COMPANY LAW

UNIT – I
INTRODUCTION

The Companies Act 1956 was an Act of the Parliament of India, enacted in 1956, which enabled
companies to be formed by registration, and set out the responsibilities of companies, their
directors and secretaries.

Companies Act 1956

Enacted 18 January 1956

Commenced 1 April 1956 and amendment 2015

The Companies Act 2013 is an Act of the Parliament of India on Indian company law which
regulates incorporation of a company, responsibilities of a company, directors, dissolution
of a company. Administered by ministry of corporate affairs Smt Nirmala sitharaman

Territorial extent India

Enacted by Parliament of India

Assented to 29 August 2013

Signed 29 August 2013

The Companies Act 2013 was introduced to ease the process of doing business in India and
improving corporate governance. Another factor behind the introduction of Companies Act
2013 was to make companies more accountable.
The maximum number of members (shareholders) permitted for a Private Limited
Company is increased to 200 from 50. One-Person company. Section 135 of the Act which
deals with Corporate Social Responsibility. Company Law Tribunal and Company Law
Appellate Tribunal.
The Companies Act, 1956 (existing Act) contains 658 sections and XV schedules. The
Companies Act 2013 has 464 sections and 7 schedules.

COMPANY - MEANING
A company is a legal entity formed by a group of individuals to engage in and operate a
business—commercial or industrial—enterprise. ... They can also be distinguished between
private and public companies. Both have different ownership structures, regulations, and
financial reporting requirements.

The word ‘company’ is derived from the Latin word Com Panis (Com means ‘With or together’
and Panis means ‘Bread’), and it originally referred to an association of persons who took their
meals together. In the leisurely past, merchants took advantage of festive gatherings, to discuss
business matters.

DEFINITION
A company is an association of persons which is formed to achieve common objects. The word
‘Company’ has been derived from the Latin word ‘com’ and ‘panis’. A company is where like
minded people come together to carry on a business.

As per Section 2 (20) of the Act, a “Company” means a company incorporated under the
Companies Act, 2013 or under any previous company law.

A company being the creation of law, is an artificial person having legal and distinct status from
that of its members.

NATURE AND CHARACTERISTICS OF COMPANY

1.INCORPORATION OF A COMPANY

A company incorporated under the Act is vested with a corporate personality so it bears its own
name, acts under name, has a seal of its own and its assets are separate and distinct from those of
its members. It is a different ‘person’ from the members who compose it. Therefore it is capable
of: owning property, incurring debts, borrowing money, having a bank account, employing
people, entering into contracts and suing or being sued in the same manner as an individual.

2. COMPANY AS AN ARTIFICIAL PERSON: A Company is an artificial person created by

law. It is not a human being but it acts through human beings. It is considered as a legal person
which can enter into contracts, possess properties in its own name, sue and can be sued by others.

3. COMPANY IS NOT A CITIZEN: The company, though a legal person, is not a citizen
under the Citizenship Act, 1955 or the Constitution of India.

4. COMPANY HAS NATIONALITY AND RESIDENCE: Though it is established through

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

5. LIMITED LIABILITY: “The privilege of limited liability for business debts is one of the
principal advantages of doing business under the corporate form of organisation.” The company,
being a separate person, is the owner of its assets and bound by its liabilities. The liability of a
member as shareholder, extends to the contribution to the capital of the company up to the
nominal value of the shares held and not paid by him.
6. PERPETUAL SUCCESSION: An incorporated company never dies, except when it is
wound up as per law. A company, being a separate legal person is unaffected by death or
departure of any member and it remains the same entity, despite total change in the membership.
Perpetual succession, means that the membership of a company may keep changing from time to
time, but that shall not affect its continuity.

7. SEPARATE PROPERTY: A company being a legal person and entirely distinct from its
members, is capable of owning, enjoying and disposing of property in its own name. The
company is the real person in which all its property is vested, and by which it is controlled,
managed and disposed off.

8. TRANSFERABILITY OF SHARES: The capital of a company is divided into parts, called

shares. The shares are said to be movable property and, subject to certain conditions, freely
transferable, so that no shareholder is permanently or necessarily wedded to a company. Section
44 of the Companies Act, 2013 enunciates the principle by providing that the shares held by the
members are movable property and can be transferred from one person to another in the manner
provided by the articles.

9. CAPACITY TO SUE AND BE SUED: A company being a body corporate, can sue and be
sued in its own name.

10. CONTRACTUAL RIGHTS: A company, being a legal entity different from its members,
can enter into contracts for the conduct of the business in its own name.

11. LIMITATION OF ACTION: A company cannot go beyond the power stated in its
Memorandum of Association. The Memorandum of Association of the company regulates the
powers and fixes the objects of the company and provides the edifice upon which the entire
structure of the company rests.
12. SEPARATE MANAGEMENT: The members may derive profits without being burdened
with the management of the company. They do not have effective and intimate control over its
working and they elect their representatives as Directors on the Board of Directors of the
company to conduct corporate functions through managerial personnel employed by them. In
other words, the company is administered and managed by its managerial personnel.

13. VOLUNTARY ASSOCIATION FOR PROFIT: A company is a voluntary association for

profit. It is formed for the accomplishment of some stated goals and whatsoever profit is gained
is divided among its shareholders or saved for the future expansion of the company.
14. TERMINATION OF EXISTENCE: A company, being an artificial juridical person, does
not die a natural death. It is created by law, carries on its affairs according to law throughout its
life and ultimately is effaced by law. Generally, the existence of a company is terminated by
means of winding up

KINDS OF COMPANY

PUBLIC COMPANY

A public company is a corporation whose ownership is distributed amongst

general public shareholders through publicly-traded stock shares.
5 Top Public Sector Companies in India
 Indian Oil Corporation Ltd. (BSE: 530965, NSE: IOC)

 Bharat Petroleum Corporation Ltd. (BSE: 500547, NSE: BPCL)

 State Bank of India (BSE: 500112, NSE: SBIN)

 Hindustan Petroleum Corporation Ltd. (BSE: 500104, NSE: HINDPETRO)

 Oil & Natural Gas Corporation Ltd. (BSE: 500312, NSE: ONGC)

A public company may be formed by persons among the public including Indian
nationals or foreigners. It may be conceived in the government, cooperative, joint,
as well as private sector of the economy.

Some examples of public companies are, Reliance Industries, Tata Motors, Bharti
Airtel, Larsen & Tourbo, etc

Salient features of a public limited company

1. Minimum number of subscribers: At least 7 persons must subscribe to the memorandum
to incorporate a public company.

2. Limit on maximum number of members: There is no ceiling on the maximum number of

members in a public company [Section 2(68)].

3. Raising of capital: A public company can invite the public to subscribe for any securities
of the company. It can issue raise capital by issuing a prospectus (Section
23).Communication relating to issue of the prospectus should be to the public and not
private communication. It may also issue securities by way of rights or issue bonus, or
through private placement. According to Section 62(2)(a)(i), offer of rights share must be
made by a notice specifying the number of shares offered and giving at least 15 days, not
 exceeding 30 days from the date of the offer. If the offer is not accepted within the
specified duration, it shall be deemed to be inclined.

4. Minimum subscription: A public company cannot allot securities without receiving

minimum subscription (Section 39).

5. Transfer of shares: A public company has no restrictions on transfer of shares, hence

they are freely transferable [Section 2(68)]. As per Section 44, both shares and
debentures are movable property capable of being transferred in the manner provided in
the articles.

6. Acceptance of public deposits: A public company can accept, as well as invite deposits
from the public (Section 76).

7. Issue of securities in dematerialised form: Only a public company can issue securities in

the dematerialised form (Section 29).

8. Articles: A public company may either formulate its own articles or endorse the model
articles appended to the Act. For e.g. Table F provides for articles of association of a
company limited by shares. Similarly, Table G provides for articles of association of a
company limited by guarantee and having a share capital (Section 5).

9. Provision for entrenchment of articles: A public company can amend the provisions for
entrenchment as to alteration of articles in its article only by passing a special resolution.

10. Minimum number of directors: A public company must have a at least 3 directors
[Section 149(1)]. As per Section 162, appointment of each director should be made by a
separate vote. The board of directors can fill a casual vacancy in the office of a director.

11. Retirement of directors: At least two-thirds of the directors of a public company must be
such whose office is liable to retire by rotation. Likewise, one-third of such directors
must retire by rotation every annual general meeting.

12. Independent directors: A public company has to appoint independent directors and must
have at least one-third of the total number of directors on its board as independent
directors [Section 149(4)].

13. Small shareholders’ director: A listed public company shall have a director elected by
small shareholders from amongst themselves, only if not less than 1000 small
shareholders or one-tenth of a total number of such shareholders, whichever is lower,
gives notice in this regard (Section 151).

14. Quorum for general meeting: The quorum varies with the number of members of the
company. The quorum may range from 5 to 30 depending on the number of members in
the company. For e.g., quorum is 15 if members are more than 1000 (Section 103).
 15. Report on annual general meeting: A report has to be prepared and be filed with the
registrar, consequent to every annual general meeting (Section 121).

16. Managerial remuneration: The total remuneration should not exceed 11% of the net
profits of the company unless a special resolution is passed (Section 197). As per Section
67(2), a public company is not permitted to give financial assistance, by way of loan,
guarantee or otherwise for the purpose of purchase of any shares by any person in the
company or any of its holding company.

17. Constitution of audit committee and nomination and remuneration committee: Every

listed public company, all public companies with a paid up share capital of ₹10 crores or
more, and all public companies having incumulative, outstanding loans, or borrowings, or
debentures, or deposits exceeding ₹50 crores or more, shall constitute an audit committee
and nomination and remuneration committee (Section 177 & 178).

18. Secretarial audit: As per Section 204(1), every company having paid up capital of ₹50
crores or more or having a turnover of ₹250 crores or more shall annex a secretarial audit
report along with its director’s report.

19. Rotation of auditors and audit firm: No listed company is allowed to appoint an
individual for more than one term of more than five consecutive years or an audit firm for
more than two terms of five consecutive years. This shall apply to only those unlisted
public companies which have a paid up share capital of ₹10 crores or more, and other
public companies having paid up share capital of less than ₹10 crores but having public
borrowings from either financial institutions or banks, or public deposits of ₹50 crores or
more.

20. SEBI Regulations: Only regulations notified by SEBI are applicable in the case of public
listed companies.

Types of public companies

i. Listed companies: As per Section 2(52) of the Companies Act, 2013 a listed company is
such which has any of its securities listed on any recognised stock exchange, for e.g.
BSE, NSE, etc. It can issue a prospectus for inviting people to subscribe to its securities
by way of an initial public offering or can make a further public offer. This ensures
ownership in the hands of several shareholders, securing liquidity. The value of dividend
to be paid to its shareholders can easily be derived since the market value can simply be
calculated. For e.g. Wipro, Tata Consultancy Services, etc. The shares of a listed public
company are traded using a Demat account.

ii. Unlisted Companies:Such companies are mostly owned by its founders or private
investors. They are not empowered to issue a prospectus to the public, as their securities
are not listed on any recognised stock exchange. Unlisted securities are often referred to
 as over-the-counter securities, as deals are made subject to preconditions of the parties.
They usually procure their capital from their members, directors, their friends and
relatives. An unlisted public company is different from that of a private company, as it
does not have any limit on the number of shareholders to raise capital for commercial
ventures. They have less stringent regulatory compliances as they are not liable to comply
with any regulation notified by SEBI, withal, it has to comply with guidelines issued by
the central government or ministry of corporate affairs. For e.g. Bennett Coleman, Parle,
etc.

Advantages of public company

 Limited Liability of the shareholders

In Public Company registration, the liability of the shareholder and Directors is limited to
the extent of the shares they hold in the company. For example, if the company suffers
from any financial contingencies because of primary business activity, then in such case
personal assets of shareholders and Directors will not be snatched by the Banks,
creditors, and government.
 Raising the capital through Public Issue

In the case of Public Company Registration, the proposed company can raise funds
through the Public.
 Separate Legal Entity

Shareholders and Directors may come and go, but the existence of the company continues
to exist. i.e. the absence or movement of any shareholder in the company will not affect
the existence of the company.
 Unlimited source of raising fund

The company has an unlimited source of raising fund through Public which results in
pursuance of new projects and for capturing the new market
 Easy Transferability

The shares of a public limited company are easily transferable. Shares of the company are
listed on a stock exchange; the shareholders find it is easy to transfer the share in the
company. In the case of Public Company Registration, shareholders are less bound to
remain with the company, which results in making people more willing to invest.
 Maintains the Transparency

Because of Public involvement, the company publishes its statutory details and reports to
maintain greater transparency and also to provide accurate information of its current
financial position.
 Maintains the Brand Position
 Being registered as a Public Company, it improves the brand position of the Company.
Listing the shares of the company in the stock exchange enhances the brand position and
reputation of the company.
Disadvantages of Public Company Registration
 Lack of Flexibility

Flexibility always acts as strength to every organization, but in the case of the public
company, there is no such advantage. Every public company is bind by the rules and
regulations, which results in a lack of flexibility in its operations.
 Lack of secrecy

To maintain the transparency and trust of the shareholders, the company provides full
disclosure to the public due to which secrecy cannot be maintained. The Public is
involved in decision making, the company cannot maintain the secrecy.
 Suitability

A public limited company is only favourable to large scale a business which is a

disadvantage to small scale industries.
 High Costs

Registering the company as a Public Company requires a huge cost. To start a public
company huge investment, time and procedural things are required to be complied with.
The profit of the company depends upon the investment you have done.

PRIVATE COMPANIES
A private company is a firm held under private ownership. Private companies may issue
stock and have shareholders, but their shares do not trade on public exchanges and are not
issued through an initial public offering (IPO).

A private limited company, or LTD, is a type of privately held small business entity. This
type of business entity limits owner liability to their shares, limits the number of shareholders
to 50, and restricts shareholders from publicly trading shares.
DHL Express (India) Private Limited
 Industry Type: Transportation | Package Transport

 Registered Office: Mumbai

 CIN: U64120MH2001PTC131743

About Company: DHL Express India is an Indian wing of

the German logistics company Deutsche Post DHL which is into the business of
international express mail services. Deutsche Post DHL is considered to be the world’s
largest logistics company operating around the world, particularly in sea and air mail.
Oberoi Hotels Private Limited
 Industry Type: Hospitality | Hotel/Resort

 Registered Office: Kolkata

 CIN: U55101WB1946PTC014548

About Company: It is a Global Hotel Company having a head office in Delhi. This was
founded in 1934. The Oberoi operates more than 30 hotels and two river cruises in five
countries.
The companies that run Flipkart, Ola, Snapdeal, Carat Lane, Zoom Car are all private
entities, while those that run MakeMyTrip and Infibeam are among the first Indian start-ups
to have gone public.

Private Limited Company McDonald Corporation * McDonalds Corporation is the largest

fast food chain in the world today.
A minimum number of two Directors who are adults.
One of the Directors of a private limited company has to be an Indian Citizen and Indian
Resident. The other director(s) can be a Foreign National.
It is also required to have two shareholders of a company. The shareholders can be natural
persons or an artificial legal entity.

Private Limited Company Registration Process:

Registration of a Pvt Ltd company in India is complete an online process. Recently the MCA
has replaced the earlier SPICe form with a new web form called SPICe+ (SPICe Plus).
Hence, Incorporating a Private Limited Company is even easier now.

Now the company can Incorporate a Private Limited Company, with a Single application for
Name reservation, Incorporation, DIN allotment, Mandatory issue of PAN, TAN, EPFO,
ESIC, Profession Tax (Maharashtra), and Opening of Bank Account.
SPICe+ is divided in two parts as follows:
1. Part A: Apply for the name reservation of the company in Part A of the form Spice+. it can
be used for taking the name approval of the proposed Company and also for filing Company
registration in one go.
2. Part B: In Part B of the Form Spice+, apply for the following services:
Incorporation DIN (Director’s Identification Number) allotment Mandatory issue of PAN
Mandatory issue of TAN Mandatory issue of EPFO registration Mandatory issue of ESIC
registration Mandatory issue of Profession Tax registration(Maharashtra) Mandatory
Opening of Bank Account for the Company and Allotment of GSTIN (if so applied for)
Advantages of Private Limited Company:
1) No Minimum Capital Needed
There is no minimum capital needed to form or incorporate private limited company in India.
2) Separate Legal Entity
A private limited company is said to be a separate legal entity according to the law because
the assets and liabilities of the business are not the same as the assets and liabilities of the
directors. Both of them are counted as different as the private limited company separates
management and ownership. The managers are counted responsible for the success and they
are also liable for the losses the company.
3) Professional Reputation of the Business
Running a business as a limited company creates a professional image and increases your
reputation in the market because these types of businesses are closely monitored and
analyzed than other structures in place. Registering your business as a limited company will
help you in attracting new investors and also helps in competing in the market of your
industry.
Disadvantages of Private Limited Company
1) Number of Shareholders and Members
If you have registered your business as private limited company, the number of shareholders
cannot exceed the limit of 50 as per the law.
Talking about maximum members in a private limited company, you cannot exceed 200.
2) Restriction on Transfer of Shares
In a private limited company, transfers of shares by its articles are not allowed and these
shares cannot be quoted in the stock exchange.
3) Cannot Issue Prospectus to Public
A private limited company is not allowed to invite public for subscription of shares, it means
they cannot issue prospectus.
B. Types of Company on the basis of Liability
1. Companies limited by shares:
A company that has the liability of its members limited by the memorandum to the amount, if
any, unpaid on the shares respectively held by them is termed as a company limited by
shares. The liability can be enforced during existence of the company as well as during the
winding up. Where the shares are fully paid up, no further liability rests on them.
For example, a shareholder who has paid 75 on a share of face value 100 can be called upon
to pay the balance of 25 only. Companies limited by shares are by far the most common and
may be either public or private.
2. Companies limited by guarantee:
Company limited by guarantee is a company that has the liability of its members limited to
such amount as the members may respectively undertake, by the memorandum, to contribute
to the assets of the company in the event of its being wound-up. In case of such companies
the liability of its members is limited to the amount of guarantee undertaken by them. The
members of such company are placed in the position of guarantors of the company’s debts up
 to the agreed amount. Clubs, trade associations, research associations and societies for
promoting various objects are various examples of guarantee companies.
3. Unlimited Liability Companies:
A company not having a limit on the liability of its members is termed as unlimited
company. Here the members are liable for the company’s debts in proportion to their
respective interests in the company and their liability is unlimited. Such companies may or
may not have share capital. They may be either a public company or a private company.

CLASSIFICATION OF COMPANIES ACCORDING TO MODE OF

INCORPORATION:

a) Chartered Company:
Companies that are formed by the Royal Charter or on any special order granted by the King or
Queen are called as Chartered Companies. Such companies enjoy exclusive powers and
privileges and can be set up only in the countries having a system of Kingship. This type of
company is not found in India nowadays. Examples: The Bank of England, The East India
Company Hudsons Bay Company, The Chartered Bank

b). Statutory Companies :

These companies are constituted by a special Act of Parliament or State Legislature. These
companies are formed mainly with an intention to provide the public services. Though primarily
they are governed under that Special Act, still the CA, 2013 will be applicable to them except
where the said provisions are inconsistent with the provisions of the Act creating them (as
Special Act prevails over General Act). Examples of these types of companies are Reserve Bank
of India, Life Insurance Corporation of India, etc.

c. Registered Companies:
Companies registered under the CA, 2013 or under any previous Company Law are called
registered companies.

Such companies comes into existence when they are registered under the Companies Act and a
certificate of incorporation is granted to it by the Registrar.

Examples: Steel Authority of India Ltd, Maruti Udyog Ltd., and Reliance Industries

TYPES OF COMPANY ON THE BASIS OF NUMBER OF MEMBERS

One Person Company (OPC):

With the enactment of the Companies Act, 2013 several new concepts was introduced that was
not in existence in Companies Act, 1956 which completely revolutionized corporate laws in
India. One of such was the introduction of OPC concept. This led to the avenue for starting
businesses giving flexibility which a company form of entity can offer, while also offering
limited liability that sole proprietorship or partnerships does not offers. Defined u/s 2(62) of the
CA, 2013 – One Person Company means a company which has only one person as a member.

Thus, one person company means one individual who may be a resident or NRI can incorporate
his/her business that has the features of a company and the benefits of a sole proprietorship

Such companies are generally created when there is only one founder/promoter for the business.
Entrepreneurs whose businesses lie in early stages prefer to create OPCs instead of sole
proprietorship business because of the several advantages that OPCs offer.

Features of a One Person Company

Here are some general features of a one-person company:
a. Private company: Section 3(1)(c) of the Companies Act says that a single person can
form a company for any lawful purpose. It further describes OPCs as private companies.

b. Single-member: OPCs can have only one member or shareholder, unlike other private
companies.

c. Nominee: A unique feature of OPCs that separates it from other kinds of companies is
that the sole member of the company has to mention a nominee while registering the
company.

d. No perpetual succession: Since there is only one member in an OPC, his death will

result in the nominee choosing or rejecting to become its sole member. This does not
happen in other companies as they follow the concept of perpetual succession.

e. Minimum one director: OPCs need to have minimum one person (the member) as
director. They can have a maximum of 15 directors.

f. No minimum paid-up share capital: Companies Act, 2013 has not prescribed any
amount as minimum paid-up capital for OPCs.

g. Special privileges: OPCs enjoy several privileges and exemptions under the Companies
Act that other kinds of companies do not possess.

Formation of One Person Companies

A single person can form an OPC by subscribing his name to the memorandum of association
and fulfilling other requirements prescribed by the Companies Act, 2013. Such memorandum
must state details of a nominee who shall become the company’s sole member in case the
original member dies or becomes incapable of entering into contractual relations.
This memorandum and the nominee’s consent to his nomination should be filed to the Registrar
of Companies along with an application of registration. Such nominee can withdraw his name at
any point in time by submission of requisite applications to the Registrar. His nomination can
also later be canceled by the member.
Membership in One Person Companies
Only natural persons who are Indian citizens and residents are eligible to form a one-person
company in India. The same condition applies to nominees of OPCs. Further, such a natural
person cannot be a member or nominee of more than one OPC at any point in time.
It is important to note that only natural persons can become members of OPCs. This does not
happen in the case of companies wherein companies themselves can own shares and be
members. Further, the law prohibits minors from being members or nominees of OPCs.
Conversion of OPCs into other Companies
Rules regulating the formation of one-person companies expressly restrict the conversion of
OPCs into Section 8 companies, i.e. companies that have charitable objectives. OPCs also cannot
voluntarily convert into other kinds of companies until the expiry of two years from the date of
their incorporation.
Privileges of One Person Companies
OPC enjoy the following privileges and exemptions under the Companies Act:
 They do not have to hold annual general meetings.

 Their financial statements need not include cash flow statements.

 A company secretary is not required to sign annual returns; directors can also do so.

 Provisions relating to independent directors do not apply to them.

 Their articles can provide for additional grounds for vacation of a director’s office.

 Several provisions relating to meetings and quorum do not apply to them.

 They can pay more remuneration to directors than compared to other companies.

D. TYPES OF COMPANY ON THE BASIS OF DOMICILE

1. Foreign company: Defined u/s 2(42) of the CA, 2013 – “foreign company” means any
company or body corporate incorporated outside India which,— has a place of business in India
whether by itself or through an agent, physically or through electronic mode; and conducts any
business activity in India in any other manner. Section 379 to Section 393 of the CA, 2013
prescribes the provisions which are applicable on such companies.

List of Foreign Companies Listed in India

 3M India Limited.

 ABB Limited.

 Abbott India Limited.

  Agro Tech Foods Limited.

 Ahlcon Parenterals (India) Ltd.

 Akzo Nobel India Limited.

 Alpha Graphic India Ltd.

 Alstom India Ltd.

2. Indian Company: A company formed and registered in India is known as an Indian

Company.

 Reliance Industries Ltd. NSE: RELIANCE. ...

 Tata Consultancy Services Ltd. NSE: TCS. ...

 HDFC Bank Ltd. NSE: HDFCBANK. ...

 Infosys Ltd. NSE: INFY. ...

 ICICI Bank Ltd. NSE: ICICIBANK. ...

 Hindustan Unilever Ltd. NSE: HINDUNILVR. ...

 State Bank Of India. ...

 Housing Development Finance Corporation Ltd.

E. Other Types of Company:

1. Section 8 Company:

A company is referred to as Section 8 Company when it registered as a Non-Profit Organization

(NPO) i.e. when it has motive of promoting arts, commerce, education, charity, protection of
environment, sports, science, research, social welfare, religion and intends to use its profits (if
any) or other income for promoting these objectives.
The income of NPO can not be used for paying out dividends to the company’s members and has
to be for the promotion of charitable objectives. Such companies obtain an incorporation
certificate from the central government and are liable to adhere to the rules specified by the
government.
According to the rules, failure to comply with the responsibilities stated by the Central
Government may lead to the winding up of the company on the orders of government. Besides,
strict legal action will be taken against all the members of the company if the objectives laid
down by the company proves to be bogus.
Famous examples of Section 8 companies include Federation of Indian Chambers of
Commerce and Industry (FICCI) and Confederation of Indian Industries (CII). The
objective of these companies is facilitating the growth of trade and commerce and India.

2. Government Company:

Government Company is a company or an organization in which at least 51% of the paid up

share capital is held by the central government or the state government or partly by both central
and state government. These are many government companies, few of them are,
Steel Authority of India Limited, Bharat Heavy Electricals Limited, Coal India Limited, State
Trading Corporation of India, etc.
The public sector companies in India were incorporated into two main objectives:
 To achieve more equity in the distribution of wealth and income amongst the citizens of
the country.

 To gain the momentum in the growth of the nation.

Features of a Government Company

 It is a separate legal entity.

 It is incorporated under Companies Act 1956 & 2013.

 The management is governed and regulated by the provisions of Companies Act.

 The Memorandum of Association and Articles of Association govern the appointment of

employees.

 A government company gets its funding from government shareholding and other private
shareholdings. The company can also raise money from the capital market.

 A government company is audited by the agency appointed by the central government.

This agency is mainly Comptroller and Auditor General of India (C&AG).

Merits of a Government Company

 To incorporate a government company, all the provisions of the Companies Act are to be
followed.

 The government organization enjoys all autonomy in management decisions and

flexibility in day to day activities.

 These companies control the local market and sustain it to curb the unhealthy business

practices.
Limitations of a Government Company
 These companies face a lot of government interference and involvement of government
officials, ministers, and politicians.

 As these companies are financed by the government, so these companies evade all
constitutional responsibilities of not answering to the parliament.

 The efficient operations of the company are hampered, as the board of the company
comprises mainly of politicians and civil servants, who have more emphasis and interest
in pleasing their political party co-workers or owners and less concentrated on growth
and development of the company.

3. Small Company:

As per the new definition and threshold limits, companies with a paid-up capital of INR 2
crore or less, and turnover of INR 20 crore or less come are defined as small companies.

characteristics of a Small Company

There are certain characteristics of it are given below:
1. Low profitability and revenue: Generally, a small company has less revenue as
compared to the large one. It is depending on the type of business how much it is able to
generate revenue. But lower revenue does not consider as lower profitability.

