EXECUTIVE PROGRAMME

COMPANY LAW
C O N T E N T S
STUDY I
INTRODUCTION
Company as a Business Medium
CompanyIts Meaning
CompanyIts Nature and Characteristics
Brief History of Company Law in India and England
Background of English Company Law
Development of Indian Company Law
Amendment by MRTP Act
Amendments made to the Companies Act by the
Depositories Act, 1996
The Companies (Amendment) Act, 1999Salient Features
The Companies (Amendment) Act, 2000Salient Features
The Companies (Amendment) Act, 2002 and Companies (Second
Amendment) Act, 2002Salient Features
The Companies (Amendment) Act, 2006
Nature, Form and Types of Business Enterprises
Non-Corporate Form of Business Enterprises
Corporate Form of Business Enterprises
Company as Distinguished from Other Business Enterprises
Distinction between Company and Partnership
Distinction between Company and Hindu Joint Family Business
Distinction between Company and Corporation
Advantages of Corporate Form of Enterprise
Disadvantages of Corporate Form of Enterprise
Concept of Corporate Personality
Lifting or Piercing the Corporate Veil
Statutory Recognition of Lifting of Corporate Veil
Lifting of Corporate Veil under Judicial Interpretation
Lifting the Corporate Veil of Small Scale Industry
Use of Corporate Veil for Hiding Criminal Activities
Personal Liability of Directors or Members
Illegal Association
Nature of Corporateness
Company as Person
Nationality and Residence of a Company


Company as a Citizen
LESSON ROUND-UP
SELF-TEST QUESTIONS

STUDY II
INCORPORATION AND ITS CONSEQUENCES-I
TYPES OF COMPANIES

Introduction
Private Company
Privileges and Exemptions of Private Company
Special Obligations of a Private Company
Consequences of Infringement of the Articles of Private Companies
Public Company
Limited Company
Companies Limited by Shares
Companies Limited by Guarantee
Unlimited Company
Association not for Profit
Government Companies
Audit in Government Companies
Foreign Companies
Holding and Subsidiary Companies
Determination of Holding-subsidiary relationship and shareholding
Investment Companies
Producer Companies
Finance Companies
Public Financial Institutions
A Brief Study of Statutory Corporations
A Brief History of Growth of Statutory Corporations in India
Principal Characteristics of Statutory Corporations
What Corporations are State
Chartered Companies in the U.K.
LESSON ROUND-UP
SELF TEST QUESTIONS





STUDY III
INCORPORATION AND ITS CONSEQUENCES-II
PROMOTERS AND FORMATION OF COMPANIES

A. PROMOTERS
Definition
Promoters contract - Ratification thereof
Legal Position of a Promoter
Duties of a Promoter
Promoters Duties under the Indian Contract Act
Termination of Promoters Duties
Remedies available to the Company against the Promoter
Liabilities of Promoters
Remuneration of Promoters
B. FORMATION OF COMPANIES
Important Steps
Types of Company
Application for Availability of Name of Company
The Emblems and Names (Prevention of Improper Use) Act, 1950
Guiding Instructions for Deciding Availability of Names for
Registration under the Companies Act, 1956
Circular No.13/90 dated 27.8.1990
Name Availability GuidelinesChanges
Preparation of Memorandum and Articles of Association
Vetting of Memorandum and Articles, Printing, Stamping and
Signing of the same
Power of Attorney
Additional Documents Required
Statutory Declaration in e-Form No. 1
Payment of Registration Fees
Certificate of Incorporation
Conclusive Evidence
LESSON ROUND-UP
SELF-TEST QUESTIONS




STUDY IV
INCORPORATION AND ITS CONSEQUENCES-III
MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION
Memorandum of Association
Purpose of Memorandum
Form of Memorandum of Association
Contents of Memorandum
Printing and Signing of Memorandum
Name Clause
Situation Clause
Objects Clause
Doctrine of Ultra Vires
Shareholders right in respect of ultra vires acts
Effects of ultra vires Transactions
Liability Clause
Capital Clause
Association Clause and Subscription
Alteration of Memorandum of Association
Alteration of Name Clause
Effect of Change
Alteration of Registered Office Clause
Alteration of Objects Clause of the Company
Registration of Alteration
Alteration of Liability Clause
Alteration of Capital Clause
Articles of Association
Nature of Articles
Registration of Articles
Statutory Requirements
Contents of Articles
Provision in articles as regards expulsion of a member
Alteration of Articles of Association
Distinction between Memorandum and Articles
Legal Effect of the Memorandum and Articles
Members Bound to the Company
Company Bound to the Members
Member Bound to Member
Company not bound to Outsiders


Constructive Notice of Memorandum and Articles
Money Payable by Members is a Debt
Interpretation of Memorandum and Articles
Doctrine of Indoor Management
Exceptions to the Doctrine of Indoor Management
ANNEXURES
I Memorandum of Association of a Company Limited by Shares
II Memorandum and Articles of Association of a Company Limited
by Guarantee and not having a Share Capital
III Memorandum and Articles of Association of a Company Limited
by Guarantee and having a Share Capital
IV Memorandum and Articles of Association of an Unlimited Company
LESSON ROUND-UP
SELF TEST QUESTIONS

STUDY V
INCORPORATION AND ITS CONSEQUENCES-IV
CONTRACTS AND CONVERSIONS

Preliminary Contracts
Pre-incorporation contracts
Provisional Contracts
Contracts made after issue of Certificate of Commencement of
Business in the case of Public Company, and after Incorporation
in the case of Private Company
Common Seal
Conversion of a Private Company into a Public Company
Private Company (which is a subsidiary of public company)
deemed to be a Public Company
Conversion of a Public Company into a Private Company
Commencement of Business
Commencement of New Business by an Existing Company
LESSON ROUND-UP
SELF TEST QUESTIONS




STUDY VI
FINANCIAL STRUCTURE AND MEMBERSHIP-I
CONCEPT OF CAPITAL AND FINANCING OF COMPANIES
Meaning of the term Capital
Use of the word Capital in different senses
Meaning and Nature of a Share
Kinds of Shares
Companies (Issue of Share Capital with Differential Voting
Rights) Rules, 2001
Preference Shares or Preference Share Capital
Types of Preference Shares
Equity Shares
Preference Shares Compared with Equity Shares
Issue of Sweat Equity Shares
Sources of Capital
Raising of Capital from Promoters
Raising of Capital from Public
Raising of Capital from existing shareholders
Public Issue of Shares
SEBI (Disclosure and Investor Protection) Guidelines, 2000
SEBI Guidelines for Issue of Equity Shares
Preferential Issue by Existing Listed Companies
Issue of Shares at a Premium
Issue of Shares at a Discount
Further issue of shares
Rights Issue
Bonus Shares
Advantages of Issuing of Bonus Shares
SEBI Guidelines pertaining to Bonus Issue
Steps in Issue of Bonus Shares
Employee Stock Option Scheme
SEBI (Employee Stock Option Scheme and Employee
Stock Purchase Scheme) Guidelines, 1999
SEBI (Employee Stock Option Scheme and Employee
Purchase Scheme) Guideline, 1999 as amended
ANNEXURE
Securities and Exchange Board of India (Issue of Sweat
Equity) Regulations, 2002
LESSON ROUND-UP
SELF TEST QUESTIONS



STUDY VII
FINANCIAL STRUCTURE AND MEMBERSHIP-II
ALTERATION OF SHARE CAPITAL
Alteration of Share Capital
Power of Alteration
Nature of Stock
Difference between Share and Stock
Reduction of Share Capital
Reduction of share capital without sanction of the Court/Tribunal
Reduction of capital when company is defunct
Reduction of capital of unlimited company
Equal Reduction of Shares of One Class
Qualification shares of directors
Creditors Right to Object to Reduction
Confirmation and Registration
Conclusiveness of certificate for reduction of capital
Diminution of share capital is not a reduction of capital
Liability of Members in respect of Reduced Share Capital
Company Prohibited to Buy its Own Shares or to Finance their Purchase
Power of Company to Purchase its Own Securities
Conditions for Buy-back
Prohibition for Buy-Back in Certain Circumstances
LESSON ROUND-UP
SELF TEST QUESTIONS

