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IV Sem B.com Regulatory Framework For Companies www.CUStudents.in

MODULE I 6. Limited liability: a company may be
THE COMPANIES ACT OF1956 company limited by shares or a company
With a view to enable the organization and limited by guarantee. In company limited by
management of companies, to develop trade shares, the liability of members is limited to
and industry for faster economic the unpaid value of the shares. In a company
development, companies’ act of 1956 came limited by guarantee the liability of members
into force on 1st April 1956. is limited to such amount as the member may
Companies undertake to contribute to the assets of the
Company is a voluntary association of company in the event of its being wound up.
persons formed to carry on some business for 7. Transferable shares. In a public company,
profit or to promote art, science, education or the shares are freely transferable. The right to
some charitable purpose. transfer shares is a statutory right and it
According to section 3 (1) (i) of the companies cannot be taken away by a provision in the
act 1956, a company means, “a company articles.
formed and registered under this act or an 8. Separate property: as a company is a legal
existing company.” An existing company person distinct from its members, it is capable
means, “A company formed and registered of owning, enjoying and disposing of property
under any of the previous companies laws.” in its own name.
Characteristics of a company 9. Delegated management: a joint stock
The main characteristics of a company are: company is an autonomous, self-governing
1. Incorporated association. A company is and self-controlling organization.
created when it is registered under the 10. Legal restrictions: the formation
companies act. It comes into being from the working and winding up of company are
date mentioned in the certificate of strictly governed by laws, rules and
incorporation. regulations.
2. Artificial legal person. A company is an 11. Share capital: a company mobilizes its
artificial person. Negatively speaking, it is not capital by selling its shares. Those persons
a natural person. It exists in the eyes of the who buy shares become its shareholders and
law and cannot act on its own. thereby become members in it.
3. Separate legal entity: a company has a Types of company
legal distinct entity and is independent of its Joint Stock Company can be of various types.
members. The creditors of the company can The following are the important types of
recover their money only from the company company:
and the property of the company. 1). Classification of companies by mode of
4. Perpetual existence. A company is a stable incorporation:-
form of business organization. Its life does not A. Chartered companies. These are
depend upon the death, insolvency or incorporated under a special charter by a
retirement of any or all shareholders or monarch. The powers and nature of business
directors of a chartered company are defined by the
5. Common seal charter which incorporates it. Such
The law has provided for the use of common companies do not exist in India.
seal, with the name of the company engraved B. Statutory companies. These companies
on it, as a substitute for its signature. Any are incorporated by a special act passed by
document bearing the common seal of the the central or state legislature. Reserve bank
company will be legally binding on the of India, state bank of India,
company.
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C. Registered or incorporated companies: - regard to the public company, we note the
these are formed under the companies act, following:
1956 or under the companies act passed i) The articles do not restrict the transfer of
earlier to this. shares of the company
I) companies limited by shares: - these ii) It imposes no restriction no restriction on
types of companies have a share capital and the maximum number of the members on the
the liability of each member or the company company.
is limited by the memorandum to the extent iii) It invites the general public to purchase
of face value of share subscribed by him. the shares and debentures of the companies.
ii) Companies limited by guarantee: - these Differences between a public company
types of companies may or may not have a and a private company
share capital. Each member promises to pay a 1. Minimum number: the minimum number
fixed sum of money specified in the of persons required to form a public company
memorandum in the event of liquidation of is 7. It is 2 in case of a private company.
the company for payment of the debts and 2. Maximum number: there is no restriction
liabilities of the company on maximum number of members in a public
iii) Unlimited companies: a company not company, whereas the maximum number
having any limit on the liability of its members cannot exceed 50 in a private company.
is called an ‘unlimited company’ 3. Number of directors. A public company
2). On the basis of number of members:- must have at least 3 directors whereas a
A. Private company private company must have at least 2
According to sec. 3(1) (iii) of the Indian directors (sec. 252)
companies act, 1956, a private company is 4. Restriction on appointment of directors.
that company which by its articles of In the case of a public company, the directors
association : must file with the register consent to act as
i) limits the number of its members to fifty, directors or sign an undertaking for their
excluding employees who are members or ex- qualification shares. The directors or a private
employees who were and continue to be company need not do so (sec 266)
members; 5. Restriction on invitation to
ii) restricts the right of transfer of shares, if subscribe for shares. A public company
any; invites the general public to subscribe for
iii) Prohibits any invitation to the public to shares.. A private company by its articles
subscribe for any shares or debentures of the prohibits invitation to public to subscribe for
company. its shares.
Where two or more persons hold share 6. Name of the company: in a private
jointly, they are treated as a single member. company, the words “private limited” shall be
According to sec 12 of the companies act, the added at the end of its name.
minimum number of members to form a 7. Public subscription: a private
private company is two. A private company company cannot invite the public to purchase
must use the word “pvt” after its name. its shares or debentures. A public company
B. Public company may do so.
According to section 3 (1) (iv) of Indian 8. Issue of prospectus: unlike a public
companies act. 1956 “a public company which company a private company is not expected to
is not a private company”, if we explain the issue a prospectus or file a statement in lieu of
definition of Indian companies act. 1956 in prospectus with the registrar before allotting
shares.
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9. Transferability of shares. In a public hold statutory meeting or file a statutory
company, the shares are freely transferable report [sec. 165 (10)]
(sec. 82). In a private company the right to 10. A director is not required to file consent to
transfer shares is restricted by articles. act as such with the registrar.
10. Special privileges. A private company 11. Provisions in section 284 regarding
enjoys some special privileges. A public removal of directors by the company in
company enjoys no such privileges. general meeting shall not apply to a life
11. Quorum. If the articles of a company do director appointed by a private company on
not provide for a larger quorum 5 members or before 1st April 1952 [sec. 284 (1)]
personally present in the case of a public 12. In case of a private company, poll can be
company are quorum for a meeting of the demanded by one member if not
company. It is 2 in the case of a private 13. It need not have more than two directors,
company (sec. 174) 3). On the basis of control
12. Managerial remuneration. Total On the basis of control, a company may be
managerial remuneration in a public classified into:
company cannot exceed 11 per cent of the net 1. Holding companies, and
profits (sec. 198). No such restriction applies 2. Subsidiary company
to a private company. 1. Holding company [sec. 4(4)].
13 Commencement of business. A private A company is known as the holding company
company may commence its business of another company if it has control over the
immediately after obtaining a certificate of other company. According to sec 4(4) a
incorporation. A public company cannot company is deemed to be the holding
commence its business until it is granted a company of another if, but only if that other is
“certificate of commencement of business”. its subsidiary.
Special privileges of a private company 2. Subsidiary company. [sec. 4 (i)].
A) Special privileges of all companies. A company is known as a subsidiary of
1. A private company may be formed with another company when its control is
only two persons as member. Sec.12 (1)] exercised by the latter (called holding
2. It may commence allotment of shares even company) over the former called a subsidiary
before the minimum subscription is company.
subscribed for or paid (sec. 69). 4). On the basis of ownership of
3. It is not required to either issue a companies:-
prospectus to the public A) Government companies. A company of
4. Restrictions imposed on public companies which not less than 51% of the paid up capital
regarding further issue of capital do not apply is held by the central government of by state
on private companies. [Sec 81 (3)] government or government singly or jointly is
5. Provisions of sections 114 and 115 relating known as a government company.
to share warrants shall not apply to it. (sec. B) Non-government companies. All other
14) companies, except the government
6. It need not keep an index of members. (sec. companies, are called non-government
115) companies.
7. It can commence its business after 5). On the basis of nationality of the
obtaining a certificate of incorporation. A company:-
certificate of commencement of business is A) Indian companies: these companies are
not required. [sec. 149 (7)] 8. It need not registered in India under the companies act.
1956 and have their registered office in India.
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B) Foreign companies: it means any MODULE II
company incorporated outside India which PROMOTION AND INCORPORATION OF
has an established place of business in India COMPANIES
Corporate veil
Company is an artificial person created by
Juristic point of view, a company is a
legal person distinct from its members. This following a legal procedure. Before a company
principle may be referred to as “the veil of is formed, a lot of preliminary work is to be
incorporation”. The effect of this principle is performed which can be divided into four
that there is a fictional veil between the distinct stages:
company and its members.
Lifting of corporate veil  Promotion;
The term “lifting corporate veil” means  Incorporation or registration;
looking behind the company as a legal person:  Capital subscription; and
i.e. disregarding the corporate entity and  Commencement of business.
paying regard, instead, to the realities behind I. Promotion
the legal façade. The term ‘promotion’ is a term of business
The various cases in which corporate veil and not of law. It is frequently used in
have been lifted are as follows. business. Gersten berg has defined promotion
Under judicial interpretation: there are as “the discovery of business opportunities
number of case, in which the court lift the and the subsequent organization of funds,
corporate veil, and a few of them are property and managerial ability into a
mentioned below business concern for the purpose of making
• Protection of revenue: the corporate may profits there from.” First of all the idea of
ignore the corporate entity of a company carrying on a business is conceived by
where it is used for tax evasion promoters. Promoters are persons engaged
• Prevention of fraud in, one or the other way; in the formation of a
• Determination of enemy character of a company.
company Promoter’s remuneration
• Where the company is a sham: the court also A promoter has no right to get compensation
lift the veil where the company has been from the company for his services in
formed for some fraudulent purpose or is a promoting it unless the company, after its
sham. incorporation, enters into a contract with him
• Company avoiding legal obligations for this purpose. If allowed, remuneration
• Company acting as agent of the shareholders may be paid in cash or partly in cash partly in
• Avoidance of welfare legislation shares and debentures of the company.
• Protecting public policy Promoter’s liability
Under express statutory provisions : the If a promoter does not disclose any profit
veil of corporate personality be lifted under made out of a transaction to which the
express statutory provisions of the companies company is a party, then the company may
act 1956, as follows. sue the promoter and recover the undisclosed
• Reduction of number of members below profit with interest
statutory minimum. Functions of promoter
• For the establishment of relationship
between holding and subsidiary company  Discovery of business idea
• Investigation of ownership of company.  Detailed investigations about the
• Fraudulent trading projects
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 Assembling of resources like land, The registrar will scrutinize these documents.
labour, capital and management If the registrar finds the document to be
personnel’s satisfactory, he registers them and enters the
 Preparing preliminary documents such name of the company in the register of
as memorandum of association etc companies and issues a certificate called the
 Entering into preliminary contracts certificate of incorporation. The certificate of
 Naming the company incorporation is the birth certificate of a
 Appointment of bankers, brokers and company.
underwriters
III. Capital subscription
II. Incorporation
A private company can start business
This is the second stage of the company
immediately after the grant of certificate of
formation. It is the registration that brings a
incorporation but public limited company has
company into existence. A company is legally
to further go through ‘capital subscription
constituted on being duly registered under
stage’ and ‘commencement of business stage’.
the act and after the issue of certificate of
In the capital subscription stage, the company
incorporation by the registrar of companies.
makes necessary arrangements for raising the
For the incorporation of a company the
capital of the company.
promoters take the following preparatory
IV commencement of business
steps:
A private company can commence business
i) To take approval of the name, an application
immediately after the grant of certificate of
has to be made in the prescribed form along
incorporation, but a public limited company
with requisite fee;
will have to undergo some more formalities
ii) To get a letter of intent under industries
before it can start business
(development and regulation) act, 1951, if the
Documents of a company
company’s business comes within the
The formation of a public company involves
purview of the act.
preparation and filing of several
iii) To get necessary documents i.e.
