LAW OF INVESTMENT AND SECURITIES

QUESTIONS ANSWERS
(July/August 2019 Paper)
Q.1: Investor Protection:
 Investor Protection Measures by SEBI Updated on March 24, 2021,
Investors are the pillar of the financial and securities market.
 They determine the level of activity in the market.
 They put the money in funds, stocks, etc. to help grow the market and
thus, the Economy.
 It thus very important to protect the interests of the investors. investor
protection involves various measures established to protect the interests
of investors from malpractices.
 Securities and Exchange Board of India (SEBI) is responsible for
regulations of the Mutual Funds and safeguard the interests of the
investors.
 Investor protection measures by SEBI are in place to safeguard the
investors from the malpractices in shares, the stock market, Mutual Fund,
etc

Investor Protection Measures by SEBI

Investor protection legislation is implemented under the Section 11(2) of the SEBI Act.
The measures are as follows: .
1) Stock Exchange and other securities market business regulation.
2) Registering and regulating the intermediaries of the business-like brokers,
transfer agents, bankers, trustees, registrars, portfolio managers,
investment consultants, merchant bankers, etc.
3) Recording and monitoring the work of custodians, depositors, participants,
foreign investors, credit rating agencies, etc.
4) Registering investment schemes like Mutual fund & venture Capital funds,
and regulating their functioning.
5) Promotion and controlling of self-regulatory companies.
6) Keeping a check on frauds and unfair trading methods related to the
securities market.
7) Observing and regulating major transactions and take-over of the
companies.
8) Carry out investor awareness and education programme.
9) Train the intermediaries of the business.
10) Inspecting and auditing the security exchanges (SEs) and intermediaries.
11) Assessment of fees and other charges.

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The concept of investor protection has to be looked at from different angles
taking into account the requirements of various kinds of investors i.e.
1. Investors in equity
2. Large institutional investors
3. Foreign Investors
4. Investors in debentures
5. Small investors/deposit holders etc.
SEBI does not give a guarantee for payment of money rather it helps you in recovering
the amount back from the concerned entity (broker).
Regulatory Framework
At present, the five main Acts governing the securities markets are:
(a) The SEBI Act, 1992
(b) The Companies Act, 1956, which sets the code of conduct for the corporate sector in
relation to issuance, allotment, and transfer of securities, and disclosures to be made in
public issues.
(c) The Securities Contracts (Regulation) Act, 1956, which provides for the regulation of
transactions in securities through control over stock exchanges.
(d) The Depositories Act, 1996 which provides for electronic maintenance and transfers
of ownership of demat (dematerialized) shares.
(e) The Prevention of Money Laundering Act, 2002.
Legislations
1. The SEBI Act, 1992: The SEBI Act, 1992 was enacted to empower SEBI with
statutory powers for:
(a) Protecting the interests of investors in securities,
(b) Promoting the development of the securities market, and
(c) Regulating the securities market. Its regulatory jurisdiction extends over corporate in
the issuance of capital and transfer of securities, in addition to all intermediaries and
persons associated with the securities market.
It can conduct enquiries, audits, and inspection of all concerned, and adjudicate
offences under the Act.

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It has the powers to register and regulate all market intermediaries, as well as to
penalize them in case of violations of the provisions of the Act, Rules, and Regulations
made there under.
SEBI has full autonomy and the authority to regulate and develop an orderly securities
market.
2. Securities Contracts (Regulation) Act, 1956: This Act provides for the direct and
indirect control of virtually all aspects of securities trading and the running of stock
exchanges, and aims to prevent undesirable transactions in securities. It gives the
Central Government regulatory jurisdiction over:
(a) Stock exchanges through a process of recognition and continued supervision,
(b) Contracts in securities, and
(c) The listing of securities on the stock exchanges.
3. Companies Act, 2013
(a). Civil Liability for Misstatement in Prospectus (Sec. 35 & 62 of Companies Act 2013)
(b). Criminal Liability for Misrepresentation in Prospectus (34 & 63 of Companies Act
2013)
Q 2: Termination of Shares:
Ans: Termination of the membership can take place in two ways:
1. Voluntary termination (by act of the parties)
2. Compulsory termination (by operation of law)
1. Voluntary/by act of the party’s termination: A person ceases to be a member of a
company by doing the following act:
• By transfer of shares
• By forfeiture of shares
• By surrender of shares
• By exercising lien by the company.
• By issue of share warrants
• By redemption of shares
• By the buyback of shares by the company
• By irregularity in allotment

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• By repudiating the contract on the ground of false or misleading statement in the
prospectus of the company.
2. Compulsory/By operation of law termination: A person ceases to be a member by
operation of law in the following cases:
• By termination of shares
• By insolvency of the person
• By the order of court on acquiring shares
• On winding up of a company
• On the death of the person
Q.3 Stock Exchange:
Definition: As per Securities Contracts (Regulation) Act, 1956; Section 2 (j)
(a) anybody of individuals, whether incorporated or not, constituted before
corporatisation and demutualisation under sections 4A and 4B, or
(b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956)
whether under a scheme of corporatisation and demutualisation or
otherwise, for the purpose of assisting, regulating or controlling the business of buying,
selling or dealing in securities.
RECOGNITION OF STOCK EXCHANGE
 According to sec 3, as provided in the Securities Contract Regulation Act, 1956,
there are certain requirements forgetting a stock exchange recognized.
 It has to comply with the procedure laid down such as making an application to
the central government according to the format as prescribed.
 After the central government receives an application from the stock exchanges to
get recognized, inquiry can be conducted by the government along with the other
conditions as laid down by the Act.
The conditions that are prescribed by the central government by virtue of clause (a) of
subsection (1) for making the stock exchanges as the recognised one may lead to the
inclusion of various other conditions. Some of the mare as follows:
1. Qualification required for getting the membership of the stock exchange
2. The mode through which the contracts will be entered into and gets enforced
between the members of the stock exchange
3. The central government can represent itself in any stock exchange by stating
some individuals that must not exceed three and who will be nominated by the
central government

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 4. The audit of the exchange and their account is required to be maintained by an
individual, who is a chartered accountant by profession. The audit is conducted
on the discretion of the government.

POWERS PROVIDED TO STOCK EXCHANGES

1. Power to make direct enquiries and to call for returns:
By virtue of sec 6 of the Securities Contract Regulation Act, 1956, it is a mandate for
every stock exchange to keep the books of accounts preserved for a minimum period of
five years. This mandate can be subjected to various inspections conducted by SEBI.

2. Establishment of the trading floor:

As per the various terms and conditions that are prescribed by SEBI, any stock
exchange can get the additional trading floor established only after getting the prior
approval of SEBI.
 The power vested with stock exchanges to draft bye-laws for the purposes of
regulations and management

The stock exchanges are granted with the power of making bye-laws so that their
management can function in a proper way. These bye-laws will also help in getting the
contracts regulated and controlled. This power is vested with it by virtue of sec 9 of the
Securities Contract Regulation Act, 1956.

Q.4: Securities Appellate Tribunal (SAT):

 Securities Appellate Tribunal is a statutory body established under the provisions
of Section 15K of the Securities and Exchange Board of India Act, 1992 to hear
and dispose of appeals against orders passed by the Securities and Exchange
Board of India or by an adjudicating officer under the Act., and to exercise
jurisdiction, powers and authority conferred on the Tribunal by or under this Act
or any other law for the time being in force.
 The Central Government may, by notification establish an Appellate Tribunal
known as Securities Appellate Tribunal to exercise the jurisdiction, powers and
authority conferred on such tribunal under the SEBI Act, 1992 or any other law
for time being in force. The Central Government has set up a Tribunal at
Mumbai.

 Securities Appellate Tribunal is a statutory body established under the

provisions of Section 15K of the Securities and Exchange Board of India Act,
1992 to hear and to dispose appeals against orders passed by the Securities and
Exchange board of India or by an adjudicating officer under the Act.
 Appeals arising out of the decisions of Board between the span of 1992 and
1999 were preferred before the Appellate Authority set by the Central Board as
per sec 20.

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  The decisions passed by Securities Appellate Tribunal were appealable before
the High Court under sec 15Z.
 The orders that were passed by the whole-time board of SEBI were also
appealed before Securities Appellate Tribunal by virtue of the amendment to sec
20.
 This amendment was done by passing the Securities Laws (Second
Amendment) Act, 1999.
 On the other hand, sec. 15Z got amended by virtue of SEBI (Amendment) Act,
2002 that was the basis to appeal before the Apex Court of India.
 The amendment brought in 2002 led to the creation of a single forum before
which the appeal against the orders of SEBI and the Adjudication Officer lied.
Such a forum is known as Securities Appellate Tribunal.

An appeal is nothing but the continuation of the original adjudication as was observed in
Hasmat Rai v.Raghunath Prasad.
Composition of SAT
SAT consists of: A Presiding Officer & Two other members
Appointment:
Presiding Officer: The Presiding officer of SAT shall be appointed by the Central
Government in consultation with the Chief Justice of India or his nominee.
Members: The two members of SAT shall be appointed by the Central Government.
Qualifications:
Presiding Officer:
 A sitting or retired judge of the supreme court or
 A sitting or retired Chief Justice of the High Court or
 A sitting or retired Judge of a High court, who has completed atleast 7 years of
service as a Judge in a High Court.
Members:
 He is a person of ability, integrity and standing and
 He has shown capacity in dealing with problems relating to securities market and
has qualification and experience of corporate law, Securities laws, Finance,
economics or accountancy.
Powers of SAT:
1) The SAT shall have, for the purpose of discharging their functions under
this Act, the same powers as are vested in a civil court under the code of
civil procedure 1908 while trying a suit, in respect of the following matters
namely
2) Summoning and enforcing the attendance of any person and examine him
on oath

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 3)Requiring the discovery and production of documents
4)Receiving evidence on affidavits
5)Issuing commissions for the examination of witnesses or documents
6)Reviewing its decisions
7)Dismissing an application for default or deciding it ex-parte
8)Setting aside any order or dismissal of any applicable for default or any
order passed by it ex-parte.
9) Any other matter which may be prescribed.
How to appear before SAT:
Appearance before SAT may be either in person or through authorized person being a
Chartered Accountant, Company Secretary, Cost Accountant or Legal Practitioner.
Appeal against the order of SAT:
1) Any person aggrieved by any decision or order of the SAT can file an appeal to
the Supreme Court.
2) The appeal can be filed only on a question of law.
3) The appeal shall be filed within 60 days from the date of receiving a copy of the
decision or order of SAT.
4) The supreme court may allow a further period of 60 days for making an appeal, if
it is satisfied that the applicant was prevented by sufficient cause from filing the
appeal within the first 60 days.
5) Civil court not to have Jurisdiction
 No civil court shall have Jurisdiction to entertain any suit or proceedings in
respect of any matter which an Adjudicating Officer appointed under this act or a
SAT constituted under this act is empowered by or under this act to determine
and
 No injunction shall be granted by any court or other authority in respect of any
action taken or to be taken in pursuance of any power conferred by or under this
act.
The appeal can be made on the basis of two grounds as per sub-section (1) of sec 15.T
of the SEBI Act, 1992.
i. First, the appeal must be made against an order passed by the adjudicating
officer or the Board of SEBI.
ii. Second, the appeal should be made by the person who is aggrieved from such a
decision.
The appeal is maintainable only if these above-mentioned conditions get fulfilled.

Q.5: What is a Depository?

Meaning: A depository can be defined as a firm or an individual with the capacity to

keep the securities safely.

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 In simple terms, depository can be understood as a storing place where one can deposit
something in order to secure it from the outer world.
 They are the companies which are formed and got registered under the Companies Act,
2013 and got a Certificate of Registration under subsection (1A) of Section 12 of SEBI
Act, 1992.
 If any individual has entered into an agreement with any depository, he is required to
provide the Certificate of Security of the depository, which he wants to avail the services.
 All the securities, which are dealt with by a depository, must be in fungible as well as
dematerialised form.
 A depository will be considered to be the enlisted owner on behalf of a beneficial owner
for the reasons for effecting transfer of ownership.
An institution that is used for storing the securities in a dematerialised form is known as
depository.
In India, there are two types of depositories viz., NSDL (National Securities Depository
Limited) and CSDL (Central Depository Services (India) Limited).
Depository Participants (DP) are the agents of these depositories.
With the help of DPs, the depositories interface with the investors.
Banks (foreign, public and private), sub- registered trading members and financial
institutions are the various forms of Depositories.

Transferring ownership of shares from the account of one investor to the account of
another investor whenever trade takes place forms one of the main functions of the
Depository.
Moreover, another main function of the depository is that it removes most of the risks in
the form of damage, loss, delay bin deliveries or theft, which are attached to the
physical form of securities.

Q.6: What is Investment Risk?

The investment risk definition is the risk of a particular investment. Furthermore, an
investment risk assessment usually contains several different forms ranging from
interest rate risks to currency risks.
 All investments involve some degree of risk.
 In finance, risk refers to the degree of uncertainty and/or potential financial loss inherent
in an investment decision.
 In general, as investment risks rise, investors seek higher returns to compensate
themselves for taking such risks.
 Every saving and investment product has different risks and returns.
 Differences include:
 how readily investors can get their money when they need it, how fast their money will
grow, and how safe their money will be.

Different Types of Risks an Investor May encounter: They include:

1. Business Risk/Financial Risk

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 a. With a stock, you are purchasing a piece of ownership in a company.
b. With a bond, you are loaning money to a company.
c. Returns from both of these investments require that that the company stays in
business. If a company goes bankrupt and its assets are liquidated, common
stockholders are the last in line to share in the proceeds.
d. If there are assets, the company’s bondholders will be paid first, then holders of
preferred stock.
e. If you are a common stockholder, you get whatever is left, which may be nothing.
f. Furthermore, this type of risk is normally associated with scandals such as Enron or
Worldcom.

If someone is are purchasing an annuity, he has to make sure to consider the financial
strength of the insurance company issuing the annuity. One has to be sure that the
company will still be around, and financially sound, during your payout phase.

2. Volatility Risk
1. Even when companies aren’t in danger of failing, their stock price may fluctuate up or
down.
2. Large company stocks as a group, for example, have lost money on average about
one out of every three years.
3. Market fluctuations can be unnerving to some investors.
4. A stock’s price can be affected by factors inside the company, such as a faulty
product, or by events the company has no control over, such as political or market
events.
3. Market Risk
This is the risk associated with in a market or index like the BSC Sensex or the Nifty.
There are currently two types of market risk.
A. The first is the unsystematic risk. It can be diversified away in a well-managed
portfolio.
B. Then the other is systematic risk. Use it to describe factors that deal with the entire
economy or an index which are simply inherent when investing.

4. Inflation Risk
1. Inflation is a general upward movement of prices.
2. Inflation reduces purchasing power, which is a risk for investors receiving a fixed rate of
interest.
3. The principal concern for individuals investing in cash equivalents is that inflation will
erode returns.
4. Currency Risk
Currency is the risk associated with an investment if it is denominated in another
currency (Like USD/Pounds/EROS). The risk here is that the exchange rates change. In
some cases, it may benefit the investor, but in others, it can really hurt.
5. Interest Rate Risk

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1. Interest rate changes can affect a bond’s value.
2. If bonds are held to maturity the investor will receive the face value, plus interest.
3. If sold before maturity, the bond may be worth more or less than the face value.
4. Rising interest rates will make newly issued bonds more appealing to investors
because the newer bonds will have a higher rate of interest than older ones.
5. To sell an older bond with a lower interest rate, you might have to sell it at a discount.

6. Liquidity Risk
1. This refers to the risk that investors won’t find a market for their securities, potentially
preventing them from buying or selling when they want.
2. This can be the case with the more complicated investment products.
3. It may also be the case with products that charge a penalty for early withdrawal or
liquidation such as a certificate of deposit (CD).

7. What is Demutualization?

 The process of demutualization is to convert the traditional “not for-profit” stock

exchanges into a “for profit” company and this process is to transform the legal
structure from a mutual form to a business corporation form.
 SEBI had set up a committee under the Chairmanship of Justice Kania for the same
which came up with report on demutualization of Stock Exchanges through uniform
scheme prescribed.
 Accordingly, SEBI issued scheme of demutualization to BSE and other Regional Stock
Exchanges.

The important features of the demutualisation exercise are as follows:

1. The board of a stock exchange should consist of 75% public interest/

shareholder directors and only 25% broker directors, and
2. 51% shareholding of the stock exchange should be divested to public/ investors
other than trading member brokers and only 49% of shareholding can remain
with the trading member brokers.
3. This will transform our broker-owned stock exchanges into professionally-run
corporate stock exchanges.

The options prescribed for divestment/dilution of brokers’ shareholding in a

stock exchange are as follows:

1. Offer for sale, by issue of prospectus, of shares held by trading member brokers.
2. Private placement of shares (either of the shares held by the member brokers or
new shares by the exchange) to any person or group of persons subject to the
prior approval of SEBI and the maximum limit of 5% to any single person/group
of persons.
3. Fresh issue of shares to the public through an IPO.

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 The purpose of demutualisation is as follows:
1) Stock exchanges owned by members tend to work towards the interest of
members alone, which could on occasion be detrimental to rights of other
stakeholders.
2) Division of ownership between members and outsiders can lead to a balanced
approach, remove conflicts of interest, create greater management
accountability.
3) Publicly owned stock exchanges can enter into capital market for expansion of
business.
4) Publicly owned stock exchange would be more professionally managed than
broker owned.
5) Demutualisation enhances the flexibility of management.
8. What is Hybrid Security?

 Hybrid Securities are financial instruments that have mixed characteristics of two or
more different financial instruments like stocks or bonds.
 These are defined under Section 2 (19A) of the Companies Act, 1956 as “any
security which has the character of more than one type of security, including
their derivatives”.
 These are hence called as ‘hybrids’ because they have mixed characteristics of both
equity and debt.

The Supreme Court dealt with the issue of whether ‘hybrid’ securities are ‘securities’ as
per the scheme of the Companies Act and SEBI Act in the case of Sahara India Real
Estate Corporation Limited & Ors. v. SEBI

In this case, the Supreme Court held that ‘hybrid securities’ are securities within the
meaning of the Companies Act, Securities Contracts Regulation Act and hence the
SEBI Act too.

 It based its decision on the fact that Section 2 (h) of the Securities Contracts
Regulation Act, 1956 defines securities to include “shares, scrips, stocks, bonds,
debenture stocks, or other marketable securities of like nature in or of any
incorporated company or other body corporate” and

 the term ‘hybrids’ has been defined as ‘any security having the character of more
than one type of security’ and since these securities are ‘marketable’ they would fall
within the meaning of securities for the purposes of Companies Act, Securities
Contracts Regulation Act and the SEBI Act.

Advantages of Hybrid Securities

1) Higher yield: Hybrid securities are generally placed subordinate in the capital structure
and hence offer a high rate of return than senior debt.
2) Less volatility in market price: Hybrid securities have less volatility in the market
because they pay a regular, pre-determined, distribution of market returns.

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3) Diverse nature: Hybrid securities are, as mentioned above, not bound by any strict
definition of either equitable securities or debt securities and hence can diversify the
overall risk portfolio while again, guaranteeing attractive returns and hence, improving
a firm’s risk profile.
Disadvantage: Complicated: Investing through hybrid securities is considered more
complicated than investing through equity or bond securities.
Different Types of Hybrid Securities:
Some of the important Hybrid Securities are:
1) Convertible Bond
2) Preferred Shares
3) Mezzanine Financing
4) Toggle Notes
5) Warrants
Exchange Traded Funds:
What are ETFs?
 Exchange Traded Funds are essentially Index Funds that are listed and traded on
exchanges like stocks.
 Until the development of ETFs, this was not possible before.
 Globally, ETFs have opened a whole new panorama of investment opportunities to
Retail as well as Institutional Money Managers.
 They enable investors to gain broad exposure to entire stock markets in different
Countries and specific sectors with relative ease, on a real-time basis and at a lower
cost than many other forms of investing.

 An ETF is a basket of stocks that reflects the composition of an Index, like S&P
CNX Nifty or BSE Sensex.
 The ETFs trading value is based on the net asset value of the underlying stocks that it
represents.
 Think of it as a Mutual Fund that you can buy and sell in real-time at a price that
change throughout the day.
 The value of the dividend received by the share-holders of ETFs depends upon the
performance and asset management of the concerned ETF company.

 They can be actively or passively managed, as per company norms. Actively managed
ETFs are operated by a portfolio manager, after carefully assessing the stock market
conditions and undertaking a calculated risk by investing in the companies with high
potential.
 Passively managed ETFs, on the other hand, follow the trends of specific market
indices, only investing in those companies listed on the rising charts.

Benefits

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1. A Diversified Pool of Securities, purchasing shares of a company keeps you limited to
the performance of that company itself, subjecting you to a higher degree of risk.
2. On the other hand, investing in exchange traded funds allow you to keep your finances
spread over equities of different companies – diluting your risk significantly.
3. Even if one asset underperforms in the pool of resources in an ETF, it can be
compensated by the exceptional growth of other assets.
4. One of the significant benefits of investing in an ETF over mutual funds is the reduced
expenses.
5. There are various charges involved in mutual funds, such as entry and exit load,
management fees, etc. This increases your total cost incurred, and thereby the total
expense ratio of mutual funds.
6. As ETFs are traded like shares in the stock market, its expense ratio is considerably
lower.
7. The value of a mutual fund depends upon the performance of the NAV and can only be
determined after the market closes for the day.
8. Any changes in the value of an ETF can be observed instantly and can be bought and
sold throughout the business day.
9. ETFs have much higher liquidity than mutual funds
10. ETF funds are more tax-friendly than mutual funds. Even though both are subjected to
capital gains tax and dividend taxes, the relative amount of fee charged on ETFs is
much lower than the one levied on mutual funds.
11.

PART – B (July/August 2019)

9. Examine pre-independence and Post-Independence historical evaluation of Securities
Laws in India.

Evolution of Capital Market and Securities Law in India:

In India the history of evolution of Capital Market may for the purpose of convenience be
divided into the four phases on which the development of stock exchange is judged.

 The first phase is from the inception of the capital markets in India up to the
First World War i.e.1875-1919. This phase brings out initial development in the
capital market in India.
 This study the inception of the capital market, limitations for the development at
the early stage and the emergence of various stock exchanges in India.
 The second phase starts from 1920 i.e. the period when industrial revolution
had spread over a large part of globe, but India, under British Empire, remained

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 underdeveloped country. The phase is restricted upto 1947 when India got
independence.
 It also highlights the glimpses of development during the volatile period for the
market as well as Indian polity.
 The third phase starts with 1947 i.e. independence and it is upto 1990 i.e.
announcement of the New Economic Policy.
 This was the period when the capital market in India has shown development in
real sense.
 Quantitatively as well as qualitatively, there was a remarkable development in
capital market during this phase.
 The final (forth) phase starts from 1991 to the present date. Especially after the
adoption of Liberalization - Privatization - Globalization (LPG) policy, there is
huge attention of the global financial markets on Indian capital market.
 As India still remains a promising country for the investors and since now foreign
investment is permitted in Indian capital market, lots of developments have
taken place since last two decades.

Inception Phase (upto 1919)

 The history of capital market in India dates back to almost 200 years.
 Indian stock markets are one of the oldest in Asia. In the early nineteenth century,
there are some signs of existence of capital market in India.
 Though the records are meagre, there are some evidences of presence of capital
market during the first half of the nineteenth century. During those days, the East India
Company was in a dominant position.
 The business in its loan securities was transacted even at the close of eighteenth
century.
 In 1830’s business on corporate stocks and shares in bank and cotton presses took
place in Mumbai (the then Bombay).
 There were only 6 brokers recognized by banks and merchants during 1840 and
1850. Even after trading list was broadened in 1839, there was no corresponding
growth in the turnover of the markets.
 In the decade of 1850’s, there was a rapid development of commercial enterprise and
brokerage business attracted many people in to the field and by the year 1860, the
number of brokers increased to 60.
 In 1860-61 American civil war started. Therefore, cotton supply from the US and
Europe was stopped. Thus, the’ share mania’ began in India.
 The number of brokers increased to almost 250.
 However, at the end of American civil war, a disaster again took place in 1865.
 This disaster was so hard that, a share of Bank of Bombay which had touched
Rs.2850 could be sold at Rs.87. This was true almost for all securities traded in the
market.

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 At the end of the American civil war, the brokers who had no place to trade, found the
place in the year 1874.
 This place was a street in Mumbai where the brokers used to come and negotiate on a
piece of paper which later took the form of share certificate.
 The place where the brokers assembled and conducted their business regularly, is
now known as “Dalal Street” and the building which is popularly reckoned as a
premier stock exchange, is now known as ‘Jijibhoy Towers’.
 In 1887, these brokers formally established the ‘Native Share and Stock Exchange
Association’ which was just an association of persons which was purely informal.
 It was not given a separate status as a corporate or business entity. However, in 1895,
the stock exchange acquired a premise in the same street and it was formally
inaugurated in 1899. Thus, the stock exchange of Mumbai (now called as BSE)
came into existence.
 Next to the city of Mumbai, Ahmedabad gained more importance in this regard. The
cotton business which was a prominent business for both of these cities was a
common feature.
 As the new mills were floated, the need for stock exchange was realized and in 1894,
the brokers formed the ‘Ahmedabad Share and Stock Brokers Association’
 During the same time Calcutta was emerging as a centre for jute and tea industry.
Apart from jute, tea and coal industries were the major industries in and around
Calcutta city.
The leading brokers of Calcutta then in June 1908 formed the ‘Calcutta Stock
Exchange Association.’
 in the beginning of the twentieth century, the industrial revolution was on the way in
India.
 At the same time, ‘Swadeshi Movement’ in India also got the momentum. In 1907,
the Tata Iron and Steel Company Limited was inaugurated (which is now popularly
called as (TISCO). This was an important development in industrial advancement of
Indian enterprises. Further, due to the First World War some of the Indian industries
prospered.
Umbrella growth (1920-1946)

 In 1920 the city of Madras (now Chennai) had a first experience of a stock exchange
functioning in the city.
 The Madras Stock Exchange was formed with 100 members in 1920. But this exchange
had a very short life. When the boom came to an end, the number of members
decreased from 100 to meagre 3. Finally, in 1923, the Madras Stock Exchange went
out of existence.
 The Second World War broke out in 1939. It had some direct as well as indirect impact
on the Indian industries. Initially, due to the world war, there was a sharp boom.
Immediately, it was followed with a sharp decline due to the fear of extending period of
world war and its ill effects on the economy.

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 After 1943, the situation again changed and by that India was recognized as a supply
base.
 some more stock exchanges which came into existence were- the Uttar Pradesh Stock
Exchange Limited (1940), Nagpur Stock Exchange Limited (1940) and Hyderabad Stock
Exchange Limited (1944). In Delhi, around this time two separate stock exchanges were
formed viz. ‘Delhi Stock and Share Broker’s Association Limited’ and the ‘Delhi Stock and
Share Exchange Limited’. During the World War II, these two exchanges were floated.

