsisting or
having effect immediately before the acquisition of financial asset and to which the
concerned bank or financial institution is a party or which are in favour of such bank
or financial institution shall, after the acquisition of the financial assets, be of as full
force and effect against or in favour of the securitisation company or reconstruction
company, as the case may be, and may be enforced or acted upon as fully and
effectually as if, in the place of the said bank or financial institution, securitisation
company or reconstruction company, as the case may be, had been a party thereto
or as if they had been issued in favour of securitisation company o reconstruction
company, as the case may be.
If, on the date of acquisition of financial asset, any suit, appeal or other proceeding
of whatever nature relating to the said financial asset is pending by or against the bank
or financial institution, save as provided in the third proviso to sub-section (1) of
section 15 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986)
the same shall not abate, or be discontinued or be, in any way, prejudicially affected
by reason of the acquisition of financial ass t by the securitisation company or
reconstruction company, as the case may be, but the suit, appeal or other proceeding
may be continued, prosecuted and enforced by or against the securitisation
company or reconstruction company, as the case may be.
(d) Measures for assets reconstruction (Section9)
A securitisation company or reconstruction company may, provide for any one or more of
the following measures, for the purposes of asset reconstruction, in accordance with the
guidelines framed by the Reserve Bank:-
(a) the proper management of the business of the borrower, by change in, or take over
of, the management of the business of the borrower;
(b) the sale or lease of a part or whole of the business of the borrower;
(c) rescheduling of payment of debts payable by the borrower;
(d) enforcement of security interest in accordance with the provisions of this Act;
(e) settlement of dues payable by the borrower;
(f) taking possession of secured assets in accordance with the provisions of this Act.
(e) Other functions of securitisation company or reconstruction company
(Section10)
Any securitisation company or reconstruction company may-
(a) act as an agent for any bank or financial institution for the purpose of recovering
their dues from the borrower on payment of such fees or charges as may be mutually
agreed upon between the parties;
(b) act as a manager referred to in clause (c) of sub-section (4) of section 13 on such
fee as may be mutually agreed upon between the parties;
(c) act as receiver if appointed by any court or tribunal:
Provided that no securitisation company or reconstruction company shall act as a
manager if acting as such gives rise to any pecuniary liability.
Save as otherwise provided in sub-section (1), no securitisation company or
reconstruction company which has been granted a certificate of registration under sub-
section (4) of section 3, shall commence or carry on, without prior approval of the
Reserve Bank, any business other than that of securitisation or asset reconstruction.
Provided that a securitisation company or reconstruction company which is carrying on,
on or before the commencement of this Act, any business other than the business
of securitisation or asset reconstruction or business referred to in sub-section (1), all
cease to carry on any such business within one year from the date of
commencement of this Act.
For the purposes of this section, "securitisation company'' or "reconstruction
company'' does not include its subsidiary.
(f) Resolution of disputes (Section 11)
Where any dispute relating to securitisation or reconstruction or non-payment of
any amount due including interest arises amongst any of the parties, namely, the
bank, or financial institution, or securitisation company or reconstruction company or
qualified institutional buyer, such dispute shall be settled by conciliation or arbitration
as provided in the Arbitration and Conciliation Act, 1996, as if the parties to the dispute
have consented in writing for determination of such dispute by conciliation or arbitration
and the provisions of that Act shall apply accordingly.
20.32 ENFORCEMENT OF SECURITY INTEREST

Provisions dealing with enforcement of security interest are contained in Chapter III of the
Act, comprising of Sections 13 – 19.
(a) Enforcement of security interest (Section 13)
Notwithstanding anything contained in section 69 or section 69A of the Transfer of
Property Act, 1882 (4 of 1882), any security interest created in favour of any secured
creditor may be enforced, without the intervention of the court or tribunal, by such
creditor in accordance with the provisions of this Act.
Where any borrower, who is under a liability to a secured creditor under a security
agreement, makes any default in repayment of secured debt or any installment thereof,
and his account in respect of such debt is classified by the secured creditor as on-
performing asset, then, the secured creditor may require the borrower by notice in
writing to discharge in full his liabilities to the secured creditor within sixty days from
the date of notice failing which the secured creditor shall be entitled to exercise all or
any of the rights under sub-section (4) of Section 13. This notice shall give details of the
amount payable by the borrower and the secured assets intended to be enforced by the
secured creditor in the event of non-payment of secured debts by the borrower. The
procedure for the service of the notice is prescribed in the Security Interests
(Enforcement) Rules.
Sub-section (4) of Section 13 provides that if the borrower fails to discharge his liability in
full within the above specified period, the secured creditor may take recourse to one or
more of the following measures to recover his secured debt:-
(a) take possession of the secured assets of the borrower including the right to
transfer by way of lease, assignment or sale for realising the secured asset;
(b) take over the management of the secured assets of the borrower including the
right to transfer by way of lease, assignment or sale and realise the secured asset;
(c) appoint any person (hereafter referred to as the manager), to manage the
secured assets the possession of which has been taken over by the secured
creditor;
(d) require at any time by notice in writing, any person who has acquired any of the
secured assets from the borrower and from whom any money is due or may
become due to the borrower, to pay the secured creditor, so much of the money
as is sufficient to pay the secured debt.
Any transfer of secured asset after taking possession thereof or take over of
management under sub-section (4), by the secured creditor or by the manager on behalf
of the secured creditor shall vest in the transferee all rights in, or in relation to, the
secured asset transferred as if the transfer had been made by the owner of such
secured asset. [Section 13(6)]
Where any action has been taken against a borrower under the provisions of sub-
section (4), all costs, charges and expenses which, in the opinion of the secured creditor,
have been properly incurred by him or any expenses incidental thereto, shall be
recoverable from the borrower and the money which is received by the secured
creditor shall, in the absence of any contract to the contrary, be held by him in trust, to
be applied, firstly, in payment of such costs, charges and expenses and secondly, in
discharge of the dues of the secured creditor and the residue of the money so received
shall be paid to the person entitled thereto in accordance with his rights and interests.
[Section 13(7)]
If the dues of the secured creditor together with all costs, charges and expenses
incurred by him are tendered to the secured creditor at any time before the date fixed
for sale or transfer, the secured asset shall not be sold or transferred by the
secured creditor, and no further step shall be taken by him for transfer or sale of that
secure asset. [Section 13(8)]
In the case of financing of a financial asset by more than one secured creditors or joint
financing of a financial asset by secured creditors, no secured creditor shall be entitled
to exercise any or all of the rights conferred on him under or pursuant to sub-section
(4) unless exercise of such right is agreed upon by the secured creditors
representing not less than three-fourth in value of the amount outstanding as on a
record date and such action shall be binding on all the secured creditors. [Section
13(9)]. But in case of a company in liquidation, the amount realised from the sale of
secured assets shall be distributed in accordance with the provisions of section 529A of
the Companies Act, 1956.
Provided further that in the case of a company being wound up on or after the
commencement of this Act, the secured creditor of such company, who opts to realise
his security instead of relinquishing his security and proving his debt under proviso to su
-section (1) of section 529 of the Companies Act, 1956 (1 of 1956), may retain the
sale-proceeds of his secured assets after depositing the workmen's dues with the
liquidator in accordance with the provisions of section 529A of that Act:
Provided also that liquidator referred to in the second proviso shall intimate the secured
creditor the workmen's dues in accordance with the provisions of section 529A of the
Companies Act, 1956 (1 of 1956) and in case such workmen's dues cannot be asc
rtained, the liquidator shall intimate the estimated amount of workmen's dues under
that section to the secured creditor and in such case the secured creditor may retain the
sale proceeds of the secured assets after depositing the amount of such estimate dues
with the liquidator:
Provided also that in case the secured creditor deposits the estimated amount of
workmen's dues, such creditor shall be liable to pay the balance of the workmen's
dues or entitled to receive the excess amount, if any, deposited by the secured creditor
with the liquidator:
Provided also that the secured creditor shall furnish an undertaking to the liquidator to
pay the balance of the workmen's dues, if any.
Explanation.-For the purposes of this sub-section,-
(a) "record date" means the date agreed upon by the secured creditors representing not
less than three-fourth in value of the amount outstanding on such date;
(b) "amount outstanding" shall include principal, interest and any other dues payable
by the borrower to the secured creditor in respect of secured asset as per the books of
account of the secured creditor.
(10) Where dues of the secured creditor are not fully satisfied with the sale proceeds of
the secured assets, the secured creditor may file an application in the form and manner
as may be prescribed to the Debts Recovery Tribunal having jurisdiction or a competent
court, as the case may be, for recovery of the balance amount from the borrower.
(11) Without prejudice to the rights conferred on the secured creditor under or by this
section, secured creditor shall be entitled to proceed against the guarantors or sell the
pledged assets without first taking any of the measured specifies in clause (a) to (d)
of
sub-section (4) in relation to the secured assets under this Act.
(12) The rights of a secured creditor under this Act may be exercised by one or more of
his officers authorised in this behalf in such manner as may be prescribed.
(13) No borrower shall, after receipt of notice referred to in sub-section (2), transfer
by way of sale, lease or otherwise (other than in the ordinary course of his business) any
of his secured assets referred to in the notice, without prior written cons ent of the
secured creditor.
(h) Manner and effect of take over of management (Section 15)

When the management of business of a borrower is taken over by a secured
creditor, the secured creditor may, by publishing a notice in a newspaper published
in English language and in a newspaper published in an Indian language in circulation in
the place where the principal office of the borrower is situated, appoint as many persons
as it thinks fit-
(a) in a case in which the borrower is a company under the Companies Act, 1956, to be
the directors of that borrower in accordance with the provisions of that Act; or
(b) in any other case, to be the administrator of the business of the borrower.
On publication of the above notice, all persons holding office as directors of the
company (if the borrower is a company) and in any other case, all persons holding any
office having power of superintendence, direction and control of the business of the
borrower immediately before the publication of the above notice, shall be deemed to have
vacated their offices. Any contract of management between the borrower and any director
or manager thereof holding office as such immediately before publication of the
above notice, shall be deemed to be terminated. The directors or the administrators
appointed under this section shall take such steps as may be necessary to take into their
custody or under their control all the property, effects and actionable claims to which the
business of the borrower is, or appears to be, entitled and all the property and effects of
the business of the borrower shall be deemed to be in the custody of the directors or
administrators, as the case may be, as from the date of the publication of the above
notice.
All directors appointed in accordance with the above notice shall, for all purposes, be
the directors of the company of the borrower and such directors or the administrators (if
the borrower is other than a company) appointed under section 15, shall only be entitled
to exercise all the powers of the directors or as the case may be, of the persons
exercising powers of superintendence, direction and control, of the business of the
borrower whether such powers are derived from the memorandum or articles of
association of the company of the borrower or from any other source.
Where the management of the business of a borrower, being a company as defined
in the Companies Act, 1956, is taken over by the secured creditor, then, notwithstanding
anything contained, such borrower- in the said Act or in the memorandum or articles of
association of such company -
(a) it shall not be lawful for the shareholders of such company or any other person to
nominate or appoint any person to be a director of the company;
(b) no resolution passed at any meeting of the shareholders of such company shall be
given effect to unless approved by the secured creditor;
(c) no proceeding for the winding up of such company or for the appointment of a
receiver in respect thereof shall lie in any court, except with the consent of the secured
creditor.
The secured creditor is under an obligation to restore the management of the
business of the borrower, on realisation of his debt in full, in case of take over of the
management of the business of a borrower by such secured creditor.
(c) No compensation to directors for loss of office (Section 16)
Irrespective of anything contained in any contract or in any other law for the time being in
force, no managing director or any other director or a manager or any person in charge of
management of the business of the borrower shall be entitled to any compensation for the
loss of office or for the premature termination under this Act. However any such
managing director or any other director or manager or any such person in charge of
management has the right to recover from the business of the borrower, moneys
recoverable otherwise than by ay of such compensation.
(d) Right to appeal (Section 17)
Any person (including borrower), aggrieved by any of the measures referred to in sub-
section (4) of section 13 taken by the secured creditor or his authorised officer under
this Chapter, may prefer an appeal to the Debts Recovery Tribunal having jurisdiction
in the matter within forty-five days from the date on which such measure had been taken.
If the appeal is preferred by a borrower, such appeal is not entertained by the Debts
Recovery Tribunal unless the borrower has deposited with the Debts Recovery Tribunal
seventy-five per cent of the amount claimed in the notice referred to in sub-section (2)
of section 13. However, the Debts Recovery Tribunal may, waive or reduce this amount to
be deposited, for reasons to be recorded in writing,
(e) Appeal to Appellate Tribunal (Section 18)
Any person aggrieved, by any order made by the Debts Recovery Tribunal under section
17 as above, may prefer an appeal to the Appellate Tribunal within thirty days from the
date of receipt of the order of Debts Recovery Tribunal.
Save as otherwise provided in this Act, the Debts Recovery Tribunal under Section
17 or the Appellate Tribunal under Section 18 shall, as far as may be, dispose of the
appeal in accordance with the provisions of the Recovery of Debts Due to Banks
and Financial Institutions Act, 1993 and rules made thereunder.
(f) Right of borrower to receive compensation and costs in certain cases