Essential documents. Three of basic
Memorandum and articles of association
documents are:
prepared and printed.
iv) To prepare preliminary contracts and a a. Memorandum of association
prospectus or statement in lieu of a b. Articles of association
prospectus. The application should be c. Prospectus
accompanied by the following
Memorandum of association
Documents:-
The preparation of memorandum of
1. Memorandum of association properly
association is the first step in the formation of
stamped, duly signed by the signatories of the
a company. It is the main document of the
memorandum and witnessed.
company which defines its objects and lays
2. Articles of association, if necessary.
down the fundamental conditions upon which
3. A copy of the agreement, if any, which the
alone the company is allowed to be formed. It
company proposes to enter into with any
is the charter of the company. It governs the
individual for his appointment as managing
relationship of the company with the outside
or whole-time director or manager.
world and defines the scope of its activities.
4. A written consent of the directors to act in
Its purpose is to enable shareholders,
that capacity, if necessary.
creditors and those who deal with the
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company to know what exactly its permitted registered office and every change shall be
range of activities is. given to the registrar within 30 days after the
Form of memorandum (sec. 14): date of incorporation of the company or after
Table B memorandum of a company limited the date of change.
by shares 3. Object clause
Table C memorandum of a company limited This is the most important clause in the
by guarantee and not having a share capital memorandum because it not only shows the
Table d memorandum of company limited by object or objects for which the company is
guarantee and having share capital. formed but also determines the extent of the
Table E memorandum of an unlimited powers which the company can exercise in
company. order to achieve the object or objects.
Contents of memorandum i) Main objects: this sub-clause has to state
1. Name clause the main objects to be pursued by the
Promoters of the company have to make an company on its incorporation and objects
application to the registrar of companies for incidental or ancillary to the attainment of
the availability of name. The company can main objects.
adopt any name if: ii) Other objects: this sub-clause shall state
i) There is no other company registered other objects which are not included in the
under the same or under an identical name; above clause. While drafting the objects
ii) The name should not be considered clause of a company the following points
undesirable and prohibited by the central should be kept in mind.
government
 The objects of the company must not be
iii) Once the name has been approved and the
illegal,.
company has been registered, then
 The objects of the company must not be
a) The name of the company with registered
against the provisions of the companies
office shall be affixed on outside of the
act
business premises;
 The objects must not be against public
b) If the liability of the members is limited the
 The objects must be stated clearly and
words “limited” or “private limited” as the
definitely.
case may be, shall be added to the name;
 The objects must be quite elaborate
c) The name and address of the registered
also.
office shall be mentioned in all letterheads,
business letters, notices and common seal of 4. Capital clause
the company, etc. In case of a company having a share capital
Name of a company is the symbol of its unless the company is an unlimited company,
personal existence. The name should be memorandum shall also state the amount of
properly and correctly mentioned. share capital with which the company is to be
2. Registered office clause registered and division thereof into shares of
Memorandum of association must state the a fixed amount [sec. 13(4)].
name of the state in which the registered 5. Liability clause
office of the company is to be situated. It will In the case of company limited by shares or by
fix up the domicile of the company. Further, guarantee, memorandum of association must
every company must have a registered office have a clause to the effect that the liability of
either from the day it begins to carry on the members is limited. It implies that a
business or within 30 days of its shareholder cannot be called upon to pay any
incorporation, notice of the situation of the time amount more than the unpaid portion on
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the shares held by him. The memorandum of b) Change of registered office from one
association of a company limited by town to another town in the same state. In this
guarantee must further state that each case, a special resolution is required to be
member undertakes to contribute to the passed at a general meeting of the
assets of the company if wound up. shareholders and a copy of it is to be filed with
6. Association or subscription clause the registrar within 30 days.
In this clause, the subscribers declare that c) Change of registered office from one
they desire to be formed into a company and state to another state to another state.
agree to take shares stated against their 3. Alteration of the object clause
names. No subscriber will take less than one The alteration shall be effective only after it is
share. The memorandum has to be subscribed approved by special resolution of the
to by at least seven persons in the case of a members in general meeting with the
public company and by at least two persons in companies amendment act, 1996, for
the case of a private company. The signature alteration of the objects clause in
of each subscriber must be attested by at least memorandum of association’s sanction of
one witness who cannot be any of the central government is dispensed with.
subscribers. Each subscriber and his witness
3. Alteration of capital clause
shall add his address, description and
occupation, if any The procedure for the alteration of share
Alteration of memorandum of association capital and the power to make such alteration
Alteration of memorandum of association are generally provided in the articles of
involves compliance with detailed formalities association if the procedure and power are
and prescribed procedure contents of the not given in the articles of association, the
memorandum of association can be altered as company must change the articles of
under: association by passing a special resolution. If
the alteration is authorized by the articles, the
1. Change of name
following changes in share capital may take
A company may change its name by special place:
resolution and with the approval of the
1. Alteration of share capital [section 94-
central government signified in writing.
95]
However, no such approval shall be required
2. Reduction of capital [section 100-105]
where the only change in the name of the
3. Reserve share capital or reserve
company is the addition there to or the
liability [section 99]
deletion there from, of the word “private”,
4. Variation of the rights of shareholders
consequent on the conversion of a public
[section 106-107]
company into a private company or of a
5. Reorganization of capital [section 390-
private company into a public company.
391]
2. Change of registered office 6. Alteration of liability clause
This may involve: Ordinarily the liability clause cannot be
a) Change of registered office from one place altered so as to make the liability of members
to another place in the same city, town or unlimited. Section 38 states that the liability
village. In this case, a notices is to be give of the members cannot be increased without
within 30 days after the date of change to the their consent. It lays down that a member
registrar who shall record the same. cannot by changing the memorandum or
articles, be made to take more shares or to pay
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more the shares already taken unless he (v) Fixing limits of the number of directors
agrees to do so in writing either before or (w) Payment of interest out of capital;
after the change. A company, if authorized by (x) Common seal; and
its articles, may Alter its memorandum to (y) Winding up.
make the liability of its directors or manager Alteration of articles
unlimited by passing a special resolution Section 31 grant power to every company to
Articles of association alter its articles whenever it desires by
Every company is required to file articles of passing a special resolution and filing a copy
association along with the memorandum of of altered articles with the registrar. An
association with the registrar at the time of its alteration is not invalid simply because it
registration articles of association are the changes the company’s constitution.
rules, regulations and bye-laws for governing Alteration of articles is much easier than
the internal affairs of the company. They may memorandum as it can be altered by special
be described as the internal regulation of the resolution.
company governing its management and
embodying the powers of the directors and Distinction between articles of association
officers of the company as well as the powers and memorandum of association
of the shareholders. Memorandum of Articles of association
Contents of articles of association association
Articles generally contain provision relating It is the charter which It is the bye-laws for the
to the following matters; set out the conditions on internal management
(a) The business of the company which the company is
incorporated
(b) Share capital Main document Subsidiary
(c) Execution or adoption of preliminary document
agreements, if any;
(d) Allotment of shares; It defines the objects and It mentioned the
(e) Lien on shares power of the company ways and means
(f) calls on shares;
It regulates the It regulates the
(g) Forfeiture of shares; relationship between the relationship between
(h) Issue of share certificates; company and the company and members
(i) issue of share warrants; general public
(j) Transfer of shares; No company can be A company can
(k) Transmission of shares; incorporated without its incorporated without its
(l) Alteration of share capital; own memorandum own articles
(m) Borrowing power of the company; It is governed by the It is governed by the
companies act only memorandum and
(n) Rules regarding meetings; companies act
(o) Voting rights of members; Cannot be altered easily Can be altered easily
(p) Notice to members;
(q) Dividends and reserves; Legal effects of memorandum and articles
(r) Accounts and audit; Legal effects as per 36 can be discussed in the
(s) Arbitration provision, if any; following headings
(t) Directors,their appointmentand
remuneration;  Members liable to the company- articles
(u) The appointment and reappointment of constitute a contract between the
the managing director, manager and company and its members, and
secretary;
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 Therefore every member is bound by the office on payment of a nominal fee. Every
articles. person who deals with the company is
 Company liable to the members- a deemed to know the contents of these two
company is bound to members by statements. This is known as constructive
whatever is contained in its notice of articles and memorandum.
memorandum and articles of Doctrine of indoor management
association. The company is bound not It is the exception to the rule of constructive
only to the members as a body, but also notice of articles and memorandum of
to the individual as to their individual association.
right. Prospectus
 Members liable to member- the The promoters of a public company will have
relationship between members also to take steps to raise the necessary capital for
regulated by the provisions in the basic the company, after having obtained the
documents like memorandum and certificate of incorporation. A public company
articles. may invite the public to subscribe to its shares
 Company to outsiders- contract between or debentures. Prospectuses are to be issued
company and outsiders also regulated by for this purpose. To issue a prospectus is very
the provisions in the memorandum and essential for a public company. If the
articles. promoters of the company are confident of
raising the required capital privately from
Doctrine of ultra vires
their friend or relatives, they need not issue a
Generally, a company has power to do all acts
prospectus. In such a case, a statement in lieu
that are authorized to be done by the
of prospectus must be filed with the registrar.
companies act, its memorandum and articles.
Definition of prospectus
So any acts done in excess of these will be
In simple words, a prospectus may be defined
ultra vires. Hence ultra vires activities are:
as an invitation to the public to subscribe to a
 Ultra vires the companies act: any act company’s shares or debentures. The word
done in excess of the scope of activities of “prospectus” means a document which invites
companies act are ultra vires the deposits from the public or invites offers from
companies act. Such an act is void. the public to buy shares or debentures of the
 Ultra vires the memorandum of company.
association: any act done contrary to the Objects of prospectus
object clause of the memorandum of The main objects of a prospectus are as
association are ultra vires the follows:
memorandum of association.
a. To bring to the notice of public that a
 Ultra vires the articles: acts which are
new company has been formed.
ultra vires the articles but intra vires the
b. To preserve an authentic record of the
memorandum will be ultra vires the
terms of allotment on which the public
articles. Such acts can be altered.
have been invited to but its shares or
Constructive notice of articles and debentures.
memorandum c. The secure that the directors of the
A company’s memorandum and articles company accept responsibility of the
become public documents on registration statement in the prospectus.
with the registrar. These documents are
Contents of prospectus
available for public inspection in the registrar
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• Name and registered office of the co. • Authorized, issued, subscribed and
• Main objects of the company paid up capital
• Full particulars about signatories to • Size of present issue
the memorandum • Paid up capital after present issue
• Number and classes of shares
Details of the issue
• Name and addresses of directors
• Director’s share qualification and • Authority for the issue
remuneration • Terms of payment
• Particulars of managerial personals • Objects of the issue
• Details of redeemable preference • Tax benefits available to the co and
shares its shareholders
• Information regarding listing of • Premium details.
shares • Details about the company
• Minimum subscription management.