Post-independence Growth

 During the World War II, there was a fear about its adverse effects on the Indian
industries.
 But in the post-world war period there was a fear of depression which proved to
be true. Most of the stock exchanges suffered almost a sharp fall during the post-
world war period.
 At the same time there was a development on political front that India got
independence. After partition, the Lahore stock exchange was shifted to Delhi and
later on it merged with Delhi Stock Exchange.
 In 1947, both of the stock exchanges in Delhi were amalgamated into the ‘Delhi
Stock Exchange Association Limited’.
 In southern India, the Bangalore Stock Exchange was registered in 1957 and it
was recognized in 1963. By this time, only few stock exchanges were recognized
by the Central Government.
 The first act to regulate and recognize the exchanges came into force in 1956 i.e.
Securities Contracts (Regulation) Act, 1956. The established stock exchanges of
Mumbai, Ahmedabad, Calcutta, Madras, Delhi, Hyderabad and Indore were
recognized under the act.
 There were 21 recognized stock exchanges upto the year 1990. The stock
exchanges during this period, not only grew in number, but also the number of
listed companies and capital raised by these companies grew considerably.
 Especially after 1985, there has been a remarkable growth in the stock exchanges
due to the favourable government policies towards the securities markets.

Post Reform Phase (1991 Onwards)

 After independence, there was a steady growth in the stock markets in India.
 But after 1991, there was really a qualitative development in the Indian market.
 The uses of technology, variety of products, investor protection are the areas
which emerged during the last two decades.
 Even though there was quantitative increase in the Indian capital market; there
were some inherent limitations like lack of liquidity, imperfections in the
information, lack of transparency, long settlement periods etc.
 During this time benami transactions and some frauds also took place in the
Indian stock markets.

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  This affected the small investors to a great extent. The last decade of the twentieth
century saw the emergence of two important stock exchanges viz. Over the
Counter Exchange of India (OTCEI) and the National Stock Exchange (NSE).

Overview of Regulation on the Capital Market in India:

 The first Act which was ordered to manage the Indian organizations was the Joint
Stock Companies Act, 1850. British India during this period legalized formation of
joint stock companies with limited liability. Five Indian organizations like East India
Company got enrolled amid 1850's under this Act.
 Then, the Government of Bombay introduced of Bill No. XXVII of 1865 to deal with
the situation arising out of the ‘share mania’ of 1860-65. This attempt failed and
subsequently, the Bill was withdrawn in 1867.
 The next in line was the Bombay Securities Contract Control Act, 1925.
 The Bombay Legislative Assembly passed a special legislation for the first time to
control stock exchanges when the Bombay Securities Contract Act was passed in
October, 1925.
 The act empowered the government to grant or withdraw the recognition to a stock
exchange. It also provided that the rules of recognized stock exchange could be
made/ amended only by prior approval of government.
 The Bombay Stock Exchange and Ahmedabad Stock Exchange were recognized
under this act in 1927 and 1939 respectively, along with their rules and
regulations. This act prevailed till 1956 when Securities Contracts (Regulations)
Act was passed by the Central Government in independent India.
 The two exclusive legislations that governed the securities market till early 1992
were the Capital Issues (Control) Act, 1947 (CICA) and the Securities Contracts
(Regulation) Act, 1956 (SCRA).
 The CICA had its origin during the war in 1943 when the objective was to channel
resources to support the war effort. Control of capital issues was introduced
through the Defence of India Rules in May 1943 under the Defence of India Act,
1939.
 After independence, Capital Issues (Control) Act 1947 has had a noteworthy
influence in the working of the Indian capital market for just about 45 years.
 The provisions of this Act, have now turned into the forces of SEBI.
 The objectives of this Act were
A. to protect the investing public;
B. to regulate investment in the market;
C. to ensure sound capital structure in public interest;
D. to ensure that there is no undue congestion in the market by public issues;
E. to regulate the volume, terms and conditions of foreign investment in the market.

 The next big step was the enactment of SEBI Act, 1992.

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  As a part of the process of globalization; reforms were inevitable in the Indian
financial system as it was vulnerable to external shocks after liberalization,
privatization, and globalization introduced in the system.
Conclusion:
 The regulatory authorities in Indian capital markets have been instrumental in the
advancement of Indian capital markets.
 At first, the capital markets in India were grossly non regulated.
 As the general population pulled in towards the capital market were less in
number, the need to direct these business sectors was not likewise felt genuinely.
 This progression was brought in accordance with the new improvements occurred
particularly after the globalization.
 Be that as it may, amid every one of these improvements, SEBI has risen as a
strong regulatory authority in development of capital markets in India.

10. Define the forms “Securities” and “Stock Exchange” under the SCR Act 1956.

MEANING OF SECURITIES

The term "security" refers to a fungible, negotiable financial instrument that holds some
type of monetary value.
It represents an ownership position in a publicly-traded corporation via stock; a creditor
relationship with a governmental body or a corporation represented by owning that
entity's bond; or rights to ownership as represented by an option.
A security is a financial instrument, typically any financial asset that can be traded.
The nature of what can and can’t be called a security generally depends on the
jurisdiction in which the assets are being traded.

As per Sec 2(h) of the Securities Contract (Regulation) Act, 1956, securities” include:

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable
securities of a like nature in or of any incorporated company or other bodies corporate;
(ia) derivative;
(ib) units or any other instrument issued by any collective investment scheme to the
investors in such schemes;
(ic)security receipt as defined in clause (zg) of section 2 of the Securitisation and
reconstruction of Financial Assets and Enforcement of Security Interest (SERFAESI)
Act,2002.
(id) units or any other such instrument issued to the investors under any mutual fund
scheme;
"securities" shall not include any unit linked insurance policy or scrips or any such
instrument or unit, by whatever name called, which provides a combined benefit risk on
the life of the persons and investment by such persons and issued by an insurer referred
to in clause (9) of section 2 of the Insurance Act, 1938 (4 of 1938)

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 (ii) Government securities; (Sec. 2(b): "Government security" means a security created
and issued, whether before or after the commencement of this Act, by the Central
Government or a State Government for the purpose of raising a public loan and having
one of the forms specified in clause (2) of section 2 of the Public Debt Act, 1944 (13 of
1944)
iia) such other instruments as may be declared by the Central Government to securities;
and
(iii) rights or interest in securities;
[(i) “spot delivery contract”

Stock Exchange: (Pleas see Q 3 for more info.)

Definition: As per Securities Contracts (Regulation) Act, 1956; Section 2 (j)
(a) anybody of individuals, whether incorporated or not, constituted before
corporatisation and demutualisation under sections 4A and 4B, or
(b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956)
whether under a scheme of corporatisation and demutualisation or
otherwise, for the purpose of assisting, regulating or controlling the business of buying,
selling or dealing in securities.
RECOGNITION OF STOCK EXCHANGE
 According to sec 3, as provided in the Securities Contract Regulation Act, 1956,
there are certain requirements forgetting a stock exchange recognized.
 It has to comply with the procedure laid down such as making an application to the
central government according to the format as prescribed.
 After the central government receives an application from the stock exchanges to
get recognized, inquiry can be conducted by the government along with the other
conditions as laid down by the Act.

The conditions that are prescribed by the central government by virtue of clause (a) of
subsection (1) for making the stock exchanges as the recognised one may lead to the
inclusion of various other conditions. Some of the mare as follows:
Qualification required for getting the membership of the stock exchange
1. The mode through which the contracts will be entered into and gets enforced between
the members of the stock exchange
2. The central government can represent itself in any stock exchange by stating some
individuals that must not exceed three and who will be nominated by the central
government
3. The audit of the exchange and their account is required to be maintained by an
individual, who is a chartered accountant by profession. The audit is conducted on the
discretion of the government.

11. Define Share and distinguish from Shares and Debentures.

Definition of Share:

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A share is an indivisible unit of capital, expressing the ownership relationship between
the company and the shareholder. The denominated value of a share is its face value,
and the total of the face value of issued shares represent the capital of a company, which
may not reflect the market value of those shares.

Another Definition: Shares are units of equity ownership interest in a corporation that
exist as a financial asset providing for an equal distribution in any residual profits, if any
are declared, in the form of dividends. Shareholders may also enjoy capital gains if the
value of the company rises.
Introduction:
1. Share is the capital of the company, but Debenture is the debt of the company.
2. The shares represent ownership of the shareholders in the company.
3. On the other hand, debentures represent indebtedness of the company.
4. The income earned on shares is the dividend, but the income earned on
debentures is interest.

Key Differences Between Shares vs Debentures

Both Shares vs Debentures are popular choices in the market. let us discuss some of the
major Difference Between Shares vs Debentures:

1) The shares are the owned capital of the company, whereas debentures are
instruments to raise debt for the company.
 In order to raise debentures, there is no need to do any backing or underlying
asset, but sheer reputation in the market.
 Investors would be more interested in how well a company can repay the
interests regularly.
 The share capital is raised through the stocks and shares from the market.
 Investors, before putting their money into the company shares, need to read
through their books of accounts, the prospective growth areas, and peer
comparison and only then invest money in a business.
2) The risk involved:
 Many investors buy debentures of a company as they carry lesser market-driven risk
and promise a fixed income regularly in the form of interest payment.
 On the other hand, shares attract investors who not only foresee the value or growth
of the company but are ready to take a risk.
 Return on shares is, therefore, higher than the interest received on debentures.
 The interest percentage also remains fixed over the period of time it has been taken
for. However, shares can give you higher profits, only subject to the market risks.
3) A ratio between Debt and Share Capital of the company: In a normal operation of a
business, debt should be capable of covering the Equity.
It just signifies that a company has good cash management and debt-handling capacity.
It signifies how much of the share capital can be leveraged to raise debt from the market.

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4) Companies as well as government float debentures in the market in order to raise
money for their financial and other long-term requirements.
Their interest remains fixed for the predetermined period for which the money is lent. On
the other hand, Shares can be issued by a company only if it is a public company, i.e. it
Is listed on the national stock exchanges of the country.
A company is able to raise money only when there are more buyers in the market for its
stock than the sellers.

Shares vs Debentures Comparison Table

S The Basis of Comparison Shares Debentures
No between Shares vs Debentures
1 Meaning Shares increase in the Debentures add to the
capital of the company. debt of the company.
2 Ownership of capital Raising capital through Raising capital through
shares allows the debentures does not
shareholder a part of the give ownership to the
ownership. debenture-holder.
3 Role in the Company Shareholders are the Debenture holders are
Owners of the company. like the creditors to the
company.
4 Types Shares are divided into 2 Debentures can be
major types: Equity Shares divided into 3 major
and Preference Shares. heads: Secured vs
Unsecured,
Convertible vs non-
convertible, Registered
and bearer
debentures.
5 Form of return A dividend is earned on the Interest is earned on
shares by the the debentures by their
shareholders. holders.
6 Payment of return Dividend needs to be paid Interest needs to be
to the shareholders only if paid to the debenture
profits are earned by the holders, even if there
company. is no profit earned.
7 Deduction from the Net Profit The dividend that is paid to The interest payment
the shareholders is is an expense to the
reduced when profits are company and is
earned. therefore reduced from
other revenue to reach
the Net Profit of the
company.
8 Conversion Shares are not convertible Debentures can be
to debentures. converted to shares.
9 Trust Deed There is no trust deed for On issuance of
share allocation. debentures to the
public, the trust deed
must be executed

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 between both parties.
10 Voting Rights Equity shareholders have Debenture holders do
voting rights and the right not carry any voting
to participate in general rights or control in the
meetings. company.
11 Dilution of the company In the case of dilution of Debenture holders get
the company, only their money back in
preference shareholders case of winding up of
are given preference and the company.
are repaid before anyone
else.
12 Transfer of ownership Shares are non-divisible Debentures are freely
and non-transferable. transferable,
13 Mortgage Assets of the company Assets of the company
cannot be mortgaged in can be mortgaged in
lieu of the shareholders, favor of the debenture
holders,

12. Explain the concept of “Corporatization” and “Demutualization” and discuss the
procedure for Corporatization and demutualization under SC ( R ) Act, 1956.

Corporatisation [Section 2(aa)] means the succession of a recognised stock exchange,

being a body of individuals or a society registered under the Societies Registration Act,
1860 (21 of 1860), by another stock exchange, being a company incorporated for the
purpose of assisting, regulating or controlling the business of buying, selling or dealing in
securities carried on by such individuals or society.
Demutualisation [Section 2(ab)] means the segregation of ownership and management
from the trading rights of the members of a recognised stock exchange in accordance
with a scheme approved by the Securities and Exchange Board of India (SEBI).

Corporatisation and demutualisation (Section 4B of the Securities Contracts (Regulation)

Act, 1956) :
According to sub section (8) of Section 4B of the Securities Contracts (Regulation) Act,
1956, every recognised stock exchange, in respect of which the scheme for
corporatisation or demutualisation has been approved shall, either by fresh issue of
equity shares to the public or in any other manner as may be specified by the regulations
made by the Securities and Exchange Board of India, ensure that at least fifty-one per
cent of its equity share capital is held, within twelve months from the date of publication
of the order under sub-section (7) of the said section by the public other than
shareholders having trading rights.
However, the Securities and Exchange Board of India may, on sufficient cause being
shown to it and in the public interest, extend the said period by another twelve months.

EXISTING STRUCTURE OF THE STOCK EXCHANGE IN INDIA

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A Stock Exchange is an organized market for purchase and sale of listed Industrial and
financial securities. Securities traded on Stock Exchanges include shares and
debentures of Public Limited Companies, Government Securities, etc.

According to the Securities Contracts (Regulation) Act, 1956, Stock Exchange is an

association, organization or body of individuals, whether incorporated or not,
established for the purpose of assisting, regulating and controlling business in buying,
selling and dealing securities.

Section 2 (f) of the above said Act defines recognized stock exchange as a Stock
Exchange, which is for the time being recognized by the Central Government under
Section 4. SEBI is empowered under Section 4 to grant recognition to Stock Exchanges.

In terms of the legal structure, the stock exchanges which are recognized under the
Securities Contracts (Regulation) Act in India, can be segregated into two broad groups:

 20 stock exchanges which were set up as companies, either limited by guarantees or

by shares, and the 3 stock exchanges which are functioning as associations of
persons (AOP) viz. BSE, ASE and Indore Stock Exchange.
 The 20 stock exchanges which are companies are: the stock exchanges of
Bangalore, Bhubaneswar, Calcutta, Cochin, Coimbatore, Delhi, Gauhati, Hyderabad,
Interconnected SE, Jaipur, Ludhiana, Madras, Magadh, Mangalore, NSE, Pune,
OTCEI, Saurashtra-Kutch, Uttar Pradesh, and Vadodara. Of these, the stock
exchanges of Ahmadabad, Bangalore, BSE, Calcutta, Delhi, Hyderabad, Madhya
Pradesh, Madras and Gauhati were given permanent recognition by the Central
Government at the time of setting up of these stock exchanges.
 Apart from NSE, all stock exchanges whether established as corporate bodies or
Association of Persons (AOPs), are non-profit making organizations.
 7 stock exchanges are set up as companies limited by shares and the remaining 13
are set up as companies limited by guarantee.
 It is thus clear that BSE, ASE and Indore Stock Exchange will have to be both
corporatized and demutualised, while of the balance 20 stock exchanges, 18 stock
exchanges that are already corporate entities, will only have to be demutualised.
 Two stock exchanges, NSE and OTCEI, are not only corporatized but also
demutualised with segregation of ownership and trading rights of members.
 Further, National Stock Exchange of India Limited (NSEIL) is a for-profit company and
the Board of NSEIL comprises of representatives of shareholders, (some of whom
have 100% stock broking subsidiaries) and outside non-shareholder directors.
 But even these two stock exchanges may if necessary, have to undergo changes in
organizational structure consequential to the recommendations of the Group so that a
common structural model is adopted by the all the stock exchanges.

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TRADITIONAL STRUCTURES OF STOCK EXCHANGES

 Internationally (as well as nationally), stock exchanges have been the product of
circumstance, or of design.
 These differences in the origins of stock exchanges have tended to lead to
differences in perceptions of the role of stock exchanges, and in views about what
their relationship with the legal system should be.
 Stock exchanges have also been subject to limited competition from other firms.

 Historically, stock exchanges all over the world were mutual organizations
owned by and run for the common benefit of their members, with no member
taking profits. They were more like "clubs" where the dealers transacted business
through the open outcry system.

DEMUTUALIZATION

 Demutualization refers to the conversion of an existing non-profit organization into

a profits-oriented company.
 In other words, an association that is mutually owned by members converts itself
into an organization that is owned by shareholders.
 The company can take different shapes and forms, that is, it could be either a
listed or unlisted company which may be closely held or publicly held.

 This process involves the segregation of members' right into distinct segments,
viz. ownership rights and trading rights.
 It changes the relationship between members and the stock exchange.
 Members while retaining their trading rights acquire ownership rights in the stock
exchange, which have a market value, and they also acquire the benefits of limited
liability.
 The shareholders in a corporatized stock exchange may be a diverse group, as
members may decide to retain their shares or to sell them. Demutualization
however, does not insulate them from competition.
 A stock exchange whose management does not effectively work to maintain its
position in the market may soon become a take-over target.
 This term is not restricted only to corporatization of stock exchanges. Any
organization that is a non-profit body (which is not the same as loss-making), and
is not distributing its profits to owner-members but retains the same to develop
infrastructure of the organization, can demutualise.
 For instance, Australia's life insurer and funds manager AMP recently
demutualised, as did Sun Life Assurance, the Canadian insurance firm. Recently,
several stock exchanges like the London Stock Exchange and two US stock

24
 exchanges, New York Stock Exchange and Nasdaq, have announced that they
will demutualise.

 Thus, recapitulating once again Demutualization refers to the transition process of

an exchange from a "mutually-owned" association to a company "owned by
shareholders".
 In other words, transforming the legal structure of an exchange from a mutual form
to a business corporation form is referred to as demutualization.
 The above, in effect means that after demutualization, the ownership, the
management and the trading rights at the exchange are segregated from one
another.
 A demutualised exchange is way different from a mutual exchange; the three
functions of ownership, management and trading are intervened into a single
Group in a mutual exchange.
 The broker members of the exchange over here are both the owners and the
traders on the exchange and they further manage the exchange as well. A
demutualised exchange has all these three functions clearly segregated.

SEBI had formed a Group on Corporatisation and Demutualization of Stock Exchanges

under the Chairmanship of Justice M H Kania, former Chief Justice of India, for advising
SEBI on corporatization and demutualization of exchanges and to recommend the steps
that need to be taken to implement the same. The Group submitted its Report to SEBI on
August 28, 2002. SEBI has taken up with Central Government to amend the SC(R) A to
affect Corporatisation and Demutualization.

THE PROCESS OF DEMUTUALIZATION TAKES PLACE IN THE

FOLLOWING MANNER:

1. The exchange values all its assets including the value of seats and arrives at a
total value.
2. This is then divided into different shares and offered to the public.
3. Later, the shares are listed on the stock exchange itself, and the funds got by
selling the shares will be distributed among the members of the exchange as
payment for their seats.
4. If the company is not being listed, the shares may be offered to the members, not
for transfer.

FORCES BEHIND THE DEMUTUALIZATION:

 Demutualization as a concept is neither a very new concept nor very sophisticated.
 The essence lies with the separation of ownership and management.
 Thus, it is well driven by the good intentions of proper governance, which has taken a new
turn after the collapse of many large corporations in the year 2002.

25
  Although there is no exclusive definition of mutual or de-mutual organization, a ‘mutual’
organization is an enterprise owned by its members, providing a variety of service to the
members for their benefit.
 This also implies that mutual are not for profit organizations; are restricted in their capacity
to raise equity, and are characterized by diffused decision-making power.
 The expression demutualization means the transition from a mutual company, in which
there are no shares, and every member has one vote, to a company limited by shares and
one vote per share.
 But it is also used to describe the process by which a company limited by shares in which
every member is required to have the same number of shares, converts to a more usual
economic model; or simply one where the link between membership in the exchange
company or ownership of a share in it, is broken.
 Thus, the central idea with demutualization does not only rests on the basic status of the
organization i.e., whether it is “for profit” or “not for profit”.
 It is found that there are many “for profit” organizations even stock exchanges, which are
not demutualized.
 The crux of the problem thus lies with the ownership of the exchange. Separation of
ownership and membership is the fundamental ingredient of the demutualization as well as
the essence of effective governance.
 The issues addressed here are essentially those arising from permitting non-brokers to
own stake in the exchange, and brokers not to have an ownership interest of any kind or to
have ownership to a limited extent.

Law of Investment and Securities

May/June 2017
1. Provisional Contracts:

 Provisional contract refers to a contract which is made by the promoter after incorporation
but before entitled to commence business.
 Provisional contract is applicable to a company having share capital whether public or
private.
 Provisional contract has no legal enforceability. A provisional contract become binding
automatically when the company is entitled to commence business.
 Unlike preliminary contract no ratification is required subsequently.
 As per the Act, the contracts made after incorporation of the company but before it is
entitled to commence business are termed as Provisional Contracts.
 Any contract made by a company before the date on which it is entitled to commence
business shall be provisional only and binding on the company until that date, and on that
date, it shall become binding.

26
 The private companies can commence its business immediately after the incorporation of
the company, however, for a public limited company, the commencement of business
occurs only after obtaining certificate of commencement of business.
 The term Provisional Contract applies only to the companies with share capital. Provisional
contract is not applicable to a company not having share capital.
 As the name stands, these contracts are made before the formation of a company. For the
formation of the company, the promoters are required to enter into various contracts with
third parties e.g. purchasing some property or hiring the services of professions like
lawyers, technicians, etc.
 After the incorporation of the company such contracts are not attached to the company, as
the company obtains legal entity status only after its incorporation.
 As per the Act, the company can neither sue nor it can be sued on the basis of such
contracts because the company was not a party to such contracts. At the same
time, company cannot even ratify or adopt such contracts to get the benefit of such
contracts.
 A third party can enforce specific performance suit against the company on the following
grounds;
1). if the agreement is prior to the Incorporation certificate date and if the said agreement
has a reference of consideration price and if such amount is adopted in the first board
meeting of the company as pre incorporation expenses and this transaction is reflected in
the first annual directors report and annual accounts of the company.
2). If the said agreement has reference by stating that, post incorporation of the company,
the said transaction will be treated as the transaction of the company.
Q.2: Bonus Shares:
Definition: Bonus shares are additional shares given to the current shareholders without
any additional cost, based upon the number of shares that a shareholder owns. These are
company's accumulated earnings which are not given out in the form of dividends, but are
converted into free shares.
Description: The basic principle behind bonus shares is that the total number of shares
increases with a constant ratio of number of shares held to the number of shares
outstanding. For instance, if Investor A holds 200 shares of a company and a company
declares 4:1 bonus, that is for every one share, he gets 4 shares for free. That is total 800
shares for free and his total holding will increase to 1000 shares.
Companies issue bonus shares to encourage retail participation and increase their equity
base. When price per share of a company is high, it becomes difficult for new investors to
buy shares of that particular company. Increase in the number of shares reduces the price
per share. But the overall capital remains the same even if bonus shares are declared.
Implications of bonus issue:

27
Bonus share issue is a corporate action to revamp the existing cash reserve of a company.
It brings the employed capital of the company in sync with the issued capital. If a company
makes profit, it results in an increase in its employed capital. This surplus is distributed
through increasing the number of issued shares, also known as issued capital.
A bonus share issue does not impact the net assets of a company. It does not involve
any cash flow. It simply means that the number of shares issued by the company – called
share capital – has increased.
Bonus share issue impacts the Earning per Share (EPS), which is calculated by dividing a
company's net profit by the number of owned shares. A decrease in EPS, however, is
compensated in the long-term by a corresponding increase in the number of owned shares.
Typically, a bonus share issue underlines the sound financial health of the company. It
reflects that the company is in a strong position to issue additional equities. It means that
the company has made profits.
Eligibility for bonus issue:
After announcing a bonus issue, a company simultaneously announces the date of issuance
of bonus shares, which is known as the record date. All existing shareholders on the record
date are eligible to receive bonus shares.
You must also know about the terms ‘Cum-Bonus’ and ‘Ex-Bonus’ with regards to bonus
shares issue.
The bonus shares between the date of announcement of bonus issue and record date is
known as ‘Cum-Bonus’, while the status of bonus shares post-issuance on the record date
is known as ‘Ex-Issue.’
Q. 3: Capital Reserve:

The capital reserve is the reserve which is created out of the profits of the company
generated from its non-operating activities during a period of time and is retained for the
purpose of financing the long-term project of the company or write off its capital expenses in
future.
A capital reserve is an account in the equity section of the balance sheet that can be used
for contingencies or to offset capital losses. It is derived from the accumulated capital
surplus of a company, created out of capital profit.
A capital reserve is an account on the balance sheet to prepare the company for any
unforeseen events like inflation, instability, need to expand the business, or to get into a
new and urgent project.
As an example, we can talk about profit on the sale of fixed assets, profit on a sale of
shares, etc.

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 It works in quite a different way. When a company sells off its assets and makes a profit, a
company can transfer the amount to capital reserve.
Since a company sells many assets and shares and can’t always make profits, it is used to
mitigate any capital losses or any other long-term contingencies.
It has nothing to do with trading or operational activities of the business. It is created out of
non-trading activities and thus it can never be an indicator of the operational efficiency of
the business.
Another thing that is important is nature. It is not always received in the monetary value but
it is always existent in the book of accounts of the business.
Q.4: Primary Market:
 The primary market is where securities are created.
 It's in this market that firms sell (float) new stocks and bonds to the public for the first time.
An initial public offering, or IPO, is an example of a primary market.
 Primary market is a key component of access to capital markets, a place where new
securities are issued and sold for the first time by a company.
 These securities can be either shares, bonds or non-convertible debentures.
 Companies use the primary market for raising capital, which is required for growth of
business, or for inducting new investors.
 An initial public offering, or IPO, is one such means, wherein new shares are issued.
Securities in the primary market are issued basis book-building or a uniform price method.
For a transaction taking place in this market, there are three entities involved.
1.It would include a company,
2.investors, and
3.an underwriter.
 A company issues security in a primary market as an initial public offering (IPO), and the
sale price of such new issue is determined by a concerned underwriter, which may or may
not be a financial institution.
 An underwriter also facilitates and monitors the new issue offering.
 Investors purchase the newly issued securities in the primary market. Such a market is
regulated by the Securities and Exchange Board of India (SEBI).
Following are the features of the primary market:
1. The primary market deals with the new issue of securities. Any share, bonds, ETF or any
marketable security, is first introduced in the primary market.
2. Unlike the secondary market, the primary market has no physical existence, which exists
in the form of stock exchanges.
3. Security is floated on the primary market before going to the secondary market. Hence it
precedes the secondary market.
4. There are different methods of raising capital in the primary market; namely, IPO, offer for
sale, private placement, rights issue, and E-IPO.

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Q.5: Listing of Securities
 Listing means the admission of securities of a company to trading on a stock exchange.
 Listing is not compulsory under the Companies Act.
 It becomes necessary when a public limited company desires to issue shares or
debentures to the public.
 When securities are listed in a stock exchange, the company has to comply with the
requirements of the exchange.
Objectives of Listing
1. To provide ready marketability and liquidity of a company’s securities.

2. To provide free negotiability to stocks.

3. To protect shareholders and investors interests.

4. To provide a mechanism for effective control and supervision of trading.

Listing requirements
1. Permission for listing should have been provided for in the Memorandum of Association
and Articles of Association.
2. The company should have issued for public subscription at least the minimum
prescribed percentage of its share capital (49 percent).
3. The prospectus should contain necessary information with regard to the opening of
subscription list, receipt of share application etc.
4. Allotment of shares should be done in a fair and reasonable manner. In case of over
subscription, the basis of allotment should be decided by the company in consultation with
the recognized stock exchange where the shares are proposed to be listed.
5. The company must enter into a listing agreement with the stock exchange. The listing
agreement contains the terms and conditions of listing. It also contains the disclosures that
have to be made by the company on a continuous basis.

