UNIT-II: Corporate Financing

a. Prospectus and its Kinds

b. Classification of Company Securities
c. Shares and Share Capital – Concept, Nature and Kinds of Shares and Share Capital, Issue and
Allotment of Shares
d. Debentures – Concept, Nature and Kinds; Debenture Bond; Remedies of Debenture Holders
e. Transfer and Transmission of Shares
f. Borrowing and Lending – Inter-Corporate Loans
g. Financial Fraud – A Case Study of Vijay Mallya
h. Fraudulent Practices to Finance Family Business in India – A Case Study of Nirav Modi, Yes Bank,
etc.
i. Role of Court to Protect Interests of Creditors and Shareholders – Class Action Suits, Derivative
Actions, Shareholders’ Rights: A Case Study of Tata-Cyrus Mistry

Prospectus and its Kinds

One of the great advantages of promoting a company is that the necessary capital for business can be
raised from the general public by means of the public issue. This advantage is, however, enjoyed only by
a public company which is listed at a recognized stock exchange. After the receipt of certificate of
incorporation, if the promoters of a public limited company wishes to issue shares to the public, he will
issue a document called prospectus. Prospectus is a document which helps the public company to raising
funds. It is an invitation to the public to subscribe to the share capital of the public company. The
prospectus should be prepared according to the law and issuing procedure also takes place according to
the law.

MEANING AND DEFINITION OF PROSPECTUS

A prospectus is any document, which outlines the company’s financial securities for sale to interested
investors. A prospectus can be issued by or on behalf of the public company.

Section 2 (70) of the Companies Act, 2013 defined the prospectus in the following words: “Prospectus’
means any document described or issued as a prospectus and includes a red herring prospectus referred to
in section 32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or other
document inviting offers from the public for the subscription or purchase of any securities of body
corporate.”

In simple words, any document inviting deposits from the public or inviting offers from the public for the
purchasing shares or debentures of a company is a prospectus.

In Pramatha Nath Sanyal v. Kali Kumar Dutt, case court held that ‘An advertisement which stated
that some shares are still available for sale according to the terms of the company which may be
obtained on application was held to be a prospectus as it invited the public to purchase shares’.

Essential Requirements of a Prospectus

According to Section 2(70) of the Companies Act, 2013, a document is considered a prospectus
if it satisfies the following conditions:
a) There must be an invitation to the public.
The document must be addressed to the general public or any section of the public, inviting them
to invest.
b) The invitation must be made "by or on behalf of the company or in relation to an intended
company".
It can be issued by an existing company or even in reference to a company that is yet to be
incorporated.
c) The invitation must be "to subscribe or purchase".
This includes both direct offers to subscribe to new securities and indirect offers to purchase
existing securities.
d) The invitation must relate to any securities of the company.
This includes shares, debentures, or any other instruments defined as securities under the Act.

Types of Prospectus under the Companies Act, 2013

Type of Governing Meaning Key Features

Prospectus Section
1. Deemed Section 25 A document that is - Applies when SEBI v.
Prospectus not directly issued securities are Kunnamkulam
by the company but offered to the Paper Mills Ltd
contains an offer public within 6 (2013): Where a
for sale of securities months of rights issue is
to the public and is allotment.- Also renounced in
treated as if it were a applies when full favour of more
prospectus issued by consideration for than 50 people, it
 the company. This securities has not is considered a
typically occurs been received at deemed
when a company the time of public prospectus.
allots securities to anoffer. ➤ Section 25(2)
intermediary (like an - Such documents clarifies when
issue house) with the are treated as such presumption
intention of them prospectus for all applies.
being sold to the legal purposes
public. and must comply
with disclosure
requirements.
2. Red Section 32 A preliminary - Filed with ➤ Often used in
Herring prospectus issued Registrar at least Initial Public
Prospectus by a company 3 days before the Offerings (IPOs).
proposing a public opening of the ➤ Encourages
offer of securities, subscription. transparency
without including - Contains all before price is
complete details necessary finalized.
like price and disclosures ➤ Investors can
number of shares. It except price evaluate company
helps investors gain band and risks and
early information number of strengths in
about the company securities advance.
and is generally used .- Any differences
in book-building between the red
issues. herring and final
prospectus must
be clearly
mentioned.-
Carries the same
legal weight as a
regular
prospectus.
3. Shelf Section 31 A single prospectus - Issued only by ➤ Saves cost and
Prospectus for multiple specific administrative
securities issues companies as burden
over a period, permitted by .➤ Popular
typically used by SEBI. among banks,
large corporations or - Validity: PSUs, and
financial institutions Maximum 1 year NBFCs making
making repeated from the date of regular issues.
public offerings. The opening of the ➤ Enhances
shelf prospectus first issue.
 remains valid for up - For subsequent market efficiency
to one year from the offers, no fresh for recurring
date of the first offer. prospectus is fund-raising.
required.
- An Information
Memorandum
must be filed
before each
subsequent offer,
updating material
changes since the
last issue.
4. As defined A condensed - Contains salient ➤ Encourages
Abridged by SEBI summary of a full features only retail investor
Prospectus regulations prospectus, provided (key risk factors, participation.
along with the financials, ➤ Promotes
application form business transparency and
for securities. Its description, etc.). avoids overload
purpose is to give - Mandatory to of complex
potential investors be attached with information.
essential and every application ➤ Helps
comprehensible form. investors make
information without - Full prospectus quick, informed
the burden of going must be available decisions.
through 300–500- at the company’s
page detailed office for public
documents. inspection.
- Aims to reduce
expenses and
ensure easy
understanding
by retail
investors.
 What is Company Securities?
Financial instruments known as securities reflect ownership in a company, debt that a company
has issued, or the right to compensation from a company or government. In order to raise capital
from investors, businesses and governments use financial markets to buy and sell securities.

Securities such as stocks and notes are the most popular kinds.

Stocks, also referred to as equity securities, are certificates of ownership that grant holders the
right to vote on significant issues like the election of the board of directors and key business
decisions. As the worth of the stock may rise over time, stocks also offer investors the possibility
of capital appreciation.

A company or the government agrees to pay the investor a set or variable interest rate over a
predetermined time period, with repayment of the principal at the end of the term. Companies
and governments frequently use bonds to raise money for new initiatives or growth, or to
refinance existing debt at a reduced interest rate. Investors have a choice between securities
released by domestic and foreign governments or businesses, with varying degrees of risk and
return. All securities do, however, involve some degree of risk, and before making any
investment choices, investors must carefully weigh the risks and potential rewards.
Classification of Securities

1. Based on Maturity/Tenure:
o Short-term
term securities (≤1
≤1 year): e.g., Treasury bills, commercial paper; low risk,
low return.
o Medium-term term securities (1–10
10 years): e.g., corporate bonds and notes.
o Long-term
term securities (≥10 years): e.g., 30-year
year Treasury bonds; higher risk and
return.
2. Derivatives:
o Include options,
ions, warrants, futures, and swaps used for hedging or risk
management.
o Options:: Right to buy/sell at a set price.
o Warrants:: Right to buy new shares at a set price.
3. Based on Credit Rating:
o Rated by agencies like Moody’s or S&P.
o AAA = safest; BB or lower = higher risk.
4. Based on Issuer Sector:
o Securities can also be chosen based on industry or business sector of the issuer.
5. Popular Types:
o Stocks and bonds are the most common.
o Other types exist to suit specific investor needs.
Securities’ under Section 2(81) of the Companies Act, 2013 has been defined to mean
‘securities’ as defined in Section 2(h) of the Securities Contracts (Regulation) Act, 1956
(SCRA). Under section 2(h) of SCRA, the term ‘securities’ include the shares, stocks,
bonds, debentures, debenture stocks etc. in or of any incorporated company or another
body corporate. The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002’s definition of a security ticket is found in
Section 2(zg) where any other similar instruments given to investors under a mutual fund
scheme, such as units.