2. Fewer Employees: it basically onboard a small team of employees than others.

Sometimes, small companies are handled by a single person or a single team.

3. Smaller Market Area: small companies are made to serve the smaller sections of the
society or community like convenience shop in a rural township. So, they have a small
area for operating business activities.

4. Sole proprietorship/partnership and taxes: the corporate structure of working does not
suit small-scale working organizations. Despite, small business has the priority to
establish sole proprietorships, partnerships and limited liability companies. It provides
them the strong sense of managerial control to the office owners with minimum hassle
and expenditure of company registration. It’s owner is liable to report business income
and expenses on their personal tax returns. As small companies do not file their own
taxes.

5. Fewer locations:  it is found in a limited area instead of several branches. The hands of
the small scale companies are not grasped by other countries and states. Its sales are just
confined to a single area. Besides, it is much easier and feasible if it is controlled by the
home itself.
Advantages
Every business structure has some merits and demerits of its own. It too has some advantages
under companies act 2013 which are given below:
1. Board Meetings: Two meetings in a financial is just sufficient for a it. Any private
limited company which is not considered as the small one shall conduct four board
meetings in a financial year.

2. Annual Return: The annual return filing can be signed by a CS or a director of the small

company. Any private limited company which is not considered as a small company shall
sign its annual return filing by a director and a company secretary both.

3. Cash flow statement: Any private limited company comes under the category of a small
company shall not maintain a cash flow statement as a part of the financial statement. On
the contrary, any private limited one does not come under the category of it then it is
mandatory to prepare a Cash flow statement as a part of the financial statement.

4.  Auditors Rotation: Any private limited company falls in a small company’s category do
not require to rotate auditors. But private limited company not classified as it, must rotate
auditors every 5 to 10 years as prescribed under the companies act 2013.

SUBSIDIARY COMPANY:
In the corporate world, a subsidiary is a company that belongs to another company, which is
usually referred to as the parent company or the holding company. The parent holds a
controlling interest in the subsidiary company, meaning it has or controls more than half of its
stock.
Purpose
A subsidiary is a separate legal entity for tax, regulation, and liability purposes. Parent
companies can benefit from owning subsidiaries because it can enable them to acquire and
control companies that manufacture components needed for the production of their goods.
For example, Walt Disney Entertainment owns 100% of Marvel Entertainment which produces
movies.
HOLDING COMPANY:
A holding company is a parent company, limited liability company, or limited partnership that
holds ample voting shares in another company. The shareholding is arranged in a way that the
holding company can control the policies of its subsidiary company and oversee its management
decisions.
 Common examples of holding companies are conglomerates. It reflects diversification of
operations, product line and market to allow business expansion. read more owning companies in
multiple industries.
A holding company is a parent business entity—usually a corporation or LLC—that doesn't
manufacture anything, sell any products or services, or conduct any other business operations. Its
purpose, as the name implies, is to hold the controlling stock or membership interests in other
companies.
An example of a well-known holding company is Berkshire Hathaway, which owns assets in
more than one hundred public and private companies, including Dairy Queen, Clayton Homes,
Duracell, GEICO, Fruit of the Loom, RC Wiley Home Furnishings and Marmon Group.
Berkshire likewise boasts minor holdings in The Coca-Cola Company, Goldman Sachs, IBM,
American Express, Apple, Delta Airlines, and Kinder Morgan.

PRODUCER COMPANY:
"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.
The Producer Companies are the companies which is registered under the Companies Act 2013
and which is incorporated with the following objective:

 Harvesting;

 Procurement;

 Grading;

 Pooling;

 Handling;

 Marketing;

 Selling; and.

 Export of primary products of its members

Every Producer Company must contain words like “Producer Company Limited” at the end of its
name. For example: Vanilla India Producer Company Limited. Minimum Paid-up capital must
be Rs. 5 lakh.
Vegetable Growers Association (VGAI), Narayangaon Pune , Sahyadri Farmer Producer
Company, Nasik , PAAYAS Milk Producer Company, Jaipur, Savithribai Phule Goat Farming
Producer Company ,Maahi Milk Producer Company, Gujarat, Nachalur Farmer Producer
Company, Tamil Nadu

PRIVILEGES AND EXEMPTIONS ENJOYED BY A PRIVATE COMPANY IN INDIA

1. Members:

A private company can be formed with only 2 persons as members.

2. Prospectus:

A private company need not issue prospectus. It is also not required to file a ‘statement in lieu of
prospectus’ with the Registrar before allotment of shares. Thus a private company is exempted
from complying with the provisions of the Act regarding the issue of the prospectus.

3. Certificate of commencement of business:

A private company can start business immediately after incorporation. It need not apply for a
certificate to commence business.

4.Statutory meetings: Private company is not required to hold statutory meetings and file
statutory report with the Registrar of Companies.

5.No restriction on the number of directors: The private company can increase its number of
directors without the permission of the government.

6.Quorum of directors meeting: Only two directors are sufficient to constitute quorum.

7.Appointment of managing director: The private company can appoint a person as managing
director, who has already been working as the managing director of other company.

8.Retirement of directors by rotation: The directors of private company need not retire by
rotation.

9.Remuneration of Managers and Directors: There is no limit on remuneration of managers

and directors of a private company. The change or increase in remuneration can be made without
the approval of Central Government.

10.Minimum paid up capital:

A private company is required to have a minimum paid up capital of 1 lakh. [Sec.3 (l) (iii)]

11.Exemption regarding right issue:

A private company need not offer shares to its existing shareholders whenever it intends to
increase its subscribed capital. (Sec. 81)

12.Exemption regarding share capital:

Restrictions applicable to public companies regarding kinds of share capital, voting rights, and
issue of shares with disproportionate voting rights and termination of disproportionate excessive
rights do not apply to private companies. (Sec. 85-90) Further, a private company can give
financial assistance for the purchase or subscription of its own shares or its holding company.

13.Exemption regarding directors:

A private company enjoys following exemptions regarding directors:

(i) A private company may have 2 directors.

(ii) Restrictions on appointment of directors regarding undertaking to take up qualification shares

and pay for them and filing consent of directors etc. are not applicable to private companies [Sec.
266 (5)].

(iii) All the directors may be appointed by a single resolution. (Sec. 255)

(iv) The directors need not retire by rotation (Sec. 256).

(v) The number of directors can be increased without the consent of the Central Government.
(Sec. 259)

(vi) Persons holding an office of profit can be appointed as directors of a company without
passing a special resolution. (Sec. 261)

(vii) The provision excluding an interested director from participating in voting at board’s
proceedings does not apply to a private company. (Sec.300)

(viii) The provision requiring Government’s approval to the amendment of provisions relating to
the appointment or reappointment of managing or whole- time does not apply. (Sec. 268)

(ix) The appointment of a whole-time managing director can be made without the consent of the
Central Government. (Sec. 269)

(x) The provisions of the Act relating to number of companies of which a person can be a
director, manager or managing director does not apply. (Sees. 386 to 388)

(xi) Prohibition regarding granting of loans by companies to directors does not apply. [Sec.
295(1)]

(xii) Restrictions on the powers of the Board regarding selling of the whole or substantially the
whole of the company’s undertaking or remitting or giving time for repayment of a debt due by a
director etc., are not applicable to private companies. (Sec. 293)

14.Exemption regarding managing director:

The restriction as to number of companies of which a person may be appointed managing
director and prohibition of appointment of managing director for more than 5 years at a time are
not applicable to private companies. (Sees. 316 & 317)

15.Exemption regarding managerial remuneration:

The provisions of the Act regarding fixing or increasing the remuneration of managerial
personnel of the company are not applicable to private companies. (Sees. 198, 309, 310 & 311)

16.Audit committee:

A private company is not required to constitute an audit committee of the Board (Sec. 292A).

17. Exemption regarding statutory meeting:

A private company need not hold a statutory meeting and file a statutory report with the
Registrar. (Sec. 165)

18. Exemption regarding inter-corporate loans and investments:

The provisions of the Act relating to investment of funds by a company in other companies or
companies under the same management are not applicable to private companies. (Sec. 372A)

19. Regarding Balance sheet:

A private company is required to file copies of balance-sheet and profit and loss account to the
Registrar of Companies but no person other than member of the company is entitled to inspect
the balance-sheet and profit and loss account. (Sec 220)

20. Exemption regarding power to prevent changes in the board:

The provisions of the Act giving power to the Company Law Board to prevent changes in the
Board likely to affect prejudicially the company are not applicable to a private company. [Sec.
409]

Thus, a private company, on the one hand, is able to enjoy all the benefits of a joint stock
company such as legal entity, perpetual existence, limited liability etc., and on the other hand, it
is free from numerous legal restrictions which apply to a public company. This grants it a greater
freedom of action than a public company in several respects.

FORMATION OF A COMPANY

The formation of a company goes through a number of steps, starting from idea generation to
commencing of the business. This whole process can be broken down into 4 major phases or
steps, which we will be discussing in the lines below.
The major steps in formation of a company are as follows:

Promotion stage

Registration stage

Incorporation stage

Commencement of Business stage

Promotion Stage:
Promotion is the first step in the formation of a company. In this phase, the idea of starting a
business is converted into reality with the help of promoters of the business idea.
The term ‘promotion’ refers to the sum total of activities by which a business enterprise is
brought into existence. At the promotion stage of a company, the promoters conceive the idea of
promoting a company and the type of activities that it intends to undertake.
A promoter may be an individual (like Jamsetji N. Tata, G.D. Birla, Dhirubhai H. Ambani, etc.,
the great promoters), a group of individuals or one or more companies (promoting a company by
another company or group of companies is becoming very popular). Subsequently, activities
related to promoting the company are undertaken.

In this stage the ideas are executed. The promotion stage consists of the following steps:

 Identify the business opportunity and decide on the type of business that needs to be
done.
 Perform a feasibility study and determine the economic, technical and legal aspect of
executing the business.
 Interest shown by promoters towards the business idea and supply of capital and other
necessary procedures to start the business.

2. Incorporation Stage:
Incorporation or registration stage involves putting an application for registering the company
before the concerned Registrar of Companies and getting it registered. In India, there is an office
of the Registrar of Companies in each major State of the country. The concerned Registrar is one
who is located in the State where the registered office of the company is to be located.
Incorporation stage involves the following activities:
i. Filing registration application with the Registrar of Companies along with relevant documents
(Memorandum of Association, Articles of Association or declaration of accepting Table A which
is a model set of Articles of Association, written consent of proposed Directors, certificate of
approval of the company’s name, agreement entered with the proposed Managing Director,
statutory declaration that all legal requirements for registration have been completed and
documentary evidence of payment of registration fees).
ii. Scrutiny of the application and documents by the Registrar of Companies.
iii. Registering the company by the Registrar if all requirements are fulfilled and entering the
name of the company in the relevant register.
iv. Issue of Certificate of Incorporation by the Registrar of Companies.
On issue of the Certificate of Incorporation, the company comes into existence as an artificial
person.

There are several steps involved in the registration phase, and are as follows:

Memorandum of Association: A memorandum of association (MoA) must be signed by the

founders of the company. A minimum of 7 members are required in case of a public company
and 2 in case of a private company. The MoA must be properly registered and stamped.

Article of Association: Article of Association (AoA) is also required to be signed and submitted.
All members who previously signed MoA, should also be signing the AoA.

The next step is preparing a list of directors which should be filed with the Registrar of
Companies.

Directors of the company should provide a written consent agreeing to be directors, should be
filed with the Registrar of Companies (RoC).

The notice of address of the office needs to be filed.

A statutory declaration should be made by any advocate of either the High Court or Supreme
Court, or a person of the capacity of Director, Secretary or Managing Director. This declaration
shall be filed with the RoC.

3. Capital Subscription Stage:

After a company is registered, it proceeds to get money through allotment of share capital to
members. Initially, shares are allotted to persons who are signatories to documents and have
agreed to subscribe to the prescribed number of shares. After this, a private company may start
its business while a public company is required to get the Certificate of Commencement of
Business from the concerned Registrar of Companies.
The procedure for subsequent allotment of shares varies for a private company and a public
company. In a private company, subsequent shares are allotted through personal contacts. In a
public company, shares may be allotted through public issue of shares.
The usual procedure for this is as follows:
i. Filing of prospectus with Securities and Exchange Board of India (SEBI).
ii. Getting approval from SEBI.
iii. Appointing managers, underwriters and registrar to the issue.
iv. Appointing bankers for receiving applications for shares along with money and brokers for
promoting the issue.
v. Inviting the general public (including institutions) for share subscription.
vi. On receiving the minimum prescribed subscription, allotting the shares in consultation with
the concerned stock exchange where the shares are to be listed for trading.
However, it may be mentioned that it is not necessary for a public company to offer its shares to
public; it has only an eligibility for public issue but not a compulsion. When a public company
issues its shares to the public, it is called a publicly-held company. When it does not issue its
shares to the public, it is called a closely-held company.
4. Commencement of Business Stage:
For commencing the business, a public company has to obtain the Certificate of Commencement
of Business from the concerned Registrar of Companies.
For this purpose, the company is required to submit the following documents:
i. A declaration that the shares to be subscribed on cash basis have been allotted.
ii. A declaration that all the Directors have paid in cash for the shares subscribed by them.
iii. A declaration, signed either by a Director or Secretary of the company, that the above
requirements have been complied with.
The Registrar of Companies scrutinises the above documents and issues the Certificate of
Commencement of Business if all requirements are as per the provisions of the Companies Act.

A company is said to be in existence, if it is registered as per the Companies Act, 2013. In order
to get a company registered, some documents need to be provided to the Registrar of Companies.

Certificate of Incorporation: Certificate of incorporation is issued when the registrar is satisfied

with the documents provided. This certificate validates the establishment of the company in the
records.

Certificate of commencement of business: Certificate of commencement of business is

required for a public company to start doing business, while a private company can start business
once it has received the certificate of incorporation.

Public companies receiving the certificate of incorporation can issue prospectus in order to make
the public subscribe to the share for raising capital. Once all the minimum number of required
shares have been subscribed, a letter should be sent to the registrar along with a bank document
stating the receiving of the money.
The registrar will issue a certificate upon finding the provided documents satisfactory. This
certificate is known as certificate of commencement of business. The company can start business
activities from the date of issue of the certificate and the business shall be done as per rules laid
down in the MoA (Memorandum of Association).

FORMATION OF A PRIVATE COMPANY

Formation Of A Private Limited Company

A private Company can be formed either by

1. incorporation of a new company for doing a new business , or

2. conversion of existing business of a sole proprietary concern or partnership firm into a

company.

A sole proprietary or partnership business can be converted into a company in any of the
following ways:

1. By outright sale of the business as a going concern. It may be a block sale where the
following takes over all the assets and liabilities of the firm or it may be partial take over
of certain assets and liabilities. The consideration may be based on itemized sale or it
may be on slump sale basis.

2. A company becoming a partner of the firm which will be dissolved thereafter by making
partners of the firms the only shareholders of the newly incorporated company for which
the following steps should be taken:

3. Form a private company as per the procedure.

4. The proprietor of the existing business along with some other persons (generally, family
members and friends) or the partners of the existing firms, are the subscribers to the
Company Memorandum of Association

5. Make the newly formed company a partner with the sole-proprietor or the partners of the
existing business. For this purpose a fresh partnership deed is to be executed.

6. Make a provision in the new partnership deed for the transfer of all assets and liabilities
of the firm to any one of the partners who will pay off to the other partners.

7. Dissolve the partnership with the whole business going to the company as the sole
continuing partner.

8. Every other partner of the firm (or the proprietor) gets shares in the company in lieu of
his interest in the firm on dissolution.
Name The name of a corporation is the symbol of its personal existence. Any suitable name may
be selected subject, however, to the following instructions:

1. No company can be registered with a name which in the opinion of the Central
Government is undesirable.

2. The name of the company should not be identical with or should not too nearly resemble,
the name of another registered company, for such name may be declared undesirable by
the Central Government.

3. Whatever be the name of the company if the liability of the members is limited the last
word of the name must be ‘Limited’ and in the case of a private company ‘Private
Limited’

4. Name of the Company must be printed on the outside of every place where the business
of the company is carried on. Such name including the address of the registered office,
must also be mentioned on all business letters and other official publications, on all
negotiable instruments issued or endorsed by the company and on all other orders,
receipts, etc.

Application for Availability of Name

● The promoters should select three to five alternative names, quite distinct from each
other.

● The names should suggest, as far as possible, the main objects of the proposed company.

● The names should not too closely resemble with the name of any other registered
company.

● The official guidelines issued by the Central Government should be followed while
selecting the names. Besides, the names so selected should not violate the provisions of
the Emblems and Names (Prevention of Improper Use) Act, 1950.

● The Dept . Of Company Affairs has advised the ROCs to make arrangements for
allowing the promoters and their representatives to ascertain the availability of proposed
names. This will ensure that the names applied for would be made available promptly
when an application for this purpose is made subsequently by the promoters

● Apply in form 1-A to the Registrar of Companies have jurisdiction along with a filing fee
of Rs. 500, to ascertain which of the selected names is available .The fee can be deposited
in cash at the counter of the office of the Registrar or by postal order.

Company to be Registered within 6 Months of Approval of the Name

 ● After scrutiny of the application for availability of name and finding no objection to the
proposed name, the Register of Companies informs the promoters to the incorporation of
company by that name within 7 days of receipt of application.

● The promoters should complete all other formalities for registration within 6 months from
the date of approval of name by Registrar.

● Various documents required for the registration of company must be filed sufficiently
well before the period of six months so that the company obtains the certificate of
incorporation on a date which is within 6 months of approval of name, after these
documents are vetted by ROC.

● If, for any reason the formalities cannot be completed, the promoters should apply for
revalidation of name by filling Form 1A afresh along with a request letter on plain paper
stating the reason together with a fee of Rs. 500 giving complete reference to the letter of
the Registrar.

● If none of the names suggested is available, the promoters should apply again selecting
fresh names, or removing the objections raised , within a period of one month from the
date of the letter.

● If no action is taken within this period, on the rejection of the name, name availability
application is to be made afresh along with a fee of Rs. 500 .

INCORPORATION OF PUBLIC LIMITED COMPANY

Just like other companies, Public Limited Company is also registered as per the rules and
regulations of the Companies Act, 2013. A public Company enjoys the benefits of limited
liabilities for its members and has rights to sell its shares for raising the capital of the company.
It can be incorporated with a minimum number of three directors and has more stringent rules
and regulations as compared to a Pvt. Ltd. Company.

It must have a minimum number of seven members whereas there is no limit for the maximum
number of members. It provides all the benefits of a private limited company along with more
transparency and easy transferability of ownership and shareholding. Name, shares, formation,
number of members, management and directors, etc differentiates any Public limited company
from the private limited companies.

Documents Required for Public Limited Company Registration

An applicant has to collect all these documents to file along with the incorporation application:

● Identity Proof such as Aadhar card, PAN card, Driving License, Voter Id of all the
designated directors and shareholders.
 ● Address Proof of all the proposed directors and shareholder of the company.

● PAN card details of all the directors and shareholders

● Utility bill such as telephone, gas, water or electricity bill of the registered office as a
residential proof of the business place. It should not be older than 2 months.

● An NOC or No Objection Certificate from the landlord of the business place.

● DSC or Digital Signature Certificate of the designated directors

● Memorandum of Association (MOA) and Article of Association (AOA)

Features of Public Limited Company Registration

Here are some important features of Public Limited Company:

Number Of Directors In The Company

As stated in the provisions of Companies Act, a public company must have a minimum number
of 3 directors to incorporate a company whereas there is no restriction on the maximum number
of directors.

Name Of The Company

All the Public limited companies must add “Limited” word at the end of their name. it is denoted
as an identity of a public company.

Prospectus Of The Company

Prospectus of the company is mandatory for the public limited companies. It is issued by the
proposed company for its general public. It is a note of comprehensive statements of works and
affairs of the company. However private companies have no such compliances as they don’t
have rights to invite the public for their shares.

Paid-Up Capital
As per the requirements of the act, no minimum capital required for the registration.

UNIT – II
MEMORANDUM OF ASSOCIATION
MEANING
A Memorandum of Association (MoA) represents the charter of the company. It is a legal
document prepared during the formation and registration process of a company to define its
relationship with shareholders and it specifies the objectives for which the company has been
formed.
Memorandum of Association (MOA) is a legal document that specifies the scope of business
activities of the company and information about the shareholding of the company. The MoA is a
document prepared for the Company registration procedure. Sometimes, it is called
the charter of the company other times, it is just called a memorandum. In most countries, the
MOA has to be filed as a ROC Compliance which also includes articles such as MGT-7 
and AOC-4 in India. In an attempt to ease the compliance of company incorporation in India, the
Ministry of Corporate Affairs (MCA) has introduced online filing for company registration.
MGT – 7
MGT-7 is an electronic form or e-form provided by the Ministry of Corporate Affairs (MCA) for
companies to file their Annual Return. Companies have to file their Annual Return within 60
days after the Annual General Meeting (AGM). Generally, this meeting is due on the 30th of
September following a particular Financial Year. Thus, barring exceptions, MGT 7 is due on
29th November every year.
MGT-7 Eligibility
All companies registered in India, whether Public or Private have to file their annual returns via
this e-form.
MGT-7 Details to be Disclosed
As the Financial Year draws to a close, filing the annual return means that the company has to
furnish a wide list of particulars pertaining to the company, these include
 Principal Business Activities; Details of companies holdings, subsidiaries, and associate
companies; Registered Office

 Shareholding patterns inclusive of Shares, Debentures and other securities.

 Particulars listing down the indebtedness of the company

 Detailed information about Members and debenture holders and the changes therein since
the close of the previous financial year.

 Changes in personnel since the close of the financial year these include people in the
workforce such as Promoters, Directors and other key managerial employees.

 Meetings of members or a class thereof, Board and its committee along with details of
attendance.

 The details of the Remuneration of Directors and Remuneration of other key company

personnel.

 Penalties or Punishment that the company or any of its officers faced, list of
compounding offenses and the appeals made against such offenses.
  Particulars related to Compliance Certification , Disclosures  as prescribed.

 Shareholding patterns of the organization; other miscellaneous matters required by the

particulars of the form.

The MCA wishes to accomplish One Day Company Formation with the new SPICe forms. After
the SPICe form has been prepared, individuals wishing to register a company must submit the e-
MoA (INC-33) electronic form along with e-AoA (INC-34) to complete the company
incorporation procedure.
The Memorandum of Association (MOA) defines the company’s relationship with its
shareholders. It is the most important document of a company as it states the objectives of the
company. It also contains the powers of the company within which it can act.
A Memorandum of Association (MOA) is a legal document prepared in the formation and
registration process of a limited liability company to define its relationship with shareholders.
The MOA is accessible to the public and describes the company’s name, physical address of
registered office, names of shareholders and the distribution of shares. The MOA and the
Articles of Association serve as the constitution of the company. The MOA is not applied in the
U.S. but is a legal requirement for limited liability companies in European countries including
the United Kingdom, France and Netherlands, as well as some Commonwealth nations.
Memorandum of Association helps the shareholders, creditors and any other person dealing with
the company to know the basic rights and powers of the company. Also, the contents of the MoA
help the prospective shareholders in taking the right decision while thinking of investing in the
company. MoA must be signed by at least 2 subscribers in case of a private limited company,
and 7 members in case of a public limited company.
PRESCRIBED FORMS OF MOA

Tables  Company 

Table A A company limited by shares

Table B A  company limited by guarantee and not having a share capital

Table C A company limited by guarantee and having a share capital

Table D An unlimited company

Table E An unlimited company having a share capital

PURPOSE OF MEMORANDUM
The main purpose of the memorandum is to explain the scope of activities of the company. The
prospective shareholders know the areas where the company will invest their money and the risk
they are taking in investing the money.
The outsiders will understand the limits of the working of the company, and their dealings with it
should remain within the prescribed scope.
There are few reasons for which any company needs to form a Memorandum of Association.
They are:-
1. The shareholders who are investing their money in the company have the right to know the
purpose for which they are investing their money and the company’s field of operations.
Therefore, this purpose is mentioned in the memorandum.
2. Any person, be it a vendor, partner, employee, etc., must know the corporate objects of the
company and whether his contract is according to the objects of the company.
Features of the Memorandum of Association
The memorandum of association contains the objectives and areas of operation to be covered in
the long run. It also works as a constitution and last resort for resolution of internal managerial
complexity in the company.
1. The memorandum of association is the basic charter on which the company is based and
is mandatory for a company.

2. The memorandum of association is the constitution of the company because it defines its
limitations and the sphere of its activities.

3. The memorandum cannot be altered by the company, except by fulfilling the conditions
laid down in the Companies Act for specific activities and situations.

4. It defines the scope of the company’s activity, and all acts beyond the scope are deemed
to be ultra-vire (beyond powers).

5. It’s a public document and is open to inspection by those who deal with the company.

6. It defines the company’s relations with outside individuals and its activities about them,

Importance of Memorandum
Memorandum is the fundamental document of a company which contains conditions upon which
the company is incorporated.
This document is important for the following reasons.
1. The memorandum defines the limitations on the powers of the company established
under the Act.

2. The whole structure of the company is built upon memorandum.

 3. It explains the scope of activities of the company. The investment knows where their
money will be spent, and outsiders also know the nature of activities the company is
authorized to take up.

4. It is a basic document of the company about its constitution.

5. It is a charter of the company which sets out its written goals.

CLAUSES OF MEMORANDUM
1. The Name Clause
A company can have any name of its choice, keeping in mind certain conditions. A company
must include “Private Limited” at the end if the company is a private company. And in the case
of a public company, it must include the word “Limited” at the end.
The company’s name mentioned in the memorandum must not contain the words which are:-
(i) Identical or resemble.
The company’s name should not be identical or must not have a resemblance with the name of
any other existing company registered under the companies act.
(ii) Already in use.
The name of the company shall not be something that is already in use by any other company.
(iii) Undesirable names.
A company shall not include any name which creates an impression that the company is
associated with central government, any state government, local bodies, etc., or with any such
body created by the central or state government. A company can include words that resemble its
existence with any government entities only after their prior approval.
Any company is not allowed to use the word ‘National‘ in its title unless it is a government
company or the government has any stake or shareholding in it. Similarly, the word ‘company‘
or ‘exchange‘ can be used with the title of any company or entity only after obtaining the Non-
Objection Certificate from SEBI (Securities and Exchange Board of India).
Reservation of company name.
Applying for Name: A person may apply for registration of a new name or change of name in
the format as may be prescribed by the registrar with the prescribed form and manner along with
the fees.
Reserving the name: After checking the documents along with the application form, the
registrar reserves the name for sixty days from the date of application.
Cancelling name: If, after the reservation of name, it is known that the company has reserved its
name showing incorrect or wrong documents, then:-
1. The reserved name shall be cancelled if the company is not yet incorporated, and
the person will be held liable for the penalty, which may extend to even one lakh
rupees.