Minimum Public Offer

A company which desires to list its securities in a stock exchange, should offer at least
sixty percent of its issued capital for public subscription. Out of this sixty percent, a
maximum of eleven percent in the aggregate may be reserved for the Central government,
State government, their investment agencies and public financial institutions.

30
The public offer should be made through a prospectus and through newspaper
advertisements. The promoters might choose to take up the remaining forty percent for
themselves, or allot a part of it to their associates.
Q.6: Floating Charge:
A floating charge is a security interest over a fund of changing assets of a company or
other legal person. Unlike a fixed charge, which is created over ascertained and definite
property, a floating charge is created over property of an ambulatory and shifting nature.
When a company borrows money, the lender / bank usually takes some security for that
debt. This is designed to protect the lenders' position and also to try and get the lenders'
money back if the borrower fails. These types of security are termed fixed and floating
charges.
A floating charge will be created on Current Assets of the Company/Firm (like Raw
material, Semi Finished Goods, Finished Goods, Book debts etc) and Fixed Charge will be
created on Fixed Assets (like, Land & Building, Plant & Machinery - fastened to the land)
to secure a debt or a contingent liability.
What is a Fixed Charge?
The bank or lender may have provided money to acquire specific asset(s) like property,
printing press, car, etc. The company cannot sell this without the lender’s permission. The
debt must be repaid as per the loan agreement or facility letter.
What is Floating Charge?
A floating charge is held over assets that can change over time in the normal course of
business.
Although the assets may be physical, the number of them, or the value, condition, or other
properties can change.
So, fixtures and fittings can be subject to a floating charge as they are difficult to quantify.
A debtor book is constantly changing. It would not be practical to stick a fixed charge over
every item of stock or desks and chairs, would it? So, the floating charge allows the lender
to recover some money if the assets are sold.
So, a floating charge can be held over the following:
1. Stock, finished or raw material
2. Work in progress
3. Unfactored debtors
4. Fixtures and fittings
5. Vehicles or assets not subject to fixed charges
Q.7: Investor Protection:

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The Securities and Exchange Board of India (SEBI) has been mandated to protect the
interests of investors in securities and to promote the development and regulate the
securities market so as to establish a dynamic and efficient Securities Market contributing
to Indian Economy.
The concept of investor protection has to be looked at from different angles taking into
account the requirements of various kinds of investors i.e.
(i) Investors in equity
(ii) Large institutional investors
(iii) Foreign Investors
(iv) Investors in debentures
(v) Small investors/deposit holders etc.
SEBI does not give a guarantee for payment of money rather it helps you in recovering the
amount back from the concerned entity (broker).
 SEBI has given out various methods and measures to ensure the investor protection
from time to time. It has published various directives, driven many investor awareness
programmes, set up investor protection Fund (IPF) to compensate the investors.
Investor protection legislation is implemented under the Section 11(2) of the SEBI
Act. The measures are as follows:
1. Monitor the end use of funds collected from the public.
2. Investor Education through media and other flatforms.
3. Ensuring/Promoting through regulatory mechanism, the transparency so that both
the regulators, investigative agencies as well as the investor are able to access
appropriate financial information to form an opinion as to the financial conduct and
performance of the company.
4. Though, there is, no need to mandate credit rating by law, for companies accepting
public deposits it is mandatory.
5. Risk cover for depositors
6. Stock Exchange and other securities market business regulation.
7. Registering and regulating the intermediaries of the business-like brokers, transfer
agents, bankers, trustees, registrars, portfolio managers, investment consultants,
merchant bankers, etc.
8. Recording and monitoring the work of custodians, depositors, participants, foreign
investors, credit rating agencies, etc.
9. Registering investment schemes like Mutual fund & venture Capital funds, and
regulating their functioning.
10. Promotion and controlling of self-regulatory companies.
11. Keeping a check on frauds and unfair trading methods related to the securities
market.
12. Observing and regulating major transactions and take-over of the companies.

32
 13. Carry out investor awareness and education programme.
14. Train the intermediaries of the business.
15. Inspecting and auditing the security exchanges (SEs) and intermediaries.
16. Assessment of fees and other charges.
Q.8: Undesirable Transactions
SECURITIES CONTRACTS (REGULATION) ACT, 1956 is An Act to prevent
undesirable transactions in securities by regulating the business of dealing therein, by
providing for certain other matters connected therewith.
Section 16. (1) of the Act: If the Central Government is of opinion that it is necessary to
prevent undesirable speculation in specified securities in any State or area, it may, by
notification in the Official Gazette, declare that no person in the State or area specified
in the notification shall, save with the permission of the Central Government, enter into
any contract for the sale or purchase of any security specified in the notification except
to the extent and in the manner, if any, specified therein.
(2) All contracts in contravention of the provisions of sub-section (1) entered into after
the date of notification issued thereunder shall be illegal.
The SCRA is an enactment to provide for direct and indirect control of all aspects of
securities trading, running of stock exchanges and to prevent undesirable transactions
in securities.
The SCRA,1956, among other provisions, making provision as to recognition of the
stock exchanges by the Government, providing for their corporatisation and
demutualisation, ensuring adequate government control over the functions and affairs of
the stock exchanges in the interest of investors, has contributed to a healthy, disciplined
and beneficial platform for the dealings in security.

9. Explain the Law relating to Procedure for issue of Shares and allotment of
Shares.
Procedure of Issue of New Shares
According to Section 62 (1) of the Companies Act 2013, the procedure for issue of shares
is as follows:
Issue of notice of Board meeting
Convene the First Board Meeting
Issue Letter of Offer
Issue of Prospectus
File MGT – 14
Receive application money
Convene the Second Board Meeting
File the forms with ROC

33
 1] Issue of Prospectus
 Before the issue of shares, comes the issue of the prospectus.
 The prospectus is like an invitation to the public to subscribe to shares of the company.
 A company must submit a copy of its prospectus to the Securities and Exchange
Commission before the publication date.
 However, private companies or public companies issuing shares privately do not need to
issue a prospectus.
 It also states the manner in which the capital collected will be spent.
 When inviting capital/funds from the public at large it is compulsory for a company to
issue a prospectus or a document in lieu of a prospectus.
 The prospectus gives brief information about the issuing company: names of directors,
past performance, terms of issue and the investment for which the company is raising
capital.
 A prospectus also contains all the information of the company, its financial structure,
previous year balance sheets and profit and Loss statements etc.
 It also gives opening and closing dates of the share issue, application fees, allotment and
on-call dates, and bank details for deposit and minimum shares for application.

2] Receiving Applications
 When the prospectus is issued, prospective investors can now apply for shares.
 After getting an invitation, interested investor prospects can submit their application
through a prescribed form, along with an application fee before the closing date given in
the prospectus.
 When the number of shares applied for exceeds the number of shares issued, there is an
oversubscription, but when applications are less than expected, there is an under-
subscription.
 Applications occur at a designated bank where a receipt is issued.
 The issuing company does not withdraw the application money until completion of the
allotment procedure.
 The application fee collected for share issue should be at least 5 percent of the nominal
share amount.
 They must fill out an application and deposit the requisite application money in the
schedule bank mentioned in the prospectus.
 The application process can stay open a maximum of 120 days.
 If in these 120 days minimum subscription has not been reached, then this issue of
shares will be cancelled.
 The application money must be refunded to the investors within 130 days since issuing of
the prospectus.

3] Allotment of Shares
 Once the minimum subscription has been reached, the shares can be allotted.
 Generally, there is always oversubscription of shares, so the allotment is done on pro-
rata bases.

34
 When the directors of an issuing company with consultation with the stock market
authorities prepare to sell shares to an applicant, they communicate through an allotment
letter.
 Most people use allotment and issuance of shares interchangeably.
 However, for a public company, share allotment strictly involves allocating the right to
shares to certain applicants.
 The allotment letter communicates allotment time and date of paying for the shares.
 Not all applicants receive allotment letters, unsuccessful applicants receive regret letters
and their application money given back.
 Share allotment can be pro-rata, in which all applicants are accepted, but each is given
lesser shares than they applied for.
 Letters of Allotment are sent to those who have been allotted their shares.
 This results in a valid contract between the company and the applicant, who will now be a
part owner of the company.

If any applications were rejected, letters of regret are sent to the applicants. After the
allotment, the company can collect the share capital as it wishes, in one go or in
instalments.
Call on Shares
Calls are used to collect remaining shares after application and allotment as per the
provisions of the prospectus.
There's first call, second call and so on, depending on the number of installments.
The last call includes the word “final.”
The call amount should not exceed 25 percent of the share's nominal value, and a month
must have elapsed from the payment date of the previous call.
A 14-day notice must be given indicating time and place.

What is a minimum subscription?

Ans: This is a minimum amount that must be raised when the shares are offered to the
public during the issue of shares.
This minimum subscription is generally set by the Board of directors, but it cannot be less
than 90% of the issued capital.

Shares Issued at Premium

When the company decides to issue shares at a price higher than the nominal value or
face value, we call it shares issued at a premium.
It is quite a common practice especially when the company has a great track record and
strong financial performances and standing in the market.

So, say the face value of a share is Rs 100/- and the company issues it at Rs 110/-.
The share is said to have been issued at a 10% premium.
The premium will not make a part of the Share Capital account but will be reflected in a
special account known as the Securities Premium Account.

35
 So at least 90% of the issued capital must receive subscriptions or the offer will be said to
have failed. In such a case the application money received thus far must be returned
within the prescribed time limit.

10. Explain the Purpose of Inter Corporate Loans and Investments in the
Companies.

 The power to invest the funds of the company is the prerogative of the Board of Directors.
 This power is derived by the board under Section 179 of the Companies Act, 2013.
 However, the act contains provisions for restrictions on investments that a company can
make and loans it can provide.
 Moreover, giving corporate guarantee is also as good as giving a loan, because the
person to whom guarantee or security is given can decide to enforce the guarantee or
security in certain conditions and in such a situation, the company will have to pay the
amount.
 Thus, apart from loan and investment, restrictions are also placed on the guarantees
which the company can give or security it can provide for loan.
 The Companies Act, 2013 has considerably modified the provision in respect to giving
loans, making investments, giving guarantee or providing security or acquiring securities
of any other body corporate from time to time.
 As of now, an overall limit of 60% of paid-up share capital plus free reserves and
securities premium account or 100% of free reserves and securities premium account,
whichever is more, has been fixed.
 The provisions relating to inter-corporate loans and investments are mentioned under
Section 186 of the Act.

Not more than two layers of investment companies (Layers mean its subsidiary or
subsidiaries);
 As per Section 186(1), a company shall unless otherwise prescribe, make investment
through not more than two layers of investment companies.
 However, the aforesaid provisions shall not effect: –
(i) a company from acquiring any other company incorporated in a country outside India if
such other company has investment subsidiaries beyond two layers as per the laws of
such country;
(ii) a subsidiary company from having any investment subsidiary for the purposes of
meeting the requirements under any law or under any rule or regulation framed under
any law for the time being in force.

Limits for loans, guarantee, security and investment:

Section 186(2) restricts the company directly or indirectly to:

(a) give any loan to any person or other body corporate;

36
 (b) give any guarantee or provide security in connection with a loan to any other body
corporate or person; and

(c) acquire by way of subscription, purchase or otherwise, the securities of any other
body corporate,
exceeding sixty per cent. of its paid-up share capital, free reserves and securities
premium account or one hundred per cent. of its free reserves and securities premium
account, whichever is more unless the same is previously authorized by a special
resolution passed in a general meeting.{Section 186(3)}.

Disclosure in financial interest

Section 186(4) provides that the company shall disclose to the members in the financial
statement the full particulars of the loans given, investment made or guarantee given or
security provided and the purpose for which the loan or guarantee or security is proposed
to be utilised by the recipient of the loan or guarantee or security.

Prior Approvals:
 The company shall not make any investment or loan or security unless the resolution
sanctioning it is passed in a meeting of the board with the consent of all the directors
present at the meeting and the prior approval of the public financial institution concerned
where any term loan is subsisting is obtained. {186(5)}

 However, the prior approval of financial institutions is not required where the aggregate of
the loans and investments so far made, the amount for which guarantee or security so far
provided to or in all other bodies corporate, along with the investments, loans, guarantee
or security proposed to be made or given does not exceed the limit as specified in sub-
section (2), and there is no default in repayment of loan instalments or payment of
interest thereon as per the terms and conditions of such loan to the public financial
institution.
Rate of interest
 According to section 186(7), the loans given shall carry the rate of interest not lower the
prevailing yield of one year, three year, five year government security closest to the tenor
of the loan.
 However such condition is not applicable on the companies who 26% or more of the
paid-up share capital is held by the Central Government or one or more State
Governments or both, and such loan is in respect of funding Industrial Research and
Development projects in furtherance of objects as stated in the memorandum of
association of the company.

Default with respect to repayment of deposits

37
 Section 186(8) specifies that the company which has made default in repayment of
deposits after the commencement of Companies Act, 2013 or in payment of interest
thereon, shall not give any loan or give any guarantee, or provide security or make an
acquisition till such default subsists.

Maintenance of registers

 Section 186(9) and 186(10) related to the provisions relating to maintenance of registers
by the company in relation to the loans, guarantee or security provided by them.
The register shall be kept at the registered office of the company and:

 (a) shall be open to inspection at such office; and

 (b) extracts may be taken therefrom by any member, and copies thereof may be
furnished to any member of the company on payment of such fees as may be prescribed.

Exemptions
 Sub-section 11 of section 186 provides that nothing contained in this section, except sub-
section (1), shall apply:

(a) to a loan made, guarantee given or security provided by a banking company

or an insurance company or a housing finance company in the ordinary course of its
business or a company engaged in the business of financing of companies or of
providing infrastructural facilities;

(b) to any investment:

1. made by any investment company;
2. made in shares allotted in pursuance of clause (a) of sub-section (1) of section 62 or in
shares allotted in pursuance of rights issues made by a body corporate;
3. made in respect of investment or lending activities, by a non-banking financial company
registered under Chapter III-B of the Reserve Bank of India Act, 1934 and principal
business in acquisition of securities.
Penalty for contravention of section 186:
 In case the company contravenes the provisions of this section, the company shall be
liable for punishment under section 186(13).
 The company will be punishable for fine which shall not be less than twenty-five
thousand rupees but which may extend to five lakh rupees and every officer of the
company shall be punishable with the imprisonment for the term which may extend to
two years and with fine which shall not be less than twenty-five thousand rupees but
which may extend one lakh rupees.
Summary
Sl. No Section Reference/Description
1 179 Powers derived by the Board of the Co. to Borrow or to

38
 lend/invest
2 186 provisions relating to inter-corporate loans and
investments are mentioned
3 186 (1) Co. cannot make investment through more than two
layers of investment companies
4 186 (2) Limits for loans, guarantee, security and investment:
5 186 (4) Discloser in financial interest – in financial statement
6 186 (5) Board approval and Prior approval from Term Loan
Lending institution required
7 186 (7) Interest rate – Should not be less than 1,2,3,5 year
interest rates of Central Govt. Securities.
8 186 (8) Default with respect to repayment of Deposits either
Principle or Interest.
9 186 (9) & (10) Maintenance of Registers
10 186 (11) Exemptions – Banks, insurance, Housing Finance Co etc
11 186 (13) Penalty for contravention provisions of Sec. 186

11. Explain the Advantages of Depository System In India

Benefits of Depository System to investors
1. A depository ensures that only pre-verified assets with good title are traded.
Therefore, an investor is always assured of assets with good title. Moreover, the
problems of bad deliveries and all the risks associated with physical certificates, such as
loss, theft, mutilation etc. are avoided.
2. Electronic transaction of securities saves time. Time spent on preparation of share
certificates and transfer deed are avoided.
3. Electronic transactions reduces the settlement time.
4. Instant transfer of securities enables the investor to get dividend, right and bonus
without delay.
5. Transaction costs are reduced as transfers in electronic form are exempt from stamp
duty.
6. There is no problem of odd lots as the marketable lot in depository is fixed as one
share.
7. The interest rate on loan against pledge of dematerialised shares is comparatively
lower.
8. As a security measure, the account holder can totally freeze his account for any
desired period.
9. Depositories enable the investors to deliver shares in any part of the country without
exposing themselves to the risk and cost of transportation.

39
10. The investor is able to revise his portfolio more frequently due to low transaction
costs and quick transfer of securities.
Benefits of Depository System to Company
1. The depository system enables the company management to maintain and update
information about shareholding pattern of the company. The company is able to know
the particulars of beneficial owners and their holdings periodically.
2. The issue cost gets drastically reduced because of dematerialisation of securities.
3. Paperless trading is a boon for the company management.
4. Distribution of cash corporate benefits (dividends) and non-cash corporate benefits
(rights and bonus) will be quicker as the ownership can be easily identified.
5. The transfer process under depository system is prompt and free from defects. So,
complaints against the company by an investor is avoided in this regard. This helps the
company build a good corporate image.
Benefits of Depository System to Intermediaries
Intermediaries will be benefited from enhanced liquidity, safety and turnover on stock
market, improved cash flow elimination of forgery and counterfeit with elimination of risk
from settlement due to bad deliveries.
Benefits of Depository System to capital market
1. As the trading, clearing and settlement mechanism are automated and inter-linked
with the depository, the capital market is more transparent.
2. Use of computers and improved communication technology in the depository system
has made capital market activities efficient.
3. Investors repose a high degree of confidence in the capital market.
4. Use of depository system attracts foreign investors.
5. Volume of trade in capital market substantially increases. More and more middle-
income group become involved either directly or through mutual funds.
Please Note the following is simplified (a bit) Answer:
Advantages of Depository System:
Enjoyed by Investors:
i. It eliminates bad deliveries;
ii. It computes the settlement cycle very fast;
iii. It makes immediate transfer and registration of securities;

40
iv. It eliminates all risks associated with physical certificate;
v. It also provides nomination facility to the investors;
vi. It reduces trading cost;
vii. Since it is paperless trading, no share certificate and deed etc. are required.
Enjoyed by the Capital Market:
(i) Dues are settled in a very short time;
(ii) It also eliminates bad delivering;
(iii) It also eliminates the problems arising from odd lots of securities;
(iv) It eliminates the physical handling of paperwork’s;
(v) It reduces errors;
(vi) Questions of loss, mutilation of securities does not arise.
(vii) Huge number of transactions can be settled at a very short time.
Enjoyed by the Company:
(a) It reduces the risk of loss of securities and, at the same time, reduces the
fraudulent activities;
(b) It avoids the checking of shares, deeds and various papers,
(e) No share certificate is issued as the securities are divisible;
(d) It reduces the various costs which require secretarial help;
(e) It supplies better communication facilities
(f) Easy availability of data and information (i.e. issue of bonus share, right share,
dividend declaration, etc.) are available which helps the shareholder to take
decisions.
It is likely to bring about the following benefits to various investors,
issuing companies as well as the nation:
a. Reduction in paper work.
b. Elimination of risks associated with physical scrips such as theft, forgery,
mutilation, loss of share certificates etc.
c. Elimination of bad delivers.

41
d. Increased liquidity of scrips through speedy settlement and reduction in delays in
registration.
e. Low transaction costs for purchase and sale of securities compared to physical
mode.
f. No stamp duty on transfer of securities.
g. Facilities the issuer companies to update the information regarding shareholders
and to communicate with them in better ways.
h. Attract foreign investors and promoting foreign investment.
i. Emergence of healthy and efficient capital market.
j. Greater opportunity for the development of sophisticated custodial services etc.
Q.12: Explain the guidelines for Disclosure Under the SEBI Act.
SEBI has issued detailed guild lines for discloser vide Circular No:
CIR/CFD/CMD/4/2015 dated 09th September 2015.
 In order to enable investors to make well-informed investment decisions, timely,
adequate and accurate disclosure of information on an ongoing basis is essential.
 Also, there is a need of uniformity in disclosures made by listed entities to ensure
compliance in letter and spirit. Towards this end, Regulation 30 of SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015 (hereinafter referred
to as “Listing Regulations”) deals with disclosure of material events by the listed
entity.
 whose equity and convertibles securities are listed. Such entity is required to make
disclosure of events specified under Part A of Schedule III of the Listing
Regulations.

The Listing Regulations divide the events that need to be disclosed broadly in
two categories.
1. The events that have to be necessarily disclosed without applying any test of
materiality are indicated in Para A of Part A of Schedule III of the Listing Regulation.
2. Para B of Part A of Schedule III indicates the events that should be disclosed by the
listed entity, if considered material.

 In case of securities or the derivatives which are listed outside India by the listed
entity, parity in disclosures shall be followed and whatever is disclosed on overseas
stock exchange(s) by the listed entity shall be simultaneously disclosed on the stock
exchange(s) where the entity is listed in India.

42
(1) An issuer making an initial public offer shall ensure that:
a) it has made an application to one or more stock exchanges to seek an in-principle
approval for listing of its specified securities on such stock exchanges and has chosen
one of them as the designated stock exchange, in terms of Schedule XIX;
b) it has entered into an agreement with a depository for dematerialisation of the
specified securities already issued and proposed to be issued;
c) all its specified securities held by the promoters are in dematerialised form prior to
filing of the offer document;
d) all its existing partly paid-up equity shares have either been fully paid-up or have
been forfeited; it has made firm arrangements of finance through verifiable means
towards seventy-five per cent. of the stated means of finance for a specific project
proposed to be funded from the issue proceeds, excluding the amount to be raised
through the proposed public issue or through existing identifiable internal accruals.
(2) The amount for general corporate purposes, as mentioned in objects of the issue in
the draft offer document and the offer document shall not exceed twenty-five per cent.
of the amount being raised by the issuer.
Additional conditions for an offer for sale
Only such fully paid-up equity shares may be offered for sale to the public, which have
been held by the sellers for a period of at least one year prior to the filing of the draft
offer document:
Provided that in case the equity shares received on conversion or exchange of fully
paid-up compulsorily convertible securities including depository receipts are being
offered for sale, the holding period of such convertible securities, including depository
receipts, as well as that of resultant equity shares together shall be considered for the
purpose of calculation of one year period referred in this sub-regulation.
Provided further that such holding period of one year shall be required to be complied
with at the time of filing of the draft offer document.
Provided further that the requirement of holding equity shares for a period of one
year shall not apply:
a) in case of an offer for sale of a government company or statutory authority or
corporation or any special purpose vehicle set up and controlled by any one or more of
them, which is engaged in the infrastructure sector;
b) if the equity shares offered for sale were acquired pursuant to any scheme
approved by a High Court under the sections 391 to 394 of Companies Act, 1956,
or approved by a tribunal or the Central Government under the sections 230 to 234 of
Companies Act, 2013, as applicable, in lieu of business and invested capital which had

43
 been in existence for a period of more than one year prior to approval of such scheme;

C) if the equity shares offered for sale were issued under a bonus issue on securities
held for a period of at least one year prior to the filing of the draft offer document with
the Board and further subject to the following:
(i) such specified securities being issued out of free reserves and share premium
existing in the books of account as at the end of the financial year preceding the
financial year in which the draft offer document is filed with the Board; and
(ii) such equity shares not being issued by utilisation of revaluation reserves or
unrealized profits of the issuer
Eligibility requirements for issue of convertible debt instruments
An issuer shall be eligible to make an initial public offer of convertible debt instruments
even without making a prior public issue of its equity shares and listing thereof.
1. Provided that it is not in default of payment of interest or repayment of principal
amount in respect of debt instruments issued by it to the public, if any, for a period of
more than six months.
2. it has obtained credit rating from at least one credit rating agency;
3. it has appointed at least one debenture trustee in accordance with the provisions of
the Companies Act, 2013 and the Securities and Exchange Board of India (Debenture
Trustees) Regulations, 1993;
4. it shall create a debenture redemption reserve in accordance with the provisions of the
Companies Act, 2013 and rules
Law of Investment and Securities
October 2020

1. Stock exchange
Definition: As per Securities Contracts (Regulation) Act, 1956; Section 2 (j)
(a) anybody of individuals, whether incorporated or not, constituted before
corporatisation and demutualisation under sections 4A and 4B, or
(b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956)
whether under a scheme of corporatisation and demutualisation or otherwise, for
the purpose of assisting, regulating or controlling the business of buying, selling or
dealing in securities.

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 RECOGNITION OF STOCK EXCHANGE
 According to sec 3, as provided in the Securities Contract Regulation Act, 1956,
there are certain requirements forgetting a stock exchange recognized.
 It has to comply with the procedure laid down such as making an application to
the central government according to the format as prescribed.
 After the central government receives an application from the stock exchanges to
get recognized, inquiry can be conducted by the government along with the other
conditions as laid down by the Act.
The conditions that are prescribed by the central government by virtue of clause
(a) of subsection (1) for making the stock exchanges as the recognised one may
lead to the inclusion of various other conditions. Some of the mare as follows:
5. Qualification required for getting the membership of the stock exchange
6. The mode through which the contracts will be entered into and gets enforced
between the members of the stock exchange
7. The central government can represent itself in any stock exchange by stating
some individuals that must not exceed three and who will be nominated by the
central government
8. The audit of the exchange and their account is required to be maintained by an
individual, who is a chartered accountant by profession. The audit is conducted on
the discretion of the government.

POWERS PROVIDED TO STOCK EXCHANGES

2. Power to make direct enquiries and to call for returns:
By virtue of sec 6 of the Securities Contract Regulation Act, 1956, it is a mandate
for every stock exchange to keep the books of accounts preserved for a minimum
period of five years. This mandate can be subjected to various inspections
conducted by SEBI.

2. Establishment of the trading floor:

As per the various terms and conditions that are prescribed by SEBI, any stock
exchange can get the additional trading floor established only after getting the
prior approval of SEBI.
 The power vested with stock exchanges to draft bye-laws for the purposes of
regulations and management

45
The stock exchanges are granted with the power of making bye-laws so that their
management can function in a proper way. These bye-laws will also help in
getting the contracts regulated and controlled. This power is vested with it by
virtue of sec 9 of the Securities Contract Regulation Act, 1956.
2. Future Contracts
A futures contract is an agreement between two parties – a buyer and a seller –
wherein the former agrees to purchase from the latter, a fixed number of shares
(Securities, Currency, Bonds, Commodities etc.) or an index at a specific time in
the future for a pre-determined price. These details are agreed upon when the
transaction takes place.
As futures contracts are standardized in terms of expiry dates and contract sizes,
they can be freely traded on exchanges. A buyer may not know the identity of the
seller and vice versa.
Further, every contract is guaranteed and honored by the stock exchange, or
more precisely, the clearing house or the clearing corporation of the stock
exchange, which is an agency designated to settle trades of investors on the stock
exchanges.
Futures contracts are available on different kinds of assets – stocks, indices,
commodities, currency pairs and so on.
FUTURES vs OPTIONS:
An options contract gives an investor the right, but not the obligation, to buy (or
sell) shares at a specific price at any time, as long as the contract is in effect.
By contrast, a futures contract requires a buyer to purchase shares—and a seller
to sell them—on a specific future date, unless the holder's position is closed
before the expiration date.
ADVANTAGES AND RISKS OF FUTURES CONTRACTS
 It allows hedgers to shift risks to speculators.
 It gives traders an efficient idea of what the futures price of a stock or value
of an index is likely to be.
 Based on the current future price, it helps in determining the future
demand and supply of the shares.