STUDY VIII
FINANCIAL STRUCTURE AND MEMBERSHIP-III
PROSPECTUS
Meaning and Definition of Prospectus
Invitation to Public
When Prospectus is not required to be issued
Statement in lieu of Prospectus
Dating and Registration of Prospectus
When Registrar Must Refuse Registration
Shelf Prospectus
Information Memorandum
Red-Herring Prospectus
Contents of Prospectus/Disclosures In Prospectus
As per Companies Act, 1956


Disclosures as per SEBI Guidelines
Application with Prospectus
Abridged Prospectus
Additional Disclosures in abridged Prospectus and Letter of Offer
Contents of the Letter of Offer
Abridged Letter of Offer
Voluntary Statement in Prospectus
The Golden Rule or Golden Legacy
Deemed ProspectusOffer for sale of existing shares
Liability for Untrue Statement
What is an Untrue Statement
Onus for Proof of Mis-statement
Remedies for Misrepresentation in Prospectus
Remedies Against Directors or Promoters
Criminal Liability for Mis-statement in Prospectus
Who is Entitled to Remedies
Penalty for Fraudulently Inducing to Invest Money
Prohibition of Allotment of Shares in Fictitious Name
LESSON ROUND-UP
SELF-TEST QUESTIONS

STUDY IX
FINANCIAL STRUCTURE AND MEMBERSHIP-IV
DEBT CAPITAL
Borrowing
Power of Company to Borrow
Unauthorised or Ultra Vires Borrowing
Intra vires Borrowing but Outside the Scope of Agents Authority
Borrowing on Security of Property
Charge on Uncalled Capital
Charge on Book Debts
Promissory Notes and Bills of Exchange
Types of Borrowings
Bank-Borrowings
Work involved in relation to Raising of Working Capital from
Banks and Raising Loans from Financial Institutions
Approaching Banks for Working Capital Requirements

Raising Loans from Financial Institutions
Debentures


Characteristics of Debentures
Kinds of Debentures
Public Companies (Terms of Issue of Debentures and Raising of
Loans with Option to Convert such Debentures or Loans into
Shares) Rules, 1977
Public Financial Institutions
Debenture Stock
Debentures Trust Deed
Appointment of Debenture Trustees and Duties of Debenture Trustees
Liability of Company to Create Security and Debenture Redemption
Reserve
Issue of Debentures
SEBI Guidelines pertaining to Issue of Debentures
Register of Debentureholders
Remedies Open to Debentureholders
Debenture-holders claim
Distinction Between Debentures and Shares
Redemption of Debenture
Re-issue of Redeemed Debentures
Public Sector Bonds
Foreign Bonds
Brokerage
Developments in Corporate Debt Financing
New Instruments in Money Market
LESSON ROUND-UP
SELF TEST QUESTIONS

STUDY X
FINANCIAL STRUCTURE AND MEMBERSHIP-V
CREATION AND REGISTRATION OF CHARGES
Definition of a Charge
Kinds of Charges
Fixed or Specific Charge
Floating Charge
Crystallisation of Floating Charge
Effect of Crystallisation of a Floating Charge
Postponement of a Floating Charge
Restraint on the Power to Create Charges with Priority to a
Floating Charge
Invalidity of Floating Charge


Registration of Charges
Particulars to be filed with the Registrar in case of series of Debentures
Effect of Registration
Conclusive Nature of the Certificate of Registration
Consequences of non-registration
Companys Register of Charges
Registrars Register of Charges
Extension of Time and Rectification of Register of Charges
Satisfaction of Charges
Modification of Charges
Purchase or Acquisition of a Property Subject to Charge
Properties Situated Abroad and Subject to Charge
Definition and Nature of Mortgage
Essentials of a Mortgage
Kinds of Mortgages
Difference between Mortgage and Charge
LESSON ROUND-UP
SELF-TEST QUESTIONS

STUDY XI
FINANCIAL STRUCTURE AND MEMBERSHIP-VI
ALLOTMENT AND CERTIFICATES OF SECURITIES
Allotment of Shares
Notice of Allotment
General Principles Regarding Allotment
Statutory Provisions regarding Allotment
Minimum Subscription
Effect of Irregular Allotment
Revocation by applicant/allottee
Ultra vires allotment
Allotment Procedure
Return of Allotment
Share Certificate
Time of Issue of Share Certificate
Significance of Share Certificate
Damages against Company and Directors for wrong certificates
Split Certificate
Purpose and Form of Share Certificate
Issue of Share Certificates
Issue of Duplicate Share Certificate


Sealing and Signing of Certificate
Records of Certificates
Whether Share Certificate an Official Publication
Legal Effect of Share Certificate
Share Warrant
Position of the Holder of a Share Warrant
Share Certificate and Share Warrant Distinguished
Personation of Shareholder
The Companies (Issue of Share Certificate) Rules, 1960
Calls and Forfeiture
Calls
Requisites of a valid call
Payment in advance of Calls
Forfeiture of Shares
Re-issue of Forfeited Shares
LESSON ROUND-UP
SELF TEST QUESTIONS
STUDY XII
FINANCIAL STRUCTURE AND MEMBERSHIP-VII
MEMBERSHIP IN A COMPANY
Who are Members
Definition of Member
Modes of Acquiring Membership
Who may become a Member
Joint Members
Registration of Shares in the name of Public Office
Minimum Number of Members
Maintenance of Minimum Number
Restriction on Membership
Cessation of Membership
Expulsion of a Member
Personation and Penalty therefor
Register of Members
Index of Members

Place of Keeping and Inspection of the Registers
Remedy if inspection is refused
Register prima facie evidence
Rectification of a register of Members


Closing of Register of Members
Foreign Register
Preservation of Registers, etc.
No Notice of Trust
Power of the Central Government to Investigate into the
Ownership of Shares
Declaration by Persons not holding Beneficial Interest in any Share
Rights of Members
Individual Rights
Corporate Membership Rights
Voting Rights of Members
Shareholders Pre-emptive Rights
Variation of Members Rights
Rights of Dissentient Members
Liability of Members
LESSON ROUND-UP
SELF TEST QUESTIONS
STUDY XIII
FINANCIAL STRUCTURE AND MEMBERSHIP-VIII
TRANSFER AND TRANSMISSION OF SECURITIES
Introduction
Provisions under companies act regulating transfer of securities
Transferor holds bonus shares only as a trustee for the transferee
Stamp Duty Payable and Affixation/Cancellation of Stamps
Lost Transfer Deeds
Delegation of Powers for Transfer
Transfer of Debentures
Power of the Board of Directors to Refuse Registration
Rejected Documents
Time for pointing out insufficiency of stamps
Impounding of documents relating to Share transfer
Extension of Time Limit for Presentation to Prescribed Authority
under Section 108(1D)
Compliance with Section 108 a mandatory provision
Transfer of Shares to a Minor
Statutory Remedy against refusal under Section 111
Applicability of Section 111 to Private Companies and not to Public
Companies
Transfer of Securities of a Public Company (Section 111A)
Restrictions on the acquisition and transfer of shares of, or by,
certain bodies corporate


Applicability of Sections 108A to 108F
Some decided cases on Transfer of Shares
Transfer of Share Warrants
Certification of Transfer
Blank Transfer
Transfer of Shares during winding up
Forged transfer
Transposition of Name
Death of transferor or transferee before registration of transfer
Proof in a transfer by representative
Relationship between Transferor and Transferee
Rights of Transferor
Effects of Transfer
Priority among Transferees
Pledging of Shares
Transfer by way of a gift
Transmission of shares
Distinction between Transfer and Transmission
Succession Certificate
Companys lien on shares
Extent and waiver of lien
Enforcement and postponement of lien
Surrender of shares
Nomination of shares/debentures
Transmission of shares in favour of nominee(s)
Transfer and Transmission of Debentures
Transfer of Shares in Depository Mode
Legal Framework for Depository System
The Depositories Act, 1996 : An Analysis
ANNEXURES
I. Circulars and Clarifications
II. Schedule XV Section 108B(2)(b)
LESSON ROUND-UP
SELF-TEST QUESTIONS