2. If the company is incorporated, then the registrar may give the company an option
of being heard and then either direct the company to change its name within 3
 months after passing an ordinary resolution or take necessary action for cancelling
the name of the company from the register of companies or make a petition for
winding up of the company. The government directed that the registrar should
take proper care while reserving the name of any company or LLP and make sure
that the names are not similar to any other body or entity.

2. Domicile Clause.
This clause mentions the name of the state where the company is incorporated. The whole
address, city, etc., are never mentioned in the domicile clause; only the state in which the
company operates is mentioned.
3. Object Clause.
It mentions the object or the purpose for the company is incorporated along with any other
related object that can take place in the future. The company can never work beyond the object
stated in its memorandum.
4. Subscription Clause.
Memorandum and articles of the company shall be duly signed by all the subscribers in such a
manner as may be prescribed in Rule 13 of the Companies (Incorporation) Rule, 2014.
5. Liability Clause.
Under this clause, a company has to mention whether the liability of its members is limited by
shares or guarantee or the liability is unlimited.
Limited by Shares: A member will be liable only for the number of shares purchased by him in
the company.
Limited by Guarantee: The person has to guarantee a certain amount he will be supposed to
pay if a company suffers losses and is winding up.
Unlimited Liability: In such cases, the company members are liable unlimitedly, even to the
extent of their personal property, if a company suffers losses.
6. The Registered Office Clause
This clause states the name of the State in which the registered office of the company will be
situated.
Every company must have a registered office which establishes its domicile, and it is also the
address at which the company’s statutory books must normally be kept and to which notices, and
all other communication can be sent.
7. The Capital Clause
This clause states the amount of share capital with which the company is registered and the mode
of Its division into shares of fixed value, i.e., the number of shares into which the capital is
divided and the amount of each share.
8. The Association Clause
The names, addresses, descriptions, occupations of the subscribers, and the number of shares
each subscriber have taken and his signature attested by a witness.
Form of Memorandum of Association
According to section 4 of the Companies Act, 2013, companies will be prescribed in the forms
given under the tables according to different types of companies.
On the left, we have Form of MOA as per Schedule I and on the right, we have the Type of
Company.
Table A : Company limited by shares.
Table B : The company not having share capital and is limited by a guarantee.
Table C : Company with share capital and limited by guarantee.
Table D : The company not having share capital and unlimited liability.
Table E : A company having share capital and unlimited liability.
ALTERATION OF MEMORANDUM OF ASSOCIATION
Alteration of Memorandum of Association is an important exercise through which the company
brings about the required flexibility which is pertinent to its existence and survival as an entity. It
is a precondition before the company can initiate any drastic change in its 'shape or structure'
Provisions relating to alteration of Memorandum of Association
Alteration in the Memorandum of Association can be carried out only by a special resolution at
the Shareholders meeting. This is a complicated and lengthy procedure. So Memorandum must
be very carefully prepared at the beginning itself.
PROVISIONS RELATING TO ALTERATION OF MEMORANDUM
The following are the provisions related to alteration in Name Clause, Objects Clause, Liability
Clause, Capital Clause and Subscription Clause.
1. Alteration of Name Clause in Memorandum of Association
A company may by passing a special resolution alter is name with the approval of the Central
Government. If the alteration involves change of the name to private limited or public limited,
permission of Central Government is not required.
In case a company has been registered with a name which resembles a name of an existing
company, the Central Government may ask it to change its name. In such case ordinary
resolution is sufficient.
The intimation of name change should be given to the Registrar who will issue a fresh certificate
of incorporation. Alteration of Situation clause
1. In case registered office has to be shifted within the same city, town or village, a notice has to
given to the Registrar within thirty day of the change.
2. In case registered office has to be shifted from one town to another town or one village to
another village, a special resolution has to be passed.
3. A company can change its registered office from one State to another State for the following
reasons:
a. to carry on business more efficiently and economically;

b. to achieve the important purpose of the company by sophisticated means;

c. to expand its operations in the current location;

 d. to control any of the existing objects;

e. to sell whole or part of the business undertaking;

f. to amalgamate with other business or person.

In case, registered office has to be shifted from one State to another State, a special resolution
has to be passed and approval from the Company Law Board has to be obtained by the company.
The altered memorandum should be filed with the Registrar of the State from which the
company is shifting and also to the Registrar of the State to which the company is shifted.
2. Alteration of Objects Clause in Memorandum of Association
A company can alter is objects clause by passing a special resolution. Alteration of objects clause
can be done for the following reasons:
1. For the purpose of carrying on its business more economically and efficiently.
2. For the purpose of obtaining the main business of the company by new and improved means
3. For the purpose of enlarging or changing the local area of its operations.
4. For the purpose of carrying on some business, which may be conveniently or advantageously
combined with the existing business.
5. For the purpose of abandoning any of the objects specified in the memorandum.
6. For the purpose of selling the whole or any part of the undertaking.
7. For the purpose of amalgamating with any other company.
3. Alteration of Liability Clause in Memorandum of Association
The liability clause can be altered only when a public company is converted to a private
company.
4. Alteration of Capital Clause in Memorandum of Association
A company can alter its capital clause by passing an ordinary resolution in a general meeting.
Alteration of capital may relate to:
i. Sub division of shares

ii. consolidation of shares

iii. conversion of shares into stock and cancellation of unsubscribed capital.

Within thirty days of passing a resolution, the altered Articles and Memorandum have to be
submitted to the Registrar.
5. Alteration of subscription clause in Memorandum of Association
The company can alter is subscription clause to make the liability of the directors appointed
subsequent to the alteration as unlimited.
DOCTRINE OF ULTRAVIRES
The term Ultra Vires is derived from the Latin word meaning “ beyond the powers of”. The
object clause of the Memorandum of Association of the company includes an object for which
the company is established. An act of the company should not be beyond the clause else it will
be ultra vires and therefore void and cannot be resolved even if all the shareholders of the
company wish to resolve. The rectification is not possible even if the shareholders pass a special
resolution with the majority of the votes. The doctrine of Ultra vires is said to have originated
intending to protect the interest of the shareholders of the company
The Doctrine of Ultra Vires is a fundamental rule of Company Law. It states that the objects of
a company, as specified in its Memorandum of Association, can be departed from only to
the extent permitted by the Act.
he concept of the doctrine of ultra vires was first introduced in the United Kingdom in 1612. The
concept of the doctrine of ultra vires enables the men to determine whether the action is
legitimate or illegitimate.  This concept has been elaborated by the judges in various judgments
over a given period. In the case, of Sutton Hospital of the year, it was stated that the doctrine of
ultra vires will not be applied for any action or transaction of chartered accountant, even though
such corporations are corporate personalities with a separate and distinct identity.

In 1612, the companies used the documents known as the “royal charters' ' to incorporate the
company and give them a separate and distinct identity from its owners in the eyes of law. Such
a royal charter retains similar rights as a natural human being such as the right to sue or to be
sued without any physical exhibition. Therefore in the case of Sutton Hospital of the year, even
though the company had a separate legal existence in the eyes of law, the doctrine of ultra vires
did not apply. This case is considered as an exception to the doctrine of the ultra vires and its
scope.
Evolution of the doctrine of Ultra Vires – India
In India, the concept of ultra vires was first traced in the case Jahangir R. Modi vs Shamji Ladha
wherein the plaintiff had purchased 600 shares of a company. And the directors also the
defendants had purchased a certain number of shares in the same company. The object clause of
the memorandum of the company, however, did not allow its directors to sell or purchase the
shares of the company. The plaintiff sued the directors and asked compensation for the loss
incurred due to such purchase from the court. The Bombay High Court held that “a shareholder
can maintain an action against the directors to compel them to restore to the company the funds
to it that have been employed by them in a transaction that they have no authority to enter into,
without making the company a party to the suit”.
Purpose of Doctrine of Ultra Vires
The Doctrine of Ultra Vires is introduced to safeguard the creditors and investors of the
company. The doctrine of Ultra vires prevents the company from using the money of the
investors other than those mentioned in the object clause of the memorandum. Hence, both the
investors and company must be assured that their investment will not be used for the objects or
activities which they did not have specified at the time of investing money in the company. This
ensures that the funds of the investors won't be dispersed in unauthorized activities by the
company. The wrongful use of a company's assets may result in the insolvency of the company,
a situation where the creditors of the company are not being paid. 
The doctrine of the company prevents the wrongful use of the company’s assets thereby
protecting the creditors. Also, the doctrine of ultra vires prevents directors from diverting the
object for which the company has been formed out, and hence constantly examining the
activities of the directors. It helps the directors to know within what lines of business they are
eligible to act.
Scope of Doctrine of Ultra Vires
The doctrine of ultra vires applies only to those companies that have been incorporated or have a
separate existence in the eyes of law. All those companies that have not been registered such as
sole proprietorship or partnership will not fall under the scope of the doctrine of ultra vires. Only
the companies that are incorporated or have a separate existence in the eyes of law come under
the scope of the doctrine of ultra vires.
Every illegal transaction or abuse of power by directors or employees of a company will not
come under the scope of the doctrine of ultra vires. Only the transactions that are beyond the
scope of what a  company can do will be liable under the scope of the doctrine of ultra vines.
What a company can do or the purpose of the company is always mentioned in the object clause
of the Memorandum of  Association of the company. Therefore, if the company is exceeding the
authority it has mentioned itself in the object clause of the Memorandum of  Association will be
criticized under this doctrine.  
Consequences of Doctrine of Ultra Vires
The Doctrine of Ultra Vires's consequence states that any act done or contract made by the
company which goes beyond the powers of the directors and company is completely void and
inoperative and hence not binding on the company. By Considering this all, a company can be
restrained from using these funds for purposes other than those sanctioned by the memorandum. 
Also, it can be restrained from carrying out any trade different from the one it is authorized to
carry out.
Effects of Doctrine of Ultra Vires
Following are the four effects of the doctrine of ultra vires:
Injunction
The members of the company can issue an injunction against the company to prevent it from
engaging in any ultra vires activities.
Ultra Vires Contract 
As we know that ultra vires contract is the void ab initio which implies that it cannot be provided
with a legal status even by ratification or estoppel. The question here rests on the company's
competency and authority regarding the contract but not its legality.
Liability of The Company
There are no principles regarding the company’s liability against the damages resulting from the
ultra vires act. However, the tortious liability may arise if it is verified with the believable
explanation that the activity in the duration of which the ultra vires act or the tort occurred falls
within the scope of the Memorandum of Association. It occurred during the duration of
employment.

Breach of Warranty
The acts that a company cannot perform as mentioned under Memorandum of Association., the
directors being the agent of the company are also prohibited from performing such acts. Hence,
the contracts that are regarded as ultra vires the company will be void. The directors must act
within the scope of the company’s power as contrary actions could hold the directors personally
liable for their breach of warranty.
ARTICLES OF ASSOCIATION – MEANING
Articles of association form a document that specifies the regulations for a company's operations
and defines the company's purpose. The document lays out how tasks are to be accomplished
within the organization, including the process for appointing directors and the handling of
financial records.
The Articles of Association or AOA are the legal document that along with the memorandum of
association serves as the constitution of the company. It is comprised of rules and regulations
that govern the company’s internal affairs.
The articles of association are concerned with the internal management of the company and aims
at carrying out the objectives as mentioned in the memorandum. These define the company’s
purpose and lay out the guidelines of how the task is to be carried out within the organization.
The articles of association cover the information related to the board of directors, general
meetings, voting rights, board proceedings, etc.
The articles of association are the contracts between the shareholders and the organization and
among the shareholder themselves. This document often defines the manner in which the shares
are to be issued, dividend to be paid, the financial records to be audited and the power to be
given to the shareholders with the voting rights.
The articles of association can be considered as the user manual for the organization that
comprises of the methodology that can be used to accomplish the company’s day to day
operations. This document is a binding on the shareholders and the organization and has nothing
to do with the outsiders. Thus, the company is not accountable for any claims made by any
external party.
The articles of association is comprised of following provisions:
 Share capital, call of share, forfeiture of share, conversion of share into stock, transfer of
shares, share warrant, surrender of shares, etc.

 Directors, their qualifications, appointment, remuneration, powers, and proceedings of

the board of directors meetings.

 Voting rights of shareholders, by poll or proxies and proceeding of shareholders general

meetings.

 Dividends and reserves, accounts and audits, borrowing powers and winding up.

It is mandatory for the following types of companies to have their own articles:
1. Unlimited Companies: The article must state the number of members with which the
company is to be registered along with the amount of share capital, if any.
 2. Companies Limited by Guarantee: The article must define the number of members
with which the company is to be registered.

3. Private Companies Limited by Shares: The private company having the share capital,
then the article must contain the provision that, restricts the right to transfer shares, limit
the number of members to 50, prohibits the invitation to the public for the further
subscription of shares in the form of shares or debentures.

CONTENT OF ARTICLES OF ASSOCIATION (AOA)

An AOA contains the rules and regulation regarding the following matters:
 Share capital including sub-division, rights of various shareholders, the relationship of
these rights, share certificates, payment of commission.

 Lien of shares: To retain or hold the possession of shares in case the member is unable
to pay his debt to the company

 Calls on shares: Calls on shares includes the whole or part unpaid on each share which
has to be paid by the shareholders on the demand of the company.

 Transfer of shares: The AOA include the process for the transfer of shares by the
shareholder to other person (transferee).

 Transmission of shares: Transmission includes title devolution by succession, death,

marriage, insolvency, etc.

 Forfeiture of shares: The AOA provides for the forfeiture of shares if the purchase
requirements such as paying call money are not met with.

 Surrender of shares: Surrender of shares is when the shareholders voluntary gives back

or return the shares they own to the company.

 Conversion of shares in stock: In consonance with the Articles of association, the

company can convert the shares into stock by an ordinary resolution in a general meeting.

 Share warrant: A share warrant is a bearer document relating to the title of shares and
cannot be issued by private companies; only public limited companies can issue a share
warrant.

 Alteration of capital: Increase, decrease or rearrangement of capital must be done as the

Articles of association provide.

 General meetings and proceedings: All the provisions relating to the general meetings
and the manner in which they are to be conducted are to be contained in the Articles of
association.
  Voting rights of members, voting by poll, proxies: The members right to vote on certain
company matters and the manner in which voting can be done is provided in the Articles
of association.

 Directors, their appointment, remuneration, qualifications, powers and proceedings of

the boards of directors meetings.

 Dividends and reserves: The Articles of association of a company also provide for the
distribution of dividend to the shareholders.

 Accounts and Audits: The auditing of a company shall be done subject to the provisions
of the Articles of association of the company.

 Borrowing Powers: Every company has powers to borrow. However; this must be done
according to the Articles of association of the company.

 Winding Up: Provisions relating to the winding up of the company finds mention in

Articles of association of the company and must be done accordingly.

FORMS OF ARTICLES OF ASSOCIATION (AOA)

The forms for Articles of Association (AOA) in tables F, G, H, I, and J for different types of
companies have been mentioned under Schedule I of the Companies Act, 2013. AOA must be in
the respective form.
 Table F- AOA of a company limited by shares

 Table G- AOA of a company limited by guarantee and having a share capital

 Table H- AOA of a company limited by guarantee and not having a share capital

 Table I- AOA of an unlimited company and having a share capital

 Table J- AOA of an unlimited company and not having a share capital

DIFFERENCE BETWEEN MEMORANDUM OF ASSOCIATION AND ARTICLES OF

ASSOCIATION
Parameters MOA AOA

It contains the rules and

It defines the objectives
regulations as well as
of a company. Further, it
Objectives bye-laws for the internal
specifies the conditions
management of the
of incorporation.
company.
 It defines the relationship It defines the relationship
Relationship of the company with the between the members
external world. and the company.

Only under special By passing a special

Alteration circumstances, it can be resolution, It can be
altered. altered.

Any acts beyond the

Acts which are ultra-vires
scope of the MOA are
the AOA can be ratified
ultra-vires and void.
by a special resolution of
Furthermore, even
Ultra-Vires the shareholders.
unanimous votes for the
However, such acts
consent of such act from
should not ultra-vires the
all the shareholders
MOA.
cannot ratify it.

Memorandum of
Association is a
Articles of Association is
document that contains
a document containing all
all the fundamental
Meaning the rules and regulations
information which are
that governs the
required for the
company.
incorporation of the
company.

Type of Information Powers and objects of the

Rules of the company.
contained company.

It is subordinate to the It is subordinate to the

Status
Companies Act. memorandum

The memorandum of
The articles of
association of the
Retrospective Effect association can be
company cannot be
amended retrospectively.
amended retrospectively.

The articles can be

A memorandum must
Major contents drafted as per the choice
contain six clauses.
of the company.

Obligatory Yes, for all companies. Only a private company

 is required to frame its
articles while a public
company limited by
shares can adopt Table F
in place of articles.

Compulsory filing at
Required Not required at all.
the time of Registration

Alteration can be done,

after passing Special
Resolution (SR) in Alteration can be done in
Annual General Meeting the Articles by passing
Alteration (AGM) and previous Special Resolution (SR)
approval of Central at Annual General
Government (CG) or Meeting (AGM)
Company Law Board
(CLB) is required.

Acts done beyond the Can be ratified by

Absolutely void
scope shareholders.

ALTERATION OF ARTICLES
Company can alter its Article by way of addition, deletion, modification, substitution, or in
any other way, only if it wants. To alter the Article of association of Company By giving
Notice of at least 7 days. At the Board meeting, the given resolutions in respect of alteration in
AOA must be passed.
The AOA of the company should be in the prescribed format as per Table F to J, as may apply to
the company. A company has to register its articles at the time of company incorporation. A
company can go for an alteration of its articles after its incorporation as may be necessary for its
management.
SPECIAL RESOLUTION
Hold a shareholders meeting on the date fixed for the meeting and pass the Special Resolution
for altering the Articles of Association by 3/4th majority or unanimously, in case of insertion of
provisions of entrenchment by a private company in accordance with Section 114 (2) of the Act
read with Section 5(4).
The alteration must be approved by passing a Special resolution in general meeting. Alteration
in the articles binds the members as original articles.
COMPANIES NEED TO ALTER THEIR ARTICLES OF ASSOCIATION IN
FOLLOWING SITUATIONS
 1. Conversion of Private Company into Public Company 

2. Conversion of Public Company into Private Company 

3. Alteration in any of the existing Articles.

MANDATORY REQUIREMENTS
1. Company shall alter its Articles as per the provisions of Companies Act and the
conditions contained in the Memorandum. [Section 14(1)]

2. The provisions for entrenchment of articles shall only be made either on formation of a
company, or by an amendment in the articles agreed to by all the members of the
company in the case of a private company and by a special resolution in the case of a
public company. [Section 5(4)]

3. Company shall pass a Special Resolution for conversion of Public Company into Private
Company and vice-versa.

Section 14 of the Companies Act, 2013 contains the provisions for the alteration of the Articles
of Association of a company. A company may modify, delete or add any article in the following
manner:
1. Meeting of the Board of Directors: 

The company has to convene a meeting of the Board of Directors. All the directors must
be served seven days’ notice of the board meeting. The board has to recommend the
proposed alteration to the members.
A special resolution, with a 75% majority, has to be passed by the Board to give effect to
any alteration of the articles. The votes which are cast in favour of the resolution should
be at least three times more than the number of votes if any cast against the resolution.

Attach Agenda, Notes to Agenda and Draft Resolution with the Notice.

Hold a meeting of Board of Directors of the Company to consider and pass the necessary
Board Resolution

1. for alteration of articles

2. to authorize Company Secretary or any Director to sign and file the relevant form
with Registrar of Companies and to do such acts, deeds and things as may be
necessary to give effect to the Board’s decision
3. to fix the day, date, time and venue of the General Meeting and to approve the
draft notice convening the General Meeting along with explanatory statement
annexed to the notice as per requirement of the Section 102 of the Companies
 Act, 2013 and authorize the Director or Company Secretary to sign and issue
notice of General Meeting.

Prepare and Circulate Draft Minutes within 15 days from the conclusion of the Board
Meeting, by Hand/Speed Post/Registered Post/Courier/E-mail to all the Directors for
their comments.

2. General meeting of the company: 

The company should call for a general meeting or an extraordinary general meeting
(EGM). The company has to give at least 21 days notice for holding the meeting
specifying the date, time and place and business to be transacted.
An EGM can be called with a shorter notice with the consent of at least 95% of the
members entitled to vote. The notice should be sent to all the directors, members and
auditor of the company. The meeting should have the prescribed quorum, presence of
auditor (leave of absence otherwise), conducted with the passing of a special resolution
for the alteration of the AOA.
Notice will be sent to all the Directors, Members, Auditors of Company, Secretarial
Auditor, Debenture Trustees and to others who are entitled to receive the notice of the
General Meeting.
Notice shall specify the day, date, time and full address of the venue of the Meeting and
contain a statement on the business to be transacted at the Meeting.
Hold the General Meeting on fixed day and pass a Special Resolution for alteration of
Articles of Association.
Disclose the proceedings of General Meeting to the Stock Exchange within 24 hours
from the conclusion of the meeting and post the same on Company’s website within 2
working days.
Prepare the minutes of General Meeting, get them signed and compile accordingly

3. Compliance with Companies Act, 2013 The amendment or the alteration to AOA

should conform to the provisions of the Companies Act, 2013. For example, the alteration
should not modify the membership or shareholding of the company. The alteration should
not increase or alter the liability of any member or shareholder of the company. The
articles are procedural, and hence the alteration can be of only the procedural matters
contained therein.

4. Compliance with Memorandum of Association: The alteration of the articles should

not violate the memorandum of association of the company. The alteration cannot alter
the objects of the company or the address of the registered office of the company. These
matters are dealt with by the Memorandum of Association of the company. The AOA is
subordinate to the memorandum of association of the company. The alteration should be
in accordance with the powers conferred by the memorandum.
 5. Changing the status of the company: The alteration should not have the effect of
changing the status of the company. In a case where the alteration has the effect of
converting a private company into a public company or a public company into a private
company, the same cannot be carried out without the approval of the Central
Government.

6. Filing compliance with ROC: After the passing of the board resolution, the company
has to file Form MGT-14 with the Registrar of Companies for the filing of resolutions
and agreements with the Registrar or ROC.

The form has to be filed within 30 days of the passing of the board resolution along with
following documents as an attachment
The form shall be accompanied with such fees as may be prescribed. In a case of delayed
filing, the company will be liable to pay additional fees at the time of filing of the form,
calculated based on the number of days of delay. The fee is calculated as per The
Companies (Registration offices and fees) Rules, 2014.
Certified True Copies of the Special Resolutions along with explanatory statement
Copy of the Notice of meeting sent to members along with all the annexure
Altered Articles including the provision of entrenchment inserted in the Articles, if any.
Copy of Attendance Sheet of General Meeting
Shorter Notice Consent, if any.

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

8. Effect of alteration of Articles of Association:The amended Articles of Association

comes into effect on the date of passing of the board resolution. The altered articles will
have the same effect as the original articles. The alteration is effective only when the
procedure laid down in the Companies Act and Memorandum is followed. The changes
shall be made in all the copies of the Articles of Association.

DOCTRINE OF INDOOR MANAGEMENT

The doctrine of indoor management, also known as the Turquand rule is a 150-year old concept,
which protects outsiders against the actions done by the company. Any person who enters
into a contract with the company shall ensure that the transaction is authorised by the articles and
memorandum of the company.

Article and Memorandum of the company will guarantee that the transaction is approved when
an individual signs a contract with the company. There is no prerequisite to investigate the
internal irregularities, and regardless of whether there are any irregularities. The company shall
be liable since the individual has followed up on the grounds of good faith.
The Beginning of the Doctrine of the Indoor Management – Turqunad’s Rule
The concept arose from the foundational decision of Royal British Bank v Turquand (1856), 6
E&B 327, where t he company’s Articles of Incorporation allow for the borrowing of funds on
bonds, which needs a resolution to be voted in the General Meeting. The directors obtained the
debt but did not pass the resolution. The loan payments fell behind, and the firm was held
responsible. In the absence of the resolution, the shareholders declined to accept the claim. It was
held that the corporation is accountable because the person engaging with the company is
reasonable to believe that the essential compliance with regard to internal management has
occurred.
The House of Lords confirmed the doctrine further in the case of Mahony v East Holyford
Mining Co. [1875] LR 7 HL 869. In this situation, the company’s AOA was required that the
cheque be signed by 2 directors and countersigned by the company’s secretary. It was then
discovered that none of them who signed the cheque had been legitimately appointed. It was held
that the person who receives the cheque is entitled to the amount because the selection of
directors is part of the business’s internal administration and a person interacting with the firm is
not obligated to inquire about it. The decision was backed up by Section 176 of the Companies
Act of 2013, which stipulates that flaws in the selection of the director do not invalidate the
activities performed.
The doctrine protects 3rd parties that engage in a contract with the firm out of any faults in the
company’s internal procedures. Because other parties cannot detect internal abnormalities in a
business entity, the company would be held accountable for all or any losses incurred as a result
of these irregularities. The principle of constructive notice safeguards the corporation against
third-party claims, but the doctrine of indoor management safeguards third-party claims from
corporate processes.
EXCEPTION OF DOCTRINE OF INDOOR MANAGEMENT
Knowledge of Irregularity
It’s the most notable exception to Turquand’s Rule, as the benefit of Turquand’s Rule can’t be
obtained by those who are already aware of irregularities in the internal management of
the company. This will confuse the concept of indoor management while also nullifying the
objective of the doctrine of Constructive notice.
In the case of Howard vs. Patent Ivory Manufacturing Company (1888) 38 Ch D 156,
the Articles of the corporation authorised the directors to loan up to 1,000 pounds. The limit
might be raised with the approval of the General Meeting. The directors got 3,500 pounds from
one of the directors who took debentures despite the resolution not being passed. According to
the ruling, the corporation was only responsible to the amount of 1,000 pounds. Because the
directors were aware that the resolution had not been enacted, they cannot rely on Turquand’s
rule for protection.
Suspicion of Irregularity / Negligence
If any individual working with the organization feels skeptical about the situations underlying a
contract, he must investigate it. He cannot rely on this rule if he does not inquire. Some
transactions that occurred under suspicious circumstances and surroundings are not protected by
the “Turquand Rule.” It implies that if any of the directors or other heads notice any questionable
activity related to the contract, they may conduct an urgent investigation and find out what is
going on. If the individual fails to discover the suspicious behaviour and the person behind it, the
court gives him all of the company’s rights and resources to do so.
In the matter of Anand Bihari Lal v Dinshaw & Co, (1946) 48 BOMLR 293, the plaintiff
accepted a property transfer from the accountant. The Court ruled that the plaintiff must have
obtained a copy of the Power of Attorney  to validate the accountant’s power. As a result, the
transfer was deemed null and invalid.
Forgery
It is important to highlight that the Doctrine of Indoor Management will not be applicable when
an outsider depends on a forged document in the name of the business entity. A corporation
cannot be held responsible for forgeries performed by its officials. Transactions involving
forgeries are void-ab- initio (null and void) because there is no free consent; there is no consent
at all.
This was established in the case of Ruben v Great Fingall Consolidated [1906] 1 AC 439. A
share certificate with the company’s common seal was issued to a person. A valid certificate
needed the signatures of 2 directors and the secretary. The certificate was signed in his name by
the secretary, who also forged the signs of the 2 directors. The holder stated that he was unaware
of the counterfeit and that he is not obligated to investigate it. The Court ruled that the
corporation is not responsible for forgery committed by its officers, but that the Doctrine
of Indoor Management has never been extended to encompass forging. Lord Loreburn took this
to held that an outsider engaging with a company is not required to look into its internal
administration and would not be impacted by any irregularities that they are ignorant of.
Acts beyond the apparent scope of the authority
Acts performed by an officer of a corporation that exceed the extent of the officer’s apparent
power will not hold the company accountable for any of the officer’s failures. In such a scenario,
the outsider cannot seek redress under the doctrine of Indoor Management since the Articles did
not grant the officer the authority to perform such activities. The outsider could only sue the
business entity under the Indoor Management theory if the officer has the delegated authority to
act on those conditions.
In the matter of Kreditbank Cassel v. Schenkers Ltd. (1927) 1 KB 826., the company’s branch
manager had endorsed a few bills of exchange in the company’s name in favour of a payee to
whom he was personally owed. He was not given any authorization to do so by the company.
The court ruled that the corporation was not obligated. Furthermore, it was noted that if an
officer of the business commits fraud on behalf of the company while acting with apparent
authority, the corporation will be held responsible for the officer’s misconduct.
Representation through Articles
This exemption is the most controversial part of the Turquand Rule. AOA of the
company typically include a “power of delegation” provision. In the case of Lakshmi Ratan
Cotton Mills v. J.K. Jute Mills Co., AIR 1957 ALL 311, The company was run by managing
agents, where one of the directors was also included. The AOA gave the directors the authority
to borrow money and also gave them the authority to transfer this power to one or more of them.
The director obtained a loan from the plaintiff. Furthermore, the Company objected to be bound
by the loan on the grounds that no resolution was made instructing the director to delegate the
right to borrow. Nonetheless, it was determined in the case that the corporation was obligated by
the loan since the AOA permitted the director to borrow money and transfer the right to do so.
Existence of an agency
The doctrine of Indoor Management does not apply where the issue is the actual existence of an
agency. The Kerala High Court decided in the case of Varkey Souriar v. Leraleeya Banking Co.
Ltd. (1957) 27 Comp. Cas. 591 (Ker.), that the doctrine of Indoor management can’t apply if the
dispute is not one of the scope of authority exercised by an apparent agent of a business, but of
the agency’s mere existence.