46
  Since it is based on margin trading, it allows small speculators to participate
and trade in the futures market by paying a small margin instead of the
entire value of physical holdings.
 However, you must be aware of the risks involved too. The main risk stems
from the temptation to speculate excessively due to a high leverage factor,
which could amplify losses in the same way as it multiplies profits.
 Further, as derivative products are slightly more complicated than stocks
or tracking an index, lack of knowledge among market participants could
lead to losses.
3. Badla
Badla was an indigenous carry-forward system invented on the Bombay Stock
Exchange as a solution to the perpetual lack of liquidity in the secondary
market. Badla were banned by the Securities and Exchange Board of India (SEBI)
in 1993, effective March 1994, amid complaints from foreign investors, with the
expectation that it would be replaced by a futures-and-options exchange. Such an
exchange was not established and badla were legalized again in 1996 (with a
carry-forward limit of Rs 200 million per broker) and banned again on 2 July 2001,
following the introduction of futures contracts in 2000.
Procedure
Badla trading involved buying stocks with borrowed money with the stock
exchange acting as an intermediary at an interest rate determined by
the demand for the underlying stock and a maturity not greater than 70 days. Like
a traditional futures contract, badla is a form of leverage; unlike futures, the
broker—not the buyer or seller—is responsible for the maintenance of
the marked-to-market margin.
Example
The mechanism of badla finance can be explained with the following example:
Suppose A wants to buy shares of a company but does not have enough money
now. If A values the shares more than their current price, A can do a badla
transaction. Suppose there is a badla financier B who has enough money to
purchase the shares, so on A's request, B purchases the shares and gives the
money to his broker. The broker gives the money to exchange and the shares are

47
transferred to B. But the exchange keeps the shares with itself on behalf of B.
Now, say one month later, when A has enough money, he gives this money to B
and takes the shares. The money that A gives to B is slightly higher than the total
value of the shares. This difference between the two values is the interest as
badla finance is treated as a loan from B to A. The rate of interest is decided by
the exchange and it changes from time to time.

4.Derivatives

The term ‘Derivative’ indicates that it has no independent value, i.e. its value is
entirely ‘derived’ from the value of the underlying asset. The underlying asset can
be securities, commodities, bullion, currency, livestock or anything else. In other
words, derivative means a forward, future, option or any other hybrid contract of
pre-determined fixed duration, linked for the purpose of contract fulfillment to
the value of a specified real or financial asset or to an index of securities.
With Securities Laws (Second Amendment) Act, 1999, derivatives have been
included in the definition of Securities. The term Derivative has been defined in
Securities Contracts (Regulations) Act. The term ‘Derivative’ indicates that it has
no independent value, i.e. its value is entirely ‘derived’ from the value of the
underlying asset. The underlying asset can be securities, commodities, bullion etc.
Advantages of Derivatives:
1. Secure Your Investment:
A derivative contract is the best way to protect yourself against an investment
that you could be observing turning sour. When you trade in derivatives in the
stock market, you are essentially placing money on your certainty that a certain
stock will either do well or sink. A large part of derivatives trading is based on
speculation and it is essential that your knowledge about the market is adequate
enough before you venture into this kind of trading. As a result, if you know that
the stocks you have invested in are beginning to drop in value, you could enter
into a contract wherein you accurately predict the reduction in the stock value.
2. Advantage Of Arbitrage:
A common trading mechanism among experienced investors is called arbitrage
trading, wherein a commodity or security is purchased at a low price in one
market and then sold at a significantly higher price in another market. Derivatives

48
trading offers you an advantage in terms of arbitrage trading, which enables you
to benefit from the differences in pricing in different markets.
3. Be Protected From Market Volatility:
Investing in derivatives enables you to remain protected from the volatility of the
market. For instance, you can buy stocks in a certain market and then enter into a
derivatives contract through which you safeguard your investment, even in case
you meet with a loss in the market.
4. Profit On Sinking Stocks:
Investing in derivatives often requires you to look at both sides of the picture. As
an investor, it is likely that you have invested in stocks that you are confident will
perform well. However, if they aren’t and you are able to accurately gauge this
before the rest of the market, you could be able to turn a profit by entering into a
derivatives contract.
5. Invest Your Surplus Funds:
While most traders enter into the derivatives market in order to speculate and
profit, it is also often the best to park any surplus funds you may have. By
entering into derivatives contracts with your surplus funds, you are using your
funds to generate additional profits without touching any of your existing,
underlying securities.

5. Interest rate of Swaps

An interest rate swap is a type of a derivative contract through which two

counterparties agree to exchange one stream of future interest payments for
another, based on a specified principal amount. In most cases, interest rate swaps
include the exchange of a fixed interest rate for a floating rate.

Similar to other types of swaps, interest rate swaps are not traded on public
exchanges – only over-the-counter (OTC).

Interest Rate Swap Example

Often the two parties involved in interest rate swap agreements are
a company and a large bank. The company may not be satisfied with the
borrowing costs available to it in the marketplace. For example, the company may
only have access to loans with floating interest rates. But the company prefers
a loan with a fixed interest rate.

49
That company can arrange an interest rate swap with a large bank that allows it to
pay interest based on a fixed rate to the bank in exchange for payments based on
a floating rate from the bank.

USES OF INTEREST RATE SWAPS

 Portfolio management: Interest rate swaps allow portfolio managers to
adjust interest rate exposure and offset the risks posed by interest rate
volatility. Swaps can also act as substitutes for other, less liquid fixed
income instruments.
● Specula on. Because swaps require little capital up front, they give fixed
income traders a way to speculate on movements in interest rates while
potentially avoiding the cost of long and short positions in Treasuries.

Risks of Interest Rate Swaps

1. Opportunity Costs: Locking in a fixed rate may result in higher interest
expense than the average of the floating rate over the same period.
2. Potential Mark-to-Market (Make-Whole): If the swap is unwound prior to
maturity and interest rates have declined, the borrower may be subject to a
termination cost.
3. Tax & Accounting Issues: Any person or entity entering into a derivative
transaction is strongly encouraged to consult with tax, legal and accounting
advisors to determine appropriate tax and accounting treatment.
4. Liquidity & Credit Pricing Risk: The derivative contract is separate and
distinct from the underlying loan. It does not create any commitment to
lend or act as a source of funding. It represents a hedge of changes in a
variable rate index only, not a hedge of the actual credit pricing on the
underlying loan.
5. Basis Risk: It is possible that changes in the variable rate index used in the
derivative contract do not perfectly mirror changes in the variable rates
used to set the pricing on the underlying loan.
6. Settlement Risk: A risk exists that the counterparty will fail to make
required payments. A weak credit profile can offer the potential for
increased counterparty risk (increased settlement risk) on derivative
transactions.

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6. Pure & Hybrid and Derivatives

7. Secondary Market
A secondary market is a platform wherein the shares of companies are traded
among investors. It means that investors can freely buy and sell shares without
the intervention of the issuing company. In these transactions among investors,
the issuing company does not participate in income generation, and share
valuation is rather based on its performance in the market. Income in this market
is thus generated via the sale of the shares from one investor to another.
Functions of Secondary Market
 A stock exchange provides a platform to investors to enter into a trading
transaction of bonds, shares, debentures and such other financial
instruments.
 Transactions can be entered into at any time, and the market allows for
active trading so that there can be immediate purchase or selling with little
variation in price among different transactions. Also, there is continuity in
trading, which increases the liquidity of assets that are traded in this
market.
 Investors find a proper platform, such as an organised exchange to
liquidate the holdings. The securities that they hold can be sold in various
stock exchanges.
 A secondary market acts as a medium of determining the pricing of assets
in a transaction consistent with the demand and supply. The information
about transactions price is within the public domain that enables investors
to decide accordingly.
 It is indicative of a nation’s economy as well, and also serves as a link
between savings and investment. As in, savings are mobilised via
investments by way of securities.

Types of Secondary Market

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Secondary markets are primarily of two types – Stock exchanges and over-the
counter
markets.

Stock exchange
 Stock exchanges are centralised platforms where securities trading take
place, sans any contact between the buyer and the seller. National Stock
Exchange (NSE) and Bombay Stock Exchange (BSE) are examples of such
platforms.

 Transactions in stock exchanges are subjected to stringent regulations in

securities trading. A stock exchange itself acts as a guarantor, and the
counterparty risk is almost non-existent. Such a safety net is obtained via a
higher transaction cost being levied on investments in the form of
commission and exchange fees.

Over-the-counter (OTC) market

 Over-the-counter markets are decentralised, comprising participants

engaging in trading among themselves. OTC markets retain higher
counterparty risks in the absence of regulatory oversight, with the parties
directly dealing with each other. Foreign exchange market (FOREX) is an
example of an over-the-counter market.
 In an OTC market, there exists tremendous competition in acquiring higher
volume. Due to this factor, the securities’ price differs from one seller to
another.

Apart from the stock exchange and OTC market, other types of secondary market
include auction market and dealer market.

 The former is essentially a platform for buyers and sellers to arrive at an

understanding of the rate at which the securities are to be traded. The
information related to pricing is put out in the public domain, including the
bidding price of the offer.

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  Dealer market is another type of secondary market in which various dealers
indicate prices of specific securities for a transaction. Foreign exchange
trade and bonds are traded primarily in a dealer market.

Advantages of Secondary Market

 Investors can ease their liquidity problems in a secondary market

conveniently. Like, an investor in need of liquid cash can sell the shares held
quite easily as a large number of buyers are present in the secondary
market.
 The secondary market indicates a benchmark for fair valuation of a
particular company.
 Price adjustments of securities in a secondary market takes place within a
short span in tune with the availability of new information about the
company.
 Investor’s funds remain relatively safe due to heavy regulations governing a
secondary stock market. The regulations are stringent as the market is a
source of liquidity and capital formation for both investors and companies.
 Mobilisation of savings becomes easier as investors’ money is held in the
form of securities.
Disadvantages of Secondary Market
 Prices of securities in a secondary market are subject to high volatility, and
such price fluctuation may lead to sudden and unpredictable loss to
investors.
 Before buying or selling in a secondary market, investors have to duly
complete the procedures involved, which are usually a time-consuming
process.
 Investors’ profit margin may experience a dent due to brokerage
commissions levied on each transaction of buying or selling of securities.
 Investments in a secondary capital market are subject to high risk due to
the influence of multiple external factors, and the existing valuation may
alter within a span of a few minutes.

8. Demutualization

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The process of demutualization is to convert the traditional “not for-profit” stock
exchanges into a “for profit” company and this process is to transform the legal
structure from a mutual form to a business corporation form.
SEBI had set up a committee under the Chairmanship of Justice Kania for the
same which came up with report on demutualization of Stock Exchanges through
uniform scheme prescribed.
Accordingly, SEBI issued scheme of demutualization to BSE and other Regional
Stock Exchanges.

The important features of the demutualisation exercise are as follows:

The board of a stock exchange should consist of 75% public interest/

shareholder directors and only 25% broker directors, and
51% shareholding of the stock exchange should be divested to public/
investors other than trading member brokers and only 49% of shareholding
can remain with the trading member brokers.
This will transform our broker-owned stock exchanges into professionally-run
corporate stock exchanges.

The options prescribed for divestment/dilution of brokers’ shareholding in a

stock exchange are as follows:

4. Offer for sale, by issue of prospectus, of shares held by trading member

brokers.
5. Private placement of shares (either of the shares held by the member
brokers or new shares by the exchange) to any person or group of persons
subject to the prior approval of SEBI and the maximum limit of 5% to any
single person/group of persons.
6. Fresh issue of shares to the public through an IPO.

The purpose of demutualization is as follows:

6) Stock exchanges owned by members tend to work towards the interest of

members alone, which could on occasion be detrimental to rights of other
stakeholders.

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 7) Division of ownership between members and outsiders can lead to a
balanced approach, remove conflicts of interest, create greater
management accountability.
8) Publicly owned stock exchanges can enter into capital market for expansion
of business.
9) Publicly owned stock exchange would be more professionally managed
than broker owned.
10) Demutualisation enhances the flexibility of management.

9. Explain the evolution, growth and functions of financial system in India.

Indian Financial System is a key tool which supports the overall economic
development of our country. It is the one which facilitates the smooth flow of
funds between the households (savers) and businessmen (investors). The financial
system of the country is one which promotes capital formation by channelizing
the ideal lying resources into useful means.

This system acts as an intermediary between the savers and investors. The
financial system has three major functions that are providing payment
mechanism, depositing and safeguarding people’s savings and providing loans to
individuals.

FEATURES OF INDIAN FINANCIAL SYSTEM:

• It plays a vital role in economic development of a country.
• It encourages both savings and investment.
• It links savers and investors.
• It helps in capital formation.
• It helps in allocation of risk.
• It facilitates expansion of financial markets.
COMPONENTS/ CONSTITUENTS OF INDIAN FINANCIAL SYSTEM The following are
the four major components that comprise the Indian Financial System:
1. Financial Institutions
2. Financial Markets
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3. Financial Instruments/ Assets/ Securities
4. Financial Services.ion of Indian Financial System
Evolution of Indian Financial System

History of Indian financial system dates back even before the period when India
got independence in the Year 1947. Evolution of Indian Financial system can be
classified into 3 phases: –

1. Pre Independence Phase (Before 1947).

2. Post-Independence Phase (1947-1991).
3. The Liberalization era (1991 and beyond).
Pre- Independence Phase
During this phase, there was a large number of banks present in India which was
around 600. Establishment of Bank of Hindustan in the year 1770 in Calcutta
marks the starting of the Indian financial system. The bank discontinued its
services in 1832. There were various banks that evolved post to Hindustan banks
such as General Bank of India (1786-1791) and Oudh commercial bank (1881-
1958). However, these banks were not able to continue for a long.

Few banks of the 19th century are existing even today such as Punjab National
bank formed in 1894 and Allahabad bank formed in 1865. Three major banks of
that time like Bank of Bengal, Bank of Madras and Bank of Bombay were merged
as one body which was termed as Imperial Bank of India. This Imperial bank was
later on renamed to State Bank of India.
During this phase, The Bombay Stock Exchange(BSE) also established in 1875 it is
Asia’s first stock exchange. The BSE has helped develop India’s capital markets,
including the retail debt market, and has helped grow the Indian corporate sector.

Hilton Young Commission in year 1935 recommended the establishment of

Reserve bank of India.

This was a phase in which majority of small-sized banks failed to function properly
and were unable to gain people’s confidence. People were more involved with
money lenders and unregulated players.

Post-Independence Phase
Post-independence period is characterized by the nationalization of banks.
Majority of banks in India were privately owned at the time of independence and
56
were serving only the big corporates. Rural population, small-scale industries and
agriculture sector were still dependent on local money lenders. The government
in order to overcome this situation decided to nationalize the banks under the
Banking regulation act, 1949. RBI was nationalized in 1949 and later on, 14
commercial banks were nationalized in July 1969 during the tenure of Indira
Gandhi.

Narasimham committee in 1975 recommended the establishment of RRBs

(Regional Rural Banks) for development of rural sector and providing services to
unserved ones.

There were several other specialized banks which were constituted during this
period to support the development of the economy. These were like NABARB in
1982 for supporting agricultural-related activities, National housing bank in 1988
for the Housing sector, SIDBI in 1990 for assisting small-scale firms.

Nationalization was a remarkable step in the banking industry of industry which

boost the country growth. It was successful in gaining people’s confidence in
banking services and also smaller group were easily able to access capital from
financial institutions post nationalization.

The Liberalization Era

This was a phase which saw remarkable changes in the banking industry.
Government of India for regulating the activities and stabilizing the profits of the
banking industry set up a committee under the chairmanship of Shri M.
Narasimham for bringing various reforms.

During this period, government opened up the economy the granted private
player’s entry to banking industry. RBI granted license to 10 private sector banks
out of which only few notables survived like Axis Bank, HDFC Bank, DCB, ICICI and
IndusInd Bank. In 1992 National Stock Exchange Established to provide fully
automated electronic trading.

Narasimham committee again in 1998 recommended the entry of more private

entities in banking industry. Therefore, license was provided to Kotak Mahindra in
2001 and Yes Bank in 2004 by RBI. Further in 2013-2014, a license was granted to
Bandhan and IDFC bank.

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There are several other measures also that were taken during this phase which
were allowing the establishment of foreign banks in India, equal treatment of
both public and private sector bank by government and RBI, allowing joint
ventures of foreign banks with Indian banks, the introduction of Payments banks,
setting up small finance banks and disallowing any further nationalization of
banks.

Functions of Financial System in India

Liquidity Function
The most important function of a financial system is to provide money and
monetary assets for the production of goods and services. Monetary assets are
those assets that can be converted into cash or money easily without loss of
value. All activities in a financial system are related to the liquidity-either
provision of liquidity or trading in liquidity.
Payment Function
The financial system offers a very convenient mode of payment for goods and
services. The cheque system and credit card system are the easiest methods of
payment in the economy. The cost and time of transactions are considerably
reduced.

Saving Function
An important function of a financial system is to mobilize savings and channelize
them into productive activities. It is through the financial system the savings are
transformed into investments.
Risk Function
The financial markets provide protection against life, health, and income risks.
These guarantees are accomplished through the sale of life, health insurance, and
property insurance policies.

Transfer Function
A financial system provides a mechanism for the transfer of resources across
geographic boundaries.

Reformatory Functions
A financial system undertaking the functions of developing, introducing
innovative financial assets/instruments services and practices and restructuring
the existing assets, services, etc, to cater to the emerging needs of borrowers and
investors.

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10. ‘’Money market is very important segment of Indian Financial System”.
Comment and discuss various features of money market.
Money Market is a segment of the financial market in India where borrowing and
lending of short-term funds take place. The maturity of money
market instruments is from one day to one year. In India, this market is regulated
by both RBI (the Reserve bank of India) and SEBI (the Security and Exchange Board
of India). The nature of transactions in this market is such that they are large in
amount and high in volume. Thus, we can say that the entire market is dominated
by a small number of large players.
Importance of Money Market

Money Market is important for the economic growth of the country. The
importance of it can be described more clearly below:

1. It fulfills the finance needs of the trade and industry as & when
required.
2. For getting the short-term funds of the commercial banks, the money
market furnishes the beneficial channels.
3. By selling the treasury bills, the government can quickly raise the
short-term capital from the market with a low rate of interest.
4. It helps the RBI to formulate and implement the monetary policies,
and to accomplish its open market operations on a large scale.
5. It helps the RBI to regulate the funds in the market and provides
commercial papers for rediscount.

Objectives of the money market in India

The following are the important objectives of an Indian money market –

 Facilitate a parking place to employ short-term surplus funds.

 Aid room for overcoming short-term deficits.
 To enable the Central Bank to influence and regulate liquidity in the
economy through its intervention in this market.

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  Help reasonable access to users of short-term funds to meet their
requirements quickly, adequately and at reasonable costs.

Segments of the Indian money market

The Indian money-market has the following two segments. The existence of the
unorganized market, though illegal, yet operates. However, we that is out of the
scope of the present article. So we will concentrate exclusively on the organized
money-markets in India. Wherever, in the blog article or elsewhere in the site we
refer money-markets, it is in organized money-market only.

1. Unorganized money-market

The unorganized money market is an old and ancient market, mainly it made of
indigenous bankers and money lenders, etc.

2. Organized money-market

The organized money market is that part which comes under the regulatory ambit
of RBI & SEBI. Governments (Central and State), Discount and Finance House of
India (DFHI), Mutual Funds, Corporate, Commercial or Cooperative Banks, Public
Sector Undertakings, Insurance Companies, and Financial Institutions and Non-
Banking Financial Companies (NBFCs) are the key players of the organized Indian
money market.

Features of the Indian money market

The following are the important features of the money market in India –

1. The money market is purely for short-term funds or assets called near
money.
2. All the instruments of the money market deal only with financial assets that
are financial in nature. Also, such instruments have maturity period up to
one year.
3. It deals assets that can convert into cash readily without much loss and
with minimum transaction cost.
4. Generally, transactions take place through oral communication (for eg.
phone or mobile). The exchange of relevant documents and written
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 communications take place subsequently. There is no formal place for the
trading ( like a stock exchange).
5. Brokers free transactions are there.
6. The components of a money market are the Central Bank, Commercial
Banks, Non-banking financial companies, discount houses, and acceptance
house. Commercial banks are dominant player of this market.

11. Explain the powers and functions of the SEBI

SEBI stands for the Securities and Exchange Board of India that was established in
the year 1988 by the Government of India. SEBI was established to regulate the
functions of the stock market. Previously, SEBI did not have the power to control
the stock market and was anon-statutory body. Later, the Union Government
established SEBI as an anonymous body with statutory powers by passing the SEBI
Act1992.

The main purpose of SEBI is to safeguard the rights and interests of the investor,
reduce malpractices related to the stock exchange, establishing a code of conduct
and promoting the healthy functioning of the stock exchange.

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Functions of SEBI:
The functions of the Securities and Exchange Board of India can be categorized
into three parts:

Protective functions:: the protective functions of SEBI are as follows:

a. Prohibits insider trading: Insider trading is the buying or selling of securities by

the insiders like directors, promoters or employees working in the company,
having access to confidential price or information that affects the prices of
securities. To prevent insider trading, SEBI has barred Trusts of listed
mployee welfare schemes from purchasing their own shares
companies and employee
from the secondary markets. It also keeps a strict check on insider trading and
takes action in case of malpractices.
b. Checks price rigging: Price rigging refers to malpractices relating to securities,
securi
with the objective of causing unnatural fluctuations in the price of securities
by increasing or decreasing the market price of stocks leading to huge losses
for investors or traders. SEBI keeps strict surveillance to prevent such price
riggings.

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c. Promotes fair trade practices: SEBI prohibits fraudulent and unfair trade
practices and promotes fair trading of securities by establishing regulations
and code of conduct in the securities market.
d. Provides financial education to investors: SEBI educates investors by
conducting online and offline seminars that help investors get insights on the
financial market and money management.

Developmental functions: The developmental functions mean the initiative taken

by SEBI to upgrade the security market with the help of technological innovations.
They are as follows:

a. By training the intermediaries of the securities market.

b. Introducing electronic/ internet trading through registered stock brokers.
c. Introducing the DEMAT format.
d. By making underwriting optional to reduce the cost of the issue.
e. By the introduction of discount brokerage.

Regulatory functions: This refers to the establishment of regulations for financial

intermediaries and corporates to make sure the market runs efficiently:

a. SEBI has framed guidelines and code of conduct that are enforced to financial
intermediaries and corporates.
b. These intermediaries have been brought under the regulatory purview and
private placement has been made more restrictive.
c. SEBI regulates the working of the mutual funds.
d. Regulates takeover of companies.
e. Conducts enquiries and audit of stock exchanges

Powers –
 Quasi-judicial powers:In cases of frauds and unethical practices
pertaining to the securities market, SEBI India has the power to pass
judgements.
The said power facilitates to maintain transparency, accountability and
fairness in the securities market.

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  Quasi-executive powers: SEBI has the power to examine the Book of
Accounts and other vital documents to identify or gather evidence
against violations. If it finds one violating the regulations, the
regulatory body has the power to impose rules, pass judgements and
take legal actions against violators.
 Quasi-Legislative powers: To protect the interest of investors, the
authoritative body has been entrusted with the power to formulate
suitable rules and regulations. Such rules tend to encompass the listing
obligations, insider trading regulations and essential disclosure
requirements. The body formulates such rules and regulation to get rid
of malpractices that are prevalent in the securities market.
The Supreme Court of India and the Securities Appellate Tribunal tend to have
an upper hand when it comes to the powers and functions of SEBI. All its
functions and related decisions have to go through the two apex bodies first.

12. Explain the SEBI initiatives on investor protection in India.

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65
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 LAW OF INVESTMENTS AND SECURITIES
Unit-I: Administration of Company Law in relation to issue of prospectus and shares --
membership and share capital -- Kinds of shares -- public issue of shares -- procedure
for issue of shares -- allotment of shares – transfer and transmission of shares.
1. Administration of Company Law in relation to issue of prospectus and shares:

Introduction: When a person or Group of Persons want to start an Industry or Business

Enterprise, generally, the following avenues are available:

1 Creation of different entity Like, Proprietorship firm, Partnership firm or a Company.

To start the firm, Capital and Funds are required for acquiring the assets and to carry on
the commercial activity.
For this the ways available to secure the funds are: Own Funds (Savings), Borrowing
(either from Banks or from other sources like Friends and Relatives, NBFIs etc.)

In case of Companies, they may also raise funds from Public, a part from the above
stated sources, by means of Selling Stocks (Issue of Shares to public), Debentures,
Company Deposits, Venture capital Etc.

For Companies to raise to funds from the Market/public, they need to follow the
guidelines issued by SEBI and provisions of Company Law.

The following are the different types of Companies: (Please Note: This is only for a
brief revision and connected to our exam)
Company:
The capital - divided into parts - shares
The liability - limited to the amount of shares
Types - Private Ltd., Public Ltd. Companies and One-Man Company
Private- Min. 2 Max. 200 (As per companies Act 2013)
Public – Min. 7 Max. Any no.

Key Highlights of Indian Companies Act 2013

 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 2013 stipulates appointment of at least one-woman Director on the
Board (for certain class of companies).

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 Electronic Mode: The Companies Act 2013 proposed E-Governance for various company
processes like maintenance and inspection of documents in electronic form, option of
keeping of books of accounts in electronic form, financial statements to be placed on
company’s website, etc.

One Person Company (OPC)

Private company: Section 3(1)(c) of the Companies Act says that a single person can
form a company for any lawful purpose.
Only natural persons who are Indian citizens and residents are eligible to form a one-
person company in India.
Memorandum of Association of such a company will mandatorily prescribe the name of
the person (Nominee), who in the event of death or disability of the subscriber shall
assume his position.
The member of the OPC will have the right to change the nominee at any time with due
intimation to the Registrar.
A person cannot be a Nominee of One Person Company (OPC) of more than one OPC,
If he/she is already a member of another OPC, at the same time, by virtue of rules has
to decide within 6 months which one person company he has to continue.
OPCs need to have minimum one person (the member) as director. They can have a
maximum of 15 directors.
OPC will be formed as a ‘Private Limited Company’. Hence, minimum paid up capital
will be Rs. 1, 00,000.
The words ‘One Person Company’ will have to be mentioned in brackets below the
name of such company, wherever its name is printed, engraved or affixed.
One person can form only upto one (1) OPC.
Provisions of Annual General Meeting (AGM) and Extra-Ordinary General Meetings do
not apply to an OPC.
OPC has a separate legal entity from its owners.
Owing to the feature of it having a separate legal entity from its owners, the OPC is
taxed separately, unlike a sole proprietorship.

(Our syllabus starts from here)

What is a Prospectus?

 Definition: Section 2(70) of the Companies Act, 2013 defines a prospectus as ““A
prospectus means Any documents described or issued as a prospectus and includes any
notices, circular, advertisement, or other documents inviting deposit from the public or
documents inviting offer from the public for the subscription of shares or debentures in a
company.” A prospectus also includes shelf prospectus and red herring prospectus. A
prospectus is not merely an advertisement.