STUDY XIV
MANAGEMENT AND CONTROL OF COMPANIES-I
INSTITUTION OF DIRECTORS

Concept of Director
Definition of Director


Types of Directors
Legal Position of Directors
Qualifications of Directors
Companies [Disqualification of Directors under Section 274(1)(g) of
the Companies Act, 1956] Rules, 2003
Qualification Shares
Number of Directors
Restriction on Number of Directorships
Appointment of Directors
Restriction on Appointment or Re-appointment of Directors
Appointment of First Directors
Appointment of Directors by Members in General Meeting
Appointment of Person other than Retiring Director
Appointment of Directors to be voted individually
Principle of Proportional Representation
Appointment of Directors by the Board
Appointment of Directors by Central Government
Application to the Company Law Board to Prevent Oppression
and Mismanagement
Appointment of Directors by Third Parties (Nominee Directors)
Appointment of a Director by Small Shareholders
Removal of Directors
Retirement of Directors
Resignation of Directors
Penalty for Wrongful Withholding of Companys Property
Vacation of Office of Directors
Remuneration of Directors
Remuneration of non-executive directors
Office or Place of Profit
Directors Relatives (Office or Place of Profit) Rules, 2003
Important Clarifications
ANNEXURE
I. Form DD-A, DD-B, DD-C
II. Companies (Appointment of Small Shareholders
Director) Rules, 2001
LESSON ROUND-UP
SELF TEST QUESITONS

STUDY XV
MANAGEMENT AND CONTROL OF COMPANIES-II


POWERS AND DUTIES OF DIRECTORS

Distribution of Powers of a Company
Exercise of Powers
Powers to be Exercised only at Board Meetings
Other Powers to be Exercised at Board Meetings
Powers Which Must be Exercised by Unanimous Vote
Powers of the Board Exercisable with the Approval of the
Company in General Meeting
Borrowings
Prohibitions and restrictions regarding political contributions
Power of Board and other persons to make contributions to the
National Defence Fund, etc.
Loans to Directors
Application for ApprovalInformation to be Stated therein
Boards sanction for contracts in which Directors are Interested
Disclosure of Interest by Directors
Position of Interested Director
Duties of Directors
Liabilities of Directors
Liability to Outsiders
Liability to the Company
Liability to the Shareholders
Liability for Statutory Defaults and Violations
Liability under other Corporate Laws
Directors Liability for Acts of Co-directors
Criminal Liability
Liability as an Officer in Default
Courts Power to grant Relief in Certain Cases
Compounding of certain OffencesSection 621A
Monitoring and Management
LESSON ROUND-UP
SELF TEST QUESTIONS

STUDY XVI
MANAGEMENT AND CONTROL OF COMPANIES-III


MANAGING DIRECTOR, WHOLE-TIME DIRECTOR AND MANAGER

MANAGING DIRECTOR
Definition
Appointment
Qualifications
Powers of Managing Director
Duties of a Managing Director
Liabilities
EXECUTIVE DIRECTOR/WHOLE-TIME DIRECTOR
Appointment
Role and Powers of Executive/Whole-time Director
Duties of a Whole-time Director
Liabilities
MANAGER
Definition
Number of Managers in a Company
Director as Manager
Appointment
Disqualification
Term of Office
Restriction on the Number of Companies of Which a Person may
be Appointed Manager
Restriction on Appointment of Manager
Distinction between Manager and Managing Director
Remuneration
Powers
Duties
Liabilities
Relationship with the Board of Directors
Compensation for loss of office
CHAIRMAN
Election of Chairman
Appointment
Removal of Chairman
Role
Whole-time and part time Chairman
Duties and Responsibilities
Chairmans Power under Common Law
Amendments to Resolution
Adjournment of Meetings


Chairmans Declaration as to result to voting
Liabilities
ANNEXURE I Schedule XIII
LESSON ROUND-UP
SELF TEST QUESTIONS
STUDY XVII
MANAGEMENT AND CONTROL OF COMPANIES-IV
COMPANY SECRETARY
Who is a Secretary
Who is a Company Secretary
Statutory Requirement
Importance of Secretary
Position of the Secretary
Qualities and QualificationsThe Companies (Appointment and
Qualifications of Secretary) Rules, 1988
Appointment of a Secretary
Dismissal of a Secretary
Powers of a Secretary
Duties of a Secretary
Statutory Duties
General Duties
Liabilities of a Secretary
Rights of a Secretary
Role of a Company Secretary
Statutory Officer
Co-ordinator
Administrative Officer
Changing Requirements
COMPANY SECRETARY IN PRACTICE
Who can Practice
The Evolution of the Profession
Areas of Practice
Professional Duties and Code of Conduct
Rules Applicable to a Company Secretary in Practice
Professional Misconduct
Quality Review Board
Peer Review
LESSON ROUND-UP


SELF-TEST QUESTIONS

STUDY XVIII
MANAGEMENT AND CONTROL OF COMPANIES-V
MEETINGS
Introduction
Meaning of a Meeting
Kinds of Company Meetings
Statutory Meeting
Statutory Report
Contents of the Statutory Report
Certification of the Statutory Report
Registration of the Statutory Report
Notice of Statutory Meeting
Time and Place for Holding a Statutory Meeting
Production of list of members at the Statutory Meeting
Scope of Statutory Meeting
Adjournment of the Statutory Meeting
Penalty for Default
Annual General Meeting
Extension of Validity Period of AGM
Time and Place for holding an Annual General Meeting
Default in holding Annual General Meeting
Canceling/Postponing of Convened General Meeting
Object of holding an Annual General Meeting
Business transacted at an Annual General Meeting
Applicability of Provisions of Sections 171 to 186
Extraordinary General Meetings
Types of Business Transacted at Extraordinary General Meeting
Who May Convene Extraordinary General Meetings
Calling of Extraordinary General Meeting on Requisition
Calling of Extraordinary General Meeting by Company Law Board
Class Meetings
Meetings of Debentureholders
Meeting of Creditors
Meeting of Board of Directors
Notice of Board Meetings
Time and Place of Board Meetings
Agenda
Resolution Passed by Circulation by Directors
Minutes of Board Meetings


Quorum of Directors
Disclosure of Interest
Chairman of Board Meeting
Meetings of Committee of Directors
General Meetings
Requisites of Valid Meeting
General Meetings to be Convened by Directors
Notice of Meeting
Venue of the Meeting
Notice of Adjourned Meeting
Day of the Meeting
Time of the Meeting
Agenda
Quorum
Proxy
Voting at General Meeting
Voting and Demand for Poll
Chairman
Duties and Role of Chairman
Clause 49 of Listing Agreement on Corporate Governance
Motion
Amendment
General Rules Regarding Amendments
Methods of Ascertaining Sense of the Meeting
Resolutions
Resolution Requiring Special Notice
Resolutions Passed at Adjourned Meeting
Circulation of Members Resolution
Registration of Resolutions and Agreements
Passing of Resolutions by Postal Ballot
The Companies (Passing of the Resolution by Postal Ballot) Rules, 2001
Adjournment
Postponement
Dissolution
Holding of Meetings through Teleconferencing
Minutes of Proceedings of Meetings
LESSON ROUND-UP
SELF TEST QUESTIONS
STUDY XIX
INVESTMENTS AND LOANS


Introduction
Inter-corporate Loans and Investments
No blanket permission from shareholders
Circular
Register of loans made, guarantees given, securities provided and
investments made
Inspection of Register
Penalties
Exemptions
Investments to be held in Companys own name
Special Court (Trial of Offences relating to Transactions in
Securities) Act, 1992
Register of Investments not held in company own name
Penalty
LESSON ROUND-UP
SELF-TEST QUESTIONS
STUDY XX
DEPOSITS
Invitation and Acceptance of Deposits
Application of Provisions of Section 58A to Guarantee
Companies and Section 25 Companies
Non-Banking Non-Financial Companies
Exemptions
Nomination by Depositors
Deposit in the Name of the Minor
Deposit in Joint Name
Deposit Receipt Not Transferable
Addition to Names not Permissible
Companys Right to Reject Application
Deposit from NRIs
Provisions Relating to Prospectus Apply to Issue of Advertisement
Companies (Acceptance of Deposits) Rules, 1975
Deposits and Loan
Deposit and Debenture
Depositor
Acceptance of deposits by Companies
Ceiling Limits for Acceptance of Deposits
Ceiling on Rate of Interest
Rate of Brokerage
Maintenance of Liquid Assets