UNIT III
PROSPECTUS
MEANING
1. The prospectus is a legal document, which outlines the company’s financial securities for
sale to the investors.

2. According to the companies act 2013, there are four types of the prospectus, abridged
prospectus, deemed prospectus, red herring prospectus, and shelf prospectus.

A prospectus is defined as a legal document describing a company’s securities that have been put
on sale. The prospectus generally discloses the company’s operations along with the purpose of
the securities being offered.
As per the Companies Act, 2013, a prospectus can include information such as advertisement,
circular or notice among other legal documents inviting the public for the offering. Also, the
prospectus should be issued only for the purchase of a company's securities.
In order for a document to be considered a prospectus, it should act as an invitation for the public
to purchase of stocks/shares, debentures or other instruments. Also, the prospectus should be
issued by the company or an institution on behalf of the company and made solely for the public.
In case a private company wishes to convert to a public company, it is required to either issue a
prospectus or file a statement in lieu of prospectus of which the provisions are mentioned under
Section 70 of the Companies Act, 2013.

DEFINITION
The Companies Act, 2013 defines a prospectus under section 2(70). Prospectus can be defined as
“any document which is described or issued as a prospectus”. This also includes any notice,
circular, advertisement or any other document acting as an invitation to offers from the public.

Objectives of Issuing the Prospectus

 To bring to the notice of the public that a new company has been formed.

  To preserve an authentic record of the terms and allotment on which the public have
been invited to buy its shares or debentures.

  To secure that the directors of the company accept responsibility for the statements in the
prospectus.

Requirements as to Issue of Prospectus of a Company

There are some requirements that company has to comply with before issuing it. Those are:-
 There should be disclosure of material matters.

 Moreover it must be dated.

 Company must file a duly signed copy of it to ROC for its registration.

 Furthermore, Company shall file it with various agencies such as SEBI, Stock exchanges
and other agencies.

 SEBI examines the draft of Prospectus to ensure disclosures and compliances.

Contents of Prospectus
The contents of the prospectus have been specified in Schedule II of the Companies Act. The
important contents in the prospectus include the following.
 Name and address of the company

 Objects of the company

 Full particulars of the signatories to the Memorandum and number of shares taken by
them.

 The names, addresses, and occupations of the directors, managing directors or managers,
etc.
 The number and classes of shares.

 The minimum subscription

 The qualification shares of a director and the remuneration of the directors.

 The amount payable on application, on the allotment, and on calls.

 The names of the underwriters.

 The estimated amount of preliminary expenses.

 The names and addresses of the auditors of the company

 Particulars about reserves and surplus

 Voting rights of the different classes of shares.

 Reports of the auditors regarding profits and losses of the company.

 A similar report by the Chartered Accountant regarding the Profits and Losses and Assets
and Liabilities of the Company.

 The prospectus should have names and addresses of the registered office of the company,
company secretary, Chief Financial Officer, auditors, legal advisers, bankers, trustees, if
any, underwriters and such other persons as may be prescribed;

 The prospectus should have dates of the opening and closing of the issue, and declaration
about the issue of allotment letters and refunds within the prescribed time;

 The prospectus should have a statement by the Board of Directors about the separate
bank account where all monies received out of the issue are to be transferred and
disclosure of details of all monies including utilised and unutilised monies out of the
previous issue in the prescribed manner;

 The prospectus should have details about underwriting of the issue and consent of the
directors, auditors, bankers to the issue, expert’s opinion, if any, and of such other
persons, as may be prescribed.

 The prospectus should have the authority for the issue and the details of the resolution
passed, the procedure and time schedule for allotment and issue of securities and capital
structure of the company in the prescribed manner;

 The prospectus should have main objects of public offer; terms of the present issue and
such other particulars as may be prescribed.
  The prospectus should have main objects and present business of the company and its
location, schedule of implementation of the project.

 The prospectus should have management perception of risk factors specific to the project,
gestation period of the project, extent of progress made in the project, deadlines for
completion of the project and any litigation or legal action pending or taken by a
Government Department or a statutory body during the last five years immediately
preceding the year of the issue of prospectus against the promoter of the company.

 The prospectus should have minimum subscription, amount payable by way of premium,
issue of shares otherwise than on cash and details of directors including their
appointments and remuneration, and such particulars of the nature and extent of their
interests in the company.

 The prospectus should have disclosures in such manner as may be prescribed about
sources of promoter’s contribution.

 The company should also make a declaration about the compliance of the provisions of
this Act and a statement to the effect that nothing in the prospectus is contrary to the
provisions of this Act, the Securities Contracts (Regulation) Act, 1956 and the Securities
and Exchange Board of India Act, 1992 and the rules and regulations made thereunder
and state such other matters and set out such other reports, as may be prescribed.

 Also, every prospectus issued shall state that a copy has been delivered for registration to
the Registrar and specify any documents required for registration.

Reports
It should also contain the following reports:
 Reports by the auditors of the company with respect to its profits and losses and assets
and liabilities and such other matter

 Reports relating to profits and losses for each of the five financial years immediately
preceding the financial year of the issue of prospectus including such reports of its
subsidiaries and in such manner as may be prescribed .If there is a company with respect
to which a period of five years has not elapsed from the date of incorporation, the
prospectus shall set out in such manner as may be prescribed, the reports relating to
profits and losses for each of the financial years immediately preceding the financial year
of the issue of prospectus including such reports of its subsidiaries;

 Reports by the auditors upon the profits and losses of the business of the company for
each of the five financial years immediately preceding issue and assets and liabilities of
its business on the last date to which the accounts of the business were made up, being a
date not more than one hundred and eighty days before the issue of the prospectus. But if
 a company with respect to which a period of five years has not elapsed from the date of
incorporation, the prospectus shall be set out in the prescribed manner, the reports made
by the auditors upon the profits and losses of the business of the company for all financial
years from the date of its incorporation, and assets and liabilities of its business on the
last date before the issue of prospectus

 Reports about the business or transaction to which the proceeds of the securities are to be
applied directly or indirectly.

EXAMPLE:
As an example of a prospectus for an offering, PNC Financial (PNC) filed a prospectus with the
Securities and Exchange Commission in 2019 requesting a new issuance of debt. The senior note
being offered to the public is a bond or a promissory note to pay a specific yield by maturity.
For review, senior notes are debt securities, or bonds, that take precedence over other unsecured
notes in the event of bankruptcy. Senior notes must be paid first if assets are available in the
event of company liquidation. A senior note pays a lower coupon rate of interest compared to
junior unsecured bonds since the senior debt has a higher level of security and a reduced risk of
default.
Below is a portion of the prospectus from the table of contents, which provides basic information
about the offering.3 We can see the following information listed:
 Securities offered, which are senior notes that pay 3.50%

 The maturity date of the notes, which is Jan. 23, 2024

 The issue date, which has yet to be determined

 How interest will be paid and denominations to be issued

 Use of proceeds or how the money raised will be spent, which might include financing
operations, paying down debt, or buying back stock

DRAFT as of December 2021

To: Director General of Directorate of Investment & Company Administration, Ministry of
National Planning & Economic Development,
Date of Filing : [________________, 2021]
Company Name : ABC Company Limited Company
Registration No. : [ ]
Date of Incorporation : [ ]
Title and Name of Representative : [Chairman, Managing Director or Director] [Name of the
Representative]
Location of the Registered Office : [________________,]
 Place to Contact : [ ]
Telephone : [ ]
Listing : [Bombay Stock Exchange or Not Applicable]
This is to certify that this prospectus shall comply with all the requirements under the Indian
Companies Act.
TABLE OF CONTENTS
PART I. COMPANY INFORMATION
I. Outline of the Company, History / Background of the Company
2. Organizational Structure of the Company and its Group ...................
3. Outline of Parent, Subsidiaries and Associated Companies ...............
4. Conditions of Employees ....................................................................
II. Description of Business ............................................................................
1. Nature of Business ..............................................................................
2. Outline of Each Business Segment .....................................................
3. Sales and Marketing ............................................................................
4. Competition .........................................................................................
5. Material Contracts ...............................................................................
6. Property, Plant and Equipment ...........................................................
7. Research and Development .................................................................
8. Other Related Business .....................................
PART II. INFORMATION ON THE COMPANY’S MANAGEMENT AND
SHAREHOLDERS
I. Board of Directors and Directors
II. Senior Management
III. Remuneration / Compensation of Senior Management
IV. Corporate Governance
V. Shareholders
VI. Dividends, Dividend Policy and Stock Options

VII. Description of the Company’s Shares ...........

KINDS OF PROSPECTUS
1. Shelf Prospectus
The term “shelf prospectus” refers to a prospectus in which the securities or classes of securities
described in it are offered for subscription to the public without the need for a new prospectus.
(i) Filing of Shelf Prospectus With the Registrar
Section 31 of the Companies Act, 2013 states that any class or classes of company or corporation
may submit a shelf prospectus with the Registrar in Form PAS 1, as the Securities and Exchange
Board of India (SEBI) may specify by regulations in this regard.
Shelf prospectus is passed with the registrar is Form PAS 1 at the stage:
  Of the initial offer of securities included therein, this shall specify a period of validity of
not more than one year, beginning on the date of the first offer of securities under such
prospectus.

 No further prospectus is necessary for a second or subsequent offer of such securities

made during the validity term of that prospectus.

(ii) Filing of Information Memorandum With the Shelf Prospectus

In case any company is filing a shelf prospectus, it is also required to submit an information
memorandum which shall contain all the material facts, new charges created, variation in the
company’s financial position that took place between the first or previous offer of securities, and
such other changes as may be prescribed.
All these things shall be filed with the Registrar in Form PAS 2 before the issuance of a second
or subsequent sale of securities under the shelf prospectus within the prescribed period.
(iii) Memorandum Together With the Shelf Prospectus Shall Be Deemed to Be a Prospectus
Whenever an offer of securities is made, an information memorandum has to be filed with such
memorandum along with the shelf prospectus, which will be deemed to be a prospectus.
2. Red Herring Prospectus
The term “red herring prospectus” refers to a prospectus that does not disclose complete details
about the quantity or price of the securities it contains. The issuing of a red herring prospectus by
a company is dealt with in section 32 of the Companies Act.
It means a prospectus that does not include full particulars of the quantum or price of the
securities included therein. In simple terms, a red herring prospectus is an offer document that
contains most of the information pertaining to the company’s operations and prospects but does
not include key details of the issue such as the price and the number of shares offered. A
company may issue a red herring prospectus prior to the issue of prospectus when it is proposing
to make an offer of securities.
According to section 32, a company proposing to make an offer of securities may issue a red
herring prospectus prior to the issue of a prospectus. Such prospectus needs to be filed with the
registrar at least three days prior to the opening of the subscription list or the offer. This type of
prospectus carries the same obligation as other prospectus and any variation between the red
herring prospectus and a prospectus shall be highlighted as variations in the prospectus.
When the offer of securities closes then the prospectus should state the total capital raised either
raised by the way of debt or share capital. It also has to state the closing price of the securities
and any other details which have not been included in the prospectus need to be registered with
the registrar and SEBI.

(i) Issue a Red Herring Prospectus Before Issuing a Prospectus

Before issuing a prospectus, a corporation planning to make an offer of securities may issue a red
herring prospectus.
(ii) Filing With the Registrar
A company that intends to release a red herring prospectus must file it with the Registrar for at
least three days before the subscription list and open offer.
(iii) Same Obligation
The same requirements apply to a red herring prospectus as that of a prospectus, and any
differences between the red herring prospectus and a prospectus must be highlighted as
differences in the prospectus.
(iv) After the Offer Is Closed, the Registrar and Sebi Must File a Red Herring Prospectus
The prospectus indicating the entire capital raised, whether by debtor share capital or other
means, as well as the closing price of securities, or any other details not included in the red
herring prospectus, shall be filed with the Registrar and the Securities and Exchange Board of
India upon the closing of the offer of securities under this section.
3. Abridged Prospectus
It refers to a memorandum that contains the main elements of a prospectus as required by the
Securities and Exchange Board of India through its rules.
Section 33 deals with “abridged” prospectuses, which are defined as “brief or edited prospectus
in the prescribed manner that includes the securities application form.”
According to section 2(1) of the Act “abridged prospectus” means a memorandum containing
such salient features of a prospectus as may be specified by the Securities and Exchange Board
by making regulations on this behalf. Section 33 of the Act provides that no form of application
for the purchase of any of the securities of a company shall be issued unless such form is
accompanied by an abridged prospectus. A copy of the prospectus shall be furnished to him on a
request being made by any person before the closing of the subscription list and the offer.
Nothing aforesaid shall apply if it is shown that the form of application was issued—
 (a) in connection with a bona fide invitation to a person to enter into an underwriting agreement
with respect to such securities; or
(b) in relation to securities that were not offered to the public.
Abridged Prospectus – Issue of Application Forms for Securities
As per section 33(1) of the Companies Act, 2013, no form of application for purchasing any of a
company’s stocks shall be issued unless it is accompanied by an abridged prospectus.
DEEMED PROSPECTUS
It is a document which the company issues in case of an offer for the sale of securities to the
public. Moreover, this document is an invitation to the public to purchase the shares of the
company through an intermediary such as Issuing House. An issuing house is a bank or other
financial institution that registers, distributes and sells securities on behalf of other companies.
Issuing house acts as an intermediary between the company and the public.
A deemed prospectus has been stated under section 25(1) of the Companies Act, 2013. Where
any company to offer securities for sale to the public, allots or agrees to allot securities, any
document by which the offer of sale to the public is made will be considered as a deemed
prospectus. The document is deemed to be a prospectus for all purposes and all the provision of
content and liabilities of a prospectus will be applied.
As the name suggests, a deemed prospectus is a document that is deemed to be the prospectus
of a company. In general, any offer for the sale of its stock by a company when presented in the
form of a detailed document addressed to the public is deemed to be a prospectus.
Section 25(1) of The Company’s Act defines a deemed prospectus as a form of prospectus.  The
idea of deemed prospectus is particularly relevant when a corporation wants to issue shares
through an intermediary in order to avoid SEBI compliance standards.
A document of Offer for Sale is created whenever a firm allots or agrees to allot its shares or
securities to an intermediary, including a merchant bank, another company, or an issuing house,
for the intention of eventually offering those shares for sale.
A deemed prospectus is a document that serves as an offer for sale. If it meets either of the
following two criteria:
 Criteria 1

Condition 1: The intermediary’s Offer for Sale to the Public was made within 6 months of the
firm’s allotment of stocks to the intermediary;
 Criteria 2

The company that allotted its shares to the intermediary received no consideration for the stocks
until the date the intermediary’s Offer for Sale was made.
Things To Keep In Mind
If one of these two conditions is met, the document in which the intermediary presents the Offer
for Sale is deemed to be a prospectus of the firm that issued its shares to the intermediary.
In this instance, all of the content and liability rules that apply to a firm’s prospectus also apply
to a deemed prospectus.
The idea of a deemed prospectus is used here to clarify that even if an intermediary produced an
offer for sale document, it will still be considered a prospectus issued by the original firm.
This assists in determining who is responsible for the shares’ original issuer.
Let’s say a firm called Abc Ltd. wants to sell its stock to the public without having to comply
with the law or the SEBI recommendations. Abc Ltd. agrees to assign its shares to an issuing
house in January 2020 for this purpose.
The issuing house in this case was an underwriting firm. Through an Offer for Sale document,
this issuing house makes the shares of Abc Ltd. available to the general public.
The shares of Abc Ltd. are now available to the general public through the issuing house, rather
than directly from XYZ Ltd. This Offer for Sale document has now been regarded to represent
Abc Ltd’s prospectus.
 Process

To directly issue shares to the general public, Abc Ltd. must follow Section 26 of the Company’s
Act as well as SEBI recommendations. However, because Abc Ltd. desired to be free from
regulatory compliance, it was unable to sell its shares to the general public.
Nevertheless, under Indian law, if a company uses another firm or issuing house to sell its stocks
to the general public, the issuing house is considered the firm’s representative, and the document
thus issued by the issuing house is regarded the deemed prospectus of the firm, Abc Ltd., if one
of the following two scenarios is fulfilled.
 Scenario 1

If Abc Ltd. agreed to issue or allot its shares to the issuing house in January 2020, the issuing
house must make those shares available to the public within six months.
So, if the issuing house issued the shares to the public in April 2020, it meets the first criterion,
and the Offer for Sale document can be considered the Abc Ltd prospectus.
 Scenario 2

Abc Ltd. should not have received any compensation for its shares when the issuing house made
them available to the public. The technique is similar to that of internet selling.
When a vendor sells their goods through an internet company, they are only compensated when
the product is sold and money is created. Therefore, the second criterion is satisfied if Abc Ltd.
does not get any consideration until the issuing house offers the shares to the public.
If any of these conditions are met, the paper is considered a deemed prospectus for Abc Ltd.
The key subject elements must be addressed in the deemed prospectus:
 Company information, including name, registered office address, and objects.

 Information on the Memorandum’s signatories, including their shareholdings.

 Information about the directors.

 Information about the shares being issued, as well as the issue’s class and voting rights.

 Amount of the minimum subscription.

 The sum due at the time of application, allotment, and subsequent calls.

 The issue’s underwriters.

 The firm’s auditors.

 The firm’s profit and losses were reported in audited reports.

 It shall be signed by two directors. If offer is made by the company or not less than ½ of
the partners if the offer is made by firm

NEED OF DEEMED PROSPECTUS

A prospectus was a document that offered extensive information on a firm and its offer to sell
shares to investors.
However, if a firm attempts to offer shares through an intermediary or underwriter, and the
prospectus is likewise issued by the underwriter, doubt may develop as to who is liable for the
prospectus’ terms and conditions.

The concept of a deemed prospectus under the Companies Act clarifies this uncertainty by
saying that the prospectus produced by the intermediary/underwriter shall be deemed to be the
prospectus of the originating company itself if certain circumstances are met.

As a result, there is more transparency in company public offerings.

MISSTATEMENT IN PROSPECTUS

Any statement in the prospectus that is erroneous or misleading is referred to as

misstatements in the prospectus. A misrepresentation is defined as the inclusion or omission of a
fact that is likely to mislead the public
The prospectus is trusted by the members of the general public for subscribing or purchasing the
securities and other instruments from the corporation and any misstatement by the prospectus
can lead to punishment. Misstatement in a prospectus occurs when a untrue or misleading
statement is included and issued in the prospectus. Any deletion and inclusion of any matter
which misleads the public is also a misstatement under Section 34 of this Act. For instance, and
statement which gives the incorrect location of the company’s office is misstatement in the
prospectus or any statement offering shares misleads the public is a misstatement in a prospectus.
LIABILITY FOR MISSTATEMENT WITHIN THE PROSPECTUS
The one who gives the consent and signs the prospectus is to blame for any misstatement in a
prospectus. The Managers, CS and also the Directors of the corporation are answerable for the
same. However, mere signing won’t result in liability for misstatement if the person who signed
the prospectus is neither a Manager nor draws salary from that company.
In the case, Sahara India Commercial Corporation Ltd., SEBI 31st October 2018, on behalf of
the Director of the company, the Company Secretary signed the prospectus using their power of
attorney and SEBI concluded that the CS wasn’t chargeable for the misstatement within the
prospectus as the Director of the corporate.
MISLEADING REPRESENTATION
Misleading representation includes –
1. Any untrue statement

2. Statements implicating wrong impression

3. Mis-leading statements

4. Not disclosing true facts

5. Omission of data
CRIMINAL LIABILITY FOR MISSTATEMENT IN PROSPECTUS
When any statement within the prospectus includes misleading or untrue information is
distributed then everyone who authorized the issue of the prospectus is liable under section 447
of the Companies Act.
WHO MAY BE SUED IN CRIMINAL LIABILITY FOR ANY MISSTATEMENT IN
THE PROSPECTUS?
The people who can be sued are –
1. The company that issues the prospectus.

2. Every Director of the company.

3. Every person whose name appeared in the prospectus as a proposed Director of the
company.

4. Every Promoter of the prospectus.

5. Every person who authorized the issue of the prospectus.

6. Any expert such as an engineer, a chartered accountant, a company secretary, a cost

accountant, etc.)

CIVIL LIABILITY FOR MISSTATEMENT

Section 62 of the Companies Act deals with civil liability and makes the actual person
responsible to pay every single individual who has contributed for any share or debentures and
could have grieved any damages by believing the prospectus where false and misleading
information has been published. Every person and the company is liable who-
1. Is a director when the prospectus was issued

2. Named as the director or authorized himself or has agreed to become a director

3. The promoter of the corporation

4. Has authorized the issue of the prospectus

Consequences of Misstatement in Prospectus

Civil and Criminal liabilities shall be faced by any person who provides with misstatement in a
prospectus.
1.  Civil liability

In case, misleading prospectus amounts to misrepresentation, the aggrieved persons can

repudiate the contract. They can claim a refund of their money. Damages can also be claimed by
the persons found guilty.
 Criminal liability
In case any deliberate concealment is made, directors will be punished with a fine of Rs. 5,000 or
imprisonment up to two years or both. If it is a fraud the fine will extend to Rs. 10,000 or 5 years
imprisonment or both.
REMEDIES FOR MISSTATEMENT IN PROSPECTUS
If the prospectus contains a misleading statement, the liability of the company, the directors,
promoters and others who authorized the issue can be classified into three kinds viz.,
1. Civil Liability,

2. Criminal Liability, and

3. Liability under the Law of Contract.

1. Civil Liability
An aggrieved shareholder who purchased shares by placing reliance on the misleading
prospectus has
a. remedies against the company, and

b. remedies against the directors, promoters and experts.

a. Remedies Against the Company

The aggrieved shareholder has two remedies against the company. They are
i. Rescission of the Contract, and

ii. Damages for fraud.

1. Rescission of the Contract

The person who purchased shares on the basis of the prospectus containing misstatements can
rescind the contract (cancel the contract). He is eligible for rescission whether the misstatement
is made intentionally or unintentionally. He has to surrender his shares to the company. Then his
name will be removed from the register of the members.
The money paid by him will be refunded by the company. The following are the conditions to be
satisfied for claiming rescission:
1. There must be an untrue statement.
2. The misstatement must be material to the contract of issuing shares. It should not be a mere
expression.
3. The shareholders must have relied on the untrue statement.
4. The statement must have induced the shareholder to purchase the shares.
5. The shareholder must apply for rescission within a reasonable time and before the liquidation
of the company.
6. The shareholder should not have affirmed the contract for purchase of shares.
2. Damages for Fraud
After rescinding the contract, the aggrieved shareholder can claim damages from the company by
filing a suit in the Court. He has to prove that the misstatement was made fraudulently.
b. Remedies against the Promoters, Directors, Experts, and Persons authorized the issue of
the Prospectus
1. Damages for Misstatement
The directors, promoters, experts, and others who have authorized the issue of the prospectus are
liable to compensate the aggrieved shareholder for the loss or damages he may have to incur
because of the untrue statement.
2. Damages for Non-disclosure of Material Facts:
If a material fact has been omitted from the prospectus, (a) the person responsible for the issue
shall be fined up to Rs.50,000 and (b) the aggrieved can recover damages from the persons
responsible for the issue.
2. Criminal Liability
1. If a prospectus contains any untrue statement, every person who authorized the issue are
punishable with fine up to Rs.50,000 or with imprisonment up to 2 years or with both.
2. Anyone who fraudulently (knowingly) makes any misstatement in the prospectus to induce
persons to invest money in the company is punishable with imprisonment up to 5 years or with
fine up to Rs.1,00,000 or with both.
3. Liability under General Law of Contract
Under the general law, the aggrieved shareholder can recover damages from all or any of the
persons responsible for the issue of the prospectus. The necessary thing is to prove that there is a
fraudulent misstatement or non-disclosure.
Liability in case of open market purchase
One who purchased shares in the open market from any shareholder of the company (not relying
on the prospectus) can’t rescind the contract for the purchase of shares. The person who
authorized the issue of prospectus cannot be held liable.
LIEU OF PROSPECTUS
The Statement in Lieu of Prospectus is a document filed with the Registrar of the Companies
( ROC ) when the company has not issued prospectus to the public for inviting them to
subscribe for shares. The statement must contain the signatures of all the directors or their
agents authorized in writing.
Statement in lieu of prospectus is a document issued by the company when it does not offer its
securities for public subscription. It is mandatory for the Public Limited Company to distribute
the Prospectus but it is not compulsory in all aspects. It gives practically the same information as
a prospectus and is signed by all the directors or proposed directors. It is also possible to adopt
an alternative to the prospectus. It is not necessary to distribute prospectus for the company if the
directors are able to raise the required funds by selling the shares and debentures to their friends
and relatives. If the company used the alternative of the prospectus, it will be necessary to submit
that copy to the registrar. It is called a substitute prospectus or substitute circular. This substitute
holds all the items that are being required in the original prospectus and it needs to be signed or
attested by the directors. In case the company has not filed a statement in lieu of prospectus with
the registrar, it is then not allowed to allot any of its shares or debentures. Such a statement must
be signed by all the directors of the company and then filed with the registrar.
A statement in lieu of prospectus contains the following information
 Name of the company

 Account of capital

 Explanation of the business

 Names, addresses, and occupations of directors

 Probable preliminary expenses

 Names of vendors and information of the property

 Substance contracts

 Director’s interests

 Least subscription.