• Details of borrowing powers • History, main object and present
• Details regarding purchase of business
property • Subsidiary of the company
• Time of opening and closing of the • Promoters and their background
subscription list. • Name and address of managers.
• Amount payable on application and
Details about the project
allotment
• Rights and privileges regarding • Cost of project
each class of shares • Location
• Estimated preliminary expenses • Technology
• Details of underwriters • Collaboration agreement
• Details of reserves and surplus • Infrastructure
• Name and address of auditor, • Export details
broker, banker • Expected capacity
• Details regarding voting rights • Stock market data for
shares, debenture etc.
New format of prospects Part (i) of
schedule (ii) General information Part (ii) schedule (ii) General information
• Name and address of company • Consent of directors, auditors etc.
• Consent of central govt. For the for the issue
present issue • Change in directors, auditors
• Name of regional stock exchange • Authority for the issue
• Punishment for fictitious • Name and address of company
applications secretary, legal advisor, lead
• Minimum subscription manager etc.
• Date of opening and closing of issue
• Name and address of lead Financial information
managers, trustees etc.  Reports by the auditors
• Rating from crisil  Reports by the accountant
• Underwriting details
Statutory and other information
Capital structure of the company
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 Minimum subscription ltd company does not wish to invite
 Underwriting commission and public subscription.
brokerage  A prospectus should accompany every
 Issue other than cash application for shares. But a statement
 Details of right issue in lieu of prospectus need not
 Details of listing on the stock exchanges accompany any application form.
 Amount of premium, discount etc. Minimum subscription (section 69) When
Statement in lieu of prospectus shares are offered to the public the amount of
A company having a share capital which does minimum subscription has to be mentioned in
not issue a prospectus or which has issued a the prospectus. It means the amount which, in
prospectus but has not proceeded to allot any the opinion of the directors, is enough to
of the shares offered to the public for meet the purchase price of any property,
subscription, shall not allot any of its shares preliminary expenses and working capital.
or debentures, unless at least three days MODULE III
before the allotment of shares or debentures, SHARE CAPITAL AND SHARES SHARE
this has been delivered to the registrar for CAPITAL
registration a ‘statement in lieu of The term ‘share capital' refers to the amount
prospectus’ signed by every person who is of capital raised (or to be raised) by a
named therein as a director or a proposed company through the issue of shares. It
director of the company or by his agent generally means the money subscribed
authorized in writing. pursuit to memorandum of association of the
A private company on becoming a public company.
company shall deliver to the registrar a Classes’ types or kinds of share capital: The
statement in lieu of prospectus in the form various kinds or sub-divisions of share capital
containing the particulars specified in part are:
(i) of schedule (iv) with report set out in part 1. Authorized capital, registered capital or
(ii) of schedule (iv) subject to the provisions nominal capital: authorized capital is the
contained in part iii of that schedule sum stated in the capital clause of the
Difference between prospectus and memorandum of association as the capital of
statement in lieu of prospectus a company. It is the maximum amount of
share capital, which the company is
 A prospectus can be considered as a authorized by its memorandum of association
prospectus proper, whereas a to raise through the issue of shares
statement in lieu prospectus can be 2. Issued capital: the part of the authorized
considered as a proforma prospectus capital which is issued or offered, for the time
 A prospectus is an invitation to the being, to the public for subscription is,
public. Where a statement in lieu usually, called the issued capital.
prospectus is not issued to the public. 3. Subscribed capital: part of the issued
 A prospectus serves more purpose and capital, which is subscribed or taken up by the
has a greater significance than a public, is called subscribed capital.
statement in lieu of prospectus. 4. Called-up capital: part of the subscribed
 The need for prospectus arises only capital, which has been called up or
when a public ltd company intends to demanded by the company is called called- up
invite the public for subscription. On the capital.
other hand the need for a statement in
lieu of prospectus arises when a public
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5. Paid -up capital: part of the called-up they are not entitled to participate in the
capital, which has been actually paid, by the surplus profits of the company.
subscribers or shareholders is called paid- up 5. Convertible preference shares: the
capital. holders of convertible preference shares are
Shares given the rights to convert their shares into
A share can be defined as, "a share is a equity shares later on (i.e., after a certain
fractional part of the capital of a company period).
which forms the basis of certain rights of a 6. Non-convertible preference share: the
member of the company as well as his holders of non-convertible preference share
liabilities vis-à-vis (i.e., as against) the are not given the right to convert their shares
company" into equity shares later on.
Kinds or types of shares 7. Redeemable preference shares:
A public company can issue only Two types of redeemable preference shares are those
shares, viz., (1) preference shares. (2) Equity preference shares, which can be redeemed
shares. (i.e., returned or paid back) even during the
1. Preference shares. existence of the company.
Meaning of preference shares: 8. Irredeemable preference shares:
Preference shares are shares, which have irredeemable preference shares are those
preferential rights (i.e., first priority over preference share, which are not (i.e.
other kinds of shares) in respect of payment Refundable) until the company is wound up.
of dividend during the existence of the Merits of preference shares
company, and also in respect of repayment or i) The payment of dividend to preference
refund of share capital in the event of the shares is not a legal obligation.
winding up of the company ii) Issue of preference shares does not create
Types of preference shares: any charge against the assets of the company.
1. Cumulative preference shares: the iii) The promoters of the company can retain
holders of cumulative preference share are control over the company
entitled to receive a fixed percentage of iv) In the case of redeemable preference
dividend before anything is given, tot other shares, there is the advantage that the amount
classes of shareholders can be repaid as soon as the company is in
2. Non-cumulative preference shares: non- possession of funds flowing out of profits.
cumulative preference shares are entitled to a v) Preference shares are entitled to a fixed
fixed rate of dividend in the first instance (i,e., rate of dividend and the company may declare
before anything is given to other types of higher rates of dividend for the equity
shareholders). shareholders
3. Participating preference share: the vi) If the assets of the company are not of high
holders of these shares, in addition to a fixed value, debenture holders will not accept them
percentage of dividend, are also entitled to as collateral securities
participate in the surplus profits of the viii) Preference shares are particularly useful
company along with the equity shareholders for those investors who want higher rate of
4. Non-participating preference share: the return with comparatively lower risk.
holders of non-participating preference ix) Preference shares add to the equity base
shares will get only a fixed rate of dividend, of of the company and they strengthen the
course, in the first instance (i.e., before any financial position of it additional equity base
dividend is paid to equity shareholders). But increases the ability of the company to
borrow in future.
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x) Preference shares have variety and There are many differences between
diversity, unlike equity shares, companies preferences shares and equity shares. The
have thus flexibility in choice. main differences between them are:
xi) Preference shareholders have only limited 1. Generally, the face value of preference
voting rights. shares is relatively higher than that of equity
Demerits of preference shares shares.
I) usually preference shares carry higher rate 2. Preference shares have priority over equity
of dividend than the rate of interest on shares in the payment of dividend as will in
debentures. the repayment of capital in the event of the
ii) Compared to debt capital, preference share winding up of the company.
capital is a very expensive source of financing 3. The rate of dividend on preference shares
iii) In the case of cumulative preference remains fixed from year to year. But the rate
shares, arrears of dividend accumulate. It is a of dividend on equity shares varies from year
permanent burden on the profits of the to year depending upon the amount of profits
company. available for distribution.
iv) From the investors’ point of view, 4. The rate of dividend on preference shares,
preference shares may be disadvantageous in generally, fixed by the articles of
because they do not carry voting rights. Their association. But the rate of dividend on equity
interest may be damaged by a equity shares is dependent on the discretion of the
shareholders in whose hands the control is board of directors.
vested. 5. Preference shares cannot participate in the
2. Equity shares. surplus profits and in the surplus assets in the
Equity shares are those, which are not event of the winding up to the company
preference shares. In other words, these are 6. Except those preference shares which are
shares, which do not enjoy any preferential issued as non-cumulative, all preference
right either in respect of payment of dividend shares are preference shares can get the
or in respect of the repayment of capital at the arrears of dividend. But equity shares cannot
time of the winding up of the company. These get the arrears of dividend.
shares are knows as equity shares, as they are 7. As the rate of dividend on preference shares
the 'ownership shares' conferring the is fixed or stable, the market value of
ownership of the company on the holders of preference shares remains more or less
these shares, i.e., the holders of these shares stable. On the other hand, as the rate of
are the real owners of the company. dividend on equity shares fluctuate from year
Merits of equity shares to year, the market value of equity shares
fluctuates greatly from year to year.
 Permanent capital
8. Preference shares, i.e., redeemable
 There is no capital obligation
preference shares, are redeemable during the
 Enhance credit worthiness
existence of the company. But equity shares
 Can be used for long term purposes
are not redeemable during the life of the
 Can strengthen its financial base
company.
 Equity holders can enjoy the sense of
9. Preference shares have limited voting
ownership
rights. On the other hand, equity shares have
 Reward is very high
full voting rights.
Differences between preference shares 10. As there is steady dividend like rent,
and equity share: preference shares capital is considered as
renter capital. On the other hand, as there is
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much risk in equity shares, equity share the employees are given the right to acquire
capital is considered as risk capital. shares of the company immediately, not at a
11. As there is not much risk in preference future date as in ESOS, at a price lower than
shares, on the other hand, equity shares the prevailing market price.
appeal to adventurous investors who are Share appreciation rights (SAR)/ phantom
prepared to assume risks. shares - under this scheme, no shares are
12. The holders of preference shares do not offered or allotted to the employee. The
have much control over the management On employee is given the appreciation in the
the other hand, the holders of equity shares value of shares between two specified dates
have much control over the management. as an incentive or performance bonus, that is
Employees stock option scheme Employee linked to the performance of the company as
stock option plans (ESOPs) & employee a whole, as reflected in its share value.
stock purchase schemes (ESPSs) are Book building
employee benefit plans, which makes the It is basically a capital issuance process used
employee of the company owners of stock in in initial public offer (IPO). It is a mechanism
that company. where, during the period for which book for
Stock options are the instruments that are the IPO is open, bids are collected from
offered to employees, allowing them to buy a investors at various prices, which are above
certain number of shares in the company at a or equal to the floor price.
specific price. This price could either be lower Allotment of shares
than the current market-price of scrip- Allotment is the acceptance of the offer by the
Different terms used in an ESOP company. Allotment is a binding contract
Grant date - the date on which the company between the company and the prospective
grants an option to its employee. shareholders.
Option price - the price at which such shares The rules and regulations with regard to the
in a scheme are offered. It is also known as the allotment are as follows
‘strike price’ or ‘grant price’.
1. General principles regarding
Vesting date - an esop would provide for a
allotment
date on which an option is vested with
2. Statutory restrictions on allotment.
employees and time frame over which the
stock option would vest with employees 1. General principles regarding allotment
Exercise period - the employees would be With regard to the allotment of shares the
given a time period, called exercise period, following general principles should be
within which they are required to exercise the observed in addition to the provisions of the
option. companies act.