A company security is a financial instrument that represents either ownership (equity) or

creditor status (debt) in a publicly listed company. These are issued by companies primarily to
raise funds and are later traded on stock exchanges, enabling investors to earn profits based on
the company’s performance.

Stocks, or equity securities, indicate ownership in the company. They allow investors to vote in
company matters and benefit from capital appreciation when the company does well. However,
if the company underperforms, stockholders may face losses due to a fall in share prices.

Bonds, on the other hand, are debt securities. When investors buy bonds, they are essentially
lending money to the company. In return, they receive regular interest payments and the full
principal amount upon maturity. Bonds are generally considered more stable than stocks but
offer lower returns.

Company securities may also include options and warrants, which give the right to buy or sell
shares at a fixed price, and are used either for investment or hedging purposes.

Type Definition Ownership / Rights Return / Voting Priority in

Benefit Rights Liquidation
Equity Represent ownership Full ownership stake Share in Yes Last – after
Shares in the company. residual debts and
profits after preference
all liabilities shareholders
and
preference
shares paid
Preference Shares with Partial ownership Fixed Usually No Before
Shares preferential rights dividend equity
regarding dividend paid before shares
and capital equity
repayment. shareholders
Deferred Shares held by Ownership held by Residual Usually Yes Last
Shares promoters/founders; founders/promoters dividends
dividend delayed after all
until other other
shareholders are shareholders
 paid.
Sweat Issued to Ownership for non- Same as Yes Last
Equity employees/directors cash contributions equity –
Shares for their contribution variable
(non-monetary) such dividend
as IP, know-how, etc. based on
profits
Shares with Equity shares with Ownership with As per Sometimes Last
Differential variations in voting tailored rights company’s limited
Rights or dividend rights. terms
(DVRs) (higher
dividend,
fewer votes
or vice versa)
No Par Shares issued Ownership, value Paid Yes Last
Value without any nominal derived from total dividend per
Shares face value. net worth share, not as
% of face
value
Debentures Debt instruments No ownership – Fixed No First
acknowledging loans lender relationship interest (secured) or
made to the (quarterly, after
company. annually, unsecured
etc.) creditors
Bonds Long-term debt No ownership Regular fixed No Priority as
instruments with a interest until per security
fixed interest rate maturity backing
and maturity period.
Notes Short-term debt No ownership Lower fixed No Varies
securities issued for interest than
temporary capital bonds
needs.
Commercial Short-term No ownership Usually no No After
Papers unsecured debt interest; secured
(CPs) issued for working issued at debts
capital needs. discount and
redeemed at
face value
1. Equity Shares
Equity shares, also known as ordinary shares or common shares, represent the core ownership
of a company. Equity shareholders are considered the true owners and hold voting rights that
empower them to participate in key decisions, such as electing the board of directors or
approving major policies. They are entitled to receive dividends, but only after preference
shareholders have been paid. The dividends are not fixed and depend on the profitability of the
company. In case of liquidation, equity shareholders are repaid only after all debts and other
liabilities are cleared. These shares are the most common type of share capital issued by
companies.

2. Preference Shares
Preference shares carry certain preferential rights over equity shares, specifically in two main
areas:
 First, they are entitled to receive a fixed dividend before any is paid to equity
shareholders.
 Second, they have the right to capital repayment before equity shareholders in the event
of liquidation.
However, preference shareholders usually do not have voting rights, unless the dividend
remains unpaid for a certain period (as per the Companies Act). These shares are often
subdivided into:
 Cumulative and Non-Cumulative Preference Shares
 Redeemable and Irredeemable Preference Shares
 Participating and Non-Participating Preference Shares

3. Deferred Shares
These are also known as founder’s shares and are typically issued to the promoters or initial
directors of the company. These shareholders receive dividends after all other classes of shares
have been paid. As a result, deferred shares carry a higher risk but also higher potential for
returns if the company performs well. They may carry enhanced voting rights, ensuring that the
original promoters retain control over the company. These shares are now rare under modern
corporate practices.

4. Sweat Equity Shares

Defined under Section 2(88) of the Companies Act, 2013, sweat equity shares are issued by a
company to its directors or employees at a discount or for non-cash consideration, such as
intellectual property rights or value additions. This provision encourages employee ownership
and boosts productivity by aligning the interests of employees with the performance of the
company. These shares are part of a broader effort to reward innovation, loyalty, and
specialized contributions without immediate financial outlay.

5. Shares with Differential Voting Rights (DVRs)

These shares are a modern innovation that allow companies to tailor voting and dividend rights.
For instance, a share may offer a higher dividend payout but fewer voting rights, or vice
versa. Section 86 of the Companies Act, amended by the Companies (Amendment) Act, 2000,
enabled companies to issue DVRs under specified conditions. DVRs are particularly useful for
startups or founder-driven companies who wish to raise equity without losing control.

6. No Par Value Shares

Unlike traditional shares that are issued with a face value (e.g., ₹10/share), no par value shares
do not carry any nominal value. Their worth is determined by the company's total assets divided
by the number of shares. Dividend is paid per share instead of a fixed percentage of face value.
These shares are more flexible in valuation and capital management, though not very common in
India due to statutory restrictions.

7. Debentures
A debenture is a formal certificate acknowledging a company’s debt. It includes terms about
interest, repayment schedule, and whether it is secured or unsecured. Secured debentures are
backed by company assets, while unsecured ones are not. Debenture holders are creditors, not
owners, and thus do not participate in company management. According to Thomas Evelyn, “A
debenture is a document under the company’s seal acknowledging a debt and providing for the
payment of interest and repayment of principal.”

8. Bonds
Bonds are long-term debt instruments, typically with a maturity of 10 years or more, issued to
raise substantial funds for capital projects. Investors receive regular interest payments (called
coupons) until the bond matures, at which point the principal amount is repaid. Bonds may be:
 Convertible or Non-convertible
 Secured or Unsecured
 Callable or Non-callable
They are less risky than equity but carry no voting rights.
9. Notes
Notes are short-term
term debt instruments
instruments, similar to bonds but with a shorter maturity period,
period
typically less than a year.. They are issued when companies need funds for operational purposes
or short-term
term obligations. While interest rates on notes are generally lower than on bonds, they
serve as an important tool for maintaining cash flow.

10. Commercial Papers (CPs)

Ps)
Commercial papers are unsecured, shortshort-term
term promissory notes issued by companies to meet
immediate financial obligations
obligations,, like paying suppliers or temporary expenses. They typically
do not bear interest,, instead being issued at a discount and redeemed at face value. The
maximum maturity is 270 days.. CPs are only issued by companies with high credit ratings,
ratings and
are a popular tool in corporate treasury management.

.
 SHARE

As per Section 2(84) of the Companies Act, a share is defined as a share in the share capital of a
company and includes stock. In simple terms, a share is a unit representing an investor’s
ownership in a company’s capital.

According to Justice Farewell, a share is the interest of a shareholder in a company measured by

a sum of money for the purposes of liability and dividend. In CIT vs. Standard Vacuum Oil Co.,
it was observed that a share is not merely money but an interest comprising diverse rights
governed by the articles of association.

SHARE CAPITAL

Share Capital refers to the money raised by a company through the issue of shares. It represents
the financial foundation of a company.

Types of Share Capital on the Basis of Rights

Equity Shares: These are shares that are not preference shares. They carry voting rights and
represent true ownership in a company. Equity shareholders are entitled to dividends and claim
on assets only after preference shareholders are paid.