The object of these documents is to convince the public to make an application for shares or
debentures in the company. It is essential for a public company to issue prospectus only if they
wish to invite public to raise the company’s capital. It must be submitted to the registrar’s office
before publication. If they don’t necessitate public for raising capital and can formulate
arrangements of raising capital with the facilitate of their friends, relatives or underwriters, it is
not necessary for them to issue a prospectus. But as a substitute, they have to file a statement in
lieu of Prospectus with the Registrar.
A public company is entitled to subscribe to its shares by means of a prospectus after receiving
the certificate of incorporation. Every copy issued to the public must, on the face of it state that a
copy has been so submitted to registrar’s office.

BASIS FOR STATEMENT IN LIEU OF

PROSPECTUS
COMPARISON PROSPECTUS

Meaning Prospectus refers to a legal- Statement in lieu of prospectus is a

document published by the document issued by the company
company to invite general public for when it does not offer its securities
subscribing its shares and for public subscription.
debentures.

Objective To encourage public subscription. To be filed with the registrar.

Used when Capital is raised from general Capital is raised from known
public. sources.
 BASIS FOR STATEMENT IN LIEU OF
PROSPECTUS
COMPARISON PROSPECTUS

Content It contains details prescribed by the It contains information similar to a

Indian Companies Act. prospectus but in brief.

Minimum Required to be stated Not required to be stated

subscription

EQUITY SHARES
Equity shares are popular investment options among investors. Equity shares offer fraction
ownership of the company. Therefore, equity shareholders are considered as part owners. Equity
shares are issued to the general public for the first time through an Initial Public Offering (IPO).
A company issues equity shares to raise capital at the cost of diluting its ownership. Investors
can purchase units of equity shares to get part ownership of the firm. By purchasing the equity
shares, investors will be contributing towards the total capital of the company and becoming its
shareholder.
Equity shareholders are the owners of the company to the tune of the shares held by them.
Through equity investing, investors benefit from capital appreciation and dividends. In addition
to the monetary benefits, equity holders also enjoy voting rights in critical matters of the
company.
The primary motive to issue equity shares is to raise funds for expansion and growth. Company
issues equity shares to the general public through Initial Public Offer (IPO). IPO is a primary
market offering. You can subscribe to the share by subscribing to the IPO. You can easily trade
the stocks upon their allotment and listing on the stock exchange. The National Stock Exchange
(NSE) and the Bombay Stock Exchange (BSE) are popular stock exchanges in India.
Equity shareholders receive the profits a company makes. Most large-cap and well-established
companies pay dividends and bonuses to their shareholders.
The value of an equity share is the face value or book value. When more people buy shares of a
company, the share prices will rise. While, if more people are selling, then the prices will fall.
Types of Equity Shares
Ordinary Shares
Ordinary shares are those shares a company issues to raise funds to meet long term expenses.
Investors get part ownership of the firm. It is to the tune of the number of shares held by then. An
ordinary shareholder will have voting rights.
Bonus Shares
Bonus shares are a type of equity shares a company issues from its retained earnings. In other
words, a company’s distributes its profits in the form of a bonus issue. However, this doesn’t
increase the company’s market capitalisation, like how other equity shares do.
Rights Shares
Rights shares are not for everyone. The company issues these shares only for specific premium
investors. As a result, the equity stake of such holders increases. The rights issue is done at a
discounted price. The motive is to raise money to meet financial requirements.
Sweat Equity
Directors and employees of a company receive sweat equity shares. They get the shares at a
discount for their excellent work in providing intellectual property rights, know-how, or value
additions to the company.
Features of Equity Shares
Following are the key features of equity shares:
 Permanent Shares: Equity shares are permanent in nature. The shares are permanent
assets of a company. And are returned only when the company winds up.

 Significant Returns: Equity shares have the potential to generate significant returns to
the shareholders. However, these are risky investment options. In other words, equity
shares are highly volatile. The price movements can be drastic and are dependent on
multiple internal and external factors. Therefore, investors with suitable risk tolerance
levels should only consider investing in these.

 Dividends: Equity shareholders share the profits of a company. In other words, a

company may distribute dividends to its shareholders from its annual profits. However, a
company is under no obligation to distribute dividends. In case a company doesn’t make
good profits and doesn’t have surplus cash flow, it can choose not to give dividends to its
shareholders.

 Voting Rights: Most equity shareholders have voting rights. This allows them to select
the people who will govern the company. Choosing effective managers assists the
company to enhance its annual turnover. As a result, investors can receive higher
average dividend income.

 Additional Profits: Equity shareholders are eligible for additional profits a company
makes. It, in turn, increases the wealth of the investor.

 Liquidity: Equity shares are highly liquid investments. The shares are trade on the stock
exchanges. As a result, you can buy and sell the share anytime during trading hours.
Therefore, one doesn’t have to worry about liquidating their shares.

 Limited Liability: Losses a company makes doesn’t affect the ordinary shareholders. In
other words, the shareholders are not liable for the company’s debt obligations. The only
effect is the decrease in the price of the stocks. This will have an impact on the return on
investment for a shareholder.

PREFERNENCE SHARES
Preference shares commonly known as preferred stocks, are those shares that enable
shareholders to receive dividends announced by the company before receiving to the equity
shareholders.
If the company has decided to pay out its dividends to investors, preference shareholders are the
first to receive payouts from the company.
Preference shares are released to raise capital for the company, which is known as preference
share capital. If the company is going through a loss and winding up, the last payments will be
made to preference shareholders before paying to equity shareholders.
Preference shares that can be easily converted into equity shares are known as convertible
preference shares. Some preference shares also receive arrears of dividends, which are called
cumulative preference shares.
In India, preference shares should be redeemed within 20 years of issuance, and these types of
preference shares are called redeemable preference shares.
As per the Companies Act 2013, companies do not have any right to issue irredeemable
preference shares in India.
There are nine different types of preference shares given below:
 Convertible Preference Shares

 Non-Convertible Preference Shares

 Redeemable Preference Shares

 Non-Redeemable Preference Shares

 Participating Preference Shares

 Non-Participating Preference Shares

 Cumulative Preference Shares

 Non-Cumulative Preference Shares

 Adjustable Preference Shares

Convertible Preference Shares

Convertible preference shares are those shares that can be easily converted into equity shares.
Convertible preferred stocks are preferred shares that include an option for the holder to convert
the shares into a fixed number of common shares after a predetermined date.
Non-Convertible Preference Shares
Non-Convertible preference shares are those shares that cannot be converted into equity shares.
Redeemable Preference Shares
Redeemable preference shares are those shares that can be repurchased or redeemed by the
issuing company at a fixed rate and date. These types of shares help the company by providing a
cushion during times of inflation.
Redeemable preference shares are those shares where the issuer of the share has the right to
redeem the shares within 20 years of the issuance at pre-determined price mentioned in the
prospectus at the time of issuance of preference shares and before redeeming such shares the
issuer shall assure that redeemable preference shares are paid up in full and all the conditions
specified at the time of issuance are fulfilled.
Non-Redeemable Preference Shares
Non-redeemable preference shares are those shares that cannot be redeemed or repurchased by
the issuing company at a fixed date. Non-redeemable preference shares help companies by acting
as a lifesaver during times of inflation.
Non-Redeemable Preference Shares are a type of preferred stock shares that do not include a
callable feature. These shares are referred to as shares that cannot be redeemed during the
lifetime of the company.
Participating Preference Shares
Participating preference shares help shareholders demand a part in the company’s surplus profit
at the time of the company’s liquidation after the dividends have been paid to other shareholders.
However, these shareholders receive fixed dividends and get part of the surplus profit of the
company along with equity shareholders.
Non-Participating Preference Shares
These shares do not benefit the shareholders the additional option of earning dividends from the
surplus profits earned by the company, but they receive fixed dividends offered by the company.
Cumulative Preference Shares
Cumulative preference shares are those type of shares that gives shareholders the right to enjoy
cumulative dividend payout by the company even if they are not making any profit.
These dividends will be counted as arrears in years when the company is not earning profit and
will be paid on a cumulative basis the next year when the business generates profits.
Non - Cumulative Preference Shares
Non - Cumulative Preference Shares do not collect dividends in the form of arrears. In the case
of these types of shares, the dividend payout takes place from the profits made by the company
in the current year.
So if a company does not make any profit in a single year, then the shareholders will not receive
any dividends for that year. Also, they cannot claim dividends in any future profit or year.
Adjustable Preference Shares
In the case of adjustable preference shares, the dividend rate is not fixed and is influenced by
current market rates.
FEATURES OF PREFERENCE SHARES
Several features of preference shares have made normal investors superior earners even during
low phases of economic growth. The most attractive features of preference shares are given
below:
 They Can Be Converted Into Common Stock
Preference shares can be easily converted into common stock. If a shareholder wants to change
its holding position, they are converted into a predetermined number of preference stocks.
Some preference shares inform investors that they can be converted beyond a specific date, while
others may require permission and approval from the company’s board of directors to be
converted.
 Dividend Payouts

Preference shares allow shareholders to receive dividend payouts when other stockholders may
receive dividends later or may not be receiving dividends.
 Dividend Preference

When it comes to dividends, preference shareholders have the major advantage of receiving
dividends first compared to equity and other shareholders.
 Voting Rights

Preference shareholders are entitled to the right to vote in case of extraordinary events. However,
this happens in only some cases. Generally, purchasing a company’s stock does not give one
voting rights in the company’s management.
 Preference In Assets

While discussing a company’s assets in the case of liquidation, preference shareholders have
priority over non-preferential shareholders.
DEBENTURES
Debentures are a debt instrument used by companies and government to issue the loan. The loan
is issued to corporates based on their reputation at a fixed rate of interest. Debentures are also
known as a bond which serves as an IOU between issuers and purchaser. Companies use
debentures when they need to borrow the money at a fixed rate of interest for its expansion.
Examples of debentures are Treasury bonds and Treasury bills
Advantages of Debentures
 Investors who want fixed income at lesser risk prefer them.

 As a debenture does not carry voting rights, financing through them does not dilute
control of equity shareholders on management.

 Financing through them is less costly as compared to the cost of preference or equity
capital as the interest payment on debentures is tax deductible.

 The company does not involve its profits in a debenture.

 The issue of debentures is appropriate in the situation when the sales and earnings are
relatively stable.

Disadvantages of Debentures
  Each company has certain borrowing capacity. With the issue of debentures, the capacity
of a company to further borrow funds reduces.

 With redeemable debenture, the company has to make provisions for repayment on the
specified date, even during periods of financial strain on the company.

 Debenture put a permanent burden on the earnings of a company. Therefore, there is a

greater risk when the earnings of the company fluctuate.

Features of Debentures
1. Debentures are usually the unsecured form of bonds which are not backed by any asset or
collateral. Instead, the investors consider the issuer’s creditworthiness as a primary
parameter for the purchase. Also, being a long-term instrument, their tenure usually lasts
for 10 years and above.

2. They have a fixed coupon rate, at which the investors receive interest at specific intervals,
i.e., monthly, quarterly, half-yearly or yearly. Some investors also get accumulated
interest on redemption. Earnings change if the interest rates are floating. Market
fluctuations and economic conditions affect interest rates.

3. The issuing company pays off the interest as an expense before paying the dividends.
The interest is thus tax-deductible, bringing down the taxable income.

4. Some companies issue debentures, which after a specified period, can be changed into
equity stocks. This facilitates the investors to procure ownership in the organization and
benefit from its earnings when its income is enhanced. In addition, the issuer enjoys low-
cost borrowing since they offer a lower interest rate than non-covertibles.

5. Repayments can be attained either in installments payable yearly or all at once. Thus, if
the issuer pays off annual installments to the holders, it may do so by making a
redemption reserve. Else, the issuer can repay the borrowed sum in a lump sum on the
maturity date of the debt.

6. They can be easily exchanged in the stock market, just like other securities. Thus, they
are a flexible debt instrument.

7. A real-world example is L&T Finance Ltd planning to issue secured, redeemable non-

convertible debentures in 2012.

Different Types of Debentures:

#1. From the Point of view of Security
 Secured Debentures: Secured debentures are that kind of debentures where a charge is
being established on the properties or assets of the enterprise for the purpose of any
payment. The charge might be either floating or fixed. The fixed charge is established
 against those assets which come under the enterprise’s possession for the purpose to use
in activities not meant for sale whereas floating charge comprises of all assets excluding
those accredited to the secured creditors. A fixed charge is established on a particular
asset whereas a floating charge is on the general assets of the enterprise.

 When any particular or specified property of the company is offered as security to the
debenture-holders and when the company can deal with it only subject to the prior right
of the debenture-holders, fixed charge is said to have been created.
 On the other hand, when the debenture-holders have a charge on the undertaking of the
company i.e., on the whole of the property of the company, both present and future, and
when it can deal with the property in the ordinary course of business until the charge
crystallizes i.e., when the company goes into liquidation or when a receiver is appointed,
the charge is said to be a floating charge.
 When the floating charge crystallizes, the debenture-holders have a right to be paid out of
the sale proceeds of the assets subject to the right of the preferential creditor but prior to
making any payment to unsecured creditors.

Example :A factory or office building is a typical example of a fixed charge asset in a

secured debenture. If a borrower becomes insolvent, they are not allowed to sell a
property asset without first repaying the lender or getting their lender's permission.
 Unsecured Debentures: They do not have a particular charge on the assets of the
enterprise. However, a floating charge may be established on these debentures by default.
Usually, these types of debentures are not circulated.

 Naked Debentures: Normally debentures are secured by a mortgage or a charge on the

company’s assets. However debentures may be issued without any charge on the assets of
the company. Such debenture is called ‘naked debenture’ or ‘unsecured debenture’. They
are mere acknowledgment of a debt due from the company, creating no rights beyond
those of unsecured creditors.

 Debentures Issued as Collateral Security for a Loan: The term collateral security or
secondary security means, a security which can be realized by the party holding it in the
event of the loan being not paid at the proper time or according to the agreement of the
parties. At times, the lenders of money are given debentures as a collateral security for
loan. The nominal value of such debentures is always more than the loan. In case the loan
is repaid, the debentures issued as collateral security are automatically redeemed.
#2. From the Point of view of Tenure
 Redeemable Debentures: These debentures are those debentures that are due on the
cessation of the time frame either in a lump-sum or in instalments during the lifetime of
the enterprise. Debentures can be reclaimed either at a premium or at par.

These debentures are issued for a specified period of time. On the expiry of that specified
time the company has the right to pay back the debenture holders and have its properties
released from the mortgage or charge. Generally, debentures are redeemable.
Example : A business owner takes out a loan in order to solve a cash flow problem
with their business. In this situation, the lender and the borrower could create a
debenture that outlines exactly how and when that sum of money would need to be
repaid.
 Perpetual or Irredeemable Debentures: These debentures are also called as Perpetual
Debentures as the company doesn’t give any attempt for the repayment of money
acquired or borrowed by circulating such debentures. These debentures are repayable on
the closing up of an enterprise or on the expiry (cessation) of a long period.

A debenture which contains no clause as to payment or which contains a clause that it

shall not be paid back is called a ‘perpetual debenture’ or ‘irredeemable debenture’.
These debentures are redeemable only on the happening of a contingency or on the
expiration of a period, however long. It follows that debentures can be made perpetual,
i.e., the loan is repayable only on winding up or after a long period of time.
Example: Irredeemable debt that pays a fixed interest rate is valued as a perpetuity. The
security's price is equal to its present value, which is the amount of the annual payment
divided by a discount factor. For example, a perpetuity might pay 3 percent annually,
or 3 dollars, on its $100 face value.
#3. From the Point of view of Convertibility
 Convertible Debentures: Debentures which are changeable to equity shares or in any
other security either at the choice of the enterprise or the debenture holders are called
convertible debentures. These debentures are either entirely convertible or partly
changeable.

Example: For example, the company might distribute 10 shares of stock for each
debenture with a face value of $1,000, which is a 10:1 conversion ratio. The convertible
debt feature is factored into the calculation of the diluted per-share metrics of the stock.
 Non-Convertible Debentures: The debentures which can’t be changed into shares or in
other securities are called Non-Convertible Debentures. Most debentures circulated by
enterprises fall in this class.

Example of NCDs: You can invest when the company announces NCDs or purchase

after it trades on the secondary market.
#4. From Coupon Rate Point of view
  Specific Coupon Rate Debentures: Such debentures are circulated with a mentioned rate
of interest, and it is known as the coupon rate.

 Zero-Coupon Rate Debentures: These debentures don’t normally carry a particular rate

of interest. In order to restore the investors, such type of debentures are circulated at a
considerable discount and the difference between the nominal value and the circulated
price is treated as the amount of interest associated to the duration of the debentures.

Examples of zero-coupon bonds include US Treasury bills, US savings bonds, long-

term zero-coupon bonds, and any type of coupon bond that has been stripped of its
coupons. Zero coupon and deep discount bonds are terms that are used interchangeably.
For example, an investor who purchases a bond for $920 at a discount will receive
$1,000. The $80 return, plus coupon payments received on the bond, is the investor's
earnings or return for holding the bond. But not all bonds have coupon payments. Those
that do not are referred to as zero-coupon bonds.
#5. From the view Point of Registration
 Registered Debentures: These debentures are such debentures within which all details
comprising addresses, names and particulars of holding of the debenture holders are filed
in a register kept by the enterprise. Such debentures can be moved only by performing a
normal transfer deed.

These are debentures which are payable to the registered holders i.e., persons whose
names appear in the Register of Debenture holders. Such debentures are transferable in
the same way as shares.
They are those debentures in respect of which the names and addresses of the debenture
holders and the particulars of the debentures held by them are entered in register of
debenture holders maintained by the company. As such, the payment of interest and the
repayment of these debentures are made only to the persons whose names are recorded in
the register of the company.
These debentures are not negotiable instruments. So, they cannot be transferred by mere
delivery or by endorsement and delivery. They can be transferred only through the
execution of proper instrument of transfer.

 Bearer Debentures: These debentures are debentures which can be transferred by way

of delivery and the company does not keep any record of the debenture holders Interest
on debentures is paid to a person who produces the interest coupon attached to such
debentures.

Bearer debentures are similar to share warrants in that they too are negotiable
instruments, transferable by delivery. The interest on bearer debentures is paid by means
of attached coupons. On maturity, the principal sum is paid to the bearers.
Unregistered Debentures:
 They are those debentures in respect of which the names and the addresses of debentures
holders and the particulars of the debentures held by them are not entered in the register
of debentures holders maintained by the company. As such, the payment of interest and
the repayment of these debentures are made to the bearers or the holders of the
debentures. These debentures are negotiable instruments. So, they can be transferred by
mere delivery.

UNIT IV
COMAPNY DIRECTOR
A director may generally be defined as a person having control over the direction, conduct,
management, or superintendence of the affairs of a company.
The Board of directors refers to the group of individuals who are in charge of the management of
the affairs of the company collectively. Every company must have a board of directors which
consists of a chairman, secretary, and members.
The importance of the board of directors as per Neville J. is that they are the brains of the
company: “The Board of Directors is the brain and the only brain of the company which is the
body and the company can and does act only through them”
A number of directors:
Every public company must have at least two directors
QUALIFICATIONS OF DIRECTORS OF COMPANIES
For a person to be appointed a director he must have the following qualifications.
1. Must be of the age of majority according to the law of the country to which he is subject.

2. had not attained the age of twenty-one or he has attained the age of seventy.

3. Must be of sound mind

4. Must not be disqualified by any law to which he/she is subject. A person can be
disqualified by law to be a director when he/she is declared bankrupt.

5. Must not be disqualified by an order of the court.

6. If the articles so require, the director must have share qualifications.  In such cases, a
person cannot be appointed as a director unless he acquires a certain minimum number
of shares in a company (share qualification).

7. Such qualification shares may be acquired within two months after his appointment or
such a shorter time as may be fixed by the articles

8. A person shall not be capable of being appointed director unless he signs and delivers to
the registrar for registration a consent in writing to act as a director.

DISQUALIFICATIONS OF DIRECTORS
As per the company law, the following persons are disqualified from being appointed as a
director:
1. Unsound mind

2. An undischarged insolvent

3. A person who is convicted by the court

4. Who has applied for being adjudged insolvent

5. Not paid for the call on shares

6. Persons who are already directors in a maximum number of companies as per the
provisions of the Act or

7. Any other person who has been disqualified by the court for any other reason

The requirement of director in a company

The company requires a maximum of 15 directors on the board of the company, whereas can the
company can increase the number of directors by passing a special resolution in AOA.
Company   Number of Directors
Public Company   Minimum number of 3 Directors
Private Company   Minimum number of 2 Directors 
One Person Company    Minimum One Director
APPOINTMENT
A director is a person duly appointed to the Board of a Company, collectively called as Board or
Board of Directors. The Board is responsible for the management of affairs of a company. They
have the responsibility to act in the best interest of the company. Although, directors act on
behalf of the company but the individual acts done by a director cannot bind the company, unless
the director is authorized by a Board Resolution. As per Section 149(1) of Companies Act, 2013
every company shall have at least three directors in case of a Public Company, two directors in
case of a Private Company and One Director in case of One Person Company (OPC). A
company may appoint maximum of fifteen directors, however, a company may appoint more
than fifteen directors after passing a Special Resolution at the general meeting of the company.

Conditions for Appointment

 Only an Individual natural person can be appointed as a Director.
 A person shall not be appointed as a director unless he has an active Director
Identification Number (DIN).
 A person shall obtain a Digital Signature Certificate (DSC) from certifying authority to
be appointed as a director.
 Every person proposed to be appointed as a director shall furnish his DIN and a
declaration that he is not disqualified to be appointed as a director under the Companies
Act, 2013.
 Every person shall furnish his consent to act as a director in Form DIR-2 on or before his
appointment.
 A person shall not be eligible for appointment as a director, if he is disqualified under
sub-section (1) of Section 164 of the Companies Act, 2013.
 A person shall not hold directorship in more than twenty companies at the same time
including any alternate directorship.
 Further, maximum number of public companies in which a person can be appointed as a
director shall not exceed ten.

APPOINTMENT OF DIRECTORS
Executive Director–
A director who is employed in the company and closely witness daily affairs of the company are
known as executive directors. They possess deep knowledge of the company. This class includes
managing directors and whole time directors also.
Non- Executive directors–
Directors who are neither employed nor are they closely involved in the day to day management
of the company are known as non-executive directors. This class majorly includes professional
directors, nominee directors etc who have unbiased attitude towards the company.
Rotational Directors–
In case of companies other than private company and certain government company, not less than
two third of the directors shall retire by rotation. Articles may specify retirement of all the
directors by rotation. Not less than one third of rotational directors are liable to retire either by
lots or agreement. Retiring director may be reappointed but not in cases specified in section
152(7)(b). Retiring director cannot hold office beyond the last date of AGM. While counting the
total number, independent directors are not included and nominee director appointed by financial
institution are also not included.
Non-rotational directors–
Directors other than rotational are non rotational directors.
First director–
Directors specified in the articles at the time of incorporation. If not specified then shall be
selected by majority of memorandum subscribers as per Table F and if Table F is not applicable
then all the subscribers are first directors. They are appointed till the company appoints
subsequent directors.
Manager/ Managing Director/ Whole time directors–
As per section 203, every listed company or any public company having paid up share capital of
more than 10 crores or a company not falling under above two but having paid up share capital
of more than 5 crores is required to appoint managing director/manager/whole time director,
company secretary and chief executive officer. A person who fits in the definition provided in
the section 2(54) of the Act is known as managing director of the company. Similarly Manager is
defined under section 2(53) and whole time director in section 2(94). No such person can be
appointed for a period of more than 5 years although such restriction is not applicable on private
company. Section 196 provides with the appointment of such key managerial persons. Such
person must be resident of India, aged between 21 to 70 years (subject to condition for above 70
years) and all other eligibilty criteria as per schedule V.
Independent directors–
As the name suggests such directors are not related in certain ways with the company. They are
not Managing directors, whole time directors or nominee directors, such directors have to
comply with the criterias given in section 149(6). An independent director can be appointed for a
consecutive period of not more than 2 years then a gap of 3 years is required before their
reappointment in the same company for the same position.
Every listed public company shall have not less than one third of its directors as independent.
Following prescribed public companies shall have minimum of 2 independent directors:-
 1. whose paid up share capital is of 10 crores or more
2. whose turnover is of 100 crores or more
3. whose outstanding loans, debentures, and deposits in aggregate exceeds 50 crores.

A joint venture, wholly owned subsidiaries and dormant companies need not to have such
directors. If a company has audit committee then more than half shall be independent directors
and this will be the minimum number of independent directors in such companies.
For example, if a public company has paid up share capital of Rs. 12 crores and has 7 members
in audit committee then minimum number shall not be 2 but 4 i.e. more than half of 7.
Nominee director–
Such directors are appointed by third party subject to the articles of the company in pursuance
with the law or any provisions for the time being in force. For example a director appointed by
bank.
Woman director–
Following companies must have atleast one director as woman-
1. Every listed company and
2. Every public company having paid up share of 100 crores or more
3. Every public company having turnover of 300 crores or more. Vacancy shall be filled by 3
months from such vacancy or immediate next board meeting after such vacancy whichever is
later.

