Index

Sr. Topic Page

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I CORPORATE ACT 2013
1.1 Definitions and Key Concepts 3
1.2 Advantage and Disadvantages of Companies 5
1.3 Concept of Corporate Veil 6
1.4 Types of Companies 8
1.5 Role of Promoters 22
1.6 Effects of pre-incorporation contracts 24
1.7 Incorporation of Companies 27
1.8 Doctrine of Ultra-vires 29
1.9 Memorandum of Association 30
1.10 Doctrine of Indoor Management 35
1.11 Articles of Association 36
1.12 Doctrine of Constructive Notice 37
1.13 Case Laws
II
2.1 Prospectus 40
2.2 Golden rule of Prospectus 42
2.3 Misstatement in Prospectus 43
2.4 Types of Prospectus - Shelf, Red Herring, Deemed Prospectus 44
2.5 Private placement, ESOPs, Buying Back of Shares, Sweat Equity 48
2.6 Members and Shareholders 55
2.7 Membership, Who can become member? 57
2.8 Modes of acquisition of membership 59
2.9 Cessation (Termination) of membership 59
2.10 Company Meetings 62
2.11 Types of Committees 68
2.12 Directors & Key Managerial Personnel 71
2.13 Types of Directors 71
2.14 Director’s Qualification, Disqualifications 74
2.15 Director’s Appointment, Removal, 74
2.16 Director’s duties, Legal position of directors 76
2.17 Case Laws

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COMPANY MEANING
A company means an association of individual formed for some common purpose. But it is a
voluntary association of persons. It has capital divisible into parts, known as shares, an artificial
person created by a process of law and it has a perpetual succession and a
common seal.

Definition
According to Prof. Lindley, company is defined as, “An association of many persons who
contribute money or money’s worth to a common stock, and employ it in some common trade or
business (i.e., for a common purpose), and who share the profit or loss (as the case may be) arising
therefore. The common stock so contributed is denoted in money and it the capital of the company.
The persons who contribute it, or to whom it belongs, are members. The proportion of capital to
which each member is entitled is his share. Shares are always transferable although the right to
transfer them is often more or less restricted”.

Characteristics of a Company
1. Separate Legal Entity
A company formed and registered under the companies act is a distinct legal entity. It is a creation
of law and is sometimes called artificial person having invisible and intangible. It is a fiction of
law with legal, but no natural or physical existence.
Case of Salomon Vs Salomon Co Ltd: S Sold his boots business to a newly formed company for
$30,000. His wife, one daughter and four sons took up one share of $ 1 each. S took 23,000 shares
of $ 1 each and $ 10,000 debentures in the company. The debentures gave S a charge-over the
assets of the company as the consideration for the transfer of the business. Subsequently when the
company was wound up, its assets were found to be worth $6,000 and its liabilities amounted to $
17,000 of which $ 10,000 were due to S (secured by debentures) and $ 7,000 due to unsecured
creditors.
The unsecured creditors claimed that S and the company were one and the same person and that
the company was a mere agent for S and hence they should be paid in priority to S. Held, the
company was, in the eyes of the law, a separate person independent from S and was not his agent.
S, though virtually the holder of all the shares in the company, was also a secured creditorand was
entitled to repayment in priority to the unsecured creditors.

2. Perpetual Succession
A company is an artificial person, as such it never dies. Its life does not depend on the life of its
members. It may not affected by insolvency, mental disorder or retirement of its members. It
is created by law and can be put an end to only by the process of law. Even the earthquake, flood
or hydrogen bomb cannot destroy it. It continues to exist even if all its human members are dead.
Unlike a natural person a company never dies. It is an entity with a perpetual succession. Its
existence is not affected by the death, lunacy and insolvency of its members.

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3. Limited Liability
In a company limited by shares, the liability of members is limited to the unpaid value of the
shares. If the face value of a share in a company is Rs.10 and a member has already paid Rs.7 per
share, he can be called up to pay not more than Rs.3 per share during the lifetime of the company.
In a company limited by guarantee, the liability of members is limited to such amount as the
members may undertake to contribute to the assets of the company in the event of its being wound
up.
4. Common seal
A company is a juristic person with a perpetual succession and a common seal. Since the company
has no physical existence, it must act through its agents and all such contracts entered into by its
agents must be under the seal of the company. The common seal acts as the official signature of
the company. Every company mush has a seal with its name engraved on it.
5. Transferability of shares
The capital of a company is divided into parts, called shares. These shares are, subject to certain
conditions, freely transferable so that no shareholder is permanently or necessarily wedded to the
company. When the joint stock companies were established, the great object was that the shares
should be capable of being easily transferred.
6. Capacity to sue and be sued
A company can sue and be sued in its corporate name. It may also inflict or suffer wrongs. It can in
fact do or have done to it most of the things which may be done by or to a human being. On
incorporation, a company acquires separate and independent legal personality. As a legal person,
it can sue and be sued in its name.
7. Separate Property
A company, as already observed, is a legal person distinct from its members. It is therefore capable
of owing, enjoying and disposing of property in its own name. Although, the capital and assets of
the company are contributed by its shareholders, they are not the private and joint owners of the
property of the company. The property of the company is not the property of the shareholders; it is
the property of the company.

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Advantages and Disadvantage of Companies

Advantages of a ‘Company’
1. Finance Resources - Resources are the crucial part of a business setup or organization.
Managing resources helps companies to work efficiently. Resources are required to meet the
desires of business outcomes. Resources can be monetary, raw material, labour, land, or in any
other form.
In a company, capital can be raised by the issue of securities publically and privately in the case of
the public and private company respectively. A company can collect a large sum of resources
through shares. E.g. there is no maximum limit of no. of shareholders in a public company. Thus
in times of need the number of shareholders can be increased.
2. Independent existence - A company is a separate legal entity independent of its members. The
members who compose it. The business to be carried out is in the name of the company, the
liabilities are the company’s liabilities. The company can only be created and dissolved by law. A
company is capable of owning, enjoying, and disposing of property in its name. The members of
the company do not have any direct rights over the company’s property. Thus the claims of the
company’s creditors will be against the company’s property.
3. Limited liability - In a company, the liability of the members of a company is limited to the
extent of the amount unpaid on the shares held by them. The members of a company are not
personally liable for its debts. The liability of each shareholder is limited to the nominal value of
the share issued to them at par. In the case of an unlimited company, the liability of the member is
enforceable at the time of winding up only.
4. Continuity of existence - A company is a separate legal person and it is independent of the
members composing it. A company can be created and dissolved by law only. Since a company
can only be dissolved by law thus doesn’t depend on the lifetime of a natural person and possess a
continuity of existence. Change in members or insolvency or retirement or even death of any
member does not affect the continued existence of a company. A company has perpetual
succession. Whereas in the case of a partnership, the death of a partner dissolves the partnership
automatically.
5. Transferability of shares - The capital of a company is divided into small units or
denominations called shares. The shares of a company are the property that is legally and freely
transferable in the case of a public company. The company provides its members to sell their
shares in the market and to get back the investment without having to withdraw the money from
the company. The concept of transferability of shares provides stability to the company. In the
partnership form of a business organization, a partner cannot transfer his shares unless he has the
unanimous consent of all partners.
6. Democratic structure - A company maintains a democratic structure. The alteration in the
memorandum or article of association is done by a special meeting and resolutions, the procedure
established by law. The board of directors is elected by the members of the company and the
members have the right to decide the policies of the company.

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Disadvantages of a ‘Company’
1. Formation - The formation of a company requires a lot of planning, paperwork and has to go
through different stages before registration. The first stage of promotion is itself expensive and
tiring. A prescribed num. of persons is to be associated to make a company.
A number of documents are to be filed with the registrar of companies of the state in the registered
office and then raising of capital. Then, after incorporating the company, all requirements and
compliances are needed to be complied with the as per the law provided.
2. Lack of privacy - In the case of a company, it is required to publish its capital structure,
constitution, accounts, etc. by filing such required documents with the registrar of the companies.
The policies, accounts, and workings of the company are to be discussed in the board meetings
with all members. Thus leaving no privacy unlike other business organizations e.g. sole
traders and partnership firms etc.
3. Slow decision making - Unlike other business organizations e.g. sole traders and partnerships,
a single person cannot make the decisions in the case of a company. Decisions are to be taken
either in the board meeting or in the general meetings. The procedure of calling a meeting of the
board of directors or members has to be followed as prescribed by law.

LIFTING THE CORPORATE VEIL

A company is a legal person distinct from its members. This principle may be referred to as ‘the
veil of incorporation’. The effect of this principle is that there is a veil between the company and
its members i.e., the company has a corporate personality which is distinct from its members.
But over a period, the abuses of this corporate personality became apparent. Thus it became
necessary for the court to break through or lift the corporate veil or crack the shell of corporate
personality and look at the persons behind the company who are the real beneficiaries of the
corporate fiction.
The corporate veil is lifted in the following cases;
 Determination of the character
 Where company is a mere cloak or sham
 Where the company is acting as an agent of the shareholders
 Protection of revenue

Statutory exception (officer is liable for act)

1. Number of members below statutory minimum
Sec.45, if a company carries on business for more than 6 months after the number of its members
has been reduced below 7 in case of a public company or 2 in case of private company, every
person who knows this fact and is a member during the time that the company so carries on

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business after the six months, is severally liable for the whole of the debts of the company
contracted during that time, i.e., after six months. It may be noted that in such a case the continuing
members (i.e., those who continue to be members after six months).
a. Can be sued and not those who have withdrawn from the membership;
b. Shall be liable only if they are aware of the fact of the member falling below
the statutory minimum.

2. Failure to refund application money

Sec.69 (5), the directors of a company are jointly and severally liable to repay the application
money with interest if the company fails to refund the application money of those applicants who
have not been allotted shares, within 130 days of the date of issue of the prospectus.

3. Mis-description of company’s name

Sec.147 (4) where an officer or agent of a company does any act or enters into a contract without
fully or properly mentioning the company's name and the address of its registered office, he shall
be personally liable. Thus where a bill of exchange, hundi or promissory note is signed by an
officer of a company or any other person on its behalf, without mentioning this fact that he is
signing on behalf of the company; he is personally liable to the holder of the instrument unless the
company has already paid the amount.

4. Fraudulent Trading
Sometimes in the course of the winding up of a company it may appear that some business of the
company has been carried on with intent to defraud creditors of the company, or any other person
or for any fraudulent purpose. In such a case, the court may declare that any persons who were
knowingly parties to the carrying on of the business in this way are personally liable without any
limitations of liability for all or any of the debts or other liabilities of the company as the court may
direct. The court may do so on the application of the official liquidator, or the liquidator or any
creditor or contributory of the company.

5. Holding and Subsidiary Companies

In the eyes of the law, the holding company and its subsidiaries (for definition of holding and
subsidiary companies) are separate legal entities. But in the following two cases, a subsidiary
company may lose its separate identity to a certain extent:
1) Where at the end of its financial year, a company has subsidiaries, it must lay before its members
in general meeting not only its own accounts, but also a set of group accounts showing the profit
or loss earned or suffered by the holding company and its subsidiaries collectively and their
collective state of affairs at the end of the year.
2) The court may, on the facts of a case, treat a subsidiary company as merely a branchor department
of one large undertaking owned by the holding company.

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Types of Companies
The three basic types of companies which may be registered under the Act are:
(a) Private Companies;
(b) Public Companies; and
(c) One Person Company (to be formed as Private Limited Company).

PRIVATE COMPANIES
As per Section 2(68) of the Companies Act, 2013, “private company” means a company having a
minimum paidup share capital as may be prescribed, and which by its articles:
 Restricts the right to transfer its shares;
Except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall,
for the purposes of this clause, be treated as a single member: Provided further that –
(a) persons who are in the employment of the company; and
(b) persons who, having been formerly in the employment of the company, were members
of the company while in that employment and have continued to be members after the
employment ceased, shall not be included in the number of members; and
 Prohibits any invitation to the public to subscribe for any securities of the company.

Characteristics of Private Company

Members – To start a company, minimum number of 2 members is required and a maximum
number of 200 members as per the provisions of the Companies Act, 2013.
Limited Liability – The liability of each member or shareholders is limited. It means that if a
company faces loss under any circumstances then its shareholders are not liable to sell their own
assets for payment. Thus, the personal, individual assets of the shareholders are not at risk.
Perpetual succession – The Company keeps on existing in the eyes of law even in the case of
death, insolvency, the bankruptcy of any of its members. This leads to perpetual succession of the
company. The life of the company keeps on existing forever.
Index of members – An index of the names entered in the respective registers of members and
the index shall, in respect of each folio, contain sufficient indication to enable the entries relating
to that folio in the register to be readily found. The maintenance of index of members is not
necessary in case the number of members of the company is less than fifty which is a privilege to
a private company wherein number of members is less than fifty.

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A number of directors – When it comes to directors, a private company needs to have minimum
two directors. With the existence of 2 directors, a private company can come into existence and
can start with its operations.
Paid up capital – There is no minimum capital requirement.
Prospectus – Prospectus is a detailed statement of the company affairs which is issued by a
company for its public. However, in the case of private limited company, the act prohibits any
invitation to the public to subscribe for any securities of the company. There is no such need to
issue a prospectus because in this type of companies, public is not invited to subscribe for the
shares of the company.
Commencement of Business – A company incorporated after the commencement of the
Companies (Amendment) Act, 2019 (w.e.f. 02/11/2018) and having a share capital cannot
commence any business or exercise any borrowing powers unless –
(a) A declaration is filed by a director within a period of one hundred and eighty days of the
date of incorporation of the company, with the Registrar that every subscriber to the
memorandum has paid the value of the shares agreed to be taken by him on the date of
making of such declaration; and
(b) The company has filed with the Registrar a verification of its registered office.
Name – It is mandatory for all the private companies to use the word “private limited” after its
name.

PUBLIC COMPANY
By virtue of Section 2(71), a public company means a company which:
(a) is not a private company; and
(b) has a minimum authorized capital 1 Lac, no minimum paid-up share capital. Provided that a
company which is a subsidiary of a company, not being a private company, shall be deemed to be
public company for the purposes of this Act even where such subsidiary company continues to be
a private company in its articles.

As per section 3(1)(a), a public company may be formed for any lawful purpose by seven or more
persons, by subscribing their names or his name to a memorandum and complying with the
requirements of this act in respect of registration.
A public company may be said to be an association consisting of not less than 7 members, which
is registered under the Act. In principle, any member of the public who is willing to pay the price
may acquire shares in or debentures of it. The securities of a public company may be quoted on a
Stock Exchange. The number of members is not limited to two hundred.
As per section 58(2), the securities or other interest of any member in a public company shall be
freely transferable. However, any contract or arrangement between two or more persons in respect
of transfer of securities shall be enforceable as a contract.

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The provision contained in the law for the free transferability of shares in a public company is
founded on the principle that members of the public must have the freedom to purchase and, every
shareholder should have the freedom to transfer. The incorporation of a company in the public, as
distinguished from the private, realm leads to specific consequences and the imposition of
obligations envisaged in law. Those who promote and manage public companies assume those
obligations. Corresponding to those obligations there are some rights which the law recognizes as
inherent in the members of the public who subscribe to shares of the company.

Characteristics of Public Company

Board of Directors: The Board of the Public company comprises of a minimum number of three
directors and a maximum of 15. The company may appoint more than 15 directors after passing a
special resolution. They act as the representatives of the shareholders in the management of the
company. Public limited companies are headed by a board of directors and Key Managerial
Personnel of the Company. Composition of the board of directors is set out in the company’s
articles of association and the applicable rules and regulation.
Limited Liability: Shareholder liability for the losses of the company is limited to their share
contribution. This is what makes it separate legal entity from its shareholders. The business can be
sued on its own and not involve its shareholders. The company does not belong to any person
since one person can own only a part of it.
Exception to limited liability : Section 3A provides that if the number of members of a public
company is reduced below seven and the business is carried on for more than six months, while
the number of members is so reduced, every person who is a member of the company during this
period and is cognisant of this fact ,shall be severally liable for the payment of the whole debts of
the company contracted during that time, and may be severally sued therefor.
Number of Members: A public limited company has a minimum number of seven shareholders
or members and no maximum limit of members. It can have as many shareholders as its share
capital can accommodate.
Transferable shares: Shares of a public limited company are bought and sold by the
shareholders. However, in case of listed company the shares are traded on a stock exchange where
the shares of the company are listed. They are freely transferable between its members and people
trading in the stock exchange.
Life Span: A public limited company is not affected by death of one of its shareholders, but the
shares are transferred to the next kin or legal heir of such deceased shareholder and the company
continues to run its business as usual. In the case of a director’s death, the Board is empowered to
fill the resulting casual vacancy that may be filled by Board of Directors at Board meeting which
shall be subsequently approved by members in the immediate next general meeting.
Financial Privacy: Public limited companies are strictly regulated and are required by law to
publish their complete financial statements annually. This ensures that they reveal their true

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financial position to their owners and to potential investors so that they can determine the true
worth of its shares.
Capital: Public limited companies enjoy an increased ability to raise capital since they can issue
shares to the public through the stock market. Debentures and bonds are in the form of secured or
unsecured debts issued to a company on the strength of its integrity and financial performance by
the general public or its members etc.

ONE PERSON COMPANY

One person company (OPC) means a company formed with only one (single) person as a member,
unlike the traditional manner of having at least two members. It is recognition of single person
economic entity lightens a path for small traders, service providers to venture into business by
expanding their opportunities through corporate identity.

Definition - As per provision of section 2(62) of the Companies Act, 2013 defined “one person
company” means a company which has only one person as member. Any natural person (should
not be minor) who is an Indian citizen whether a resident in India or not i.e. NRI shall be eligible
to incorporate a OPC and appoint nominee of an OPC.

Benefits of One Person Company

OPC is corporatization of sole proprietorship, so it has all benefits will a corporate enjoys aside to
this it has some relaxations in provision of company law. Benefits of One Person Company.
 It has separate legal entity.
 The liability of shareholder/ director is limited
 The organized version of OPC will open the avenues for more favorable banking facilities
 Legal status and social recognition for your business.
 It gives suppliers and customers a sense of confidence in business.
 The director and shareholder can be same person
 On the death/disability company can be succeed by nominee.
 Exemption available from various provisions under Company law.