Preference Shares: These shares carry preferential rights regarding payment of dividend and
return of capital during winding up. They usually receive a fixed dividend before equity
shareholders.

Types of Share Capital on the Basis of Called-Up Amount

Type Description
Authorised Capital Maximum amount a company is permitted to raise, as mentioned in the
Memorandum
Issued/Allotted Portion of authorised capital issued to shareholders
Capital
Paid-Up Capital Amount paid by shareholders on issued capital
Called-Up Capital Paid-up capital plus amounts called for but not yet paid
Uncalled Capital Amount not yet called from shareholders on partly-paid shares
Reserve Capital Portion of uncalled capital reserved to be called only in winding up
Capital Reserve Unutilized portion of authorised capital not yet called or issued
ALLOTMENT OF SHARES

Allotment refers to the company’s acceptance of an offer from the public or individuals to
purchase its shares. Although not defined in the Companies Act, it is judicially recognized as the
appropriation of shares from unappropriated capital to specific applicants.

Procedure for Allotment

 Board or committee resolution must be passed.

 Allotment letter must be sent to applicants.
 File Form PAS-3 (Return of Allotment) with ROC within 30 days.
 Maintain the Register of Members (Sec 88).
 Shares are reflected in demat form, not by physical certificates.

FORFEITURE OF SHARES

When a shareholder fails to pay a call on shares, the company may forfeit the shares as per its
Articles of Association (AOA). This is a disciplinary tool.

Key aspects:

 Upon forfeiture, the person ceases to be a member.

 As per Schedule I, Clause 32, the liability of such a person ceases.
 Shares become company property and reduce paid-up capital till reissue.
 Reissue can be at any price, even at a discount, if the total received equals the par value.
 For validity, articles must authorize, proper notice must be served, and a board resolution
must be passed (Regulations 28 & 30 of Table F).

CALLS ON SHARES

Calls refer to the demand made by a company on its shareholders to pay unpaid amounts on
shares (after allotment and application money).

Important points:

 Can be made in installments: First call, Second call, Final call, etc.
 Power to make calls lies with the Board.
 Non-payment leads to liability and possible forfeiture.
 Shareholders are bound to pay, failing which interest may be charged

CALLS IN ADVANCE

Calls-in-advance are payments received before the company actually makes a call.

Conditions:
  Must be authorized by the AOA.
 Can be accepted even if not yet due.
 Interest can be paid (up to 12% p.a.)
 Not refundable unless winding up.
 Ranked after creditors but paid before regular shareholders.

SWEAT EQUITY SHARES

Sweat equity shares are equity shares issued at a discount or for non
non-cash
cash consideration to
employees or directors in exchange for thei
their knowledge, IPR, or value addition.
Purpose:
 Reward talent and retain employees.
 Considered a form of share
share-based compensation.
Legal requirements:
 Requires a special resolution.
 Details must include number of shares, market price, nature of consideration,
consideration and eligible
class of persons.
 Listed companies follow SEBI regulations; unlisted companies follow Companies Rules.
Eligible persons:
 Permanent employee of the company (India or abroad).
 Any director, whether whole
whole-time or not.
EMPLOYEE STOCK OPTION PLAN (ESOP)
The term Employee Stock Option Plan (ESOP) has been defined under section 2(37) of the
Companies Act 2013.
Definition as per companies Act 2013 : u/s 2(37) "employees' stock option means the option
given to the directors, officers or employees of a company or of its holding company or
subsidiary company or companies, if any, which gives such directors, officers or employees, the
benefit or right to purchase, or to subscribe for, the shares of the company at a future date at pre-
determined price.

BONUS SHARES SECTION 63

All successful companies increase their capital base by giving free shares to its existing
shareholders from the reserves, when there are large accumulated reserves which cannot, either
by law or as a matter of financial prudence, be distributed as dividends in cash to shareholders.

DEBENTURE

Under Section 2(30) of the Companies Act, 2013, the term “debenture” includes debenture
stock, bonds, or any other instrument of a company that evidences a debt, whether or not it
creates a charge on the assets of the company. In essence, a debenture is an instrument
acknowledging a loan taken by the company, and the company promises to repay the debt
along with interest.

A debenture does not necessarily give ownership rights to the holder, as it merely reflects a
creditor-debtor relationship between the investor and the company. Debentures may or may
not be secured and are often issued with a fixed interest rate.

Features of debentures

A debenture is a debt tool used by a company that supports long-term loans. Here, the fund is a
borrowed capital, which makes the holder of debenture a creditor of the business. The debentures
are redeemable and unredeemable, freely transferable with a fixed interest rate. It is unsecured
and sustained only by the issuer’s credibility.

 A debenture is a loan document that acknowledges a debt

 The debentures are the part of the borrowed fund capital
 It is in the form of a certificate issued under the seal of the company called a debenture
deed
 The interest is payable irrespective of the profit level, which means that even when the
company is at loss, it has to pay the interest
 Debentures can be secured against the assets of the company or maybe unsecured.
 Debentures are generally freely transferable by the debenture holder.
  Debenture holder does not have the right to vote in the company’s general meetings of
shareholders, but they may have separate meetings to vote.
 The debenture holders are eligible to get a fixed rate of interest.
 In the event of liquefying the company, the debenture holder get preference in terms of
repaying the borrowed amount

Nature of Debentures

Debentures for cash

As defined above, debentures are usually issued for raising funds for the company. They are
mainly issued for cash. The Debentures can be issued either at par, at discount, or at a premium

Debentures as collateral security

Collateral security is additional security along with the primary security when a company obtains
a loan or overdrafts facility from a bank or any other financial institution. Debentures issued as
such a collateral liability are a contingent liability for the company, Only when the company
defaults on such a loan plus interest will this liability arise.

Debentures issued as consideration other than cash

This is another type of issue of debentures. Sometimes a company requires some assets or types
of machinery, plants, equipment that are huge in cost. The company need not have money at that
particular time for the payment So, instead of making payment in cash, the Company issues
debentures to the vendor against such purchase with the terms of payment of the consideration
other than cash
TYPES OF DEBENTURES

Debentures can be classified into various types based on negotiability, security, priority,
permanence, and convertibility. Each type has distinct legal and financial implications.

1. Classification Based on Negotiability

Type Description
Registered The name of the holder is recorded in the books of the company. They are
Debentures not negotiable instruments and can only be transferred via a regular transfer
deed.
Bearer or These are payable to the bearer. Their ownership is not recorded by the
Unregistered company, and they are transferable by mere delivery, making them similar to
Debentures currency notes.

2. Classification Based on Security

Type Description
Secured These debentures create a charge (fixed or floating) on the company’s property
Debentures or assets, ensuring a safety net for repayment.
Unsecured These do not carry any charge on assets. Holders are considered unsecured
(Naked) creditors. Such instruments may be treated as deposits and come under the
Debentures Companies (Acceptance of Deposits) Rules, 2014.
  Fixed Charge: Attached to specific assets (e.g., land or machinery).
 Floating Charge: General charge over the company’s current and future assets, which
can crystallize into a fixed charge upon default.

3. Classification Based on Priority

Type Description
First Mortgage Debentures with the first claim on the company’s assets in the event of
Debentures winding up. They are given priority over other debts.
Second Mortgage These have a subordinate claim, i.e., are repaid only after the first mortgage
Debentures debentures have been settled.

4. Classification Based on Permanence

Type Description
Redeemable These are repaid by the company either after a fixed period or at the
Debentures discretion of the company. Most debentures are redeemable unless
otherwise specified.
Irredeemable These have no fixed maturity period. The company is not obliged to repay
(Perpetual) Debentures the principal during its lifetime unless winding up occurs.