Constitutional Validity of Section 58A of the Act and Rule 3A
of Deposit Rules
Form and Particulars of Advertisement
Delivery of the Text of Advertisement to the Registrar
Statement in Lieu of Advertisement
Signing of Advertisement
Form of Application for Deposits
Furnishing of receipts to Depositors
Register of Deposits
General Provisions regarding Premature Repayment of Deposits
Exemption
Power of the Central Government
Return of Deposits
Renewal of Deposits
Repayment of Deposits
Penalties
Defaults in Repayment of Deposits to Small Deposit holders
Remedy if the Company Fails to Repay on Due Date
Powers to Grant Extension of Time and Exemption

ANNEXURES

I. Non-payment of Matured Deposits Remedies
available to Investors

II. Investors Grievances Relating to Deposits, Mutual Funds,
Collective Investment Scheme, Companies in Liquidation
and other Investor Complaints
LESSON ROUND-UP
SELF TEST QUESTIONS

STUDY XXI
ACCOUNTS AND AUDIT
ACCOUNTS
Requirement of Keeping Books of Account
Place of Keeping Books of Account
Books of Accounts in Respect of Branch Office
True and Fair View
Preservation of Books of Accounts
Inspection of Books of Accounts


Maintenance of Costing Records and Stock Records
Persons Responsible for Keeping Books of Accounts
Statutory Books
Statistical Books
Annual Accounts: Balance Sheet and Profit and Loss Account
Annual Accounts to Comply with Accounting Standards
National Advisory Committee on Accounting Standards
Balance Sheet Abstract and Companys General Business Profile
Laying of Accounts
Default in Laying of Accounts
Approval of Balance Sheet and Profit and Loss Account
Penalty
Authentication of Annual Accounts by Secretary
Authentication of Annual Accounts when only one Director is available
Time Gap between authentication of accounts and signing by auditor
Approval of Annual Accounts by Delegation
Circulation of Balance Sheet and Auditors Report
Adoption of Accounts at Annual General Meeting
Filing of Annual Accounts with the Registrar
Clarifications issued by DCA with respect of filing of Annual Accounts
Inspection of Annual Accounts in case of Private Companies
Duty of officer to make Disclosure of Payments
Construction of References to Documents Annexed to Accounts
Determination of Net Profits
Directors Report
Directors responsibility statement
Directors of RBI
Signing of Boards Report
Liability for statements in Boards Reports
Compliance Certificate
Corporate Governance Report
Accounts of Holding and Subsidiary Companies
Chairmans Speech
AUDIT
What is Audit
Need for Audit
Appointment of Auditor
Qualifications and Disqualifications of Auditors
Method of Appointment of Auditors
Appointment of First Auditors
Subsequent Appointment of Auditors


Ceiling on Appointment as Auditor
Reappointment of Auditors
Appointment of Auditor Other Than a Retiring Auditor
Rights of Retiring Auditors
Filling of Casual Vacancy
Power of Central Government to Appoint Auditors
Appointment of Auditors by Special Resolution
Remuneration of Auditors
Term of Office
Resignation by an Auditor
Removal of Auditors
Status of the Auditors
Auditors of Government Companies
Rights and Powers of Auditors
Duties of Auditors
Judicial pronouncements on the duties of auditors
Liabilities of an Auditor
Audit of Branch Accounts
Special Audit
Cost Audit
Cost Audit Report
Social Audit
Proper Books of Accounts
True and Fair View
Notes on Accounts
Guidelines for Filing Statutory Applications
Annexure 1: Companies (Auditors Report) Order, 2003
LESSON ROUND-UP
SELF-TEST QUESTIONS
STUDY XXII
DIVISIBLE PROFITS AND DIVIDENDS
Definition and Meaning of Dividend
Difference between Dividend and Interest
Types of Dividend
Final Dividend
Interim Dividend
Dividend on Preference Shares
Dividend on Equity Shares
Restrictions on Declaration of Dividend and Purpose Behind it


Ascertainment of Divisible Profits and Dividends
Depreciation
Loss of Previous Year(s) to be Set off against Profits of
Current Year or Previous Years
Certain Legal Pronouncements on Divisible Profits
Transfer of Profits to Reserves
Dividend in case of Absence or Inadequacy of Profits
Declaration of Dividend
Revocation of Declared Dividend
Payment of Dividend in Cash or in Kind
Liability of Directors, Shareholders and Auditors for improper Dividend
Shareholders Right to Dividend
To Whom Paid
When Payable
Establishment of Investor Education and Protection Fund
Dividend Warrants
Dividend Mandate
Use of Information Technology in Cash Transaction of Listed
Companies for Payment of Dividends
Can Dividends be Paid out of Capital
Payment of Interest out of Capital
Payment of Dividend out of Capital Profits
Remittance of Dividend or Interest or Sale Proceeds to NRIs,
Foreigners and Foreign Companies
Rate of Dividend on Preference Shares

ANNEXURES
I. The Companies (Transfer of Profits to Reserves) Rules, 1975
II. Clarifications of the Department
III. The Companies (Declaration of Dividend out of Reserves)
Rules, 1975
IV. Investor Education and Protection Fund
LESSON ROUND-UP
SELF TEST QUESTIONS

STUDY XXIII
SOLE SELLING AND SOLE BUYING AGENTS
Sole Selling Agents-Meaning


Appointment of Sole-selling Agents
Powers of the Central Government to Investigate Terms of Appointment
Companys Duty in Investigation
Penalty
Power of the Central Government to Prohibit the Appointment of
Sole Selling Agent in Certain Cases
Re-appointment of Sole Selling Agents
Duties of a Secretary
Important Note
Remuneration of Sole Selling Agents
Sole Buying or Purchasing Agents
No Compensation to Sole Selling Agent for Loss of Office
Meaning of Relative
The Companies (Appointment of Sole Agents) Rules, 1975
Guidelines for filing statutory applications under
Section 294AA of the Companies Act, 1956
LESSON ROUND-UP
SELF-TEST QUESTIONS


STUDY XXIV
BOARDS REPORT AND DISCLOSURES

Introduction
Disclosures under Companies Act
Disclosure under Section 217(1)
Disclosure under Section 217(2)
Accounts of Holding and Subsidiary Companies
Particulars in respect of certain employees [Section 217(2A)]
Directors Responsibility Statement [Section 217(2AA)]
Comment on Auditors Report [Section 217(3)]
Other Disclosures
Disclosures pursuant to the Listing agreement of Stock Exchanges
Disclosures pursuant to employee stock option and employees
stock purchase schemes
Disclosures pursuant to Directors of RBI
Approval of the Boards Report
Signing and dating of the Boards Report
Filing of the Boards Report


Right of Members to copies of Balance Sheet, Boards Report, etc.
Liability for Mis-statement
Chairmans Speech
Compliance Certificate under Section 383A
Need for Compliance Certificate
Scope of Compliance Certificate
Penalty for Non-Compliance
Mode and period of Appointment of PCS
Certification with Qualification
Penalty for false compliance certificate
Professional Responsibility
LESSON ROUND-UP
SELF-TEST QUESTIONS

STUDY XXV
REGISTERS AND RETURNS

Statutory Books/Registers
Secretarial Standards
Electronic Forms
Digital Signature
Statutory Books Elaborated
Procedure for Keeping Registers and Returns at a Place
other than the Registered Office
Non-statutory Registers
Filing of Various Forms/Returns with Registrar of Companies
Preparation and Filing of Returns with the Registrar of Companies
Returns on Occurrence of Certain Events
Filing Fee for Companies Registered in India
Filing Fee by Foreign Companies
Payment of fees
Company Secretarys Role in Filing and Filing Returns and Forms
Guidelines for Preparing/Filing Forms, Documents, Returns etc.
Defective Forms/Documents
Procedure for Condonation of Delay by Central Government in
Relation to Filing of Documents with Registrar of Companies
Penalty for Filing False Documents/Statements with Registrar
ANNEXURES- I.List of returns and other documents filed with
Registrar of Companies
LESSON ROUND-UP


SELF-TEST QUESTIONS

STUDY XXVI
INSPECTION AND INVESTIGATION

INSPECTION
Introduction
Note on Strategy
Nature of Inspection
Inspection by whom
Directors right to make inspection
Right of Members to make inspection
Time and Place of Inspection
Inspection of Books of Account and other books and papers
Notice for Inspection
Duties of Directors, other Officers and Employees
Powers of Inspector
Inspection Report
Follow-up Action on the Report of Inspecting Officer
Penalty for Default
Preparation by Company Secretary to face Inspection
Powers of Registrar to call for Information or Explanation
Reports of Registrar
Seizure of documents by Registrar