Thus,

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 Prospectus is an offer document or information brochure issued by a public company
used for inviting offers from the general public for subscribing the shares.
 Thus, a prospectus is a document issued by the company inviting the public and
investors for the subscription of its securities.
 A prospectus also helps in informing the investors about the risk of investing in the
company.
 A Prospectus is required to be issued only after the incorporation of the company.
 These documents describe stocks, bonds and other types of securities offered by the
company.
 Mutual fund companies also provide a prospectus to prospective clients, which includes a
report of the money’s strategies, the manager’s background, the fund’s fee structure and
a fund’s financial statements.
 A prospectus is always accompanied by performance history and financial information of
the company.
 The reason for accompanying such an information along with the prospectus is to make
sure that, the investors are well aware of the company’s background and overall
performance and the investors do not fall into the prey of investing in a bad company.
 It contains all the material information as to the price and number of shares/convertible
shares being offered for sale to the public, which helps the investors to take a rational
decision regarding the investment of his/her funds.
 The prospectus is a legally mandated document and so it needs to be registered with
the Registrar of Companies (RoC) prior to the opening of an issue when there is a fixed
price issue and after the closure of issue when there is a book-built issue.
 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 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.

Types of Prospectuses:

According to Companies Act 2013, there are four types of prospectus.

1. Deemed Prospectus – Deemed prospectus has mentioned under Companies Act, 2013
Section 25 (1). When a company allows or agrees to allot any securities of the company,
the document is considered as a deemed prospectus via which the offer is made to
investors.
Any document which offers the sale of securities to the public is deemed to be a
prospectus by implication of law.

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2. Abridged Prospectus [Sec. 2(1)]: An abridged prospectus as the name signifies is the
summarized offer document containing salient features of an ordinary prospectus. It is
issued together with the company’s application form of pubic issue.
3. Red herring Prospectus: A red herring prospectus is a prospectus used when there is a
book built public issue. It contains all the material facts and information excluding the
price or quantum of the securities offered for sale.
Basically, it contains information concerning the company’s operations and future
prospects, but the relevant details about the offering are not mentioned.

4. Shelf Prospectus: Shelf Prospectus refers to an offer document that lets the company
make a number of issues of the securities or the class of securities mentioned in the
document within a period of one year. Meaning that there is no requirement of issuing a
fresh prospectus each time when the issue has to be made.
The facility to issue shelf prospectus is available to specific banks and financial
institutions only.

Fixed Price Issue and Book Built Issue

Fixed Price issue is one such issue wherein the company decides the issue price in the
first place and discloses the same in the prospectus (offer document).

On the Contrary, Book built issue is the type of issue in which the price of the issue is
decided as per the securities demanded by the potential investors at different price
levels.
Prospectus Example
In an Initial Public Offer (IPO), the prospectus tells potential shareholders about the
company’s plans and business model.
For insurance and investment fund customers, a prospectus lists out the objective of the
product, inclusions, and exclusions, fees, etc.

For an Exchange-traded fund (ETF), a prospectus informs likely investors of the fund’s
goals, history, portfolio, fees and costs, and other financial details.

Prospectus and its importance:

The company provides prospectus with capital raising intention.
Prospectus helps the investors to make a well-informed decision because of the
prospectus all the required information of the securities which are offered to the public
for sale.
Whenever the company issues the prospectus, the company must file it with the
regulator. The prospectus includes the details of the company’s business, financial
statements.
1. To notify the public of the issue
2. To put the company on record with regards to the terms of the issue and allotment
process

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3. To establish accountability on the part of the directors and promoters of the company

Disclosures to be made in a Prospectus

General Information:
 The general information contained in a prospectus will be related to the name and
address of the company’s head office, officers, company secretary, directors, bankers,
legal advisers.
 It accounts for the primary objective and business operated by the company.
 It describes the company’s capital structure in a specified manner.
 it contains information about the issue opening and closing date, procedure and terms for
allotment.
 It lists out the objective of the public offer and terms and conditions of the issue.
 It also contains the consent of all the officers.

Financial Information:
 The financial information includes reports provided by company’s auditors in connection
to the profitability, liquidity, assets and liabilities, etc. as well as the report relating to the
business in which the capital raised from the public will be utilized.
Statutory Information:
 The prospectus should include an official declaration concerning the compliance of the
Companies Act and also that the prospectus does not contain anything which violates the
provisions of the law.

In a nutshell, securities can be offered for sale, by inviting applications from the public at
large through the issue of prospectus.
The prospectus needs to be filed with Registrars of Companies (RoC) and must
adhere to the minimum information requirements, as it is the only genuine source of
information to the investors to know the soundness of the Company.

In Brief What is prospectus and its contents.

The prospectus contents are specified in the Companies Act. The prospectus must
touch over the following content points:

1. Details of the company, such as name, registered office address, and objects
2. Details of signatories to the Memorandum and their shareholding particulars
3. Details of the directors
4. Details of shares offered and the class of the issue as well as voting rights
5. Minimum subscription amount
6. The amount payable on application, on allotment, and on further calls
7. Underwriters of the issue
8. Auditors of the company
9. Audited reports regarded profit and losses of the company ef

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 Legal requirement regarding issue of prospectus: (Sec. 26 of the Companies Act,
2013)
The Companies Act has defined some legal requirements about the issue and
registration of a prospectus. The issue of the prospectus would be deemed to be legal
only if the requirements are met.

1. Issue after the incorporation: As a rule, the prospectus of a company can only be issued
after its incorporation.
A prospectus issued by, or on behalf of a company, or in relation to an intended
company, shall be dated, and that date shall be taken as the date of publication of the
prospectus.

2. Registration of prospectus: it is mandatory to get the prospectus registered with the

Registrar of Companies before it is issued to the public.
The procedure of getting the prospectus registered is as under:
A. A copy of the prospectus, duly signed by every person who is named therein as a
director or a proposed director of the company must be filed with Registrar of
Companies before the prospectus is issued to the public.
B. The following document must be attached thereto:
i) Consent to the issue of the prospectus required under any person as an expert
confirming his written consent to the issue thereof, and that he has not withdrawn his
consent as aforesaid appears in the prospectus.
ii) Copies of all contracts entered into with respect to the appointment of the managing
director, directors and other officers of the company must also be filed with Registrar.
iii) If the auditor or accountant of the company has made any adjustments in the
company’s account, the said adjustments and the reasons thereof must be filed with the
documents.
iv) There must be a copy of the application which is to be filled for the issue of the
company’s shares and debentures attached with the prospectus.
v) The prospectus must have the written consent of all the persons who have been
named as auditors, solicitors, bankers, brokers, etc.

C. Every prospectus must have, on the face of it, a statement that:

i) A copy of the prospectus has been delivered to the Registrar for registration.
ii) Specifies that any documents required to be endorsed by this section have been
delivered to the Registrar.

D. A copy of the prospectus must be filed with the Registrar of Companies.

E. According to the Section 26, no prospectus shall be issued more than ninety days
after the date on which a copy thereof is delivered for registration.

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If a prospectus issued in contravention of the above –stated provisions, then the
company and every person who knows a party to the issue of the prospectus shall be
punishable with a fine.

Misleading Prospectus or Mis-statement in prospectus:

A prospectus is said to be misleading or untrue in two following cases:
1. A statement included in a prospectus shall be deemed to be untrue, if the statement
is misleading in the form and context in which it is included.
2. Omission from prospectus of any matter to mislead the investors.
CRIMINAL LIABILITY FOR MIS-STATEMENT IN PROSPECTUS (SECTION 34):
Where a prospectus, issued, circulated or distributed:
1. includes any statement which is untrue or misleading in form or context in which it is
included; or
2. where any inclusion or omission of any matter is likely to mislead;
Every person who authoresses the issue of such prospectus shall be liable under
section 447 i.e. fraud.

Defences available in this section are:

1. Person prove that statement or omission was immaterial;
2. Person has reasonable ground to believe and did believe that statement was true; or
3. Person has reasonable ground to believe and did believe that the inclusion or
omission was necessary.

CIVIL LIABILITY FOR MIS-STATEMENTS IN PROSPECTUS (SECTION 35):

Where a person has subscribed for securities of a company acting upon any misleading
statement, inclusion or omission and has sustained any loss or damage as its
consequence, the company and every person who:
1. is a director at the time of the issue of prospectus;
2. has named as director or as proposed director with his consent;
3. is a promoter of the company;
4. has authorised the issue of the prospectus; and
5. is an expert;
shall be liable to pay compensation to effected person.
This civil liability shall be in addition to the criminal liability under section 36. Where it is
proved that a prospectus has been issued with intent to defraud the applicants for the
securities of a company or any other person or for any fraudulent purpose, every person
shall be personally responsible, without any limitation of liability, for all or any of the
losses or damages that may have been incurred by any person who subscribed to the
securities on the basis of such prospectus.

Membership and share capital

Members of a Company
As per Section 2(55) of Companies Act 2013

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 By definition, the term “Member” in relation to a company means, one who has agreed
to become the member of the company by entering his name into the ‘Register of
Members’.
Every person who has agreed in writing to become a part of the company and also
holds shares of the company is considered the ‘Member of the Company’ and is said to
hold membership in a company.
The name of the member of the company is entered as ‘Beneficial owner in the
record of depository’.
In order to acquire the membership of the company, the following two elements must be
presented:

1. An Agreement to become a member.

2. Entry of the name of the person so agreeing, in the Register of members of the
company.

The enlisted person should be in a capable of entering into a contract with the company.
But a bearer of share warrant is not a member of the company.
Finally, to become the registered member of the company the person should be
satisfactory as an asset to the company.

Difference between Member & Shareholder

Matter Member Shareholder
Meaning A person whose name is entered in A person who owns the shares of the
the register of members of a company.
company.
Definition Companies Act, 2013 defines Shareholder is not listed under the
‘Member’ under section 2(55) Companies Act, 2013
Share The holder of the share warrant is not The holder of the share warrant is a
Warrants a member. Shareholder.
Company Every company must have a The Company limited by shares can have
minimum number of members. shareholders
Memorandum A person who signs the memorandum After signing the memorandum, a person
of association with the company can become a shareholder only if shares
becomes a member. are allotted to him.

In short, The following are the differences between members and shareholders:

 A member is a person who subscribed the memorandum of the company. A shareholder

is a person who owns the shares of the company.
 The term member is defined under section 2 (55) of the Indian Companies Act, 1956.
Conversely, the term shareholder is not defined in the Indian Companies Act, 1956.
 The bearer of a share warrant is not a member, but the bearer of a share warrant can be
a shareholder.
 All shareholders whose name are entered in the register of members are the members.
On the other hand, all members may not be the shareholders.

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 In the case of a public company, there must be a minimum of 7 members. There is no
such cap on the maximum number of members. Similarly, a private company can have a
minimum of 2 and maximum of 200 members. As opposed to shareholders, there is no
minimum or maximum limit, in the case of a public company.
Conclusion
Members and Shareholders both are important persons of any company, whether it is
public or a private limited company.
Many differences are explained between them, which makes it clear that how these two
terms differentiate each other.
However, a member can be a shareholder and in the same way, a shareholder can also
be a member subject to certain conditions has to be fulfilled for the same.

METHODS OF BECOMING MEMBER:

1. By subscribing memorandum: At the time of Incorporation, the persons who agree to

purchase at least one share of the company.
2. By allotment of shares: allotment of shares occurs when the company(issuer) issues
shares initially either by way of Initial Public Offering or Further Public Offering.
3. By transfer: transferee becomes a member of the company when the company registers
such transfer and enters his name in register of members.
4. By transmission: the person entitled for the shares of the deceased member will
become the member of the company when his name gets entered in the register of
members on providing notice of transmission to the company.
5. By becoming beneficial owner: a person whose name is entered as beneficial owner in
the records of the depository
6. NOTE: here “Beneficial owner” means a person who is entitled for the ultimate
benefits.
7. By estoppel: a person whose name was entered in the register of members and
knowingly he does not apply for rectification of the same, becomes a member by
estoppel (estopped from his own act)

SOME IMPORTANT POINTS TO BE NOTICED REGARDING MEMBERSHIP IN A

COMPANY:

√ The term Shareholder is distinct from the term Member

√ Minor can become member of a company (only for fully paid up shares)
√ A firm cannot become a member of a company as it does not carry a separate legal
entity.
√ HUF cannot become a member of a company; however, a KARTA can become a
member in his individual capacity.
√ Subsidiary company cannot become a member of its holding company except 3 cases
mentioned under section 19 of Companies Act 2013.

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 INTERPRETATION OF SECTION 19 OF THE ACT:

Subsidiary company cannot hold shares of its holding company

Either by himself or Through any of its nominees
Except:
a. Holding shares as a legal Representative of a deceased member.
b. Holding shares as a trustee.
c. Was already a shareholder before being a subsidiary company.
NOTE: the subsidiary company who was already a shareholder before being a
subsidiary company will not be entitled for any voting rights on his holding.
However, in case of Company limited by Guarantee or an Unlimited Company not
having share capital:
The reference to shares shall be constructed to the interest of members in whatever
form.

Cessation of Membership
The term ‘Cessation’ means ‘Termination’. Just as there’s a process to add a member
of the company, there’s a process to terminate that member.
Terminating a member of the company can result in removal from the ‘Register of
Members’.
The following are the modes of removing a member of the company:

1. Transfer of Membership
Here, the shares of a member are transferred to another person by the company in the
name of the transferee.
The name of the transferor is removed from the Register of Members.
After transferring all the shares from the person to another person, the person is legally
removed from the company.
2. Transmission of Membership
On the death of a shareholder/member of the company, his/her legal heir or
representative becomes a member.
3. Surrender of Membership
A person is removed from the membership once he/she surrenders his shares, which
requires ‘Acceptance on part of Board’.
4. Forfeiture of Membership
On account of Loss or selling of a share, the member is terminated from the company.
5. Buyback of shares
Subject to the provisions of Section 68 of the Companies Act, 2018 and Articles of
Association of the Company, those members who offer their shares to the company for

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 sell in buy back, such members cease to be a member of the company on cancellation
of such bought back shares.
6. Sale of shares under lien:
A member on whose shares, company enforces its lien by way of sale of such shares,
such member ceases to be a member on the date when his name got removed from the
registers of members or from the Registers of Beneficial Owners.
NOTE: A company can only exercise lien on the shares if such power is given under
AOA (Articles of Association) of the company.
7. Death/Insolvency
In case of death of a member he ceases to be a member on removal of his name from
the register of members or beneficial owners and enters the name of his nominee/
successor in his place in the registers.
NOTE: The nominee/ successor shall follow the laid down procedure for the
transmission of shares.
8. Conversion of shares into share warrants/stocks
A company can convert its fully paid up shares into stock or share warrants (if
authorized by its Articles of Association),
On such conversion the name of such members got struck from the registers and they
cease to be a member of the company.
9. Dissolution/Winding up/Striking off the name of the Company
In case of Dissolution/ striking off : if a company’s name is stuck off or it has been
dissolved then the members of such company ceases to be members.
In case of winding up of the company : on winding up the members ceases to be
members but remain liable as contributories and are entitled to claim share in the
profits (if any).
10. Expulsion of Member

Can a member be Expelled from the Company by inserting a clause to its MOA or AOA
?

No, A member cannot be Expelled because according to section 6 of Companies Act

2013 anything contained in MOA or AOA beyond the powers provided by Companies
Act 2013, is void
According to Section 6 of the Companies Act, the Act overrides the memorandum and
articles of association and any provision contained in these documents repugnant to the
provisions of the Companies Act, is void.

However, Section 235 is an Exception to this Rule that Members cannot be expelled.

CASE LAW: MALINI BHARTI RAO CASE

Liabilities of Members

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 A ‘Liability’ is a state of being legally responsible for something. This term is usually
used in an organization to emphasize the responsibilities of a member of the company.

The following are the liabilities of the member of a company:

1) To make shares if he/she is allotted as per the Act.

2) To pay call money or pay the due amount for the shares.
3) To abide by the decision of majority when they act in ‘bonafide’.
4) To contribute to the Asset of the company in case of winding up and when the shares
are partly paid up.
A member can be distinguished from a shareholder in the following circumstances:

1. A registered member of a company having no share capital is not a shareholder since

the company itself has no share capital.
2. A person who holds a share warrant is a shareholder but he is not a member of the
company.

Share capital, Kinds of shares & public issue of shares

What is Capital
Capital in the General or Popular sense is the amount invested in a
Business/Firm/Entity by owners, with an aim to derive profits/return out of it.
Economists definition: One of the Factors of Production (Land, Labour, Capital and
Organisation are the factors of production)
Accounting Definition: Owner’s Equity or Owner’s contribution for the project/enterprise.
It is treated as liability because it is the what the firm owes and source of funds.

Thus, the Capital can be defined as “All those man-made goods which are used in
further production of wealth.”
In other words, capital is a man-made resource of production.
Machinery, tools and equipment of all kinds, buildings, railways and all means of
transport and communication, raw materials, etc., are included in capital.
Capital has a number of related meanings in economics, finance and accounting.
In finance and accounting capital generally refers to financial wealth especially that
used to start a business.
‘Capital’ includes all those goods (items or commodities) which are used for further
production of more goods, e.g., machines, tools, factory buildings, transport equipment,
etc.
‘Capital’ is the result of human efforts made, on natural resources, in the past. As
suggested by CAIRNCROSS, stocks, shares, government bonds, securities, etc., are
also included in ‘capital’ because all these yield income to the investors.

Characteristics of Capital:

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 1. Perpetuality – It will be available as long as company/firm exists.
2. Should have loss absorbing capacity
Other Characteristics of Capital:
1. Capital is a Passive Factor
2. Capital is Man Made
3. Capital is not an Indispensable Factor of Production: Production can be possible
even without capital, whereas, land and labour are the original and indispensable
factors of production.
4. Capital Has high Mobility
5. Capital is Elastic
6. Capital Depreciates
Share Capital:
What is Share Capital?
Share capital is the money that a company raises through the issuance of common or
preferred stock. With additional public offerings, the amount of share capital or equity
financing that a firm has can change over time.
In short, share capital means the total amount raised by the company in sales of shares.
The following different terms are used to denote different aspects of share
capital:-
1.Nominal, authorised or registered capital: means the sum mentioned in the capital
clause of Memorandum of Association. It is the maximum amount which the company
raise by issuing the shares and on which the registration fee is paid. This limit is cannot
be exceeded unless the Memorandum of Association is altered.
2.Issued capital: means that part of the authorised capital which has been offered for
subscription to members and includes shares allotted to members for consideration in
kind also.

3.Subscribed capital: means that part of the issued capital at nominal or face value
which has been subscribed or taken up by purchaser of shares in the company and
which has been allotted.
4.Called-up capital: means the total amount of called up capital on the shares issued
and subscribed by the shareholders on capital account. I.e if the face value of a share is
Rs. 10/- but the company requires only Rs. 2/- at present, it may call only Rs. 2/- now
and the balance Rs.8/- at a later date. Rs. 2/- is the called-up share capital and Rs. 8/-
is the uncalled share capital.
5.Paid-up capital: means the total amount of called up share capital which is actually
paid to the company by the members.

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 In India, there is the concept of par value of shares.
 Par value of shares means the face value of the shares.
 A share under the Companies act, can either of Rs10 or Rs100 or any other value which may
be the fixed by the Memorandum of Association of the company.
 When the shares are issued at the price which is higher than the par value say, for example
Par value is Rs10 and it is issued at Rs15 then Rs. 5 is the premium amount i.e, Rs10 is the
par value of the shares and Rs. 5 is the premium.
 Similarly when a share is issued at an amount lower than the par value, say Rs8, in that case
Rs. 2 is discount on shares and Rs10 will be par value.
Types of shares: Shares in the company may be similar i.e they may carry the same
rights and liabilities and confer on their holders the same rights, liabilities and duties.
There are two types of shares under Indian Company Law:

1.Equity shares means that part of the share capital of the company which are not
preference shares.

2.Preference Shares means shares which fulfill the following 2 conditions. Therefore, a
share which is does not fulfill both these conditions is an equity share.

1. It carries Preferential rights in respect of Dividend at fixed amount or at fixed rate i.e. dividend
payable is payable on fixed figure or percent and this dividend must paid before the holders
of the equity shares can be paid dividend.
2. It also carries preferential right in regard to payment of capital on winding up or otherwise.
It means the amount paid on preference share must be paid back to preference
shareholders before anything in paid to the equity shareholders.
In other words, preference share capital has priority both in repayment of dividend as
well as capital.

Types of Preference Shares:

1. Cumulative or Non-cumulative:
 A non-cumulative or simple preference shares gives right to fixed percentage dividend of
profit of each year.
 In case no dividend thereon is declared in any year because of absence of profit, the
holders of preference shares get nothing nor can they claim unpaid dividend in the
subsequent year or years in respect of that year.

Cumulative preference shares however give the right to the preference shareholders
to demand the unpaid dividend in any year during the subsequent year or years when
the profits are available for distribution.
 In this case dividends which are not paid in any year are accumulated and are paid out
when the profits are available.

2. Redeemable and Non- Redeemable:

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 Redeemable Preference shares are preference shares which have to be repaid by the
company after the term of which for which the preference shares have been issued.

Irredeemable Preference shares(Non- Redeemable) means preference shares need

not repaid by the company except on winding up of the company.

 However, under the Indian Companies Act, a company cannot issue irredeemable
preference shares.
 In fact, a company limited by shares cannot issue preference shares which are
redeemable after more than 10 years from the date of issue.
 In other words, the maximum tenure of preference shares is 10 years.
 If a company is unable to redeem any preference shares within the specified period, it
may, with consent of the Company Law Board, issue further redeemable preference
shares equal to redeem the old preference shares including dividend thereon.
 A company can issue the preference shares which from the very beginning are
redeemable on a fixed date or after certain period of time not exceeding 10 years provided
it comprises of following conditions:
A. It must be authorized by the articles of association to make such an issue.
B. The shares will be only redeemable if they are fully paid up.
C. The shares may be redeemed out of profits of the company which otherwise would be
available for dividends or out of proceeds of new issue of shares made for the purpose of
redeem shares.
D. If there is premium payable on redemption it must have provided out of profits or out of
shares premium account before the shares are redeemed.
E. When shares are redeemed out of profits a sum equal to nominal amount of shares
redeemed is to be transferred out of profits to the capital redemption reserve account.
F. This amount should then be utilised for the purpose of redemption of redeemable
preference shares.
G. This reserve can be used to issue of fully paid bonus shares to the members of the
company.
3. Participating Preference Share or non-participating preference shares:
Participating Preference shares are entitled to a preferential dividend at a fixed rate
with the right to participate further in the profits either along with or after payment of
certain rate of dividend on equity shares.
A non-participating share is one which does not such right to participate in the profits
of the company after the dividend and capital have been paid to the preference
shareholders.
Different Types of Shares issued in Practice

1. Equity share capital and preference share capital

2. Shares with differential voting rights

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 3. Sweat equity shares

4. Issue of securities at a premium

5. Prohibition to issue the shares at discount

6. Issue of shares on preferential basis

7. Further issue of shares

8. Bonus shares

9. Employee stock option scheme

Types of Issue of Shares

Definition: A share is that smallest part, into which the overall capital of the company is
divided.
Issue of shares is a process through which the company allocates fresh shares to the
new or existing shareholders.
The issue of shares is made to both individuals, institutions or body corporates.
A share in nutshell is a financial investment made by a person in a project/Business
Enterprise

Types of Issue of Shares

There are a number of ways in which the shares of a company can be issued, as
discussed below:

Public Issue:
 This is the most common way to issue securities to the general public.
 Through an Initial Public Offer (IPO), the company is able to raise funds.
 The securities are listed on a stock exchange for trading purposes.
 Public issue or public offering refers to the issue of shares or convertible securities in the
primary market by the company’s promoters, so as to attract new investors for a
subscription.
 In a public issue, the shares are offered for sale in order to raise capital from the general
public, for which the company issues a prospectus.
 The investors who want to subscribe for the shares make an application to the company,
which then allots shares to them. The entity which makes an issue is called an Issuer.

Initial Public Offer:

 Otherwise called an IPO, as its name suggests it is the sale of company’s shares to the
public at large for the very first time.

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 It is an offer in which an unlisted or privately held company makes a fresh issue of shares
or convertible securities, or an already listed company makes an issue of existing shares
or convertible securities, for the first time to the public at large.
 In this way the unlisted or budding company lists its shares in the recognized stock
exchange and goes public, to raise funds for running the business.
 On the other hand, established entities make IPO facilitate owners to sell some or all of
their ownership to the public.

Further Public Offer:

 If an already listed company, which has gone through an IPO offers new or in better
words, additional shares to the public for sale, so as to expand their equity base or pay off
debts, or for new project or expansion of the existing capacity, it is known as Follow-on
Public Offer or Further Public Offer (FPO)

 Right Issue (Sec.62): In a right issue, shares or convertible securities are offered to the
existing shareholders at a concessional rate, on a stipulated date, fixed by the company
itself.
 The main aim of issuing right shares is to raise additional funds by offering shares to the
existing equity shareholders, in the proportion of their holdings, rather than making a fresh
issue.
Composite Issue:
A composite issue is one in which an already listed company offers shares on the
public-cum-rights basis and makes concurrent allotment of the shares.

Bonus Issue (Sec.63): As the name itself suggests, it is the free additional shares
distributed to the current shareholders in the proportion of the fully paid-up equity
shares held by them on a particular date.

A company may issue fully paid-up bonus shares to its members, in any manner
whatsoever, out of –

A. Free Reserves;
B. Securities Premium;
C. Capital Redemption Reserve:
 No company shall capitalise its profits or reserves for the purpose of issuing fully paid-up
bonus shares, unless Authorised by Articles; on the recommendation of the Board, been
authorised in the General Meeting.
 Other Conditions:
1) Not defaulted in payment of interest or principal of fixed deposits or debt securities;
2) Not defaulted in respect of the payment of statutory dues of the employees, such as,
contribution to provident fund, gratuity and bonus;
3) Partly paid-up shares are made fully paid-up;

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 4) The company which has once announced the decision of its Board recommending a
bonus issue, shall not subsequently withdraw the same.
5) The bonus shares shall not be issued in lieu of dividend.
6) Approve in Board meeting File PAS-3 within 15 days from the date of allotment.

Private Placement (Sec.42): If a company offers shares to a selected group of

investors which can be mutual funds, banks, insurance companies, pension funds and
so forth, to raise capital, is called private placement.

Any offer or invitation to subscribe or issue of securities to a select group of persons by

a company (other than by way of public offer) through private placement offer- cum-
application, which satisfies the conditions specified in this (Sec.42) section

 To selected group of persons which has been identified by Board.

 On the recommendation of the Board, been authorized in the General Meeting File MGT-
14 within 30 days from the date passing of special resolution with the Registrar and
application letter shall be in the form of an application in Form PAS-4.
 Allot securities within 60 days from the date of receipt of the application money.
 Company shall maintain a complete record of private placement offers in Form PAS-5.
 Return of allotment of securities shall be filed with the Registrar within 15 days of allotment
in Form PAS-3.

Preferential Issue: Preferential allotment is one in which a publicly listed enterprise

allots shares to a selected group of investors such as individuals, venture capitalists,
companies on preferential basis.

Qualified Institutional Placement (QIP): If a listed organization offers equity shares or

non-convertible securities to a qualified institutional buyer for sale to raise capital.
Here qualified institutional buyer includes mutual funds, venture capital fund, public
financial institutions, insurance funds, scheduled commercial bank, pension funds, etc.

Institutional Placement Programme (IPP): If a publicly listed company makes a

follow-on offer of equity shares or the promoters offers shares for sale, wherein the
shares are allotted to the QIB’s only, with the aim of achieving minimum public
shareholding.