5. Classification Based on Convertibility

Type Description
Convertible These give the holder an option to convert their debentures into equity or
Debentures preference shares after a specified time. Upon conversion, holders become
shareholders, ending their status as creditors.
Non-Convertible These remain debt instruments till maturity and are repaid in cash. They do
Debentures not carry any right to be converted into shares.
 Section 71: Debentures (Effective from 01-04-2014)

Sub- Provision Details

section
71(1) Convertible Debentures A company may issue debentures with an option to
convert into shares (wholly or partly) at the time of
redemption.
Requires Special Resolution at a general meeting.
71(2) Voting Rights Debentures cannot carry voting rights.
71(3) Secured Debentures Allowed subject to terms and conditions as may be
prescribed.
71(4) Debenture Redemption Company must create a DRR from profits available for
Reserve (DRR) dividend.
This reserve can be used only for redemption of
debentures.
71(5) Issue to Public or If debentures are offered to more than 500 persons,
Members (500+) company must:
Appoint Debenture Trustee(s) before such offer.
Conditions for appointment as prescribed.
71(6) Duties of Debenture Trustee must:
Trustee Protect interests of debenture holders.
Redress grievances as per prescribed rules.
71(7) Trust Deed Liability Any clause exempting trustee from liability for breach of
trust is void, unless:
 ¾th in value of debenture-holders agree in a meeting to
provide exemptions.
71(8) Repayment Obligations Company must pay interest and redeem debentures as
per issue terms.
71(9) Insufficient Assets If trustee believes company’s assets are/will be
insufficient to repay, trustee can:
File petition before Tribunal.
Tribunal may restrict further liabilities by company.
71(10) Default in Payment If company fails to redeem or pay interest, Tribunal
may:
On application by debenture-holder(s) or trustee,
Order immediate redemption with principal + interest.
71(11) Penalty for Non- If company disobeys Tribunal order:
compliance Officer in default liable for:
Imprisonment up to 3 years, or
Fine ₹2–5 lakhs, or both.
71(12) Specific Performance A contract to take up/purchase debentures can be
specifically enforced by a court decree.
71(13) Central Government CG may prescribe rules regarding:
Powers Securing issue,
Debenture trust deed format,
Inspection/copy rights,
DRR quantum, and
other related matters.

Remedies of Debentureholders

When a company fails to repay the principal amount or interest on debentures, the legal remedies
available to debentureholders depend on whether the debenture is secured or unsecured.

I. Remedies for Unsecured Debentureholders

An unsecured debentureholder is like a general creditor of the company. They do not have any
specific security or charge over the assets of the company. In case of default, they have limited
remedies, as follows:

1. Right to Sue for Recovery

The debentureholder can file a civil suit against the company for the recovery of unpaid
principal and interest, just like any ordinary creditor.

2. Petition for Winding Up

If the company is financially unstable and fails to meet its debt obligations, the debentureholder
can:

 File a petition before the National Company Law Tribunal (NCLT) for the winding
up of the company under the Companies Act, 2013.
 After winding up is ordered, they can prove their debt as an unsecured creditor and
claim their share during liquidation.

Note: Since there is no charge on the company’s assets, unsecured debentureholders are paid
only after the secured creditors and preferential creditors are paid.

II. Remedies for Secured Debentureholders

A secured debentureholder has a specific charge (either fixed or floating) on the company’s
assets. This provides better security and additional remedies in case of default. Their remedies
depend on whether or not a trust deed has been executed.

A. Where a Trust Deed Has Been Executed

A trust deed is a legal document executed between the company and a debenture trustee who
acts on behalf of the debentureholders. It provides powers and procedures to enforce the security.

In such a case, the following remedies are available:

1. Sale of Assets

 If the trust deed gives the power of sale, the trustee can directly sell the charged assets to
recover the amount due.
 If the power of sale is not explicitly mentioned, the trustee must seek permission from
the court to sell the property.

2. Foreclosure

 Foreclosure means the complete transfer of ownership of the charged assets from the
company to the debentureholders.
 The trustees must apply to the court for a foreclosure order.
 This is a more severe remedy as the company’s right in the property ends forever.
 All debentureholders of that class must join together to take this action.

Case Law:
Wallace v. Evershed (1899) 1 Ch. 891 — held that foreclosure is possible only when all
debentureholders agree.

3. Appointment of Receiver
  A receiver is a neutral person appointed to take control of the charged assets, manage
them, and ensure repayment to debentureholders.
 If the trust deed allows, the trustee can appoint a receiver directly.
 Otherwise, an application must be made to the court.
 Once appointed:
o The company loses control over the charged assets.
o The assets are used solely for repaying the debentureholders.
o However, the company continues to exist legally unless it is wound up.

B. Where No Trust Deed Has Been Executed

In the absence of a trust deed, an individual debentureholder (or group of them) can approach the
court through a debentureholder’s action.
In such an action, the debentureholder may seek:
1. Declaration of Charge
A declaration from the court that the debentures create a valid charge over specific assets of
the company.
2. Statement of Accounts
An accounting of what is owed to debentureholders, what assets exist, and which other creditors
(especially secured ones) have prior claims.
3. Foreclosure or Sale
Request the court to issue orders for:
 Foreclosure (complete transfer of the asset), or
 Sale of charged assets to realize the dues.
4. Appointment of Receiver

Request the court to appoint a receiver who will manage the charged assets, collect income, and
distribute proceeds to debentureholders.

Important Rule – No Right of Set-Off

If a debentureholder owes money to the company, and the company defaults on its repayment
obligations, the debentureholder cannot set off his own liability against what is due from the
company — especially when the company is insolvent. A person claiming a share in a
company’s assets must first pay any dues they owe to the company before claiming anything in
return.

Case Law:
Re Brown and Gregory Ltd. (1904) 1 Ch. 627
Held that one must fulfill obligations before making any claims on company funds.

Role of SEBI

The Securities and Exchange Board of India (SEBI) has issued guidelines for the issue and
protection of debentureholders, especially for companies issuing listed debentures. These
include:
  Appointment of debenture trustees
 Creation of security within a specified time
 Disclosure of risk factors in the offer document
 Monitoring the use of funds raised through debentures
 Ensuring timely payment of interest and redemption

Category Remedies Available

Unsecured - Sue for recovery- Petition for company winding up
Debentureholder
Secured with Trust Deed - Sale of assets- Foreclosure- Appointment of receiver
Secured without Trust - Debentureholders’ action for declaration, account, sale, or receiver
Deed appointment

Transfer and Transmission of shares

Provisions Regarding Transferability

Free transferability of securities

According to Section 58(2), the shares of a public company are freely transferable. This means
that the Board of Directors of a company or even the
concerned depository (such as NSDL or CDSL) does not
The SH-4 form must be properly
have the authority to refuse or block the transfer of any
stamped with adequate value, dated,
shares. Once the request for transfer is properly made, the
and signed either by or on behalf of
company or depository must process the transfer
the transferor (person selling/giving
automatically and without delay.
the shares) and the transferee
(person receiving the shares).
Instruments of transfer to be presented to the company
As per Section 56 of the Companies Act, 2013, a company
will register a transfer of its securities only when a proper
instrument of transfer is submitted. This instrument must follow the format provided in Form
No. SH-4, which is required when the securities are held in physical form.
(This is also mentioned in Rule 11 of the Companies (Share Capital and Debentures) Rules,
2014.)

This form must be sent to the company either by the transferor or the transferee within sixty
days from the date it was signed. It should be accompanied by the relevant share certificate or
certificate related to the securities. If the share certificate is not available, then the form should
be submitted along with the letter of allotment of securities.