Additional Director:
Section 161(1) Where there is a power in the Articles, the board may appoint director as
additional director. The tenure of additional director is up to the date of the annual general
meeting or the last date on which AGM should have been held, whichever is earlier. The vary
purpose of appointment of additional director is to ease the burden of work. A person whose
proposal to be appointed as a director in the AGM is rejected by the shareholders cannot be
appointed as an Additional Director.
Alternate Director:
Section 161(2) The board may appoint a person as an alternate director provided they have a
power to do so in the Articles of Association or by a resolution passed in the General Meeting in
this regard. An alternate director is appointed where a director remains outside India for a period
of not less than 3 months and that person shall not be an alternate director for any other director
of the company. The term of office of an alternate director shall terminate when the original
director returns to India or where the term of original director expires before his return to India
the term of alternate director shall also expires at that time.
Appointment of Nominee Director:
Section 161(3) Where due to the requirements of any law or terms of an agreement, it is
mandatory to appoint a person as a nominee director to the board of the company, the board may
appoint a person as a nominee of such bank or financial institution or government, provided
board has power to do so in the Articles of Association of the company. There are situations
where a bank provides financial assistance on the term that a person of their bank shall be
appointed at the Board to keep a watch that the funds are not misused. The nominee director does
not have any active role in the board.
Appointment of Director in Casual Vacancy:
Section 161(4) Where a vacancy has arisen due to the death or resignation by a director
appointed in the general meeting before expiry of his term, the Board may fill such vacancy by
appointing a director. The tenure of such casual vacancy director shall be only up to the term of
the director in whose place he is appointed. There is no qualification prescribed under
Companies Act, 2013 for appointment of a person as a Director, however, Section 164 provides
certain disqualifications for appointment of directors. Where a person is disqualified under
Section 164 he shall not be eligible to be appointed as a Director in a company.

PROCEDURE FOR THE APPOINTMENT OF THE DIRECTOR IN A COMPANY

A director is a person who is appointed to perform the duties and functions of a company as per
the provisions of the act of 2013. Appointment of director’s procedure is mentioned
under section 152 to 159 of the Companies Act 2013 is described below:
Section 153- The application for the allotment of the Director Identification Number (DIN)
has to be made by the person intending to be a director of a company before the central
government along with the depositing of the prescribed fees.
Section 154- The central government then allot the DIN (Director Identification Number) in
favour of the applicant within the one month of the receiving of the allotment application made.
Section 155- The applicant who has already received an allotment of the DIN (Director
Identification Number) previously is now allowed to apply or possess another Director
Identification Number.
Section 156- The existing director has to disclose his DIN (Director Identification Number),
which he has obtained by the central government within one month of the receiving. He has to
intimate to the company or the companies wherein he is a director.
Section 157- The company has to inform about the DIN (Director Identification Number) of all
the directors to the registrar or the authorised person within the 15 days of receiving the
intimation.  The fees also have to be submitted as prescribed by the central government and also
mentioned under section 403. On the failure of the intimation within 15 days the company has
to pay fine for Rs 25,000 twenty-five thousand which may extend to Rs 1,00,000 one lakh. 
Section 158- Every company or person has to mention DIN (Director Identification Number)
while furnishing any return, information or particulars in relation with the director or contain any
reference of the director.
Section 159- If any of the provisions under section 152, 155 and 156 have not been followed
then fine of Rs 50,000 fifty thousand has to be imposed or may be liable for the imprisonment
for the six months. If there is a continuation of the contravention of the provisions then per day
fine of Rs 500 has to be imposed till the contravention continues.
DOCUMENTS FURNISHED ON APPOINTMENT OF DIRECTOR
  The Company has to call the board meeting and pass the resolution to appoint
the additional director according to the AOA of the company if no clause is mentioned
then in accordance with provisions of section 161 of the act.

 It has to ensure there must be allotment of the DIN (Director Identification Number) to

the director who wants his appointment.

 Form DIR 12 filled along with the letter of the appointment and then submission of the
documents by the director within 30 days.  

 The consent Form DIR-2 has to be given in writing for willingness to be a director. It is

under Rule 8 of Companies Appointment and Qualification of the Director Rules 2014.

 The appointing director has to provide Form DIR 8 intimating that he is not disqualified
under the provisions of section 164(2) of the act.

 After the appointment, the director has to give Form MBP-1 in compliance to section
184(1) read with Rule 9(1) of Companies (Meeting of Board and Its Powers) Rules 2014.

RESIGNATION OF THE DIRECTOR

A Director of a company can give resignation from the office by giving a notice in writing to the
board of the company under section 168(1) of the Companies Act 2013.
After this, the company will take the following steps to remove the concerned name from the
register of Directors on the MCA Portal[2].
 The Board members of the company will hold a Board meeting by providing seven
days of clear notice.  A clear notice for 21 days issued by the company which excludes
the day on which the notice was sent and received.

 In the board meeting, the Board members will discuss and then decide whether to accept
the resignation or not.

 If the board accepts the resignation of the director, they will pass a Board resolution
accepting the resignation in the following format :

o “Resolved that the resignation of Mr ABC is accepted with immediate effect.

o “FURTHER RESOLVED “ that Mr ABC has performed really well during his/her
tenure as the director of the company. The board places this appreciation as a
record.

o “RESOLVED FURTHER” that the concerned director who is putting forward

his/her resignation is hereby authorized to do all deeds, acts and things which are
necessary for the resignation procedure of the director from the Directorship
position of the company. 
  After the resolution is being passed, the outgoing director will file the form DIR-11 along
with the Board Resolution, proof of the delivery of the resignation letter and copy of the
resignation letter.

 The Form– DIR-12 is needed to be filed in this case. DIR-11 is filed by the Director
while DIR-12 is filed by the company itself with the ROC (Registrar of the Companies)
along with the Resignation of the letter and the Board Resolution.

 In the end, the name of the concerned director’s data has to be removed from the
company records who has given his/her resignation in the MCA (Ministry of Corporate
Affairs) website

REMOVAL OF THE DIRECTORS

The removal of the directors under section 169 of the act can be made as follows:
 The company, by passing an ordinary resolution, can remove the directors by giving an
opportunity of being heard. (Note: Directors appointed under section 242 by the tribunal
are not covered under this clause).

 For the removal of the director, a special notice of a resolution is required to remove, and
the notice has to be issued for the appointment in place of the removed director.

 After the receiving of the notice of the resolution this notice has to send immediately to
the concerned director an other directors which are a member or non-member of the
board of the company and those are required to be heard o resolution at the meeting.

 When a director receives notice of the resolution for his removal, then the concerned
director has to give his representation in writing to the company. The notice of
representation has to be given to all members of the company and send a copy of that
representation to every member of the company who has called for the meeting.

 The vacancy is created under this section after the removal of the director then in the
same meeting of the removal another director is being appointed for time being, and a
special notice of the intended appointment is provided.

 The newly appointed director has to hold the post until the duration up to the new formal
appointment of the director is made.

 The director removed once shall not be re-appointed by the board of the directors.

 The removed director is liable for the damages and compensation which is required to be

payable to him in lieu of his removal or termination according to the prescribed terms and
conditions of the appointment.

Reasons for the removal of the director

The Board of Directors or shareholders can remove the Directors of a company if he/she incurs
any of the disqualifications specified under section 164  the Companies Act of 2013, or he/she
is absent from the Board meeting over 12 months. Also, if the concerned director enters into a
contract or arrangement against the provision of section 184, then that director is convicted by
the court and can be sentenced to imprisonment for not less than six months.
Who can take part in the removal of the director?
 The shareholders who are holding shares not less than sum of  Rs. 5,00,000 as a paid up
capital shares on the date of notice or are holding not less than 1% of the total voting
power, can send a special notice to the company for removal of the director.

 Shareholders have the discretion to decide the date of the meeting. However, the special
notice shall not be sent earlier than three months from the date of meeting but at least 14
clear days before the date of the meeting, at which the resolution is to be moved.

 The concerned director has given an opportunity of being heard at the meeting before the
board of the directors. If the reasons are validated by the shareholders and the board of
the directors, then they can terminate the procedure of the removal after consideration.

Mandatory Requirements
1. It is an obligatory condition to issue a special notice for the removal of director.

2. [Section 115 and Rule 23(1) of the Companies (Management and Administration) Rules,
2014] – A special notice necessary to be given to the Company shall be signed by number
of members holding not exceeding one percent of total voting power either collectively or
individually or holding of the shares for which a cumulative sum not exceeding five lakh
rupees have been paid on the notice date. 

3.  Any vacancy formed by the removal of a director if he had been appointed in the general
meeting by the company or by the Board then it shall be filled by appointing another
director at his place at that particular meeting where he was removed, provided that the
intended appointment’s special notice has been given.

4. It is always important for the director to hold office until the date from which his
predecessor could have held the office if he was not been removed.

5. There shall be no re-appointment of the director by the Board of Directors.

PROCEDURE TO REMOVE A DIRECTOR UNDER THE COMPANIES ACT, 2013

The procedure for the removal of a director is as follows:
1. Draft notice of board meeting together with draft resolution(s) to be considered in the
board meeting.

2. The company shall give intimation to the concerned director regarding his removal.
 3. Dispatch of Notice to all the directors together with Agenda of Board meeting.

4. Hold a board meeting and pass the Board Resolution for the removal of the concerned
Director and notice of the annual general meeting to all the members of the company.

5. Dispatching of notice of the annual general meeting to all the members minimum 14 days
before date of holding general meeting together with special notice to remove a director
by the specific number of members of the company must be passed minimum before 14
days before the concerned annual general meeting at which it has pass excluding the day
on which the notice is served and the meeting day.

6. A special notice required to be given to the company shall be signed, either individually
or collectively by such number of members holding not less than one percent of the total
voting power or holding shares on which an aggregate sum of not more than five lakh
rupees has been paid upon the date of the notice.

7. Holding a General Meeting, allowing the removed director to be heard and speak.
Passing an ordinary resolution if it seems just and equitable.

8. Preparation of Documents for removal of director and intimation to concerned

departments.

9. Once the director who was removed from office shall not be re-appointed as a director by
the Board of Directors.

REMUNERATION OF DIRECTORS
‘Remuneration’ is a way of compensating a person for services rendered to a company. Section
2(78) of the Companies Act, 2013 provides that “remuneration” is any money or equivalent
given to any person for services provided by him. It includes perquisites as provided under the
Income-tax Act, 1961.
Applicability of Remuneration of Director
Being a Director of a company, it is important to be aware of the managerial remuneration
prescribed as per Companies Act, 2013. Whether it is a private limited company or a Public
limited company, in both the cases regulations for payment of directors will be followed.
1.  Automatically by Profits

2. By Shareholders’ Approval

3. By Shareholders’ and Central Government

Remuneration of Director under section 197 of the companies act 2013

The various methods at which company can pay remuneration to its director is below:
  In case of Public company, a company can pay not more than 11% of the net profit as
calculated in a manner laid down in section 198 of the companies act. Whether it is
Managing director or whole time directors.

 A company having only one managing director, whole-time director or manager shall not
pay more than 5% of its net profits.

 A company has more than one such directors, remuneration shall be payable not more
than 11% of the net profit

In a company, there can be many types of directors such as Managing Director, Whole-time

Director, Part-time Directors and managers. The remuneration shall be paid all of the directors in
accordance with provisions of section 197 of the companies act, 2013. In the old companies act,
1956 there were provisions under chapter 198,309 etc which dealt with Managerial
remunerations separately whereas the new companies act, 2013 consolidated all these provisions
under one chapter i.e 197. With the appointment of Directors, there is some remuneration set by
the act which should not be forgotten. This article will let you know the Remuneration of
Director as per companies Act 2013.
 Applicability of Remuneration of Director
Being a Director of a company, it is important to be aware of the managerial remuneration
prescribed as per Companies Act, 2013. Whether it is a private limited company or a Public
limited company, in both the cases regulations for payment of directors will be followed.
 
Three ways of Managerial Remuneration are described by the following figure:
1. Automatically by Profits

2. By Shareholders’ Approval

3. By Shareholders’ and Central Government

Remuneration of Director under section 197 of the companies act 2013

The various methods at which company can pay remuneration to its director is below:
 In case of Public company, a company can pay not more than 11% of the net profit as
calculated in a manner laid down in section 198 of the companies act. Whether it is
Managing director or whole time directors.

 A company having only one managing director, whole-time director or manager shall not
pay more than 5% of its net profits.

 A company has more than one such directors, remuneration shall be payable not more
than 11% of the net profit.

Maximum remuneration for a Director:

The table given below will further portray the limits:

Capital (Rupees) Highest limit for Remuneration to a Director

Less than 5 crores 30 lakhs

5 crore or more but less than 100 crore 42 lakhs

100 crore or more but less than 250 crore 60 lakhs

250 crore and above 60 lakhs along with 9.99% of the capital in excess of Rs. 250 crore

 
1. If a company is having an adequate profit then it can pay to its managing director or
whole time manager remuneration up to 200% of the above mentioned managerial
remuneration if shareholders have given their approval through a special resolution.

2. A managerial director who is not holding share up to Rs. 5 lakhs or more and director of
the company is not related to any promoter during the period of two years prior to his
appointment as a managerial person, so in this case, the company may pay to him 2.5%
of the current relevant profits and up to 5% with the approval of shareholders by a
special resolution.

3. Current relevant profit is the profit calculated under section 198 and under this there is
no deduction of an excess of expenditure over income as prescribed in section 4(1). It is
relating to all usual working charges in respect of those years during which the
managerial person was not an employee, director or shareholder of the company or its
holding and subsidiary companies.

4. While computing of the ceiling on remuneration specified in section II and section III,
following are the perquisites which shall not be included:

 PF or superannuation fund or annuity fund are not taxable under the Income-tax Act,
1961 (43 of 1961).

 Gratuity shall not be exceeding half a month’s salary for each year of service

 Encashment of leave at the end of the tenure.

5. According to clause (a), any contribution made to PF (Provident fund), superannuation

fund or annuity fund more than the limits of tax under IT Act 1961, shall not be
 included for the purpose of calculation of managerial remuneration. Whether it is an
event of adequate profit or nil profit.

POWERS, DUTIES AND LIABILITIES OF DIRECTORS

Rights Of Directors
 Rights that can only be exercised by passing resolutions at a Board meeting (Section 292

 Power to make calls on shareholders for money unpaid on their shares that have not been
paid.

 The authority to issue debentures

 Ability to borrow money in a way other than by debentures

 The authority to invest the company's funds

 Having the ability to make loans

o Certain limitations on the Board's general powers can be enforced, and in those
situations, the Board must obtain shareholder approval at General Meetings.
Restrictions are dealt with in parts 293, 294AA, and so on.

o Such rights, such as Section 294AA (appointment of sole selling agents) and
Section 295 (Loans to Directors), can only be exercised with the consent of the
shareholders and the Central Government.

Section 180 of the Companies Act 2013 states that the Board can only exercise those powers if
they are authorized by the general meeting:
 To sell, lease, or otherwise dispose of the company's undertakings in whole or in part

 To invest in trust securities otherwise.

 To take out a loan for the company's needs.

 To allow the director time to repay any debt or to refrain from doing so

 Unless the director acted in good faith and with due care and diligence, the title of lessee
or purchaser is compromised when the director violates the restrictions which are
imposed under the sections.

 Provided, this section does not extend to companies whose primary activity is the sale or
leasing of real estate.

Right to form an Audit Committee

Section 177 gives the board of directors the authority to form an audit committee. It must have at
least three directors, one of whom must be an independent director. Independent directors must
comprise the majority of the committee. The audit committee's chairperson and members should
be capable of reading and comprehending financial statements.
The audit committee must function in compliance with the written terms of reference adopted by
the Board.

Right to form Nomination and Remuneration Committees, as well as a Stakeholder

Relationship Committee
 Section 178 allows the Board of Directors to form the Nomination and Remuneration
Committee and the Stakeholders Relationship Committee. Three or more non-executive
directors should make up the Nomination and Remuneration Committee, with one-half of
them to be independent directors.

 The Stakeholders Relationship Committee may be formed by the Board of Directors if

there are more than 1,000 shareholders, debenture holders, or other security holders on
the board of directors. This committee is responsible for considering and resolving
shareholder complaints.

DUTIES
 A director must behave in compliance with the company's Articles of Association

 A director must act in the best interests of the company's stakeholders and promote the
company's objectives in good faith.

 A director must exercise impartial judgment in carrying out his responsibilities with due
consideration, ability, and diligence.

 A director should always be mindful of potential conflicts of interest and strive to prevent
them in the best interests of the company

 Before authorizing related party transactions, the Director must ensure that proper
deliberations have to be taken place and that the transactions are in the company's best
interests.

 To ensure that the company's vigilance system and users are not harmed as a result of
such use.

 Confidentiality of confidential proprietary knowledge, business secrets, inventions, and

unpublished prices must be maintained and should not be revealed until the board has
authorized it or the legislation requires it

 A Company's Director can not appoint his or her office, and any such assignment is
invalid.
  If a company director violates the provisions of this section, he or she will be fined not
less than one lakh rupees but not more than five lakh rupees.

 The Companies Act of 2013 also assigns different roles to Independent Directors in order
to ensure the Board's independence and fairness. An Independent Director is a member of
the Board of Directors who does not hold any stock in the company and has no financial
ties to it other than the fees it earns for serving on the board. According to the Companies
Act of 2013, Schedule IV

 Protecting and promoting the interests of all stakeholders, especially minorities

shareholders.

 In the event of a conflict of interest among the stakeholders, acting as a mediator.

 Assistance in delivering an independent and fair decision to the Board of Directors.

 Adequate attention is paid to transactions between related parties.

 Any unethical activity, code of ethics breach, or alleged fraud in the company should be
reported honestly and impartially.

Liabilities Of Directors
For any and all acts prejudicial to the company's interests, the directors may be held jointly or
collectively liable. Despite the fact that the Director and the Company are distinct bodies, the
Director can be held responsible on behalf of the Company in the following situations:
 Directors who fail to make the necessary disclosures under the SEBI (Acquisition of
Shares & Takeovers) Regulations, 1997 and SEBI (Prohibition of Insider Trading)
Regulations, 1992 can face legal action from SEBI.

 Refunding of share application or excess in share application fee

 To pay for qualification shares

 Civil Liability for Prospectus Misrepresentation

Tax Liability:
Unless a Director or a Former Director can show that the non-recovery or non-payment of taxes
is due to gross negligence or violation of duty, any present or past Director (during the defaulter's
time period) will be liable to pay the tax deficit as well as any penalties.

The Following Are Some Criminal Liabilities Associated With A Director's Actions:
 Bounced or dishonored checks: Under the Negotiable Instruments Act of 1881, a
Director's signature on a dishonored check may result in criminal charges, in addition to
the company's income tax violations under the 1961 Income Tax Act.
  Also, under the Employees Provident Funds and Miscellaneous Provisions Act, 1952, and
the Factories Act, 1948.

 Derivative action is characterized as an action taken by one or more shareholders of a

corporation in which the company is the plaintiff and relief is sought on its behalf. It
must, however, be presented in a representative manner.

 A shareholder can bring an action against the company and its directors for matters that
are in violation of the company's Memorandum or Articles and that no majority
shareholder can sanction.

 Directors and the corporation could be held liable if the majority of shareholders engage
in "fraud on the minority," or discriminatory conduct. As a result, this is an extremely
valuable clause for Directors to be aware of and strive to take advantage of as much as
possible.

 The Companies Act requires a corporation to purchase insurance to cover itself against
losses caused by its directors. A director may also purchase insurance to compensate for
losses incurred due to liability to the company, with the premium charged by the
company.

Definition of a Company Secretary:

A Company Secretary means “a person who is a member of the Institute of Company

Secretaries of India”. [Sec. 2(i) (c) of the Company Secretaries Act, 1980],

According to Section 2(45) of the Companies Act, 1956, “Secretary means any individual

possessing the prescribed qualifications, appointed to perform the duties which may be

performed by a secretary under this Act and any other ministerial or administrative duties”.

Legal Status:
The Companies Act, 1956, imposed certain statutory obligations on the secretary of a company
but law does not define his exact position. From the nature of functions performed by a secretary,
we can have some idea about the legal position of a Company Secretary. According to the law of
the land, a secretary is merely a servant of the company working under full control of the Board
of Directors of the company.
He will carry out the orders given to him by the Directors. But since the judgment of Lord Esher
in 1887, everything has changed. Legal position of the Company Secretary has completely
changed. Today a secretary occupies a very important position in the administrative setup of the
company. He is an officer of the company with extensive duties and responsibilities.
He is no longer a mere clerk. He regularly makes representations on behalf of the company and
enters into contracts on its behalf which come within the day-to-day running of the company’s
business, so much so that he may be regarded as having authority to do such things on behalf of
the company.
Companies Act also regards him as the principal officer of the company who is personally re-
sponsible for filing various returns to the Registrar of Companies. The legal status of the
secretary has been described as a servant of the company but the actual position is much more
than a servant.
It is the duty of the Company Secretary to execute the policy decisions of the Board of Directors.
He plays an important role in the administrative work of the company. As a man on the spot he
has to take quick decisions on many routine matters. As the Chief Executive Officer of the
Company, he has tremendous influence on the Directors and gives valuable advice in the policy
decisions of the Board of Directors.
Since the Directors are fully busy with the development of business, they have no time to deal
with shareholders, staff and the public. The secretary communicates the decisions of the Board of
Directors to the staff, shareholders and the public. Here the secretary is the liaison officer
between the Directors and others.
As the secretary has a sound knowledge of the Companies Act, the Board of Directors seek
expert advice from him. The secretary has to convene and conduct all meetings of the company.
He will prepare the agenda and send notice to all concerned and help the Chairman of the
meeting in conducting the meeting.
The Directors act as the brain of the company because they frame the policy of the company. But
in framing the policy decisions of the company the Directors have to depend heavily on the
secretary. It is rightly said that while the Directors are the brains of the company, the secretary is
its ears, eyes and hands.
QUALIFICATIONS OF THE SECRETARY:
Since the amendment of the Companies Act in 1994, only a person having prescribed
qualifications can be appointed secretary of a company. Apart from the statutory qualifications,
he should also have other qualifications as may be necessary to conduct the affairs of the
company.
STATUTORY QUALIFICATIONS:
According to Section 2(45) of the Companies Act 1956, as amended in 1974, a Company Secre-
tary must possess the qualifications prescribed by the Central Govt. from time to time.
The qualifications as prescribed by the Companies (Secretary’s Qualifications) Rules 1975, for
the Secretary of a Company are:
(a) In case of a company having a paid-up share capital of Rs. 50 lakhs or more, the Secretary
must be a member of the Institute of Company Secretaries of India incorporated under the
Companies Act, 1956, and licensed under Sec. 25 of that Act. A person who is a member of the
Institute of Chartered Secretaries of London shall also be eligible for appointment as Secretary of
such a company.
(b) In the case of any other company, one or more of the following qualifications shall have to be
possessed by the Secretary:
(i) Qualifications specified in clause (a) above;
(ii) A degree in law granted by any university.
(iii) Membership of the Institute of Chartered Accountants of India.
(iv) Membership of the Institute of Cost and Works Accountants of India.
(v) A post-graduate degree or diploma in Management granted by any university or the Indian
Institute of Management.
(vi) A post-graduate degree is Commerce granted by any university.
(vii) A diploma in Company Law granted by any Indian Law Institute.
OTHER QUALIFICATIONS:
In order to be a Company Secretary, statutory qualifications are not enough.
A Company Secretary should also possess the following special qualifications:
1. Knowledge of Company Law:
The Secretary must know the detailed provisions of the Companies Act and its implications. He
must have a knowledge of the rules of meetings.
2. Knowledge of Mercantile Law:
Most of the companies carry on their business as mercantile firms and have to act according to
different provisions of Mercantile Law including the Contract Act, Sale of Goods Act,
Negotiable Instruments Act, MRTP Act, Insurance Act etc.
The company also faces problems of labour, trademarks, patents, copyrights and so on.
Therefore, the Secretary must have a sound knowledge of Labour Laws, Factories Act, ESI Act,
Mercantile Laws and Patent, Copyright and Trade Mark Laws.
3. Knowledge of Economics:
In order to handle economic problems of the company, the Secretary should have a sound
knowledge of Economics—theoretical and practical—general money market, capital market and
financial institutions.
4. General Knowledge:
The Secretary must have a sound general knowledge. He must have thorough acquaintance with
social, political and economic conditions of the country.
5. The Secretary must be smart, unbiased, and must have high IQ, presence of mind and amiable
personality.
PROVISIONS RELATED TO DISQUALIFICATION OF A COMPANY SECRETARY
Requirement for a secretary

1.  A company shall have at least one secretary who shall be : a. a natural person; b.
eighteen years of age and above; and c. a citizen or permanent resident of Malaysia,who
shall ordinarily reside in Malaysia by having a principal place of residence in Malaysia.

2. A secretary shall be : a. a member of a body as set out in the Fourth Schedule;b. a person
licensed by the Commission under section 20g of the Companies Commission of
Malaysia Act 2001.

3. For the purposes of paragraph (2)(a), the Minister may prescribe any professional body or
any other body by notification in the Gazette and may impose any term and condition as
he thinks fit.

4. The company and every director who contravene this section commit an offence.

Disqualification to act as a secretary

1. A person shall be disqualified to act as a secretary if : a. he is an undischarged bankrupt;
b. he is convicted whether in or outside Malaysia of any offence referred to in section
198; or c. he ceases to be a holder of a practicing certificate issued by the Registrar under
section 241.

2. Notwithstanding subsection (1), if the Registrar is of the opinion that a person has failed
to act honestly or use reasonable diligence in the discharge of his duties as a secretary,
the Registrar may require the person to show cause why his practising certificate should
not be revoked or why he should not be disqualified from acting as a secretary of a
company.

3. If a person continues to act as a secretary for a company after the person is disqualified
under this section without leave of the Court, the secretary and every director who
knowingly permits the person to act in that capacity commit an offence.

APPOINTMENT:
The First Secretary of a company is generally appointed by promoters and his name may be men-

tioned in the Articles of Association. If the First Secretary is appointed subsequently, it has to be

done by the Board of Directors by passing a resolution in their meeting. The terms and

conditions of appointment should be mentioned in the resolution of the Board meeting. A

Director may also be appointed as a Secretary.

Convene board meeting by giving a notice to all the directors and pass a resolution for
appointing a whole-time company secretary. Inform the Registrar of Companies about the
appointment of the company secretary by filing form MGT-14 and DIR-12 within 30 days
from the date of appointment.
Every Listed Company and every other Public Company having a paid-up share capital of ten
crore rupees or more shall have whole-time key managerial personnel. [Rule 8 of the
Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014]
Every private company which has a paid up share capital of ten crore rupees or more shall have a
whole -time company secretary. 
PROCESS OF APPOINTMENT OF COMPANY SECRETARY, 
After giving proper notice, a board meeting should be conducted where necessary resolutions is
passed for the appointment of company secretary.
The person appointed as company secretary should give a written consent to act as same.
After the meeting, an appointment letter should be given to the company secretary so appointed.
The company should file Form DIR 12(necessary documents to be attached) with ROC within 30
days of the appointment.
Also inform the stock exchange within 30 minutes of the conclusion of the meeting.