Basic mandatory compliance for OPC

 At least one Board Meeting in each half of the calendar year and the time gap between the
two Board Meetings should not be less than 90 days.
 Maintenance of proper books of accounts.
 Statutory audit of Financial Statements.
 Filing of business income tax returns every year before 30th September.
 Filing of Financial Statements in Form AOC-4 and Annual Return in proposed Form MGT 7-
A

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Provision applicable on OPC
Naming the OPC
Section 3(1)(c) of the Act provides that the words ‘One Person Company’ must be mentioned
below the name of the company in bracket wherever it appears.

Members and Directors in an OPC

 The minimum and maximum number of members in an OPC can be only one. As per
Section 152(1) of the Act, an individual being member of OPC is deemed as First Director of the
OPC until the director(s) are duly appointed by the member.
 A person can be member in only one OPC.
 The minimum and maximum number of directors in an OPC can be one (1) and fifteen
(15) respectively.
 In order to increase the number of directors beyond 15 directors, a special resolution must
be passed by the OPC to that effect

Nominee in an OPC
An OPC must mention one person as ‘Nominee’ in the event of death, incapacity, etc. who
will-
(a) become a member of OPC;
(b) be entitled to all shares of the OPC, and
(c) bear all liabilities of OPC.
However, written consent of such Nominee to act as nominee must be obtained and filed with
the RoC at the time of incorporation along with MoA and AoA.
A Nominee may, withdraw his consent by giving a notice in writing to the sole member and to
the OPC. The sole member then nominates another person as nominee within 15 days of the
receipt of the notice of withdrawal.
Nominee can be changed at any time by providing a notice to the RoC. Where a natural person,
being member in OPC becomes a member in another OPC by virtue of his being a nominee in that
OPC, then such person shall meet the eligibility criteria of being a member in only one OPC
within a period of 180 days, i.e., he/she shall withdraw his membership from either of the
OPCs within 180 days.

Board Meetings and AGM

 OPC is deemed to have complied with Sec. 173, if at least one meeting of the BoD is has
been conducted in each half of a calendar year and the gap between two meetings is not less

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than 90 days. Section 173 and 174 (Quorum of Meeting of BoD) will not apply to an OPC in
which there is only one director on its Board.
 An OPC is not required to hold an AGM.

Financial Statements of an OPC

 Financial Statement of an OPC has to be approved by the Board and needs to be signed by
only one director for submission to the auditor.
 OPC need not to prepare Cash Flow Statement as part of its financial statement.
 The copy of such financial statement along with other documents etc. must be filed with
the RoC within 180 days from the closure of the financial year. Report of the Board to be
attached to the financial statement shall mean, in case of an OPC, a report containing explanations
or comments by the Board on every qualifications, reservations or adverse remarks or disclaimer
made by the auditor in his report.

Annual Returns & Auditor’s Report of an OPC

 Annual Returns of an OPC must be signed by a company secretary and the director. In
case there is no company secretary, the signature is required only from the Director.
 Mandatory rotation of auditor after expiry of maximum term is not applicable to an OPC.

Contract between OPC and Member

 Where an OPC enters into a contract with its sole member (who is also the director),
unless the contract is in writing, the OPC should shall ensure that the terms of the contract / offer
are incorporated in the memorandum of the OPC or recorded in the first meeting of the Board
held next after entering into such contract.
 The above provision is, however, not applicable if the contracts are entered into by the
company in the ordinary course of business.
 The other requirement is that the OPC must intimate the RoC about every such contract
recorded in the minute book of its Board under section 193(1) within 15 days of the date of
approval by the Board.
Penalty of non-compliance with the provision of the Act
If an OPC or any officer of such company contravenes the provisions of Companies Incorporation
Rules, 2014, such contravening party will be punishable with fine which may extend to Rs.
10,000/- and with a further fine which may extend to Rs. 1000 for every day after the first
during which such contravention continues.

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DISTINCTION BETWEEN PUBLIC COMPANY AND PRIVATE
COMPANY
Private Limited
Category Public Limited Company
Company
A public limited company is a A private company is a closely
joint stock company, that is not a held company that does not
Meaning private company, and the shares of have its shares listed on any
which are listed on a stock stock exchange and cannot be
exchange. openly traded.
The minimum number of
The minimum number of
members to start a public limited
members needed to start a
Number of company is 7 and there are no
private limited company is 2
members restrictions on the maximum
and the maximum number of
number of members in a public
members cannot exceed 200.
limited company.
The minimum authorised capital
No minimum paid-up capital
Paid-capital Rs. 1 Lac. No minimum paid-up
needed.
capital needed.
Shares of a public company are
Shares of a private limited
available in the open market and
Transferability company cannot be listed on
can be traded easily subject to the
of shares any stock exchange and cannot
rules and regulations laid down by
be traded in the open market.
SEBI
A public limited company
A private company cannot
mandatorily needs to issue a
Issue issue a prospectus and a
prospectus and duly file it as per
of prospectus statement in lieu of a
the guidelines of the Companies
prospectus is issued.
Act, 2013.
A private limited company is
not allowed to have a
A public limited company is subscription of its shares by
Subscription entitled to accept subscriptions the general public. This
from the from the general public and issue implies that such a company
public shares or debentures to raise cannot issue any shares or
capital. debentures to the general
public for raising capital at any
point
Allotment A public company is restricted to A private company has no
subject to allot shares until the minimum such restrictions and are free to
minimum subscription required as per its allot their shares as per their
subscription prospectus is achieved articles of association.

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 The minimum number of The minimum number of
Directors Directors in a public limited Directors in a private limited
company is 3 company is 2
In a public limited company the In a private limited company,
Appointment appointment of only one Director two or more Directors can be
of Directors can be done through a single appointed through a single
resolution. resolution
As per the provisions of the
Companies Act, 2013, at least ⅔ A private limited company
Retirement of Directors of the common have to does not have such restrictions
Directors retire by rotation. Out of these relating to the retirement of
Directors, at least ⅓ Directors Directors by rotation.
have to retire each year
In the case of a public company
the quorum required for a meeting A private company needs
is minimum 2 members present
Quorum
1000 or less - 5 members. to meet the quorum of a
1000 to 5000 -15 members. meeting
More than 5000 -30 members
The AGM of the company is to be
The AGM of a private limited
held only at its registered office
AGM company can be held
or any place in the city where the
anywhere
registered office is situated
It is mandatory for the public
There is no need for a private
company to hold statutory
company to hold a statutory
Meeting meetings as per the provisions of
meeting as per the provisions
section 165 of the Companies Act,
of Companies Act, 2013
2013

DISTINCTION BETWEEN PARTNERSHIP FIRM AND JOINT STOCK

COMPANY

Category Joint Stock Company Partnership Firm

Legal Incorporated under the Governed by the Indian
Structure Companies Act Partnership Act
Partners –
Number of Shareholders or members
Minimum of 2 person
Members Min. number of members
Public – 7 persons Maximum –

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 Private – 2 persons 50 - (Rule 10 of
Companies
Max. number of
(Miscellaneous) Rules,
members
2014 )
Public – Unlimited
Private – 200 excluding 100 - (Companies Act
members or employees 2013 (section 464)

Limited liability of Unlimited liability of

Liability
shareholders/members partners
More complex and formal
Formation Simpler formation process
process
Ownership Shares can be easily Transfer of partnership
Transfer transferred interest may be restricted
Managed by partners or
Managed by directors and
Management designated managing
officers
partners
Regulatory More extensive regulatory Less extensive regulatory
Compliance requirements requirements
Includes "Limited" or "Private Partners' names usually
Name
Limited" in name included in the firm name
Dissolution or
Perpetual Continuity beyond the death
reconstitution on partner's
Succession of shareholders
death
Can be listed on stock Cannot be listed on stock
Public Listing
exchanges exchanges
Ownership can be
Ownership Typically distributed
concentrated among a few
Concentration ownership among partners
shareholders
Raise capital through shares Capital raised through
Capital
issuance partners' contributions
Profits shared among
Dividends distributed among
Profit Sharing partners based on
shareholders
agreement
Legal More legal formalities for Fewer legal formalities, but
Formalities incorporation and operation partnership deed needed
Partners taxed individually
Taxation Corporate tax rates applicable
on their share of income
Not mandatory, unless
Statutory Mandatory holding of AGMs
specified in partnership
Meetings and EGMs
deed
Decision- Board of directors makes key Decisions made
making decisions collectively by partners

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Borrowing Limited borrowing
Higher borrowing capacity
Capacity capacity
Risk Sharing Shared among shareholders Shared among partners
Regulatory Need to submit financial Fewer reporting
Reporting reports to regulatory bodies requirements
Transition may require
Ownership Ownership can be easily
partnership agreement
Transition transferred through shares
changes
Investor Attracts various investors due Generally preferred for
Attraction to stock market access small businesses
More flexibility in
Less flexibility in terms of
Flexibility decision-making and
management and decision
operations
Audit No mandatory statutory
Statutory audit mandatory
Requirements audit
Separate legal entity distinct No separate legal entity,
Legal Entity
from shareholders partners are the entity
Capital Shareholders contribute Partners contribute capital
Contribution capital through shares as per agreement
Dispute Resolved as per company law Resolved based on
Resolution and shareholder agreements partnership agreement
Exiting partner's interest
Exit Strategy Shares can be sold to exit
transferred or dissolved
Public Perceived as more stable and Perception can vary based
Perception credible on nature of partnership
Can convert to LLP or other Can convert to company or
Conversion
entities other business structures
Legal
Generally more complex due Less complex due to fewer
Compliance
to legal requirements legal formalities
Complexity

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Classification of Companies
Joint Stock Companies can be classified on the basis of corporation, nature of liability, extent of
public interest, ownership, nationality etc. let us examine briefly the different kinds of companies.

I. On the Basis of Incorporation

Any company is to be incorporated under an Act. The provision of the particular Act under which it
is established governs it working. Companies of this kind are of three types. They are;
a. Statutory Companies
These are the companies which are created special act of the Parliament or State Legislature, e.g.,
the Reserve Bank of India, the State bank of India, the Life Insurance Corporation, etc. these are
mostly concerned with public utilities, e.g., railways, tramways, electricity companies and
enterprise of national importance.

b. Registered Companies
Companies which are registered under the Companies Act, 2013, or were registered under any of
the earlier companies Acts are called registered companies. A vast majority of companies we
come across belong to this category. Tata Motors Limited, Reliance Telecommunication Limited,
EID Parry Limited, etc belong to this category.

c. Chartered Companies
Companies established as a result of a charter granted by the King or Queen of a country is
known as chartered companies. The charter issued, governs their functioning. In other words, The
Crown, in the exercise of the royal prorogated has power to create a corporation by the grant of a
charter to persons assenting to be incorporated. Example – Bank of England, East India Company.

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II. On the Basis of Liability
On the basis of the extent of liabilities of the shareholders such companies are divided into three
categories.
a. Companies Limited by Share
Where the liability of the members of a company is limited to the amount unpaid on the shares
such a company is known as a company limited by shares. If the shares are fully paid, the liability
of the members holding such shares is nil.

b. Companies Limited by Guarantee

In a company limited by guarantee the liability of a shareholder is limited to the amount he has
voluntarily undertake to contribute to meet any deficiency at the time of its winding up. Such a
company may or may not have a share capital. If it has a share capital a member’s liability is
limited to the amount remaining unpaid on his share plus the amount guaranteed by him. This type
of company is started with the object of promoting science, arts, sports, charity, etc. it is clear
that its objective is not profit earning. It gets subscription from its members and donations and
endowments from philanthropists.

c. Unlimited Liability
A company without limited liability is known as an unlimited liability. In case of such a company,
every member is liable for the debts of the company, as in an ordinary partnership, is proportion to
his interest in the company. In other words, their liability extends to their private properties also in
the event of winding up. Unlimited companies are almost non- existent.

III. On the Basis of Nationality

They are of two types’ viz., domestic companies and foreign companies.
a. Domestic Company
Companies registered under the Companies Act, 2013 or under earlier Acts are considered domestic
companies.

b. Foreign Company
Foreign company means a company incorporated outside India but having a place of business of
India. It has to furnish to the authorities the full address of the registered or principal office of the
company or a list of its directors or names and addresses of the residents in India authorized to
receive notices, documents, etc.

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IV. On the Basis of Number of Members
a. Private Company
A private company means a company which by its articles
i. restricts the rights to transfer its shares
ii. Limits the number of its members minimum 2 and maximum number of members 200
(excluding the employees)
iii. Prohibits any invitation to the public to subscribe for any shares or debentures of the company.
iv. The name of the company must end with the words ‘private limited’.

b. Public Company
 The public is invited to subscribe to the shares of the company usually by issuing a
prospectus.
 Shares are easily transferable.
 A public company must have at least 7 persons to form and no maximum limit as to its
number of shareholders or members.
 The name must end with the word ‘limited’.

V. On the Basis of Control / Ownership

a. Holding Company and Subsidiary Company
A company is known as the holding company of another company if it has control over that other
company. A company becomes a holding company of another
i) if it can appoint or remove all or majority of the directors of the latter company or
ii) if it holds more than 50% of the equity share capital of the latter or
iii) if it can exercise more than 50% of the total voting power of the latter.
A company is known as a Subsidiary of another company when control is exercised by the latter
(called holding company). Over the former called a subsidiary company.

b. Government Companies
A Government company is one in which not less than 51% of the paid up capital is held by the
Central Government or by any one or more State Governments or partly by the Central
Governments and partly by one or more State Governments. Examples: Bharat Heavy Electricals
Limited, Steel Authority of India Limited, etc.
A subsidiary of a Government company is also treated as a Government company. A Government
company also enjoys a separate corporate existence. It should not be identified with the
Government and its employees are not Government employees.

c. One Person company (OPC)

These are companies in which one man holds virtually the whole of the share capital with a few
extra members holding the remainder who may be his relations or nominees.

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Other Forms of Companies
Section 8 Companies: a person or an association of persons proposed to be registered under this
Act as a limited company and proved to the satisfaction of the Central Government that the
company – (i) has in its objects the promotion of commerce, art, science, sports, education,
research, social welfare, religion, charity, protection of environment or any such other object; (ii)
intends to apply its profits, if any, or other income in promoting its objects; and (iii) intends to
prohibit the payment of any dividend to its members, such person or association of persons may
be allowed to be registered as a limited company without addition to its name of the word
“limited” or "private limited" by the Central Government by issuing a license and by prescribing
specified condition. The association proposed to be registered under section 8 shall not be
proposed to be an unlimited company. However the same may be company limited by guarantee
or a company limited by shares.
Producer Companies: According to Section 378A of the Companies Act, 2013, Producer
Company means a body corporate having objects or activities specified in section 378B of the
Companies Act, -2013 and registered as Producer Company under the Companies Act, 2013 or
under the Companies Act, 1956.
Nidhi Companies: A nidhi company is a type of company in the Indian non-banking finance
sector, recognized under section 406 of the Companies Act, 2013 their core business is borrowing
and lending money between their members. They are also known as Permanent Fund, Benefit
Funds, Mutual Benefit Funds and Mutual Benefit Company. These companies are regulated under
the Nidhi Rules, 2014 issued by the Ministry of Corporate affairs.
Dormant Companies covered under section 455 of the Companies Act, 2013 and includes a
company which is formed and registered under the Act for a future project or to hold an asset or
intellectual property and which has not been carrying on any business or operation, or has not
made any significant accounting transaction during the last two financial years, or has not filed
financial statements and annual returns during the last two financial years.
Small Company : The MCA for the Ease of doing Business has revised the definition of Small
companies by increasing their threshold limits for paid up capital from “not exceeding ` 50 Lakhs”
to “not exceeding ` 2 Crore” and turnover from “not exceeding ` 2 Crore” to “not exceeding ` 20
Crore”.
“Small company” means a company, other than a public company-
(i) paid-up share capital of which does not exceed two crores rupees or such higher amount as
may be prescribed which shall not be more than ten crore rupees; and
(ii) turnover of which as per profit and loss account for the immediately preceding financial year
does not exceed twenty crore rupees or such higher amount as may be prescribed which shall not
be more than one hundred crore rupees: Provided that nothing in this clause shall apply to—
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act

P a g e 20 | 85
ROLE OF PROMOTER
PROMOTER
It is the promoter who gets the idea of starting a company and undertakes all the preliminary work
necessary for its formation. In other words, the promoter of a company is a person who does the
necessary preliminary work incidental to the formation of the company.

Definition
Palmer explains the significance of the term promoter in the following words. “A Promoter starts
a scheme of forming a company, gets together the Board of Directors, retains bankers and
solicitors, prepares or gets prepared memorandum and articles of association, provides the
preliminary expenses, drafts the prospectus; in a word undertakes to form a company with
reference to a given project and takes the necessary steps to get it going”.

Under Section 2 (69) Companies Act, 2013 "promoter" means a person:

 Who has been named as such in a prospectus or is identified by the company in the annual
return referred to in section 92; or
 Who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise; or
 In accordance with whose advice, directions or instructions the Board of Directors of the
company is accustomed to act: provided that nothing in sub-clause (c) shall apply to a person who
is acting merely in a professional capacity; i.e. CA, Attorney

Role of the Promoter

The Common Law propounds that "the term promoter is a short and convenient way of
designating those who set in motion the machinery by which the Act enables them to create an
incorporated company" and therefore promoter is one who "undertakes to form a company with
reference to a given project and to set it going, and who takes the necessary steps to accomplish
that purpose."
"Promoter plays a very important role in a company. Formation of a company starts with the
promotion of a company. Usually the idea of the company will be of the promoters, they have the
idea of the business and its feasibility.
"Promoter is a person who brings about the incorporation and organization of a corporation. He
brings together the persons who become interested in the enterprise, aids in procuring
subscriptions, and in motion the machinery which leads to the formation itself."
"The eminence of a promoter is generally terminated when the Board of Directors has been
formed and they start governing the company. Technically, the first persons who control the
company's affairs are its promoters. They carry out the necessary investigation to find out
whether the formation of a company is possible and profitable. Thereafter, they organize the
resources to convert the idea into a reality by forming a company. In this sense, the promoters are
the originators of the plan for the formation of a company.

P a g e 21 | 85
They are the ones who it to arrange or find ones who can arrange the share and loan capital and
other financial resources, Promoters are the one who arrange for the company to acquire the
business which the company is to conduct or the property or assets from which it is to derive its
profits or income, when these things have been done, the promoter hand over the control of the
company to its director, who are themselves under a different name."