Different types of ESOPs i - Allotted by proper authority
Employee stock option scheme (ESOS) - Allotment should be made by proper
under this scheme, the company grants an authority, ie, the board of directors of the
option to its employees to acquire shares at a company or a committee authorized to allot
future date at a pre-determined price. Eligible shares on behalf of the board. An allotment
employees are free to acquire shares on made without proper authority will be
vesting within the exercise period. Generally invalid.
exercise price is lower than the prevalent ii - allotment against application only
market price. No valid allotment can be made on an oral
Employee stock purchase plan (ESPP) - this request. Section 41 provides that for
is generally used in listed companies, wherein becoming a member, a person should agree in
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writing. Thus no allotment can be made 1) Where an allotment is made without
without a written application for allotment. receiving the minimum subscription.
iii - Reasonable time 2) Where an allotment is made without
Allotment must be made within a reasonable receiving at-least five per cent of the nominal
period of time, otherwise, the application value of shares as application money.
lapses. Reasonable time is a question of facts 3) Where an allotment is made without
depending on circumstances of the case. With depositing the application money in a
regard to reasonable time section 6 of the scheduled bank.
contract act becomes applicable 4) in the case of a company which does not
iv - Communication invite public to subscribe its shares, if the
As per the contract act, for a legal offer and allotment is made without filing with the
acceptance communication is essential. The registrar the 'statement in lieu of prospectus'
allotment is an acceptance and be at least three days before the first allotment of
communicated to the applicant. shares.
v - Absolute and unconditional 5) Where the company fails to apply for listing
The allotment must be absolute and of its shares in one or more recognized stock
unconditional, that means it must be made on exchanges before the tenth day after the first
the same terms as stated in the application. issue of prospectus
The legal rules regarding offer and acceptance 6) Where the allotment is made before the
is applicable in allotment also. expiry of the fifth day after the date of issue of
2. Statutory restrictions on allotment of the prospectus.
shares Allotment procedure
i) a prospectus must be issued and a copy The directors of the company take decision
of the same should be filed with the regarding allotment. Allotment is an act of the
registrar. The company cannot allot the directors by accepting the offer of an
shares immediately after issuing the applicant to purchase the shares of the
prospectus. No allotment can be made until company. The decision is taken
the beginning of the fifth day from the date of after complying with the provisions of the act
issue of prospectus. by passing a resolution at the board meeting
ii) Minimum subscription: no company can Letter of regret
proceed to allot shares to the public until the These letters are sent to those applicants to
minimum subscription (which is usually 90% whom shares have not been allotted. Such a
of the issue amount) has been subscribed, and letter will contain the regret of the directors
the sum payable on applications for it has for their inability to allot shares. A cheque also
been received by the company in cash will be enclosed with the letter for the refund
iii) Statement in lieu of prospectus: where of the application money.
a company having a share capital does not Splitting of allotment
issue a prospectus, it can allot shares only When a large block of shares has been allotted
after submitting statement in lieu of to a single person, the company at his request
prospectus for registration. split or divide the original allotment letter
Irregular allotment and its consequences into a number of small allotment letters. This
An allotment of shares shall be termed facility is usually enjoyed by speculators of
irregular if it is made without fulfilling the shares who are interested to sell part of their
conditions precedent to a regular allotment. holdings.
The allotment of shares will irregular in the Renunciation of allotment
following cases:
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To renounce means to give up. An allottee is work. It is the reward paid to the middlemen
permitted under the act to give up the right who brings about a bargain between the seller
over shares allotted to him either wholly or and a purchase of shares or debentures.
partly and transfer allotment made to him to Brokerage is different from the underwriting
some other person. This is known as commission. Underwriters are liable for the
renunciation of allotment. The right of under subscription of shares, but there is no
renunciation is exercised by an allottee when such liability for brokers.
he is not in a position to retain the Shares to Issue of shares or terms of issue of shares :
himself, a) Issue of shares at par
Underwriting When shares are issued by a company to the
Underwriting is an act of guarantee by an public at a price equal to their face value (i.e.,
organization for the sale of certain minimum the price written on the face of the share
amount of shares and debentures issued by a certificates), they are said to be issued at par.
public limited company. According to the b) Issue of shares at a premium (section
companies act, when a person agrees to take 78) When a company finds at there is a great
up the shares specified in the underwriting demand for its shares, it may issue shares at a
agreement, when the public or others have premium. Issue of shares at a premium means
failed to subscribe for them, it is called the issue of shares by a company at a price
underwriting agreement. higher than the face value of the shares. (The
Underwriting commission difference between the issue price, i.e., the
The consideration for the work done by the price at which the shares are issued, and the
underwriter is known as underwriting face value of the shares is called share
commission. Section 76 permits the payment premium) the share premium may be
of underwriting commission subject to the utilized for the following
compliance of the following conditions:- purposes:-
1. It should be authorized by the articles of the 1. to issue fully paid bonus shares to the
company. members
2. The commission payable should not exceed 2. To write off preliminary expenses of the
5% in case of share and 21/2 % in the case of company.
debentures. 3. To write off expenses or commissions paid
3. Underwriting commission may be paid in or discounts allowed on an issue of shares or
cash or kind debentures.
4. Underwriting commission shall be 4. To provide for the premium payable on
disclosed in the prospectus or statement in redemption of any redeemable preference
lieu of prospectus as the case may be. shares or debentures.
5. Details of shares undertaken are also c) Issue of shares at a discount section (79)
disclosed in the prospectus or statement in when a company wants to raise further
lieu of prospectus. capital at a time when its shares are not
6. A copy of contract relating to the payment demanded, and so, quoted in the market
of the commission should be delivered To the below par, it may issue shares at a discount.
registrar. Issue of shares at a discount means the issue
Brokerage of shares at a price less than the face value of
Broker is a person connecting a purchaser the shares. (The differences between the
and a seller. In the process of subscribing face value and the issue price of the shares are
shares to the public, company appoints the discount allowed on the shares. The
brokers. Brokerage is the reward for the discount allowed is a capital loss to the
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company.). Section (79) of the companies act Bonus shares
lays down that a company may issue shares at Bonus shares are shares issued by a company
a discount, if the following conditions are out of its accumulated reserves or profits to
satisfied. the existing equity share holders either
as fully paid shares or partly paid shares free
 The issue of shares at discount must
of cost.
be of a class of shares already issued.
Differences between bonus shares and
 At least one year have lapsed at the
rights shares:-
date of the issue from the date of
1. Bonus shares are issued to the existing
commencement of business by the
members (i.e. Free of costs. But rights shares
company.
are issued to the existing member for money.
 The issue is authorized by a resolution
2. Bonus shares can be issued by a company
(ordinary) in the general meeting
only when it has sufficient accumulated
which must state the maximum rate of
reserves or profits. But the issue of rights
discount.
shares is not at all related to the availability of
 The resolution shall specify the
accumulated reserves or profits.
maximum rate of discount which shall
3. The purpose of bonus issue is to bring the
not exceed 10%
issued capital of the company in line with the
 The resolution shall sanctioned by the
true worth of the undertaking so that the net
central government.
profit of the company may not appear to be
 Shares are issued within two months
excessively high as compared to its paid -up
of the date on which the issue is
capital. But the purpose of rights issue is to
sanctioned by the central government
raise additional share capital for the
 The prospectus relating to the issue
company.
shall contain particulars of discount
4. For the issue of bonus shares, the
allowed on the issue of shares.
permission of the controller of capital issues
Sweat equity: is necessary; on the other hand, for the issue
Sweat equity shares’ to mean equity shares of right shares, the permission of the
issued by the company to employees or controller of capital issues is necessary only
directors at a discount or for consideration when the issue exceeds rs.1 crore in a period
other than cash for providing the knowhow or of 12 months.
making available rights in the nature of 5. For the issue of bonus shares, sanction of
intellectual property rights the shareholders is necessary always. But for
Rights shares the issue of rights shares, the sanction of the
If a public company issues additional or shareholders is necessary only when the
further shares at any time after the expiry of rights issue involves increase in the
two years of its formation or one year of the authorized capital. ,
first allotment of shares, whichever is earlier, Calls on shares
such additional shares must be offered to the When shares are issued, the terms of issue
existing equity shareholders of the company may specify the installment by which the
in proportion to the capital paid up on their issue price shall be payable. A member of a
shares, such shares are called rights shares. company is bound to pay the nominal amount
Such shares are called rights shares, as the of share which he has purchased. As noted
existing equity shareholders are given earlier section 69 provides that not less than
preferential rights (i.e., first preference) in the five percent of the nominal value of share can
allotment of such shares. be called by way of application money and
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another sum at allotment. The balance may be make payment of the remaining amount. Such
payable as and when called for. The power to shares become the property of the company.
make call is exercised by the board in the Therefore company may sell these shares.
meeting by means of a resolution. The board, Such sale
making a call, must observe the provision of Difference between forfeiture and
the articles, otherwise the call will be invalid surrender of shares
and the shareholder is not bound to pay. • Forfeiture of shares is a compulsory action
Notice of call taken by a company as a last resort to recover
A call must be made by serving upon the calls on arrears. But surrender of share is
members a notice of payment in accordance a voluntary act done by a
with the provision of section 53. It should be • Shareholder either to avoid forfeiture of
a formal notice, not a demand or request for shares or to exchange his share for new
payment. Every share-holder is under a shares
statutory obligation to pay the full amount of • For forfeiture the company takes the
his shares. initiative. But in surrender, shareholder takes
Calls in advance the initiative.
According to sec.92 of the companies act, a • Complicated procedures are required for
company may if so authorized by its articles, forfeiture, while surrender requires easy
accept from a shareholder either the whole or procedures.
part of the amount remaining unpaid on any • There cannot be forfeiture of fully paid
shares held by them, as calls in advance. shares, as there is no outstanding call on such
Surrender of shares: - a shareholder who is shares. But there can be surrender of fully
not able to pay the call money paid shares in exchange of new issues.
may surrender its shares to the company. The Stock
company cancels such surrender shares. Stock can be defined as, "stock is a bundle of
Surrender is a voluntary act on the part of the fully paid shares put together for
shareholder, whereas forfeiture is a convenience". In other words, it is the
compulsory act on part of the company aggregate of fully-paid shares of a company
Forfeiture of shares:- When shares are consolidated or put together for the purpose
allotted to an applicant, it becomes a contract of facilitating its division and transfer in
between the shareholder & the company. The fraction of any denomination or amount
shareholder is bound to contribute to the Share certificate:
capital and the premium if any of the company A share certificate is a document issued by a
to the extent of the shares he has agreed to company under its common seal specifying
take. As & when the directors make the calls. the number of shares held by a member and
If the fails to pay the calls then his shares may the amount paid on each share and evidencing
be forfeiture by the directors if authorized by the title of the member to those shares. It is a
the articles of association of the company. The prima facie evidence of the title of a member
forfeiture can be only for non-payment of calls of the shares specified therein.
on shares and not for any other reasons. Contents of a share certificate:
Re-issue of forfeited shares:- Shares are A share certificate must contain the name and
forfeited because only a part of the due the registered office of the company. It must
amount of such shares is received and the bear the common seal of the company. It must
balance remains unpaid. On forfeiture the contain the signatures of at least two
membership of the original allottee is directors who are authorized to sign and also
cancelled. He/she cannot be asked to
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the counter signature of the secretary of the 5. Shares represented by a share certificate
company. are considered as qualification shares for the
In addition to the above, it must contain the directorship of a company. But the shares
following particulars: represented by a share warrant are not
considered as qualification shares for the
a. Name and address of the member
directorship of a company.
b. Share certificate no.