(Section 19)
If the Debts Recovery Tribunal or the Appellate Tribunal, as the case may be, on an
appeal filed under section 17 or section 18 holds the possession of secured assets by
the secure creditor as wrongful and directs the secured creditor to return such
secured assets to the concerned borrower, such borrower shall be entitled to payment
of such compensation and costs as may be determined by such Tribunal or Appellate
Tribunal.
20.33 CENTRAL REGISTRY

Chapter IV deals with provisions relating to the Central Registry. The provisions are
contained in Sections 20 – 26 of the Act.
(a) Central Registry (Section 20)
The Central Government may, by notification, set up or cause to be set up from such date
as it may specify in such notification, a registry to be known as the Central Registry with
its own seal for the purposes of registration of transaction of securitisation and
reconstruction of financial assets and creation of security interest under this Act. The
head office of the Central Registry shall be at such place as the Central Government may
specify and for the purpose of facilitating registration of transactions referred above, there
may be established at such other places as the Central Government may think fit,
branch offices of the Central Registry. The Central Government may, by notification,
define the territorial limits within which an office of the Central Registry may exercise its
functions. The provisions of this Act pertaining to the Central Registry shall be in
addition to and not in derogation of any of the provisions contained in the Registration
Act, 1908, the Companies Act, 1956, the Merchant Shipping Act, 1958, the Patents Act,
1970, the Motor Vehicles Act, 1988 and the Designs Act, 2000 or any other law
requiring registration of charges and shall not affect the priority of charges or validity
thereof under those Acts or laws.
(b) Central Registrar (Section 21)
The Central Government may, by notification, appoint a person for the purpose of
registration of transactions relating to securitisation, reconstruction of financial assets
and security interest created over properties, who shall be known as the Central
Registrar. The Central Government may appoint such other officers with such
designations as it thinks fit for the purpose of discharging, under the superintendence
and direction of the Central Registrar, such functions of the Central Registrar under
this Act as he may, from time to time, authorise them to discharge.
(c) Register of securitisation, reconstruction and security Interest transactions.

(Section 22)
A record called the Central Register shall be kept at the head office of the Central
Registry for entering the particulars of the transactions relating to-
(a) securitisation of financial assets;
(b) reconstruction of financial assets; and
(c) creation of security interest.
The Central Registrar can keep the records wholly or partly in computer, floppies,
diskettes or in any other electronic form subject to the prescribed safeguards. Records
kept in these form shall also form a part of the Central Register. The register shall be kept
under the control and management of the Central Registrar.
(d) Filing of transactions of securitisation, reconstruction and creation of security
interest (Section 23)
The particulars of every transaction of securitisation, asset reconstruction or creation of
security interest shall be filed, with the Central Registrar in the prescribed manner and on
payment of the prescribed fees, within thirty days after the date of such transaction or
creation of security, by the securitisation company or reconstruction company or the
secured creditor, as the case may be. In case of delay in the filing, the Central Registrar
is empowered to allow the filing of the particulars of such transaction or creation of
security within thirty days next following the expiry of the said period of thirty days on
payment of such additional fees not exceeding ten times the amount of such fee.
20.34 OFFENCES AND PENALTIES
Chapter V (Section 27-30) deals with offences and penalties under the Act.
Penalties (Section 27)
If a default is made-
(a) in filing under section 23, the particulars of every transaction of any securitisation or
asset reconstruction or security interest created by a securitisation company or
reconstruction company or secured creditors; or
(b) in sending under section 24, the particulars of the modification referred to in that
section; or
(c) in giving intimation under section 25,
then, every company and every officer of the company or the secured creditors and
every officer of the secured creditor who is in default shall be punishable with fine which
may extend to five thousand rupees for every day during which the default continues.
Penalties for non-compliance of directions issued by RBI (Section 28)
If any securitisation company or reconstruction company fails to comply with any
direction issued by the Reserve Bank under section 12, such company and every
officer of the company who is in default, shall be punishable with fine which may extend
to five lakh rupees and in the case of a continuing offence, with an additional fine which
may extend to ten thousand rupees for every day during which the default
continues.
Offences (Section 29)
If any person contravenes or attempts to contravene or abets the contravention of the
provisions of this Act or of any rules made thereunder, he shall be punishable with
imprisonment for a term which may extend to one year, or with fine, or with both.
Cognizance of Offence (Section 30)
No court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the
first class shall try any offence punishable under this Act.
20.35 MISCELLANEOUS MATTERS
Chapter VI (Sections 31-42) concerns with various miscellaneous matters.
(a) Provisions of the Act not to apply in some cases (Section 31)
The situations in which the provisions of this Act do not apply are as follows :-
(a) a lien on any goods, money or security given by or under the Indian Contract Act,
1872 (9 of 1872) or the Sale of Goods Act, 1930 (3 of 1930) or any other law for the time
being in force;
(b) a pledge of movables within the meaning of section 172 of the Indian Contract Act,
1872 (9 of 1872);
(c) creation of any security in any aircraft as defined in clause (1) of section 2 of the
Aircraft Act, 1934 (24 of 1934);
(d) creation of security interest in any vessel as defined in clause (55) of section 3 of the
Merchant Shipping Act, 1958 (44 of 1958);
(e) any conditional sale, hire-purchase or lease or any other contract in which no security
interest has been created;
(f) any rights of unpaid seller under section 47 of the Sale of Goods Act, 1930 (3 of
1930);
(g) any properties not liable to attachment or sale under the first proviso to sub-section
(1) of section 60 of the Code of Civil Procedure, 1908 (5 of 1908);
(h) any security interest for securing repayment of any financial asset not exceeding
one lakh rupees;
(i) any security interest created in agricultural land;
(j) any case in which the amount due is less than twenty per cent of the principal amount
and interest thereon.
(b) Protection of action taken in good faith (Section 32)
No suit, prosecution or other legal proceedings shall lie against any secured creditor or
any of his officers or manager exercising any of the rights of the secured creditor or
borrower for anything done or omitted to be done in good faith under this Act.
(c) Offence by companies (Section 33)
Where an offence under this Act has been committed by a company, every person who at
the time the offence was committed was in charge of, and was responsible to, the
company, for the conduct of the business of the company, as well as the company, shall
be deemed to be guilty of the offence and shall be liable to be proceeded against and
punished in accordance with the provisions of the Act. But if such person is able to prove
that the offence was committed without his knowledge or that he had exercised all due
diligence to prevent the co mission of such offence, then Section 33 does not apply to
such person. It must also be noted that, where an offence under this Act has been
committed by a company and it is proved that the offence has been committed with
the consent or connivance of, or is attributable to any neglect on the part of, any
director, manager, secretary or other officer of the company, such director, manager,
secretary or other officer shall also be deemed to be guilty of the offence and shall be
liable to be proceeded against and punished in accordance with the provisions of the Act.
For the purposes of Section 33:-
(a) "company'' means any body corporate and includes a firm or other association of
individuals; and
(b) "director'', in relation to a firm, means a partner in the firm.
(d) Civil Court not to have jurisdiction (Section 34)
No civil court shall have jurisdiction to entertain any suit or proceeding in respect of
any matter which a Debts Recovery Tribunal or the Appellate Tribunal is empowered by
or under this Act to determine and no injunction shall be granted by any court or other
authority in respect of any action taken or to be taken in pursuance of any power
conferred by or under this Act or under the Recovery of Debts Due to Banks and
Financial Institutions Act, 1993.
(e) Overriding Provisions (Section 35)
The provisions of this Act shall have effect, notwithstanding anything inconsistent
therewith contained in any other law for the time being in force or any instrument having
effect by virtue of any such law.
(f) Limitation (Section 36)
No secured creditor shall be entitled to take all or any of the measures under sub-section
(4) of section 13, unless his claim in respect of the financial asset is made within the
period of limitation prescribed under the Limitation Act, 1963.
(g) Application of other laws (Section 37)
The provisions of this Act or the rules made thereunder shall be in addition to, and not
in derogation of, the Companies Act, 1956, the Securities Exchange Board of India
Act, 1992, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 or
any other law for the time being in force. Securities Contracts (Regulation) Act, 1956.
The Central Government may, by notification and in the Electronic Gazette as defined
in clause (s) of section 2 of the Information Technology Act, 2000, make rules for carrying
out the provisions of this Act. In particular, and without prejudice to the generality of the
foregoing power, such rules may provide for all or any of the following matters,
namely:-
(a) the form and manner in which an application may be filed under sub-section (10) of
section 13;
(b) the manner in which the rights of a secured creditor may be exercised by one or
more of his officers under sub-section (12) of section 13;
(c) the safeguards subject to which the records may be kept under sub-section (2) of
section 22;
(d) the manner in which the particulars of every transaction of securitisation shall be
filed under section 23 and fee for filing such transaction;
(e) the fee for inspecting the particulars of transactions kept under section 22 and
entered in the Central Register under sub-section (1) of section 26;
(f) the fee for inspecting the Central Register maintained in electronic form under
(g) any other matter which is required to be, or may be, prescribed, in respect of which
provision is to be, or may be, made by rules.
(h) Power of the Central Government to make rules (Section 38)
Every rule made under this Act shall be laid, as soon as may be after it is made,
before each House of Parliament, while it is in session, for a total period of thirty days
before the expiry of the session immediately following the session or the
successive sessions aforesaid, both Houses agree in making any modification in the
rule or both Houses agree that the rule should not be made, the rule shall thereafter have
effect only in such modified form or be of no effect, as the case may be; so, however,
that any such modification or annulment shall be without prejudice to the validity of
anything previously done under that rule.
20.36 SELF EXAMINATION QUESTIONS

1. How IRDA 1999 came into existence. Explain in brief.
2. Who is a Authority?
3. How many members are in the Authority?
4. In what way, Assets and Liabilities get transferred from IIRA to IRDA.
5. Explain in brief, the powers of the ‘Authority’.
6. How Accounts and Audit are made in IRDA.

7. To what extent RBI has the power to control loans and advances granted by a
banking company ?
8. Discuss in brief the provisions relating to Commission, Rebates under the
Insurance Act, 1938.
9. How is enforcement of security interest done under SRFAESI Act, 2002 ?
21
PREVENTION OF MONEY LAUNDERING ACT, 2002
21.0 INTRODUCTION
Prevention of Money Laundering Act, 2002 or more commonly known as PMLA 2002 (an
abbreviation for Prevention of Money Laundering Act, 2002) came into force w.e.f 1st July
2005. It extends to the whole of India. It aims at combating channellising of money into illegal
activities, provides for attachment and seizure of property and records, stringent punishment,
including rigorous imprisonment of upto 10 years and fine of upto Rs. 5 lakh. The Act, in line
with India's commitment to fight all forms of economic crimes
The preamble to the Act provides that it aims to prevent money –laundering and to provide for
confiscation of property derived from, or involved in money – laundering and for matters
connected therewith or incidental thereto. The legislation is a result of the Political Declaration
and Global Programme of Action, annexed to the resolution S-17/2 which was adopted by the
General Assembly of the United Nations at the 17th special session on 23rd February, 1990
and the Political Declaration adopted by the Special Session of the United Nations General
Assembly held on 8th – 10th June, 1998. The legislation is very recent and most essential
provisions have been discussed herein below so that the ethos behind the work is well
understood, instead of simply reading the legislation for the purpose of reading it only. PMLA
will certainly have a far reaching impact. The fact that such a legislation has been drafted,
passed and notified indicates the desire of the system to become neat and clean.
21.1 DEFINITIONS
Four major Definitions
(a) Money - Laundering
(b) Proceeds of crime
(c) Property
(d) Scheduled Offence
Actually to understand the meaning of money – laundering it is essential to define proceeds of