Functions of a Promoter
 The formation of idea and forming the company and explore the possibilities.
 To conduct the negotiation for the purchase of business.
 To collect the number for signing of the MOA and the AOA.
 To decide the name of the company, location of the registered office, amount and form of
share capital.
 To get the MOA and the AOA drafted and printed.
 To arrange for the minimum subscription.
 To arrange for the registration of company and certificate of incorporation.

Duties of promoters
 Involved in business activities
 Instruct the solicitors to prepare necessary documents
 Secure the services of directors
 Provide registration fees
 Arranging for advertisement, circulation of prospectus, investment of capital.

Remuneration of Promoters
A promoter has no right to get compensation from the company for his services in promoting the
company unless there is a contract to that effect. But in practice, a promoter takes remuneration
for his services in one of the following ways;
 He may sell his own property to the company for cash or fully paid shares at a profit provided
he makes a disclosure to this effect
 He may be given an option to buy a certain number of shares in the company at par
 He may take a commission on the shares sold
 He may take some shares of the company
 He may be paid a lump sum by the company
Any remuneration paid to the promoters must be disclosed in the prospectus, if it is paid within the
preceding 2 years from the date of the prospectus.

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PRE-INCORPORATION CONTRACTS
As the name stands, these contracts are made before the formation of a company.
For the formation of the company, the promoters are required to enter into various contracts with
third parties e.g. purchasing some property or hiring the services of professions like lawyers,
technicians, etc.
After the incorporation of the company such contracts are not attached to the company, as the
company obtains legal entity status only after its incorporation.

Highlights of Preliminary Contracts

 Contracts entered by the promoters on behalf of the company which is yet to be
incorporated.
 Can be applicable to public limited and private limited companies.
 Company is not bound by pre-incorporation contracts.
 Company cannot sue or be sued on the basis of such contracts.
 Promoters, themselves, remain personally liable on all such contracts, unless a new contract
on the same terms as that of the old one is made by the company after incorporation.
 Company, after its incorporation, cannot even ratify such contracts.
 The liability of the promoter ceases on the adoption of such agreement by the company
after incorporation
 As per the Act, either party can rescind the agreement if the incorporation is not obtained in
a specific period of time.
 Further, the company may adopt the preliminary agreement. In certain cases, the company can
enforce a pre-incorporation contract if it is warranted by the terms of incorporation. At the same
time, specific performance of such contracts can be enforced by other parties against the company if
such contracts are for the purposes of the company and are warranted by the terms of incorporation
of the company. This is so provided under the provisions of Specific Relief Act, 1963.

Liability of the Company

As per the Act, the company can neither sue nor can be sued on the basis of such contracts
because the company was not a party to such contracts. At the same time, company cannot even
ratify or adopt such contracts to get the benefit of such contracts.

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Liability of the Promoter
"Promoters are generally held personally liable for pre-incorporation contract. If a company
does not ratify or adopt a pre-incorporation contract under the Specific Relief Act, then the
common law principle would be applicable and the promoter will be liable for breach of contract.
"The common Law in this context gave prime importance to the intention of the parties in
adjudicating the contract. If the promoter purported to act for the corporation, then he was held
personally liable for the contract. However, if the contract is entered in name of the proposed
company and the promoter merely authenticated the signature, the promoter was absolved
from all liability." The justification for the same was based on the intention of the parties i.e. who
they look to when contracting."

How Can Promoter Shift His Liability and Right to Company

Although under common law promoter is personally liable for the pre-incorporation contract, but
there are some scope where the promoter can shift his liability to company. He can shift to
company his liability under the Specific Relief Act 1963 or he can go for novation under contract
law.

A) Under Specific Relief Act

Specific Relief Act 1963 is introduced to ensure a large number of remedial aspects of law so
as to ensure the protection of life and property. Relief can be sought on the following grounds as
per Section 15 of the Act.
 Where the promoters of a company have made a contract before its incorporation for the
purpose of the company
 if the contract is “warranted by the terms of incorporation” means within the scope of the
company’s objects as stated in the Memorandum.
 The contract should be for the purpose of the company. A person, who intended to promote a
company, acquired a leasehold interest for it.

Under the Specific Relief Act 1963, section 15(h) and 19(e) are the two important sections for pre-
incorporation contract. Section 15 is about stranger’s right to sue if he entitled to a benefit or has
any interest under the contract, although it has certain limitation. Section 15(h) talks about the
company, being a stranger to pre-incorporation contract, has the right to sue to the other
contracting party. But the necessary condition is that the contract should be warranted by the terms
of its incorporation. This provision clearly negates the common law doctrine which says that the
company cannot ratify or adopt the pre-incorporation contract. Under this provision promoter can
give his right to sue to sue to the company. In Vali Pattabhirama Roa v Sri Ramanuja Ginning and
Rice Factory Pvt. Ltd this position was accepted.

P a g e 24 | 85
On the other hand, section 19(e) states that the company can be sued by the other party of pre-
incorporation contract, if the terms of incorporation warrant and adopt the contract. This provision
reduces the promoter of liability of pre-incorporation contract.

B) Under Novation of Contract

Novation of contract is defined in Scarf v Jardine as, ‘being a contract in existence, some new
contract is substituted for it either between the same parties (for that might be) or different parties,
the consideration mutually being the discharge of the old contract’.
Novation is different from the Ratification; because in Novation, a new contract is made on
the same terms but this time between the company and the third party, whereas in
Ratification, dates back to the time of the act ratified, so that if the company ratifying, who is not
in existence, cannot itself have then performed the act in question its subsequent ratification of it
is ineffective.
In the situation of Novation of Contract, the Company can replace the promoter from the pre-
incorporation contract. But one might say that such contract would not be called pre-
incorporation contract, but it should be called post-incorporation contract; because novation of
contract result into a new contract. In Howard v Patent Ivory Manufacturing, the English Court
accepted the novation of contract.

C) Doctrine of Equity
In India under the doctrine of equity the company can be held liable. Weavers Mills Ltd V.
Balkies Ammal, company was held liable because it get the benefit of pre-incorporation
contract. But the position in English Common Law is deferent. According to Chitty on Contract,
even in equity the company cannot be held liable for pre-incorporation contract.

Provisional Contracts
As per the Act, the contracts made after incorporation of the company but before it is entitled
to commence business are termed as Provisional Contracts.
Any contract made by a company before the date on which it is entitled to commence business
shall be provisional only and binding on the company until that date, and on that date, it shall
become binding.
The private companies can commence its business immediately after the incorporation of the
company, however, for a public limited company, the commencement of business occurs only
after obtaining certificate of commencement of business. The term Provisional Contract applies
only to the companies with share capital.

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Differences between Pre-incorporation and Provisional contract
Preliminary contracts are those contracts made before the formation of the company, whereas the
contract entered by a company after incorporation but before it is entitled to commence business
is termed as provisional contracts.
As per the provisions of the act, neither the company can sue nor can it be sued to enforce the
preliminary contracts, whereas the provisional contracts can be enforced only on receiving
a certificate of Commencement of Business.
Preliminary contracts are the liabilities of promoters, his liability ceases only after adoption of
such contract by the company after incorporation. However, provisional contracts are the
responsibilities of the company. Preliminary contracts may relate to property which
the promoters desire to purchase for the company or they may be made with the persons whose
know-how is vital to the success of the company.
As per the Act, both private and public company have the right to undertake these contracts,
whereas only public limited companies can undertake provisional contracts.
As the provisional contracts are being entered in a period after incorporation and before
obtaining business commencement certificate, it can be applied only to public limited companies.
However, no such case arises in private limited companies as private limited company obtain legal
feature immediately on receipt of incorporation certificate.

INCORPORATION / FORMATION OF COMPANY

For registering the company with the registrar of companies, the promoter has to initiate a number
of steps as outlined below;
1. Approval for the proposed name
A company can choose any name but it should not closely resemble the name of an existingcompany.
Hence the promoter has to get the approval from the registrar for the proposed name of the
company.

2. Filing of Documents
The promoter has to get prepared the following documents and file them with the registrar of
companies of the State in which the registered office of the company is situated.
 Memorandum of Association - This document which is of fundamental importance
defines the scope of activities of the company. It should contain the name, the place where the
registered office is situated, authorized capital and the objects of the business. It should be
printed and duly stamped, signed and witnessed. A minimum of two persons in the case of a
private limited company and seven in the case of a public limited company must sign the
document.
 Article of Association - This contains the regulations connected with the internal
management of the company. This document must also be duly stamped and signed by the

P a g e 26 | 85
 signatories to the memorandum and witnessed.
 Original letter of approval - Original letter of approval of name be obtained from the
Registrar and be filed.
 A list of directors - A list of directors who have consented to be its directors must be
filed.
 Written consent to act as directors - The directors have to give their consent in writing to
act as its directors. They should also undertake to take the necessary qualification shares and
pay for them.
 Notice of the address of the registered office
 Statutory declaration - A declaration stating that all the requirements of law relating to
registration have been complied with is to be filed. This declaration must be given by an
Advocate of the Supreme Court or High Court, or by a Chartered Accountant who is engaged
in the formation of the company or by a person named in the Articles as a director or secretary
of the company.
 The registrar will scrutinize all the documents and if he finds them in order, he will issue
the certificate of incorporation
This certificate is a conclusive evidence of the fact that the company has been duly registered.
A private limited company can commence business on getting the certificate of incorporation,
but a public company has to take some more steps for getting another certificate known as
certificate for commencement of business.
3. Issue of Prospectus
The Board of directors should arrange for drafting a prospectus when it wants to approach the
public for securing capital. A prospectus contains all essential points which would induce the
investing public to apply for shares in the company. A copy of the prospectus must be delivered to
the Registrar before issuing to the public.
4. Minimum Subscription
A company can proceed to allot shares only if minimum subscription specified in the prospectus
has been collected in cash.

5. Statement in Lieu of Prospectus

Where the promoters raise the entire capital through private arrangement, there is no need to issue
a prospectus. However, a statement in lieu of prospectus, the contents of which are similar to a
prospectus, must be prepared and filed with the Registrar at least three days before allotment.

6. Filing of further documents

The following documents are also to be filed with the Registrar;
 A declaration that the minimum subscription stated in the prospectus has been collected in
cash
 A declaration stating that each director has paid in cash for the application and allotment on
the shares taken up by them

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 A declaration that no money has become refundable to applicants because of its failureto obtain
permission for shares or debentures to be dealt in on any recognized stock exchange
 A statutory declaration by the secretary or one of its directors stating that the above
requirements have been complied with.
If the Registrar is satisfied that these documents are in order, he will issue a certificate entitling the
company to commence business. It is only on getting this certificate; a public limited company can
start its business.

Certificate of Incorporation
On registration, the Registrar will issue a certificate of incorporation whereby he certifies that the
company is incorporated. For the date of incorporation mentioned in the certificate, the company
becomes a legal person separate from its shareholders and secures a perpetual succession. Hence
it is the birth certificate of the company.

Certificate of commencement of business

A private company may commence its business immediately on incorporation but a public company
cannot commences business immediately after incorporation, unless it has obtained a certificate of
commencement of business from the Registrar.

Doctrine of Ultra Vires

Definition:
The term "ultra vires" is a Latin term that means "beyond the powers." In the context of the Indian
Companies Act 2013, it refers to actions taken by a company that are beyond the legal powers and
objects mentioned in its Memorandum of Association (MOA).
Under Section 4 of the Companies Act 2013, the MOA of a company defines its objects, and any
action taken by the company must be in pursuit of those objects. Any act that is not within the
scope of the MOA is considered ultra vires.

Doctrine's Purpose: The doctrine of ultra vires exists to protect the interests of shareholders and
creditors by ensuring that a company does not engage in activities that are not authorized by its
MOA. It prevents the company from deviating from its intended purposes.

An act ultra vires the company - A company has the power to do all such things as are –
 Authorized to be done by the companies act,
 Essential to the attainment of its objects specified in the memorandum,
 Reasonable and fairly incidental to its objects.

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A company has power to carry out the objects set out in the memorandum and also everything
which is reasonably necessary to enable it to carry out those objects. Any activities not expressly
authorized by the memorandum are ultra vires to the company. Otherwise, the term ultra vires
means that the doing of the act is beyond the legal power and authority of the company. If an act is
ultra vires the company i.e., it is outside the scope of the scope of the company’s objects, it is
wholly void and inoperative and will not be binding on the company. Even the whole body of
shareholders cannot ratify it.

Exceptions:
Doctrine's Restriction: Actions that are expressly prohibited by the MOA are undoubtedly ultra
vires and void.
Doctrine's Relaxation: The Companies Act 2013 provides certain relaxations and exceptions to
the doctrine of ultra vires:
a. Doctrine Not Applicable to Third Parties: Actions that are ultra vires as per the MOA are not
automatically void concerning third parties who transact with the company in good faith and
without knowledge of the limitations set by the MOA.

b. Doctrine's Impact on Company and Directors: If a company takes an action that is ultra
vires, the company can sue its directors for damages for breach of duty. However, third parties
dealing with the company are protected.

c. Alteration of MOA: A company can alter its MOA by obtaining the approval of its
shareholders. Once the MOA is altered, the company can undertake activities that were previously
considered ultra vires.

d. Doctrine's Impact on Contracts: Contracts made by a company that are beyond its objects can
be ratified by the shareholders. This ratification makes the contract valid and binding.

e. Doctrine's Impact on Shareholders: Shareholders have the right to challenge ultra vires
actions in court if they believe the company is acting beyond its authorized scope.

MEMORANDUM OF ASSOCIATION (MOA)

MOA is one of the core documents, which has to be filed with the Registrar of companies at the
time of incorporation of a company. It is a document, which sets out the constitution of the
company and is really the fundamental conditions upon which alone the company is allowed to be
incorporated.
In other words, it contains the fundamental conditions upon which alone the company is allowed
to be incorporated. It defines the activities the company is permitted to undertake. Any act done
which is outside the scope outlined in its memorandum is ultra vires (beyond the power of) the
company and is not binding on it.

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Contents of Memorandum
1. Name Clause
A company may be registered with any name it likes. But a name, which in the opinion of the
Central Government is undesirable, and in particular which is identical or which too nearly
resembles the name of an existing company shall register no company. Every public company
must write the word ‘limited’ after its name and every private company must write the word
‘private limited’ after its name.
Rules regarding name
 undesirable name to be avoided
 identical name to be avoided
 injunction if identical name adopted
 limited or private limited as the last word or words
 prohibition of use of certain names
 restriction on use of certain key words as part of name

2. Registered Office Clause

This clause states the name of the state where the registered office of the company is to situate.
The registered office clause is important for two reasons. First, it ascertains the domicile and
nationality of a company. Second, it is place where various registers relating to the company must
be kept and to which all communications and notice must be sent.

3. Object Clause
The object clause is the most important clause in the memorandum of association of a company. It
is not merely a record of what is contemplated by the subscribers. But it serves a two- fold purpose;
1) it gives an idea to the prospective shareholders the purpose for which their moneywill be utilized;
2) it enables the persons dealing with the company to ascertain its powers.

4. Liability Clause
This clause states that the liability of the members of the company is limited. In the case of a
company limited by shares, the members are liable only to the amount unpaid on the shares taken
by him. In the case of a company limited by guarantee, the members are liable to the amount
undertaken to be contributed by them to the assets of the company in the event of its being wound
up.

5. Capital Clause
The memorandum of a company limited by shares must state the authorized or nominal share
capital, the different kinds of shares, and the nominal value of each share. The chief point to
consider in regard to this clause is what funds are necessary to set the business going or, if it is
proposed by an existing concern, what sum is needed to pay its price and what, in addition, is
wanted to keep the business going.

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6. Association Clause or Subscription Clause
This clause provides that those who have agreed to subscribe to the memorandum must signify
their willingness to associate and form a company. The memorandum has to be signed by each
subscriber in the presence of at least one witness who must attest the signature. Each subscriber
must write opposite his name the number of shares he shall take.

Alteration of Memorandum of Association

The MOA must be drafted and executed in accordance with the provisions of the Companies Act,
2013, and any amendments thereto. Any alteration to the MOA must also comply with the
provisions of the Act and require the approval of the shareholders and the ROC.

1. Change of name
A) By Special Resolution
A company may change its name by a special resolution and with approval of the Central
Government signified in writing in case of deletion or addition of the word “private” on the
conversion of a public company into a private company or vice versa.

B) By ordinary Resolution
If a company registered by a name which, in the opinion of the Central Government, is identical
with or too nearly resembles, the company may change its name by ordinary resolution with the
previous approval of the Central Government within 12 months.
The company has to get fresh certificate of incorporation.

2. Change of registered office

a. Change Of Registered Office From One Place To Another Place In The Same City, Town
or Village
With the confirmation of the Regional Director of the Zone the change of place of its registered
office can be done. This change has to be informed within 30 days to the Registrar with supportive
documents.
b. Change of Registered Office From One State To Another
 The company has to pass special resolution and with the previous approval from the Central
Government.
 Copy of special resolution signed by the chairman should be filed with the registrar with 30
days of passing the resolution.
 A copy of the notice should be send to the recognized stock exchange if it is listed
companies.
 6 copies of the altered memorandum of association should send to the stock exchange.

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3. Alteration of Objects
Object clause is the most important clause in the MOA. It can be altered by passingspecial
resolution so as to enable it –
i) To carry on its business more economically or more efficiently
ii) To attain its main purpose by new or improved means
iii) To enlarge or change the local area of its operation
iv) To carry on some business which under existing circumstances may conveniently or
advantageously be combined with the objects specified in the memorandum
v) To restrict or abandon any of the objects specified in the memorandum
vi) To sell or dispose of the whole, or any of the undertaking
vii) To amalgamate with any other company or body of persons.
The altered copy along with minutes should be send within 30 from the date of filing of such
documents.

4. Change in liability clause

A company limited by shares or guarantee cannot change the Memorandum so as to impose any
additional liability on the members or to compel them to buy additional shares of the company
unless all the members agree in writing to such change either before or after the change.

5. Change in capital clause

Change in the capital clause which may involve increase, reduction or reorganization of capital,
will be done by passing ordinary or special resolution as required by the circumstances.

Steps for alteration in objects clause of Memorandum of Association:

STEP‐I ‐ Convene a Board Meeting: (As per section 173 and SS-1)
 Issue Notice of Board Meeting to all the directors of company at least 7 days before the date
of Board Meeting.
 Attach Agenda
 Notes to Agenda
 Draft Resolution

STEP: II‐ Hold the Board Meeting:

 Proposed new Objects of the company.
 Pass Board Resolution after Selection of Object.