The company issues share in order to raise funds from the general public, so as to
apply these funds in business operations. However, they can also be issued to serve
other purposes also, as the money can be utilized in repaying debts, funding a new
project, acquiring another company.

Procedure of Issue of New Shares

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 According to Section 62 (1) of the Companies Act 2013, the procedure for issue of
shares is as follows:
Issue of notice of Board meeting
Convene the First Board Meeting
Issue Letter of Offer
File MGT – 14
Receive application money
Convene the Second Board Meeting
File the forms with ROC

1] Issue of Prospectus
 Before the issue of shares, comes the issue of the prospectus.
 The prospectus is like an invitation to the public to subscribe to shares of the company.
 A company must submit a copy of its prospectus to the Securities and Exchange
Commission before the publication date.
 However, private companies or public companies issuing shares privately do not need to
issue a prospectus.
 It also states the manner in which the capital collected will be spent.
 When inviting capital/funds from the public at large it is compulsory for a company to
issue a prospectus or a document in lieu of a prospectus.
 The prospectus gives brief information about the issuing company: names of directors,
past performance, terms of issue and the investment for which the company is raising
capital.
 A prospectus also contains all the information of the company, its financial structure,
previous year balance sheets and profit and Loss statements etc.
 It also gives opening and closing dates of the share issue, application fees, allotment and
on-call dates, and bank details for deposit and minimum shares for application.

2] Receiving Applications
 When the prospectus is issued, prospective investors can now apply for shares.
 After getting an invitation, interested investor prospects can submit their application
through a prescribed form, along with an application fee before the closing date given in
the prospectus.
 When the number of shares applied for exceeds the number of shares issued, there is an
oversubscription, but when applications are less than expected, there is an under-
subscription.
 Applications occur at a designated bank where a receipt is issued.
 The issuing company does not withdraw the application money until completion of the
allotment procedure.
 The application fee collected for share issue should be at least 5 percent of the nominal
share amount.
 They must fill out an application and deposit the requisite application money in the
schedule bank mentioned in the prospectus.

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 The application process can stay open a maximum of 120 days.
 If in these 120 days minimum subscription has not been reached, then this issue of
shares will be cancelled.
 The application money must be refunded to the investors within 130 days since issuing of
the prospectus.

3] Allotment of Shares
 Once the minimum subscription has been reached, the shares can be allotted.
 Generally, there is always oversubscription of shares, so the allotment is done on pro-
rata bases.
 When the directors of an issuing company with consultation with the stock market
authorities prepare to sell shares to an applicant, they communicate through an allotment
letter.
 Most people use allotment and issuance of shares interchangeably.
 However, for a public company, share allotment strictly involves allocating the right to
shares to certain applicants.
 The allotment letter communicates allotment time and date of paying for the shares.
 Not all applicants receive allotment letters, unsuccessful applicants receive regret letters
and their application money given back.
 Share allotment can be pro-rata, in which all applicants are accepted, but each is given
lesser shares than they applied for.
 Letters of Allotment are sent to those who have been allotted their shares.
 This results in a valid contract between the company and the applicant, who will now be a
part owner of the company.

If any applications were rejected, letters of regret are sent to the applicants. After the
allotment, the company can collect the share capital as it wishes, in one go or in
instalments.
Call on Shares
Calls are used to collect remaining shares after application and allotment as per the
provisions of the prospectus.
There's first call, second call and so on, depending on the number of installments.
The last call includes the word “final.”
The call amount should not exceed 25 percent of the share's nominal value, and a
month must have elapsed from the payment date of the previous call.
A 14-day notice must be given indicating time and place.

What is a minimum subscription?

Ans: This is a minimum amount that must be raised when the shares are offered to the
public during the issue of shares.
This minimum subscription is generally set by the Board of directors, but it cannot be
less than 90% of the issued capital.

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 Shares Issued at Premium
When the company decides to issue shares at a price higher than the nominal value or
face value, we call it shares issued at a premium.
It is quite a common practice especially when the company has a great track record and
strong financial performances and standing in the market.

So, say the face value of a share is Rs 100/- and the company issues it at Rs 110/-.
The share is said to have been issued at a 10% premium.
The premium will not make a part of the Share Capital account but will be reflected in a
special account known as the Securities Premium Account.

So at least 90% of the issued capital must receive subscriptions or the offer will be said
to have failed. In such a case the application money received thus far must be returned
within the prescribed time limit.

Rights Issue:
Overview of Right Issue
 A company issues right shares to its existing shareholders in proportion to their
shareholdings in order to raise subscribed capital.
 The company offers these shares at a price lower than the prevailing market price of its
shares.
 By this method, a company can raise funds without incurring any additional cost.
Moreover, right issue is a more feasible option than borrowing money from banks or
financial institutions as it involves fewer documentation and compliance requirements.

Section 62 of the Companies Act, 2013 regulates the process of right issue and also
provides pre-emptive right to the shareholders to subscribe to such shares.
Therefore, the right issue acts as a formal invitation from the company to its existing
shareholders to buy additional shares.

Key Objectives for Right Issue of Shares

1) The Right Issue is done to increase the subscribed capital of the Company.
2) The shares are issued to the existing shareholders of the Company in proportion to their
current share capital issued earlier.
3) The Right Issue is done by sending a letter of offer to the shareholders of the Company.
4) The notice of the issue of shares should be sent to the shareholders by offering them an
option to take the shares offered to them.
5) The shareholders should answer the notice within 15 days or a maximum of 30 days.
6) The shareholder does not respond to the Company’s notice of issuing shares; then the
offer will be deemed to be declined by the shareholders.
7) The notice of shares issue should be sent through registered post or speed post or any
electronic mode to the shareholders.

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8) The Reason behind issuing the Right Issue
9) By issuing the Right issue, the Company gets sufficient funds and besides gives the right
to the existing shareholders of the Company to purchase the shares at a discounted price.
10) Apart from raising the Capital of the Company, the Right issue bestows other advantages
like-Provides ease for raising Fund, Converting the unsubscribed share capital to the
Subscribed share capital of the Company.
11) Favorable method of raising the Capital which results in expansion without Debt.

Conditions relating to Right Issue

A company needs to fulfil the following conditions before undergoing the process of
Right Issue:

 Any company can go for right issue be a private company, public, listed or unlisted
company.
 Every unlisted company making the offer of the right issue needs to get its securities
converted into a dematerialized form.
 The KMP (Key Managerial Personnel), Directors and Promoters hold these securities as
per the provisions of the Depositories Act, 1996;
 Any shareholder who intends to subscribe the shares offered also needs to get their
securities converted into dematerialised form;
 A company needs to check whether its authorised capital is enough to issue the right
shares. If not, then the company needs to alter the capital clause of its MOA
(Memorandum of Association);
 A company needs to verify whether the AOA (Article of Association) authoresses the
issue of the right shares or not. If not, then the company also needs to alter AOA by
including the provision of the right issue;
 A company can issue the right shares only to the shareholders of the company.

Who can apply for Right Issue?

 As per section 62 of the Companies Act, 2013 the following entities can apply for the
Right Issue:

Existing Shareholders: A company can issue right shares to its existing shareholders in
proportion to their shareholdings by sending them a letter of offer. However, a company
needs to fulfil the following conditions for issuing rights shares:

A company needs to send a letter of offer to the shareholders specifying the number of
shares offered.
 The shareholders must accept the offer in a minimum of 15 days and a maximum of 30
days;
 If the shareholders do not accept the offer within the prescribed period, the same offer
stands declined;

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 The letter of offer also includes a right to renounce the shares offered in favour of some
other person;
 After the expiry of the prescribed period or on receipt of an intimation from the
shareholder regarding their rejection to the shares offered, the BOD (Board of Directors)
may dispose of the shares in a manner advantageous to both the company and
shareholders.

Employees: A company can issue the right shares to its employee under a scheme of
ESOP (Employee Stock Option Plan) by passing a special resolution and complying
with specified conditions.

Any other person: A company can also issue the right shares to any other person by
passing a Special Resolution either for cash or for consideration other than cash.
However, the registered valuer determines the price of such shares by making a
valuation report subject to prescribed conditions.

Procedure for Rights Issue

According to Section 62 (1) of the Companies Act 2013, the procedure for issue of
shares is as follows:

1. Issue of notice of Board meeting:

According to Section 173(3) of the Companies Act 2013, the notice for the board
meeting has to be sent minimum 7 days prior to the board meeting and must specify the
agenda for the meeting.
Convene the First Board Meeting:
The Board meeting is held, and the resolution for issuing rights shares is passed.
The rights issue does not require the approval of shareholders, and hence the board
can proceed towards the issue.

Issue Letter of Offer:

On the passing of the resolution, the letter of offer is issued to all shareholders, and the
same is sent through registered post or speed post.
For shareholders to accept the offer a window period of 15 – 30 days is given that is to
say the maximum time the shareholders can take to accept the offer is 30 days and the
minimum period is 15 days.
The offer is considered declined if it is not accepted before the expiry period. The offer
must be open at least three days after the issue of the letter of offer.
File MGT – 14: After the passing of board resolution, the company must file the MGT -
14 within 30 days of passing of the Board Resolution.
The form MGT 14 is mandatory for a public limited company.
A true certified copy of the Board Resolution needs to be attached to MGT 14.

Receive application money:

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 The shareholders must send the accepted application along with application money.

Convene the Second Board Meeting:

The company must convene the second board meeting, the notice of which must be
sent 7 days prior to the board meeting.
The required quorum must be present, and the resolution for the allotment of shares
must be passed.
On passing the resolution for allotment of shares, the allotment of shares must be done
within 60 days of receiving the application money for the same.

File the forms with ROC:

The company must file the Form PAS -3, within 30 days from the allotment of the
shares with the Registrar of Companies.
The certified true copy of the Board Resolution and the list of the allottees must be
attached to the form.
Additionally, the MGT – 14 must be filed for both the allotment and issue of shares.

Issue of Share Certificates:

The share certificates must be issued; if the shares are in “Demat” form, then the
company must inform the depository immediately on allotment of shares.
If the shares are held in physical form, then the share certificates must be issued within
2 months from the date of allotment of shares.
The share certificate must be signed by at least 2 directors. The share certificates must
be issued in Form SH -1.

Conclusion
The Right Issue Shares is a prescribed invite to the existing shareholders of the
Company to buy the further, new shares in the company which gives the right to the
existing shareholder to purchase new shares at a discounted rate.
While issuing the Right issue, the motive of the company is to fortify an equitable
distribution of shares. However, it does not affect the voting rights of the shareholders.

Transfer and transmission of shares.

Shares Transfer or Transmission in a private limited company are bound by few rules
and regulations.
The shares or debentures or other interest of any member in a company is a movable
property, transferable in the manner provided by the articles of the company

Transfer of Shares

 Transfer of shares is a voluntary act that takes place by way of contract between
transferor and transferee.

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  Transfer of shares refers to the intentional transfer of title of the shares between the
transferor (one who transfers) and the transferee (one who receives).
 Transfer deed is executed in transfer of shares.
 Transfer of shares refers to the transfer of title to shares, voluntarily, by one party to
another.
 The shares of a public company are freely transferable unless the company has a valid
reason to disallow the same.
 The shares of a private limited company are not transferable subject to certain exceptions
 Adequate consideration is involved under this contract.
 Liabilities of transferor cease on the completion of transfer.
 Stamp duty is involved under transfer and payable on the market value of shares.

Transmission of Shares

 Transmission of shares means the transfer of title to shares by the operation of law.
 It is initiated by legal heir or receiver.
 Transmission of shares takes place due to the operation of law that is when the holder is
no more or has become lunatic or insolvent.
 It can also take place when the holder of shares is a company, and it has wound up.
 No transfer deed is involved in transmission of shares.
 No adequate consideration is involved under this contract.
 Original liability of shares continues to exist.
 No stamp duty is payable.
 The transferee will be given the rights to the shares, and the transmission is recorded only
when the transferee gives proof of entitlement to the shares.
 In case of the death of the holder the shares, it will be transferred to the legal
representative and in case of insolvency to the official assignee.

The following table illustrates the differences between the transfer of shares and
transmission of shares:

Details Transfer of Shares Transmission of Shares

What is it? Voluntary Act Operational by law
Who can Transferor or Transferee Legal heir or receiver
initiate?
How is it A deliberate act of parties Insolvency, lunacy, death, or inheritance
affected?
Is there a Yes No
consideration?
Is a transfer Yes No
deed
compulsory?
Is stamp duty Yes. Payable on the market value of No
compulsory? shares
Who is liable? Liability of transferor ceases to exist Original liability of shares continues to
post the transfer exist

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Provisions under Companies Act, 2013 and SEBI (Listing Obligations and Disclosure
Requirements) Regulation, 2015

(A) Section 56 of Companies Act, 2013 read with Rule 11 of Companies (Share
Capital & Debenture) Rules, 2014
(1) Transfer of Shares (Form SH-4)
A company shall register a transfer of securities of the company only if a proper
instrument of transfer, in form SH-4 as given in sub rule 1 of rule 11 of Companies
(Share Capital & Debentures) Rules 2014 duly stamped, dated and executed by or on
behalf of the transferor and the transferee and specifying the name, address and
occupation, if any, of the transferee has been delivered to the company by the
transferor or the transferee within a period of 60 days from the date of execution, along
with the certificate relating to the securities, or if no such certificate is in existence, along
with the letter of allotment of securities.
(2) Transmission of Shares:
Intimation/application of Transmission accompanied with followings relevant documents
(as require) would be enough for valid transmission request.
Execution of transfer deed not required in case of transmission of shares.

The following are the relevant documents for the transmission of shares
1. Certified Copy of Death Certificate
2. Self-Attested Copy of PAN
3. Succession certificate/ Probate of Will/Will/ Letter of Administration/ Court Decree
4. Specimen signature of successor

Time limit for delivery of a certificate in both cases

Every company must deliver the certificates of all securities transferred or transmitted
within 1 month from the date of receipt of the instrument of transfer in case of transfer or
intimation of transmission as applicable unless prohibited by any provision of law or any
order of Court, Tribunal, or other authority.

Penalty in case of non-compliance

Where any default is made in complying with the above, the company shall be
punishable with a fine not be less than Rs. 25,000 but which may extend to Rs.
5,00,000, and
Every officer of the company who is in default shall be punishable with a fine not be less
than Rs.10,000 but which may extend to Rs.1,00,000.

While the transfer of shares and transmission of shares intend a change in ownership of
the title of the shares, the distinction lies in the fact that the transfer of shares is
voluntary and initiated by the transferee or transferor while transmission of shares is
operational by law and is initiated by the legal representative or receiver.

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 Unit – II
Debentures - Kinds of Debentures and Charges – Dividend -- Inter-Corporate
Loans and Investments:
Following provisions of the Companies Act, 2013 governs the floatation, issue
and allotment with regards to the debentures:

Section 2(30) – Definition;

Section 44 – Nature of debentures;
Section 71 – Provisions relating to issue and allotment of debentures;
Rule 18 of the Companies (Share Capital and Debenture) Rules, 2014 – Rules
pertaining to issue and allotment of debentures.

What is Debenture
A Debenture is a financial debt instrument, issued either as Non-Convertible or
Convertible, either partly or fully, by a Company or financial institute, for raising long
term secured or unsecured, loans from public for specific needs, repayable on maturity,
with fixed rate of interest which is paid either at maturity or periodically, and can be
traded in the financial markets.

A company can borrow by splitting the loan amount into several units for the ease of
borrowing large sum.
The company may do so by issuing debentures.
A debenture is a certificate of loan issued by a company. It is a type of security
Definition
“debenture” is not specifically defined in the CA but Section 4 (interpretation section)
explains that “debenture”:
• includes debenture stock, bonds, notes
• excludes cheque, letter of credit
Levy v Abercorris Slate and Slab Co [1887] provides the following case law definition :
A debenture is a document which either creates a debt or acknowledges it, and any
document which fulfills either of these conditions is a “debenture”.

Meaning of Debentures:
 The term ‘debenture’ is derived from the Latin word ‘debere’ which refers to borrow.
 A debenture is a written tool accepting a debt under the general authentication of the
enterprise.
 It comprises of an agreement for repayment of principal after a particular period or at
intermissions or at the option of the enterprise and for payment of interest at a fixed rate
due to, usually either yearly or half-yearly on fixed dates.

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 According to the section 2(30) of The Companies Act, 2013 ‘Debenture’ comprises of –
Debenture Inventory, Bonds and any other securities of an enterprise whether comprising
a charge on the assets of the enterprise or not.
 The debenture categorisation depends on their redemption, tenure, convertibility, security,
mode of redemption, type of interest rate, coupon rate, demonstrability, etc.,
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 fixed assets whereas floating charge on current
assets.
 A fixed charge is established on a particular asset whereas a floating charge is on the
general assets of the enterprise.
Unsecured Debentures/’naked debenture’
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.
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.

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.
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.

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The debenture-holders cannot demand payment as long as the company is a going
concern and does not make default in payment of interest. But all debentures, whether
redeemable or irredeemable, become payable on the company going into liquidation.
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.
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.
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 is 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.
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.
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.
Other Types of Debentures:
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.

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 In case the loan is repaid, the debentures issued as collateral security are automatically
redeemed.
As Regards Status:
Equitable debentures: are those which are secured by deposit of little deeds of the
property with a memorandum in writing creating a charge.
Legal debentures: are those in which the legal ownership of the property of the
company is transferred by a deed to the debenture-holders as security for the loans.
As Regards Rank or Priority:
Preferred or First debentures: are those which are, in the event of winding up of the
company, paid first.
Ordinary or Second debentures: are paid after the preferred, or first debentures have
been redeemed.
Merits of Debenture Issue: Debentures as the source of capital have many
advantages.
From the point of view of the investors,
1. They offer a Secured investment opportunity with a notch above the market rate.
2. For example, a mortgage debenture-holder knows exactly what his security is, and
generally, there are trustees to protect his interest.
3. The better the security, the greater will be the chance of successful debenture issue.
4. The debentures issued by companies with good standing will be rated high by rating
agencies, with in turn gives more security and low risk of investment for those investors
who wish to invest for medium to long term.
5. As these Debentures are tradable in the capital markets, they provide reasonable
liquidity.
6. As these debentures are Regular fixed rate of interest payable by the company to the
debenture-holders even out of capital if profits are not available, adds to the merits of
debentures.

From the Point of View of the Company:

1. Cost Effective way of raising long term funds from the market compared to the funds
raised from Bank and other financial institutions.
2. Debentures enable the company to raise finance without giving any control to the
debenture holders.
3. The rate of interest payable on them is fixed, as well as lower than the rates of dividend
paid on shares.
4. Servicing of debt is easier visa-vis, Equity, as the expectations of equity holder will
always be on high side.

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5. Debentures being issued for a fairly long period, there is a certainty of finance for that
specific period and the company is in a position to adjust its financial plan accordingly;
6. As a debenture does not carry voting rights, financing through them does not dilute
control of equity shareholders on management.
7. 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.
8. The company does not involve its profits in a debenture.
9. 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.

Charges:
Borrowing under the Companies Act, 2013
 Borrowing is a critical source of finance for any Company.
 Apart from the traditional means of borrowing from Banks, Financial Institutions, issue of
secured Bonds and Debentures etc., Sections 73,179, 180 of the Companies Act 2013
read with The Companies (Acceptance of Deposit) Rules, 2014 and
 The Companies (meeting of board and its powers) Rules, 2014 regulate the manner in
which a Company can further borrow money, from whom it can borrow, the extent to
which it can borrow and the compliances to be done by it.

 A company's borrowings are often backed by securities, on the strength of which loans
are given by the banks and financial institutions.
 The security is given for securing loans or debentures by way of mortgage on the assets
of the company when the Charge is created.
 The Companies Act, 2013 covers the provisions relating to registration, modification,
satisfaction of Charges, consequences of failure in registration inclusive of delay in
registration.
 The main purpose of registration of a Charge is to give notice to the Registrar of
Companies ("RoC") and to people who intend to advance money to the company about
the encumbrance created on the assets of the company.
 The prospective lender may inspect the index of Charges and forms on the Ministry of
Corporate Affairs portal.

What is a Charge?

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 "Section 2(16) of the Companies Act, 2013 defines "Charge" as an interest or lien
created on the property or assets of a company or any of its undertakings or both as
security and includes a mortgage."

In simple terms, a Charge is a right created by a company i.e. "Borrower" in favour

of a financial institution or a bank or any other lender, i.e. "creditor" who has agreed to
extend financial assistance to the company on its assets or properties or any of its
undertakings present and future.
In simple terms security is a right created in favour of the bank (lender) on any asset-
over which cover for the funds lent is available in case of need

Kinds of Charge
On the basis of the nature of the Charge, its kinds may be as follows:
1-Fixed Charges
2-Floating Charges
3-Pari Passu Charges
4-Exclusive Charges
5- 1st Charge
6- 2nd Charge

i. Fixed or specific Charge:

 A Charge is called fixed or specific when it is created to cover assets that are
associated and definite or are capable of being ascertained and defined, at the time of
creating the Charge e.g. land, building or plant, and machinery.
 A fixed Charge, therefore, is security in terms of certain specific property and
 the company gives up its right to dispose of that property until the Charge is satisfied.
 In case of winding up/liquidation of the company, a specific Charge holder will be placed
in the highest-ranking class of creditors.

ii. Floating Charge:

 A floating Charge is not attached to any definite property but covers property which is
fluctuating type e.g. stock-in-trade. In any company/Business enterprise, the
stocks/goods will not be constant (for example in an Industry, the Raw material will
under go different processes like semi-finished goods – finished goods – Cash/Bank
Balance or Book debts).
 A floating Charge is on a class of assets in present and in future which in the ordinary
course of business is changing from time to time and leaves the company free to deal
with the property as it sees fit until the holders of Charge take steps to enforce their
security.
 The crux of a floating Charge is that the security remains inactive until it is fixed or
crystallised.
 A Hypothecation Charge is created on such floating assets and the company can deal
with such assets as required for carrying on the production. The concurrence of the
financier/charge holder is not required to deal with such assets in the course of
production.

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 On the basis of the conditions of the Charge, its kinds may be as follows:

Pari-passu Charge:
 The expression “Paripassu” implies with an equal step, equally treated, at the same
rate, or at par with. It is the Latin term which means "On equal Footing".
 Companies generally borrow from different financial institutions/Banks simultaneously,
to meet their huge financial needs. In such multi banking arrangement, this “Paripassu”
charge will be resorted to, so that all banks are at equal footing with regards to security,
as per their share.
 Under this, the Charge is shared by more than one lender in the ratio of their
outstanding amount.
 In case a new Bank/Financial Institution is joining the lender’s group, then the prior
consent of the existing Charge holders is required by the company for creating
Paripassu.

Exclusive Charge:
The exclusive Charge (First Charge) is provided to a particular lender only on the
security provided.
The creditor who is given credit facility will be given exclusive charge against the the
firm’s property and the creditor enjoys exclusive right over the security above all other
people.

Further Charge (Second Charge): With the consent of the first Charge holder, a
further Charge (Second charge) can be created on the security, already provided for the
first Charge holder. In case of winding up or liquidation, the first Charge holder has the
right to recover his dues first and then the left-over balance is available to the second
Charge holder, followed by other unsecured lenders

Registration of Charge
Section 77 to 87 of the Companies Act 2013 provides the procedure for the registration
of Charges.

Every company, creating or modifying a Charge on its property, assets or undertakings,

whether it is tangible or intangible situated within or outside India, shall register the
particular of Charge with the Registrar of Companies within 30 days of such creation by
applying Form No. CHG-1 (for other than debentures) and Form No. CHG-9 (for
debentures).

Along with the Form CHG-1 or CHG-9 as the case may be, the documents such as a
certified true copy of every instrument evidencing creation or modification of the Charge,
particular of other Charge holders in case of joint Charge and consortium finance, and
in case of acquisition of property which is already subject to Charge instrument
evidencing such acquisitions, are filed.

Payment of fees can be made online in accordance with Annexure B of Companies

(Registration offices and fees) Rules, 2014.

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Extension of time for registration
If the particulars of the Charge are not registered with the Registrar within the
prescribed period of 30 days then the extension of time may be sought by filing Form
CHG-1 and supported by a declaration from the company signed by its secretary or
director that such belated filing shall not adversely affect the rights of any other
intervening creditors of the company.

The application for extension shall be allowed in case of Charge created before the
commencement of the Companies (Amendment) Ordinance 2019 within a period of 300
days and on or after the commencement of the Companies (Amendment) Ordinance
2019 within 60 days upon payment of additional fees as prescribed.

Further, if the Charge created is not registered within the condoned 300 days or 60 days
then the Charge holder shall file Form No. CHG-8 with the central government for
further condonation of delay of 300 days if the Charge was created before the
commencement of the Companies (Amendment) Ordinance 2019 and 60 days if the
Charge was created on or after the commencement of the Companies (Amendment)
Ordinance 2019.

Certificate of registration of Charge or modification of Charge

Once the Charge is registered, Registrar will issue a certificate of registration of such
Charge in Form No. CHG-2 and if the particulars of modification of Charge are
registered with the Registrar, then the Registrar shall issue a certificate of modification
of Charge in Form No. CHG-3.

Satisfaction of Charge
The company shall within the period of 30 days intimate the Registrar of companies
through Form CHG-4 along with the fee as prescribed in Annexure B of Companies
(Registration offices and fees) Rules, 2014.
The Registrar shall enter the memorandum of satisfaction of Charge and issue the
certificate of registration of satisfaction of Charge in Form No. CHG-5.

Further, the company shall incorporate the changes in the creation, modification or
satisfaction of the Charges in the form no. CHG-7 in the Register of Charges maintained
by the company.

Further, if the Charge satisfied is not registered within the condoned 300 days or 60
days then the Charge holder shall file Form No. CHG-8 with the central government for
further condonation of delay of 300 days if the Charge was created before the
commencement of the Companies (Amendment) Ordinance 2019 and 60 days if the
Charge was created on or after the commencement of the Companies (Amendment)
Ordinance 2019

Consequence of non-registration of Charge

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Non-registration of the Charges with the Registrar of Companies shall not invalidate the
Charge created but the same shall not be taken into account by the liquidator appointed
under the Companies Act, 2013 or the Insolvency and Bankruptcy Code, 2016 on
winding up of the company and the creditor. However, this does not prejudice any
contract or obligation for the repayment of the money secured by the Charge.

Penalty for default

Section 86 of the Companies Act,2013 provides for the punishment and

contraventions of Section 77.
If the company defaults the provision, it shall be punishable with a fine, not less than
one lakh rupees and which may extend to 10 lakh rupees.

If the officer of the company is in default then he shall be punishable with imprisonment
for a term which may extend to six months or with fine not less than twenty-five
thousand rupees which may extend to one lakh rupees or with both.

Dividend
Dividend in simple terms is the return on equity invested by a shareholder.

Definition: Dividend refers to a reward, cash or otherwise, that a company gives to its
shareholders. Dividends can be issued in various forms, such as cash payment, stocks
or any other form. A company’s dividend is decided by its board of directors and it
requires the shareholders’ approval. However, it is not obligatory for a company to pay
dividend. Dividend is usually a part of the profit that the company shares with its
shareholders.
Companies that earn a profit can either pay that profit out to shareholders, reinvest it in
the business through expansion, debt reduction or share repurchases, or both.
When part of the profit is paid out to shareholders, the payment is known as a dividend.