If partly paid-up shares are being transferred, the company will not register the transfer unless it
has given a notice in Form SH-5 to the buyer and received no objection from the buyer within
two weeks from the date of the notice.
 Time Limit for Delivery of Certificates
According to Section 56(4), every company (unless restricted by law, court order, tribunal,
or any other authority) must deliver the certificates of all securities that are allotted,
transferred, or transmitted within one month from the date it receives the instrument of
transfer or, in the case of transmission, the intimation of transmission.

Intimation to Depository
Section 56(4) also states that if the securities are being dealt with in a depository, the company
must immediately inform the depository about the details of allotment once the securities are
allotted.

Transfer of Securities by Legal Representative

As per Section 56(5) of the Companies Act, 2013, if the holder of securities passes away, then
the legal representative of the deceased person can transfer the securities. This transfer will be
valid, even if the legal representative was not the registered holder at the time of execution of the
transfer instrument. It will be considered as if he/she were the actual holder.

Penalties
According to Section 56(6), if a company does not follow the
above provisions, then:

 The company can be fined with an amount not less

than ₹25,000, and it can go up to ₹5,00,000.
 Every officer of the company who is responsible for
the default can also be fined with an amount not less
than ₹10,000, and it can go up to ₹1,00,000.

TRANSFER OF SHARES TO A MINOR

As per Section 11 of the Indian Contract Act, 1872, a minor is not capable of entering into
any legal contract. Therefore, his name cannot be entered into the Register of Members, and
he cannot become a member of a company on his own.

However, the law does not stop the guardian of a minor from entering into a contract on behalf
of the minor. This is allowed under the Hindu Minority and Guardianship Act, 1956, which
gives the guardian a legal right to act for the minor.

So, under Section 56 of the Companies Act, 2013, a transfer deed (used for transfer of shares)
can be executed by the minor's natural guardian, and this contract will be considered valid
and binding. This is permitted by Section 8 of the Hindu Minority and Guardianship Act, 1956.
NOTE:
The Articles of Association (AOA) of a company cannot place a blanket ban on the transfer of
shares to a minor. Such a total ban is unreasonable.
If this kind of restriction is allowed, then legal heirs (like a minor child of a deceased
shareholder) would never be able to inherit those shares. That would be completely unjust and
is therefore not acceptable in law.

So, there is no valid reason to stop the transfer of fully paid-up shares to a minor, especially
when no financial burden is involved. This was held in the case of Saroj v. Britannia
Industries Ltd.

TRANSFER OF SHARES TO A PARTNERSHIP FIRM

A partnership firm is not a legal person in the eyes of law. Since it is not a separate legal
entity, it cannot apply to become a member of a company. Hence, shares cannot be
transferred in the name of a firm.

TRANSFER OF SECURITIES TO A BODY CORPORATE

A body corporate (like a registered company) is a legal person, so it can hold and acquire
shares or securities in its own name.

When a company (or any incorporated body) is the transferee (i.e., the one receiving the
shares), it needs to submit the following documents to the company whose shares are being
transferred:

1. A certified true copy of the Board Resolution authorizing the company to execute the
transfer.
2. A certified true copy of another Board Resolution passed under Section 179(3)(e) of
the Companies Act, authorizing the company to invest in shares/securities.
3. A certified true copy of the Memorandum and Articles of Association (MOA and
AOA) of the company.

It is important to note that neither the Board of Directors of the company nor the depository
has the power to refuse or delay the transfer of securities once the legal process is properly
followed.
TRANSMISSION OF SECURITIES

Meaning
Transmission of securities refers to the process by which the ownership of securities passes from
one person to another due to operation of law, and not through a contract or agreement. This can
happen in cases such as death of the shareholder, insolvency, or lunacy of the holder, or when
securities are purchased through a court sale..

Under Section 56(1) of the Companies Act, 2013, it is stated that transfer of securities requires
a proper instrument of transfer. However, in the case of transmission, an instrument of
transfer is not required. Instead, an application made by the legal representative of the
deceased or affected holder is enough for initiating transmission.

Even though the legal representative becomes the rightful owner of the shares upon death of the
holder, he does not automatically become a member of the company. He may either apply to
the company to be registered as a member in his own name or choose to transfer the shares to
someone else, just as the original holder could have done.

The Board of Directors of the company has the same powers to refuse registration of the
transmission as they would in the case of a regular transfer. However, if the company refuses the
request for transmission without valid reason, the legal representative has the right to appeal
to the Tribunal under Section 58, just like in the case of transfer.

DISTINCTION BETWEEN TRANSFER AND TRANSMISSION OF

SECURITIES

Basis Transfer of Securities Transmission of Securities

Nature Transfer takes place through the Transmission happens due to
voluntary act of the holder operation of law (e.g., death,
(transferor). insolvency).
Instrument Requires a proper instrument of No instrument of transfer is
transfer (Form SH-4). required.
Circumstance Happens in the normal course of a Happens in special cases such as
business or sale. death or insolvency.
Consideration Generally made for consideration Without consideration – passes as a
(money or exchange). legal right.
Stamp Duty Stamp duty is payable as per the No stamp duty is payable.
value of the securities.

WHAT IS FREE TRANSFERABILITY OF SECURITIES?

Free transferability of securities refers to the situation where, upon receiving the required
information about the settlement of a purchase transaction, the transfer of securities is
processed immediately, and the transferee becomes entitled to all rights and obligations linked
to those securities. Once a genuine purchase has taken place and has been duly recorded, no
authority—including the issuing company, depository, intermediaries, or even regulators—can
block or delay the transfer.

This concept ensures smooth and unrestricted market transactions in public companies,
promoting transparency and investor confidence.

TYPES OF SECURITIES FREELY TRANSFERABLE

Only the securities of a public limited company—whether listed or unlisted—are freely

transferable under the law. These include:

 Shares
 Debentures
 Other securities issued by public companies

In such cases, the Board of Directors or the depository has no discretion to refuse or withhold
the transfer if all legal conditions are satisfied.

In contrast, securities issued by a private company, mutual fund units, or other forms of
securities not issued by public companies are not freely transferable. These are subject to
restrictions stated in the company’s Articles of Association (AOA) and the terms of issue.
Such restrictions may include prior approval of the board, pre-emption rights, or limitations on
the number or nature of transferees.

Borrowing and Lending- Inter-Corporate Loans

Introduction

The Companies Act, 2013 has brought several changes regarding how companies can give loans,
provide guarantees, offer securities, or make investments in other bodies. One of the major
changes is that a company cannot invest through more than two layers of investment
companies, with a few exceptions. This restriction was not present in the earlier Companies Act
of 1956.

Under the new law, the exemption that was earlier available to private companies and to loans
or investments made by a holding company to its subsidiary company has been removed.
Now, even these companies must follow the rules laid down under Section 186 of the 2013 Act.

Meaning of 'Layer' and 'Investment Company'

As per Explanation (d) to Section 2(87) of the Companies Act, a ‘layer’ refers to a subsidiary
or chain of subsidiaries of a holding company. In simpler terms, it means a level of company
ownership—one company holding another.
An ‘Investment Company’ is defined as a company whose main business is to acquire shares,
debentures, or other securities.. These companies exist mai
mainly
nly to hold investments in other
businesses.

Restriction on Layers of Investment Companies [Section 186(1)]

According to Section 186(1),, a company is allowed to make investments through not more
than two layers of investment companies
companies. This means, if a company
mpany invests in another, and
that company invests in another, the chain should not go beyond two levels.. The law aims to
prevent excessive layering, which can be used to hide ownership or financial information.

However, this restriction does not apply in the following two cases:

1. If a company acquires another foreign company that already has more than two layers of
subsidiaries, and it is permitted under the law of that foreign country.
2. If a subsidiary company creates another investment subsidiary only for legal
compliance under any existing law or regulation.