crime, property and scheduled offence. And infact, all the above definitions have to be read
together.
Clause (p) of sub section 1 of Section 2 provides that "money-laundering" has the meaning
assigned to it in section 3. Moving to Section 3, it is observed that whosoever directly or
indirectly attempts to indulge or knowingly assists or knowingly is a party or is actually
involved in any process or activity connected with the proceeds of crime and projecting it as
untainted property shall be guilty of offence of money laundering.
Section 2(1)(u) defines "proceeds of crime" as any property derived or obtained, directly or
indirectly, by any person as a result of criminal activity relating to a scheduled offence or the
value of any such property.
In terms of Clause (v) of sub – section (1) of Section 2, "property" means any property or
assets of every description, whether corporeal or incorporeal, movable or immovable, tangible
or intangible and includes deeds and instruments evidencing title to, or interest in, such
property or assets, wherever located.
The term “scheduled offence" has been defined in clause (y) of sub-section (1) of Section 2 of
the Act. Accordingly it means –
(a) the offences specified under Part A of the Schedule; or
(b) the offences specified under Part B of the Schedule if the total value involved in such
offences is thirty lakh rupees or more.
The Schedule to the Act gives a list of all the above offences. The Schedule is divided into two
parts. Part A and Part B which are as follows:-
PART A
Paragraph 1 - Offences under the Indian Penal Code (Part A)
(a) Section 121 - Waging, or attempting to wage war, or abetting waging of war, against
the Government of India.
(b) Section 121A - Conspiracy to commit offences punishable by section 121 against the
State.
Paragraph 2 - Offences under the Narcotic Drugs And Psychotropic Substances Act,
1985
(a) Section 15 - Contravention in relation to poppy straw.
(b) Section 18 - Contravention in relation to opium poppy and opium.
(c) Section 20 - Contravention in relation to cannabis plant and cannabis.
(d) Section 22 - Contravention in relation to psychotropic substances.
Prevention of Money Laundering Act, 2002 21.3
(e) Section 23 - Illegal import into India , export from India or transshipment of narcotic
drugs and psychotropic substances.
(f) Section 24 - External dealings in narcotic drugs and psychotropic substances in
contravention of section 12 of the Narcotic Drugs and Psychotropic Substances Act,
1985.
(g) Section 25A - Contravention of orders made under section 9A of the Narcotic Drugs
and Psychotropic Substances Act, 1985.
(h) Section 27A - Financing illicit traffic and harbouring offenders.
(i) Section 29 - Abetment and criminal conspiracy.
PART B
Paragraph 1 - Offences under the Indian Penal Code
(a) Section 302 - Murder.
(b) Section 304 - Culpable homicide not amounting to murder, if act by which the death is
caused is done with the intention of causing death.
(c) Section 307 - Attempt to murder.
(d) Section 308 - Attempt to commit culpable homicide.
(e) Section 327 - Voluntarily causing hurt to extort property, or a valuable security, or to
constrain to do anything which is illegal or which may facilitate the commission of the
offence.
(f) Section 329 - Voluntarily causing grievous hurt to extort property, or a valuable
security, or to constrain to do anything which is illegal or which may facilitate the
commission of the offence.
(g) Section 364A - Kidnapping for ransom, etc.
(h) Section 384 to 389 - Offences relating to extortion.
(i) Section 392 to 402 - Offences relating to robbery and dacoity.
(j) Section 467 - Forgery of a valuable security, will or authority to make or transfer any
valuable security, or to receive any money, etc.
(k) Section 489A - Counterfeiting currency notes or bank notes.
(l) Section 489B - Using as genuine, forged or counterfeit currency notes or bank notes.
Paragraph 2 - Offences under the Arms Act, 1959
(a) Section 25 –
(i.) To manufacture, sell, transfer, convert, repair or test or prove or expose or offer for
sale or transfer or have in his possession for sale, transfer, conversion, repair, test
or proof, any arms or ammunition in contravention of section 5 of the Arms Act,

1959.
(ii.) To acquire, have in possession or carry any prohibited arms or prohibited
ammunition in contravention of section 7 of the Arms Act, 1959. Contravention of
section 24A of the Arms Act, 1959 relating to prohibition as to possession of notified
arms in disturbed areas, etc.
(iii.) Contravention of section 24B of the Arms Act, 1959 relating to prohibition as to
carrying of notified arms in or through public places in disturbed areas.
(iv.) Other offences specified in section 25
(b) Section 26 - To do any act in contravention of any provisions of section 3, 4, 10 or 12 of
the Arms Act, 1959 in such manner as specified in sub-section (1) of section 26 of the
said Act. To do any act in contravention of any provisions of section 5, 6, 7 or 11 of the
Arms Act, 1959 in such manner as specified in sub-section (2) of section 26 of the said
Act. Other offences specified in section 26.
(c) Section 27. - Use of arms or ammunitions in contravention of section 5 or use of any
arms or ammunition in contravention of section 7 of the Arms Act, 1959.
(d) Section 28 -Use and possession of fire arms or imitation fire arms in certain cases.
(e) Section 29 - Knowingly purchasing arms from unlicensed person or for delivering arms,
etc., to person not entitled to possess the same.
(f) Section 30 -Contravention of any condition of a licence or any provisions of the Arms Act,
1959 or any rule made thereunder.
Paragraph 3 - Offences under the Wild Life (Protection) Act, 1972
(a) Section 51 read with section 17A - Contravention of provisions of Section 17A relating
to prohibition of picking, uprooting, etc., of specified plants
(b) Section 51 read with section 39 - Contravention of provisions of Section 39 relating to
wild animals, etc., to be Government property.
(c) Section 51 read with section 44 - Contravention of provisions of Section 44 relating to
dealings in trophy and animal articles without licence prohibite.d
(d) Section 51 read with section 48 - Contravention of provisions of Section 48 relating to
purchase of animal, etc., by licensee.
(e) Section 51 read with section 49B - Contravention of provisions of Section 49B relating
to prohibition of dealings in trophies, animal articles, etc., derived from scheduled
animals
Paragraph 4 - Offences under the Immoral Traffic (Prevention) Act, 1956
(a) Section 5 - Procuring, inducing or taking person for the sake of prostitution.
(b) Section 6 - Detaining a person in premises where prostitution is carried on.

(c) Section 8 - Seducing or soliciting for purpose of prostitution.
(d) Section 9 - Seduction of a person in custody.
Paragraph 5 - Offences under the Prevention Of Corruption Act, 1988
(a) Section 7 - Public servant taking gratification other than legal remuneration in respect
of an official act.
(b) Section 8 - Taking gratification in order, by corrupt or illegal means. to influence public
servant.
(c) Section 9 - Taking gratification for exercise of personal influence, with public servant.
(d) Section 10 - Abetment by public servant of offences defined in section 8 or section 9 of
the Prevention of Corruption Act, 1988.
21.2 PUNISHMENT FOR THE OFFENCE OF MONEY LAUNDERING

Chapter II comprises of Sections 3 and 4. Section 3 deals with the office of money laundering
which has been discussed in the definition part above. Section 4 provides for the punishment
for Money-Laundering. Whoever commits the offence of money-laundering shall be punishable
with rigorous imprisonment for a term which shall not be less than three years but which may
extend to seven years and shall also be liable to fine which may extend to five lakh rupees.
But where the proceeds of crime involved in money-laundering relates to any offence specified
under paragraph 2 of Part A of the Schedule, the maximum punishment may extend to ten
years instead of seven years.
21.3 OBLIGATION OF BANKING COMPANIES, FINANCIAL INSTITUTIONS AND

INTERMEDIARIES
Section 12 provides for the obligation of Banking Companies, Financial Institutions and
Intermediaries of securities market. Every banking company, financial institution and
intermediary shall –
(a.) maintain a record of all transactions, the nature and value of which may be prescribed,
whether such transactions comprise of a single transaction or a series of transactions
integrally connected to each other, and where such series of transactions take place
within a month. Such records shall be maintained for a period of ten years from the date
of cessation of the transactions between the clients and the banking company or financial
institution or intermediary, as the case may be.
(b.) furnish information of the above transactions to the Director within the prescribed time.
(c.) verify and maintain the records of the identity of all its clients, in the prescribed manner.
If the principal officer of a banking company or financial institution or intermediary, , has
reason to believe that a single transaction or series of transactions integrally connected to
each other have been valued below the prescribed value so as to defeat the provisions of this
section, such officer shall furnish information in respect of such transactions to the Director
within the prescribed time.
Section 13 deals with the powers of the Director. The Director may, either of his own motion or
on an application made by any authority, officer or person, call for records referred to in sub-
section (1) of section 12 and may make such inquiry or cause such inquiry to be made, as he
thinks fit. If the Director, in the course of any inquiry, finds that a banking company, financial
institution or an intermediary or any of its officers has failed to comply with the provisions of
section 12, then, without prejudice to any other action that may be taken under any other
provisions of this Act, he may, by an order, levy a fine on such banking company or financial
institution or intermediary which shall not be less than ten thousand rupees but may extend to
one lakh rupees for each failure. [Section 13(2)]. The Director shall forward a copy of the order
passed under sub-section (2) to every banking company, financial institution or intermediary or
person who is a party to the proceedings under that sub-section.
Section 14 gives immunity to banking companies, financial institutions and intermediaries of
securities market, etc., against civil proceedings for furnishing information under clause (b) of
sub-section (1) of section 12.
Section 15 provides for prescribing the procedure and manner of maintaining and furnishing
information. The Central Government may, in consultation with the Reserve Bank of India,
prescribe the procedure and the manner of maintaining and furnishing information under sub-
section (1) of section 12 for the purpose of implementing the provisions of this Act.
21.4 APPLELLATE TRIBUNAL

Section 25 empowers the Central Government to establish an Appellate Tribunal to hear
appeals against the orders of the Adjudicating Authority and the authorities under this Act.
Section 26 deals with the right and time frame to make and appeal to the Appellate Tribunal.
The Director or any person aggrieved by an order made by the Adjudicating Authority under
this Act or any banking company, financial institution or intermediary aggrieved by any order of
the Director made under sub-section (2) of section 13 may prefer an appeal to the Appellate
Tribunal within a period of forty-five days from the date on which a copy of the order made by
the Adjudicating Authority or Director is received and it shall be in such form and be
accompanied by such fee as may be prescribed., may prefer an appeal to the Appellate
Tribunal. The Appellate Tribunal may, after giving an opportunity of being heard, entertain an
appeal after the expiry of the said period of forty-five days if it is satisfied that there was
sufficient cause for not filing it within that period. On receipt of an appeal under sub-section
(1), or sub-section (2), the Appellate Tribunal may, after giving the parties to the appeal an
opportunity of being heard, pass such orders thereon as it thinks fit, confirming, modifying or
setting aside the order appealed against. The Appellate Tribunal shall send a copy of every
order made by it to the parties to the appeal and to the concerned Adjudicating Authority or
the Director, as the case may be. The appeal filed before the Appellate Tribunal shall be dealt
with by it as expeditiously as possible and endeavour shall be made by it to dispose of the
appeal finally within six months from the date of filing of the appeal.
Section 27 deals with the composition of the Appellate Tribunal. The Appellate Tribunal shall
consist of a Chairperson and two other members. Sub-section (2) of Section 27 also provides
that the jurisdiction of the Appellate Tribunal may be exercised by Benches thereof, as the
Central Government may notify. Each bench may constituted by the Chairperson with one or
two Members as the Chairperson may deem fit.
Section 28 deals with the qualifications for appointment to the Appellate Tribunal.
Section 29 dealing with term of office of of the Chairperson and Member of the Appellate
Tribunal was omitted by the Prevention of Money-Laundering (Amendment) Act, 2005.
Sections 30-37 deal with the conditions of service, vacancies, resignation and removal of the
Chairperson or any Member of the Appellate Tribunal, circumstances when Member of the
Appellate Tribunal can act as the Chairman, Staff of the Appellate Tribunal, Procedure and
power of the Appellate Tribunal, distribution of business amongst benches, power of the
Chairperson to transfer cases and decision making within the Appellate Tribunal respectively.
Section 39 gives the right to the appellant to take assistance of authorised representative and
of Government to appoint presenting officers. A person preferring an appeal to the Appellate
Tribunal under this Act may either appear in person or take the assistance of an authorised
representative of his choice to present his case before the Appellate Tribunal. The expression
"authorized representative" shall have the same meaning as assigned to it under sub-section
(2) of section 288 of the Income Tax Act, 1961. The Central Government or the Director may
authorise one or more authorised representatives or any of its officers to act as presenting
officers and every person so authorised may present the case with respect to any appeal
before the Appellate Tribunal. As per Section 40 of the Act, The Chairperson, Members and
other officers and employees of the Appellate Tribunal, the Adjudicating Authority, Director
and the officers subordinate to him shall be deemed to be public servants within the meaning
of section 21 of the Indian Penal Code, 1860. Officers of FIU_IND are also covered within the
purview of section. Section 41 provides that no civil court shall have jurisdiction to entertain
any suit or proceeding in respect of any matter which the Director, an Adjudicating Authority or
the Appellate Tribunal is empowered by or under this Act to determine and no injunction shall
be granted by any court or other authority in respect of any action taken or to be taken in
pursuance of any power conferred by or under this Act.
Section 42 contains provisions regarding appeal to High Court. Any person aggrieved by any
decision or order of the Appellate Tribunal may file an appeal to the High Court within sixty
days from the date of communication of the decision or order of the Appellate Tribunal to him
on any question of law or fact arising out of such order. The High Court may, if it is satisfied
that the appellant was prevented by sufficient cause from filing the appeal within the said
period, allow it to be filed within a further period not exceeding sixty days. For the purposes of
this section, "High Court" means-
(i) the High Court within the jurisdiction of which the aggrieved party ordinarily resides or
carries on business or personally works for gain; and
(ii) where the Central Government is the aggrieved party, the High Court within the jurisdiction
of which the respondent, or in a case where there are more than one respondent, any of the
respondents, ordinarily resides or carries on business or personally works for gain.
21.5 SPECIAL COURTS