6. The stamp duty payable on the issue of
c. Number and class of shares.
share certificates is just nominal, whereas the
d. Distinctive numbers of the shares
stamp duty payable on the issue of share
included in the certificate.
warrants is heavy
e. Face value of the amount paid on each
7. The name of the bolder of a share certificate
share.
appears in the register of members. But the
f. Date of issue of the share certificate.
name of the holder of a share warrant does
g. A revenue stamp.
not appear in the register of members.
Share warrants 8. A share certificate is not a negotiable
A share warrant is a document issued by a instrument, whereas a share warrant is
public limited company under its common considered as a negotiable instrument under
seal to its shareholders in respect of fully paid mercantile usage and custom.
shares, stating that the bearer of the 9. A share certificate can be issued originally.
instrument (i.e., the share warrant) is entitled But a share warrant cannot be issued
to the shares mentioned therein. In short, it is originally. Only share certificates can be
bearer document of title to the shares issued converted into share warrants later on.
by a public limited company to its 10. A share certificate is only a prima facie
shareholders. evidence of the title of the holder to the shares
Differences between a share certificate specified therein. On the other hand, a share
and share warrant: warrant is a conclusive evidence of the title of
They are many differences between a share the holder to the shares specified therein,
certificate and a share warrant. They are provided he is a bonafide holder for value.
1. Share certificates can be issued by public Transfer of shares:
companies as well as private companies. But When a registered shareholder passed on the
share warrants can be issued only by public property or interest in his shares by sale or
companies limited by shares. otherwise (say) by gift) to another person
2. Share certificates can be issued for fully- voluntarily) there is said to be transfer of
paid as well as partly paid shares, whereas shares. So, transfer of shares refers to the
share warrants can be issued only for fully passing on of the property or interest in the
paid shares. shares by a registered shareholder to some
3. No authorization by the articles of other person voluntarily for a valuable
association is necessary for the issue of shares consideration.
certificates. But share warrants cannot be Power to directors to reject transfer
issued by a company unless their issue is A) Where in the articles no clause for
authorized by the articles of association. reject the transfer
4. No sanction or approval of the central In such a case the shareholder may freely
government is necessary for the issue of transfer his shares and may carry the
shares certificates, whereas the approval of direction to register the transfer
the central government is necessary for the B) Where the articles have provision
issue of share warrants.
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If the articles contain a clause empowering special circumstances, such as the death,
the director to reject the transfer they can do lunacy or insolvency of a shareholder.
so. 3. As the transfer of shares is a voluntary act
Certification of transfer – section 112 of the parties, there must be adequate and
Where a shareholder desires to sell away valid consideration for the transfer of shares.
some of the shares represented by a share On the other hand, as the transmission of
certificate or to sell them to different buyers, shares is the result of the operation of law
the problem of single share certificate arise. 4. As the transfer of shares take place for valid
To overcome this problem, a practice has consideration, stamp duty is payable in case
grown up whereby the transferor lodges the of transfer of shares. But as the transmission
certificate and transfer form with the of shares take place without any
company with a request to certify the consideration, no stamp duty is payable in the
transfer. case of transmission of shares.
Forged transfer 5. For the transfer of shares, an instrument of
An instrument of transfer which is not signed transfer is required to be executed by the
by the true owner of shares, but is signed by transferor in favour of the transferee. On the
some other person as the true owner is called other hand, for the transmission of shares,
a forged transfer. In other words, an there is no need for an instrument of transfer.
instrument of transfer which contains the 6. In the case of transfer of shares, as soon as
forged signature of the transferor is called a the transfer is complete, the liability of the
forged transfer. transferor ceases completely. But in the case
Blank transfer of transmission of shares, the shares
When an instrument of transfer duly transmitted continue to be subject to the
completed and signed by the transferor, but liability of the original holder to the company.
the name, address and signature of the Lien on shares
transferee left blank, is delivered by the Company's lien over partly paid shares
transferor to the transferee along with the If a shareholder has not fully paid the
relevant share certificate, there is said to be a allotment price of any share or owes money to
blank transfer. the company, the company has a lien over all
Transmission of shares: shares registered for that shareholder alone
Transmission of shares refers to the passing (except fully paid shares). This lien is for the
of property in shares by the operation of law, amount outstanding, even if it is not
and not by sale by the original owner, on the immediately payable.
happening such events as death, insolvency or Dematting of shares
lunacy of a shareholder, to his legal Dematerialization (commonly known as
representative. 'demat') signifies conversion of a share
Differences between transfer of shares certificate from its present physical form to
and transmission of shares: electronic form for the same number of
1. Transfer of shares is the result of a holding. It offers scope for paperless trading
voluntary and deliberate act of the holder of through state-of-the-art technology, whereby
shares, whereas transmission of shares is the share transactions and transfers are
result of the operation of law. processed electronically without involving
2. Transfer of shares is a common or general any share certificate or transfer deed after the
method of passing of property in the shares share certificates have been converted from
from one person to another. But transmission physical form to electronic form.
of shares takes place only under certain Listing of securities
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Listing means the enrolment of a name of shares in the market. It provide ample
company in an official list maintained in the scope for speculators.
stock exchanges. These securities are only  No regular price quotation
allowed to be traded in stock exchanges.  Large amount of listing fees
Listing is compulsory in the case of companies  Information of competitors
which intend to offer securities for public
issue through the issue of prospectus. Operation in depository system
Objectives of listing The operations in the depository system
involve the participation of a depository,
 Creation of ready depository participants,
marketability, liquidity to securities. company/registrars and investors. The
 Mobilize savings for economic company is also called the issuer. A
development depository (NSDL and CDSL) is an
 Protect interest of investors organization where the securities on an
 Ensure control of trading investor are held in electronic form, through
Advantages of listing depository participants. A depository
participant is the agent of the depository and
 High liquidity: listing ensures is the medium through which the shares are
liquidity to the public and free held in the electronic form. They are also the
transferability. representatives of the investor, providing the
 Helps to know the performance: the link between the investor and the company
investing public gets periodic reports through the depository. In both systems, the
of the listed companies, which help transfer of funds or securities happens
them to know the performance of the without the actual handling of funds or
company. securities. Both the banks and the depository
 Get regular information: the are accountable for safe keeping of funds and
transaction of the listed companies is securities respectively.
reported in daily and the investors get MODULE IV
regular information of the securities. MANAGEMENT OF COMPANIES
 Tax advantages A company is an artificial person created by
 Facilitates buying and selling of law. Thus a company is not a natural person
securities and yet it acts as a natural person through the
 Helps to raise finance for companies persons who conducts his business, and they
 Protects the interest of investors are known as directors of the company. The
 Fair price: prices on the stock directors of the company are collectively
exchange are determined by two way known as board of directors or the board. The
bids under the operation of the law of board of directors entrust the day to day
supply and demand. So it provides fair management of the company to a chief
price for securities. executive, who may be managing director or
 Collateral security: it can be used as manager by delegating necessary powers. So
collateral securities for obtaining loans. the chief executive looks after the day to day
managerial functions of the company, with or
Limitations without whole time director or directors. As
 Speculation: listing of securities can per the companies [amendment] act, 2000,
the following are the managerial persons of a
bring wide fluctuations in the value of
company.
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a. Directors (i) has not filed the annual accounts and
b. Whole time director annual returns for any continuous three
c. Managing director or manager financial years commencing on and after the
first day of April. 1999 or
Director’s duties and responsibilities
(ii) has failed to repay its deposit or interest
directors
thereon due date or redeem its debentures
The companies act says that the term
Legal position of directors
‘director’ includes ‘any person occupying the
It is difficult to define the exact legal position
position of director regardless of title’. The
of the director of a company. In the words of
definition of ‘director’ includes ‘any person
Bowen. L.j. “directors are described
occupying the position of a director, by
sometimes as agents, sometimes as trustees
whatever name called’. Directors of the
and sometimes as managing directors
company may therefore be trustees,
Directors as agents
governors, managers, officers etc., they will
In the theory of the English law, the agent is a
have the legal status of a director if that is
connecting line between the principal & third
their function
parties. He is an intermediary who has the
Qualification of a director General
power to create legal relationships between
qualifications:
the principal and the third parties. Directors
1. Director should possess a variety of of a company are in the eye of law agents of
knowledge and experiences while being the company for which they act and the
a professional with an ethical mind. general principles of the law of principal and
2. Director should fully understand his agent regulate in most respects the
obligations and practices with a relationship of the company and its directors.
commitment to create long-term values A director of a company is not necessarily the
to the business and shareholders. agent of the company or of its shareholder,
3. Director should have enough time to but the true position of the directors of a
perform his duties effectively. company may that be of agents for the
4. Director should be able to assess company with powers and duties of carrying
himself and is ready to notify the board on the whole of its business, subject to the
of Directors upon change or if there is restrictions imposed by the articles of
anything that prevents him from association.
performing his job effectively. Directors as trustees
In the non-profit world, “directors” and
Dis-qualification of directors
“trustees” are often used interchangeably;
1. A person shall not be capable of being
intended to refer to the group of individuals
appointed as a director of a company, if,
responsible for the management of the
A. He has been found to be of unsound mind
activities and affairs of the corporation (e.g.,
B. He is an undercharged insolvent
“board of directors,” “board of trustees,”
C. He has applied to be adjudicated as an
“board of governors”). Most state non-profit
insolvent
laws provide a common structure from which
D. He has been convicted by a court of any
these individuals (whether directors,
E. He has not paid any call in respect of shares,
trustees, or governors) may carry out those
F. An order disqualifying him for appointment
responsibilities.
as director has been passed by a court
Directors as managing partners
G. Such person is already a director of a
Directors are elected representatives of the
public company which
shareholders and therefore they are in a
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IV Sem B.com Regulatory Framework For Companies www.CUStudents.in
position as managing partners. In addition to company’s articles. They shall held office until
that, they themselves are the shareholders of directors are duly appointed in the first
the company, this also makes them partners annual general meeting Appointment of
with other shareholders. They do almost all subsequent directors The subsequent
the functions of the Company in the capacity directors of a company are appointed in any
of its proprietor but they are not the of the following ways:-
managing partners of the company in full 1: By the company in annual general
sense. Because, if they are the managing meeting
partners, why are they not authorized to bind Except for the first directors, the subsequent
other directors and shareholders by their acts directors are appointed by the company in the
and why do they compulsorily retire. general meeting. In case of a public company
Although directors are agent of the company, or a subsidiary thereof, unless the article
they are not employees or servants to the provide for the retirement of all directors at
company. Hence they cannot claim their every annual general meeting, at least 2/3 of
remunerations as a preferential creditor in the total number of directors shall be liable to
the event of winding up of a company under retire by rotation.
section 530 of the companies act 1956. But 2: By the board of directors: the board can
where any director, besides being a director, appoint the following types of directors
is also in the service or employment of the Additional directors
company such as secretary, manager or Directors in casual vacancy
otherwise, he will be treated as an employee. Alternate directors: the board of directors can
He will be entitled to the remuneration and appoint an alternate director to act for the
other benefits of the employee in addition to original director during his absence.
his rights as a director to sitting fee etc. 3: appointment of directors by third
Appointment and removal of directors parties: if the articles provides, other parties
Appointment of directors may also appoint the directors. Third parties
The directors are the brain of a company. includes, debenture holders, bankers etc.