Limits for Loans, Guarantees, Security, and Investments [Section 186(2)]

Section 186(2) sets limits on how much a company can:

 Give as loan to any person or body corporate.

 Provide guarantee or securit
security in connection with a loan.
 Acquire securities of any other body corporate (through subscription, purchase, or any
other method).

These transactions cannot exceed:

  60% of the company’s paid-up share capital + free reserves + securities premium
account, or
 100% of the company’s free reserves + securities premium account,
whichever is higher.

This provision ensures that companies do not take excessive financial risks while giving loans or
making investments, and that the interest of shareholders and creditors remains protected.

Approval from Members [Section 186(3)]

Although Section 186(2) places limits on the amount a company can lend, invest, or provide as a
guarantee or security, Section 186(3) allows the company to exceed those limits. However, this
can only be done with the prior approval of the members by way of a special resolution
passed at a general meeting. This ensures transparency and shareholder participation when the
company is planning to take on higher financial exposure.

Disclosure of Particulars of Loan, Guarantee, and Security [Section 186(4)]

As per Section 186(4), every company must disclose the following details in its financial
statement:

 Complete details of all loans given, investments made, guarantees given, or securities
provided.
 The purpose for which the recipient company or person intends to use the loan,
guarantee, or security.

Additionally, when the company sends out the notice for the general meeting to pass the special
resolution, the following details must be clearly mentioned:

1. The extra limit being sought beyond what is allowed under Section 186(2).
2. The name and details of the body corporate receiving the loan, investment, or guarantee.
3. The objective or purpose of such financial support.
4. The source of funds the company will use to provide the loan or investment.
5. Any other details as may be required under the law or by regulatory authorities.

Approval of Board and Public Financial Institutions [Section 186(5)]

According to Section 186(5), a company must first obtain approval of all the directors present
at the Board meeting before:

 Giving any loan,

 Making an investment,
 Giving a guarantee, or
 Providing any security.
If the company has taken loans or financial assistance from a Public Financial Institution
(PFI), it must also obtain prior approval from the PFI before proceeding with such financial
decisions.

Exception:
If the proposed loan, investment, guarantee, or security falls within the limits specified under
Section 186(2), and there is no default in repayment of any previous loan or interest to the
Public Financial Institution, then prior approval of the PFI is not required.

Companies Registeed under SEBI [Section 186(6)]

As per Section 186(6), companies that are:

 Registered under Section 12 of the SEBI Act, 1992, and

 Belong to a specific class or category as notified by the Central Government in
consultation with SEBI,

may take inter-corporate loans or deposits exceeding the prescribed limits. However, they are
required to disclose full details of these loans or deposits in their financial statements.

Rate of Interest on Loans [Section 186(7)]

Any loan given under this section must carry an interest rate which is not lower than the
Government Security yield (G-sec yield) for the term that is closest to the tenure of the loan.
For example, if a company is giving a 3-year loan, the rate of interest should not be lower than
the 3-year G-sec yield prevailing at that time. This rule ensures that companies do not offer
loans at unfair or below-market interest rates.

No Loans by Defaulting Companies [Section 186(8)]

If a company has defaulted in the repayment of any deposit, whether accepted before or after
the commencement of the Companies Act, 2013, or has not paid the interest due on such
deposits, it is prohibited from:

 Giving any new loans,

 Providing any guarantees or securities, or
 Making any further investments or acquisitions,

until the default is fully cleared. This provision ensures financial discipline and protects
creditors and depositors.

Register of Loans, Guarantees, Securities, and Investments [Section 186(9) and

(10)]

Every company must maintain a register containing complete details of:

 Loans given,
  Guarantees or securities provided, and
 Investments or acquisitions made.
This register must be maintained from the date of incorporation of the company in the format
prescribed as Form MBP-2.
Entries must be made separately for each transaction and must be kept at the registered office
of the company. The register should be made available for inspection by members, and it serves
as a record for transparency and compliance.

Financial Fraud- A Case Study of Vijay Mallya

Introduction

The Vijay Mallya case is one of the most infamous financial frauds in post-liberalisation India. It
highlights the collapse of regulatory mechanisms, misuse of corporate powers by directors, and
failure to maintain financial discipline and ethical governance. Vijay Mallya, a former Member
of Parliament and the chairman of the United Breweries (UB) Group, founded Kingfisher
Airlines in 2005. The airline was initially promoted as a luxurious carrier and expanded rapidly.
However, it soon became financially unsustainable due to excessive operational costs,
mismanagement, and reckless borrowing. The case raises significant legal issues concerning
fraud, corporate accountability, director responsibility, and financial misconduct under the
Companies Act, 2013 and other relevant laws.

Factual Background

Kingfisher Airlines borrowed approximately ₹9,000 crore from a consortium of 17 banks, led by
the State Bank of India. The loans were extended despite the airline’s weakening financials,
largely on the personal guarantee of Vijay Mallya and optimistic projections provided by
Kingfisher’s management. By 2012, the airline had grounded operations, defaulted on loan
repayments, failed to pay salaries to employees, and accrued massive statutory and operational
liabilities.

In early 2016, as pressure mounted from investigative agencies and public outcry grew, Vijay
Mallya left India and settled in the United Kingdom. He departed just before banks initiated legal
proceedings to recover the dues and just before a lookout notice could be issued against him.
Mallya’s failure to honour his guarantees, along with the suspected diversion of funds to
personal and offshore accounts, brought him under the scanner of the Central Bureau of
Investigation (CBI), the Enforcement Directorate (ED), and the Serious Fraud Investigation
Office (SFIO).

Legal Issues Involved

Several legal issues arise from this case:

1. Whether the director of a company can be held personally liable for wilful default and
diversion of funds borrowed in the name of the company.
2. Whether there was fraudulent misrepresentation made to banks to secure loans.
3. Whether the corporate entity was used as a facade to commit unlawful acts, thereby
warranting lifting of the corporate veil.
4. Whether provisions under the Companies Act, 2013, specifically those related to director
duties, fraudulent conduct, and corporate governance, were violated.
5. Whether criminal liability could be imposed for economic offences committed through
corporate mechanisms.

Relevant Provisions of the Companies Act, 2013

The following sections of the Companies Act, 2013, are directly applicable to the case:

Section 166 – Duties of Directors

This provision mandates that directors must act in good faith and in the best interests of the
company, its employees, shareholders, and the community. Vijay Mallya failed to uphold these
duties by continuing lavish expenditures, ignoring operational debts, and misusing corporate
resources.

Section 447 – Punishment for Fraud

This section defines fraud as an act of deception intended to gain an undue advantage and
provides for imprisonment up to 10 years and a fine which may extend to three times the amount
involved. The suspected diversion of loan funds for personal use and submission of false
financial statements fall squarely within this provision.

Section 448 – Punishment for False Statements

This provision criminalizes any false statement made in any return, report, certificate, or
financial document. Misleading financial disclosures by Kingfisher Airlines to banks and
regulatory bodies potentially attract penalties under this section.

Section 185 – Loan to Directors

Although Kingfisher Airlines itself did not issue a loan to Mallya in the conventional sense, the
misuse of corporate loans for personal benefit indirectly contravenes the spirit of this section,
which prohibits companies from giving loans or guarantees to directors.

Section 129 and Section 134 – Financial Statements and Board’s Report

These sections deal with the preparation and approval of financial statements. False
representation of the company’s financial health and failure to disclose material facts amount to
violation of these provisions.

Penalties under the Companies Act, 2013

The Companies Act prescribes stringent penalties for violations involving fraud and false
representations:

 Under Section 447, imprisonment for not less than 6 months extending up to 10 years and
a fine of up to three times the amount involved.
 Under Section 448, imprisonment for up to 10 years and a fine.
 Under Section 166, breach of director duties can attract a fine up to ₹5 lakh.
 Under Section 185, imprisonment up to 6 months and/or fine up to ₹5 lakh.