INVESTIGATION
Meaning and Object
Kinds of Investigation
Investigation of the Affairs of a Company by the Central Government
Special Resolution under Section 237(a)(ii) to investigate the affairs
of the company
Clarifications with respect to Sections 234, 235, 237 and 241 of
the Companies Act, 1956
Only Individual to be appointed as Inspector
Powers of Inspectors
Penalty for Default
Inspectors Report
Follow-up Action on the Report
Expenses of Investigation
Preparation by a Company Secretary to face Investigation
Investigation of the Ownership of Company


Restrictions on Shares and Debentures
Saving for disclosure by Legal Advisor or Banker
Protection of the Employees of Company during Investigation
LESSON ROUND-UP
SELF-TEST QUESTIONS

STUDY XXVII
SHAREHOLDERS DEMOCRACY, MAJORITY POWERS AND MINORITY
RIGHTS AND PREVENTION OF OPPRESSION AND MISMANAGEMENT
SHAREHOLDER'S DEMOCRACY
Introduction
MAJORITY POWERS AND MINORITY RIGHTS
Powers of Majority
The Principle of Non-interference (Rule in Foss v. Harbottle)
Justification and Advantages of the Rule in Foss v. Harbottle
Exceptions to the Rule in Foss v. Harbottle Protection of
Minority Rights and Shareholders Remedies
Actions by Shareholders in Common Law
Statutory Remedies (under the Companies Act)
PREVENTION OF OPPRESSION AND MISMANAGEMENT
Prevention of Oppression
Meaning of Oppression
Oppression must be of a continuous Nature
Public Interest
Winding up Order under Just and Equitable Clause
Winding up Would Unfairly Prejudice the Petitioners
Prevention of Mismanagement
Persons Entitled to Apply
Powers of the Company Law Board/Tribunal
Consequences of Termination or Modification of Agreements
Powers of the Central Government to Prevent Oppression
or Mismanagement
Power to Prevent Changes in the Board
LESSON ROUND-UP
SELF-TEST QUESTIONS



STUDY XXVIII
COMPROMISES AND ARRANGEMENTS AN OVERVIEW

Scope of Section 391
Sanctioned Arrangement binding on all Concerned Parties
Need for Reports from Registrar of Companies
When Courts do not sanction a Scheme
Explanatory statement
Powers of the Court to Supervise the Implementation of the Scheme
Powers of the Court to Sanction Modification of the Terms of a Scheme
Powers of the Court to order a Winding up while considering a Scheme
Powers of the Court to make Consequential Orders
LESSON ROUND-UP
SELF-TEST QUESTIONS

STUDY XXIX
LAW RELATING TO CO-OPERATIVES, SOCIETIES AND TRUSTS

LAW RELATING TO CO-OPERATIVE SOCIETIES
Introduction
Types of Societies
Definition
Societies that can be Registered
Cooperative Principles
Objects of Multi-State Co-operative Societies
Application for Registration
Enclosures to Application
Whom to Apply
Members of the Co-operative Society
Registration of the Society
Refusal to Register
Deemed Registration
Registration Certificate
Subject Matter of Bye-Laws
Amendment in Name and Bye-Laws
Admission as a Member
Expulsion of Members
Management
General Meeting
Board of Directors


Chief Executive
Powers and Functions of the Board of Directors
Meetings of the Board
Investment of Funds
Net Profits
Disposal of Net Profit
Settlement of Disputes
Amalgamation of Co-operative Societies
Transfer of Assets or Division of Assets
Conversion
Winding up of a Co-operative Society
LAW RELATING TO SOCIETIES
Introduction
Status
Registration
Procedure for Registration
Rules and Regulations
Society May Make Bye-laws
Members Their Rights and Liabilities
When Members Treated as Strangers
Property of Society : Where it vests?
Working and Management of Society
Amendment or Alteration
Suits by and Against Society
Enforcement of Judgement Against Society
Amalgamation or Division of the Society
Dissolution of Society
Consequences of Dissolution
Registrar of Societies Powers & Duties
Offences and Penalties
Taxable Income (Computation)
LAW RELATING TO TRUSTS
Introduction
Trust Laws in India
Indian Trust Act
Scope
Definition of Trust
Trust and Contract
Difference Between Trust and Bailment, Trust and Agency
Classification of Trusts
Creation of Trusts


Certainties of a Trust
Who Can Create a Trust
Who May be a Trustee
Duties of Trustee
Liabilities of Trustees
Rights, Powers and Disabilities of Trustees
Meaning of a Beneficiary
Who may be a Beneficiary
Doctrine of Cypres
Rights and Liabilities of Beneficiaries
Extinction of a Trust
Revocation of a Trust
Certain Obligations in the Nature of Trust
Tax Treatment of Trust
ANNEXURES
I Schedule II: List of National Co-operative Societies
II Guidelines for Registration of a Society under Societies
Registration Act, 1860, as applicable to Delhi
III Titles of Authorities Equivalent to Registrar of Societies
in Various States
LESSON ROUND-UP
SELF TEST QUESTIONS

STUDY XXX
PRODUCER COMPANIES
Genesis
Objects of Producer Company
Formation of Producer Company and its Registration
Membership and voting rights of members of Producer Company
Benefits to Members
Memorandum of Association, Articles of Association
Contents of Memorandum of Producer Company
Contents of Articles of Association of Producer Company
Amendment to Memorandum and Articles
Option to Inter-State Co-operative Societies to become
Producer Companies
Vesting of undertaking in Producer Company
Concession, etc. to be deemed to have been granted to
Producer Company
Provisions in respect of Officers and other employees of Inter-State


Co-operative Society
Number of Directors
Appointment of Director
Vacation of Officer by Directors
Powers and functions of Board
Matters to be transacted at the General Meeting
Liability of Directors
Committee of Directors
Meetings of the Board and Quorum
Chief Executive and his functions
Secretary of Producer Company
Quorum of the General Meeting
Voting Rights
Annual General Meetings [Section 581ZA]
Share Capital
Transferability of shares and attendant rights
Surrender of shares
Books of account
Internal Audit
Donation or Subscription by Producer Company
General and other reserves
Issue of Bonus Shares
Loan, etc., to Members [Section 581ZK]
Investment in other companies, formation of subsidiaries etc.
[Section 581ZL]
Amalgamation, merger or division, etc., to form new Producer Companies
Disputes
Striking off name of Producer Company
Re-conversion of producer company to Inter-State Co-operative Society
Expected Benefits to Producer Companies
Difference between a Producer Company and a Private Company
LESSON ROUND-UP
SELF-TEST QUESTIONS
STUDY XXXI
LIMITED LIABILITY PARTNERSHIPS
Introduction
Salient Features
Distinction between LLP and Partnership
Distinction between LLP and Comapny
Contribution of Capital
Statement of Solvency and Accounts


Limited Liability
Members and designated Members
Roles and Responsibilities of Designated Partners
Partners obligation
LLP agreement
Making a choice
Winding up and dissolution
Comparison of LLP with Private Limited Company
LESSON ROUND-UP
SELF-TEST QUESTIONS

STUDY XXXII
APPLICATION OF COMPANY LAW TO DIFFERENT SECTORS
Banking
Procedure for application
Insurance
Insurance Regulatory and Development Authority (IRDA)
Powers, Duties and Functions of the Authority
Registration of an Insurance Company
Setting up an Insurance business
Registration of an Insurance Company
LESSON ROUND-UP
SELF-TEST QUESTIONS