Sections 43 – 47 deals with provision relating to Special Courts. Section 43 empowers the
Central Government (in consultation with the Chief Justice of the High Court) for trial of
offence of money laundering, to notify one or more Courts of Sessions as Special Court of
Special Courts for such area or areas or for such cases as may be prescribed in the
notification to this effect. Section 44 clearly provides for the offences triable by Special Courts.
It overrides the provisions of the Code of Criminal Procedure, 1973 and provides that –
(i) the schedule offence and the offence punishable under section 4 shall be triable only by the
Special Court constituted for the area in which the offence has been committed;
(ii) a Special Court may, upon a complaint made by an authority authorised in this behalf
under this Act take cognizance of the offence for which the accused is committed to it for trial.
The requirement of police report of the facts which constitute an offence under this Act is no
more applicable.
The provisions of Section 44 shall not be deemed to affect the special powers of the High
Court regarding bail under section 439 of the Code of Criminal Procedure, 1973 and the High
Court may exercise such powers including the power under clause (b) of sub-section (1) of
that section as if the reference to "Magistrate" in that section includes also a reference to a
"Special Court" designated under section 43.
Section 45 provides that the offences under the Act shall be cognizable and non-bailable.
Notwithstanding anything contained in the Code of Criminal Procedure, 1973, no person
accused of an offence punishable for a term of imprisonment of more than three years under
Part A of the Schedule shall be released on bail or on his own bond unless-
(i) The Public Prosecutor has been given an opportunity to oppose the application for such
release and
(ii) Where the Public Prosecutor opposes the application, the court is satisfied that there are
reasonable grounds for believing that he is not guilty of such offence and that he is not
likely to commit any offence while on bail.
In case of any person who is under the age of 16 years or in case of a woman or in case of a
sick or infirm person, the Special Court can direct the release of such person on bail.
The Special Court cannot take cognizance of any offence under the Act, unless a complaint in
writing is made by:-
(a.) The Director or
(b.) Any officer of the Central Government or a State Government, authorised in writing in
this behalf by the Central Government by a general or special order made in this
behalf by that Government.
Notwithstanding anything contained in the Code of Criminal Procedure, 1973, or any other
provision of this Act, no police officer shall investigate into an offence under this Act unless
specifically authorised, by the Central Government by a general or special order, and, subject
to such conditions as may be prescribed.
Section 45 has been amended by the Amendment Act of 2005 and it is interesting to observe,
how the law grants the right of bail to the accused but avoids the misuse of this right by
providing for adequate safeguards in the Section. The suo motto authority of the police officer
in investigating an offence under the Act has been done away with. An authority from the
Central Government by a general or special order, and fulfillment of the prescribed conditions
has been introduced by the Amendment Act - is in right spirit. There is always a fear of such
powerful legislation being misused unless adequate safeguards are provided as in the instant
case.
Section 46 provides that the provisions of the code of Criminal Procedure, 1973 (including the
provisions as to bails or bonds) shall apply to the proceedings before a Special Court and the
Special Court shall be deemed to be a Court of Session and the persons conducting the
prosecution before the Special Court, shall be deemed to be a Public Prosecutor.
Section 47 empowers the High Court to exercise (so far as applicable) all the powers granted
by Chapter XXIX or Chapter XXX of the Code of Criminal Procedure 1973 on Special Court
within its jurisdiction
21.6 AUTHORITIES UNDER THE ACT

Section 48 – 54 deals with authorities under the Act.
Section 48 provides for the following classes of authorities for the purposes of this Act,
namely:-
1. Director or Additional Director or Joint Director,
2. Deputy Director,
3. Assistant Director, and
4. such other class of officers as may be appointed for the purposes of this Act.
Section 49 provides that The Central Government may appoint such persons as it thinks fit to
be authorities for the purposes of this Act. The Central Government may also authorise the
Director or an Additional Director or a Joint Director or a Deputy Director or an Assistant

Director appointed to appoint other authorities below the rank of an Assistant Director. An
authority under the Act, may exercise the powers and discharge the duties conferred or
imposed on it under this Act, subject to such conditions and limitations as may be imposed by
Section 50 envisages the powers of the authorities regarding summons, production of
documents and to give evidence etc. The Director shall, for the purposes of section 13 supra,
have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908
while trying a suit in respect of the following matters, namely:-
(a) discovery and inspection;
(b) enforcing the attendance of any person, including any officer of a banking company,
financial institution or a company, and examining him on oath;
(c) compelling the production of records;
(d) receiving evidence on affidavits;
(e) issuing commissions for examination of witnesses and documents; and
(f) any other matter which may be prescribed
The Director, Additional Director, Joint Director, Deputy Director or Assistant Director shall
have power to summon any person whose attendance he considers necessary whether to give
evidence or to produce any records during the course of any investigation or proceeding under
this Act. [Section 50(2)]. All the persons so summoned shall be bound to attend in person or
through authorised agents, as such officer may direct, and shall be bound to state the truth
upon any subject respecting which they are examined or make statements, and produce such
documents as may be required. [Section 50(3)]. Every proceeding under sub-sections (2) and
(3) shall be deemed to be a judicial proceeding within the meaning of sections 193 and 228 of
the Indian Penal Code, 1860. Any officer referred to in sub-section (2) may impound and retain
in his custody for such period, as he thinks fit, any records produced before him in any
proceedings under this Act, in accordance with the rules framed by the Central Government in
this regard. [Section 50(5)]. However, an Assistant Director or a Deputy Director shall not -
(a) impound any records without recording his reasons for so doing; or
(b) retain in his custody any such records for a period exceeding three months, without
obtaining the previous approval of the Director. [proviso to Section 50(2)]
Section 51 explains that the authorities under the Act shall exercise all or any of the powers
and perform all or any of the functions conferred on, or assigned to them by or under this Act
or the rules framed thereunder in accordance with the directions issued by the Central
Government. It further provides that the Central Government may have regard to any one or
more of the following criteria, at the time of issuing the directions to the authorities under the
Act:-
(a) Territorial area

(b) Classes of persons
(c) Classes of cases and
(d) Any other criterion specified by the Central Government in this behalf.
Section 52 further provides that the Central Government shall have the power to issue from
time to time, such orders, instructions and directions to the authorities as it may deem fit for
the proper administration of this Act and such other authorities and all other persons employed
in execution of this Act shall observe and follow such orders, instructions and directions issued
by the Central Government. Section 53 allows the Central Government to empower an officer,
not below the rank of a Director of the Central Government or of a State Government to act as
an authority under the Act, either by a special order of by a general order. But if such an
officer (rank of the Director or above) is not available in a particular area, the Central
Government can appoint an officer below such rank.
Section 54 provides that the following officers are empowered and required to assist the
authorities in the enforcement of this Act, namely:-
(a) officers of the Customs and Central Excise Departments;
(b) officers appointed under sub-section (1) of section 5 of the Narcotic Drugs and
Psychotropic Substances Act, 1985 (61 of 1985);
(c) income-tax authorities under sub-section (1) of section 117 of the Income-tax Act, 1961
(d) officers of the stock exchange recognised under section 4 of the Securities Contracts
(Regulation) Act, 1956
(e) officers of the Reserve Bank of India constituted under sub-section (1) of section 3 of
the Reserve Bank of India Act, 1934
(f) officers of Police;
(g) officers of enforcement appointed under sub-section (1) of section 36 of the Foreign
Exchange Management Act, 1973
(h) officers of the Securities and Exchange Board of India established under section 3 of
the Securities and Exchange Board of India Act, 1992
(i) officers of any other body corporate constituted or established under a Central Act or a
State Act
(j) such other officers of the Central Government, State Government, local authorities or
banking companies as the Central Government may, by notification, specify, in this
behalf.
The Central Government, has specified the Director, Financial Intelligence Unit, India, under
the Ministry of Finance, Department of Revenue, as Director vide notification of the
Government of India, in the Ministry of Finance (Department of Revenue) number G.S.R.

440(E), dated the 1st July, 2005 or any other authority specified by him by a general or special
order may furnish or cause to be furnished the information received or obtained by such
Director or such authority, to the authority or body specified hereunder for the purpose of
performing its functions :-
1. Directorate of Enforcement under the Ministry of Finance, Department of Revenue;
2. Cabinet Secretariat (Research and Analysis Wing);
3. Ministry of Home Affairs or National Security Council Secretariat or Intelligence
Bureau;
4. Economic Offences Wing of Central Bureau of Investigation;
5. Chief Secretaries of the State Governments;
6. Reserve Bank of India;
7. Department of Company Affairs, Government of India;
8. Securities and Exchange Board of India;
9. Insurance Regulatory and Development Authority of India
21.7 RECIPROCAL ARRANGEMENT FOR ASSISTANCE IN CERTAIN MATTERS AND

PROCEDURE FOR ATTACHMENT AND CONFISCATION OF PROPERTY
Section 56 provides for agreements with foreign countries so that there is proper exchange of
information with them.
The Central Government may enter into an agreement with the Government of any country
outside India for-
(a) enforcing the provisions of this Act;
(b) exchange of information for the prevention of any offence under this Act or under the
corresponding law in force in that country or investigation of cases relating to any
offence under this Act.
and may, by notification in the Official Gazette, make such provisions as may be necessary for
implementing the agreement.
The Central Government may, by notification in the Official Gazette, direct that the application
of this Chapter in relation to a contracting State with which reciprocal arrangements have been
made, shall be subject to such conditions, exceptions or qualifications as are specified in the
said notification.
21.8 DISCLOSURE OF INFORMATION

The Director or any other authority specified by him by a general or special order in this behalf
may furnish or cause to be furnished to-
(i) any officer, authority or body performing any functions under any law relating to
imposition of any tax, duty or cess or to dealings in foreign exchange, or prevention of
illicit traffic in the narcotic drugs and psychotropic substances under the Narcotic Drugs
and Psychotropic Substances Act, 1985 or
(ii) such other officer, authority or body performing functions under any other law as the
Central Government may, if in its opinion it is necessary so to do in the public interest,
specify by notification in the Official Gazette in this behalf, any information received or
obtained by such Director or any other authority, specified by him in the performance of
their functions under this Act, as may, in the opinion of the Director or the other authority
so specified by him, be necessary for the purpose of the officer, authority or body
specified in clause (i) or clause (ii) to perform his or its functions under that law
21.9 RECOVERY OF FINES

Where any fine imposed on any person under section 13 or section 63 is not paid within six
months from the day of imposition of fine, the Director or any other officer authorised by him in
this behalf may proceed to recover the amount from the said for the recovery of arrears and he
or any officer authorised by him in this behalf shall have all the powers of the Tax Recovery
Officer mentioned in the said Schedule for the said purpose.
21.10 POWER TO REMOVE DIFFICULTIES

As we have observed that the objective of the Act, tries to hit at the criminal activities rightly at
the most desirable point – funding. Hence there may be difficulties in executing the theory
lying behind various sections of the Act. Taking care of this aspect, Section 75 of the Act
provides that, If any difficulty arises in giving effect to the provisions of this Act, the Central
Government may, by order, published in the Official Gazette, make such provisions not
inconsistent with the provisions of this Act as may appear to be necessary for removing the
difficulty. However two years time period, has been considered as sufficient for the
Government to put the framework in place and hence no order shall be made under this
section after the expiry of two years from the commencement of this Act. Every order made
under this section shall be laid, as soon as may be after it is made, before each House of
Parliament.
21.11 CONCLUSION
Now that we have read all the above definitions, it is the right time to duly understand money –
laundering. All the activities mentioned above (scheduled offences) appear to be extremely
anti-social, illegal, immoral and infact treated as heinous by the Society. What has money –
laundering to do with it? Does money laundering mean siphoning of fund. No, not just
siphoning of fund. It actually refers to a whole process or an entire system by which money is
actually generated from serious crimes as listed above, but they are given such shape (by
disguising its origin into a series of transactions) that it looks like it has originated from
legitimate sources. The point to note is that the volume of money generated by above
activities is also very huge. But the fact remains how does it effect us. The answer lies in
observing the continuous increase in terrorist or militant or other criminal activities worldwide
(wide spreading global network of terrorists and others who deal in above crimes) and we
cannot be ignorant to the fact that such activities need huge funding and they generate large
volume of money. To curb the criminal activities, one needs to follow and hit at this generation
and utilization of revenue. PLMA, 2002 aims to achieve this. So, money laundering is simply
giving shape to the financial structure required and generated from serious crimes as listed
above. For example, a criminal may deposit all his money into a bank account or purchase a
fixed deposit or even buy a property. But sudden appearance of such a transaction, invites the
attraction of one and all. Hence he may resort to money laundering by making cash purchases
from the market and then selling the goods in the legal manner and at the end create an
impression that the money has come from the sales and not from the criminal activities. So the
money has been disguised by entering into a series of transactions and its origin now looks
legitimate. India has followed the recommendations of FATF and criminalized money
laundering. FATF refers to the Financial Action Task Force which is an international
government boy. It was formed by the G7 at Paris in the year 1989. Asia Pacific Group (APG)
is the regional body of FATF and India is also an active participant in APG deliberations.
Financial Intelligence Unit of India (FIU_IND) was also set up at New Delhi with an objective to
coordinate and strengthen the collection and sharing of financial intelligence through an
effective national, regional and global network to combat money laundering and al the related
crimes. The subject is a major issue of concern at the international level and all sectors of
business across the globe, like insurance, retail, real-estate, stock –market, entertainment –
just to name a few are getting flooded with money and more money and at this stage we can
certainly doubt, that it might be a case of money – laundering. Hence the need, significance
and scope of operation of Prevention of Money Laundering Act, 2002. So it becomes,
interesting now.
21.12 SELF EXAMINATION QUESTIONS