Additionally, regulatory bodies such as the SEBI and RBI can impose further penalties for
violations under their respective jurisdictions.

Arguments by Parties

Contentions of the Banks and Investigating Agencies:

The banks, led by the State Bank of India, argued that Mallya was a wilful defaulter who had no
intention of repaying the loans. They contended that he gave personal guarantees to secure loans
and then willfully defaulted. Investigative agencies further alleged that Mallya had siphoned off
substantial funds to offshore tax havens, indulged in money laundering, and used company funds
for personal luxury, in violation of Indian laws.

Contentions of Vijay Mallya:

Mallya consistently maintained that the collapse of Kingfisher Airlines was due to adverse
business conditions, including rising fuel costs, tax burdens, and economic downturn. He denied
allegations of fund diversion and maintained that he was being unfairly targeted for a genuine
business failure. He also made partial offers of settlement, including repayment of ₹4,000 crore,
which were rejected by the banks.

Evidence and Investigation

Forensic audits conducted by authorities found strong indicators of fund diversion. Bank account
trails showed transfers to overseas entities linked to Mallya. Several transactions lacked business
justification, indicating misuse of funds. In addition, emails, internal communications, and board
minutes revealed attempts to downplay the financial stress of the company. Employee
testimonies confirmed non-payment of dues even as Mallya continued to host lavish events such
as the Indian Premier League after-parties.

Final Judicial Outcome

Vijay Mallya was declared a "wilful defaulter" by banks and was later declared a "Fugitive
Economic Offender" under the Fugitive Economic Offenders Act, 2018 by a Special PMLA
Court in Mumbai in 2019. This was the first such declaration under the new law. His properties
were ordered to be attached, and the ED successfully auctioned several of his Indian assets to
recover part of the loan amount.

In 2020, the Westminster Magistrates’ Court in the United Kingdom ordered his extradition
to India. The UK High Court also dismissed his appeals. However, Mallya remains in the UK,
citing pending legal proceedings and asylum-related matters, which have delayed his extradition.

 Vijay Mallya continues to reside in the United Kingdom.

 Extradition has been approved by UK courts but is yet to be executed due to legal
formalities and confidential asylum proceedings.
 Indian authorities have attached and auctioned various assets including luxury properties,
bank accounts, and shares.
 Banks have managed to recover around ₹13,000 crore (more than the principal) through
asset sales, mainly due to enforcement by ED.
 Mallya’s passport has been revoked, and he has no legal business presence in India
anymore.

The Vijay Mallya case represents a watershed moment in Indian corporate and financial law
enforcement. It exposes how the corporate structure can be manipulated to commit large-scale
fraud. The case also prompted reforms such as the Fugitive Economic Offenders Act and
tightened lending norms by banks. Under the Companies Act, 2013, the case serves as a
benchmark for enforcement of director accountability, fraud prevention, and corporate
transparency.

Mallya’s case is not just about one man’s fall from grace, but a reminder that corporate law must
remain vigilant and proactive in preserving the integrity of India’s financial systems.
Case Study: The Nirav Modi Scam – A Corporate Fraud Analysis Under the
Companies Act, 2013
Introduction

The Nirav Modi scam is one of the most significant financial frauds in Indian banking history.
Estimated at over ₹13,000 crore, the scam shook the foundations of public trust in the country’s
banking and corporate governance systems. It also exposed severe lapses in internal control
mechanisms within public sector banks and raised concerns over regulatory oversight, collusion,
and abuse of corporate structures. Nirav Modi, a high-profile luxury diamond jeweller, with
global brand visibility and a clientele that included Hollywood celebrities, was accused of
orchestrating a complex scheme of fraudulent transactions in connivance with senior officials of
the Punjab National Bank (PNB). His actions not only defrauded the banking system but also
demonstrated a systematic misuse of corporate entities to launder funds and finance personal and
family-owned business expansions across borders.

Background and Nature of the Fraud

Nirav Modi operated multiple companies in India and abroad, primarily engaged in the business
of diamonds and jewellery, under the flagship of Firestar Diamond International Pvt. Ltd. and its
associates. Over a period spanning from 2011 to 2018, Modi, in collusion with certain officials
from PNB’s Brady House branch in Mumbai, managed to obtain fraudulently issued Letters of
Undertaking (LoUs) — a form of bank guarantee used in international trade — without any
sanctioned limit or underlying collateral.

The LoUs were transmitted through the SWIFT (Society for Worldwide Interbank Financial
Telecommunication) messaging system, which operates independently of the bank’s Core
Banking System (CBS). As a result, these transactions went unrecorded in the bank’s official
books, bypassing internal audits and external statutory checks. Other Indian banks with overseas
branches, acting on these LoUs, disbursed foreign currency loans to Nirav Modi’s companies
based in Hong Kong and Dubai.
The fraudulent LoUs were renewed year after year without repayment of earlier dues, and fresh
LoUs were issued to repay the earlier ones — creating a cycle resembling a Ponzi scheme. There
was no genuine import of goods or services to back these credit transactions. The entire
operation was orchestrated to siphon funds out of the Indian banking system and funnel them
into shell entities and luxury businesses controlled by Modi and his family members abroad.

Detection and Exposure

The scam was exposed in early 2018 when PNB officials, during an internal audit, refused to
issue a fresh LoU to Modi’s firm due to lack of prior credit approval. When Modi’s
representatives insisted that such LoUs were routinely issued earlier, the bank began an internal
investigation, which soon revealed that over ₹11,000 crore worth of LoUs had been issued over
several years without being recorded in the CBS. By the time the fraud was publicly disclosed in
February 2018, the estimated exposure had crossed ₹13,000 crore.

The bank immediately filed a First Information Report (FIR) with the Central Bureau of
Investigation (CBI), and the case was soon transferred to the Enforcement Directorate (ED)
under the Prevention of Money Laundering Act, 2002. By then, Nirav Modi had already left
India — in January 2018 — just days before the complaint was registered.

Legal Violations under the Companies Act, 2013

The scam involved multiple violations under the Companies Act, 2013, in addition to criminal
liability under penal and economic laws.

First, there was a clear breach of Section 447 of the Companies Act, which criminalizes fraud.
The Act defines fraud as any act, omission, concealment of fact, or abuse of position with an
intent to deceive or gain undue advantage. Nirav Modi’s use of shell companies, falsified
documentation, and creation of fictitious transactions to mislead banks falls squarely within this
definition. Section 447 prescribes stringent punishment, including imprisonment for a term that
may extend up to ten years and a fine of up to three times the amount involved in the fraud.

Second, Section 448 was violated, as it relates to making false statements in any return, report,
certificate, or document filed under the Act. It was found that the financial statements of Nirav
Modi’s firms significantly understated liabilities and concealed the fraudulent LoUs, thereby
misleading both lenders and regulatory authorities.

Third, the fraudulent actions constituted a gross violation of Section 166, which prescribes the
duties of directors. Directors of Modi’s companies had a fiduciary obligation to act in good faith,
with due care, and in the interest of the company and its stakeholders. However, they participated
in or allowed fraudulent financial practices that jeopardized the financial integrity of the
organization and the public funds involved.

Further, there were violations of Section 129 and Section 134, which deal with the preparation
and approval of financial statements and the Board’s report. The financial statements filed with
the Registrar of Companies failed to disclose material facts and understated the exposure of the
company to external liabilities, thereby misleading shareholders, creditors, and regulators.

In addition to the Companies Act, Modi’s acts involved offences under the Indian Penal Code
(IPC), the Prevention of Corruption Act, the Fugitive Economic Offenders Act, 2018, and
the Foreign Exchange Management Act (FEMA).