STUDY XXXIII
OFFENCES AND PENALTIES AN OVERVIEW
Introduction
Officer in default
ANNEXURE- I. List of Sections Imposing Penalty
LESSON ROUND-UP
SELF-TEST QUESTIONS
STUDY XXXIV
STRIKING OFF NAMES OF COMPANIES
Meaning of Striking off
When a Company is still in operation
The rights of person aggrieved by the company having


been struck off the register
Effect
Mode of Sending Letter/Notice
Who can apply?
Supreme Court Rules
MCA Circulars
Procedure for Striking off a company
LESSON ROUND-UP
SELF-TEST QUESTIONS
STUDY XXXV
WINDING UP OF COMPANIES
Introduction
Company cannot be adjudged insolvent
Winding up and Dissolution
Modes of winding up
Winding up by the Court/Tribunal
Grounds on which a company may be wound up by the Court
Who may petition for winding up
Jurisdiction of Court for entertaining winding up petition
Voluntary winding up
Kinds of voluntary winding up
Members voluntary winding up
Creditors voluntary winding up
Distinction between Members and Creditors voluntary winding up
Powers of the Court to Intervene in voluntary winding up
Winding up subject to the supervision of Court
Effect of supervision order
Distinction between voluntary winding up and winding up under
the supervision of the Court
Commencement of winding up
Winding up of unregistered companies
LESSON ROUND-UP
SELF-TEST QUESTIONS
STUDY XXXVI
AN INTRODUCTION TO E-GOVERNANCE
Introduction
Organisation of ROC offices under MCA-21
Front office
Virtual front office
Registrars Front office


Back office
Important features
Director Identification Number
Corporate Identity Number
Digital Signature Certificate
Certified filing centre
Infrastructure for e-filing
Mode of payment
Service Request Number
Payment of stamp duty
Categories of e-forms
Annual filing
Pre-certification of e-forms
Terms used while e-fling the e-forms
Introduction of e-stamping facility by MCA
Key benefits of MCA21 Project
Clarifications issued by MCA from time to time
General structure of an e-form and e-filing process
E-forms notified

LESSON ROUND-UP

SELF-TEST QUESTIONS

STUDY XXXVII
SECRETARIAL STANDARDS

Secretarial Standards - issued for the first time in any country- a
unique and pioneering effort
Secretarial Standard on Meetings of the Board of Directors (SS-1)
Secretarial Standard on General Meetings (SS-2)
Secretarial Standard on Dividend (SS-3)
Secretarial Standard on Registers and Records (SS-4)
Secretarial Standard on Minutes (SS-5)
Secretarial Standard on Transmission (SS-6)
Guidance Notes
Procedure for issuing Secretarial Standards
Secretarial Standard on Passing of Resolutions by Circulation (SS-7)
Secretarial Standard on Affixing of Common Seal (SS-8)
Secretarial Standard on Forfeiture of Shares (SS-9)
The Institute has recently issued the Secretarial Standard
on Boards Report (SS-10)

TEST PAPERS/2010
Test Paper 1/2010


Test Paper 2/2010
Test Paper 3/2010
Test Paper 4/2010
Test Paper 5/2010

PREVIOUS SESSIONS QUESTION PAPER
June 2010
December 2010







































STUDY I
INTRODUCTION

LEARNING OBJECTIVES
This chapter deals with the company as a business medium, the nature and form of
business enterprises and types of business enterprises. It explains the concept of
corporate personality and the nature of corporateness, i.e. company as a person,
resident and a citizen.
At the end of this lesson, you will be able to understand:
Definition of a company.
Nature and characteristics of a company.
History of Company Law in India and England.
The development of Indian Company Law along with various amendments to it
including the Companies (Amendment) Act, 2006.
Forms and types of business enterprises.
Distinction between a company and other business enterprises.
Advantages and disadvantages of corporate form of enterprises.
Concept of Corporate Personality and Nature of Corporateness.

1. COMPANY AS A BUSINESS MEDIUM
CompanyIts Meaning
The word company is derived from the Latin word (Com=with or together; panis
=bread), and it originally referred to an association of persons who took their meals
together. In the leisurely past, no less than in the speedy present, merchants took
advantage of festive gatherings, to discuss business matters. Nowadays, the
business matters have become more complicated and cannot be discussed at length
at festive gatherings. Therefore, the word company has assumed greater importance.
It denotes a joint stock enterprise in which the capital is contributed by a large
number of people. Thus, in popular parlance, a company denotes an association of
like minded persons formed for the purpose of carrying on some business or
undertaking. Though an association may be brought into existence for multifarious
purposes, in Company Law it figures predominantly as a business association with a
large and fluctuating membership formed for acquisition of gain. There may also be
non-profit trading concerns like a club or a society. In Smith v. Anderson, (1880) 15
Ch. D. 247, it was observed that a company, in broad sense, may mean an
association of individuals formed for some purpose.
A company may be an incorporated company or a Corporation, or an
unincorporated company. An incorporated company is a single and legal (artificial)
person distinct from the individuals constituting it, whereas an unincorporated
company, such as a partnership, is a mere collection or aggregation of individuals.
Therefore, unlike a partnership, a company is a corporate body and a legal person
1


having status and personality distinct and separate from that of the members
constituting it.
It is called a body corporate because the persons composing it are made into one
body by incorporating it according to the law and clothing it with legal personality. The
word corporation is derived from the Latin term corpus which means body.
Accordingly, corporation is a legal person created by the process other than natural
birth. It is, for this reason, sometimes called artificial legal person. As a legal person,
a corporate is capable of enjoying many of the rights and incurring many of the
liabilities of a natural person.
The incorporated company owes its existence either to a special Act of
Parliament or to a company legislation. The public corporations like Life Insurance
Corporation of India and Damodar Valley Corporation have been brought into
existence through special Acts of Parliament, whereas companies like Tata Iron and
Steel Co. Ltd., Hindustan Lever Ltd. and State Trading Corporation of India Ltd. have
been formed under the Companys Legislation as may be applicable. The trading
partnership which is governed by Partnership Act is the most apt example of an
unincorporated association.
In the legal sense, a company is an association of both natural and artificial
persons incorporated under the existing law of a country. In terms of the Companies
Act, 1956 (Act No. 1 of 1956) [hereinafter referred to as the Act] a company means a
company formed and registered under the Companies Act, 1956 or under the
previous laws relating to companies" [Section 3(1)(ii)]. In common law, a company is
a legal person or legal entity separate from, and capable of surviving beyond the
lives of its members. However, an association formed not for profit acquires a
corporate life and falls within the meaning of a company by reason of a licence under
Section 25(1) of the Act.
But a company is not merely a legal institution. It is rather a legal device for the
attainment of any social or economic end. It is, therefore, a combined political, social,
economic and legal institution. Thus, the term company has been described in many
ways. It is a means of cooperation and organisation in the conduct of an enterprise.
It is an intricate, centralised, economic and administrative structure run by
professional managers who hire capital from the investor(s). Lord Justice James has
defined a company as an association of many persons who contribute money or
moneys worth to a common stock and employ it in some trade or business and who
share the profit and loss arising therefrom. The common stock so contributed is
denoted in money and is the capital of the company. The persons who form it, or to
whom it belongs, are members. The proportion of capital to which each member is
entitled is his share.
Under Halsburys Laws of England, the term Company has been defined as a
collection of many individuals united into one body under a special domination, having
perpetual succession under an artificial form, and vested by the policy of law with the
capacity of acting in several respects as an individual, particularly of taking and
granting property, of contracting obligations, and of suing and being sued, of enjoying
privileges and immunities in common, and of exercising a variety of political rights,
more or less extensive, according to the designs of its institution, or the powers upon it,
either at the time of its creation or at any subsequent period of its existence.