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 Get Approval to change in the objects clause and recommending the proposal for members'
consideration by way of special resolution.
 Fixing the date, time, and venue of the general meeting and authorizing a director or any other
person to send the notice for the same to the members.

STEP‐ III: Issue Notice of General Meeting: (Section 101)

Notice of EGM shall be given at least 21 days before the actual date of EGM. EGM can be called
on Shorter Notice with the consent of atleast majority in number and ninety five percent of such
part of the paid up share capital of the company giving a right to vote at such a meeting:
 All the Directors.
 Members
 Auditors of Company
The notice shall specify the place, date, day and time of the meeting and contain a statement on
the business to be transacted at the EGM.

STEP‐IV‐ Hold General Meeting: (Section 101)

 Check the Quorum.
 Check whether auditor is present, if not. Then Leave of absence is Granted or Not. (As per
Section- 146).
Pass Special Resolution.[Section-114(2)]
 Approval of Alteration in MOA.

STEP‐V‐ Filing and fees:

File FORM NO. MGT-14 (Filing of Resolutions and agreements to the Registrar under section
117) with the Registrar along with the requisite filing within 30 days of passing the special
resolution, along with given documents:- ATTACHMENTS: Certified True Copies of the
Special Resolutions along with explanatory statement; Copy of the Notice of meeting send to
members along with all the annexure; A printed copy of the Memorandum Article of
Associations. Copy of Attendance Sheet of General Meeting. Shorter Notice Consent, if any.

STEP‐VI‐ Follow up:

The Registrar shall then accordingly register the alteration and issue a certificate which will be the
conclusive evidence that all the requirements with respect to the alteration have been duly
complied with by the company. The alteration shall be complete and effective only on the issue
of certificate by the Registrar. Incorporate the alteration in every copy of the memorandum.

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DOCTRINE of INDOOR MANAGEMENT
Definition:
The "Indoor Management" concept, also known as the "Doctrine of Indoor Management," is a
legal principle that pertains to the authority of a company's officers and agents to bind the
company in various transactions, even if their actions exceed their actual authority.

This concept is primarily applied in the context of company law, contract law, and corporate
governance. It is designed to protect third parties who deal with a company in good faith and
have no knowledge of any limitations on the authority of the company's officers or agents.

In simple terms, the Indoor Management Rule suggests that if someone dealing with a company
has no reason to suspect that the internal procedures or authorization requirements have not
been followed, they can assume that the company's representatives have the authority to act
on behalf of the company. This is especially relevant in situations where a company's internal
management might not be functioning properly or where outsiders don't have access to
information about the company's internal affairs.

This principle has been upheld in the landmark case of Oakbank Oil Co. V. Crum (1882) 8
A.C.65. Thus, if any person enters into a contract, which is inconsistent with the company’s
Memorandum and Article, he shall not acquire any rights against the company and shall bear the
consequences himself.

Examples of Doctrine of Indoor Management

1) ABC received a cheque from XYZ Company. The Articles of Association of XYZ company
provided that cheques issued by the company need to be signed by two directors and
countersigned by the secretary. The directors nor the secretary who signed the cheque was
appointed properly and thus the cheque issued was not valid. ABC sued the company for the
irregularities in the procedure. Is ABC liable for relief?
Answer: ABC is entitled to relief and the company has to pay the amount of the cheque since the
appointment of directors is a part of the internal management of the company and a person dealing
with the company is not required to enquire about it.
2) XYZ receives a share certificate of ABC Limited issued under the seal of the company. The
company secretary issues the certificate after affixing the seal and forging the signature of the two
directors. XYZ files a lawsuit claiming that the forging of signatures is a part of the internal
management of the company. Is the claim by XYZ valid and is liable to get relief?
Answer: According to the exceptions to the doctrine of indoor management, a transaction
involving forgery is null and void. Since the document issued to XYZ is null and void, the claim
made by him is not valid. Thus, he is not entitled to any relief.

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EXCEPTIONS
1. Knowledge of Irregularity - This rule does not apply to circumstances where the person
affected has actual or constructive notice of the irregularity. In Howard V Patent Ivory
Manufacturing Company (1888) 38 Ch D 156, the Articles of the company empowered the
directors to borrow up to 1,000 pounds. The limit could be raised provided consent was given in the
General Meeting. Without the resolution being passed, the directors took 3,500 pounds from one of
the directors who took debentures. Held, the company was liable only to the extent of 1,000
pounds. Since the directors knew the resolution was not passed, they could not claim protection
under Turquand’s rule.
2. Negligence - Where a person dealing with a company could discover the irregularity if he had
made proper inquiries he can’t claim the benefit of the rule of indoor management.
Example: Anand Bihari Lal V. Dinshaw and Company, In this case accepted of a company
property its accountants. Held, the transfer was void as such as transaction was apparently beyond
the scope of the accounting authority.

3. Forgery or Fraud - The indoor management does not apply where a person relies upon a
document that turns out to be forged since nothing can validate forgery. A company can never be
held bound for forgery committed by its officers.
4. Ultra Vires Acts: If a company's officers or agents are engaging in activities that are clearly
beyond the scope of the company's stated objectives (ultra vires acts), the Indoor Management
Rule may not apply. If the transaction is outside the company's legal powers, the company might
not be bound by it even if a third party had no knowledge of the limitation.
5. Public Documents: In some jurisdictions, the Indoor Management Rule might not apply to
certain types of documents that are considered public, as the third party should have checked these
documents to ascertain the authority of the company's officers.

ARTICLES OF ASSOCIATION
‘Articles’ means the Articles of Association of a company as originally framed or as altered from
time to time in pursuance of any previous companies law or of this Act. The articles of association
are the rules and regulations of a company frame d for the purpose of internal management of its
affairs. The articles are framed for carrying out the aims and objects of the Memorandum of
Association.

Contents of Articles of Association

1. Adoption of preliminary contracts
2. number and value of shares
3. allotment of shares
4. calls on shares

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5. lien on shares
6. transfer and transmission of shares
7. forfeiture of shares
8. alternation of shares
9. shares certificate
10. conversion of shares into stock
11. voting rights and proxies
12. meetings
13. directors, their appointment etc
14. borrowing powers
15. accounts and audit
16. dividends and reserves
17. winding up
18. issue of redeemable preference shares, if any

In the case of companies with the liability limited by guarantee, the articles must also state the
number of members with which the company is to be registered. It must also state the extent of
liability in the event of winding up.

In the case of a private company the articles must also contain the following provisions;
a. restricting the right to transfer shares, if any
b. limiting the number of its members to 50 excluding the past and present employee
members
c. Prohibiting any invitation to the public to subscribe for any shares in or debentures of the
company.
d. Prohibiting any acceptance of deposits from the persons other than the directors, members or
their relatives.

DOCTRINE of CONSTRUCTIVE NOTICE

The Memorandum and Articles of association of every company are required to the register with the
registrar of companies. On registration they become public documents and are open for public
inspection on payment. Everyone dealing with the company, whether a shareholder or an
outsider, is presumed to have read the two documents. This deemed knowledge of the two
documents their contents is known as the constructive notice memorandum and articles.
Constructive notice is a legal principle that contributes to accountability and informed
decision-making by imputing knowledge to individuals or entities when certain information is
accessible through recognized public or official channels.

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"Constructive notice" is a legal concept that pertains to the imputation of knowledge or
information to a person or entity based on the fact that the information is available through
official or public channels.
In other words, even if a person or entity does not have actual knowledge of a particular fact,
the law treats them as if they had knowledge because the information was accessible to them
through proper and recognized means.

Concept of constructive notice:

1. Actual Notice vs. Constructive Notice:
 Actual Notice: This refers to direct knowledge or awareness of a fact. If someone has
actual notice of something, it means they have been explicitly informed or made aware of that
information.
 Constructive Notice: This is an implied or presumed notice. It is not based on direct
communication but on the legal assumption that the information was available through
proper channels, and therefore the person should be deemed to have knowledge of it.

2. Application: Constructive notice often arises in legal contexts where individuals or entities
are expected to be aware of certain facts due to their public availability or official recording.
It is commonly applied in areas such as property law, contract law, company law, and
intellectual property law.

3. Examples:
 Real Estate Transactions: In property law, recording a deed or a mortgage in a public land
records office gives constructive notice to others that there is a claim or interest in that property.
 Intellectual Property: Registering a trademark, copyright, or patent provides constructive
notice to others of the owner's rights, preventing a party from claiming they were unaware of those
rights.
 Company Law: The concept of constructive notice can also relate to information contained
in a company's public filings, such as its articles of association, bylaws, or annual reports. Third
parties dealing with a company are expected to be aware of the contents of these documents.

4. Rationale: Constructive notice serves as a means of maintaining fairness and transparency

in legal dealings. It prevents parties from claiming ignorance of information that was reasonably
accessible to them. It encourages individuals and entities to conduct due diligence and research
before entering into transactions or making claims.

5. Protection for Third Parties: The concept of constructive notice is related to the "indoor
management rule" discussed earlier. In situations where third parties deal with companies, they are
expected to have constructive notice of the company's public documents and the information

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contained therein. This prevents third parties from claiming they were unaware of certain
provisions or limitations within a company's internal regulations.

DIFFERENCE between MEMORANDUM AND ARTICLES

1. Content and Scope - MOA is the charter of the company and defines the scope of its
activities. AOA of the company is a document, which regulates the internal management of the
company.

2. Relationship between company, members and outsiders - MOA defines the relationship of
the company with the outside world, whereas AOA deals with the right of the members of the
company intense and also establishes the relationship of the company with the members.

3. Alteration - MOA cannot be altered except in the manner and to the extent provided by the
Act, whereas the AOA being only the bylaws of the company can be altered by a special resolution.

4. Supremacy - Memorandum is a supreme document of the company, whereas articles are

subordinate to the memorandum.

5. Ultra-vires Acts - A company cannot depart from the provision contained in the memorandum,
and if it does, it would be ultra-vires the company, anything done against the provisions of
Articles, but which is ultra-vires the Memorandum, can be ratified.

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 MODULE 2

PROSPECTUS
Sec.2 (36) defines “Any documents described as a prospectus and include any notice circular,
advertisement or documents inviting deposits from the public or inviting offer from the public for
the purchase of any shares in or debentures of a body corporate.

Formalities in issuing a prospectus

 Every company is issued by or on behalf of a company must be dated; this date is regarded
as a date of its publication
 It should be signed by every director / agent delivered to registrar on or before the date of
application
 The prospectus issued to the public should mention copy of prospectus along with specified
with document filed with registrar.
 Authorized form securities exchange board of India
 A prospectus must contain the necessary information to enable the public to decide whether
or not to subscribe for its shares.

Contents of a prospectus
1. General Information
 Name and address of registered office of the company
 Details of letter of intent \ industrial license
 Name of stock exchange where listed
 Date of opening, closing of the issue
 Name, address of lead manager, bankers to the issue, brokers to the issue
 Underwriting arrangement

2. Capital Structure of the company

 Authorized, issued, subscribed, paid up capital of the company should bementioned
 Size of the issue

3. Details of the issues

 Object of the issues
 Tax benefits available to the company

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 Rights of the information holders AND Terms of payment
 Authority for the issues and details of resolution passed for the issues

4. Details about the company management

 History, main objects, present business of the company
 Subsidiaries of the company
 Promoters and their background
 Name, address occupation of manager, managing director’s relationship with thecompany

5. Details about the Project

 Cost of the project and means of financing
 Location of the project
 Plant & machinery for the projects
 Infrastructure facilities for raw materials
 Expected date of trail production and commercial production
 Schedule of implementation of the projects

6. Financial Information
 A report from the auditors on profit and losses of the company
 Asset and liabilities of the company
 Rate of dividend paid by the company

7. Statutory and other Information

 Minimum subscription as laid down in the SEBI guidelines
 Underwriting Commission and brokerage
 Fees payable to the lead manager
 Date of listing on stock exchanges

8. Other Information
In respect of any issue made by the company and other listed companies under the same
management, the following details;
 Name of the company, year of issue, types of issue, amount of issue and date ofcompletion of
the projects
 Procedure and time schedule for allotment and issue of certificates
 Management perception of risk factors
 Procedure for making application and availability of forms, prospectus and modeof payment
 Changes in directors and auditors in the last 3 years.

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GOLDEN RULE of Framing PROSPECTUS in Company Law
The Golden Rule in Prospectus has meaning and a moral in it, which states whatever information
comes from the company to the public, through the medium of prospectus, must be true, fair and
accurate.

The ‘Golden Rule’ for framing of a prospectus was laid down by Justice Kindersely in New
Brunswick & Canada Rly. & Land Co. v. Muggeridge (1860). Briefly, the rule is:
The followings must be kept in mind when preparing the prospectus of a company:
1. The prospectus must be an honest statement of the company’s profile; there must be no
misleading, ambiguous or erroneous reference to the company in its prospectus.
2. Every important aspect of a contract of the company should be clarified.
3. The contents of the prospectus should conform to the provision of the Companies Act.
4. The restrictions on the appointment of directors must be kept in mind.
5. The conditions of civil liability as laid down must have strictly adhered to issue and registration
of prospectus or legal requirement regarding the issue of the prospectus.

Golden rule of disclosure was laid down in New Brunswick and Canada railway case and
described as golden legacy in “Henderson vs lackon” case:
Everything in the prospectus must be stated with strict scrupulous accuracy. In other words the
true nature of Company venture should be disclosed.
Under section 64(2) it will be presumed, unless the contrary is proved, that an allotment of shares
or debentures was made with a view to their being offered for sale to the public if:
 The offer to the public by the issue house was made within 6 months of allotment or
agreement to allot (to the issue house); or
 The whole consideration was not received by the company at the time when the offer was
made by the issue house.

In Rex v. Kylsant (1932), the prospectus stated that dividends of 5 to 8 per cent had been
regularly paid over a long period. The truth was that the company had been incurring substantial
losses during the seven years preceding the date of the prospectus and dividends had been paid out
of the realised capital profits. Held, the prospectus was false and misleading. The statement
though true in itself was rendered false in the context in which it was stated.

A half truth, for instance, represented as a whole truth may tantamount to a false statement [Lord
Halsbury in Aarons Reefs vs. Twisa].

Thus, the persons issuing the prospectus must not only include in the prospectus all the relevant

P a g e 41 | 85
particulars specified in Section 26 of the Act, which are required to be stated compulsorily but
should also voluntarily disclose any other information within their knowledge which might in any
way affect the decision of the prospective investor to invest in the company.

MIS-STATEMENT IN THE PROSPECTUS

Misrepresentation in a prospectus refers to the act of making a false statement, omitting material
information, or providing misleading information in a prospectus. This is a serious offense
because a prospectus is a legal document that investors rely on to make informed decisions about
whether or not to invest in a security. If a company or its directors are found to have made a
misrepresentation in a prospectus, they may face both civil and criminal liability.
Under the Section 34 of Indian Companies Act, 2013, any person who is responsible for the
misrepresentation in a prospectus can be held liable. This includes the company, its directors, and
any other person who has authorized the issue of the prospectus.

A. Civil Liability
A person who has been induced to subscribe for shares in a company on the strength of
misstatement or omission in the prospectus may have a remedy either against the company or
against the promoters or directors.

Remedies against the company

a. Recession of contract - Where a person has purchased the shares of a company on the
faith of a prospectus which contained misleading, but no necessarily fraudulent statement, he can
seek rescission of the contract.
b. Claim for damages - The shareholders have to return the shares to the company and the
claim the money with interest from the company.

Remedies against the directors \ promoters

Any person who has purchase shares \ debentures on the faith of the prospectus containing untrue
statement may sue directors, promoters and experts
a. Damages for deceit \ fraud - Any persons induced to invest in the company by
fraudulent statement in a prospectus cansue the company and persons responsible for damages. The
share should be first surrendered to thecompany before the company is sued for damages.
b. Compensation - The above persons shall be liable to compensation to every person who
subscribes for any shares \ debentures for any loss or damages sustained by him by reason of any
untrue statement included therein.

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B. Criminal Liability
Every person who authorizes the issue of prospectus shall be liable for punishment which shall
extend to imprisonment for a term which may extend to five years and shall also be liable to fine
which may extend to three times amount of the value of the securities issued by the company or
the fraud committed, whichever is higher.

TYPES of PROSPECTUS

Red Herring Prospectus (RHP)

The Red Herring Prospectus (RHP) is a preliminary prospectus or offer document used by
companies to make an initial public offering (IPO) or a follow-on public offer (FPO) of securities.
The RHP contains all the relevant information about the company’s shares or debentures, except
for the final offer price. It is filed with the ROC and circulated to potential investors for their
consideration. The relevant provisions for RHP under the Companies Act 2013 include:
Section 26: This section outlines the requirements for the contents of a prospectus, including
the information to be included in the RHP.
Section 32: This section specifies the procedure for filing the prospectus with the ROC,
including the requirement to file the RHP before the opening of the subscription list.
Section 31: This section mandates the inclusion of a statement in the RHP that the offer is being
made through a prospectus and that investors should read the prospectus before making an
investment decision.
 It is the offer document which contains all the details about the offer of securities. However
it does not include quantum of issue and the price of securities.
 Furthermore, it is not the final prospectus as Company can update it several times before
the final issue.
 Issuer Company needs to file it with Registrar at least 3 days prior to the opening of offer.
 It is named in such a way because it contains a para in Red ink. That states that Company
is not attempting to sell the shares before approval of SEBI.

Shelf Prospectus
A Shelf Prospectus is a prospectus that is filed by a company for multiple issues of securities
within a period of one year from the date of its approval by the ROC. It allows the company to
make multiple public offers of its securities during the validity period of the Shelf Prospectus
without filing a fresh prospectus for each offer. The relevant provisions for Shelf Prospectus
under the Companies Act 2013 include:
Section 31A: This section outlines the requirements for filing a Shelf Prospectus, including the

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conditions for its validity, the period of validity, and the amendments to be made to the
prospectus during its validity period.
Rule 10 of the Companies (Prospectus and Allotment of Securities) Rules, 2014: This rule
provides further details on the contents of a Shelf Prospectus, including the information to be
included in the prospectus and the procedures for filing and updating the Shelf Prospectus.