Investigation and Evidence

The CBI and ED launched large-scale investigations across India, the UAE, the United States,
and Europe. Several bank officials, including senior personnel from PNB, were arrested for
collusion and breach of trust. The ED uncovered multiple layers of companies, many of which
were either shell firms or set up for circular trading, with no genuine commercial activity. The
funds routed through these companies were traced to luxury real estate purchases in New York
and London, high-value artworks, and business expansions in Europe.

The ED attached Modi’s properties under the PMLA, including multiple apartments in South
Mumbai, his luxury bungalow in Alibaug, and properties abroad. In addition, assets belonging to
his Firestar group, worth over ₹2,400 crore, were attached. A red corner notice was issued
through Interpol. Nirav Modi was located in London and arrested by Scotland Yard in March
2019. He has remained in custody in the United Kingdom ever since.

Extradition Proceedings and Judicial Developments

India formally sought Modi’s extradition from the United Kingdom. In 2021, the Westminster
Magistrates’ Court ruled in favour of extradition, citing sufficient prima facie evidence of fraud,
money laundering, and criminal breach of trust. The court noted that Modi had intimidated
witnesses, destroyed evidence, and posed a flight risk. It dismissed his claims of political
persecution or lack of fair trial in India.

Modi filed multiple appeals in the UK High Court, citing mental health and human rights
concerns. However, these appeals have been repeatedly dismissed. As of 2025, the final order
from the UK Home Office on his extradition remains pending due to ongoing proceedings
related to asylum claims and health-based objections.

Current Status

Nirav Modi remains imprisoned in Wandsworth Prison, a high-security facility in London.

Indian agencies have managed to recover and auction assets worth a significant portion of the
defrauded amount. Several Indian banks have declared the loss as non-performing assets but
have recovered a part of their dues through sale of attached properties and guarantees.

The Indian government continues to pursue his extradition, and parallel investigations into his
uncle Mehul Choksi are ongoing. Choksi fled to Antigua and Barbuda and has obtained
citizenship there, further complicating the extradition process.
The Nirav Modi scam is a textbook case of how corporate entities can be misused to commit
large-scale financial frauds. It underscores the importance of robust internal controls,
accountable corporate governance, and independent auditing mechanisms. From a legal
perspective, the Companies Act, 2013, provides a strong framework to penalize fraudulent
conduct, but enforcement depends heavily on timely regulatory oversight and cooperation
between institutions.

The case also serves as a cautionary tale for public sector banks and government agencies to
enhance vigilance, ensure integration between banking systems like SWIFT and CBS, and
mandate forensic audits in high-risk financial operations. While India’s corporate legal regime
has evolved to respond to such crimes, the Nirav Modi case remains a stark reminder that
financial integrity must be continuously guarded, both by law and by leadership.

Role of Court to Protect Interests of Creditors and Shareholders

I. Legal Provisions to Protect the Interests of Shareholders and Creditors

Several provisions under the Companies Act, 2013, aim to safeguard the interests of shareholders
and creditors from misrepresentation, financial manipulation, and unfair corporate practices.

Section 34 of the Act imposes criminal liability for misstatements in a prospectus. If any
statement in a prospectus is found to be false or misleading, and the person making such a
statement was aware of its inaccuracy, they may face criminal charges. This also applies to
anyone who authorizes the circulation of such a misleading document.

Section 35 deals with civil liability for misstatements in the prospectus. If a prospectus contains
information that is misleading by misrepresentation or by omission of important facts, then those
who authorized its issuance may face imprisonment ranging from six months to ten years and a
fine.

Section 66 governs the reduction of share capital. It requires companies to follow strict
procedural safeguards, including obtaining approvals from shareholders and creditors, to ensure
that creditors’ interests are not adversely affected by such a move.

Section 53 prohibits companies from issuing shares at a discount. This ensures that shares are
issued at either face value or at a premium, thereby preserving the economic value for
shareholders and avoiding dilution of their stake.

II. Other Protective Provisions under the Companies Act

Apart from the core provisions, the Companies Act and SEBI regulations include several
measures to ensure transparency, fairness, and accountability in corporate governance:

 Prohibition of forward trading and insider trading by key management personnel

helps ensure that internal information is not misused for personal gains.
  Shareholders are allowed to vote electronically, thereby making the process more
inclusive and accessible.
 Annual General Meetings (AGMs) must now be held during business hours (9 am to 6
pm), thereby ensuring greater transparency.
 Quorum for meetings is now linked to the total number of members, rather than a fixed
number, making meetings more representative.
 Companies must maintain minutes of all meetings, including those of the Board of
Directors and postal ballots, to ensure a reliable audit trail.
 All key documents and resolutions are required to be stored and accessible in electronic
form, improving transparency and public access.

III. Role of Courts in Protecting Shareholders and Creditors

Courts, particularly the National Company Law Tribunal (NCLT), play a pivotal role in
safeguarding the rights of shareholders and creditors.

The NCLT, a quasi-judicial authority under the Companies Act, 2013, adjudicates matters such
as corporate insolvency, liquidation, oppression and mismanagement, mergers, and other
corporate disputes. It provides a legal platform for shareholders and creditors to file suits when
their rights are infringed.

Through various legislations and judicial mechanisms, the courts help creditors recover debts
and protect investors’ rights. Shareholders and creditors have the legal right to be heard, and
they can initiate lawsuits if companies act against their interests. The judicial system also
supports creditors through insolvency and debt restructuring mechanisms, ensuring that their
dues are settled fairly.

IV. Key Case Laws Protecting Shareholders and Creditors

1. R v. Lord Kylsant: This case involved misleading statements in a prospectus. The

company appeared to be profitable by showing past dividend payouts, but in reality, the
profits were due to wartime revenues, not current performance. The court held this as
misrepresentation.
2. Bharat Insurance Co. v. Kanhaiya Lal: The court allowed a minority shareholder to
sue the company for making unsecured investments, despite majority rule, because the
acts were ultra vires (beyond the company's powers as stated in its memorandum).
3. Glass v. Atkin: Plaintiffs sued their business partners (also directors) for
misappropriating company funds. The court allowed the suit, recognizing that the
defendants’ control over the company would prevent the organization from taking action
against them.
4. Reliance Industries Ltd. v. SEBI: RIL failed to disclose its increasing stake in L&T
despite holding over 5% of shares, as required under SEBI regulations. The court held
that RIL had violated Regulation 7 by not informing the target company.
5. Bajaj Auto Ltd. v. Company Law Board: The court ruled that merely attempting to
acquire a controlling interest does not justify refusing share transfers unless the acquirer
poses a clear threat to the company’s interests.
 6. H.V. Jayaram v. ICICI: The Supreme Court held that offences under Section 113(2) of
the Companies Act must be tried where the company is headquartered, not where the
shareholder resides.
7. LIC v. Escorts Ltd.: The Court recognized the nominee’s right over shares, affirming
that a nominee acquires all associated rights. The case also reinforced shareholder rights
such as voting, dividend entitlement, and access to legal remedies.

V. Recent Developments in Shareholder and Creditor Protection

In November 2022, SEBI proposed a new framework to protect public equity shareholders
during the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and
Bankruptcy Code (IBC). This was intended to address the concerns of public shareholders in
listed companies undergoing insolvency, ensuring that their interests are not ignored during
resolution plans and asset distributions.

In 2023, SEBI mandated that stockbrokers and depository institutions such as the Central
Depository Services India Ltd. (CDSL) and National Securities Depository Ltd. (NSDL)
maintain and regularly update their websites. This was aimed at enhancing transparency in the
securities market by ensuring up-to-date disclosure of shareholding patterns, corporate actions,
and other relevant investor information.