From the foregoing discussion it is clear that a company has its own corporate
and legal personality distinct and separate from that of its members. A brief
description of the various attributes is given here to explain the nature and
characteristics of the company as a corporate body.
CompanyIts Nature and Characteristics
Since a corporate body (i.e. a company) is the creation of law, it is not a human
being, it is an artificial person (i.e. created by law); it is clothed with many rights,
obligations, powers and duties prescribed by law; it is called a person. It is
appropriately described as an artificial person being invisible, intangible, existing
only in the contemplation of law. Being the creation of law, it possesses only the
properties conferred upon it by its Memorandum of Association. Among the most
important of these are individuality and immorality. Within the limits of powers
conferred by the charter, it can do all acts as a natural person may do.
As it has a distinct legal personality of its own, it is capable of enjoying rights and
being subject to obligations which are different from those enjoyed or borne by its
members. Like a natural person it can enter into contracts, sue and can be sued in its
own name, but unlike a human being it has no mind. You cannot shake it by the
hand, or knock it down in a fit of temper, as it is inanimate and has no physical shape
or form. Again, like a natural person it has individuality and owns property but unlike
him, it has a common seal and perpetual succession.
The most striking characteristics of a company are:
(i) Corporate personality
By incorporation under the Act, the company is vested with a corporate
personality quite distinct from individuals who are its members. Being a separate
legal entity it bears its own name and acts under a corporate name. It has a seal of its
own. Its assets are separate and distinct from those of its members. It is also a
different person from the members who compose it. As such it is capable of owning
property, incurring debts, borrowing money, having a bank account, employing
people, entering into contracts and suing or being sued in the same manner as an
individual. Its members are its owners but they can be its creditors simultaneously as
it has a separate legal entity. A shareholder cannot be held liable for the acts of the
company even if he holds virtually the entire share capital. The shareholders are not
the agents of the company and so they cannot bind it by their acts. The company
does not hold its property as an agent or trustee for its members and they cannot sue
to enforce its rights, nor can they be sued in respect of its liabilities. Thus,
incorporation is the act of forming a legal corporation as a juristic person. A juristic
person is in law also conferred with rights and obligations and is dealt with in
accordance with law. In other words, the entity acts like a natural person but only
through a designated person, whose acts are processed within the ambit of law
[Shiromani Gurdwara Prabandhak Committee v. Shri Sam Nath Dass AIR 2000 SCW
139].
The case of Salomon v. Salomon and Co. Ltd., (1897) A.C. 22, has clearly
established the principle that once a company has been validly constituted
under the Companies Act, 1956 it becomes a legal person distinct from its


members and for this purpose it is immaterial whether any member has a large
or small proportion of the shares, and whether he holds those shares
beneficially or as a mere trustee.
In the case, Salomon had, for some years, carried on a prosperous
business as a leather merchant and boot manufacturer. He formed a limited
company consisting of himself, his wife, his daughter and his four sons as the
shareholders, all of whom subscribed for 1 share each so that the actual cash
paid as capital was 7. Salomon sold his business (which was perfectly
solvent at that time), to the Company for the sum of 38,782. The companys
nominal capital was 40,000 in 1 shares. In part payment of the purchase
money for the business sold to the company, debentures of the amount of
10,000 secured by a floating charge on the companys assets were issued to
Salomon, who also applied for and received an allotment of 20,000 1 fully
paid shares. The remaining amount of 8,782 was paid to Salomon in cash.
Salomon was the managing director and two of his sons were other directors.
The company soon ran into difficulties and the debentureholders appointed
a receiver and the company went into liquidation. The total assets of the
company amounted to 6050, its liabilities were 10,000 secured by
debentures, 8,000 owning to unsecured trade creditors, who claimed the
whole of the companys assets, viz., 6,050, on the ground that, as the
company was a mere alias or agent for Salomon, they were entitled to
payment of their debts in priority to debentures. They further pleaded that
Salomon, as principal beneficiary, was ultimately responsible for the debts
incurred by his agent or trustee on his behalf. The trial judge and the Appellate
Court agreed with these contentions and decreed against Salomon. The House
of Lords disagreeing with the lower Courts, repudiated these contentions and
accepted the appeal and reversed the order of the Appellate Court. The House
of Lords held that on registration, the company comes into existence and
attains maturity on its birth. There is no period of minority, no interval of
incapacity. It has its own existence or personality separate and distinct from its
members and, as a result, a shareholder cannot be held liable for its acts even
though he holds virtually the entire share capital. Thus, the case also
established the legality of what is known as one-man company. The case
also recognised that subscribers do not have to be independent or strangers to
one another. The case also recognised the principle of limited liability. It also
established that a person can be at the same time a member, a creditor and an
employee of the company, as well as its director.
Their Lordships of the House of Lords observed:
When the memorandum is duly signed and registered, though there be
only seven shares taken, the subscribers are a body corporate capable
forthwith of exercising all the functions of an incorporated company. It is
difficult to understand how a body corporate thus created by statute can lose
its individuality by issuing the bulk of its capital to one person. The company is
at law a different person altogether from the subscribers of the memorandum;
and though it may be that after incorporation the business is precisely the
same as before, the same persons are managers, and the same hands receive


the profits, the company is not in law their agent or trustee. The statute enacts
nothing as to the extent or degree of interest which may be held by each of the
seven or as to the proportion of interest, or influence possessed by one or
majority of the shareholders over others. There is nothing in the Act requiring
that the subscribers to the memorandum should be independent or
unconnected, or that they or any of them should take a substantial interest in
the undertakings, or that they should have a mind or will of their own, or that
there should be anything like a balance of power in the constitution of
company.
The case of Lee v. Lees Air Farming Ltd. (1961) A.C. 12 (P.C.), illustrates
the application of the principles established in Salomons case (supra). In this
case, a company was formed for the purpose of aerial top-dressing. Lee, a
qualified pilot, held all but one of the shares in the company. He voted himself
the managing director and got himself appointed by the articles as chief pilot at
a salary. He was killed in an air crash while working for the company. His
widow claimed compensation for the death of her husband in the course of his
employment. The company opposed the claim on the ground that Lee was not
a worker as the same person could not be the employer and the employee. The
Privy Council held that Lee and his company were distinct legal persons which
had entered into contractual relationships under which he became, the chief
pilot, a servant of the company. In his capacity of managing director he could,
on behalf of the company, give himself orders in his other capacity of pilot, and
the relationship between himself, as pilot and the company, was that of servant
and master. Lee was a separate person from the company he formed and his
widow was held entitled to get the compensation. In effect the magic of
corporate personality enabled him (Lee) to be the master and servant at the
same time and enjoy the advantages of both.
The case of Foss v. Harbottle (1843) Hare 461, though is usually cited in
connection with oppression & mismanagement, it relates directly to the theory
of the corporate personality. The facts briefly reported were that the minority
shareholders brought an action against the directors to compel them to make
good the losses incurred by the company due to fraud committed by them. It
was held that since the loss was suffered by the company, the only proper
plaintiff for any action is the company, itself and the company can act only
through its majority shareholders. This decision is the logical result of the
principle that a company has separate legal entity from the members who
compose it.
The decision of the Calcutta High Court in Re. Kondoli Tea Co. Ltd., (1886) ILR
13 Cal. 43, recognised the principle of separate legal entity even much earlier than
the decision in Salomon v. Salomon & Co. Ltd. case. Certain persons transferred a
Tea Estate to a company and claimed exemptions from ad valorem duty on the
ground that they themselves were the shareholders in the company and, therefore, it
was nothing but a transfer from them in one name to themselves under another
name. While rejecting this the Calcutta High Court observed: The company was a
separate person, a separate body altogether from the shareholders and the transfer
was as much a conveyance, a transfer of the property, as if the shareholders had
been totally different persons.


In reference to one-man companies of the Salomon kind, Kania, J. observed in
T.R. Pratt (Bombay) Ltd. v. E.D. Sasson & Co. Ltd., A.I.R. 1936 Bom. 62 the following:
Under the law, an incorporated company is a distinct entity, and although all the
shares may be practically controlled by one person, in law a company is a distinct
entity and it is not permissible or relevant to enquire whether the directors belonged
to the same family or whether it is compendiously described a one-man company.
Thus, one-man companies exist with the encouragement of the legislature, and
the great majority of them are as bona fide and genuine as in a business sense.
They are convenient and suitable media for provision and application of capital to
industry. Reference may also be made to Dhulia Amalner Motor Transport Ltd. v.
Roychand Rupsi Dharmasi, A.I.R. 1952 Bom. P. 37. A partnership firm carrying on
the business of plying buses having worked for some time, some of the partners
formed a private limited company which they could do under the law even while the
partnership continuted to be a running concern. Such of the partners who formed the
company sold to the company their own buses which were heretobefore being used
by the firm. The other set of partners who constituted the minority sued the section of
partners forming the company for accounts and their share of profits on the ground
that in reality the company was not a different entity from the firm and that the
business carried on by it was the same as that of the firm. Basing their arguments on
Salomons case, their Lordships of the Bombay High Court observed: I am simply
here dealing with the provision of a statute and it seems to me to be essential to the
artificial creation that the law should recognise only that artificial existence quite apart
from the motives or conduct of individual corporators either the limited company was
a legal entity or it was not. If it was, the business belonged to it and not to Mr.
Salomon. If it was not, there was no person and nothing to be an agent at all; and it is
impossible to say at the same time that there is a company and there is not. In view
of this, the court held that the plaintiffs had no legal right to sue for accounts of the
business done by the company which was altogether a third person. Buses which the
company was plying were the property not of its shareholders, but the property of the
company itself. Company was a corporate body whose entity was entirely different
from the entities of its shareholders. Motive for becoming shareholders is not a field
of inquiry. The law recognises the existence of the company irrespective of the
motives, intentions, schemes or conduct of the individual shareholders.
Experience of a Shareholder is Experience of a Company
The experience of a shareholder of a company can be regarded as experience of
a company. In New Horizons Ltd. v. Union of India, AIR 1994, Delhi 126, the
tender of the company, New Horizons Ltd., for publication of telephone
directory was not accepted by the Tender Evaluation Committee on the ground
that the company had nothing on record to show that it had the technical
experience required to be possessed to qualify for tender. On appeal the
rejection of tender was upheld by the Delhi High Court.
The judgement of the Delhi High Court was reversed by the Supreme Court
which observed as under:
Once it is held that NHL (New Horizons Ltd.) is a joint venture, as claimed
by it in the tender, the experience of its various constituents namely, TPI