Dividend as per Companies Act, 2013

Dividend is the share of profit of a company, distributed among shareholders of a
company. Dividend can be paid on both equity or preference shares, based on a fixed
rate or at a rate determined by the shareholders of a company. As per Companies Act,
2013, the term dividend is also inclusive of interim dividend.

Types of Dividend
Dividend can be classified into the following two types broadly:

Interim Dividend (Sec.123(3))

Dividend announced and paid by the company during a financial year before
determining the full financial year earnings is called as interim dividend. As, the dividend
is announced and paid in the middle of a financial year, it’s called as interim dividend.

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 Note: As per Section- 2(35) “dividend includes interim dividend” signifies that the
provisions of Companies Act 2013, applicable to the final dividend to the extent
possible, shall also applicable on interim dividend.

Final dividend
A dividend is considered to be a final dividend if it is declared at the Annual General
Meeting of the company. Final dividend becomes an enforceable debt of the company
once it is declared.

Description:

 After paying its creditors, a company can use part or whole of the residual profits to
reward its shareholders as dividends.
 However, when firms face cash shortage or when it needs cash for reinvestments, it can
also skip paying dividends.
 When a company announces dividend, it also fixes a record date and all shareholders
who are registered as of that date become eligible to get dividend payout in proportion
to their shareholding.
 The company usually mails the cheques to shareholders within in a week or so or where
the shares are in DMAT form, dividend amount will be credited to the share holders
accounts directly.
 Stocks are normally bought or sold with dividend until two business days ahead of the
record date and then they turn ex-dividend.

The Dividend Process

Process for Declaring Dividend - Payment of Dividend Out of Profits:

Dividend can be distributed from profits as below:

1. Out of the profits of the Company of that financial year; or

2. Out of the profits of the Company earned in previous year or years (Rule 3 of
Companies (Declaration and Payment of Dividend) Rules, 2014) or

3. Out of both of the above;

4. Out of money provided by the state government or central government for payment of
dividend in pursuance of a guarantee given by that government.

Depreciation must be provided first from the Profit of the Company, which is to be
calculated as per Schedule II.

Process for Payment of Dividend

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Step 1: The company in a Board Meeting decides on the amount of dividend that would
be declared and paid.
Step 2: Company issues notice of general meeting with intent to declare dividends.
Step 3: General meeting is conducted and the resolution for declaring dividend is
passed along with record date.

Transfer to Reserve for declaration of Dividend:

The company may before declaration of dividend in any financial year transfer such part
of its profits for that financial year to Reserve as the Board of Directors thinks
appropriate.
This is a paradigm shift from the Companies Act, 1956.Now there is no compulsion for
transfer a fixed percentage of Profit to Reserve.
It enables the Company to have more fund for dividend.
In the event of the annual dividend, the persons who are considered members as on the
date of the annual general meeting shall be eligible to receive the dividend as the
dividend is accepted by the members on the day when annual general meeting is held.

Listed companies are required to inform the Stock Exchange in progress of closing the
Register of members for payment of dividend declared during the annual general
meeting for the determination of names of shareholders entitled to dividend.

Step 4: Once the resolution is passed for declaring dividend, the dividend is paid to the
shareholders. Payment of the same must be done within 30 days of declaration and all
unpaid dividend must be transferred to a special account

Eligibility of distribution of Dividend:

If the Articles of Association of the Company does not bear any contrary provisions to
pay dividend then the company can distribute dividend in proportion of the Paid-up
Share Capital of the Company.

However, question may arise as what will happen if all the share of the Company are
not equally paid up. In that case dividend will declared in pro rata basis i.e. in proportion
of the paid up capital.

Dividend Payable in Cash Only:

As per Section 123(5) of the Companies Act, 2013 Dividend shall always be payable in
cash. Payable in cash include paid by cheque or warrant or any electronic mode.

If the amount is transferable to the Bank account of the shareholders by electronics

mode proper consent and accounts details should be obtained from the shareholders.

Provisions for Listed Company as per SEBI(ICDR)2015:

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 The listed entity shall use any of the electronic mode of payment facility approved by the
Reserve Bank of India, in the manner specified in Schedule I, for the payment of the
dividends;
Provided that where it is not possible to use electronic mode of payment, ‘payable-at-
par’ warrants or cheques may be issued:

Provided further that where the amount payable as dividend exceeds one thousand and
five hundred rupees, the ‘payable-at-par’ warrants or cheques shall be sent by speed
post.

Enforceability of Dividend Declared:

In case of Final Dividend, the shareholders get the right of Dividend once it is approved
at the General Meeting and once approved it is not revocable except with the consent of
the shareholders at their meeting.
However, this situation is different in case of Interim Dividend.
The Board of Directors can revoke the payment before disbursement, if the Board of
Directors feels that circumstances are not proper or changed for payment of dividend.

PROCEDURE OF PAYMENT OF FINAL DIVIDEND

Procedure of Declaration of Final Dividend:

1) Board Meeting: A meeting of the Board of Directors will be convened.

2) Agenda of the meeting shall mention, amongst others, the following:

a) Approval of Annual Accounts;

b) Recommendation of Payment of Dividend to the shareholders at the proposed rate at

the forthcoming Annual General Meeting;

c) To decide the Book Closure period/Record Date to determine the eligible holders of
shares for the purposes of declaration of Dividend;

d)Approving the date, time place of AGM and draft Notice of AGM, including authorizing
Company Secretary or where is no Company Secretary is appointed or available then
the Chairman of the Board or any other authorized person as the Board feel competent,
to issue Notice on behalf of the Board of Directors.

3)Director’s Report: As per Section 134(3)(k) the Director’s Report should mention
the amount proposed to be declared as Dividend. However, if no dividend is proposed
for declaration then a statement to that effect shall be mentioned.

5) AGM: Conduct the AGM at the schedule time and place.

Required quorum must be present at the meeting.

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Shareholders has the right to reschedule the amount of Divided as proposed by the
Board of Directors.
However, the Shareholders has no right to increase the rate of Dividend as originally
proposed by the Directors. They can only reduce the same. Shareholders shall pass
Ordinary Resolution approving the Dividend.

5) Opening of Special Account: Immediately on approving of Dividend by the

Shareholders a Special Account with Schedule Bank will be opened for depositing the
total amount of Dividend.

6) Credit of Total Amount Payable to Dividend Account: Within 5 days of declaration

of Dividend, total amount of Dividend payable shall be credited with the special bank
account opened for distribution of Dividend to eligible shareholders;

7) Distribution of Dividend: Prepare a list of eligible shareholders and statement of

dividend thereon. Dividend must be distributed within 30 days of declaration.
Necessary arrangement with Bank should be made for payment of Dividend.

Additional Compliances for Listed Companies while distribution of Dividend(Final

/Interim) under SEBI (ICDR) 2015:

AGM:
Intimation to Stock Exchange of annual general meeting or extraordinary general
meeting or postal ballot that is proposed to be held shall be given

Record Date:
The listed entity shall give notice in advance of record date specifying the purpose of
the record date of at least seven working days (excluding the date of intimation and the
record date) to stock exchange(s).

The listed entity shall recommend or declare all dividend and/or cash bonuses at least
five working days (excluding the date of intimation and the record date) before the
record date fixed for the purpose.

Dividend.
The listed entity shall declare and disclose the dividend on per share basis only.

Other Important Aspects:

Transfer unpaid dividend amount to Investor Education and Protection Fund (IEPF)
after the expiry of seven years from the date of transfer to unpaid dividend A/c.

EXAMPLE 1: ABC Private Limited, a domestic company declared an interim dividend of

Rs. 15,00,000 in its Board meeting held on 19.03.2020 to be paid to the shareholders of
the company. what are the applicable provisions as per the companies Act and Income
tax Act?

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AS PER COMPANIES ACT, 2013

The company is required to deposit the amount of dividend so declared within 5 days
from the date of declaration of Dividend i.e. 19.03.2020 (up to 23.03.2020)
Further, the company is required to make the payment within 30 days of declaration of
dividend (up to 17.04.2020), failing which company will be liable to pay interest @18%
p.a. for the period of default. Moreover, it is required to deposit the unpaid dividend
amount in the special account within 7 days from expiry of 30 days (i.e. 23.04.2020).

AS PER INCOME TAX ACT, 1961

The company is liable to pay tax on dividend, known as Dividend Distribution Tax
(DDT) or Corporate Dividend Tax (CDT) at an effective rate of 20.555% (Basis rate
15% including surcharge (12%) and cess (4%)) (Refer Section 115O of the Income tax
Act)
In this Case, DDT to be paid by the company is:

15,00,000*20.555%= 3,08,325

*Note: The amount of dividend of Rs 5,00,000 (in excess of Rs 10 lakh) is taxable in the
hands of shareholder at a rate of 10% (section 115BBDA). (This provision is not
applicable in case shareholder is a company or religious or charitable trust)

The amount of DDT as calculated above shall be deposited with the Central
Government within 14 days from the date of:

(a) declaration of any dividend; or

(b) distribution of any dividend; or
(c) payment of any dividend,

whichever is earliest.

In this case, it must be paid maximum by 01.04.2020, failing which company will be
liable to pay by way of interest at the rate of 1% of the DDT from the date following the
date on which such DDT was payable till the time such DDT is actually paid to the
government.

(*Note: Dividend amount of Rs 10,00,000 is fully exempt in the hands of shareholder.

Provided, if the dividend amount exceeds Rs 10 lakh, then the amount in excess of Rs
10 Lakh shall be taxable in the hands of shareholder at a special rate of 10% (Refer
Section 115BBDA)

EXAMPLE 2: ABC Private limited, a domestic company declared a final dividend of Rs.
10,00,000 in its Annual general meeting held on 30.09.2020 to be paid to the
shareholders of the company. what are the applicable provisions as per the companies
Act and Income tax Act?

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AS PER COMPANIES ACT, 2013

The company is required to deposit the amount of dividend so declared within 5 days
from the date of declaration of Dividend i.e. 30.09.2020 (up to 04.10.2020)
Further, the company is required to make the payment within 30 days of declaration of
dividend (up to 29.10.2020), failing which company will be liable to pay interest @18%
p.a. for the period of default. Moreover, it is required to deposit the unpaid dividend
amount in the special account within 7 days from expiry of 30 days (i.e. 05.11.2020).
AS PER INCOME TAX ACT, 1961

As per Union Budget 2020, DDT will not be required to be made (under section 115-O
of the Act) from Assessment Year (‘AY’) 2021-22 relevant to Financial Year (‘FY’) 2020-
21, on dividends declared, distributed or paid by domestic companies to shareholders;
Section 115BBDA which taxes dividend income in excess of Rs. 10 lakhs in the hands
of shareholders at 10% shall not be applicable and consequentially the dividend income
will be taxable based on the shareholders tax brackets;
Deduction will be allowed under section 57 of the Act in respect of interest expense and
such deduction shall not exceed 20% of the dividend income;
The domestic company declaring dividend will be required to withhold tax on resident
payees at 10% (under section 194) where dividend is paid in excess of Rs. 5,000 to a
shareholder and non-resident payees at the rate of 20% or as mentioned in the Double
taxation avoidance agreement (‘DTAA’), whichever is lower;
CONCLUSION: Now the shareholders will be liable to pay tax on the dividend income
as per their normal tax rate.

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–

EXCEPTIONS- In the following cases, no offence shall be deemed to have been

committed

(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the payment of
the dividend and those directions cannot be complied with and the same has been
communicated to him;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due
to it from the shareholder; or
(e) where, for any other reason, the failure to pay the dividend or to post the warrant
within the period under this section was not due to any default on the part of the
company.

Inter-Corporate Loans and Investments

To simplify the functioning and processes of a company, Section 186 of the Companies
Act, 2013 has introduced a few modifications in the concept of Inter Corporate Loans
and Investments made by the company.
This act defines laws by which a company can or cannot give loan, guarantee, and
security or make an investment.

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What is Inter Corporate Loans and Investment?

When a company provides loan, security or guarantee to another company or any entity
is termed as inter-corporate loans. And,
when a company invests in any other company in any form is referred as inter-
corporate investment.

A firm can provide loans, investment, guarantee or security to another company after
taking consent from the board of directors or shareholders.

The section 186 defines the laws made regarding loans and investments by companies
and specifies rules by which a company can give a loan and to whom it can provide.

What is Inter Corporate Loans and Investment?

When a company provides loan, security or guarantee to another company or any entity
is termed as inter-corporate loans. And, when a company invests in any other company
in any form is referred as inter-corporate investment.

A firm can provide loans, investment, guarantee or security to another company after
taking consent from the board of directors or shareholders.
The section 186 defines the laws made regarding loans and investments by companies
and specifies rules by which a company can give a loan and to whom it can provide.

What is the Applicability for Inter Corporate Loans?

According to the Companies Act, 2013 investments cannot be made through more than
two layers of companies. According to the same, the word investment implies to:

 Subscribing or purchasing of shares

 Subscribing or obtaining of share warrants
 Subscribing or purchasing of debt securities
Also, it does not include:
 The making of loans or advances
 Financial transactions like lease purchase of receivables, or any credit facilities.

What is the Non-Applicability for Inter-Corporate Loans?

The non-applicability to follow the provisions of section 186(subsection 1) is for the
following cases;
 Companies integrated outside India
 Companies having investment subsidiaries past two layers
 Private and public companies authorized by IFSC
 And a subsidiary company which has its investment subsidiary

The non-applicability to follow these provisions except subsection 1 of the

section 186 is for the following cases;

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  A company who has any loan, guarantee, security or investment taken from, any
banking firm, Insurance firm, any housing finance company, any company
engaged in financing companies
 Also, a defaulter company in terms of payment of interest cannot provide loans to
any other company.

All about Approval from Members

 A company can provide a loan or invest by passing a special resolution in the
Annual General Meeting.
 In this meeting, if all the board members agree for the same, then only the
loan/investment can be given.

What are the Requirements for the Disclosure of Particulars of Loan?

The company needs to disclose to the directors, accordingly about

A. The full details of the loan, investment

B. Security or guarantee given
C. And, the purpose of the demand for the loan by the recipient

And the notice of the general meeting for passing the resolution should stipulate
the following;

1. The purpose of the loan/security/guarantee/investment

2. The details of the recipient
3. Source of funding
4. The limit of the loan amount which can be given
5. Other specified details

What is the Rate of Interest for Inter-Corporate Loans?

A company should not provide a loan at a rate less than the yield of the previous one,
three, five or ten years whichever is the closest to the tenure of the given loan.

What is the Process of Keeping a Record of Inter-Corporate Loans?

According to section 186, subsection 9, The Companies Act 2013, every

company has to maintain a record of the loan given in a register containing all the
prescribed details, subsequently. and furthermore,
According to subsection 10, the registry should be kept at the registered office
for inspection by the concerned department.

Fine for the Violation of Section 186

As the rule, if any corporation fails to comply with this act has to pay a fine of Rs 25000
to Rs 5 lakhs, and the officer at default has to pay a fine ranging from Rs. 25000 to Rs.
1 lakh consequently.

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 Can a Company give a Loan to an Individual?

A Company can provide a loan to an individual or other corporate body under the norms
contained in The Companies Act 2013.
Sub-section 2, Section 186 specifies that a company can give loan to a person or a
body corporate of less than sixty percent of paid-up capital share, free reserves and
securities premium account or less than hundred per cent of the free reserves and
securities premium account, whichever is more.

Can a Company give Loan to LLPs?

A company can give loan to partnership firms following the prescribed rules given in the
Companies Act 2013.
According to the section 185, sub-section 1, the act defines that a company can give
loan to body corporate including the LLPs (Limited Liability Partnerships).

Can a Private Limited Company give Loan to Shareholders?

According to Section 185 of the Companies Act, 2013, no company can provide a loan
to shareholders possessing 2% or more shares of the company.

Can a Company give Loan to another Private Limited Company?

Companies Act, 2013. The section 185, sub-section 1, specifies that a director or “any
other person in which the director is interested” a company cannot give lone to such
people, where “any other person in which the director is interested” means;

 A firm in which the director or any of his relative is a partner

 Any private company where the director is a director or member
 A body corporate where the director has not less than 25% of the voting rights at
a general meeting
 A director of a lending company, any holding company or any other partner

Some more Key Points

 The Companies Act, 2013 (Act) has come up with a change in the concept of ‘Loan and
Investment by Company.
 The new Act provides that inter-corporate investments not to be made through more
than two layers of investment companies.
 The 2013 Act states that companies can make investments only through two layers of
investment companies, subject to exceptions which includes company incorporated
outside India. There are no such restrictions which were imposed under the 1956 Act.
 Further, the exemption available from the provisions of section 372A of the 1956 Act to
private companies as well as loans or investment given or made by a holding company
to its subsidiary company are no longer available under the 2013 Act.
 In pursuance to the provisions of Section 186(1) of the Act, a Company shall make
investment through not more than two layers of investment companies.
 ‘Layer’ according to explanation (d) of Section 2(87) of the Act in relation to a holding
Company means its subsidiary or subsidiaries.

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 ‘Investment Company’ means a Company whose principal business is the acquisition
of shares, debentures or other securities”
 The provisions of Section 186 (1) shall not have effect in the following cases:
A. If a company acquires any company which is incorporated outside India and such
company has investment subsidiaries beyond two layers as per the laws of such
country.
B. A subsidiary company from having any investment subsidiary for the purposes of
meeting the requirement under any law/ rule/ regulation framed under any law for the
time being in force.

LIMITS FOR LOANS /GUARANTEE/SECURITY/INVESTMENT [SEC-186(2)]

In pursuant to provisions of Section 186(2) of the Act, no company shall directly or
indirectly
A. give any loan to any person or other body corporate,
B. give any guarantee or provide security in connection with a loan to any other
body corporate or person and
C. acquire by way of subscription, purchase or otherwise, the securities of any other
body corporate exceeding 60% of its paid-up share capital plus free reserves
plus securities premium account or 100% of its free reserves plus securities
premium account, whichever is more.

Key Notes:
Since Section 186(2)(c) provides for acquisition by way of subscription, purchase or
otherwise, the securities of any other body corporate, it is not necessary that the target
entity into which investment flows must be a company. It can be any type of body
corporate.
But it is to be kept in mind that the intermediary company through which investments
are made must have to be a company.
This section mandates a company to make investment only through two layers of
investment companies.
If ABC Ltd. makes an investment in XYZ Ltd. and further XYZ Ltd. makes an investment
in PQR LLP whereas PQR LLP holds shares of SSB Ltd., there is no violation of
Section 186 (1) of the Act as there are not more than two layers of investment
companies.
It is the investor company which shall be held liable in case of any violation of the
section; therefore, it is prudent and advisable that the investee company to seek a
declaration from the investor company whether the investment made by the investor is
coming from more than two layers up.

APPROVAL FROM MEMBERS [SECTION 186(3)]

Though the Section 186(2) makes restriction as above, Section 186(3), empowers a
Company to give loan, guarantee or provide any security or acquisition beyond the limit
but subject to prior approval of members by a special resolution passed at a general
meeting.
.

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 DISCLOSURE OF PARTICULARS OF LOAN, GUARANTEE GIVEN AND SECURITY
PROVIDED [SECTION 186(4)]

Section 186(4) of the Act provides that the Company shall disclose following details to
the members in the financial statement.

A. the full particulars of the loans given, investment made or guarantee given or
security provided.
B. the purpose for which the loan or guarantee or security is proposed to be utilised
by the recipient of the loan or guarantee or security.

The notice of the general meeting for passing resolution shall indicate that
(a) The limits that will be required in excess of the prescribed limits involved in the
proposal;
(b) The particulars of the body corporate in which the investment is proposed to be
made or to which the loan or guarantee or security proposed to be given.
(c) The purpose of the investment, loan, guarantee or security;
(d) The source of funding for meeting the proposal; and
(e) Other details as may be specified.

APPROVAL OF BOARD AND PUBLIC FINANCIAL INSTITUTION [SECTION 185(5)]

a. In pursuant to provisions of Section 186(5) of the Act, every company shall take
consent of all the directors present at the board meeting before making any investment,
giving loan and guarantee and providing security.
b. In case of company has already taken loan etc., from any Public Financial Institutions,
then it is mandatory to take prior approval from such Public Financial Institution.

Exception:
Provided that prior approval of Public Financial Institution shall not be required where
the aggregate loan, investment, guarantee and security proposed is within the limits as
specified under section 186(2) and there is no default in repayment of loan instalments
or interest thereon to the Public Financials Institution.

COMPANIES REGISTERED UNDER SECURITIES EXCHANGE BOARD OF INDIA

(SEBI) [SECTION 186(6)]
Section 186(6) of the Act provides that those Companies which are registered under
Section 12 of SEBI Act, 1992 and covered under such class or classes of companies
which may be notified by the Central Government, in consultation with the Securities
and Exchange Board, shall can take inter-corporate loans or deposits exceeding
the prescribed limit and shall furnish details of loans or deposit in their financial
statement
ANANNTHA LAW COLLEGE, HYDERABAD
VIth Semester; Ist Assignment; Subject: LAW OF INVESTMENTS & SECURITIES
-=-=-=-=-=--=-=-==============================================

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Q.1) Explain Prospectus:
Ans: Sec 2(70) of the Companies Act, 2013 provides for the definition of the prospectus,
such as, prospectus includes all those documents that are issued or described as a
prospectus along with the red herring prospectus that is referred to in sec 32 or shelf
prospectus that is referred to in sec 31 or any advertisement, circular, notice or any
other kind of document that is meant for inviting offers from the public for purchase or
subscription of any securities of a body corporate.
Q. 2) Shelf Prospectus:
Shelf Prospectus refers to an offer document that lets the company make a number of
issues of the securities or the class of securities mentioned in the document within a
period of one year. Meaning that there is no requirement of issuing a fresh prospectus
each time when the issue has to be made.
The facility to issue shelf prospectus is available to specific banks and financial
institutions only. These mandates are provided by virtue of sec 31 (1) of the companies
act, 2013.
Q.3) Red herring Prospectus:
A red herring prospectus is a prospectus used when there is a book built public issue. It
contains all the material facts and information excluding the price or quantum of the
securities offered for sale.
Basically, it contains information concerning the company’s operations and future
prospects, but the relevant details about the offering are not mentioned.
Q.4) Explain Golden rule:
It is the duty of those who issue the prospectus to be truthful in all respects. This golden
rule was enunciated by Kinderseley, V.C. And has come to be known as the “golden
legacy”.
Those who issue a prospectus hold out to the public great advantages which will accrue
to the persons who will take shares in the proposed undertaking. Public is invited to take
shares on the faith of the representation contained in the prospectus.

Q. 5) Explain Kinds of shares: (Hope this is Types of Shares)

i. Ordinary shares. These carry no special rights or restrictions. ...
ii. Deferred ordinary shares. ...
iii. Non-voting ordinary shares. ...
iv. Redeemable shares. ...
v. Preference shares. ...
vi. Cumulative preference shares. ...

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 vii. Redeemable preference shares.

Q. 6) Explain transfer of shares:

i. Transfer of shares is a voluntary act that takes place by way of contract between
transferor and transferee for consideration.
ii. Transfer of shares refers to the intentional transfer of title of the shares between
the transferor (one who transfers) and the transferee (one who receives).
iii. Transfer deed is executed in transfer of shares which attracts stamp duty.
iv. Transfer of shares refers to the transfer of title to shares, voluntarily, by one party
to another.
v. The shares of a public company are freely transferable unless the company has
a valid reason to disallow the same.
vi. The shares of a private limited company are not transferable subject to certain
exceptions
vii. Liabilities of transferor cease on the completion of transfer.
Q.7) Explain transmission of shares:
i. Transmission of shares means the transfer of title to shares by the operation of
law.
ii. It is initiated by legal heir or receiver.
iii. Transmission of shares takes place due to the operation of law that is when the
holder is no more or has become lunatic or insolvent.
iv. It can also take place when the holder of shares is a company, and it has wound
up.
v. No transfer deed is involved in transmission of shares.
vi. No adequate consideration is involved under this contract.
vii. Original liability of shares continues to exist.
viii. No stamp duty is payable.
ix. The transferee will be given the rights to the shares, and the transmission is
recorded only when the transferee gives proof of entitlement to the shares.
x. In case of the death of the holder the shares, it will be transferred to the legal
representative and in case of insolvency to the official assignee
Q. 8) Explain types of Investments.
Financial Investment: (a) Equities; (b) Bonds; (c) Mutual Funds; (d) Cash equivalents
and (e) Deposits.
Non- Financial Investment: (a) Real Estate; (b) Gold- Silver.
Growth investments: These are more suitable for long term investors that are willing
and able to withstand market ups and downs
Defensive investments: These are more focused on consistently generating income,
rather than growth, and are considered lower risk than growth investments.

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Q. 9) Explain types of securities
Equity securities: These are typically shares in a corporation, commonly known as
stocks. That means you’ll literally own a portion of that company.
Debt securities: These are loans, or bonds, issued to the market by companies and
governments. Because bonds are loans offered by reputable organizations, they are
much safer than stocks.
Derivatives: These can be based on stocks or bonds, but also include futures
contracts. Those contracts, including commodities futures, allow investors to bet for or
against the price of a particular asset. However, derivatives contain far more risk than
either stocks or bonds and may be a poor choice for a new investor.
Q.10) Explain Debentures:
i. Debentures are a debt instrument used by companies and government to issue
the loan.
ii. The loan is issued to corporates based on their reputation at a fixed rate of
interest.
iii. Debentures are also known as a bond which serves as an IOU between issuers
and purchaser.
iv. Companies use debentures when they need to borrow the money at a fixed rate
of interest for its expansion.

Q.11) Explain kinds of Debenture:

The major types of debentures are:
i. Registered Debentures
ii. Bearer Debentures
iii. Secured Debentures
iv. Unsecured Debentures
v. Redeemable Debentures
vi. Non-redeemable Debentures.
vii. Convertible Debentures (Partially & Fully )
viii. Non-convertible Debentures:
ix. First Debentures
x. Second Debentures
Q. 12) Explain Dividends:
It can be called as an Instrument to distribute a part of the profit earned by the company
to the shareholders. The norm being Debt earns Interest and Equity earns Dividend.
It can also be said that a token reward that is given to the shareholders of a company.

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The portion of profit is used to be distributed as dividends. The company keeps some
portion of the profit with itself under the title of retained earnings so that the ongoing, as
well as the future business activities of the company, can be carried on easily.

Q. 13) Forfeiture of shares:

A forfeited share is an equity share investment which is cancelled by the issuing
company.
A share is forfeited when the shareholder fails to pay the subscription money called
upon by the issuing company.
A company can forfeit shares only when the Articles of Association of the company
contain a provision for share forfeiture.
A shareholder subscribing to the shares of a company owes the subscription price of
the shares to the company.
The company may call upon the shareholder to pay the price in instalments.
The instalment payments are called call money.
The call money is due from the shareholders. Non-payment of the dues can result in
forfeiture of the shares.