1. What is money laundering?
2. What are the obligations of The Banking Companies, Financial Institutions and
Intermediaries under the Prevention of Money Laundering Act, 2002.
22
INTERPRETATION OF STATUTES, DEEDS AND
DOCUMENTS
22.0 INTRODUCTION
This study relates to ‘Interpretation of Statutes, Deeds and Documents’. So, first of all
we must understand what these terms and some other terms denote. It would, therefore, be
profitable for us at this stage itself to understand the terms ‘Statute’, ‘Document’,
‘Instrument’, ‘Deed’ and ‘Interpretation’.
‘Statute’: To the common man the terms ‘Statute’ generally means the laws and
regulations of every sort without considering from which source they emanate.
However, the term ‘Statute’ has been defined as the written will of the legislature solemnly
expressed according to the forms necessary to constitute it the law of the State. Normally,
the term denotes an Act enacted by the legislative authority (e.g. Parliament of India).
The Constitution does not use the terms ‘statute’ though one finds the terms ‘law’ used at
many places. The terms ‘law’ is defined as including any ordinance, order, bye-law, rule,
regulation, notification, and the like.
In short ‘statute’ signifies written law in contradiction to unwritten law.
‘Document’: Generally understood, a document is a paper or other material thing giving
information, proof or evidence of anything. The Law defines ‘document’ in a more technical
form. For example, Section 3 of the Indian Evidence Act, 1872 states that ‘document’ means
any matter expressed or described upon any substance by means of letters, figures or
marks or by more than one of those means, intended to be used, or which may be used, for
the purpose of recording that matter. Section 3(18) of the General Clauses Act, 1897 states
that the term ‘document’ shall include any matter written, expressed or described upon any
substance by means of letters, figures or marks, or by more by than one of those means
which is intended to be used, or which may be used, for the purpose of recording this
matter.
‘Instrument’: In common parlance, ‘instrument’ means a formal legal document which
creates or confirms a right or records a fact. It is a formal writing of any kind, such as an
agreement deed, charter or record, drawn up and executed in a technical form. It also
means a formal legal document having legal effect, either as creating liability or as affording
evidence of it. Section 2(14) of the Indian Stamp Act, 1899 states that ‘instrument’ includes
every document by which any right or liability is or purports to be created, transferred,
extended, extinguished or recorded.
‘Deed’: The Legal Glossary defined ‘deed’ instrument in writing (or other legible
representation or words on parchment or paper) purporting to effect some legal disposition.
Simply stated deeds are instruments though all instruments may not be deeds. However, in
India no distinction seems to be made between instruments and deeds.
‘Interpretation’: By interpretation is meant the process by which the Courts seek to
ascertain the meaning of the legislature through the medium of the authoritative forms in
which it is expressed. Simply stated, ‘interpretation’ is the process by which the real
meaning of an Act (or a document) and the intention of the legislature in enacting it (or of
the parties executing the document) is ascertained. ‘Interpretation’ signifies expounding the
meaning of abstruse words, writings, etc., making out of their meaning, explaining,
understanding them in a specified manner. A person is there by aided in arguing, contesting
and interpreting the proper significance of a section, a proviso, explanation or schedule to
an Act or any document, deed or instrument.
Jolowicz, in his Lectures on Jurisprudence (1963 ed., p. 280) speaks of interpretation
thus: Interpretation is usually said to be either ‘legal’ or ‘doctrinal’. It is ‘legal’ when there is
an actual rule of law which binds the Judge to place a certain interpretation of the statute. It
is ‘doctrinal’ when its purpose is to discover ‘real’ and ‘true’ meaning of the statute. ‘Legal’
interpretation is sub-divided into ‘authentic’ and ‘usual’. It is ‘authentic’ when rule of
interpretation is derived from the legislator himself; it is ‘usual’ when it comes from some
other source such as custom or case law. Thus when Justinian ordered that all the
difficulties arising out of his legislation should be referred to him for decision, he was
providing for ‘authentic’ interpretation, and so also was the Prussian Code, 1794, when it
was laid down that Judges should report any doubt as to its meaning to a Statute
Commission and abide by their ruling.
‘Doctrinal’ interpretation may again be divided into two categories: ‘grammatical’ & ‘logical’.
It is ‘grammatical’ when the court applies ony the ordinary rules of speech for finding out the
meaning of the words used in the statute. On the other hand, when the court goes beyond
the words and tries to discover the intention of the statute in some other way, then it is said
resort to what is called a ‘logical’ interpretation.
According to Fitzerald, interpretation is of two kinds – ‘literal’ and ‘functional’. The literal
interpretation is that which regards conclusively the verbal expression of the law. It does not
look beyond the ‘literaligis’. The duty of the Court is to ascertain the intention of the
legislature and seek for that intent in every legitimate way, but first of all in the words and
Interpretation of Statutes, Deeds and Documents 22.3
the language employed. ‘Functional’ interpretation, on the other hand, is that which departs
from the letter of the law and seeks elsewhere for some other and more satisfactory
evidence of the true intention of the legislature. In other words, it is necessary to determine
the relative claims of the letters and the spirit of the enacted law. In all ordinary cases, the
Courts must be content to accept the letter of the law as the exclusive and conclusive
evidence of the spirit of the law (Salmon: Jurisprudence, 12th ed., pp. 131-132). It is
essential to determine with accuracy the relations which subsist between the two methods.
It would also be worthwhile to note, at this stage itself, the difference between the terms
‘Interpretation’ and Construction. While more often than not the two terms are used
interchangeably to denote a process adopted by the courts to ascertain the meaning of the
legislative form in which it is expressed these two terms have different connotations. Cooley
has differentiated the two, defining ‘interpretation’ as the art of finding out the true sense of
any form of words, that is, the sense which the author intended to convey: and ‘construction’
as the drawing of conclusions respecting subjects that lie beyond the direct expression of
the text from elements known from and given in the text; conclusions which are in the spirit
though not within the letter of the text.
For example, Section 173(2) of the Companies Act, 1956, stipulates that in case of an
annual general meeting, where any items of business to be transacted at the meeting are
deemed to be special, there shal be annexed to the notice of the meeting a statement
setting out all material facts concerning each such item of business including in particular
the nature of concern or interest, if any, therein of every director and manager, if any.
Now, let us consider the words ‘all material facts’. When we say ‘material facts’ are those
essential facts as will give a clear idea of the nature of the item; we are simply interpreting
the words. But when we further move to decide whether the fact that the Company Law
Board indicated through a show cause notice that the terms and conditions of a proposed
appointment are prejudicial to the interest of the company is or is not a material fact, we
have to go for the construction of those words. We have to construe the words widely to
give effect to the intent of the law. For this the definition of the term ‘material facts’ must
cover all the essential facts as will give a clear idea of the nature of the term and which by
reason of their relevance and bearing, will influence the shareholders in making up their
minds as regards approving or rejecting the motion proposed to be moved at the meeting in
respect of which the explanatory statement is annexed.
Thus, where the Court adheres to the plain meaning of the language used by the legislature,
it would be ‘interpretation’ of the words, but where the meaning is not plain, the court hs to
decide whether the wording was meant to cover the situation before the court here the court
would be resorting to what is called ‘construction’, however, the two terms – ‘interpretation’
and ‘construction’ – overlap each other and it is rather difficult to state where ‘interpretation’
leaves off and ‘construction’ begins.
22.1 WHY DO WE NEED INTERPRETATION/CONSTRUCTION?

No doubt in modern times the enacted Laws are drafted by legal experts, yet they are
expressed in language and no language is so perfect as to leave no ambiguities. Further, by
its very nature, a statute is an edict of the legislature and many-a-time the intent of the
legislature has to be gathered not only from the language but the surrounding circumstances
that prevailed at the time when that particular law was enacted. If any provision of the
statute is open to two interpretations, the Court has to choose that interpretation which
represents the true intention of the legislature. Also, it is not within human powers to foresee
the manifold set of facts which may arise in the future and even if it were so it is not
possible to provide for them in terms free from all ambiguity. All these aspects add to give
great prominence to the subject of interpretation and construction in the practical
administration of the law.
It would be worth our while to note what Denning L.J. has said on the need for statutory
interpretation: It is not within human powers to foresee the manifold sets of facts which may
arise; and that, even if it were, it is not possible to provide for them in terms free from all
ambiguity. The English language is not an instrument of mathematical precision. Our
literature would be much the poorer if it were. This is where the draftsmen of Acts of
Parliament have often been unfairly criticized. A judge, believing himself to be fettered by
the supposed rule that he must look to the language and nothing else, laments that the
draftsmen have not provide for this or that, or have been guilty of some or other ambiguity.
It would certainly save the judges’ trouble if Acts of Parliament were drafted with divine
prescience and perfect clarity. In the absence of it, when a defect appears, a judge can not
simply fold his hands and blame the draftsman. He must set to work on the constructive task
of finding the intention of Parliament, and he must do this, not only from the language of the
statute, but also from a consideration of the social conditions which gave rise to it, and of
the mischief which it was passed to remedy, and then he must supplement the written word
so as to give ‘force and life’ intention of the legislature.
It has been rightly said that a statute is the will of the legislature. The fundamental rule of
interpretation of a statute is that it should be expounded according to the intent of those that
made it. In the event of the words of the statute being precise and unambiguous in
themselves it is only just necessary to expound those words in their natural and ordinary
sense: thus far and no further. This is because these words distinctly indicate the intention
of the legislature. The purpose of interpretation is to discern the intention which is conveyed
either expressly or impliedly by the language used. If the intention is express, then the task
becomes one of ‘verbal construction’ alone. But in the absence of any intention being
expressed by the statute on the question to which it gives rise and yet some intention has to
be, of necessity, imputed to the legislature regarding it, then the interpreter has to determine
it by inference based on certain legal principles. In such a case, the interpretation has to be
one which is commensurate with the public benefit. Consequently, if a statute levies a
penalty without expressly mentioning the recipient of the penalty, then, by implication, it
goes to the officers of the State.
The subject of the interpretation of a statute, therefore, seems to fall under two general
heads:
(a) What are the principles which govern the construction of the language of an Act of
Parliament?
(b) What are those principles which guide the interpreter in gathering the intention on those
incidental points on which the legislature is necessarily presumed to have entertained
an opinion but on which it has not expressed any?
Through the process of interpretation the Court seeks to discern the meaning of the
legislation through the medium of authoritative forms in which it is expressed.
As we have noted earlier, ‘interpretation’ may be either ‘grammatical’ or ‘logical’.
‘Grammatical interpretation’ concerns itself exclusively with the verbal expression of the law:
it does not go beyond the letter of the law. ‘Logical interpretation’, on the other hand, seeks
more satisfactory evidence of the true intention of the legislature.
In all ordinary cases, ‘grammatical interpretation’ is the sole form allowable. The Court
cannot take from or add to modify the letter of the law. This rule is, however, subject to
some expectations: firstly, where the letter of the law is logically defective on account of
ambiguity, inconsistency or incompleteness. As regard the defect to ambiguity, the Court is
under a duty to travel beyond the letter of the law so as to determine from the other sources
the true intention of the legislature. In the case of the statutory expression being defective
on account of inconsistency, the court must ascertain the spirit of the law. Secondly, if the
text leads to a result which is so unreasonable that it is self-evident that the legislature
could not mean what it says, the court may resolve such impasse by inferring logically the
intention of the legislature.
About one thing there seems to be no controversy at all: a statute is enforceable at law,
howsoever unreasonable it may be. The duty of the court is to administer the law as it
stands. It is not within its jurisdiction to see whether the law is just or unreasonable. The
ascertainment of the justification or reasonableness of law is the exclusive domain of the
legislature and it alone can consider alteration or modification of the law passed by it. Until it
is altered or modified or amended, the court has no choice but to enforce the law as it is.
22.2 RULES OF INTERPRETATION/CONSTRUCTION

Over a period, certain rules of interpretation/construction have come to be well recognized.
However, these rules are considered as guides only and are not inflexible. These rules can
be broadly classified as (a) Primary Rules and (b) Other (Secondary) Rules. Primary
Rules can be further sub-divided into.
(1) Rule of Literal Construction