They occupy a very important position in the 4: appointment of directors by
structure of the company. Only individuals proportional representation: section 265 of
can be appointed as directors. Legally, no firm the act provides an option to companies to
or association or company can be appointed appoint directors by way of proportional
as directors representation.
A. Appointment of first directors 5: appointment by the central
government: the central government can
1. by articles of the company
appoint such number of directors in a
2. by the subscribers to the
company on an order passed by tribunal
memorandum of association
under the winding circumstances.
The first directors are generally nominated by Directors as employees Removal of
the promoters of the company, and their directors
names are mentioned in the articles of Removal of director by shareholders –
association of the company. If the first shareholders may remove any director before
directors are not nominated by the promoters the expiration of his or her term of office by
of the company, the subscribers to the special resolution. In that event, the
memorandum, who are individuals, shall be shareholders may elect, or appoint by
deemed to be the first directors of the ordinary resolution, a director to fill the
company, subject to the regulations of the resulting vacancy.
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Removal of director by directors – the consent of the company accorded by special
directors may remove any director before the resolution
expiration of his or her term of office if the 5. Disclosure of interest: if a director is
director is convicted of an indictable offence, having interest in any contract entered into or
or if the director ceases to be qualified to act to be entered into on behalf of the company,
as a director of a company and does not he is bound to disclose his interest through a
promptly resign, and the directors may notice to the board of directors.
appoint a director to fill the resulting vacancy. 6. Loan (section 295): no director shall
Removal by central government: central govt. obtain any loan from the company without
has the power to remove the directors when the previous approval of the central
the management follow illegal and unsatisfied government.
conducts. Managing director: - According to section 2
Removal by tribunal: the tribunal is also has (26) of the act, the managing director is a
authority to remove the directors on an director who by virtue of an agreement with
application for prevention of mis- the company or of a resolution passed in the
management. general meeting or by board of directors, by
Powers of directors virtue of a memorandum of articles is
“entrusted with substantial powers of the
• To make calls on shares
management which would not otherwise be
• To issue debentures
exercisable by him”.
• To borrow money
Whole time director
• To invest the funds of the company
Whole time director is an employee director
• To make loans
with the company. He does not exercise
• To forfeit shares
substantial powers of management but
• To fill up casual vacancy in the office
performs important administrative functions.
of a director
Manager: - According to section 2 (26)
• To make contracts for the purchase
manager means an individual, who, subject to
of land, patents etc.
the superintendence, control and direction of
• To recommend to the general body,
the board of directors, has the management of
the rate of dividend.
the whole or substantially the whole of the
• To appoint major executives like
affairs of a company, and includes a director
md, manager, secretary etc.
or any other person occupying the position of
• To determine internal organization
a manager
• To formulate major policies
Difference between MD and manager
Restrictions on directors
 A MD must be a director of the co,
1. Age: a person who has reached the age of
whereas a manager need not necessarily
65 cannot become director unless approved
be a director.
by ordinary resolution
 A co. Have more than one MD but
2. Number of directorship: a person cannot
ordinarily a company can have only one
become director in more than 15 companies
manager.
at one time.
3. Assignment of office: a director cannot  A md is entitled with substantial powers
assign or transfer his office in favour of of management. A manager on the other
anyone else hand, has the management of the whole
4. Office of profit: a director cannot hold any or substantially the whole of the affairs
office of profit except with the previous of co.
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 MD exercises powers under agreement meeting is the statutory meeting. The time,
or memorandum or articles. But a date and place of the meeting must be
manager exercise powers under control mentioned in the notice.
and directions of the board. Statutory report
 MD acts both as a director and a The board of directors is required to prepare
manager. But a manager is appointed a report which is known as the 'statutory
only for managerial services. report" and must send this report to the
members at least 21 days before the day on
Company meetings which the meeting is to be held [section
The company is an artificial person created by 165(2)].
law having a separate entity distinct from its Contents of statutory report
members. Being an artificial person, it cannot The statutory report shall set out:
ake decisions on its own. It has to take (a) The total number of shares allotted,
decisions on matters relating to its wellbeing (b) The total amount of cash received by
by way of resolutions passed at properly the company
constituted and convened meetings of its (c) An abstract of the receipts and
shareholders or directors. The decisions payments made
about a company's management are taken by (d) The name, address and occupations of
the directors in their meetings and they are to the directors of the company
be ratified in the general meetings of the E) Contracts
company by the shareholders. Generally, the F) Underwriting contracts
purpose of a meeting is to consider issues of (g) The arrears due on cash from every
common interests to its attendants. director and from the manager.
Kinds of meetings (h) Particulars of any commission or
The meetings of a company are of four kinds: brokerage
1. Meetings of the shareholders Objects
i) statutory meeting The obvious purpose of the statutory meeting
ii) annual general meetings Iii)extra ordinary with its preliminary report is to put the
general meeting Iv) class meetings shareholders of the company as early as
2. Meetings of the directors possible in possession of all the important
3. Meetings of the creditors facts relating to the new company what
4. Meetings of the debenture holders’ shares have been taken up, what moneys
statutory meeting received, what contracts entered into, what
The statutory meeting is held only once in the sums spent on preliminary expenses, etc.
life time of a company. The first meeting of the Annual general meeting
shareholders of the public company is known The annual general meeting is to be held in
as a statutory meeting. Private companies, addition to any other general meeting that
public companies limited by guarantee and might have been held in a year. It appears that
not having a share capital and unlimited holding of an annual general meeting in every
companies are not required to hold the calendar year is a statutory necessity.
statutory meeting Calendar year is to be calculated from 1st
Notice January to 31st December and not twelve
The company must give notice to its members months from the date of incorporation of the
21 days before the holding of the statutory company.
meeting. The notice convening the statutory First annual general meeting A company
meeting must specifically state that the must hold its first annual general meeting
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IV Sem B.com Regulatory Framework For Companies www.CUStudents.in
within a period of not more than 18 months
from the date of its incorporation and if such Requisites of a valid meeting
general meeting is held within that period, it A meeting to be in order must fulfill certain
shall not be necessary for the company to hold requirements.
any annual general meeting in the year of its 1. Proper authority
incorporation or in the following year. The board of directors is the proper authority
Subsequent annual general meeting. as to convene a general meeting of a company
already discussed a company is required to and for this purpose the board should pass a
hold an annual general meeting in each year. resolution at a duly convened meeting of the
Where a meeting called and held on a day in board.
one year is adjourned to a date in the next 2. Notice of meetings
Power to convene an annual general A proper notice of the meetings must be given
meeting. The proper authority to convene an to the members of the company. The notice
annual general meeting is the board of must be given 21 days before the date of the
directors, and if the managing director, meeting.
manager, secretary or other officer calls a 3. Quorum
meeting without such authority Quorum means the minimum number of
Notice. A public company must give at least members that must be present at the meeting.
21 days’ notice for convening any general The quorum is generally fixed by the
meeting including annual general meeting. company's article. Unless the articles provide
Annual general meeting may be called after for a large number, five members personally
giving a shorter notice than 21 days present in the case of a public and two
Date, time and place of holding the annual members personally present in the case of
general meeting. every annual general any other company will be the quorum for a
meeting shall be called at any time during the meeting of the company
business hours, on a day that is not a public 4. Chairman of meeting
holiday. It shall be held either at the Before a meeting of a company can start its
registered office of the company or at some business, it is required to have a chairman. It
other place within the city, town or village in is the chairman who is to preside at the
which the registered office of the company is meeting of the company. He is to conduct the
situated. meeting and to maintain the order.
Extra ordinary general meeting. all general Duties of the chairman
meetings other than annual general meetings (a) He must take care that the minority is not
shall be called extraordinary general oppressed in any way.
meetings. An extraordinary general meeting is (b) He must give the members who are
called to consider those transactions or present a reasonable opportunity to discuss
business which cannot be postponed till the any proposed resolution
next annual general meeting. Hence, it is a (c) He must see that the meeting is properly
meeting of a company which is held between convened and constituted
two consecutive annual general meetings for (d) The chairman must conduct the
transacting some urgent or special business. proceedings in accordance with the
Class meetings Class meetings are the provisions of the act, the company’s articles of
meetings of the shareholders and the association
creditors. Class meetings are held to pass (e) He should adjourn the meeting when it is
resolutions which will bind only the members impossible.
of the particular class concerned
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IV Sem B.com Regulatory Framework For Companies www.CUStudents.in
(f) He must take care that the opinion of the The decisions of a meeting take the form of
meeting is properly ascertained with regard resolutions carried by a majority of votes. A
to the questions before it resolution may, thus, be defined as the formal
(g) He must keep order in the meeting. decision of a meeting on a particular proposal
(h) He should exercise his casting vote, if any, before it.
(i) The minutes of the meeting should be Types of resolutions
properly recorded and signed by the Resolutions are of the following types:
chairman. 1. Ordinary resolutions;
Minutes of the meeting: 2. Special resolutions; and
Every company must keep a record of all 3. Resolutions requiring special notice.
proceedings of every general meeting and of Ordinary resolution
all proceedings of every meeting of its board At a general meeting of which notice has been
of directors and of every committee of the given, if votes cast in favour of the resolution
board. These records are known as minutes by members exceed the votes, if any, cast
and the books in which these records are against the resolution by members, the
written are called 'minute books'. resolution so passed is an ordinary resolution
Voting and roll Special resolution
A vote is the formal expression of the will of The resolution is a special resolution, if
the members of the house either for or against (i) The intention to propose the resolution as
a proposal. The matters proposed and duly a special resolution has been duly specified in
recommended in a general meeting of the the notice calling the general meeting;
company are decided by the voting of the (ii) The notice required has been duly given
members of the company. The procedure of of the general meeting; and
voting is regulated by the articles subject to (iii) The votes cast in favour of the resolution
the provisions of the act by members are three times the number of
1. Voting by a show of hands at any general the votes, if any,
meeting, unless the articles otherwise Resolutions requiring special notice
provide, a resolution put to the vote is in the A resolution requiring special notice is not an
first instance decided by a show of hands independent class of resolutions. It is a kind of
except when a poll is ordinary resolution, with the only difference
2. Voting by poll [sec. 179] if there is that here the mover of the proposed
dissatisfaction among the members about the resolution is required to give a special notice
result of voting by the show of hands, they can of 14 days to the company before moving the
demand a poll. 'Poll' means counting the resolution, and the company shall then
number of votes cast for and against a motion immediately give its members notice of the
Proxies resolution in the same manner as it gives
A meeting has right to vote either in person or notice of the meeting
by proxy. Any member of a company who is Difference between ordinary resolution
entitled to attend and vote at a meeting of the and special resolution
company can appoint another person Ordinary resolution Special resolution
(whether a member or not) as his proxy to It is not required to It is required to
attend and vote instead of himself but a proxy mention in the notice of mention in the notice
so appointed will have no right to speak at the the meeting that the co. Of the meeting that the
Is going to pass an co. Is going to pass a
meeting. ordinary resolution. Special resolution.