 Company can issue more than one issue from the single document which we call Shelf
Prospectus.
 Furthermore, banks and financial institutions usually issue it.
 In this case once the company files it with ROC, there is no need to file fresh prospectus at
every issue.
 However it has the validity of up to one year.
 In case there is any change in the issue, then company can file such change in Information
Memorandum.

Abridged Prospectus
An Abridged Prospectus is a shorter version of the prospectus that contains only the salient
features of the full prospectus. It is intended to provide a concise summary of the key information
about the company’s securities and the offer to potential investors. The relevant provisions for
Abridged Prospectus under the Companies Act 2013 include:
Rule 3 of the Companies (Prospectus and Allotment of Securities) Rules, 2014: This rule
outlines the requirements for the contents of an Abridged Prospectus, including the information to
be included in the prospectus and the procedures for filing and circulation of the Abridged
Prospectus.

 It means a memorandum containing salient features of a prospectus.

 Furthermore it contains the information in brief which helps the investor to take investment
decision quickly.
 In this case, Company needs to attach it along with every application form for purchase of
securities.

Deemed Prospectus
A Deemed Prospectus refers to any document that fulfils the characteristics of a prospectus and
invites subscription or offer for securities of a company. It includes documents like
advertisements, pamphlets, circulars, or any other communication that offers securities to
the public for subscription or purchase. Such documents are deemed to be prospectuses and are
subject to the same regulatory requirements as a regular prospectus. The relevant provisions for
Deemed Prospectus under the Companies Act 2013 include:

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Section 2(70) and Section 2(71): These sections define the term “prospectus” and “deemed
prospectus” respectively, and outline the broad scope of documents that may be considered as a
deemed prospectus.
Section 26 and Section 32: These sections, as mentioned earlier, also apply to deemed
prospectuses, requiring them to comply with the same requirements for contents and filing as
regular prospectuses.

 It is a document which the company issues in case of offer for sale of securities to the public.
 Moreover this document is an invitation to public to purchase the shares of company through
an intermediary such as Issuing House.

STATEMENT IN LIEU OF PROSPECTUS

If a public company does not invite the public to subscribe to its stock, but instead seeks to raise
funds from the private sector, it does not need to publish a prospectus. In this case, promoters
are required to create a draft prospectus, a “statement in lieu of prospectus”. Under the Companies
Ordinance, if a public company does not issue a prospectus of incorporation, it must file a
statement in lieu of the prospectus with the company register. The Prospectus Replacement
Statement is defined as a public document prepared in Schedule Two of the Corporate Regulations
by such a corporation that does not issue a prospectus to the Registrar of its preparation prior to
the allotment of shares of the Bonds, and be signed by each of the persons named therein”.
This is a statement that the company with a registered capital of makes to the Registrar for
registration at least three days before the first allotment of shares or bonds under the following
conditions:
 if the company does not issue a prospectus; or
 When a company publishes a prospectus but has not allotted any of its shares offered for
public subscription
The Declaration must be signed in lieu of a prospectus by each person appointed therein as a
director or proposed director of the Company. According to Section 69 (1), if the company that is
required to publish a prospectus does not comply with this obligation, it cannot allocate any
shares.

MATTERS CONTAINED IN THE STATEMENT IN LIEU OF PROSPECTUS

 Company Name.
 The company’s share capital is divided into ordinary shares and the nominal value of one
share.
 Description of the proposed activity and prospectus.
 Name, address, description and duties of proposed or appointed directors, officers, delegated
counsel and company secretaries.

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 Provisions for the appointment and remuneration of the foregoing corporate representatives.
 Voting rights at company meetings.
 Number and amount of shares and debentures agreed to be issued.
 Names, occupations and addresses of sellers of goods purchased or offered for sale by the
company.
 Amount to be paid in cash, stocks or bonds to each real estate seller.[15]

PUBLIC OFFER
No business can run without funding. Private companies that seek to raise capital through issuing
securities have two options: offering securities to the public or through a private placement.
Regulations on publicly traded securities are subject to more scrutiny than those for private
placements. Each offers capital but the criteria for issuing, ongoing financial reporting, and
availability to investors differ with each type of issue.
An initial public offering, or IPO, is the first issue of security made for sale on the open market.
These issues are under regulation by the Securities and Exchange Commission, and require
financial reporting on a regular basis to remain available for trade by investors.
Going public provides an opportunity to the companies to raise cash for setting up a project or for
diversification/expansion or sometimes for working capital or even to retire debt or for potential
acquisitions. This is called the fresh issue of the capital where the proceeds of the issue go to the
company.
Companies also go public to provide a route for some of the existing shareholders including
venture capitalists to exit fully or partially from the company's shareholding or for promoters to
partially dilute their holding. This is called an offer for sale where the proceeds of the issue go to
the selling shareholders and not to the company.
Through a public offering, the issuer makes an offer for new investors to enter its shareholding
family. The shares are made available to the investors at the price determined by the promoters of
the company in consultation with its investment bankers. The successful completion of an IPO
leads to the listing and trading of the company's shares at the designated stock exchanges.

Eligibility norms for making an IPO (Public offer)

SEBI has stipulated the eligibility norms for companies planning an IPO. Which are as follows:
 Net tangible assets of at least Rs 3 crore for three full years
 Distributable profits in at least three years
 Net worth of at least Rs 1 crore in three years
 The issue size should not exceed 5 times the pre-issue net worth
 If there has been a change in the company's name, at least 50 percent of the revenue for
preceding one year should be from the new activity denoted by the new name.

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PRIVATE PLACEMENT of Shares
Private placement is a cost effective way of raising capital without going public. Private placement
means any offer of securities or invitation to subscribe securities to a select group of persons by a
company (other than by way of public offer) through issue of a private placement offer letter and
which satisfies the conditions specified in section 42 of Companies Act, 2013. Private Placement
means any offer of securities (Not Only Shares) or invitation to subscribe securities to a select
group of persons by a company through issue of a private placement offer letter and which
satisfies the conditions specified in section 42 of the Act.
A Company shall need to raise funds for purpose of setting up of projects or new venture /
expansion of the existing business or for funding the working capital requirements. The Company
has the option to raise funds either by way of raising debt funds such as loan from Banks /
Financial Institutions / Non-Banking Finance Companies or by way of issue of Debentures or
Bonds, or further issue of Share Capital. It will depend on current financial position of the
company to choose, whether to raise further funds by way of debt funding or by way of share
capital, after taking into consideration its internal financial dynamics.
Companies using private placements generally seek a smaller amount of capital from a limited
number of investors. If issued under Regulation, these securities are exempt from many of the
financial reporting requirements of public offerings, saving the issuing company time and money.

Advantages of raising funds through PRIVATE PLACEMENT

 Minimum Regulatory Requirements
 Saved Cost and Time
 Comparatively easy process

Employee Stock Option Plans (ESOP)

Employee Stock Option Plans, or ESOPs, incentivize employees for performance. Many firms use
ESOPs as a retention strategy to retain employees in the long term. When a company awards an
ESOP to an employee, they get a ‘right to purchase’ shares in the company at a predetermined
price. This right is usually subject to certain conditions.

Statutory Requirements For ESOPs under Companies Act, 2013

Section 62(1)(b) of the Act governs the issue of ESOPs to employees. ESOPs can be issued when
the company passes a special resolution, and the employee fulfils the terms and conditions
associated with the ESOP.
Section 2(37) defines employee stock options as options given to a company’s directors, officers,

P a g e 47 | 85
or employees. The law is vague on how to treat employee benefit schemes such as Stock
Appreciation Rights (SAR) or Phantom Stock. In the case of SARs and Phantom Stock, real
shares or stocks are not issued, and the employees only benefit from the increase in the value of
the underlying shares. So, these benefits are akin to a stock-linked bonus settled in cash.
Rule 12 of the Companies (Share Capital and Debenture) Rules, 2014 lays out the following
requirements:
The shareholders shall approve the ESOP scheme by passing a separate resolution. This resolution
should be accompanied by an explanatory statement, which should contain the following:
 Number of stock options to be granted
 Manner of identification of the employee
 Vesting requirements
 Lock-in period, if any
 Valuation methodology
 Conditions for lapse of the options (i.e. reverse vesting)

A statement that the company will comply with the relevant accounting standards.
 Options granted cannot be transferred, pledged, hypothecated or mortgaged.
 Modification of the scheme is valid only by passing a special resolution, and such
modification should not be detrimental to the existing option holders.
 A minimum lock in one year is required between grand and vesting.
 Employees will not be eligible for dividends or voting rights until they exercise their options.
 The options shall be transferred to their legal heir in case of the employee’s death.
 In case of permanent incapacitation during employment, all the options shall immediately vest
on the date of such incapacitation.
 All companies issuing options shall maintain a register of employee stock options at the
company’s registered office.
 The board’s report under Section 134 of the Act mandates certain disclosures in the Board
report (see below)

Specific Requirements for a Listed Company

In addition to requirements for ESOP under Companies Act, 2013, listed companies are required
to follow the SEBI (Share Based Employees Benefits) Regulations, 2014. The summary of these
requirements is as follows:
 The ESOP scheme can be implemented directly by the company or a trust (known as the
ESOP trust).
 The company shall transfer the option pool to the trust and provide financial assistance to
the trust.

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 All listed companies are required to have a compensation committee. This committee
would determine the eligibility of the employees and the terms and conditions associated with the
options.

Board Report
Guidelines for ESOP under Companies Act 2013 requires the Board of Directors to disclose the
following in the company’s directors report:
 Number of options granted, vested, exercised and lapsed,
 The total number of shares arising as a result of the exercise of options
 the exercise price of the option
 variation of terms of options, if any
 money realized by exercise of options
 total number of options in force, and
 employee-wise details of options granted to the key managerial personnel, any other
employees and identified employees.

Eligible Employee –
The term employee is defined under explanation given under Rule 12(1) for the purpose of clause
(b) of sub-section (1) of this section and for the purpose of rule itself. The definition is an
exhaustive one with exclusions. Subject to exclusions the following can be exhaustive list of
employee:
(i) A permanent employee of the company working in India
(ii) A permanent employee of the company working outside India
(iii) A permanent employee of the subsidiary company of the company working in India
(iv) A permanent employee of the subsidiary company of the company working outside India
(v) A permanent employee of the holding company of the company
(vi) A director other than independent director of Company whether whole time or not
(vii) A director other than independent director of subsidiary of the company whether whole time
or not, whether in India or out-side India
(viii) A director other than independent director of holding company of the company
whether whole time or not, whether in India or outside India

Not eligible employees:

The following employees are not eligible to participate in ESOS schemes under this Act:
(i) An employee who is not permanent, in other words temporary employees, contract
employees, consultants of the company

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(ii) An employee who is a promoter
(iii) An employee who is a person belonging to the promoter group
(iv) Director who holds more than 10% of outstanding equity shares of the company either
directly (i) himself or indirectly
 through his relative or
 through any board corporate
 Independent director (section 197(7) of the Act)

BUY BACK OF SHARE

A buyback of shares is buying back of own shares by a company that was issued earlier. It is
a corporate action event wherein a company makes a public announcement for the buyback
offer to acquire the shares from existing shareholders within a given timeframe. The buyback
of shares is also known as a stock buyback or repurchase of shares. The company
announces an offer price for the buyback that is generally higher than the current market
price.

Reason for Buyback of shares

Recently, we have seen a spur in the buyback offers by the company. Do you know why do
the companies buy back stock that was once issued by them? There are several reasons
associated with it that urge a company to announce a buyback.

1. Undervalued stock
This is one of the main reasons why companies opt to buy back their shares. When the
management feels that their stock is undervalued, they adopt the buyback route to rectify the
stock price. The stock buyback reduces the number of shares in the market and thus gives a
price boost to the remaining shares in the market.
2. Excess Cash with not many project opportunities
A company with free reserves in hand but not many project opportunities would prefer to go
for a buyback. The company would use the cash to reward the shareholders rather than
keeping it idle in the bank account over the required amount.

3. Tax-efficient method of rewarding shareholders

The dividends get taxed at two levels. First, at the company level and a second time in the
hands of the shareholders. However, in the case of a buyback, only the company is liable to
pay a buyback tax. The capital gains tax on the income from the buyback of shares is
exempted for the investor. Thus, buybacks prove to be a more tax-effective way of
distributing rewards to the shareholder.

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4. Strengthen promoter holding in the company
The company promoters can increase its stake in the company by forfeiting the buyback offer.
This strengthens their hold over the company and acts as a defense strategy in the case of
hostile takeovers.

5. To achieve optimum capital structure

The capital structure of a company gets represented by its debt-equity ratio. Each industry has
a different capital structure requirement. Some industries may not be suitable to rely on more
debts, whereas some other business models may require large debts to run their business.
Thus, as per the company requirement, a company may opt for buyback as a tool and
repurchase its equity from the market to achieve an optimum capital structure.

Condition of Buy-back: (Sec 68)

1) A
uthorization for Buy-Back: Articles of Association (AOA) of the company should authorize
Buy-Back, if no provision in AOA then first alter the AOA.
2) A
pproval of Board - up to 10% of the total paid-up equity capital and free reserves; or
Approval of Shareholders- up to 25% of the aggregate of paid-up capital and free reserves.
3) Post buy-back debt-equity ratio cannot exceed 2:1.
4) Only fully paid up shares can be brought back in a financial year.
5) Time limits: The buy-back should be completed within a period of one year from the
date of passing of Special Resolution or Board Resolution, as the case may be.
6) Cooling Period: from the date of completion of Buy-back Company cannot issue same
kind shares including right issue of shares within a period of 6 month except Bonus issue or
discharge of subsisting obligations.
7) Withdrawal of offer: No withdrawal of offer is allowed once it is announced to the
shareholders.
8) Basis of arriving at Buy-back price: Calculation of Buy-back needs to be done on the
basis of :
♦ Audited account which is not more than 6 month old from the date of offer document; or
♦ Unaudited account not older than 6 month from offer document subject to limited review by
Auditor of the Company 8.

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Buyback of shares methods
SEBI Buyback Regulations prescribe three methods of buyback of shares in India. A
company can buy back the securities through any one of the following modes:
1. Buyback of shares through tender offer
In a tender offer, the company buys back its shares from the existing shareholders at a fixed
price on a proportionate basis within a given time frame. The company issues a letter of offer
and Tender Form to all the eligible shareholders on the company records as on the buyback
record date. All the eligible shareholders who hold the shares either in physical form or
Demat can participate in the buyback offer.

2. Buyback of shares through open market

In the case of buyback of shares from open market, a company can do so either through the
stock exchange or the book-building process.
In the case of buyback from the open market through the Stock Exchange mechanism, a
company can buy back the shares only on the stock exchanges having nationwide trading
terminals via an order matching mechanism. The promoters are not allowed to
participate in the open market offers through the stock exchange. All other shareholders
holding Equity shares of the company can participate in this offer.
In the buyback through the book-building process, the buyback gets routed through
electronically linked bidding centers. The company appoints a merchant banker to handle
the buyback procedure. The merchant banker and the company determine the buyback price
based on the response received for the buyback.

3. Buyback of shares from Odd-lot holders

In the case of buyback from the odd-lot holders, the company buys directly from the odd-lot
shareholders by approaching them. An odd lot holder is a shareholder with shares lesser than
the marketable lots as specified by the stock exchange. This method of the buyback is less
common in India

Procedure of Buyback of shares

A buyback of shares is a corporate action event in which a company purchases its shares from
the existing shareholders either via a tender offer or from the open market. A buyback of
shares can be out of company free reserves or the securities premium account. Below is
the generic buyback process.
1. As a first step, a company approves the buyback proposal in a board meeting.
2. Post that, the company makes a public announcement for the buyback. The buyback
announcement mentions the mode of the buyback.
3. The company then files a letter of offer with SEBI in case of a tender offer.

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4. Interested shareholders approach their stockbrokers to tender their shares for
buyback or put their bid for buyback in case of an open market offer.
5. The stockbrokers then submit the tender forms and other specific documents like
physical share certificates to the company registrar in case of a tender offer.
6. The registrar verifies the tender forms and informs the exchanges on acceptance/non-
acceptance of the tendered Equity shares.
(i) The non-accepted shares get returned to the shareholders.
(ii) The acceptance of the shares in an open market offer happens on order matching and gets
executed on relevant pay-out dates.
7. Once the shares get accepted, the shareholder receives the cash in return for the shares
offered in the buyback.
8. Lastly, the securities purchased in buyback are destroyed/extinguished by the company.

Buyback of shares benefits

 Buybacks boost the share prices rectifying the prices of undervalued stocks.
 Buybacks improve the company's Key Financial Ratios like Earning Per Share, Return
on Equity, Return on Asset.
 Buyback works as an alternative mode of reduction in capital without requiring
approval from National Company Law Tribunal or Court.
 Buyback serves as a financial engineering tool to optimize the capital structure of the
company.
 Buyback is a defense strategy to prevent hostile takeovers.
 Buyback provides an easy exit route for shareholders for undervalued stocks.
 Buyback helps optimum utilization of free cash with not many options of investment.
 Buyback serves as a health check on the company's financial position as only the
companies with good liquidity position are allowed to announce buyback offers.
Buyback of shares disadvantages
 The improvement in the financial ratios of the company may not be real. The
increase may be due to a reduction in the denominator on account of a decrease in the number
of equity shares and assets. However, that may not be a real profit.
 Possibility of diversion of excess cash for buyback rather than a productive investment
opportunity,

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SWEAT EQUITY SHARES
“Sweat Equity Shares” means such equity shares are issued by a company to its directors or
employees at a discount or for consideration, other than cash, for providing their know-how
or making available rights in the nature of intellectual property rights or value additions.
Sweat equity is the type of investment that measures time and effort put into a project. It is
the ownership interest or increased value that results from the owner's hard work. In start-ups,
sweat equity may be the biggest contribution of founders who may not have the cash to
contribute.

MEMBER and SHAREHOLDER

Definition of a Member
Section 2 (55) of the Companies Act, 2013 defines a member in the following words :
1. The subscribers to the Memorandum of a company shall be deemed to have agreed to become
members of the company, and on its registration, shall be entered as members in its register of
members.
2. Every other person who agrees in writing to become a member of the company and whose name
is entered in its register of members shall be a member of the company.
In Herdilia Unimers Ltd. v. Renu Jain [1995], it was held that the moment the shares were
allotted and share certificate signed and the name entered in the register of members, the allottee
became the shareholder, irrespective of the allottee receiving the shares or not.
3. Every person holding shares of the company and whose name is entered as beneficial owner in
the records of a depository.