(2) Rule of Reasonable Construction
(3) Rule of Harmonious Construction
(4) Rule of Beneficial Construction
(5) Rule of Exceptional Construction
(6) Rule of Ejusdem Generis.
(A) Primary Rules
(1) Rule of Literal Construction: It is the cardinal rule of construction that words,
sentences and phrases of a statute should be read in their ordinary, natural and
grammatical meaning so that they may have effect in their widest amplitude. At the same
time, the elementary rule of construction has to be borne in mind that words and phrases of
technical nature are ‘prima facie’ used in their technical meaning, if they have any, and
otherwise in their ordinary popular meaning.
Sometimes, occasions may arise when a choice has to be made between two interpretations
– one narrower and the other wider or bolder. In such a situation, if the narrower
interpretation would fail to achieve the manifest purpose of the legislation, one should rather
adopt the wider one. For example, when we talk of disclosure of The Nature of the
Concern or Interest’ of a director or the manager of a company in the subject-matter of a
proposed motion (as referred to in Section 173(2) of the Companies Act, 1956), we can not
confine the words to Pecuniary Concern or Interest alone but we have to include any
concern or interest whatever. What is required is a full and frank disclosure without
reservation or suppression, as, for instance where a son or daughter or father or mother or
brother or sister is concerned in any contract or matter, the shareholders ought fairly to be
informed of it and the material facts disclosed to them. Here a restricted narrow
interpretation would defeat the very purpose of the disclosure.
Further, the phrase and sentences are to be construed according to the rules of grammar.
This was emphasized in no uncertain terms by the Supreme Court in the case of S.S.
Railway Company vs. Workers Union (AIR 1969 S.C. at 518) when it is stated that the
courts should give a literal meaning to the language used by the legislature unless the
language is ambiguous or its literal sense gives rise to any anomaly or results in something
which may defeat the purpose of the Act. It is the duty of the court go give effect to the
intent of the legislature and in doing so, its first reference is to the literal meaning of the
words employed. Where the language is plain and admits of only one meaning, there is no
room for interpretation and only that meaning is to be enforced even though it is absurd or
mischievous, the maxim being ‘absoluta sententia expositor non indiget’ (which means
that when you have plain words capable of only one interpretation no explanation to them is
required).
Similarly, when a matter which should have been, but has not been, proved for in a statute
can not be supplied by courts as to do so would amount to legislation and would not be
construction. Let us take an example: Section 71 of the U.P. District Boards Act, 1922
provided that a Board may dismiss its secretary by special resolution which in certain cases
required sanction of the Local Government. Section 90 of the same Act conferred a power to
suspend the secretary pending, inter alia, the orders of any authority whose sanction was
necessary for his dismissal. Section 71 of the Act was amended in 1931 and it then provided
that a resolution of dismissal was not to take effect till the expiry of the period of appeal or
till the decision of the appeal, if it was so presented. However Section 90 of the Act was not
correspondingly amended. The Supreme Court observed that it was unfortunate that when
the legislature came to amend the old Section 71 of the Act it forgot to amend Section 90 in
conformity with the amendment of Section 71. The Court, however emphasized that while no
doubt it is the duty of the Court to try and harmonise the various provisions of an Act passed
by the legislature, it is certainly not the duty of the court to stretch the word used by the
legislature to fill in gaps or omissions in the provisions of an Act.
However, sometimes the courts may look at the setting or the context in which the words are
used and the circumstances in the law has come to be passed to decide whether there is
something implicit behind the words actually used which would control the literal meaning of
the words used. If there are two possible constructions of a clause, one a mere mechanical
and literal construction based on the rules of grammar and the other which emerges from
the setting in which the clause appears and the circumstances in which it came to be
enacted and also from the words used therein, the courts may prefer the second
construction which, through may not be literal, may be a better one. (Arora vs. State of U.P.,
AIR 1964 S.C. 1230 at 1236-37).
Words used in the popular sense: It dealing with mattes regarding the general public,
statute are presumed to words in their popular sense. But to deal with particular business or
transaction, words are presumed to be used with the particular meaning in which the
particular meaning in which they are used and understood in the particular
business/transaction in question. However, words in statutes are generally construed in their
popular meaning and not in their technical meaning.
It is the general rule that omissions are not likely to be inferred. From this springs another
rule that nothing is to be added to or taken away from a statute unless there are some
adequate grounds to justify the inference that the legislature intended something which it
omitted to express. “It is a strong thing to real into an Act of Parliament Words which
are not there and, in the absence of clear Necessity, it is a wrong thing to do.” If a
case has not been provided for in a statute. It is not to be dealt with merely because there
seems to be no good reason why it should have been omitted, and the omission appears to
be consequentially unintentional.
Reasonable Corrections are not to over-ride plain terms of a statute. A construction
that will render ineffective any part of the language of a statute will normally be rejected. For
example, if an Act plainly gave a right of appeal from one Court of Quarter Sessions to
another, it was held that such a provision though extraordinary and perhaps an oversight
could not be eliminated.
(2) Rule of Reasonable Construction: According to this Rule, the words of a statute must
be construed ‘ut us maquis valeat quampareat’ meaning thereby that words of statute
must be construed so as to lead to a sensible meaning. Generally the words or phrases of a
statute are to be given their ordinary meaning. For example, in the case of Dr. A.L. Mudaliar
vs. LIC of India (1963) 33 Comp Cas. 420 (SC), it was held that the Memorandum of
Association of a company must be read fairly and its import derived from a reasonable
interpretation of the language which it employs. Further, in order to determine whether a
transaction is intra vires the objects of a company, the objects clause should be reasonably
construed: neither with rigidity nor with laxity. [Waman Lal Chotanlal Parekh vs. Scindia
Steam Navitation Co. Ltd. (1944) 14 Comp. Cas. 69 (Bom.)].
Thus, if the Court finds that giving a plain meaning to the words will not be a fair or
reasonable construction, it becomes the duty of the court to depart from the dictionary
meaning and adopt the construction which will advance the remedy and suppress the
mischief provided the Court does not have to resort to conjecture or surmise. A reasonable
construction will be adopted in accordance with the policy and object of the statute.
(3) Rule Harmonious Construction: When there is doubt about the meaning of the words
of a statute, these should be understood in the sense in which they harmonise with the
subject of the enactment and the object which the legislature had in view. Their meaning is
found not so much in a strictly grammatical or etymological propriety of language, nor even
in its popular use, as in the subject or in the occasion on which they are used and the object
to be attained.
Where there are in an enactment two or more provisions which can not be reconciled with
each other, they should be so interpreted,wherever possible, as to give effect to all of them.
This is what is known as the Rule of Harmonious Construction. Let us take an example:
according to Section 166(1) of the Companies Act, there must be not more than fifteen
months between two consecutive annual general meetings of a company. Section 210
requires the Board of Directors to lay at every annual general meeting of a company a profit
and loss account, which must cover the period since the preceding account and must be
made up to date not earlier than the date of the meeting by more than six months. The
account is required to be accompanied by a balance sheet as at the date to which the profit
and loss account is made up. For some special reason however, the Registrar may give an
extension for not more than 3 months to hold the meeting. In such a case, the accounts
must relate to a period not earlier than the date of the meeting by more than six months plus
the extension period. From this, we can easily make out that except the first annual general
meeting which is subject to different rules, an annual general meeting is to be held subject
to the following rules:

(i) The meeting must be held in each year.
(ii) It must be held not later than 15 months (18 months, if extension is granted) from the
date of the previous general meeting.
(iii) Further, it must be held later than six months (or six months + extension) of the date of
the balance sheet.
These three requirements are cumulative and separate: failure to comply with any of them
constitutes an offence. We would note that even where a company may hold its annual
general meeting within the time limit of 15 months (or 18 months, if extension is granted) it
may still be guilty of contravention of Section 210! Therefore, to give effect to both the
sections, they are to be interpreted harmoniously and in fixing the date of the annual
general meeting, Section 166 as well as Section 210 are to be taken into account. The
following illustration will make things clear:
The financial year of a company ends on 31st March each year, presuming that the annual
general meeting to adopt the accounts etc. relating to the year ended on 31st March, 1999
was held on 30th September, 1999 under Section 166(1) the next annual general meeting
need not be held till 31st December, 2000. But the relevant accounts would be those of the
year ended on 31st March, 2000 which would be more than six months before the date of
the meeting. Therefore, the last date for holding that meeting would be 30th September,
2000.
It must always be borne in mind that a statute is passed as a whole and not in sections and
it may well be assumed to be animated by one general purpose and intent. The Court’s duty
is to give effect to all the parts of a statute, if possible. But this general principle is meant to
guide the courts in furthering the intent of the legislature, not overriding it. When rigid
adherence to the general rule would require disregard of clear indications to the contrary,
this rule must be applied. The sections and sub-sections must be read as parts of an
integral whole and being inter-dependent. Therefore, importance should not be attached to a
single clause in one section overlooking the provisions of another section. If it is impossible
to avoid inconsistency, the provision which was enacted or amended later in point of time
must prevail.
The Rule of Harmonious Construction is applicable only when there is a real and not merely
apparent conflict between the provisions of an Act, and one of them has not been made
subject to the other. When after having construed their context the words are capable of
only a single meaning, the rule of harmonious construction disappears and is replaced by
the rule of literal construction.
(4) rule of Beneficial Construction or the Heydon’s Rule: Where the language used in a
statute is capable of more than one interpretation, the most firmly established rule for
construction is the principle laid down in the Heydon’s case (1584) 3 Co. Rep 7a 76 ER 637.
The rule which is also known as ‘purposive construction’ or mischieve rule, enables
consideration of four matters in construing an Act:
(1) what was the law before the making of the Act;
(2) what was the mischief or defect for which the law did not provide;
(3) what is the remedy that the Act has provided; and
(4) what is the reason for the remedy. The rule then directs that the courts must adopt that
construction which ‘shall suppress the mischief and advance the remedy’. Therefore,
even in a case where the usual meaning of the language used falls short of the whole
object of the legislature, a more extended meaning may be attributed to the words,
provided they are fairly susceptible of it. If, however, the circumstances show that the
phraseology in the Act is used in a larger sense than its ordinary meaning then that
sense may be given to it. If the object of a statute is public safety then its working must
be interpreted widely to give effect to that object. Thus, the legislature having intended,
while passing the Workmen’s Compensation Act, 1923 that every workman in the
prescribed trade should be entitled to compensation, it was held that the Act ought to be
so construed, as far as possible, as to give effect to its primary provisions.
Statutes which require something to be done, e.g. a statute which requires notice of action
for anything done, are to be construed as including an omission of an act which ought to be
done as well as the commission of a wrongful act. Where a statute requires something to be
done by a person it would generally be sufficient compliance with it if the thing is done by
another person on his behalf and by his authority, for it would be presumed that the statute
does not intend to prevent the application of the general principle of law: ‘quo facit per
alium facit per se’ (he who acts though another is deemed to act in person). This would be
so unless there is womthing in either the language or the object of the statute which shows
that personal act alone was intended.
However, it has been emphasized by the Supreme Court that the rule in Heydon’s case is
applicable only when the words used are ambiguous and are reasonably capable of more
than one meaning (CIT vs. Sodra Devei, 1957 SC 823 at 832 at 835).
(5) Rule of Exceptional Construction: This rule has several aspects, viz.:
(a) The Common Sense Rule: Despite the general rule that full effect must be given to
every word, if no sensible meaning can be fixed to a word or phrase, or if it would
defeat the real object of the enactment, it should be eliminated. The words of a statute
must be so construed as to give a sensible meaning to them, if at all possible. They
ought to be construed ‘utres magis valeat quampereat’ meaning thereby that it is
better for a thing to have effect than to be made void.
(b) Conjunctive and Disjunctive Words ‘or’ ‘and’: The word ‘or’ is normally disjunctive and
‘and’ is normally conjunctive. However, at times they are read as vice versa to give
effect to the manifest intention of the leiglature as disclosed from the context. This
would be so where the literal reading of the words produces an unintelligible or absurd
result: in such a case ‘and’ may by read for ‘or’ and ‘or’ for ‘and’ even though the result
of so modifying the words is less favourable to the subject, provided that the intention of
the legislature is otherwise quite clear.
(c) ‘May’, ‘must’ and ‘shall’: Before discussing this aspect, it would be worth our while to
note the terms ‘mandatory’ and ‘directory’. Practically speaking, the distinction
between a provision which is ‘mandatory’ and one which is ‘directory’ is that when it is
mandatory, it must be strictly observed; when it is ‘directory’ it would be sufficient that it
is substantially complied with. However, we have to look to the substance and not
merely the form: an enactment in mandatory form might substantially be directory and,
conversely, a statute in directory form may in substance be mandatory. Hence, it is the
substance that counts and must take precedence over mere form. If a provision gives a
power coupled with a duty, it is mandatory: whether it is or is not so would depend on
such consideration as:
— the nature of the thing empowered to be done,
— the object for which it is done, and
— the personfor whose benefit the power is to be exercised. Adverting to the topic
under discussion:
‘May’, it is well settled that enabling words are construed as compulsory, wherever the
object of the power is to give effect to a legal right: the use of the word ‘may’ in a statutory
provision would not by itself show that the provision is directory in nature. In some cases the
legislature may use the word ‘may’ as a matter of pure conventional courtesy and yet intend
a mandatory force. Therefore, in order to interpret the legal import of the word ‘may’ we
have to consider various factors, e.g., the object and the scheme of the Act, the context or
background against which the words have been used, the purpose and advantages of the
Act sought to be achieved by use if this word and the like.
Where the word ‘may’ involves a discretion coupled with an obligation or where it confers a
positive benefit to the general class of subjects, or where a remedy would be advanced and
a mischief suppressed, or where giving the word a directory significance would defeat the
very object of the Act then word ‘may’ should be interpreted to convey a mandatory force.
Thus where a discretion is conferred upon a public authority coupled with an obligation, the
word ‘may’ should be construed to mean a command. Similarly when a order of the
Government or a statute confers a power on an authority in the discharge of a public duty,
and though such power appears to be merely permissive, it is imperative that the authority
should exercise that power in the discharge of its duties: there the word ‘may’ assumes
mandatory force.
The, word ‘may’ is often read as ‘shall’ or ‘must’ when there is something in the nature of
the thing to be done, which makes it the duty of the person on whom the power is conferred
to exercise the power. No general rule can be laid down for deciding whether any particular
provision in a statute is mandatory, meaning thereby that non-observance thereof involves
theconsequences of invalidity, or only directory, i.e. a discretion, non-observance of which
does not entail the consequence of invalidity, whatever other consequences may occur. But
in each case the Court has to decide the legislature’s intent. Did the legislature intend in
making the statutory provision that non observance of this would entail invalidity or did it
not? To decide this, we have to consider not only the actual words used, but the scheme of
the statute, the intended benefit to the public or what is enjoined by the provisions and the
material danager to the public by the contravention of the scheme. The use of the
expression ‘shall’ or ‘may’ is not decisive. Having regard to the context, the expression
‘may’ has varying significance. In one context, it may be purely permissive, while in another
context it may confer a power and make it obligatory upon the person invested with the
power to exercise it as laid down. Therefore, while undoubtedly the word ‘may’ generally
does not mean ‘must’ or ‘shall’ yet the same word ‘may’ is capable of meaning ‘must’ or
‘shall’ in the light of the context in which it occurs.
Coming to the word shall: the use of the word shall would not of itself make a provision of
the act mandatory. It has to be construed with reference to the context in which it is used.
Thus, as against the Government the word ‘shall’ when used in statutes is to be construed
as ‘may’ unless a contrary intention is manifest. Hence, a provision in a criminal statute that
the offender shall be punished as prescribed in the statute is not necessarily to be taken as
against the Government to direct prosecution under that provision rather than under some
other applicable statute.
Therefore, generally speaking when a statute uses the word ‘shall’ prima facie it is
mandatory but it is sometimes not so interpreted if the context or intention of the legislature
otherwise demands. Thus, under certain circumstances the expression ‘shall’ is construed
as ‘may’. Yet, it has to be emphasized that the term ‘shall’ in its ordinary significance, is
mandatory and the Court shall ordinarily give that interpretation to the term, unless such an
interpretation leads to some absurd or inconvenient consequence or be at variance with the
intent of the legislature to be collected from other parts of the Act. For ascertaining the real
intention of the legislature, the Court may consider amongst other things:
— the nature and design of the statute,
— the consequence which would flow from construing it one way or the other,
— the impact of other provisions by resorting to which the necessity of complying with the
provision in question can be voided,
— whether or not the statute provides may penalty if the provision in question is not
complied with,
— if the provision in question is not complied with, whether the consequences would be
trivial or serious, and
— most important of all, whether the object of the legislation will be defeated or furthered.
Where a specific penalty is provided in statute itself for non compliance with the particular
provision of the Act, no discretion is left to the Court to determine whether such provision is
directory or mandatory – it has to be taken as mandatory.
(6) Rule of Ejusdem Generis: The term ‘ejusdem generis’ means ‘of the same kind or
species’. Simply stated, the rule means:
(i) Where any Act enumerates different subjects, general words following specific words
are to be construed (and understood) with reference to the words that precede them.
Those general words are to be taken as applying to things of the same kind as the
specific words previously mentioned, unless there is something to show that a wider
sense was intended. Thus the rule of ejusdem generis mean that where specific words
are used and after those specific words, some general words are used, the general
words would take their colour from the specific words used earlier. For instance ‘in the
expression in consequence of war, disturbance or any other cause’, the words ‘any
other cause’ would take colour from the earlier words ‘war, disturbance’ and therefore,
would be limited to causes of the same kind as the two named instances. Similarly,
where an Act permits keeping of dogs, cats, cows, buffaloes and other animals, the
expression ‘other animals’ would not include wild animals like lions and tigers, but would
mean only domesticated animals like horses, etc.
Where there was prohibition on importation of ‘arms, ammunition, or gunpower or any
other goods’ the words ‘any other goods’ where construed as referring to goods similar
to ‘arms, ammunition or gun powder’ (AG vs. Brown (1920), 1 KB 773).
(ii) If the particular words used exhaust the whole genus (category), then the general words
are to be construed as covering a larger genus.
(iii) We must note, however, that the general principle of ‘ejusdem generis’ applies only
where the specific words are all the same nature. When they are of different categories,
then the meaning of the general words following those specific words remains
unaffected-those general words then would not take colour from the earlier specific
words.
It is also to be noted that the courts have a discretion whether to apply the ‘ejusdem
generis’ doctrine in particular case or not. For example, the ‘just and equitable’ clause in
the winding-up powers of the Courts is held to be not restricted by the first five situations in
which the Court may wind up a company.
(B) Other (Secondary) Rules of Interpretation.

(1) Effect of usage: In this connection, we have to bear in mind two Latin maxims:
(i) ‘Optima Legum interpresest consuetudo’ (the custom is the best interpreter of the law);
and
(ii) ‘Contempranea expositoest optima et fortissima in lege’ (the best way to interpret a
document is to read it as it would have been read when made). Therefore, the best
interpretation/construction of a statute or any other document is that which has eben
made by the contemporary authority. Simply stated, old statutes and documents should
be interpreted as they would have been at the time when they were enacted/written.
(2) Associated Words to be Understood in Common Sense Manner: When two words or
expressions are coupled together one of which generally excludes the other, obviously the
more general term is used in a meaning excluding the specific one. On the ther hand, there
is the concept of ‘Noscitur A Sociis’ (‘it is known by its associates’), that is to say ‘the
meaning of a word is to be judged by the company it keeps’. When two or more words which
are capable of analogous (similar or parallel) meaning are coupled together, they are to be
understood in their cognate sense (i.e. akin in origin, nature or quality). They take, as it
were, their colour from each other, i.e., the more general is restricted to a sense analogous
to the less general. For example, in the expression ‘commercial establishment means an
establishment which carries on any business, trade or profession’, the term ‘profession’ was
construed with the associated words ‘business’ and ‘trade’ and it was held that a private
dispensary was not within the definition. (Devendra M. Surti (Dr.) vs. State of Gujrat, AIR
1969 SC 63 at 67).
The term ‘entertainment’ would have a different meaning when used in the expression
‘houses for public refreshment, resort and entertainment’ than its generally understood
meaning of theatrical, musical or similar performance. Similarly, the expression ‘place of
public resort’ would have one meaning when coupled with the expression ‘roads and streets’
and the same express ‘place of public resort’ would have quite a different meaning when
coupled with the word ‘houses’.
22.3 INTERNAL AIDS TO INTERPRETATION/CONSTRUCTION

Every enactment has its Title, Preamble, Heading, Marginal Notes, Definitional
Sections/Clauses, Illustrations etc. They are known as ‘internal aids to construction’ and can
be of immense help in interpreting/construing the enactment or any of its parts.
(a) Long Title: An enactment would have what is known as a ‘Short Title’ and also a
‘Long Title’. The ‘Short Title’ merely identifies the enactment and is chosen merely
for convenience the ‘Long Title’ on the other hand, describes the enactment and does
not merely identify it.
It is now settled that the Long Title of an Act is a part of the Act. We can, therefore,
refer to it to ascertain the object, scope and purpose of the Act.
(b) Preamble: The Preamble expresses the scope, object and purpose of the Act more
comprehensively than the Long Title. The Preamble may recite the ground and the
cause making a statute and the evil which is sought to be remedied by it.
Like the Long Tile, the Preamble of a Statute is a part of the enactment and can
legitimately be used for construing it. However, the Preamble does not over-ride the
plain provision of the Act but if the wording of the statute gives rise to doubts as to its
proper construction, e.g., where the words or phrase has more than one meaning and a
doubt arises as to which of the two meanings is intended in the Act, the Preamble can
and ought to be referred to in order to arrive at the proper construction.
In short, the Preamble to an Act discloses the primary intention of the legislature but
can only be brought in as an aid to construction if the language of the statute is not
clear. However, it cannot override the provisions of the enactment.
(c) Heading and Title of a Chapter: If we glance through any Act, we would generally find
that a number of its Sections applicable to any particular object are grouped together,
sometimes in the form of Chapters, prefixed by Heading and/or Titles. These Heading
and Titles prefixed to sections or groups of sections can legitimately be referred to for
the purpose of construing the enactment or its parts. However, there is a conflict of
opinion about the weightage to be given to them. While one section of opinion considers
that a heading is to be regarded as giving the key to the interpretation of the clauses
ranged under it and might be treated as ‘preambles to the provisions following it’, the
other section of opinion is emphatic that resort to the heading can only be taken when
the enacting words are ambiguous. According to this view headings or titles prefixed to
sections or group of sections may be referred to as to construction of doubtful
expressions, but can not be used to restrict the plain terms of an enactment.
We must, however, note that the heading to one group of sections can not be used to
interpret another group of sections.
(d) Marginal Notes: Although there is difference of opinion regarding resort to Marginal
Notes for construing an enactment, the generally held view is that the Marginal Notes
appended to a Section can not be used for construing the Section. In C.I.T. vs.
Ahmedbhai Umarbhai & Co. (AIR 1950 SC 134 at 141), Patanjali Shastri, J., had
declared: “Marginal notes in an Indian statute, as in an Act, of Parliament cannot be
referred to for the purpose of construing the statute”, and the same view has been taken
in many other cases.
However, marginal notes appended to Articles of the Constitution have been held to be
part of the Constitution as passed by the Constituent Assembly and therefore have been
made use of in construing the Articles.
(e) Definitional Sections/Clauses: The legislature has the power to embody in a statute
itself the definitions of its language and it is quite common to find in the statutes
‘definitions’ of certainwords and expressions used in the body of the statute. When a
word or phase is defined as having a particular meaning in the enactment, it is that
meaning alone which must be given to it in interpreting a Section of the Act unless there
be anything repugnant in the context. The Court can not ignore the statutory definition
and try and extract what it considers to be the true meaning of the expression
independently of it.
The purpose of a definition clause is two-fold: (i) to provide a key to the proper
interpretation of the enactment, and (ii) to shorten the language of the enacting part by
avoiding repetition of the same words contained in the definition part every time the
legislature wants to refer to the expressions contained in the definition.
The definition of a word or expression in the definition section may either be restricting
of its ordinary meaning or may be extensive of the same. When a word is defined to
‘mean’ such and such, the definition is ‘prima facie’ restrictive and exhaustive we must
restrict the meaning of the word to that given in the definition section. But where the
word is defined to ‘include’ such and such, the definition is ‘prima facie’ extensive: here
the word defined is not restricted to the meaning assigned to it but has extensive
meaning which also includes the meaning assigned to it in the definition section. We
may also find a word being defined as ‘means and includes’ such and such: here
again the definition would be exhaustive.
It has been a universally accepted principle that where an expression is defined in an
Act, it must be taken to have, throughout the Act, the meaning assigned to it by the
definition, unless by doing so any repugnancy is created in the subject or context.
(f) Illustrations: We would find that many, though not all, sections have illustrations
appended to them. These illustrations follow the text of the Sections and, therefore, do
not form a part of the Sections. However, illustrations do form a part of the statute and
are considered to be of relevance and value in construing the text of the sections.
However, illustrations can not have the effect of modifying the language of the section
and can neither curtail nor expand the ambit of the section.
(g) Proviso: The normal function of a proviso is to except something out of the enactment
or to qualify something stated in the enactment which would be within its purview if the
proviso were not there. The effect of the proviso is to qualify the preceding enactment
which is expressed in terms which are too general. As a general rule, a proviso is added
to an enactment to qualify or create an exception to what is in the enactment: ordinarily
a proviso is not interpreted as stating a general rule.
It is a cardinal rule of interpretation that a proviso to a particular provision of a statute
only embraces the field which is covered by the main provision. It carves out an
exception to the main provision to which it has been enacted as a proviso and to no
other. (Ram Narain Sons Ltd. vs. Assistant Commissioner of Sales Tax, AIR 1955 SC
765).
(h) Explanation: An Explanation is at times appended to a section to explain the meaning
of the text of the section. An Explanation may be added to include something within the
section or to exclude something from it. An Explanation should normally be so read as
to harmonise with and clear up any ambiguity in the main section. It should not be so
construed as to widen the ambit of the section.
(i) Schedules: The Schedules form part of an Act. Therefore, they must be read together
with the Act for all purposes of construction. However, the expressions in the
Schedule cannot control or prevail over the expression enactment. If there appears to
be any inconsistency between the schedule and the enactment, the enactment shall
always prevail.
(j) ‘Read the Statute as a Whole’: It is the elementary principle that construction of a
statute is to be made of all its parts taken together and not of one part only. Lord
Waston, speaking with regard to deeds had stated thus: The deed must be read as a
whole in order to ascertain the true meaning of its several clauses, and the words of
each clause should be so interpreted as to bring them into harmony with other
provisions – if that interpretation does no violence to the meaning of which they are
naturally susceptible. And the same approach would apply with equal force with regard
to Acts and Rules passed by the legislature.
One of the safest guides to the construction of sweeping general words is to examine other
words of like import in the same enactment or instrument to see what limitations must be
imposed on them. If we find tht a number of such expressions have to be subjected to
limitations and qualifications and that such limitations and qualifications are of the same
nature, that circumstance forms a strong argument for subjecting the expression in dispute
to a similar limitation and qualification. For example, if one section of an Act requires ‘notice’
should be given, then a verbal notice would generally be sufficient. But, if another section
provides that ‘notice’ should be ‘served’ on the person or ‘left’ with him, or in a particular
manner or place, then it would obviously indicate that a written notice was intended.
22.4 EXTERNAL AIDS TO INTERPRETATION/CONSTRUCTION