Resolutions
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Generally required for Required for special  Issue invitation letters to the auditors
ordinary matters matters and other persons if their presence is
This is passed by a At least ¾ the majority
essential.
simple majority of is required for passing
votes the special resolution At the meeting
Casting vote is available Casting vote is not
to the chairman available  Assist the chairman in meeting
A copy of resolution A copy of resolution  To secure signature of the directors
need not be filed with must be filed with the
the registrar registrar within 30 days
 To ascertain the quorum
Meeting of directors:  Read the notice if necessary
A meeting of the board of directors must be  Note decision taken at the meeting
held at least once in every three months and After meeting
at least four such meetings shall be held in
every year.  To prepare minutes of the meeting
Notice of the meeting: notice of the every  Take steps to carry out the
meeting must be given in writing to every instructions of the directors’ meeting
director within the time prescribed. Winding up of a company
Agenda: when the agenda is enclosed with Winding up of a company is defined as a
notice each of the directors gives due process by which the life of a company is
consideration to the proposed business and brought to an end and its property
comes with necessary preparation for administered for the benefit of its members
discussion in the meeting. and creditors. An administrator, called the
Quorum: the quorum for a meeting of the liquidator, is appointed and he takes control
board of directors of a company shall be 1/3 of the company, collects its assets, pays debts
of its total strength or two directors and finally distributes any surplus among the
whichever is higher. members in accordance with their rights. At
Chairman: every meeting of the board must the end of winding up, the company will have
have a chairman who shall preside over the no assets or liabilities. When the affairs of a
board meeting. company are completely wound up, the
Resolution: decision are taken by directors dissolution of the company takes place.
by passing resolution on matters presented Compulsory winding up or winding up by
before them for consideration. the tribunal
Voting: each director has one vote for each Winding up by the tribunal is also called
resolution put to vote at the meeting. In case compulsory winding up. The following are the
of equality, chairman have a second or casting circumstances in which company may
vote. wound up by tribunal.
Secretary’s duties regarding board
meeting:  If the co. has, by special resolution
Before meeting: resolved that the co. be wound up by the
tribunal.
 To give notice to each director
 If default is made in delivering the
 Prepare agenda statutory report to the registrar
 Make available the records necessary  If the co. Does not commence its business
for the meeting within a year from its incorporation.
 To make all other arrangements for  If the number of members reduced
meeting below to statutory minimum.
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 If the co. Is unable to pay its debts Under the present act, the only person who is
 If the tribunal is of opinion that it is competent to act as the liquidator in a
equitable that the co. Should be wound winding up is the official liquidator. For the
up purpose of winding up, there shall be attached
 If the co. Has made a default in filing with to each high court an official liquidator
the registrar its balance sheet and p/l a/c appointed by the central government, who
for any five consecutive years may be either a whole time or part time officer
 If the co. acted against the interests of the depending upon the volume of work.
integrity and sovereignty of India. Powers of liquidators to be exercised with
the sanction of the tribunal
Petitions for winding up
Petition by the co.: the co. Can present  To carry out on the business of the co.
petition to the court for winding up where the  To sell the properties
shareholders passed a special resolution.  To carry on the legal proceedings
Creditors’ petition: creditors can also file a  To charge the assets in order to raise
petition if the co. Is unable to pay its debts. money
Creditors include, debenture holders, secured  To sell the undertaking
creditors etc.  To pay the creditors
Contributor’s petition: the term  To appoint an advocate
contributory means any person liable to  To disclaim any property
contribute to the assets of the co. In the event  To compromise for all calls, debts and
of its wound up. A contributory may present a other liabilities
petition for winding up if the co. makes any  To distribute the money
default in filing statutory report or holding
statutory meeting or there is a dead lock in the Powers to be exercised without the
management etc. sanction of the tribunal
Joint petition: petition given by the co.,  To inspects the records
creditors and contributories together or  To use the seal of the co.
separately to wound up the co.
 To deal with the negotiable
Registrar’s petition: registrar may present
instrument
petition,
 To sue against the insolvency of
 If default is made in submitting the contributories
statutory report or  To collect the money
 Holding statutory meeting or  To appoint agent
 The co. Fails to commence business
Duties of the liquidators
within a year from its incorporation
 If number of members below the  To conduct the winding up process
minimum  To submit the preliminary report to
 If the co. Is unable to pay its debts the tribunal
 If the tribunal considers it just and  Custody of the properties of the co.
equitable  To follow the directions given by the
committee of inspection
Central govt.’s petition: central govt. May
 To call the meetings of creditors and
sometimes present petition to wound up a co.
contributories
Official liquidators
 To maintain proper books
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 To present an account to the court Liquidator of a body corporate: the
liquidator of a body corporate which held
Provisional liquidator
shares in the company in liquidation and
The court may appoint the official liquidator
which had been included in the list of
to be the liquidator provisionally at any time
contributories will become liable as a
after the presentation of the petition for contributory.
winding up and before making winding up
Directors, md or manager with
Committee of inspection
unlimited liability: the above said persons of
The court may, at the time of making an order
the co. In liquidation whose liability is
for the winding up or at any time thereafter,
unlimited becomes liable as contributories.
direct that there shall be appointed a VOLUNTARY WINDING
committee of inspection to act with the
Voluntary winding up means winding up of
liquidator. Where such a direction is given by
the co. By the members or creditors without
the court, the liquidator is required to
interference by the tribunal. In this type of
convene, within 2 months from the date of the
winding up, the co and its creditors are left
direction, a meeting of the creditors to free to settle their affairs without going to the
determine who are to be the members of the court. The co. Can wound up voluntarily by
committee, within 14 days from the date of
passing an ordinary resolution in general
the creditors' meeting, the liquidator must
meeting and also through passing special
call a meeting of the contributories to
resolution.
consider the creditors' decision with respect Types of voluntary winding up
to the membership of the committee
Contributory  Members’ voluntary winding up
According to sec 428 contributories refers to  Creditors’ voluntary winding up
persons who are liable to contribute to the
MEMBERS’ VOLUNTARY WINDING UP
assets of the co. In the event of winding up.
A member’s voluntary winding up take place
The following persons are liable as
only when the co. Is solvent. It is initiated by
contributories on the winding up of the co.
members and is entirely managed by them.
Present and past: a present member of the
The liquidator is appointed by the members.
co. Is liable to contribute the unpaid amount
No meeting of creditors held and no
on his shares or the amount which he has
committee of inspection is appointed. The
agreed to pay.
members in confidence say that they are
A past member is liable to pay only when it
ready to pay liabilities and are solvent.
appears to the tribunal that the present
Conditions of members’ voluntary winding
members are unable to satisfy the
up
contribution required to be made by them.
1. Declaration of solvency: the declaration
Legal representatives: if a person died
of solvency must be made by the directors and
before or after he has been included in the list
verified by an affidavit. They have to make a
of contributories, his legal representative will
declaration to the effect that they made full
become as a contributory.
enquiry into the affairs of the co. And have the
Official assignee: if a person liable as a
opinion that the co. has no debt or that it will
contributory has been adjudged as an
be able to pay its debt within a period of 3
insolvent, the official assignee or receiver of
years from the commencement of winding up.
the insolvent contributory become liable as a
2. Shareholders’ resolution: after the
contributory.
declaration, the shareholders must meet and
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IV Sem B.com Regulatory Framework For Companies www.CUStudents.in
pass an ordinary resolution or a special  He should see that the liquidator is
resolution. appointed and his remuneration is
Provisions applicable to members’ voluntary satisfied
winding up  To see that the notice of the
3. Appointment of liquidator: a co. In appointment is given to the registrar
general meeting shall appoint liquidator by  He must help for the preparation of
passing resolution for winding up the affairs statement of affairs
of the co. And for distributing the assets.
CREDITORS’ VOLUNTARY WINDING UP
4. Board’s power to cease on
Creditors’ voluntary winding up is take place
appointment of a liquidator: board of
when the co is insolvent and co. Is unable to
directors and the md has the power to cease
pay its debt in full. The law gives the creditors
the appointment of liquidator
primary place in the process of winding up.
5. Power to fill a vacancy in the office of a
Provisions regarding creditors’ voluntary
liquidator: if the vacancy occurs in the office
winding up
of the any liquidator appointed by the co., the
co. In the general meeting may fill the  Meeting of creditors’: the co. shall call a
vacancy. meeting of the creditors when the
6. Notice of the appointment of liquidator resolution for voluntary winding up is
to be given to the registrar passed.
7. Restriction on liquidator to accept share  Notice to the registrar: the co. shall
: the liquidator cannot accept shares in the give notice of resolution passed at the
transferee co. As consideration without creditors meeting to the registrar
sanction of a special resolution of the co. In within 10 days.
the process of sale.  Appointment of liquidator: the
8. Duty of liquidator to call creditors’ creditors and the members appoint a
meeting in case of insolvency: Liquidator person to be the liquidator.
must call the general meeting at the end of  Committee of inspection : the creditors
each year at the meeting may appoint a committee
9. Final meeting and dissolution: the of inspection consisting of not more
liquidator call the last meeting of the co. When than five members
all the affairs have been completely over.  Fixing liquidator’s remuneration : it is
Secretary’s duties in connection with fixed either by the committee of
Members’ voluntary winding up inspection or by creditors
 He should arrange for the preparation  Board’s power to cease on
and audit of the balance sheet and p/l appointment of a liquidator : board of
a/c of the co. directors and the md has the power to
 He must convene a meeting of board of cease the appointment of liquidator
directors  Power to fill a vacancy in the office of
 He must convene an extra ordinary a liquidator: if the vacancy occurs in the
meeting to pass the resolution for the office of the any liquidator appointed by
winding up the co., the creditors in the meeting may
 He must publish notice of the resolution fill the vacancy.
 He must see the declaration of solvency,  Restriction on liquidator to accept
verified and delivered to the registrar share: the liquidator cannot accept
shares in the transferee co. As
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consideration without sanction of court Members’ voluntary Creditors
or committee of inspection. winding up voluntary
winding up
 Meeting at the end each year: where
the winding up continues for more than Take place when co. Is Take place when co. Is
a year, the liquidator shall call a general solvent insolvent
meeting of the co. Under this, declaration No such declaration is
 Final meeting and dissolution: the of solvency is made by made in this type of
directors. winding up
liquidator call the last meeting of the co.
When all the affairs have been Only members meeting Both members and
is called creditors meeting is
completely over called
Liquidator is appointed Liquidator is appointed by
Secretary’s duties in connection with by members creditors
creditors’ voluntary winding up
No committee of Committee of inspection is
 To arrange to hold a board meeting to inspection is appointed appointed
fix the date, time and place and agenda Meeting of members’ is Meeting of membersand
of the general meeting called on completion of creditors’ is called at the
 He should prepare and get the approval proceedings of winding end.
up
of the board for the draft resolution to
be placed in general meeting.