On this basis, two pre-requisites for a person to become a member of a company are:
i) the agreement in writing to take shares of the company; and
ii) the registration of his name in its register of members.

Besides, a person may also become a member of a company through the depository system.
Thus, a person can agree to take shares of a company either as the subscriber at the initial stage of
its formation or in any of the following manner :
a) by subscribing to its further or new shares;
b) on transfer of its shares from an existing member;

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c) on acquisition or purchase of its shares (for example, take-over bid, renunciation of rights
shares by an existing member); and
d) on acquisition of its shares by devolution (for example, transmission of shares to legal heirs of a
deceased member, on insolvency, upon merger/ amalgamation through Tribunal’s order);
e) on conversion of convertible debentures or loans pursuant to the terms of issue of such
debenture or loan agreement respectively.
The fundamental difference between the subscribers who agree to take shares at the time of
formation of the company and persons who agree to take shares later is that the former become
members immediately on incorporation of the company, that is, they automatically become
members. The latter, though having agreed to take shares, become members only after their names
are entered in the register of members of the company.

DISTINCTION between MEMBER and SHAREHOLDER

In normal usage the two terms ‘member’ and ‘shareholder’ are used synonymously. But, legally,
there is a difference between the two. A shareholder is a person who holds or owns the shares in a
company, whereas a member is one whose name is recorded in the Register of Members. In some
cases, a person may be a member but not a shareholder, or he may be a shareholder but not a
member. Following are the main points of difference:
i) A company limited by guarantee having no share capital will have only members but no
shareholders.
ii) When a person transfers his shares, he ceases to be a holder of those shares but continues to be
the member of the company until his name is replaced by the name of the transferee.
iii) the legal representatives of a deceased member become shareholders immediately on the death
of the member but they do not become members until their names are entered in the Register of
Members.
iv) A person whose shares are forfeited or who has surrendered his shares to the company may be
held liable as a member to contribute to the assets of the company, if winding-up commences
within twelve months of his ceasing to be a member, though he is no longer the shareholder of the
company.
In Kedarnath Agarwal v. Jay Engineering Works Ltd. it was held that a member may be a
shareholder, but a shareholder may not be a member.
From the above discussion, it should be clear to you that person holding shares of a company are
shareholders, while members are persons who constitute the company as a corporate entity and
whose names are entered in the Register of Members.

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WHO CAN BECOME A MEMBER?
The Companies Act does not specifically lay down as to who can be a member of a company. It
also does not prescribe any disqualification for any person which would debar him from becoming
a member of a company. The Act simply provides that any person who agrees in writing to
become a member of a company can become a member. You know that a contract to purchase
shares in a company is like any other contract. Therefore, only such persons can become members
of a company who are competent to contract. However, as regards competency of a member, the
provisions of the Indian Contract Act shall apply.
This means that minors, persons of unsound mind and those who have been disqualified by
law from contracting cannot become members of a company.
Let us now discuss the position of a few special types of members:
i) Minor: According to Section 11 of the Indian Contract Act, a minor is incompetent to contract,
therefore, he cannot become a member of the company. In Palaniappa vs. Official Liquidator,
Pasupati Bank Ltd., an application was made by a father as guardian of his minor daughter
describing her as minor. The company went into liquidation. It was held that the allotment was
void and neither the minor nor her guardian could be held liable as contributories. But, if in
ignorance of the fact of minority, a minor is allotted shares, the company can repudiate the
allotment and remove his name from the Register of Members. The minor may also rescind the
allotment any time during his minority. In either case, the company has to refund all moneys
received from minor in respect of the shares allotted to him. If neither party repudiates allotment,
the name of the minor shall continue to appear on the Register of Members, but in that event a
minor incurs no personal liability.
After the minor attains majority, he can still repudiate his liability even if he had received
dividends during his minority (Sadiq Ali v. Jai Kishori). But, he cannot repudiate the same if he
had received dividends after attaining majority and intentionally permitted the company to believe
him to be a shareholder (Fazalbhoy v. The Credit Bank of India Ltd.). Thus, it is in the interest of
the companies to allot only fully paid shares to the minor because otherwise he will not be liable
for the unpaid amount of shares.
There is nothing in the Act to bar a minor from becoming a transferee of fully paid shares. In Miss
Nandita Jain v. Bennel Coleman and Company Ltd., the Company Law Board held that the
contract entered into by a minor for registration of transfer of fully paid shares through the natural
guardian was a valid and binding contract. In such a case the entry in the Register of Members
will be made as follows: “A (a minor) through
................................... guardian”.
If shares are transferred to a minor, the transferor will continue to remain liable for all future calls
on such shares even if he was ignorant of the minority of the transferee. If the company is aware
of the minority of the transferee at the time of transfer, it can refuse to register the transfer in
favour of a minor unless the shares are fully paid.

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ii) Company: A company, being a legal person, is competent to contract.
Therefore, a company may become a member of another company if it is authorised by its
memorandum or articles of association. However, a subsidiary company cannot become a member
of its holding company (Section 19).

iii) Partnership firm: A partnership firm is not a legal person. Therefore, it cannot buy shares in
its own name. A firm may hold shares in the names of individual partners who may be entered as
joint holders in the Register of Members. However, it can become member of a non-profit making
company licensed under Section 8 of the Act. A limited liability partnership created under Limited
Liability Partnership Act, 2008 is a separate legal entity and, therefore, may become a member of
a company.

iv) Hindu Undivided Family (HUF): A HUF can have shares in a company in the name of its
Karta. Thus, the Karta will be a member of the company as his name alone will be entered in the
register of members.

v) Insolvent: If any member is declared insolvent, he remains a member of the company till his
name appears on company’s Register of Members. He is entitled to vote in respect of shares held
by him, but the dividend on shares will be paid to Official Assignee or Official Receiver.

vi) Foreigners: A foreigner may become a shareholder with the general or special permission of
the Reserve Bank of India under the Foreign Exchange Management Act, 1999. But if he becomes
an alien enemy, his rights as a member shall be suspended.

vii) Joint Holders: The shares of a company may also be held jointly by two or more persons. In
a public company, even joint shareholders are counted as separate members but in a private
company, joint holders are treated as a single member for purposes of Section 2(68) of the Act.
The joint holders of shares may get themselves registered in any order they like. The company
may pay dividend to the person whose name is first written in the register of members. Similarly,
a notice served by the company on the joint holder named first in the register of members will be
deemed to have been served properly on all of them. You should, however, remember that joint
holders are jointly and severally liable for payment of calls. The transfer of shares by the joint
holders will be effective only if it is made by all of them jointly.

viii) Public Office: A public office like income tax department, sales tax department etc. cannot
be a member of a company. It cannot register shares in its own name. A registered trade union or a
registered society can hold shares in its own name.

ix) President and Governor: Shares in a government company can be held in the name of the
President of India or Governor of a State.

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MODES of BECOMING MEMBER
A person may become a member in a company in any of the following ways:
1) By subscribing to the memorandum: A signatory to the memorandum automatically becomes a
member of the company on its incorporation.
Neither application nor allotment of shares is necessary to constitute them members of the
company. Even if his name is not entered in the register of members, he will still be treated as a
member of the company.
2) By application and allotment of shares: A person who agrees in writing to become the member
of the company and whose name is entered in the Register of Members is also a member of the
company. An application for shares is an offer to take shares and allotment is the acceptance of
that offer. The rules regarding offer and acceptance (Law of Contract) are applicable. Thus, if a
person applies for shares subject to certain conditions, the allotment by the company must be
made according to those conditions; otherwise the allottee shall not be bound to accept the shares.
3) By transfer of shares: You know that the shares of a public company are freely transferable.
Thus, a person may buy shares in the open market and get those shares registered in his name. On
the registration of transfer of shares, transferee becomes the member of the company.
4) By transmission of shares: A person may become a member by operation of law i.e.
transmission. On the death of a member, his nominee/legal representatives have the right to get the
shares of the deceased member registered in his/their names. No instrument of transfer is
necessary in this case.
5) By estoppels/holding out: This arises when a person holds himself out as a member or
knowingly allows his name to remain on the register when he has actually parted with his shares.
In the event of winding-up, he will be liable, like other genuine members as a contributory (Hans
Raj v. Asthana). But in view of the rule laid down in Section 2(55) of the Companies Act that the
person must agree in writing to be a member, a person cannot be treated as a member of a
company simply because his name is entered in the register of members. Thus, he enjoys no rights
of a member though he may be held liable as a member. However, he may escape liability by
applying to Tribunal for rectification of register of members under section 59.

TERMINATION OF MEMBERSHIP
You learnt that a person becomes a member of a company when his name appears in the Register
of Members. Accordingly, a person ceases to be a member of a company when his name is
removed from the Register of Members.
A person may cease to be a member in any one of the following ways:
1) Transfer of Shares: When he transfers his shares to another person and the transfer is duly
registered by the company, the name of the transferor is removed from the Register of Members.

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2) Transmission of Shares: On the death of a member, his shares get transmitted to his
nominee/legal representatives.

3) Forfeiture of Shares: Shares may be forfeited for non-payment of calls and other reasons
contained in the articles. The membership terminates on share forfeiture.

4) Surrender of Shares: When a member validly surrenders his shares to the company, he ceases
to be a member.

5) Insolvency of Member: When a member is declared insolvent, his shares vest in the Official
Receiver or Official Assignee. The Assignee or Receiver may sell these shares and when the
transferee’s name is entered in the Register of Members, insolvent member cases to be a member.

6) Winding up of Company: Membership terminates on the winding-up of the company, but he

continues to be liable as a contributory.

7) Repudiation of Contract: If he repudiates the contract to take shares on the ground of

misrepresentation or mistake in the prospectus or on the ground of irregular allotment.

8) Enforcement of Lien: When the company has a lien on the shares and the shares are sold by
the company to enforce this lien or if the shares are sold in the execution of a decree of the court,
the membership terminates.

9) Redemption of Shares: If a member is holding redeemable preference shares, then on their

redemption his membership terminates.

10) Tribunal’s Order: When the Tribunal passes an order for the purchase of shares of a member
under Section 242 of the Companies Act, his membership terminates.

RIGHTS OF MEMBERS
A number of rights have been conferred on the members by the Companies Act, 2013, some of the
important rights are as under:

i) Right to receive copies of Memorandum and Articles of Association on request and on payment
of the prescribed fee.

ii) Right to receive share certificate within the prescribed period of 3 months from the date of
allotment.

iii) Right to transfer his shares according to the provisions of the Companies Act and Articles of
Association.

iv) Right to have his name entered in the Register of Members.

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v) Right of priority to have shares offered in case of increase of capital.

vi) Right to receive notice of meetings, to attend, to appoint a proxy and vote at the meeting.

vii) Right to participate in the appointment of directors, auditors, etc. at the annual general
meeting.

viii) Right to inspect register of members, register of debenture holders and copies of annual
returns.

ix) Right to apply to the Tribunal for rectification of register of members.

x) Right to request to the Tribunal for calling an annual general meeting when the Board of
Directors fails to call such meeting or apply for an extraordinary meeting of the company,
whenever necessary.

xi) Right to receive copies of the financial statements and Director’s Report before the annual
general meeting.

xii) Right to receive proper notice of resolutions requiring special notice.

xiii) Right to have, on request, minutes of proceedings at a general meeting.

xiv) Right to apply to the Tribunal for ordering an investigation into the affairs of the company.

xv) Right to present petition to the Tribunal for relief in cases of oppression and mismanagement.

xvi) Right to present petition to the Tribunal for the winding up the company.

xvii) Right to share in the surplus assets of the company on winding up.

xviii) In the case of a body corporate which is a member, the right to appoint a representative to
attend a general meeting on its behalf.

xix) The right to require the company to circulate resolution under section 111.

xx) Right to apply to the Tribunal under section 48 to have any variation of shareholders’ rights
set aside.

xxi) Right to participate in the removal of directors by passing an ordinary resolution.

From the above you must have noted that these rights are very valuable to keep the management
of the company on the right track. How far these rights are exercised effectively by members is a
different question.

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LIABILITY OF MEMBERS
Liability of members of a company depends upon the nature of the company.
This is discussed accordingly as follows:

i) Unlimited company: Every member of such a company is liable for all debts contracted by the
company during the period when he was a member. However, a company being a separate legal
entity, no member/shareholder can be proceeded against directly by the claimants/creditors. Their
liability, unlike a partnership firm, is not joint and several.

ii) Company limited by guarantee: Every member is liable to contribute to the extent of the
amount guaranteed by him which is given in the liability clause of the memorandum.

iii) Company limited by shares: The majority of the companies belong to this category. In the
case of such companies, the liability of a member is limited to the amount unpaid on the shares
held by him. If he has paid full amount on shares, his liability is nil.

You should remember that all money payable by any member of the company under the
memorandum or articles are a debt due from him to the company. If a shareholder dies and he was
holding partly paid-up shares, then his estate will be liable or the legal representatives will be
liable for the unpaid amount.

COMPANY MEETINGS

Meaning and Definition of Company Meeting:

The word “meeting” is not defined anywhere in the Companies Act. Ordinarily, a company may
be defined as gathering, assembling or coming together of two or more persons (by previous
notice or by mutual arrangement) for discussion and transaction of some lawful business. A
company meeting may be defined as a concurrence or coming together of at least a quorum of
members in order to transact either ordinary or special business of the company.

Kinds of Company Meetings:

The meetings of a company may be classified into the following categories:

Meetings of shareholders Meetings of directors:

I. Statutory meeting; 1. Meetings of board of directors;
II. Annual general meeting (AGM) 2. Meetings of directors;
III. Extra ordinary general meeting; 3. Meetings of creditors.
IV. Class meetings. 4. Meetings of debenture-holders.

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A. Meetings of Shareholders:
The shareholders are the real owners of the company, but due to certain limitations they cannot
take part in the management of the company. They leave this to their representatives called the
directors. For controlling the board of directors and their activities ‘shareholders’ ‘meetings’ are
held from time to time. Meeting of shareholders can be classified as under.

I. Statutory Meeting:
Every public company having share capital must convene a general meeting of shareholders
within a period of not less than one month and not more than six months after the date on which it
is authorised to commence its business. This is the first meeting of the shareholders of the
company and it is held once in the whole life of the company.

The following companies need not to hold statutory meeting:

(i) Private company.
(ii) Company limited by Guarantee having no share capital.
(iii) Unlimited liability company.
(iv) A public company which was registered as a private company earlier.
(v) A company which has been deemed as a public company under Sec. 43 A.

Notice of the Meeting: The directors are required to send a notice of the meeting to all the
members of the company at least 21 days before the date of the meeting stating that it is the
‘statutory meeting’ of the company. If the notice convening this meeting does not name it as the
“Statutory Meeting” it will not Amount to compliance with the provisions of this section.

Objects of Statutory Meeting: The statutory meeting is held to inform the shareholders about
matters relating to incorporation, allotment of share, the details of the contracts concluded by the
company, etc. According to Stephenson, “Statutory Meeting is convened in order to aord the
shareholders an opportunity for seeing what degree of success has attained the floatation of the
company and in order that any special matters requiring their approval may be laid before them”.

Statutory Report: The directors are required to prepare and send a report called the ‘Statutory
Report’ to every member of the company at least 21 days before the date of the meeting. If the
report is sent later it shall be deemed to have been duly forwarded if it is so agreed to by a
unanimous vote of the members entitled to attend and vote at the meeting [Sec. 165 (2)]. A copy
of this report should be sent to the Registrar

Effect of Non-compliance:
(i) If default is made in complying with the provisions of Section 165, every director or
other officer of the company who is in default will be liable to a fine which may extend to
Rs. 500.
(ii) (ii) If the statutory meeting is not held or the statutory report is not filed as per the
provisions of Companies Act, the company may be compulsorily wound up under the

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 orders of court. [Sec. 43(6)] The court may, however, give direction for the statutory
report to be filed or a meeting to be held as the case may be and refuse to order the
winding up of the company. [Sec. 443(3)]

II. Annual General Meeting (AGM):

It is a meeting of shareholders which is held once in a year.
The object of holding this meeting is to review the progress and prospects of the company and
elect its office-bearers for the coming year.

Holding of the Meeting: The first annual general meeting of the company is held within 18
months of its incorporation. After holding such meeting it is not necessary to hold any other
annual general meeting in the year of its incorporation and in the next year. Subsequent annual
general meeting must be held by the company each year within six months of the closing of the
financial year. I the interval between any two annual general meetings must not be more than
fifteen months. The registrar is empowered to extend the time upto a period to three months
except in the case of first annual general meeting.

Notice: The Board of Directors has to call Annual General Meeting giving 21 days notice to all
the members entitled to attend the meeting. However, such a meeting may be called with shorter
notice, if it is agreed to by all the members to vote in the meeting. Certified copies of Profit and
Loss Account and Balance Sheet, Directors’ Report and Auditor’s Report should also be
forwarded to the members at least 21 days before the holding of the meeting of the company.
Considering the importance of annual general meeting to shareholders it has been held that the
directors must call the meeting even though the accounts are not ready or the company is not
functioning.

Effect of Non-Compliance:
(i) If default is made in holding the annual general meeting in accordance with the above
provisions, the Central Government may on the application of any member of the
company, call or direct for the calling of the meeting and give such directions for this
purpose as it thinks proper. The directions may include that one member of the company
present in person or by proxy shall be deemed to constitute the meeting. (Sec. 167)
(ii) If default is made in holding a meeting of the company in accordance with the above
provisions, the company and its every officer who is in default shall be punishable with a
fine which may extend to five hundred and in case of continued defaults, with a further
fine which may extend to Rs. 250 for every day during which such default continues,
(i) Routine Business: (a) Adoption of Annual Accounts, Directors’ Report and
Auditors’ Report. (b) To declare the dividend. (c) To elect the directors in place of
those retiring by rotation. (d)To appoint auditors and fix their remuneration.
(ii) (ii) Special Business: (a) To increase Authorised Capital. (b) To alter the Articles
of Association, etc.