Q.14) Explain Lien on shares:

A lien is the right to retain possession of a thing until a claim is satisfied.
In the case of a company lien on a share means that the member would not be
permitted to transfer his shares unless he pays his debt to the company.
The articles generally provide that the company shall have a first lien on the shares of
each member for his debts and liabilities to the company.
The right of lien is not inherent but must be clearly provided for in the articles.
The articles may give the right of lien over share either for unpaid calls or for any other
debt due by the member of the company.
The company may have lien on fully paid-up shares. The lien also extends to the
dividends payable on the shares.
Q. 15) Explain kinds of Lien
There are three different types of Lien namely (Ref: https://www.indiafilings.com/learn/right-of-lien/)
i. Possessory Lien

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 ii. Equitable Lien
iii. Maritime Lien
Another Classification:
1. Promissory Lien
a. Particular Lien
b. General Lien
c. Banker’s Lien
2. Negative Lien
3. Maritime Lien
Q. 16) Certificate of shares:
A share Certificate refers to a document which is issued by a company evidencing that
a person named in such certificate is the owner of the shares of Company as stated in
the share certificate. The Indian Companies Act mandates companies for issuing share
certificates post their incorporation.
Q.17) Government Bonds:
A government bond is a type of debt-based investment, where you loan money to a
government in return for an agreed rate of interest. Governments use them to raise
funds that can be spent on new projects or infrastructure, and investors can use them to
get a set return paid at regular intervals.
Q 18) Civil liability for Misstatement in prospectus:
In accordance to Sec. 35 of Companies Act. 2013, where a person has subscribed for
securities of a company acting upon any misleading statement, inclusion or omission
and has sustained any loss or damage as its consequence, the company and every
person who:
1. is a director at the time of the issue of prospectus;
2. has named as director or as proposed director with his consent;
3. is a promoter of the company;
4. has authorised the issue of the prospectus; and
5. is an expert;

Q. 19) Grounds of cessation of Membership:

The term ‘Cessation’ means ‘Termination’. Just as there’s a process to add a member
of the company, there’s a process to terminate that member.
Terminating a member of the company can result in removal from the ‘Register of
Members’.
The following are the grounds of cessation of Membership:
A. Transfer of Shares

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 B. Transmission of Shares
C. Surrender of Membership and
D. Forfeiture of Membership
Q. 20) Directors:
The directors are effectively the agents of the company, appointed by the shareholders
to manage its day-to-day affairs. The basic rule is that the directors should act together
as a board but typically the board may also delegate certain powers to individual
directors or to a committee of the board.
JULY/AUGUST 2019
1. A public Limited Company Interested to Send Machinery outside India on lease
terms. Advise in the Light of FEMA.
Answer:
Export of Goods on Lease, Hire, etc.
Similar Question: Batliboi & co. is into manufacturing of heavy machineries of high
value. They wanted to export some machinery on Lease basis for a particular
period and then re-import into India upon the expiry of the Lease period. What
formalities are to be followed?

Section 47 in The Foreign Exchange Management Act, 1999. Confers on RBI the
“Power to make regulations:
Section 47(1) The Reserve Bank may, by notification, make regulations to carry out the
provisions of this Act and the rules made thereunder.

The “FOREIGN EXCHANGE MANAGEMENT (EXPORT OF GOODS AND SERVICES)

REGULATIONS, 2000 of Reserve Bank of India, dated 17th May,2000 (Notification No.
FEMA 23 /2000-RB) dated 3rd May 2000” states as under:

Regulation 14 A: Export of goods on lease, hire, etc.

No person shall, except with the prior permission of the Reserve Bank, take or send out
by land, sea or air any goods from India to any place outside India on lease or hire or
under any arrangement or in any other manner other than sale or disposal of such
goods.

A) Export of goods on lease, hire, etc.

Prior approval from the concerned Regional Office of the Reserve Bank through AD is
required for export of machinery, equipment, etc., on lease, hire basis under agreement
with the overseas lessee against collection of lease rental/hire charges and ultimate
reimport.
Exporters should apply for necessary permission, through a bank, to the Regional Office
concerned of the Reserve Bank, giving full particulars of the goods to be exported.

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 Further, in terms of Clause 13 of the above stated notification, (Payment for the Export)
which States:
“ In respect of export of any goods or software for which a declaration is required to be
furnished under Regulation 3, no person shall except with the permission of the Reserve
Bank or, subject to the directions of the Reserve Bank, permission of an authorised
dealer, do or refrain from doing anything or take or refrain from taking any action which
has the effect of securing :

I. that the payment for the goods or software is made otherwise than in the specified
manner; or

II. that the payment is delayed beyond the period specified under these Regulations;
or

III. that the proceeds of sale of the goods or software exported do not represent the
full export value of the goods or software subject to such deductions, if any, as
may be allowed by the Reserve Bank or, subject to the directions of the Reserve
Bank, by an authorised dealer;

Provided that no proceedings in respect of contravention of these provisions shall be

instituted unless the specified period has expired and payment for the goods or software
representing the full export value, or the value after deductions allowed under clause (iii),
has not been made in the specified manner within the specified period.”

Which means, the Company has to account for the payments received/made thereof and
also rout them through an Authorised dealer, with in the timelines prescribed by RBI.

2. “A” trader carried on business under the name of ‘A’s Co., Ltd. with out being
registered as a company with limited liability. Decide the consequences of the act
of ‘A’.

 The term unregistered company is not defined under the Companies Act 2013,
 The Companies defined in the section 366(1) of the companies Act 2013 which are not
registered and applies for registration under part I of Chapter XXI (Companies Authorized
to Register under this Act) of the Companies Act 2013 are considered as unregistered
companies.
However, section 375 (4) (d) of the Companies Act 2013 explained the expression of
unregistered company as follows:

The business entity considered as unregistered company-

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1. Partnership firm,
2. Limited Liability Partnership,
3. Society,

The Companies Act, 2013 evidently highlights that the main essential for any
organization to turn into a company is to get itself registered.
A company cannot come into existence until it gets registered.
 But no such obligation has been imposed for firms by the Indian Partnership Act, 1932.
 If a firm is not registered it does not cease to be called as a firm, it still exists in the eyes
law.
 Certainly, such a big advantage is not absolute but is subjected to a lot of limitations.
 If the company is not registered it ceases to exist in the eyes of law.
 Then the “A” firm is governed by the Indian Partnership Act, 1932.
 A firm shall have a minimum of 2 partners and a maximum in the commerce industry to
be 20 and in the banking industry to be 10.

Implication for Not Registering of the Partnership Firm:

1] No suit in a civil court by the firm or other co-partners against any third party. ...
2] No relief to partners for set-off of claim. ...
3] An aggrieved partner cannot bring legal action against another partner or the firm.
4] A third party can sue the firm
5] In case of default in payment of moneys, the liability of the partners is unlimited and all
partners are jointly and severally liable.

3. “X” Company lends “Y” Company on a mortgage of its assets. The procedure laid
down in Article for such transaction not Complied with. The Directors of Z company
are the same. Is the mortgage is binding up on “Y” company.
Answers:

This case is similar to the case of “T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon & Co.
Ltd.”
Articles of Association (AOA):
The by-laws, rules and regulations which help in governing the management of
internal affairs of the company and also conduct the company’s business are known
as the “articles of association” of a company. The term article has been defined in
Section 2(5) of the Companies Act, 2013.
 The articles are basically for the internal management of the company.
 Article of associations can be inspected by anyone as they are a public
document.

A breach of the obligations provided within the articles of association will, usually,
render the action taken void.
Exceptions to the Doctrine of indoor management

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 Exceptions To The Rule
The rule of doctrine of indoor management is however subject to certain exceptions.
In other words, relief on the ground of ‘indoor management’ can’t be claimed by an
outsider dealing with the company in the following circumstances:
1. Where the outsider has knowledge of Irregularity
2. Suspicion of Irregularity
3. Forgery
4. Representation through Articles
5. Acts outside apparent authority
Knowledge of Irregularity: - The first and the most obvious restriction is that the rule has
no application where the party affected by an irregularity had actual notice of it.
Knowledge of an irregularity may arise from the fact that the person contracting was
himself a party to the inside procedure. As in Devi Ditta Mal v The Standard Bank of
India, where a transfer of shares was approved by two directors, one of whom within
the knowledge of the transferor was disqualified by reason of being the transfer himself
and the other was never validly appointed, the transfer was held to be ineffective.
In this given case also as in Both the companies the directors being the same, they had
full knowledge of Irregularity that exists.
In the instant case, the procedure laid down in the Articles for such transactions was not
complied with. The directors of the two companies were the same. It was fact in this
case that the lender had notice of the irregularity and hence the mortgage was not
binding.
Where a person dealing with a company has actual or constructive notice of the
irregularity as regards internal management, he cannot claim the benefit under the rule
of indoor management. Further,
 He may in some cases, be himself a part of the internal procedure.
 The rule is based on common sense and any other rule would "encourage ignorance
and condone dereliction of duty". Some instances in this regard are as follows:

T.R. Pratt (Bombay) Ltd. v. E.D. Sassoon & Co. Ltd.

Company A lent money to Company B on a mortgage of its assets. The procedure
laid down in the Articles for such transactions was not complied with. The directors of
the two companies were the same. It was held in this case that the lender had notice
of irregularity and hence the Mortgage was not binding in terms of “Doctrine of
Constructive Notice”
Conclusion: In this case, the Directors in both the companies being the same, the
mortgage not Binding on “Y” company.

4. Three Singapore Nationals who have never been to India have decided to be the
shareholders holding 100% equity shares and the only directors of a private company,
in India in the year 2017. Which is not a subsidiary of Public Company. Comment.

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 Foreign Direct Investment Overview
The Indian Government is keen on increasing foreign investment in India and has taken
various policy decisions to encourage FDI.
The FDI Policy in India is regulated by the Department of Industrial Policy and
Promotions (DIPP), Ministry of Commerce and Industry.
A consolidated circular issued by the DIPP services as an important policy note on FDI
and the latest FDI Circular was issued 17-4-2014.

FDI in Private Limited Company

 Greater connectivity and relaxation of regulatory regimes has encouraged globalization

and the free flow of capital across countries.
 Foreign Direct Investment (FDI) is one of the most popular routes for foreigners to start a
business in India.
 As per regulations, FDI means investment by non-resident entity/person resident outside
India and includes all types of foreign investment in India including investment by FIIs,
investment by NRI, investment by foreigners or foreign entities, etc.,

FDI in Private Limited Company

 FDI in Private Limited Company is allowed for non-resident entities, subject to the FDI
Policy and sectoral caps.
 FDI in a Private Limited Company falls under two categories:
A. automatic route or approval route. FDI is permitted upto 100% in most of the
sectors other than those sectors which are capped or restricted.
B. In cases where automatic approval is not allowed, prior approval from the Foreign
Investment Promotion Board (FIPB) of the Government of India must be obtained
prior to the investment.
C. Further, citizens or entities of Bangladesh or Pakistan can invest in India, only
under the approval route.

 FDI in a Private Limited company can be through various equity instruments. Indian
companies can issue equity shares, preference shares and convertible debentures,
subject to the norms and guidelines.
 The equity shares of a private limited company issued under FDI must as at fair value.
 However, in case of a newly incorporated entity or subscription to the Memorandum of
Association during Company Incorporation by a NRI or Foreigner, the shares can be
issued at face value.

FDI Prohibited Sectors:

 Atomic Energy
 Lottery business including government lottery and online lottery (even foreign
collaboration, franchise, trademark, brand name, management contract is
prohibited)

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  Gambling and betting including casino (even foreign collaboration, franchise,
trademark, brand name, management contract is prohibited)
 Business of chit funds Etc.

FDI under Approval Route

FDI in Private Limited Company under the automatic route is not permitted for the
following sectors. Hence, prior approval of the FIPB is required. Here are some of Such
sectors:

 Petroleum sector (except for private sector oil refining), Natural gas/LNG
Pipelines
 Investing companies in Infrastructure & Service Sector
 Defense and strategic industries
 Atomic minerals
 Print media
 Broadcasting
 Postal services
 Courier services
 Establishment or operation of satellite
 Development of integrated township
 Tea sector
 Asset Reconstruction Company

FDI under Automatic Route

 In case the activity proposed to be undertaken by the foreign or non-resident entity in
India, doesn’t fall under the FDI prohibited or approval category, FDI under the
automatic route is permissible.
 Under automatic route, an application for FDI in the Private Limited Company is not
required, if the investment is within the FDI cap.
 Under the automatic route, no prior permission of the FIPB or RBI is required for FDI in
a Private Limited Company.
 The Company must only file certain filings relating to the FDI with the Reserve Bank of
India after receipt of the share subscription money from the foreign or non-resident
investor and issuance of shares.
 Further, under the automatic route, the investment cannot be made in a company which
required an industrial license under the Industries Act, 1951 or for acquisition of another
Indian companies existing shares or for financing an expansion.
 It is important to note that, majority of the sectors in India are eligible for 100% FDI
under the automatic route, wherein a FDI report has to be filed only after issuance of
shares for the foreign or non-resident entity.
 Therefore, the process for starting a business in India for Foreign Nationals and Non-
Resident Indians is very smooth and easy.

Incorporation of a Private Limited Company or Limited Company

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As per regulations, FDI means investment by non-resident entity/person resident
outside India and includes all types of foreign investment in India including investment
by FIIs, investment by NRI, investment by foreigners or foreign entities, etc.,
Incorporation of a private limited company is the easiest and fastest type of India entry
strategy for foreign nationals and foreign companies.
Foreign direct investment of upto 100% into a private limited company or limited
company is under the automatic route, wherein no Central Government permission is
required.
Hence, incorporation of a private limited company as a wholly owned subsidiary of a
foreign company or joint venture is the cheapest, easiest and fastest entry strategy for
foreign companies and foreign nationals into India, and they are at liberty to appoint
directors and manage the affairs of the company.

May /June – 2017

Q13. Ramu subscribed shares issued by “X” Ltd. The Prospectus of ‘X’ Ltd.,
included a statement, which was misleading in the forms and contents. On the
Bases of the Prospectus, believing it to be true, Ramu subscribed for shares and
sustained loss. Can Ramu sue for compensation of loss? If so, Who will be Sued
for Loss?

Answer:
Facts of the Case: One Mr. Ramu Subscribed for the shares of Company ‘X’ on the
basis of the prospectus issued by the company and believing that the statement
included in the prospectus is true and both in form and content reported therein.
However, the statement issued by the company in the prospectus, in the forms and
Contents were misleading.
Ramu subscribed for shares and sustained loss.

Issues before us:

1. Can Ramu Sue for Compensation?
2. If so, Who will be sued for Loss;

Applicability of Law:
1. Civil Liability for Misstatement in Prospectus (Sec. 35 & 62 of Companies Act
2013)
2. Criminal Liability for Misrepresentation in Prospectus (34 & 63 of Companies Act
2013)
3. “Fraud” in relation to affairs of a company or anybody corporate (Sec. 447 of
Companies Act 2013)
Important Case Laws:
1. Sahara India Real Estate ... vs Securities & Exchange Board Of India (on 11
September, 2012) – Supreme Court of India
2. T.G. Venkatesh vs Registrar of Companies on 5 June, 2006 – AP High Court

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 3. Kuldeep Kumar Kohli & Ors. vs The Registrar of Companies For ... on 19
January, 2012 - Delhi High Court

Discerption:
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

Mis-statements in prospectus
 A prospectus contains the information which is relied on by the public to either
subscribe or purchase the securities of a company.
 If it contains any misstatement then it would invite serious consequences.
 Any statement that is incorrect or misleading is included in the prospectus then it
would be termed as mis-statements in prospectus.
 Any inclusion or omission of a fact which is likely to mislead the public shall also
be termed as a misstatement.

Civil Liability
Section 35 of the 2013 Act provides for statutory cause of action to any person
who has subscribed for securities of a company offered through a prospectus and
has suffered losses by relying on any statement in the prospectus that was untrue
or misleading, or owing to omission of any matter in the prospectus.
Section 62 of the Companies Act deals with civil liability

 Where a person who has subscribed for securities of a company based on any
statement included or any inclusion or omission of a matter, in the prospectus that
is misleading and upon acting on the content of the prospectus, suffers any loss or
damage as a consequence, then the company and every person who–

 is a director of the company at the time of issue of the prospectus,

 or is named in the prospectus as the director of the company or agreed to become
such director,
 or is a promoter of the company,
 or has authorised/allowed the issue of the prospectus
 and is an expert who has been engaged or interested in the formation,
management or promotion of the company.
 Shall be liable to pay compensation to every person, without prejudice to any
punishment to which any person may be liable, to every person who has suffered
such loss or damage.
Issuance of Prospectus with intent to defraud or any other fraudulent purposes–

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 Where it has been proved that a prospectus has been issued with an intent to defraud
the applicants for the securities of the company or any other person for that matter or for
any other malicious purpose, each person referred in the above-mentioned passage
shall be personally liable, without any limitation of liability, for all or any of the damages
incurred by any person who had subscribed to the securities on the basis of such
prospectus.
Remedies under Civil Liability:
There are two remedies available against company:
1. Revocation of the Contract
The person who purchased the securities can cancel the contract. The money will be
refunded to him, which he paid to the company.
2. Damages for Fraud:
After revocation, the shareholders can claim damages from the company by filing a
case in the court.
Remedies against the Directors, promoters and the authorized persons who
issued the prospectus:
Damages for misstatement:
Compensation will be given to the shareholders for the loss by the directors, promoters
and the authorized persons.
Damages for non-disclosure:
Fine of Rs. 50,000 and recovering the damages must be given by the people who
mislead the purchasers from the one that is chargeable for the damages.
Criminal Liability
Section 63 of the Companies Act deals with criminal liability for mis-statements in
prospectus
Where a prospectus issued, circulated, or distributed includes any statement that is
untrue or misleading in any form in which it is included or where any inclusion or
omission of any matter is likely to mislead, every person who authorises such issue of
the prospectus shall be liable for fraud.
Sec-34:- Criminal liability for misstatements in prospectus.
Where a prospectus, issued, circulated or distributed under this Chapter, includes any
statement which is untrue or misleading in form or context in which it is included or
where any inclusion or omission of any matter is likely to mislead, every person who
authorizes the issue of such prospectus shall be liable under section 447:

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Fraud” under Sec. 447 comprises of an act, omission, concealment of any fact with an
intent to deceive, gain undue advantage, or to injure the interests of the company, its
shareholders, its creditors or any other person.
It is not necessary that such an act involve any wrongful profit or wrongful loss.
If a person commits abuse of position, then that shall also be considered fraud under
this section.
Punishment for mis-statement
If a person is found to be guilty of the offence of fraud, then that person shall be
punished with imprisonment for a term that shall not be less than six months and may
extend to ten years.
He shall also be liable to fine, which shall not be less than the amount involved in the
fraud and may extend to three times the amount involved in the fraud.
If the fraud so committed involves public interest, the term of imprisonment shall not be
less than three years.
The people who can be sued in respect of Criminal Liability are:
1. The company who 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.

In Case of Civil Liability:

Section 62 of the Companies Act deals with the 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 are liable who:
1. Is a director when 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

Conclusion:
I. Can Ramu Sue for Compensation?: Yes Ramu can sue for the loss suffered by
him on account of Misstatement in the Prospectus under Section 35 and 62 of

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 Companies Act for Civil Liability and He can also lodge a criminal case under
Section 34, 63 and 447 of Companies act.

II. If so, who will be sued for Loss: Ramu Can Sue the following:
1.The company who 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.

Q14: Dinesh, one of the joint holders of shares of a company, sent a requisition to the
company to split the shares equally amongst him and other joint holder, by issuing fresh
share certificates. State whether the company is bound to comply with this requirement.

Answer: No. Not necessary for the company to comply with the request.

When a person holds one or more shares jointly with one or more person(s) in a
Company, he/she is called Joint shareholder.
Since Joint Shareholders are not considered as legal entity or incorporated entities,
which acquires legal status after incorporation.

In case of joint shareholders, each of joint shareholder is a separate member of the

Company except where the Act provides that the Joint Shareholders would be treated
as single member as provides in Section 2(68)(ii) of the Companies Act, 2013 in case of
a private limited Company.

All Joint Holders are members of the Company in general law, but provisions of the Act
and Clauses of Article of Association of the Company may provide that the first named
shareholder will be treated as member of the Company to the exclusion of others.
The First Named Joint Shareholder will be treated as member and all correspondences
or transactions will be done with him only.
Every person who holds shares in a Company, whether singly or jointly and whose
name is appear on the Register of Members of the Company, will be treated as member
of the Company.

Not in case of listed companies. The regulations provides that one or more shares
cannot be held by more than three persons jointly.

However, there are certain limitations and misconceptions relating to joint shareholding.

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In fact, many investors believe that all the joint shareholders enjoy equal rights in
respect of the shares jointly held by them.

However, problems arise when there are differences amongst the joint shareholders
and some of them wish to have the portion of their shares separated from the other joint
shareholders.
In such a situation, the question that would arise is, can a joint shareholder ask the
company to split the shares so as to give him the portion of shares claimed to be
belonging to him
A somewhat similar question had come up for the consideration of the Company Law
Board (CLB) in the case of Dr.Rajiv Das v. United Press Ltd, and others [(2001) 44 CLA
268 (CLB)].
The brief facts of that case: the petitioner was jointly holding a total of 8,143 fully paid-
up equity shares of Rs.10 each in the Respondent-company (the company).
Out of the said holding, 3,788 shares stood jointly in the name of his mother Shrimati
Kanti Devi (2nd respondent in the above case) and the petitioner himself.
It is noteworthy that the petitioner was the joint shareholder with his mother as the first
named shareholder.

Later on, differences and disputes arose between the mother and the son, the two joint
shareholders.
An application was made by the petitioner to the company with a request to split the
said joint holdings of 3,738 equity shares, in two equal lots.
The company, however, asked the petitioner to lodge share transfer forms and the
share certificates for the said shares before the shareholding could be split in two lots.
The petitioner claimed that the certificates were in the custody of his mother and just to
avoid the split in holding, she had refused to hand over the certificates.

The company claimed that as the petitioner had failed to comply with the mandatory
requirements, he was not entitled to any relief sought by him.
However, the petitioner denied the allegations made against him and contended that the
refusal by the company to split the shares into two lots was illegal as he was entitled to
half of the said shares.

The petitioner also claimed that his request for splitting of the shares in favour of either
of the joint holders could be done by any of the holders as both were members of the
company.
Moreover, the petitioner also stressed that there was no need for any consent from the
other holder nor the original certificates and transfer deeds were required to be
submitted.

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The CLB after hearing the contentions upheld the stand taken by the company saying
its stand was neither illegal nor without sufficient cause. Hence, the petition was
rejected.
Hence, investors should be conscious of the fact that being a joint holder confers very
limited rights under the Companies Act.
Any request for transfer of shares, transposing of the names i.e. changing the order in
which the names appear in the register of members, splitting of shares, etc., requires
signature of all the joint shareholders.

A joint holder, whether named first, second or third cannot on his own ask for transfer or
splitting of shares and if he does so, the company would be within its rights to reject
such a request.

15. Can a Subsidiary Company hold shares in its Holding Company? ‘S’ Ltd., holds
shares in ‘H’ Ltd., before becoming its Subsidiary. Will it be necessary for ‘S’ Ltd., to
surrender those shares on its becoming subsidiary of ‘H’ Ltd?

Answer:

1. No. A Subsidiary company cannot hold shares in a Holding Company.

2. where the subsidiary company is a shareholder even before it became a
subsidiary company of the holding company, it need not surrender those shares.
However, subsidiary cannot have voting Rights.

 Section 19 of Companies Act, 2013, part of chapter II, lays down the provision
which states that subsidiary companies cannot hold shares in its holding
company.
 Companies Act, 2013 defines in relation to one of more other companies, a
holding company to be a company of which such companies are subsidiary
companies.
 A subsidiary company is defined in relation to any other company/ holding
company in which the holding company:
(i) has control over the composition of the board of directors in the subsidiary
company
(ii) has control over more than one-half of the total share capital of the subsidiary
company, either by way of its own or together with one or more of its subsidiary
companies.
(iii) The holding company has control over the working of a subsidiary and thus they
are not allowed to hold shares in holding company as this could be misused by
the holding company.
Section 19 of The Companies Act States That:
1. Similar to the provisions of the 1956 Act, this section prohibits subsidiary
companies from holding shares in its holding company.

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 It prohibits holding companies to allot or transfer its shares to any of its
subsidiary companies.
Any such allotment or transfer of shares of a company to its subsidiary
company will be void according to this section.
2. Certain exception to the rule of this section is provided in this section itself as
follows:
(a) the subsidiary company holds shares in the holding company as the legal
representative
(b) the subsidiary company holds shares as a trustee
(c) where the subsidiary company is a shareholder even before it became a
subsidiary company of the holding company.
3. Subsidiary companies who are an exception under this section have a right to
vote at a meeting of the holding company, but this right only extends in respect
of the shares held by it as a legal representative or as a trust. However, under
the third exception, where the subsidiary company is a shareholder even
before it became a subsidiary company of the holding company, right to vote
will not be extended to the subsidiary company at the meeting of the holding
company.
4. It may be noted that debentures are not shares and, therefore, a subsidiary
can hold debentures in a holding company.
However, in the case of convertible debentures, the section is not attracted
when the debentures are allotted, but this section becomes applicable when
the debentures get converted into shares.

Q. 16: ‘X’ Ltd., has received a letter from Murthy informing the purchase of 1000
equity shares of the company through his Broker. But that transfer deeds have been
misplaced in Transit. Advise as the procedure for effecting transfer of shares in such
a case.

Answer:

LOST TRANSFER DEEDS

 It is sometimes found that the transfer documents sent to companies are lost, say,
in transit.
 In such a case, the proviso to section 56(1) of the Act provides that where the
instrument of transfer has been lost or the instrument of transfer has not been
delivered within the prescribed period (within 60 days from the date of execution of
the instrument of transfer), the company may register the transfer on such terms as
to indemnity as the Board may think fit.
 The Board of directors of the company should be satisfied that the instrument of
transfer signed by or on behalf of the transferor and by or on behalf of the
transferee has been lost.

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  The proof may be in the form of an affidavit from the transferor or the transferee and
supported by the purchase or sale note of the broker and the registration receipt
issued by the postal authorities.

Instrument for Transfer of Share is compulsory: Section 56 provides that a company

shall not register a transfer of shares of, the company, unless a proper transfer deed in
Form SH.4 as given in Rule 11 of Companies (Share Capital & Debentures) Rules
2014 duly stamped and executed by or on behalf of the transferor and by or on behalf
of the transferee and specifying the name, address and occupation, if any, of the
transferee, has been delivered to the company, along with the certificate relating to the
shares, or if no such certificate is in existence, along with the letter of allotment of the
shares.

However, in case the Transfer Deed is lost, as is the case in the instant case, the
proviso to section 56(1) of the Act, as discussed above will be applicable.

The Procedure to be followed by Mr. Murthy:

1. Intimate the Company, Original holder, Register associated with the Stock Exchange
and the depository detailing the date of loss and how the Transfer deed (SH-4) was
lost.
2. Affix the same value stamp on a written application in this case, the board may register
the transfer on specific terms of indemnity as it thinks fit.
3. Submit the following documents to the Company:
a) Intimation letter from the stock broker with regards to purchase of 1000 shares.
b) File a police Complaint and submit a copy of FIR
c) Affidavit
d) Indemnity as per the Company’s proforma (Indemnity by registered holder)

Now the Company

i. informs all the Stock Exchanges where the shares are traded regarding the loss of
shares in lieu of which duplicate shares are being issued, if not already informed
ii. issue an advertisement in a widely circulated newspaper if the value of the shares is
greater than Rs 10,000 In case the Company issues duplicate share certificate based
on any other documents, then the Company shall be solely responsible for the issue of
such duplicate share certificates.

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