 He should see that the notice of general Winding up subject to supervision of court
meeting of the members and meeting of At any time after a co. has passed a resolution
the creditors are issued. for voluntary winding up, the court may make
 He should see that the creditors’ an order that the voluntary winding up shall
meeting is duly held. continue, but subject to such supervision of
the court as the court think just. The object of
 He should see that a director is
supervision order is to protect the interest of
nominated to preside the creditors
the members, creditors and the co. Such an
meeting.
order is passed by the court when there are
 He should see that the resolution
irregularities or fraud in the voluntary
necessary for the winding up is passed
winding up.
at the directors’ meeting
Consequences of winding up
 He should see that the notice of the
resolution is published in the official o Consequences as to shareholders:
gazette. the shareholders are liable to the face
 He should ensure that the liquidator is value of share. Hence a member or
appointed and the remuneration is contributory of a co. Is liable and bound
fixed. to pay the full amount on the shares held
 He should see that a copy of statement by him.
of affairs of the co. Is duly verified and o Consequences as to creditors: the
affidavit is send to the liquidator. object of winding up is to realize the
assets and discharge the liabilities and
Distinguish between members’ Voluntary then if there be any surplus, to pay it off
winding up and creditors’ voluntary to the shareholders. Sec 530 says,
winding up certain debts which are to be paid in
priority to all other debts. Such
payments are called preferential
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IV Sem B.com Regulatory Framework For Companies www.CUStudents.in
payments. It may note that such such order of the tribunal, the co. Is
payments are made after paying dissolved.
secured creditors and costs, charges o Dissolution by liquidation: when the
and expenses of the winding up. liquidator or the co. Has completed all
o Consequences as to servant’s and the formalities of the winding up of the
officers’: a winding up order by a court co., the co. Is taken to be dissolved.
operates as a notice of discharge to the
Difference between winding up and
employees and officer of the co. When
dissolution
the business of the co. Is continued.
o Consequences of proceedings against Winding up Dissolution
the co.: when a winding up order is It is the first stage It is the second stage that
made, no suit or legal proceedings can towards the give the end to the co.
be commenced and no pending legal dissolution. In
winding up assets are
proceedings continued against the co, sold and utilized for
except with the permission of court. the payment of
o Consequences as to costs: where the liabilities
assets of the co. Are insufficient to It is carried out by While in dissolution no
satisfy the liabilities, the court may liquidator such proceedings, it is
make an order for payment of the costs the end result.
out of the assets, including the cost of The liquidator No such representation
winding up as first priority. represents the co.
o Consequences as to documents: any Order of court is not Dissolution take place
document, letters, invoice issued in the essential in winding only by order of the
up court.
name of the co. Must contain a
statement that the co. Is being wound Defunct company
up. Defunct simply means de-functioning. A
defunct co. Thus means a co. Which never
DISSOLUTION OF A COMPANY
commenced business or which is not carrying
Dissolution means the stage when the co.
on business and has either no assets or has
ceases to exist. On dissolution the existence of
such assets shall not be sufficient to meet the
a co. comes to an end. It is similar death of a
costs of liquidation.
living person. Methods of dissolution of
company
o If the name of the co. Is removed MODULE V
(defunct co.): according to sec 560 of EMERGING ISSUES IN COMPANY LAW
Indian companies act 1956, registrar of PRODUCER COMPANIES
companies may remove the name of any Till recently, the companies act, 1956 (the
co. From its register of the companies, if act), recognized only three types of
the co. Is not doing its business for a long companies, namely, companies limited by
time or if the co. Is not a going concern. shares (sub-divided into public limited and
o Dissolution by the court order: sec 394 private limited companies), companies
of the Indian companies act states that a limited by guarantees and unlimited
tribunal may order for the dissolution of companies. With the coming into force on
a co., on the re-organization or February 6 of the companies (amendment)
restructuring of the co. Or on the act 2002, (1 of 2003), a fourth category,
amalgamation of two companies. On `Producer companies,' finds a place in the act.
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IV Sem B.com Regulatory Framework For Companies www.CUStudents.in
Formation equity shares. Members will be eligible to
Any ten or more individuals, each of them receive bonus shares. An interesting
being a producer, that is, any person engaged provision is for the distribution of patronage
in any activity connected with primary bonus after the annual accounts are approved
produce. — patronage bonus means payment out of
Objects surplus income to members in proportion to
The objects of producer companies shall their respective patronage. Patronage, in turn,
include one or more of the eleven items is defined as the use of services offered by
specified in the act, the more important being: producer companies to their members by
(i) Production, harvesting, procurement, participation in their business activities.
grading, pooling, handling, marketing, selling, Limited liability partnership
export of primary produce of members or It is viewed as an alternative corporate
import of goods or services for their benefit; business vehicle that provides the benefits of
(ii) processing including preserving, limited liability but allows its members the
drying, distilling, brewing, venting, canning flexibility of organizing their internal
and packaging of produce of its members; and structure as a partnership based on a
(iii) Manufacture, sale or supply of mutually arrived agreement. Owing to
machinery, equipment or consumables flexibility in its structure and operation, the
mainly to its members. lip would also be a suitable vehicle for small
The other objects include rendering technical enterprises and for investment by venture
or consultancy services, insurance, capital.
generation, transmission and distribution of Formation of limited liability partnership
power and revitalization of land and water 1) For a limited liability partnership to be
resources; promoting techniques of mutuality incorporated.
and mutual assistance; welfare measures and (a) Two or more persons associated for
providing education on mutual assistance carrying on a lawful business
principles. It is to be noted that private limited (b) The incorporation document shall be
or public limited companies are not filed in such manner and which such fees
hamstrung by such restrictions as to their (c) There shall be filed along with the
objectives, provided they are legal. incorporation document, a statement in the
Management prescribed form
(a) Every producer company is to have at 2) The incorporation document shall
least five and not more than 15 directors. (a) Be in a form as may be prescribed.
(b) A full time chief executive, is to be (b) State the name of the limited liability
appointed by the board. partnership.
(c) A stipulation that could dismay company (c) State the proposed business of the limited
secretaries is that only producer companies liability partnership.
having an average annual turnover exceeding (d) State the address of the registered office
RS. 5 crores in each of three consecutive years of the limited liability partnership.
need have a whole-time secretary (e) State the name and address of each of the
Members' benefits persons who are to be partners of the limited
Members will initially receive only such value liability partnership on incorporation.
for the produce or products pooled and (f) State the name and address of the persons
supplied as the directors may determine. The who are to be designated partners of the
withheld amount may be disbursed later limited liability partnership on incorporation.
either in cash or in kind or by allotment of
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IV Sem B.com Regulatory Framework For Companies www.CUStudents.in
(g) Contains such other information D) Responsibility in discharging its functions
concerning the proposed limited liability including compliance with regulations and
partnership as may be prescribed. code of conduct.
Corporate governance Securities Exchange Board of India (SEBI)
Corporate governance refers to the structures It was officially established by the
and processes for the direction and control of government of India in the year of 1992 with
companies. Corporate governance concerns SEBI act 1992 being passed by the Indian
the relationships among the management, parliament. Initially SEBI was a non-statutory
board of directors, controlling shareholders, body without any statutory power. However
minority shareholders and other in the year of 1995, the SEBI was given
stakeholders. Good corporate governance additional statutory power by the
contributes to sustainable economic government of India through an amendment
development by enhancing the performance to the securities and exchange board of India
of companies and increasing their access to act 1992.
outside capital. Management of the board
Corporate governance may be defined as “a 1. The board shall consist of the following
set of systems, processes and principles members, namely:-
which ensure that a company is governed in (a) A chairman;
the best interest of all stakeholders”. (b) Two members from amongst the officials
In simple sense, it is the process of managing of the ministry of the central government
the corporate by establishing better relation dealing with finance and administration of the
with the top management and other companies act, 1956
interested parties to the affairs of the (c) One member from amongst the officials of
company with a view to maximize the the reserve bank;
shareholders’ value in the long run through (d) Five other members of whom at least
better business practices, better Three shall be the whole-time members to be
quality of work life and culture. appointed by the central government.
Accordingly good corporate governance 2. The general superintendence, direction and
implies the following management of the affairs of the board shall
1. Optimal utilization of resources for vest in a board of members
enhancing the value of the company 3. The chairman shall also have powers of
2. Ethical behavior of the company in honoring general superintendence and direction of the
and protecting the rights of all the affairs of the board
stakeholders. 4. The chairman and members shall be
The core principles of corporate governance nominated by the central government and the
are fairness, transparency, accountability and reserve bank respectively.
responsibility. That is 5. The chairman and the other members shall
A) Fairness to ensure the right of be persons of ability, integrity and standing
shareholders including minority who have shown capacity in dealing with
shareholders. problems relating to securities market or
B) Transparency through disclosure of have special knowledge or experience of law,
information on financial performance finance, economics, accountancy,
governance and ownership. administration.
C) Accountability for handling resources of Functions of SEBI
the company on the part of board of
 Protect the interest of investors
governors.
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IV Sem B.com Regulatory Framework For Companies www.CUStudents.in
 Regulating the business in stock  It can compel listing of securities of
exchanges public co.
 Registering and regulating the working of  It can control and regulate stock
stock brokers, sub brokers, share transfer exchanges
agents, underwriters etc  Granting registration to market
 Registering and regulating the working of intermediaries
the depositories, participants, custodians  Promoting investor- education and
of securities, fiis, credit rating agencies training of intermediaries
etc.  Regulating purchase of shares and take
 Registering and regulating the working over of companies.
venture capital funds.
Securities appellate tribunals
 Promoting and regulating self regulatory
Securities appellate tribunals means a
organizations
securities appellate tribunal established
 Prohibiting fraudulent and unfair trade
under subsection (1) of section 15 k of the
practices relating to securities market.
securities and exchange of India act 1992
 Promoting investors’ education and
Composition of securities appellate
training of intermediaries of stock
tribunal
markets.
A securities appellate tribunal shall consist of
 Prohibiting insider trading a presiding officer and two other members, to
 Collecting information, undertaking be appointed, by notification, by the central
inspection, conducting enquiries of the government:
stock exchanges, mutual funds etc. Tenure of office of presiding officer and
 Levying fees and other charges other members of securities appellate
 Inspection of books and records of any co. tribunal
Powers of SEBI The presiding officer and every other member
of a securities appellate tribunal shall hold
 To file a complaints in a court office for a terms of five years from the date
 To regulate companies in the issue and on which he enters upon his office and shall
transfer of shares be eligible for re-appointment.
 It can impose penalties on companies Difference between company and
and on brokers for violating partnership
transactions Basis Company Partnership
 Power to summon any broker or Mode of By registration By agreement
intermediaries and call for documents creation
Legal Legal separate entity No separate
 It can issue directions to all brokers for statute entity
protecting the interest of investors Life Perpetual succession Uncertain life
 It can call for periodical returns from Liability Limited liability Unlimited joint
stock exchange and several
 Seek any information from stock liability
Authority Representative Common
exchange management management
 It can enquire into functioning of stock
Transfer co – freely shares No right to
exchange Public transferable transfer
 It can grant permission for the change of
bye-laws of any stock exchange Minimum Private -2 members. 2 members
members Public -7 members
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IV Sem B.com Regulatory Framework For Companies www.CUStudents.in
Maximum Private- 50 and 20 members
members public – unlimited
Resource Large and unlimited Personal
s resources of
partners are
limited

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