REMOVAL OF SECREATRY
Dismissal:
The Secretary is a servant of the company and his dismissal is governed by the normal law appli-
cable to master and servant. The Secretary can ordinarily be dismissed by the Board of Directors.
He may be removed in the following manner:
(i) By giving a written notice;
(ii) On the expiry of the tenure of service;
(iii) In such manner as prescribed by the Articles of Association of the company.
The Secretary may also be removed without notice for:
i. Willful misconduct;
ii. Willful disobedience to order of the manner;
iii. Negligence of duty;
iv. Permanent disability; and
v. Moral turpitude.
PROCEDURE FOR THE TERMINATION OF EMPLOYMENT OF COMPANY
SECRETARY:

The Company secretary is appointed as a whole time employee of the Company. In order to
remove the Company Secretary, the Company shall serve the notice of termination to the
Company Secretary in terms with the Appointment Letter signed between the Company and the
Company secretary. If there is no appointment letter/offer letter, the Company can follow its
regular procedure for termination of employment of the employee.
1. Convene a Board Meeting: The company shall convene a board meeting to discuss the
termination of employment of Company Secretary and shall pass a resolution to the effect. The
resolution shall state the effective date of termination of the CS.
2. Service of termination notice to the Company Secretary: The Company shall thereafter serve a
notice of termination on the Company Secretary. The period of notice shall be governed by the
employment letter or in its absence the termination policy of the Company. The notice shall be
sent by email with acknowledgment due and also by courier/registered post. The Company
Secretary shall cease to be in office from the date of expiry of notice.
3. DIR -12- After passing of the Resolution of Board of Directors the Company shall file e-Form
DIR-12 with the Registrar of Companies to intimate about the removal of existing Company
Secretary.
4. The e-Form DIR-12 shall be filed within 30 days of removal of the Company Secretary, along
with the Resolution passed for the removal of the Secretary and requisite fees.
Important Note: In accordance with Section 179 read with Rule 8 of the Companies Act, 2013 a
Company Secretary being a KMP shall be appointed and removed only by means of resolutions
passed at meetings of the Board and not via Resolution by Circulation.

REMUNERATION
Company Secretary Salary In India
On an average Updated Company Secretary Salary In India 2022 is Rs 514,449 per year.
Company Secretary Pay Scale/ Package include Bonus, profit sharing, allowances and other
benefits/incentives as per skills, qualification, and companies.
Company Secretary is one of the professions with satisfying salaries. It is a large range of
opportunities. The Company Secretary Salary is determined on the basis of skills of individual,
knowledge and experience.
Company Secretary Pay Scale | Salary of CS
Starting Salary perMid Level Salary perSenior Level Salary per
Job Profile
annum (in INR) annum (in INR) annum (In INR)
Company Secretary Rs. 3,00,000 Rs. 6,00,000 Rs. 9,00,000 – 12,00,000
Legal Advisor Rs. 3,00,000 Rs. 4,00,000 – 5,00,000 Rs. 10,00,000
Principal Secretary Rs. 3,00,000 Rs. 6,00,000 Rs. 9,00,000 – 12,00,000
Company Secretary Salary In India
Average Salary Of Company Secretary In India Per Month!!! Those who are looking for
Maximum Salary Of Company Secretary they can check from below framed table:
Particulars Company Secretary Salary Package
Salary Rs 247,142 – Rs 1,374,138
Bonus Rs 10,022 – Rs 390,555
Profit Sharing Rs 12,671 – Rs 690,428
Total Pay Rs 248,933 – Rs 1,442,945

Company Secretary Salary India with Experience:

Associate Company Secretary Salary paid as per Experience has a positive trend. At entry level
Salary of Company Secretary in India with less than 5 years of experience is expected to be Rs
485,000 based on 314 salaries.
Company Secretary Job Salary with 5 to 10 years of experience is expected to be Rs 784,000
based on 131 salaries. However employees with 10 to 20 years of experience will withdraw Rs
1,469,000 as Salary of Company Secretary
A Company Secretary with late-career experience or having with greater than 20 years of
experience will get average total Company Secretary Emoluments of Rs 2,387,000 based on 9
salaries. People general do not have experience more than 20 years as they move towards other
position.

DUTIES & POWERS OF COMPANY SECRETARY

Secretary's Powers
The powers of the Secretary are limited to a few powers given to him by statute and such other
powers as may be delegated to him by the board of directors.
The Secretary has power to enter into contracts relating to the day to day administration of the
company. Where the Secretary enters into contracts within his apparent or ostensible authority,
his actions will bind the company even if he had no authority to act.

SECRETARY'S DUTIES
An officer of a company is guilty of an offence if he authorises or, in breach of his duty as an
officer, permits the default in question. There is now a presumption that the relevant officer had
permitted the default unless the officer can establish that he took reasonable steps to prevent the
default or that he was unable to prevent it because of reasons outside of his control. This places
the onus on the officer to disprove to the court, any fault on his part.
Where a Secretary, in purported compliance with any provision of the Companies Acts, answers
a question, makes a statement, produces a document, knowing the answer, statement or
document to be false, or is reckless in the conduct of his duties, he is in breach of the Companies
Acts.
As the Secretary has no power to ensure compliance, such being vested in the board of directors,
it would appear unreasonable to impose a duty to do so. The Companies Bill 2012 proposes to
clarify the duties of directors and secretaries in this regard however the new Companies Act is
not anticipated until 2014.
The duties of a Secretary are classified below as (i) Statutory Duties; (ii) Duty of disclosure; (iii)
Duty to exercise due care, skill and diligence; and (iv) Administrative duties.
i. Statutory Duties

A number of duties are imposed on the Secretary by the Companies Acts however few are
carried out exclusively by him. Rather, they tend to be tasks carried out by a director and the
Secretary. These include:
 Signing the annual return, which is also required to be signed by a director;

 Certifying the financial statements attached to the annual return, which are also required
to be certified by a director;

 Giving the company such information as is necessary to enable it to comply with its
obligations to notify the companies registration office (“CRO”) of changes of Secretary
or to his particulars;

 Ensuring that the requirements of the Companies Acts are complied with (section 100 of
the Company Law Enforcement Act 2001);

 Signing of application forms to re-register (i) a private limited company as a public

limited company; (ii) an unlimited company to a public limited company; (iii) an
unlimited company as a public limited company as a private company; (iv) a limited
company as an unlimited company; and (v) an unlimited company as private limited
company;

 Making the statutory declaration required for a public limited company before it may
carry on business;

 Completing and signing a form of application to register a business name of the

company;

 Making out the statement of affairs in a receivership, either two directors or one director
and the company secretary can complete this; and

 Making out the statement of affairs in a winding up, either two directors or one director
and the company secretary can complete this.

ii. Duty of Disclosure

The Secretary is obliged to disclose certain information for inclusion in the register of directors'
and secretary and the register of directors' and secretaries' interests.
 iii. Duty to exercise due care, skill and diligence

A Secretary is under a duty to exercise due care, skill and diligence in the performance of his
duties. He can be held liable for any loss arising as a result of his negligence. The Secretary
however need not exhibit in the performance of his duties a greater degree of skill than might
reasonably be expected from a person with his level of knowledge and experience.
iv. Administrative Duties

In addition to the duties imposed specifically by statute, a Secretary has a number of important
administrative duties. These duties will vary depending on the size and type of the company
involved and any decisions by the board regarding matters to be delegated to the Secretary. They
may include:
 Maintaining the statutory registers of the company (register of directors and secretary,
register of members, register of directors’ and secretaries’ interests and register of
debenture holders) and making them available for inspection to those entitled;

 Preparing and filing the annual return and notice of other matters such as changes in
directors and secretaries or in their particulars, change of registered office address, return
of allotments, passing of special and certain ordinary resolutions etc. within the
prescribed time limits in the CRO;

 Preparing and issuing notice of board and general meetings in accordance with
instructions given by the chairman or the board;

 Attending and taking minutes of meetings and maintenance of the related minute books;

 Ensuring that board decisions are properly communicated and that action items are
circulated to the board members after each board meeting;

 Registration of share transfers and issuance of related share certificates, subject to board
approval;

 Ensuring that guidance is provided to the board on corporate governance matters

generally and ensuring that the provisions of the memorandum and articles of association
and of any shareholders’ agreements, to which the company is a party, are observed;

 Providing support to the executive and non-executive directors to include (i) providing
them with a copy of the most recent memorandum and articles of association of the
company; (ii) ensuring that they are aware of their statutory obligations; (iii) providing
them with a schedule of board meetings; and (iv) providing them with any other
information they may validly require to fulfil their functions;

 Ensuring that the company complies with its disclosure requirements such as information
contained on company letterhead, websites and electronic communications;
  Communicating with company shareholders;

 Safe custody of the company seal and, where authorised, countersigning its affixing with
one of the directors;

 Certifying documents such as copies of the certificate of incorporation, memorandum and

articles of association, copies of certain resolutions and copies of certain statutory
registers.

LIABILITIES OF COMPANY SECRETARY

Liabilities of a CS can be divided into two ways:
1. Statutory Liabilities (some of which are mentioned below):
1. Default in complying with name requirements: Fine of Rs. 1000 every day not exceeding Rs.
1 Lakh till such default continues.
2. Default in filing return on allotment: Fine of Rs. 1000 every day during such default persists
or Rs. 1 Lakh, whichever is less.
3. Default in delivering Share or Debenture Certificates: fine upto Rs. 5 Lakh.
4. Default in filing Annual Return: Fine ranging from Rs. 50,000 to Rs. 5 Lakh.
5. Default in holding AGM: Fine upto Rs. 5000 during which such default persists, extending
upto Rs. 1 Lakh.
6. Failure to maintain registers of members: Fine ranging from Rs. 50,000 to Rs. 3 Lakh.
7. Other liabilities as are provided under provisions of Companies Act of 2013.
2. Contractual liabilities (some of which are mentioned below):
1. Liable for negligence on part of his or her duty.
2. Liable for breaching or exceeding his or her authority.
3. Liable for disclosing any secret information of the company to outsiders.
4. Liable for earning secret profits on account of his position.
5. Liable for fraud
6. Any other such contractual duties for which to be held liable as specified in provisions of
Companies Act of 2013.
Apart from the same, a CS is also defined as an ‘officer in default’ along with MD, WTD, etc,
and therefore can be punished under respective offences. Can also be punished as a KMP, as per
certain provisions of Companies Act of 2013. Moreover, if a case is filed against a company or
corporation, then a summon can also be served on a CS, apart from director or other principal
officer of the company or on the registered office of such company, as per Order 9 Rule 2 of
Civil Procedure Code of 1908.

UNIT V
COMPANY MEETING
MEANING
A company meeting may be defined as a concurrence or coming together of at least a
quorum of members in order to transact either ordinary or special business of the
company.
The term meeting means assembling or gathering or coming together of two or more persons on
a fixed date and at a fixed time and place to discuss some pre-determined matters to take some
decisions or not.
CHARACTERISTICS OF A MEETING
(a) There shall be two or more persons. The total number may be small (as in case of a
committee meeting) or large (as in case of annual general meeting of a public company or an
association) or very large (as in case of a public meeting).
(b) There must be a definite place of the meeting. In case of an official meeting the office itself
may be the place. A big official meeting, like the annual general meeting of a public company,
may be held in a public hall. A public meeting may, be held in a public hall or on open ground or
on the road.
(c) There must be a fixed date and time. In case of an official meeting the date is generally a
working day and the time is within office hours. Sometimes there are restrictions with regard to
date and time as we find in case of a company under the Companies Act.
(d) There shall be some discussion. It means that the persons present shall present their view-
points and opinions on the subject matters for which the meeting has been called.
(e) The topics or matters to be discussed at a meeting are pre-determined or known to the
participants earlier, so that they can come prepared with their thoughts.
(f) Decisions are generally taken at meetings. Taking of decisions on some matters is the main
purpose of a meeting. The decisions taken at a meeting are binding on the members of the
organisation whether present at the meeting or not, whether agree to the decisions or not.
Decisions are taken by voting and in the forms of resolutions. There are different methods of
voting. Generally decisions are not taken at public meetings and if taken they are not binding in
any way.
(g) Meetings can be of different types—private, public or international (e.g. the U.N. O.).
It has to be noted that a meeting does not take place automatically. A meeting has to lie called or
convened. It means that a notice has to be given to every person individually who is entitled to
attend the meeting. A general publicity is required in case of a public meeting. There are rules
and procedures of giving notices for different kinds of meetings.
An accidental meeting of two or more persons does not really constitute a meeting.
The secretary has great responsibilities with regard to calling and holding of meetings and
follow-up actions.
IMPORTANCE OF MEETING:
Importance of meetings is very great in our social life. Holding of meetings is a democratic
process. Meetings are necessary at all stages of decision-making, be it for a club or an
association or a company or for running the Government.
Meeting of Legislative Assemblies of different States and the meeting of Parliament are essential
for the administration of the Government. Even for solving any family problem the members of a
family sit together or meet. Social gatherings, religious gatherings etc. are part and parcel of our
life.
Meetings are effective forms of publicity at the time of elections. Public opinion is gathered
through meetings. Judgements are delivered when courts meet. Group discussions are effective
means for introducing organisational change and decision-making as well as for better employer-
employee relations. The objects and procedures of holding different types of meetings are
different.
REQUISITES OF A VALID MEETING
1. Proper Authority:
The authority to call a general meeting is the board of directors of the company. The notice of
the meeting should be issued under their authority, granted at a duly constituted meeting of the
board or passing a resolution by circulation. A single director has no power to convene a
meeting. The secretary of the company has no authority to call a general meeting unless the
Board resolves and authorises him to do so.
In case the meeting of the Board of directors itself is unlawful e.g. where rightful directors are
prevented from attending the directors’ meeting, the decision taken by the Board at such meeting
to call the general meeting, shall also be unlawful.
Where, however, the meeting at which the directors decide to call a general meeting is not
properly constituted (e.g. there is some defect in the appointment or qualification of the
directors), and the Board acts bona fide, a general meeting called in pursuance of a resolution
passed at such directors’ meeting, is not necessarily invalid.
However, under certain circumstances, the requisitionists, the Central Government or the
Company Law Board (the Tribunal after its constitution) may call a general meeting in case of
default by the directors.
2. Notice:
Notice to whom? Notice of every general meeting should be given to the following persons:
(i) Every member of the company.
(ii) Every person entitled to a share in consequence of the death or insolvency of a member.
(iii) Auditor or auditors of the company [Sec. 172 (2)].
Deliberate omission to give notice to a single member may invalidate the meeting. However, an
accidental omission to give notice to or non-receipt of it, by a member will not invalidate the
meeting [Sec. 172 (3)].
Length of Notice:
A proper notice in writing to every member of the company is required by law for the holding of
every valid meeting. Notice must be given even though a member has waived his right to have
notice. It must disclose the purpose for which the meeting is called. It must be given at least 21
clear days before the date of the meeting.
In calculating 21 days, the date of receipt of notice and the date of the meeting should be
excluded [Sec. 171 (1)]. Articles may provide for a notice longer than 21 days, but not shorter
than 21 days. The notice shall be deemed to have been received by a member at the expiry of 48
hours from the time of posting [Sec. 53 (2) (b)].
A general meeting may be called at a shorter notice, if,
(i) In the case of an annual general meeting, all members entitled to vote thereat agree;
(ii) In the case of any other meeting (a) if the company has a share capital, members holding
95% of the paid-up share capital carrying voting rights exercisable at the meeting agree, (b) if the
company does not have a share capital, members holding at least 95% of the total voting power
exercisable at the meeting agree.
The consent of the members for shorter notice may be obtained either at the meeting or before
the meeting. It may also be obtained after the meeting and the post consent will validate the
resolution originally passed without sufficient notice. It is usual to obtain it by asking the
shareholders to sign a form of consent.
Service of Notice:
Company may serve notice on the members either personally or by prepaid post or by
advertisement in the newspaper. It must be properly addressed. Service of notice’ by
advertisement shall be deemed to be complete the day when the advertisement appears in the
newspaper on both resident and non-resident members.
Explanatory statement need not be advertised, but the fact that the same has been sent to the
members through post shall be mentioned in the advertisement. In case of joint- holding of
shares, notice to first named shareholder would be sufficient.
When the meeting is adjourned for 30 days or more and the new business is to be transacted at
the adjourned meeting, a fresh notice has to be given.
Contents of the notice:
The notice must contain the following particulars:
(i) It should specify the name of the meeting, the place, day and hour of the meeting and the
meeting to be valid must be held at the place and time specified. Annual General Meeting should
be held on a working day during business hours. However, a meeting may continue beyond
business hours. Extraordinary general meeting can be held on any day including a holiday and
not necessarily during working hours.
(ii) It should also specify the nature of the business to be conducted at the meeting. Section 173
puts business into two categories:
(a) General business:
In case of annual general meeting, all business relating to : (i) the consideration of annual
accounts, (ii) the declaration of a dividend, (iii) the appointment of directors in place of those
retiring, and (iv) the appointment of, and the fixing of remuneration of the auditors, are
considered as general business.
(b) Special business:
Any other business at an annual general meeting and all businesses in case of any other meeting
are regarded as special business. If special business is to be transacted at a general meeting, an
‘explanatory statement’ giving all the material facts of the item of special business including the
particulars of interest, if any, of every director or other managerial personnel, must be annexed to
the notice.
Agenda:
Agenda gives guidance and information as to the business to be discussed and transacted in the
meeting. It sets out the chronological sequence in which the various items of business shall be
taken up in the meeting for discussion. The sequence should not be changed unless agreed to by
the members present. Routine items should be put first and debatable items later. Similar items
should be placed closer to each other.
Agenda is prepared by the Secretary in consultation with the Chairman or the Managing
Director. Agenda must be clear and complete. A company may be restrained from transacting
that business which is not mentioned in the agenda.
3. Place of the Meeting:
Annual General Meeting. The annual general meeting is to be held by a public company at its
registered office or at some other place in the same city, town or village where the registered
office of the company is situated. However, the Central Government has the power to grant
exemption to any company from this provision.
A private company can hold its annual general meeting at any other place if:
(i) It has fixed the place of the meeting by the articles; or
(ii) It has fixed the place of the meeting by a resolution agreed by all the members.
A company registered under section 25 of the Companies Act can hold the annual general
meeting at any place. In case of a Government company, meeting can be held at any other place
with the approval of the Ministry of Corporate Affairs.
Other General Meetings:
There is no such provision in the Companies Act which requires that the general meetings of the
company other than the annual general meeting must be held at some particular place. It,
therefore, follows that the other general meetings can be held, subject to any specific provision in
the articles at any other place. However, the directors must act reasonably in fixing the time and
place of the meeting so that members get full opportunity in exercising their voting rights.
4. Quorum:
Minimum number of members required to constitute a valid meeting and to transact business
therein is called ‘quorum’. No meeting can be valid without quorum. Any resolution passed at a
meeting without quorum shall be invalid. Quorum is to be fixed by the Articles of Association.
But unless the articles provide for a large number, 5 persons personally present in the case of a
public company and 2 members personally present in the case of private company shall be the
quorum for a meeting of a company. [Section 174 (2)]. Thus, articles cannot provide a smaller
quorum than what has been provided in section 174 (1). Besides that, for the purpose of quorum,
only members present in person and not by proxy are counted.
If within half an hour from the time appointed for holding a meeting of the company, a quorum
is not present, the meeting, if called on the requisition of members, shall stand dissolved [Sec.
174 (3)]. In any other case, the meeting shall stand adjourned to the same day in the next week,
at the same time and place, or to such other day and at such other time and place as the Board
may determine [Sec. 174 (4)].
If at the adjourned meeting also a quorum is not present within half an hour from the time
appointed for holding the meeting, the members present shall constitute quorum [Sec. 174 (5)].
However, the above provisions shall not be applicable if the articles of the company otherwise
provide [Sec. 174 (2)]. But this does not mean that the number of members personally attending
can be less than two. A single person cannot constitute a valid meeting except in certain cases
only.
5. Chairman:
A general meeting of the company is to be presided over by a chairman who regulates and
supervises the proper conduct of the business at a meeting. He decides all incidental questions
arising in the course of the proceedings of the meeting. Chairman should act bonafide and in the
best interest of the company as a whole. Articles usually provide the mode of appointment of the
chairman of a meeting. If the articles do not provide otherwise, the members personally present
at the meeting shall elect one of themselves to be the chairman thereof on a show of hands [Sec.
175 (2)].
If a poll is demanded on the election of the chairman, it must be taken forthwith and the
chairman elected on a show of hands can exercise all the powers in this connection [Sec. 175
(2)]. If some other person is elected chairman as a result of the poll, he shall be the chairman for
the rest of the meeting [Sec. 175 (3)].
Articles 50, 51 and 52 of Table A provides on the appointment of a chairman:
50. The chairman, if any, of the Board shall preside over as chairman at every general meeting of
the company.
51. If there is no such chairman, or if he is not present within fifteen minutes after the time
appointed for holding the meeting, or is unwilling to act as chairman of the meeting, the directors
present shall elect one of their members to be the chairman of the meeting.
52. If at any meeting no director is willing to act as chairman or if no director is present within
fifteen minutes after the time appointed for holding the meeting, the members present shall
choose one of their members to be the chairman of the meeting.
Chairman of the original meeting shall be the chairman of the adjourned meeting also unless
validly removed. The chairman of a meeting may be appointed by the Company Law
Board/Tribunal in cases where there are differences among the shareholders, and a peaceful
meeting under the chairmanship of a person appointed by either group is impossible.
Powers of a Chairman:
1. The chairman has prima facie authority to decide all questions which arise at a meeting and
which require decision at the time.
2. The entry in the minute’s book of the chairman’s decision is evidence of the decision of the
meeting.
3. The chairman has a right to decide priority amongst speakers, to demand poll, to exercise
casting vote, to expel an unruly member and he may, with the support of the majority, apply
closure to a discussion after it has been reasonably debated.
4. He can adjourn a meeting when it is impossible, by reason of disorder or other like causes, to
conduct the meeting and complete business.
Casting Vote:
Articles of Association may give an additional or second vote to the chairman of the company,
over and above his right to vote as an ordinary member. In the case of a tie, i.e. equality of votes,
chairman may use the casting vote to decide the matter in one way or the other.
Duties of a Chairman:
The chairman must take care to see that proper discipline is maintained at the meeting, that the
proceedings are conducted in a proper manner, that proper opportunity is given to the members
to express their views, that the voting is fair, and that the proceedings of the meeting are properly
and correctly recorded in the minutes book.
The chairman should act bona fide according to his best ability and judgment and without any
prejudices. He should see that the meeting is duly convened and properly held.
6. Proxy:
The term proxy has two meanings:
(a) A personal representative of the member at a meeting i.e. the person authorised to act or vote
for another at a meeting of the company, and
(b) The instrument by which a person is appointed to act for another at a meeting of the
company, since a representative can be appointed only in writing.
The following are the provisions of the Companies Act regarding appointment and rights of
proxy:
(1) Law entitles every member of a company to appoint a person as his proxy to attend and vote
at company meeting instead of himself [Sec. 176 (2)]. However, a member of a company having
no share capital does not have this right unless its articles provide otherwise [Sec. 176 (4)].
(2) A member of a private company is not entitled to appoint more than one proxy to attend on
the same occasion unless its articles provide otherwise. But a member of a public company may
appoint more than one proxy i.e., he may appoint one proxy in respect of certain shares held by
him and a different proxy for other shares held by him.
(3) Any person can be appointed as a proxy whether he is a member of the company or not. In
case the proxy is not a member of the company, he shall have no right to speak at the general
meeting unless the articles otherwise provide. There is, however, no provision preventing a
proxy putting questions in writing and sending the same to the chairman for answer.
(4) A proxy is ordinarily entitled to vote only on a poll. But he may vote on voting by show of
hands if the articles provide. Besides that, he may demand or join in demanding a poll [Sec. 176
(1) (n)]. However, he shall have no right to inspect proxy forms or the minutes of the meeting.
(5) Proxy must be appointed by an instrument in writing, duly stamped and signed by the
member of the company. A blank but stamped proxy is valid and may be completed by the
person authorised to do so.
Proxy must be deposited with the company at least 48 hours before the commencement of the
meeting. A company, however, cannot legally require proxies to be deposited with it earlier than
48 hours before the time of the meeting.
After giving 3 days’ notice to the company, members may inspect during business hours the
proxies lodged with the company at any time during the period commencing 24 hours before the
time fixed for the commencement of the meeting and ending with the conclusion of the meeting
[Sec. 176 (7)]. Proxy lodged for the original meeting remains valid for the adjourned meeting
also.
(6) Every notice of a meeting must appropriately mention that a member is entitled to appoint a
proxy and that the proxy need not be a member [Sec. 176 (2)]. A company cannot send invitation
to members to appoint any one or more persons as proxies.
(7) A proxy is revocable. It can be revoked at any time. Death of the shareholder appointing a
proxy will, in the absence of provisions in the Articles revoke the authority of the proxy.
Shareholder may himself attend and vote in the meeting. Vote tendered by the proxy in such a
case will not be accepted because the need for exercising the proxy had never arisen. Proxy in
this case shall stand revoked impliedly.
However, the mere presence of a member at the meeting does not imply the revocation of the
authority of the proxy. When both the member and the proxy are present at the meeting, the
member’s absence from voting on the resolution on which the proxy casts his vote does not
imply the revocation of the authority of the proxy. A proxy appointed later revokes the proxy
appointed earlier.
(8) The relationship between the member and the proxy is that of principal and agent. A minor
member has no capacity to appoint a proxy. He can act only through his guardian. However, a
minor can be appointed a proxy.
In the case of joint holders of shares, proxy appointed by the first named joint holder will have
precedence over the proxy appointed by second joint holder. Proxy appointed by first joint
holder will exercise voting right to the exclusion of the joint holders who may be present in the
meeting. There is no need to obtain prior consent of the proxy to his appointment as such.
7. Voting at General Meeting:
The decisions at the meetings are taken by way of passing the resolutions. Every proposed
resolution is discussed by the members of the company. Members have the right to move
amendments to the proposed resolutions provided the amendments are germane to the proposed
resolution.
After a proposed resolution has been discussed it is put to vote. Every member has a right to vote
on such resolutions. Shareholders may exercise their voting rights in their best interests with
complete freedom.
They are allowed to vote even if their interest is in conflict with the interest of the company. A
director may vote in the shareholders’ meeting even though his interest in the subject matter is
opposed to the interest of the company. Only members whose names appear in the Register of
Members shall have the right to vote.
Share warrant holders, executor of a deceased member, receiver of an insolvent member cannot
exercise any right to vote, unless registered as a member. However, a person who becomes a
member between the date of original meeting and the adjourned meeting may vote at the
adjourned meeting. Members who were not present at the time of voting by show of hands may
vote at a poll.
A company cannot prohibit any member from exercising his voting right on the ground that he
has not held his shares or other interests in the company for any specified period before the
meeting or on any other ground (Sec. 182).
However, the articles may provide that a member shall not be entitled to exercise any voting
rights, in respect of any shares registered in his name on which he has not paid all calls or other
sums presently payable by him or in regard to which the company has exercised any right of lien
(Sec. 181).
The preference shareholders have right to vote only on such resolutions which directly affect
them; and when their dividends are in arrears for a specified number of years [Sec. 87(2)].
Voting may be either by a show of hands or by a poll.
Voting by show of hands:
In the first instance, at any general meeting, voting takes place by a show of hands (Sec. 177).
On a show of hands, each member has only one vote. Proxies are not entitled to vote in case of
such a voting unless the articles otherwise provide. The chairman’s declaration on the result of
voting by show of hands is conclusive.
Voting by poll:
Voting in accordance with the voting rights given to the members by the Articles of Association
is called a ‘Poll’. Proxies are allowed to vote in case of voting by poll. There is a counting of
votes cast in favour and against the resolution in case of a poll.
Ordinarily, it implies exercise of voting rights by members in proportion to their share of the
paid up equity capital of the company [Sec. 87 (l) (b)]. All decisions taken on voting by show of
hands will stand cancelled as soon as a demand for voting by poll is made. It is the demand for
poll and not its result which will eradicate the decision by show of hands.
A poll can be demanded either before or after the declaration of the result of voting on a show of
hands. A poll may be demanded by either of the following:
(a) Chairman, on his own motion, or
(b) In the case of a public company having share capital, by any member or members, present in
person or by proxy holding shares carrying not less than 1/10 of the total voting power in respect
of the resolution or having paid up share capital of not less than f 50,000.
(c) In the case of a private company having share capital, by at least one member present in
person or by proxy, if not more than 7 members are personally present, and by 2 members
present in person or by proxy, if more than 7 members are personally present.
(d) In the case of any other company, by any member or members present in person or by proxy
and having not less than 1/10 of the total voting power.
The demand for poll may be withdrawn at any time by the person or persons who made the
demand (Sec. 179).
A poll on a resolution for the adjournment of the meeting or for the appointment of the chairman
must be immediately taken. Chairman, in all other cases, must take poll at any suitable time but
not later than 48 hours of the demand for poll (Sec. 180).
If a poll is not completed on the same day, it will be continued on the next day and the chairman
will not be entitled to close the poll. When more than one resolution is to be passed, poll should
be taken on each of the resolutions separately.
Poll must be held according to the provisions of the Articles of Association. The manner of
taking the poll is to be decided by the chairman. It is the duty of the chairman to demand poll
when he knows that proxies have been lodged and that on a poll the decision on a show of hands
is likely to be reversed.
The chairman of the meeting shall have the power to regulate the manner in which a poll shall be
taken (Sec. 185). It need not necessarily be by ballot. It may be by show of hands. But it cannot
be by secret ballot because secret ballot polling is possible where each member has one vote to
cast. In case of voting by poll, members have the votes in accordance with the shares held by
them. The chairman shall appoint two scrutineers to scrutinise the votes given on a poll and to
report thereon to him.
Out of the two scrutineers, at least one shall be a member (not being an officer or employee of
the company) present at the meeting, provided such member is available and willing to be
appointed (Sec. 184).