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III. Extraordinary General Meeting:
Extraordinary meeting is a general meeting which is held between two Annual General Meetings.
Extraordinary General Meeting is Called to discuss any particular matter of urgent importance to
the company. This meeting is called for the consideration of any specific subject, decision of
which cannot be postponed to the next Annual General Meeting

This meeting may also be called to discuss the following:

(i) Alteration of any clause of Memorandum of Association; or
(ii) Changes in the Articles of Association; or
(iii) Scheme of the reduction of share capital etc.

 The Extraordinary General Meeting may be called by the Directors or may be convened by
the Shareholders if the Board of Directors does not arrange for it despite their requisition to
call it.
 Directors may call the Extraordinary General Meeting in accordance with the procedure laid
down in the Articles of Association of the company.
 Shareholders holding at least one-tenth of the paid-up share capital of the company can make
a requisition to the Board of Directors to convince such a meeting.
 If due to any reason it is impracticable to hold extraordinary general meeting the Company
Law Board may order to call such meeting either on its own initiative or on the application of
any director or any member of the company who are entitled to vote at the meeting. Section
186 of the Companies Act empowers the Company Law Board to call only extraordinary
general meeting and not the annual general meeting of the company.
 If no such meeting is convened within 21 days of their requisition, shareholders may
themselves convene the meeting within 3 months from the date of their requisition. A notice
of 21 days has to be given to members indicating the nature and particulars of the resolutions
to be discussed.
 The special resolutions passed at Extraordinary General Meeting have to be filed with the
Registrar within 15 days.

IV. Class Meetings:

When the meeting of a particular class of shareholders takes place such as preference shareholder
meeting, it is known as class meeting. Such a meeting can be attended only by that class of
shareholders. The articles define the procedure for calling such meeting. Such a meeting is called
for the alteration in the rights and privileges of the shareholders and for the purpose of conversion
of one class of shares into another.

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B. Meetings of Directors:

I. Meetings of Board of Directors:

At Least One Meeting in Every Three Months: The directors of a company exercise most of
their powers in a joint meeting called the meeting of the Board. In the case of every company, a
meeting of the Board of Directors must be held:
(i) At least once in every three months, and
(ii) At least four such meetings shall be held in every year. [Sec. 285]

In other words, no three months should pass without directors’ meeting being held, and no year
should expire without at least four directors’ meetings having been held in it. The object of this
section is to ensure that the Board meetings are held at reasonably frequent intervals so that the
directors may be in touch with the management of the affairs of the company. However, the
Central Government is empowered to relax the rule with regard to any class of companies (Section
285). The object of this provision is to save smaller companies having insufficient business to be
transacted at Board meetings from unnecessary hardships and expenditure involved in holding
them.

Notice: There is no need to send notice, if the articles provide for meetings to be held at regular
intervals’ e.g., monthly, the time and place being fixed. Also, if all the directors should meet
casually, and are willing to hold a meeting, the meeting can be held notwithstanding the absence
of notice. Unless the articles of the company provide a definite period of notice, a reasonable
notice must be given of the Board meeting. What is a reasonable notice will depend on any
particular case. If a proper notice is not given the proceedings are invalid unless all the directors
are present at the meeting. The notice should mention the place, time and date of the meeting. The
day must be a working day and the time should be during business hours unless agreed otherwise
by all the directors. It is not necessary to state in the notice the business to be transacted, unless
the articles of the company or the Act so require.

Agenda: The term ‘agenda’ means things to be done. In the present context it is a statement of the
business to be transacted at a meeting. It also sets out the order in which the business is to be dealt
with. Though the Companies Act does not make it obligatory on the secretary to send an agenda or
to incorporate the same in the notice of Board Meeting, yet by convention it necessarily
accompanies the notice calling the meeting. When the agenda is enclosed with the notice each
director gives due consideration to the proposed business and comes with necessary preparations
for discussion in the meeting.

Quorum: There must be a proper quorum for every meeting. The quorum for Board Meeting
should be at least two directors or one-third of total strength of the Board of Directors, whichever
is more subject to a minimum of two directors. While determining the total strength, the vacancies
are not counted. Again the directors who are interested in any of the resolutions to be passed at the
Board Meeting shall not be counted for the purpose of quorum of that resolution. If at any time the
number of interested directors exceeds or is equal to two-thirds of the total strength of directors,

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then the remaining directors who are not interested will be the quorum for that item, provided their
number is not less than two [Sec. 283]. If the meeting of the Board could not be held for want of
quorum then unless the articles otherwise provide the meeting shall automatically stand adjourned
till the same day in the next week and at the same time and place. Where that day happens to be a
public holiday then the meeting stands adjourned to the next succeeding day, at the same time and
place. If a meeting could not be held for want of a quorum, it shall all right be counted towards the
minimum number of meetings which must be held in every year under Sec. 285. [Sec. 288]

Board meetings are called for the following business:

(i) To issue shares and debentures.
(ii) To make calls on shares.
(iii) To forfeit the share
(iv) To transfer, the shares.
(v) To fix the rate of dividend.
(vi) To take loan in addition to debentures.
(vii) To invest the wealth of the company.
(viii) To think over the difficulties of the company.
(ix) To determine the policies of the company.

II. Meetings of the Committees of Directors:

The Board of Directors may form certain committees and delegate some of its powers to them.
These committees should consist of only directors. The delegation of powers to such committees
is to be authorised by the Articles of Association and should be subject to the provisions of the
Companies Act.
In a large company routine matters like Allotment, Transfer, Finance are handled by sub-
committees of the Board of Directors. The meetings of such committees are held in the same way
as those of Board Meetings.

III. Meetings of Creditors:

The meetings of creditors are called when the company proposes to make a scheme for
arrangement with its creditors. Section, 391 to 393 of the Companies Act not only give powers to
the company to compromise with the creditors but also lay down the procedure of doing so.

IV. Meetings of Debenture Holders:

Meetings of the debenture holders are held according to the conditions contained in the debenture
trust deed. These meetings are called from time to time where the interests of debenture holders
are involved at the time of reconstruction, reorganisation, amalgamation or winding up of the
company. The rules and regulations entered in trust deed relate to the notice of the meeting,

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appointment of a Chairman of the meeting, passing the resolutions, quorum of the meeting and the
writing and signing of minutes.

Proxy: Any member, entitled to attend and vote in a meeting, can appoint another person to attend
and vote on his behalf. The person appointed is called the Proxy. The appointment of a Proxy
must be made by a written instruction signed by the appointer and deposited with the company,
not more than 48 hours before the meeting. A Proxy is not entitled to speak in the meeting and
vote only in a poll unless the articles provide otherwise. A Proxy need not be a member of the
company. A member of a private company cannot appoint more than one Proxy to attend on the
same occasion, unless the articles otherwise provide. A body corporate which is a member of a
company can appoint a representative or proxy, by resolution of the Board. The President of India
or the Governor of a State, if he is a member of a company, may appoint any person to act as his
representative in a meeting.

COMMITTEES
Committees are a sub-set of the board, deriving their authority from the powers delegated to them
by the board. Under Section 177 of Companies Act, 2013, Board of Directors may delegate certain
matters to the committees set up for the purpose. Committees are formed as a means to improve
board effectiveness and efficiency in areas where more focused, specialised and technically
oriented discussions is required.

Some of the important committees to be constituted by the Board as follows

1. Audit Committee:
Applicability:
 Every Listed Public Companies and Public Companies having a Paid-up share capital of
10 crore rupees or more, and a turnover of Rs. 100 Crore or more.
 Additionally All Public Companies which have in aggregate outstanding loans, debentures
and deposits exceeding 50 crore rupees are required to constitute an Audit Committee.

Composition of Audit Committee as per Companies Act, 2013:

 Minimum 3 directors with majority of Independent Director.
 Members including the Chairman of Audit Committee should be able to read and
understand financial statement.

Composition of Audit Committee as per clause 49 of Listing Agreement:

 Minimum of 3 Director of which 2/3rd are independent Directors.
 All members should be financially literate and at least 1 member shall have accounting or
related financial management expertise.

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Vigil Mechanism:
 Vigil Mechanism provides adequate safeguard against victimisation of persons. It is
established for directors and employees to report their grievances and concerns.
 Rule 7 of Companies (Meetings of Board and its Powers) Rules, 2014 describes about
establishment of Vigil Mechanism for every Listed Company and companies prescribed
below:
 Companies which accepts deposits from public.
 Companies which have borrowed money from bank and public financial institutions in
excess of Rs.50 Crores.
 The Board of Directors shall nominate a director to play role of Audit Committee for the
purpose of Vigil Mechanism for reporting purpose. The aggrieved person will have direct
access with the Chairperson/Nominated Director of the Audit Committee.
 The details of establishment of such mechanism shall be disclosed on the company’s
website, and in the Board ‘report.
 Penalty for the Violation of Audit Committee Provisions: The Company shall be
punishable with a fine of Rs. 1 lakh to Rs. 5lakh and every officer of the company who is
in default shall be punishable with imprisonment upto 1 year or with Rs. 25,000 to Rs. 1
lakh or with both.

Function of Audit Committee:

 To recommend appointment, remuneration and terms of appointment of the Auditor of the
Company.
 To establish a Vigil Mechanism Policy.
 To call for remarks of the auditors about the internal control system.
 At the Annual General Meeting, the chairman of the Committee should be present to
answer the shareholder’s inquiry.
 To discuss any issues related to internal and statutory auditors and the management of the
Company.

2. Nomination and Remuneration Committee:

Applicability:
 Every Listed Public Companies and Public Companies having a Paid-up share capital of
10 crore rupees or more, and a turnover of Rs. 100 Crore or more.
 Additionally All Public Companies which have in aggregate outstanding loans, debentures
and deposits exceeding 50 crore rupees are required to constitute an Audit Committee.

Composition of Nomination and Remuneration Committee as per Companies Act,2013:

 Minimum of 3 Non-Executive Directors out of which two shall be Independent Directors.
 Chairperson shall be an Independent director.

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Functions of Nomination and Remuneration Committee:
 Recommendation of success plans for the directors.
 To review the elements of the remuneration package, structure of remuneration package.
 To review the changes to remuneration package, terms of appointment, severance fee,
requirement and termination policies and procedures.
 To recommend the shortlisted candidates who are qualified to be director and who can be
appointment in senior management.
 The committee is authorised to seek information about any employee and the management
is directed to co-operate.
 The Committee can be present at the General Meeting to answer the shareholder’s queries.

3. Stakeholders Relationship Committee:

Section 178 of Companies Act,2013 states that a company which holds 1000 numbers of
shareholders, debenture holders, deposit holders and any other security holders at any time during
a financial year.

Composition of Stakeholders Relationship Committee:

 As per the SEBI Listing regulations the Committee should consist of least three directors,
with at least one being an Independent director, shall be members of the committee and in
case of a listed entity having outstanding SR equity shares, at least two-thirds of the
committee shall comprise of independent directors.
 The chairperson of the Committee shall be a non-executive director and such other
members as may be decided by the Board.
As per regulation the Committee shall meet at least once in a year. The chairperson or, in his
absence any other member of the committee authorized by him in this behalf shall attend the
general meetings of the Company.

Functions of Corporate Stakeholders Relationship Committee:

The Committee shall resolve complaints related to transfer / transmission of shares, non-receipt of
annual report and non-receipt of declared dividends, general meetings, approve issue of new/
duplicate certificates and new certificate on split /consolidation / renewal etc. approve
transfer/transmission, dematerialization.

4. Corporate Social Responsibility Committee:

Section 135 of Companies Act,2013 , with Companies(CSR Policy) Rules,2014 states that every
company having :
 net worth of not less than Rs.500 crores or more
 or turnover of not less than Rs. 1000 crores or more
 or Net Profit of Rs.5 crore or more
shall constitute a Corporate Social Responsibility Committee.

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Composition of CSR Committee as per Companies Act, 2013 :
In case of Listed Company at least 3 Directors out of which 1 should be an Independent Director.

Functions of Corporate Social Responsibility Committee:

 To suggest and devise a CSR Policy according to the Schedule VII of Companies Act,
2013 to the board.
 To recommend the amount of expenditure of the devised policy above.
 To monitor the CSR Policy of company from time to time and prepare a transparent
monitoring mechanism.
 Institution of a transparent monitoring mechanism for implementation of the CSR projects
or programs or activities undertaken by the company.

DIRECTOR

MEANING
A director includes any person occupying the position of director by whatever name called. Only
an individual can be appointed a director.

POSITION OF DIRECTORS
1. Directors as Agents - When the directors enter into contract with third parties sign
documents for and on behalf of the company etc, they act as the agent of the company. They bind
the company be their acts.
2. Directors as Trustees - They are in the position of trustees, when they manage the assets and
properties of the company. Similarly when they exercise the powers entrusted to them they are in
the same position. It means that they should safeguard the interest of the company and should
never abuse the powers for promoting their personal ends.
3. Directors as Officers - Directors also act as officers of the company. When they have to
manage the affairs of the company, they are in the position to Chief Executive Officers. Thus the
directors combine in themselves the roles of agents, trustees and officers.

CLASSIFICATION OF DIRECTORS in a Company

A company has different types of directors, and all of them have different roles in the company.
Let’s study about all the directors one by one.

1) Managing Director - Managing director is a person who has substantial powers of

management of the company. He is given this power by the articles of the company, agreement

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with the company, passing resolution in the general meeting of the company, or by the board of
directors.

2) Independent Director - A person becoming the independent director of the company must
fulfil certain criteria given under section 149(6) of the Companies Act, 2013, which states that an
independent director is a person other than managing director, whole-time director, or nominee
director, and:
 He must have relevant experience and should be a person of integrity as per the board.
 A person appointed as an independent director shall not be a promoter of the same company
or any other company which is the holding, subsidiary, or associate company of the same
company in which he has been appointed.
 The person shall not be related to the promoters or directors of the company or its holding,
subsidiary, or associate company.
 The person must not have any money-related relationship with the company or its holding,
subsidiary, or associated company other than his salary.
 None of his relatives or he himself shall not have any kind of interest in the company.
Provided, the relative can hold shares of face value up to Rs. 50 Lakhs or 2% of the paid-up
capital.

Section 149(4) of the Companies Act, 2013, states that every listed public company must have
1/3rd of its total directors as independent directors.
Example: XYZ Ltd is a listed public company having a total of 15 directors. 1/3rd of 15 is 5.
Therefore, the company will have 5 directors as independent directors.
Rule 4 of Companies (Appointment and Qualification of Directors) Rules, 2014 states that the
following companies will have at least 2 independent directors:
 Companies having paid-up share capital of Rs. 10 crores or more.
 Companies having a turnover of Rs. 100 crores or more.
 Companies having outstanding loans, debentures, deposits, in aggregate of more than Rs. 50
crores.

3) Small Shareholders Director - As per the Companies Act, 2013, a small shareholder means
a shareholder holding shares of the nominal value of Rs. 20,000 or less.
As per Rule 7 of the Companies (Appointment and Qualification of Directors) Rules, 2014,
 every listed company having paid-up share capital of Rs. 5 crores or more and
 also having 1000 or more shareholders holding shares of the nominal value of Rs. 20,000
or less may have a small shareholder director elected by such small shareholders.

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4) Women Director –
 Every listed company, and every other public company having a turnover of Rs. 300 crore
or more and
 paid-up share capital of Rs. 100 crore or more
must appoint at least 1 women director in the company.
The women director can be appointed at any time during registration of the company or even
after incorporation and shall hold the office till the next annual general meeting (AGM) of the
company from the date of her appointment. She can also resign from the office at any time by
giving notice to the company.

5) Additional Director - The board of directors has the power to appoint additional directors
if required by the company. If a person has not been appointed as an additional director in the
general meeting, then he or she will not be appointed as an additional director of the company.
The tenure of the additional director will be till the time of the next annual general meeting
(AGM) or the last date on which the annual general meeting should be held, whichever is
earlier.
Example: In the year 2020-21, if the last date for the company to take AGM is 30th September,
but the company has not taken AGM on that date due to some reasons and postponed the same to
30th October. Still, the tenure of the additional director appointed during the last AGM will come
to an end on 30th September.

6) Alternate Director - If the existing director of the company is not present in India for the
last 3 months, then the company shall appoint an alternate director in his place.
A company can appoint an alternate director if the articles of the company authorise so or by way
of passing a resolution in the company’s general meeting.
The alternate director will hold the office till the term of the existing director on whose place he
has been appointed or if the existing director returns to India.

7) Nominee Director - The nominee director is not appointed or removed by the company.
He is appointed by the financial institution, by an agreement, by the Government, or by any
other person in order to represent his interest in the company.
The company does not have the power to retire such directors, nor are they retired by rotation.
Only the agencies who have nominated such a director can remove the nominee director.
Example: If XYZ Ltd took a loan from SBI bank, then the bank (to monitor the activities of the
company) will appoint a nominee director in the company till the time the company does not repay
the loan.

8) Executive Director - An executive director is the company’s full-time working director.

They are in charge of the company’s activities and have a higher level of accountability. During
their operations in the company, they must be attentive and cautious.

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9) Non-executive Director - A non-executive director is not involved in the day-to-day
operations of the company. They may take part in the planning or policy-making process,
challenging the executive directors to make decisions that are in the company’s best interests.

QUALIFICATION OF DIRECTORS
1. Only individuals can be appointed as directors of the company.
2. They must have contractual capacity.
3. They must possess qualification shares, if laid down in the Articles. In such a case the
qualification must be acquired within 2 months of their appointment as directors. The nominal
value of qualification share should not exceed Rs.5,000.

DISQUALIFICATION OF DIRECTORS
The following persons are disqualified for appointment as directors of a company;
1. A person of unsound mind
2. An undischarged insolvent
3. Any person who has applied for being adjudged an insolvent
4. Any person who had been sentenced with imprisonment for an offence involving moral
turpitude for a period exceeding 6 months and a period of 5 years has not elapsed since the date
of expiry of the sentence
5. A person who has not paid the call money and the calls in arrear are outstanding for more
than 6 months
6. Any person disqualified by a court for appointment as director for having committed fraud
in management

APPOINTMENT OF DIRECTORS

a. Appointment by Articles of Association

First directors are usually named in the Articles if the Articles are silent, the signatories to the
memorandum shall be deemed to be the first directors of the company.

b. Appointment of Directors by the Company

Subsequent directors are elected by shareholders at the AGM.
If a company adopts the principle of retirement by rotation, 1/3rd of the directors must retire by
rotation. The retiring directors are eligible for re-appointment.