Society does not function in a void. Everything done has its reasons, its background, the
particular circumstances prevailing at the time, and so on. These factors apply to any
enactment as well. These factors are of great help in interpreting/construing an Act and
have been given the convenient nomenclature of ‘External Aids To Interpretation’. Some
of these factors are enumerated below:
(a) Historical Setting: The history of the external circumstances which led to the
enactment in question is of much significance in construing any enactment. We have,
for this purpose, to take help from all those external or historical facts which are
necessary in the understanding and comprehension of the subject matter and the scope
and object of the enactment. History in general and Parliamentary History in particular,
ancient statutes, contemporary or other authentic works and writings all are relevant in
interpreting and construing an Act. We have also to consider whether the statute in
question was intended to alter the law or leave it where it stood before.
(b) Consolidating Statutes & Previous Law: The Preambles to many statutes contain
expressions such as “An Act to consolidate” the previous law, etc. In such a case, the
Courts may stick to the presumption that it is not intended to alter the law. They may
solve doubtful points in the statute with the aid of such presumption in intention,
rejecting the literal construction.
(c) Usage: Usage is also sometimes taken into consideration in construing an Act. The acts
done under a statute provide quite often the key to the statute itself. It is well known that
where the meaning of the language in a statute is doubtful, usage – how that language
has been interpreted and acted upon over a long period – may determine its true
meaning. It has been emphasized that when a legislative measure of doubtful meaning
has, for several years, received an interpretation which has generally been acted upon
by the public, the Courts should be very unwilling to changes that interpretation,
unlessthey see cogent reasons for doing so.
(d) Earlier & Later Acts and Analogous Acts: Exposition of One Act by Language of
Another:
The general principle is that where there are different statutes in ‘pari materia’ (i.e. in an
analogous case), though made at different times, or even expired and not referring to
each other, they shall be taken and construed together as one system and as
explanatory of each other.
If two Acts are to be read together then every part of each Act has to construed as if
contained in one composite Act. But if there is some clear discrepancy thensuch a
discrepancy may render it necessary to hold the later Act (in point of time) had modified
the earlier one. However, this does not mean that every word in the later Act is to be
interpreted in the same way as in the earlier Act.
Where the later of the two Acts provides that the earlier Act should, so far as consistent,
be construed as one with it then an enactment in the later statute that nothing therein
should include debentures was held to exclude debentures from the earlier statute as
well.
Where a single Sectin of one Act (say, Act ‘A’) is incorporated into another statute (say
Act ‘B’), it must be read in the sense which it bore in the original Act from which it is
taken consequently, it would be legitimate to refer to all the rest of Act ‘A’ to ascertain
what that Section means, though one Section alone is incorporated in the new Act (Act
‘B’).
Suppose the earlier bye-law limited the appointment of the chairman of an organisation
to a person possessed of certain qualifications and the later bye-law authorises the
election of any person to be the chairman of the organisation. In such a case, the later
bye-law would be so construed as to harmonise and not to conflict with the earlier bye-
law: the expression ‘any person’ used in the later bye-law would be understood to mean
only any eligible person who has the requisite qualifications as provided in the earlier
bye-law.
♦ Earlier Act Explained by the Later Act: Not only may the later Act be construed in the
light of the earlier Act but it (the later Act) sometimes furnishes a legislative
interpretation of the earlier one, if it is ‘pari materia’ and if, but only if, the provisions of
the earlier Act are ambiguous.
Where the earlier statute contained a negative provision but the later one merely omits
that negative provision: this can not by itself have the result of substantive affirmation.
In such a situation, it would be necessary to see how the law would have stood without
the original provision and the terms in which the repealed sections are re-enacted.
The general rules and forms framed under an Act which enacted that they should have
the same force as if they had been included in it any may also be referred to for the
purposes of interpretation of the Act.
♦ Reference to Repealed Act: Where a part of an Act has been repealed, it loses its
operative force. Nevertheless, such a repealed part of the Act may still be taken into
account for construing the unrepealed part. This is so because it is part of the history of
the new Act.
(e) Dictionary Definitions: First we have to refer to the Act in question to find out if any
particular word or expression is defined in it. Where we find that a word is not defined in
the Act itself, we may refer to dictionaries to find out the general sense in which that
word is commonly understood. However, in selecting one out of the several meanings of
a word, we must always take into consideration the context in which it is used in the
Act. It is the fundamental rule that the meanings of words and expressions used in an
Act must take their colour from the context in which they appear. Further, judicial
decisions laying down the meaning of words in construing statutes in ‘pari materia’ will
have greater weight than the meaning furnished by dictionaries. However, for technical
terms reference may be made to technical dictionaries.
(f) Use of Foreign Decisions: Foreign decisions of countries following the same system of
jurisprudence as ours and given on laws similar to ours can be legitimately used for
construing our own Acts. However, prime importance is always to be given to the
language of the Indian statute. Further, where guidance can be obtained from Indian
decisions, reference to foreign decisions may become unnecessary.
22.5 RULES OF INTERPRETATION/CONSTRUCTION OF DEEDS AND DOCUMENTS

The first and foremost point that has to be borne in mind is that one has to find out what a
reasonable man, who has taken care to inform himself of the surrounding circumstances of
a deed or a document, and of its scope and intendments, would understand by the words
used in that deed or document.
It is inexpedient to construe the terms of one deed by reference to the terms of another.
Further, it is well established that the same word can not have two different meanings in the
same document, unless the context compels the adoption of such a rule.
The Golden Rule is to ascertain the intention of th parties to the instrument after considering
all the words in the document/deed concerned in their ordinary, natural sense. For this
purpose, the relevant portions of the document have to be considered as a whole. The
circumstances in which the particular words had been used have also to be taken into
account. Very often, the status and training of the parties using the words have also to be
taken into account as the same words may be used by a ordinary person in one sense and
by a trained person or a specialist in quite another ad a special sense. It has also to be
considered that very many words are used in more than one sense. It may happen that the
same word understood in one sense will give effect to all the clauses in the deed while
taken in another sense might render one or more of the clauses ineffective. In such a case
the word should be understood in the former and not the latter sense.
It may also happen that there is a conflict between two or more clauses of the same
document. An effort must be made to resolve the conflict by interpreting the clauses so that
all the clauses are given effect to. If, however, it is not possible to give effect to all of them,
then it is the earlier clause that will over-ride the latter one.
Similarly, if one part of the document is in conflict with another part, an attempt should
always be made to read the two parts of the document harmoniously, if possible. If that is
not possible, then the earlier part will prevail over the latter one which should, therefore, be
disregarded.
22.6 Self-examination questions
1. What do you understand by the term ‘statute’, ‘instrument’, ‘deed’ and ‘document’?
2. What is the difference between ‘interpretation’ and ‘construction’?
3. Discuss the role of ‘interpretation’ and ‘construction’ in the understanding and
application of statutes?
4. Discuss briefly the Primary Rules of Interpretation.
5. What are the Secondary Rules of Interpretation and what help can we derive from them
in understanding enactments?
6. Evaluate briefly the internal and external aids to interpretation of statutes and
documents.
7. State the rules of interpretation/construction of deeds and documents.

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PAPER 4

CORPORATE AND ALLIED LAWS

© The Institute of Chartered Accountants of India

Website : www.icai.org E-mail : bosnoida@icai.org

PAPER – 4: CORPORATE AND ALLIED LAWS

(One paper - Three hours - 100 marks)

SECTION A : COMPANY LAW (70 MARKS)

Level of Knowledge: Advanced knowledge

1.0 MAINTENANCE OF BOOKS OF ACCOUNTS

1.1 NATURE OF BOOKS OF ACCOUNT

1.2 PERSONS WHO CAN INSPECT

1.3 PLACE OF MAINTENANCE OF BOOKS OF ACCOUNT

1.4 PERIOD OF MAINTENANCE

1.5 PERSONS RESPONSIBLE FOR MAINTENANCE & PENALTY

1.6 LAYING OF ANNUAL ACCOUNTS AND BALANCE SHEET

1.8 DEVIATION FROM ACCOUNTING STANDARDS

1.9 AUTHENTICATION OF ANNUAL ACCOUNTS

1.10 BOARD’S REPORT

1.11 DIRECTORS’ RESPONSIBILITY STATEMENT (SECTION 217 (2AA)

1.12 DISCLOSURES IN BOARD’S REPORT

1.13 RIGHT OF MEMBERS TO COPIES OF BALANCE SHEET AND AUDITORS’

1.14 FILING WITH THE REGISTRAR

1.15 HOLDING & SUBSIDIARIES ACCOUNTS

1.17 DISQUALIFICATIONS OF AUDITORS

1.18 FIRST AUDITORS

1.19 SUBSEQUENT AUDITORS [SECTION 224 (1)]

1.20 AUDITORS’ APPOINTMENT BY SPECIAL RESOLUTION [SECTION 224A (1)]

1.21 RE-APPOINTMENT OF RETIRING AUDITOR

providing expressly that he shall not be re-appointed; or

1.22 CEILING ON NUMBER OF AUDITS

1.23 FILLING UP CASUAL VACANCY

1.24 REMUNERATION OF AUDITORS

1.25 REMOVAL OF AUDITORS

1.26 POWERS OF AUDITORS

1.27 DUTIES OF AUDITORS

amount of cess not so paid.

1.28 AUDIT OF ACCOUNTS OF BRANCH OFFICE OF COMPANY

1.29 SIGNATURE OF AUDIT REPORT, ETC. (SECTION 229)

1.30 SPECIAL AUDIT (SECTION 233A)

1.31 AUDIT OF COST ACCOUNTS (SECTION 233B)

2.0 MANNER AND TIME OF PAYMENT

(c) Method of depreciation

2.1 COMPULSORY TRANSFER TO RESERVES:

2.2 TRANSFER OF HIGHER PERCENTAGE OF PROFITS TO RESERVES

2.3 DECLARATION OF DIVIDEND OUT OF PAST RESERVES

2.4 DECLARATION OF INTERIM DIVIDEND

2.5 TIME LIMIT

2.6 UNPAID OR UNCLAIMED DIVIDEND (SECTION 205A)

2.8 WHEN DIVIDEND TO BE KEPT IN ABEYANCE? (SECTION 206A)

2.9 INVESTOR EDUCATION & PROTECTION FUND (SECTION 205C)

2.10 PAYMENT OF INTEREST OUT OF CAPITAL (SECTION 208)

3.1 LEGAL POSITION OF DIRECTORS

3.2 APPOINTMENT OF DIRECTORS

loans to the company to induct a director on the Board of the Company.

shareholders’ director on and from such date on which he ceased to be a small

the company in a general meeting is precluded from appointing additional directors

good corporate governance has been introduced in the Companies Act

(b) “appointing company” is the company in which an individual is seeking appointment as

Indian Automobile Association, a company registered under Section 25 of the

3.3 SHARE QUALIFICATION FOR DIRECTORS