COMPONENTS OF MEETING:
A meeting consists of the following:
(a) The Participants:
In case of a private meeting only the persons entitled to attend a meeting, can participate in it.
The members of the organisation, committee or sub-committee etc. as well as invitees are
entitled to participate. Sometimes a person entitled to attend a meeting may send his
representative or proxy to attend the meeting. In case of a public meeting general members of the
public can take part in it.
(b) The Chairman:
There must be a Chairman at every meeting who has the powers and duties for conducting a
meeting.
(c) The Secretary:

The secretary of the organisation, committee or sub-committee etc. who has many duties before,
at and after a meeting, has to play a significant role to play.

(D) The Invitees:

Apart from those who are entitled to attend a meeting, some people are invited, e.g.. press
reporters.

(E) The Material Elements:

The sitting arrangement, materials for writing etc. are essential.

ESSENTIALS OF COMPANY MEETINGS
The essential requirements of a company meeting can be summed up as follows:
1. Two or More Persons: To constitute a valid meeting, there must be two or more persons.
However, the articles of association may provide for a larger number of persons to constitute a
valid quorum.
2. Lawful Assembly: The gathering must be for conducting a lawful business. An unlawful
assembly shall not be a meeting in the eye of law.
3. Previous Notice: Previous notice is a condition precedent for a valid meeting. A meeting,
which is purely accidental and not summoned after a due notice, is not at all a valid meeting in
the eye of law.
4. To Transact a Business: The purpose of the meeting is to transact a business. If the meeting
has no definite object or summoned without any predetermined object, it is not a valid meeting.
Some business should be transacted in the meeting but no decision need be arrived in such
meeting.

KINDS OF MEETING

1. STATUTORY MEETING:
Every public company limited by shares—and every company limited by guarantee
and having a share capital—must, within a period of not less than one month and not
more than six months from the date at which the company is entitled to commence
business, hold a general meeting of the members which is to be called the Statutory
Meeting.
In this meeting the members are to discuss a report by the Directors, known as the
Statutory Report, which contains particulars relating to the formation of the
company.
Private companies are exempted from holding this meeting
Statutory Report:
The nature of business conducted at the statutory meeting involves consideration
and adoption of the Statutory Report. The Statutory Report is drafted by Directors
and certified as correct by at least two of them. A copy of the report must be sent to every
member at least 21 days before the date of the meeting. A copy is also to be sent
to the Registrar for registration
Section 165(3) provides that the Statutory Report must contain the
following particulars:

(i) The total number of fully paid-up and partly paid-up shares allotted;
(ii) The total amount of cash received by the company in respect of the shares;
(iii) An abstract of the receipts, classifying them according to source and mentioning
the expenses incurred for commission, brokerage etc.
(iv) The names, addresses and occupations of directors, auditors, managers and sec-
retaries and changes of the names, addresses etc.
(v) Particulars of contracts which are to be submitted to the meeting for approval,
with proposed modifications, if any;
(vi) If any underwriting contracts have not been carried out, the reasons therefor;
(vii) The arrears due on calls from directors and others;
(viii) Particulars of commissions and brokerages paid to directors and managers.

Particulars as regards cash in the Statutory Report are to be certified as correct by

the auditors of the company.

The members of the company who are present in the Statutory Meeting are at liberty
to discuss any matter relating to the formation of the company or arising out of the
Statutory Report, whether previous notice has been given or not. But no resolution
can be passed of which notice has not been given in accordance with the provisions of
the Act.

If default is made in complying with the provisions of Section 165, every Director or
any other officer of the company who is in default shall be punishable with a fine
which may extend to Rs. 500.
2. ANNUAL GENERAL MEETING:

General Meeting of a company means a meeting of its members for specified

purposes.
There are two kinds of General Meetings:
(i) The Annual General Meeting and
(ii) Other General Meetings.
The statutory provisions regarding the Annual General Meeting
are:
(a) Section 166:
The first Annual General Meeting of a company may be held within a period of not
more than 18 months from the date of its incorporation. If such a meeting is held
within the period, it is not necessary for the company to hold any annual general
meeting in the year of its incorporation or in the following year.
Subject to the above-mentioned provision, a company must hold an Annual General
Meeting each year. Not more than 15 months shall elapse between the date of one
Annual General Meeting and the next. The Registrar may, for any special reason,
extend the time of holding an Annual General Meeting (other than the first Annual
General Meeting) by a period not exceeding 3 months.
The notice, by which an Annual General Meeting is called, must specify it as such.
Every Annual General meeting shall be called during business hours, on a day which
is not a public holiday, at the Registered Office of the company or at some other place
within the town or village where the Registered Office is situated. The Central Govt.
may exempt any class of companies from the provisions mentioned in this
paragraph.
The time of holding of the Annual General Meeting may be fixed by the articles of the
company. A public company or a private company which is a subsidiary of a public
company, may, by a resolution passed in one general meeting, fix the time for its
subsequent general meetings. Other private companies may do so by a resolution
agreed to by all the members thereof.

(b) Section 167:

If default is made in holding an Annual General Meeting in accordance with Sec. 166,
the Regional Director of the Company Law Board may, on the application of any
member of the company, call or direct the calling of a general meeting. He may also
give directions regarding the calling, holding and conducting the meeting. Such a
meeting shall be deemed to be an Annual General Meeting of the company

(c) Section 168

If the provisions of Sections 166 and 167 are not complied with, the company and
every officer of the company be fined.

(d) Section 171:

A general meeting may be called by giving not less than 21 days’ notice in writing.
The Annual General Meeting may be called with a shorter notice if it is agreed to by
all the members entitled to vote in the meeting. The Court has no power to direct the
calling of the Annual General Meeting.

3. EXTRAORDINARY GENERAL MEETING:

Any general meeting of the company which is not an Annual General Meeting or a
Statutory Meeting is called Extraordinary General Meeting. An Extraordinary
General Meeting is held for dealing with some business of special or extraordinary
nature and which is outside the scope of the Annual General Meeting.
This meeting is also held to transact some urgent business that cannot be deferred
till the next Annual General Meeting. This meeting may be called by the Directors or
requisitioned by the member’s according to Sec.169 of the Companies Act, 1956. The
Board of Directors can be compelled to hold
Extraordinary General Meeting upon request or requisition made
for it, under the following conditions:

(a) The requisition must be signed by members holding at least 1/10th of the paid- up
capital of the company, in the case of companies having a share-capital; and by
members holding at least 1/10th of the total voting power in other cases.

(b) The requisition must set out the matters which will be considered at the meeting.

(c) The requisition must be deposited at the Registered Office of the company.
The Board must, within 21 days of the receipt of a valid requisition, issue a notice for
the holding of the meeting on a date fixed within 45 days of the receipt of the
requisition. If the Board does not hold the meeting as aforesaid, the requisitionists
can call a meeting to be held on a date fixed within 3 months of the date of
requisition.

Resolutions, properly passed at a meeting called by the requisitionists, are binding

on the company.
4. MEETNG OF BOARD OF DIRECTORS

The management of the company is vested on the Board of Directors. Therefore, the
Directors are to meet frequently to decide both policy and routine matters.
The provisions regarding Board Meeting are:

1. Board Meeting must be held once in every three calendar months and at least four
times in every year. This provision may be exempted by the Central Govt.

2. Notice of Board Meeting shall be given in writing to every director for the time
being in India and at his usual address in India.

3. The Quorum:
Quorum means the minimum number of members required to hold a meeting.
According to the Act, quorum is constituted by 5 members personally present in the
case of a public company and 2 members personally present in the case of other
companies.
The articles may prescribe a larger number. If there is no quorum within half an hour
of the notified time for starting the meeting, it is dissolved. No quorum is necessary
in any adjourned meeting.

In every organisation there should be a provision in their constitution or by-laws or

Articles of Association fixing the number which should constitute a quorum. If,
however, no quorum is fixed in the constitution or articles, the first meeting should
decide what should constitute the quorum of the meeting.
The quorum of members must be present not only at the beginning but it also be
maintained throughout the meeting. Otherwise the business transacted at the
meeting will be invalid. If a quorum is not present at the starting time, the Chairman
may allow some extra time (e.g. half an hour) to enable the meeting to form the
quorum.

If even the quorum is not present, the meeting shall stand adjourned and will be held
again at a place, time and date as may be determined by the Chairman.

4. The Agenda:
Agenda means “things to be done” at the meeting. It is the list of businesses to be
transacted at the meeting. The Secretary prepares the agenda in consultation with
the Chairman. The notice of every meeting must specify the business to be transacted
in the meeting.

The Act states that the notice must annex an “Explanatory Statement” at which some
special business is to be transacted. The statement must contain all the material facts
relating to each item of the business, indicating the nature and extent of the interest
of every director and manager of the company. The statement must mention the time
and place where all documents relating to special business can be inspected

The business transacted in a shareholders’ meeting can be divided

into two classes:

(i) Ordinary and

(ii) Special.
Ordinary means consideration of accounts and the Balance Sheet; declaration of
dividend; appointment of directors and appointment and fixation of remuneration of
auditors. Any other business is special business
5. Chairman:
Unless otherwise laid down in the articles, the members personally present at the
meeting shall elect a Chairman from amongst themselves by show of hands. But if a
poll is demanded, it must be taken forthwith with a Chairman elected for the
purpose. Every director has one vote but the Chairman has an extra vote known as
casting vote, i.e., either for or against the resolution.

6. Proxy:
Any member, entitled to attend and vote in a meeting, can appoint another person to
attend and vote on his behalf. The person appointed is called the Proxy. The
appointment of a Proxy must be made by a written instruction signed by the
appointer and deposited with the company, not more than 48 hours before the
meeting.

A Proxy is not entitled to speak in the meeting and vote only in a poll unless the
articles provide otherwise. A Proxy need not be a member of the company. A member
of a private company cannot appoint more than one Proxy to attend on the same
occasion, unless the articles otherwise provide.

A body corporate which is a member of a company can appoint a representative or

proxy, by resolution of the Board. The President of India or the Governor of a State, if
he is a member of a company, may appoint any person to act as his representative in
a meeting.

7. Method of Voting:
Resolutions are to be voted upon, in the first instance, by show of hands. The
Chairman’s declaration of the results of voting by show of hands is conclusive.

A poll is to be taken:
(i) If the Chairman so directs;
(ii) In all cases, if it is demanded by members holding at least 1/10th of the voting
power or paid-up capital;
(iii) In the case of public companies if it is demanded by at least 5 members present
and entitled to vote; and
(iv) In the case of private companies if it is demanded by any one member if not
more than 7 members are present and by 2 members if more than 7 members are
present.

A poll on a resolution for adjournment or for the appointment of a Chairman is to be

taken immediately. In other cases it is to be taken when the Chairman decides, but it
must be within 48 hours of the demand for poll.
A poll is to be taken in the manner decided by the Chairman. The usual method is to
ask each member to record his decision on ballot papers provided for the purpose.
The Chairman shall appoint two scrutinizers to scrutinize the ballot papers.

Notice:
Notice is an instrument of giving intimation to all persons who are entitled to attend
a meeting regarding the place, date, time and purpose of the meeting.
Requisites of a valid notice are:

(i) Notice must be issued in accordance with the provisions of the statute.
(ii) It should be in writing. Oral notice may also be sufficient.
(iii) Notice must state the nature of the meeting.
(iv) Notice must be given not only to members but also to all persons entitled to
attend a meeting, for e.g., in case of Annual General Meeting, notice has to be served
to the auditors of the company.

(v) Proper length of notice must be given. A General Meeting requires 21 days’ notice
in writing. A meeting may be called by a shorter notice if all members give their
consent.
(vi) Notice must be adequate. It must clearly state the place, date and hour of the
meeting. A complete agenda is appended as a part of the notice.
(vii) Notice must be signed and issued by the proper authority.
(viii) Notice is not the same as a circular. Notice is given to members but circulars are
given to customers and public.

5. CLASS MEETING
These meetings are held by a particular class of shareholders for the purpose of
effecting variation in the Articles in respect of their rights and privileges or for
conversion of one class into another.
The provision for variation must be contained in the Memorandum or Articles and
this variation must not be prohibited by the terms of issue of shares of that particular
class. Such resolutions are to be passed by three-fourth majority of the members of
that class.

6. MEETING OF CREDITORS
These meetings are called when the company proposes to make a scheme of
arrangement with its creditors. The Court may order a meeting of the creditors or a
class of creditors on the application of the company or of liquidator in case of a com-
pany being wound-up.

Such a meeting is held and conducted in such a manner as the Court directs. If
arrangement is passed by a majority of three-fourth in value of creditors and the
same is sanctioned by the Court, it is binding on all the creditors.

7. MEETING OF DEBENTURE HOLDERS

These meeting are called according to the rules and regulations of the Trust Deed or
Debenture Bond. Such meetings are held from time to time where the interests of
debenture holders are involved at the time of re-organisation, reconstruction,
amalgamation or winding-up of the company. The rules regarding the appointment
of Chairman, notice of the meeting, quorum etc. are contained in the Trust Deed.

8. MEETING OF CREDITORS AND CONTRIBUTORIES:

These meetings are held when the company has gone into liquidation to ascertain the
total amount due by the company to its creditors. The main purpose of these
meetings is to obtain the approval of the creditors and contributories to the scheme
of compromise or rearrangement to save the company from financial difficulties.
Sometimes, the Court may also order for such a meeting to be held.

When a company desires to vary the rights of debenture-holders, such meetings are
to be held according to the rules laid down in the Debenture Trust Deed. They are
also held to enable the company to issue new debentures or to vary the rate of
interest payable to debenture-holders. The term “contributory” covers every person
who is liable to contribute to the assets of the company when the company is being wound up.

WINDING UP
Winding up refers to closing the operations of a business, selling off assets, paying off
creditors, and distributing any remaining assets to the owners. Once the winding-up process
is complete, the dissolution step comes into play. This is when the company formally under law
ceases to exist.
Winding-up is a process whereby the life of a company is ended & property is administered for
the benefit of shareholders & creditors.
Particulars Winding up Dissolution
Dissolution means to dissolve the
Winding up means appointing a liquidator to
company completely. Any further
Meaning sell off the assets, divide the proceeds among
operations cannot be done in the
creditors, and file to the NCLT for dissolution.
company name.
Dissolution is the end
Winding up is one of
process/result of winding up and
Process the method through which the dissolution of a
getting the name stuck off from
company is carried on.
the Register of Companies.
The legal entity of the company continues and
The dissolution of the company
Existence of exists at
brings an end to its legal entity
Company the commencement and during the winding up
status.
process.
A company can be
allowed to continue its
Continuation
business during the winding up process if it is The company ceases to exist
of
required for the upon its dissolution.
Business
beneficial winding up of
the company.
Liquidator carries out the process of winding The NCLT passes the order of
Moderator
up. dissolution.
Filling of winding up resolution or petition, the Filing of resolutions, declarations
Activities appointment of the liquidator, receiving and other required documents to
Included declarations, preparation of reports, disclosures the NCLT to pass dissolution
to ROC and filing for dissolution to the NCLT. order.

MODES OF WINDING UP
The modes of winding up may be discussed under the following three heads, namely:- 1.
Compulsory winding up by the court.  2. Voluntary winding up without the intervention of the
court.  3. Voluntary winding up with the intervention of the court i.e., under the supervision of
the court.
1. Compulsory Winding Up by the Court:
Winding up of a Company by an order of the court is called the compulsory winding up. Section
433 of the Companies Act lays down the circumstances under which a Company may be
compulsorily wound up.
They are:
(a) If the Company has by special resolution, resolved that the Company may be wound up by
the court.
(b) If default is made in delivering the statutory report to the Registrar or in holding the statutory
meeting.
(c) If the Company does not commence its business within a year from its incorporation or
suspends it for a whole year.
(d) If the number of members is reduced, in the case of a public Company below seven, and in
the case of a private company below two.
(e) If the Company is unable to pay its debts.
(f) If the court is of the opinion that it is just and equitable that the company should be wound up.
Persons Entitled to Apply for Liquidation:
The Petition for winding up of a Company may be presented by any of the following
persons (Sec. 439):
(1) The Company.
(2) The creditors which include contingent creditors, prospective creditors, secured creditors,
debenture holders, or a trustee for debenture holders.
(3) The contributories – comprise present and past shareholders of a Company (Secs. 426 and
428).
(4) The Registrar.
(5) Any person authorised by the Central Government on the-basis of report of inspectors.
2. Voluntary Winding Up:
A voluntary winding up occurs without the intervention of the court. Here the Company and its
creditors mutually settle their affairs without going to the court.
This mode of winding up takes place on:
(a) The expiry of the prefixed duration of the Company, or the occurrence of event whereby the
Company is to be dissolved, and adoption by the Company in general meeting of an ordinary
resolution to wind up voluntarily; or
(b) The passing of a special resolution by the Company to wind up voluntarily.
Section 488 provides for two types of voluntary winding up;
(a) Member’s voluntary winding up and
(b) Creditor’s voluntary winding up.
(a) Member’s Voluntary Winding Up:
This type of winding up occurs only when the Company is solvent. It requires a declaration of
the Company’s solvency at the meeting of Board of Directors. The declaration must specify the
director’s opinion that the Company has no debt or it will be able to pay its debts in full within
three years of the commencement of the winding up.
The company in general meeting must then appoint a liquidator and fix his remuneration. With
his appointment, all the powers of the Board and the managing director or manager cease unless
the company in general meeting sanctions otherwise.
The liquidator must annually call a general meeting to lay before it an account of his dealings
and the conduct of the winding up.
When the company’s affairs are fully wound up, he must:
(a) Prepare an Account – Liquidator’s Final Statement of Account – to show the disposition and
disbursement of the company’s property;
(b) Call a final meeting of the company of laying the final account before it, and
(c) Send a copy of the account and a return of the meeting to the Registrar of Companies. The
company thereafter dissolves.
(b) Creditor’s Voluntary Winding Up:
It occurs in the absence of declaration of solvency i.e., when the company is insolvent. Hence,
the Act empowers the creditors of dominate over the members in this mode of winding up so as
to effectively protect their interest. It requires the company to hold the creditors’ meeting
wherein the Board must make a full statement of the company’s affairs together with a detailed
list of creditors including their estimated claims.
Both the members and creditors at their respective meeting nominate a liquidator and on their
disagreement, the creditor’s nominee is appointed as the liquidator. All the powers of the Board
then cease unless the creditor’s meeting sanctions otherwise.
The liquidator must annually call here not only the members’ meeting but also the creditors’
meeting to lay an account of his dealings and the conduct of the winding up. So also, he must
call a final general meeting of the members and creditors for the company’s dissolution as in the
case of member’s winding up.
3. Winding Up Subject to Supervision of the Court:
Windings up with the intervention of the court are ordered where the voluntary winding up has
already commenced. As a matter of fact, it is the voluntary winding up but under the supervision
of the court. A court may approve a resolution passed by the Company for voluntary winding up
but the winding up should continue under the supervision of the court.
The court will issue such an order only under the following circumstances:
(a) If the resolution for winding up was obtained by fraud by the company; or
(b) If the rules pertaining to winding up are not being properly adhered to; or
(c) If the liquidator is found to be prejudicial or is negligent in releasing the assets of the
company.
The Court may exercise the same powers as it has in the case of compulsory winding up under
the order of the court.
Powers of the Liquidators (Sec. 457):
(1) The liquidator, in a winding-up by the Court, has power to do the following with the
sanction of the Court:
(a) To institute or defend any suit, prosecution or other legal proceedings, civil or criminal, in the
name and on behalf of company;
(b) To carry on the business of the company so far as may be necessary for the beneficial
winding-up of the company;
(c) To sell the immovable property and actionable claims of the company by public auction or
private contract, with power to transfer the whole thereof to any person or body corporate or to
sell to the same in parcels;
(d) To raise on the security of the assets of the company any money requisites;
(e) To do all such other things as may be necessary for winding-up the affairs of the company
and distributing its assets.
According to Sec. 546, the liquidator can pay any class of creditors in full, make any
compromise or arrangement with creditors; and compromise any call or liability, with the
sanction of the Court.
The liquidator can disclaim any onerous property or unprofitable contract.
(2) The liquidator in a winding-up by the court has power to do the following things,
without taking special permission from the court:
(a) To do all acts and to execute, in the name and on behalf of the company, all deeds, receipts
and other documents, and for that purpose to use, when necessary, the company’s seal;
(b) To inspect the records and returns of the company on the files of the Registrar without
payment of any fee;
(c) To prove, rank and claim in the insolvency of any contributory for any balance against his
estate, and to receive dividends in the insolvency;
(d) To draw, accept make and endorse any bill of exchange, hundi or promissory note in the
name and on behalf of the company;
(e) To take out, in his official name, letters of administration to any deceased contributory and to
do in his official name any other act necessary for obtaining payment of any money due from a
contributory or his estate which cannot be conveniently done in the name of the company;
(f) To appoint an agent to do any business which the liquidator is unable to do himself.
The Court can limit or modify the exercise of any of the powers of the liquidator enumerated
under (2) above.
Duties of Liquidator:
The duties of a liquidator are enumerated:
(i) Proceeding in Winding-up:
Sec. 451(1) states that the liquidator shall conduct the proceedings in winding-up the company
and perform such duties as the Court may impose.
(ii) Report:
After receipt of the Statement of Affairs of the company the liquidator must submit a preliminary
report to the Court not later than 6 months from the date of the order of winding-up.
(iii) Additional Reports:
Sec. 455(2) also provides that the official liquidator may make, if he thinks fit, further report
stating the manner in which the company was promoted or formed. He may also state if any
fraud has been committed by any person relating to formation or any other matters which it is
desirable to bring to the notice of the Court.
(iv) Custody of Company’s Property:
Sec. 456 (1) states that where a winding-up order has been made or where a provisional
liquidator has been appointed, the liquidator, or the provisional liquidator, as the case may be,
shall take into his custody all the property, affects and actionable claims to which the company is
entitled.
(v) Control of Powers:
Sec. 460(1) provides that the liquidator shall, in the administration of the asset of the company
and the distribution thereof among creditors, have regard to any directions which may be given
by the committee of inspection.
(vi) Meeting of Creditors and Contributories:
According to Sec. 460(3), the liquidator may summon general meeting of the
creditors/contributories as soon as he thinks fit in order to ascertain their wishes. He shall
summon such meeting at such times as the creditors/contributories may, by direct resolution or
whenever requested in writing, to do so by not less than 1/10th in value of
creditors/contributories, as the case may be.
(vii) Directions from the Court:
Sec. 460(4) (4) provides that the liquidator may apply to the Court for directions in relation to
any particular matter arising in a winding-up.
(viii) Proper Books:
Sec. 461(1) states that the liquidator shall keep proper books for making entries or recording
minutes of the proceeding at meetings and such other matters as may be prescribed.
(ix) Audit of Accounts:
Sec. 462(1) also provides that the liquidator shall, at such times as may be prescribed but at least
twice each year during his tenure of office, present to the court an account of his receipts and
payments as liquidators. The account must be in the prescribed form, shall be made in duplicate
and duly verified [Sec. 462(2)].
(x) Appointment of Committee of Inspection:
Sec. 464(1)(b) provides that the liquidator shall, within two months from the date of duration by
the Court, convene a meeting of the company’s creditors to determine the members of the
committee of inspection.
Statement of Affairs:
When the liquidator has been appointed, a Statement of Affairs of the company is to be made to
him in the prescribed form, verified by an affidavit, and containing particulars regarding the
assets, liabilities, names and addresses of the creditors, etc.
The statement shall be verified by a Director and the Manager, Secretary, or other chief officer of
the company. The Statement of Affairs is required in both compulsory and voluntary winding-up
[Section 454 and 511 A].
Statement of Affairs Contains:
(i) The assets of the company (showing separately cash in hand, cash at bank and negotiable
securities);
(ii) Names, addresses, occupations of its creditors (showing separately the secured and unsecured
debts);
(iii) Its debts and liabilities;
(iv) In case of secured debts, particulars of the securities held by the creditors, their value and
dates on which they were given.
(v) The debts due to the company and names and addresses of persons from whom they are due
and the amount likely to be realized.
(vi) And any such further information as may be required by the official liquidators [Sec.
454(1)].
According to Sec. 455, the official liquidator must, after the receipts of the statement, within 6
months (or such extended time as may be allowed by the Court) of the order, submit to the Court
a preliminary report as to the amount of capital issued, subscribed and paid-up, and the estimated
amounts of the company’s assets and liabilities if the company has failed, the causes of its failure
and whether, in his opinion, any further enquiry is desirable.