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c. Appointment by Board of Directors
 The Board can appoint additional directors. They can fill up casual vacancy caused by
death, resignations, etc.
 They can also appoint alternate director. If empowered by Articles, the Board may appoint
an alternate director during his absence for a period of the less than 3 months from the date in
which meetings of the Board are ordinarily held.

d. Appointment by Third Parties

If authorized by the Articles, third parties such as vendor of the business, banking or financial
institutions which have advanced loans to the companies, can appoint their nominees on the
Board.

e. Appointment by Central Government

The Central Government can also appoint directors on an order passed by the Company Law Board
or on the application of not less than 100 members of the company or of members holding 10%
of the total voting power.

Terms of Appointment
The following are the conditions for the appointment of the Directors-
 Only a natural person may be appointed as a Director.
 A person may not be appointed as a director unless he or she has a Director ID number
(DIN).
 The person will receive a Digital Signature Certificate (DSC) from the accrediting authority
for appointment as director.
 Every person nominated for appointment as a director must submit his or her DIN and
declaration that he or she is eligible for appointment as a director under the Companies Act,
2013.
 Everyone will give their consent to serve as a director on Form DIR-2 before or after his
or her appointment.
 A person may not be eligible for appointment as a director, if he or she does not qualify under
subsection (1) of Section 164 of the Companies Act, 2013.
 One cannot hold directorship of more than 20 companies at one time including any other
directorate position. In addition, the maximum number of public companies for which a person
may be appointed as director should not exceed 10.
 In calculating the number of directorships, the directorship of a dormant company,
independent private limited companies, non-profit associations, alternate directorships excluded.

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NUMBER OF DIRECTORSHIP
Every public company must have at least 3 directors and every private company must have at
least 2 directors.
The maximum number of directors a company can appoint is 15. However, the maximum number
of directors in a company can be increased beyond 15 by passing a special resolution.

REMOVAL OF DIRECTORS
A director of a company can be removed from office by the company by an ordinary resolution
before the expiry of his term, when such a director has acted in fraudulent manner or abused
his fiduciary position.
The Central Government can remove a director under certain circumstances.
The Company Law Tribunal may also order for removal of a director where an application has
been made to it on charges of oppression and mismanagement of the company affairs.

VACATION OF OFFICE
A director must vacate his office in the following circumstances;
i. When he is found to be of unsound mind by a competent court
ii. If he is adjudged an insolvent
iii. If he fails to obtain his qualification shares within the prescribed time or ceases tohold at
any time thereafter
iv. If he is convicted of an offence involving moral turpitude and sentenced to imprisonment for
not less than 6 months
v. If he fails to pay any call money within 6 months
vi. If he absents himself from 3 consecutive Board meetings or from all meetings of the Board
for a continuous period of 3 months whichever is longer without obtaining leave of absence from
the Board
vii. If he becomes disqualified by an order of the Court
viii. If he fails to disclose to the Board his interest in any contract entered into by the company.

POWER OF DIRECTORS
According to sec.292, the powers are mentioned below;
1. General Powers – The board of directors of a company is entitled to exercise all such powers
and to do all such acts and things as the company is authorized to do. However the Board shall not

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do any act which is to be done by the company in general meeting.
2. Statutory Powers – By means of resolutions passed at the Board meetings, the following
powers can be exercised by the directors.
i. To make calls
ii. To issue debentures
iii. To borrow money otherwise than on debentures
iv. To make loans

3. Other powers to be exercised at Board Meetings

i. To fill up casual vacancy in the office of directors
ii. To appoint additional directors, if authorized by the articles
iii. To appoint an alternate director if authorized by the articles
iv. To accord sanction to contracts in which any director or his relative is interested
v. To recommend a certain rate of dividend to be declared at the annual general meeting
vi. To make investments in the companies in the same group
vii. To appoint the first auditors of the company
viii. To fill up the casual vacancy of the office of an auditor not caused by resignation

4. Restrictions on the powers of directors

The following powers cannot be exercised by the Board without the consent of the shareholders
in the general meeting.
i. To sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking
of the company
ii. To extent time for repayment of any debt due by a director
iii. To borrow money where the money to be borrowed together with that already borrowed is
in excess of the aggregate of the paid up capital and free reserves
iv. To contribute to charitable funds in excess of the prescribed limit

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DUTIES OF DIRECTORS
1. Fiduciary Obligation
Since the company is an artificial person, it acts through the agency of natural persons who are
known as directors. Though the directors have powers, they have to do it for the benefit of the
company. Accordingly they must display good faith in all dealings or acting on behalf of the
company.

2. Duty to Care
The directors should work very careful and honesty so that the company will get more profits.
Directors must act honesty in the performance of his duties.

3. Duty to attend the Board Meeting

Board meetings are the appropriate places for the decisions and policy making of the company. If
the does not attend the meetings, it shows his negligence. If he absents for 3 consecutive meetings,
then he shall be removed from the company. It is the duty of the directors to attend the board
meetings regularly.

4. Duty not to delegate

The directors must perform their duties personally. The powers of the company are delegated to
the directors. Therefore he cannot delegate his powers to others persons.

5. Duty to disclose interest

Every director who is in any way whether directly or indirectly concerned or interested in
arrangement or proposed contract or arrangement, entered into or on behalf of the company shall
disclose the nature of his concern or interest at a meeting of the board of directors.

6. Statutory Duties
Some of the important duties laid down in the Companies Act are listed below;
a. To sign a prospectus and deliver it to the Registrar before its issued to the public
b. To see that all moneys received from applicants for shares are kept in a scheduled bank
c. Not to allot shares before receiving minimum subscription.
d. To forward a statutory report to all its members at least 21 days before the dateof the
meeting
e. To hold the meetings at least once in 3 months
f. If a director is interested in a contract, to disclose the nature of his interest
g. To call for annual general meeting every year
h. To file all statutory returns with prescribed authorities
i. To take steps for filing declaration of solvency in the case of voluntary winding up.

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LIABILITY OF DIRECTORS
A. liability to outsiders
The directors are personally liable to third parties of contract in the following cases;
 When they contract with outsiders in their personal capacity
 When they contract as agents of an undisclosed principal.
 When they enter into a contract on behalf of prospective company
 When the contract is ultra vires the company
 When they fail to repay application money
 When they make miss-statement in prospectus
 When they make irregularity.

B. Liability to Company
The directors shall be liable to the company for the following;
 Where they have acted ultra vires the company
 When they have acted negligently
 Where there is a breach of trust
 Directors are liable to the company for misfeasance (Failure to discharge obligation)

C. Criminal Liability of Directors

Directors may incur criminal liability for the following activities;
a. Misstatement in the prospectus
b. Failure to file return of allotment
c. Failure to issue share certificates within the prescribed period
d. Failure to pay dividend within 30 days from the date of declaration
e. Failure to lay before the AGM audited profit and loss account and balance sheet
f. Failure to file copies of special resolution with the Registrar within 30 days of passing the
resolution
g. Failure to furnish the necessary information to the company’s auditors
h. Destruction of important document
i. Holding the office of directors in more than 20 companies excluding private companies.

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MANAGING DIRECTOR
Meaning
Managing Director is a director who is entrusted with substantial powers of management, which
would not be otherwise available to him. Routine administrative work is not included in the term
“Substantial Powers of management”. A managing director is appointed
a) As result of an agreement entered into with the company or
b) As a result of a provision contained in the memorandum or articles or
c) In pursuance of a resolution passed wither by the Board or by the company in general
meeting

Some of the important points worth noting regarding managing director are given below
1. Without the approval of Central Government no change can be effected in the terms of
appointment of a managing director
2. A managing director cannot be appointed for a period exceeding 5 years at a time
3. A person cannot act as a managing director of more than 2 companies at a time
4. The remuneration should not exceed 5% of the annual net profits if there is one managing
director. If there is more than one such director, 10% for all of them together. This can be paid by
way of monthly payment or at a specified percentage of net profits or by both ways.

MANAGER
Manager and managing director have similar functions to perform. The important difference
between the two is that while a managing director must be a director, a manager need not be a
director. Only an individual can be appointed as a manager.
Subject to the superintendence, control and direction of the Board of directors, a manager is
entrusted with the management of the whole or substantially the whole of the affairs of the
company.
1. A company cannot have more than one manager
2. The powers of a manager are wider than those of a managing director, because the manager
may be entrusted with the management of whole of the affairs of the company.
3. Maximum remuneration payable to a manager cannot exceed 5% of the annual net profits
4. Manager cannot be appointed for a period exceeding 5 years at a time

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MANAGERIAL REMUNERATION
Managerial remuneration may take the form of monthly payments (salary), or a specified
percentage of net profits or a commission, etc. this expression shall include the value of
perquisites. The total managerial remuneration payable by a public limited company to its director
or manager must not exceed 11% of the net profits of the company for that financial year.
Remuneration to a managing director or whole time director may be paid not exceeding 5% of the
net profits and if there is more than one such director, 10% for all of them together.
In a year of no profits or inadequate profits, such managerial remuneration shall be governed by
the provisions of Schedule XIII of the Companies Act, 1956.
Otherwise, the remuneration payable to directors is usually determined by the Articles of
Association or a resolution passed by the company in its general meeting. The total managerial
remuneration payable to directly managing director, or manager and whole-time director should
not exceed 11% of the net profit and if profit is inadequate, a sum not exceeding Rs.50, 000 per
annum, this will applicable for public company and there is no restriction for private company.

WOMEN DIRECTORS
Woman Director – Companies Act 2013
As per the Companies Act, 2013, it is mandatory to appoint at least one woman director as a board
member in certain types of companies. The penalty for non-compliance of provision extends to a
fine of Rs.10,000 with a further fine of Rs.1000 per day if the contravention continues.

Criteria - A company, whether a public company or a private concern, will be required to

mandatorily appoint at least one woman director if it fulfils any of the following criteria:
1. It is a listed company whose securities are listed on any stock exchange.
2. It is a company having Paid-up capital of Rupees 100 crore or more, and
Turnover of Rupees 300 crores or more.
Procedure for Appointment of Woman Director
A Woman Director can be appointed during the time of company registration or after
incorporation by the Board Members and the Shareholders.

Director Identification Number

Any person who wishes to hold the position of Director in an Indian company must first obtain
Director Identification Number (DIN) which is a unique identification number for each director. A
Woman Director must first obtain DIN to become Director of a Company. In case a Woman
Director is being appointed during the company incorporation process itself, DIN will be
generated along with the incorporation certificate. No person can hold or acquire more than one
DIN.

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Consent to Act as Director
In case of appointment of Woman Director in existing company, consent in Form DIR-2 given by
the Woman Director is to be filed with the Registrar of Companies within 30 days of her
appointment.

Roles of Women Directors

Women director has to play the role like any other director. Women can take up a role of Nominee
Director who will be nominated by a party in the company to take care of its interest. Also,
Women can take up a role of Independent Director who is not liable to retire by rotation.
Women Directors can hold a maximum of twenty directorships that includes the sub-limit of ten
public companies. Any contravention on this part shall be subjected to a fine ranging between Rs.
5000 -Rs.25000.

Vacancy in the Position of a Women Director

A Woman Director may leave the company on any reasons such as resignation, removal,
automatic vacation or retirement by rotation before the expiry of her term as a Director. The Board of
Directors must fulfil this vacancy known as intermittent vacancy within a period of 3 months.
A company can also have more than one woman director and the vacancy caused by one of them
will not be considered as an intermittent vacancy, as the company still satisfied the Companies Act
of 2013 with respect to Women Directors.

Alternative Director
In case of absence of a Woman Director for a period of not less than 3 months, the board must
appoint an alternative director to ensure the smooth functioning of the company. The alternative
director shall leave the firm after the return of the woman Director. In case of more than one
woman director, it is optional for the company to appoint an alternative director.

Term of Women Director

A woman director can hold the position of Director until her next Annual General Meeting from
the date of appointment. She is also entitled to seek for reappointment at the general meeting. The
tenure of women director is liable to retirement by rotation similar to other directors. Like any
other director, a Woman Director can also tender her resignation any time before the expiry of her
term by giving a notice to the company.

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INDEPENDENT DIRECTORS
Independent Director – Companies Act 2013. An independent director is a non-executive director
who does not have any kind of relationship with the company that may affect the independence
of his/her judgment.

Companies Which Are Required To Appoint Independent Directors

I. LISTED PUBLIC COMPANY
Every listed public company shall have
 At least one-third of a total number of directors as independent directors.
 Any fraction contained in that one-third shall be rounded off as one.

II. UNLISTED PUBLIC COMPANY

The Central Government may prescribe the minimum number of independent directors incase of
any class(es) of public companies.
As per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014,the
following classes of companies shall have at least 2 directors as independent directors.
 Public Companies with paid-up share capital of Rs. 10 crores or more.
 Public Companies with turnover of Rs. 100 crores or more.
 Public Companies with aggregate outstanding loans, debentures, and deposits, exceeding Rs.
50 crores.

Role of an Independent Director

Independent Director acts as a guide, coach, and mentor to the Company. The role includes
improving corporate credibility and governance standards by working as a watchdog and help in
managing risk. Independent directors are responsible for ensuring better governance by actively
involving in various committees set up by company

The independent directors are required because they perform the following important role:
1. Facilitate withstanding and countering pressures from owners;
2. Fulfil a useful role in succession planning;
3. On issues such as strategy, performance, risk management, resources, key appointments and
standards of conduct he must support in gaining independent judgment to bear on the board’s
deliberations
4. While evaluating the performance of board and management of the company bring an

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objective view
5. Scrutinizing, monitoring and reporting management’s performance regarding goals and
objectives agreed in the board meetings
6. Safeguard the interests of all stakeholders, particularly the minority shareholders;
7. Balance the conflicting interest of the stakeholders;
8. Satisfying themselves that financial controls and systems of risk management are in
operation and check on the integrity of financial information
9. In situations of conflict between management and shareholder’s interest, aim towards the
solutions which are in the best interest of the company
10. Establishing the suitable levels of remuneration of
 Executive directors,
 Key managerial personnel
 Senior management

Duties of an Independent Director

The Independent Directors shall :
1. Undertake appropriate induction and regularly update and refresh their skills, knowledge, and
familiarity with the company
2. Attempt to attend company’s general meetings
3. Attempt to attend BOD’s meetings and board committees meeting being a member
4. Have adequate knowledge about the company and the external environment in which it
operates
5. Report matters concerning the unethical behaviour, actual or suspected fraud or violation
of the company’s code of conduct or ethics policy
6. Acting within his authority, assist in protecting the legitimate interests of the company,
shareholders and its employees
7. Not to unfairly obstruct the functioning of the company or committee of the board
8. Participate in the board’s committee being chairpersons or members of that committee
9. Not to disclose confidential information, including commercial secrets, technologies,
advertising and sales promotion plans, unpublished price sensitive information, unless such
disclosure is expressly approved by the board or required by law
10. Ascertain and ensure that the company has an adequate and functional vigil mechanism and to
ensure that the interests of a person who uses such mechanism are not prejudicially affected on
account of such use.

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DIRECTOR IDENTIFICATION NUMBER (DIN)
DIN is a unique Director Identification number allotted by the Central Government to any person
intending to be a Director or an existing director of a company.
It is an 8-digit unique identification number which has a lifetime validity. Through DIN, details of
the directors are maintained in a database.
DIN is specific to a person, which means even if he is a director in 2 or more companies, he has to
obtain only 1 DIN. And if he leaves a company and joins some other, the same DIN would work
in the other company as well.
DIN is used - whenever a return, an application or any information related to a company will be
submitted under any law, the director signing such return, application or information will mention
his DIN underneath his signature.

DIN is applied as follows with relevant forms:

1. SPICe Form:- Application for allotment of DINs to the proposed first Directors in respect of
New companies shall be made in SPICe form only.
2. DIR-3 Form:- Any person intending to become a director in an already existing company
shall have to make an application in e-form DIR-3 for allotment of DIN.
3. DIR-6 Form:- Any changes in the particulars of the directors shall be filed in form DIR-6

Reasons for Surrendering or Cancelling the DIN

The Central government may cancel the DIN due to the following reasons:
1. If a duplicate DIN has been issued to the director
2. DIN was obtained by fraudulent means
3. On the death of the concerned person
4. The person has been declared unsound mind by the court
5. The person has been adjudicated as insolvent
The director can also surrender the DIN in Form DIR-5. With the form, he has to submit a
declaration that he has never been appointed as a director in the company and the said DIN has
never been used for filing any document with any authority. Upon verifying the e-records, the
central government will de-activate the DIN.
Note that, once a person is appointed as a director in any company as per the Companies Act
2013, he cannot relinquish his DIN in the future. Even if he doesn’t remain a director anymore in
that company or in any other company, his DIN will exist as it is.

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OTHER KEY MANAGERIAL PERSONNEL
Key Managerial Personnel refers to a group of people who are in charge of maintaining the
operations of the company. Accounting Standard 18(AS-18) states that Key Managerial Personnel
(KMP) are people who have authority and responsibility for planning, directing and controlling the
activities of the reporting enterprise. Chief Executive Office, Chief Financial Officer, Company
Secretary, Whole Time Director are the Key Managerial Personnel.

Key Managerial Personnel under Companies Act, 2013

Under Section 2 of the Companies Act 2013, Key Managerial Personnel in reference to a company
are as follows:
 Chief Executive Officer/Managing Director
 Company Secretary
 Whole Time Director
 Chief Financial Officer

Chief Executive Officer/Managing Director

The managing director or chief executive officer is responsible for running the whole company.
Also, the managing director has authority over all operations and has the most power in a
managerial hierarchy.
He is also responsible for innovating and growing the company to a larger scale. In many
countries, a managing director is also called a Chief Executive Officer (CEO).

Company Secretary
A company secretary is a senior level employee in a company who is responsible for the looking
after the efficient administration of the company. The company secretary takes care of all the
compliances with statutory and regulatory requirements.
He also ensures that the targets and instructions of the board are successfully implemented.
However, in some countries, a company secretary is also called a corporate secretary.

Whole Time Director

A Whole Time Director is simply a director who devotes the whole of his working hours to the
company. He is different from independent directors in the sense that he has a significant stake in
the company and is part of the daily operation. A managing director may also be a whole time
director.

Chief Financial Officer

Chief Financial Officer (CFO) is a senior level executive responsible for handling the financial
status of the company. The CFO keeps tabs on cash flow operations, does financial planning, and
creates contingency plans for possible financial crises.

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