(Thomson Press India Ltd.), LMI (Living Media India Ltd.) and WML (World
Media Ltd.) as well as IIPL (Integrated Information Pvt. Ltd.) had to be taken into
consideration, if the Tender Evaluation Committee had adopted the approach
of a prudent business man.
Seeing through the veil covering the face of NHL, it will be found that as a
result of re-organisation in 1992 the company is functioning as a joint venture
wherein the Indian group (TPI, LMI and WML) and Mr. Aroon Purie hold 60%
shares and the Singapore based company (IIPL) hold 40% shares. Both the
groups have contributed towards the resources of the joint venture in the form
of machines, equipment and expertise in the field. The company is in the nature
of partnership between the Indian group of companies and Singapore based
company who have jointly undertaken this commercial enterprise wherein they
will contribute to the assets and share the risk. In respect of such a joint
venture company, the experience of the company can only mean the
experience of the constituents of the joint venture i.e. the Indian group of
companies (TPI, LMI and WML) and the Singapore based company (IIPL) (New
Horizons Ltd. and another v. Union of India (1995) 1 Comp. LJ 100 SC).
(ii) Limited Liability
The privilege of limited liability for business debts is one of the principal
advantages of doing business under the corporate form of organisation. Limited
liability means the status of being legally responsible only to a limited amount for debt
of a company. The company, being a separate person, is the owner of its assets and
bound by its liabilities. The liability of a member as shareholder, extends to
contribution to the assets of the company up to the nominal value of the shares held
and not paid by him. Members, even as a whole, are neither the owners of the
companys undertakings, nor liable for its debts. In other words, a shareholder is
liable to pay the balance, if any, due on the shares held by him, when called upon to
pay and nothing more, even if the liabilities of the company far exceed its assets. This
means that the liability of a member is limited. For example, if A holds shares of the
total nominal value of Rs. 1,000 and has already paid Rs. 500/- (or 50% of the value)
as part payment at the time of allotment, he cannot be called upon to pay more than
Rs. 500/-, the amount remaining unpaid on his shares. If he holds fully-paid shares,
he has no further liability to pay even if the company is declared insolvent. In the case
of a company limited by guarantee, the liability of members is limited to a specified
amount mentioned in the memorandum.
In the case of unincorporated associations like partnership firms, the liability of
the partners for the debts of the business is unlimited. Not only their share in the firm
but their personal assets may be attached to satisfy the debts and liability of the firm.
Section 25 of the Indian Partnership Act, 1932, for example, lays down that every
partner, is liable, jointly with all the other partners and also severally, for all acts of the
firm done while he is partner.
Buckley, J. in Re. London and Globe Finance Corporation, (1903) 1 Ch.D. 728 at
731, has observed: The statutes relating to limited liability have probably done more
than any legislation of the last fifty years to further the commercial prosperity of the
country. They have, to the advantage of the investor as well as of the public, allowed


and encouraged aggregation of small sums into large capitals which have been
employed in undertakings of great public utility largely increasing the wealth of the
country.
There are, however, some statutory exceptions to the principle of limited liability.
As provided by Section 45 of the Companies Act, 1956, the members become
personally liable if the membership falls below prescribed minimum and the business
is carried on for more than six months thereafter. It is also provided in the Act vide
Section 323 that a limited company may, if so authorised by its articles, alter its
memorandum by special resolution so as to render the liability of its directors or of
any of its director or manager as unlimited. Further, where in the course of winding up
it appears that any business of the company has been carried on with an intent to
defraud creditors, the Court (now Tribunal) may declare the persons who were
knowingly parties to the transaction as personally liable without limitation of liability
for all or any of the debts/liabilities of the company.
(iii) Perpetual Succession
An incorporated company never dies except when it is wound up as per law. A
company, being a separate legal person is unaffected by death or departure of any
member and remains the same entity, despite total change in the membership. A
companys life is determined by the terms of its Memorandum of Association. It may
be perpetual or it may continue for a specified time to carry on a task or object as laid
down in the Memorandum of Association. Perpetual succession, therefore, means
that the membership of a company may keep changing from time to time, but that
does not affect its continuity. But a partnership firm, on the other hand, is affected by
the death or incapacity of its partners. A company is independent of the lives of its
members as a natural consequence of incorporation and transferability of its shares.
The membership of an incorporated company may change either because one
shareholder has transferred his shares to another or his shares devolve on his legal
representatives on his death or he ceases to be a member under some other
provisions of the Companies Act. Thus, perpetual succession denotes the ability of a
company to maintain its existence by the constant succession of new individuals who
step into the shoes of those who cease to be members of the company. Professor
L.C.B. Gower rightly mentions, Members may come and go, but the company can go
on for ever. During the war all the members of one private company, while in general
meeting, were killed by a bomb, but the company survived not even a hydrogen
bomb could have destroyed it.
(iv) Separate Property
A company being a legal person and entirely distinct from its members, is
capable of owning, enjoying and disposing of property in its own name. The company
is the real person in which all its property is vested, and by which it is controlled,
managed and disposed of. Their Lordships of the Madras High Court in R.F. Perumal
v. H. John Deavin, A.I.R. 1960 Mad. 43 held that no member can claim himself to be
the owner of the companys property during its existence or in its winding-up. A
member does not even have an insurable interest in the property of the company. A
person, for example, was the holder of nearly all the shares except one of a timber
company and was also a substantial creditor. He insured the companys timber in his


own name. The timber, having been destroyed by fire, the insurance company was
held not liable to him. [See Macaura v. Northern Assurance Co. Ltd., 1925 A.C. 619].
Lord Buckmaster observed in this case that No shareholder has any right to any item
of property owned by the company, for he has no legal or equitable interest therein.
In the words of Walton, J.: The property of the company is not the property of the
shareholders, it is the property of the company. [Gramophone and Typewriter Co. v.
Stanley, (1906) 2 K.B. 856 at 869].
In other words, the property of the company is not the property of the individual
members. As stated by the Supreme Court, a shareholder has merely an interest in
the company arising under the Articles of Association, measured by a sum of money
for the purpose of liability, and by a share in the profit. He has merely a right to
participate in the profits of the company subject to the contract contained in articles of
association (R.C. Cooper v. Union of India, A.I.R. 1970 S.C. 564). In another case the
Supreme Court held that, though the income of a tea company is entitled to be
exempted from Income-tax up to 60% being partly agricultural, the same income
when received by a shareholder in the form of dividend cannot be regarded as
agricultural income for the assessment of income-tax. [See Mrs. Bacha F. Guzdar v.
The Commissioner of Income Tax, Bombay, A.I.R. 1955 S.C. 74]. It was also
observed by the Supreme Court that a shareholder does not, as is erroneously
believed by some people, become the part owner of the company or its property; he
is only given certain rights by law, e.g., to receive or to attend or vote at the meetings
of the shareholders. The court refused to identify the shareholders with the company
and reiterated the distinct personality of the company. A similar observation was also
made by Evershed, L.J. in these words:
Shareholders are not, in the eyes of the law, part owners of the undertaking. The
undertaking is something different from the totality of shareholders. [Short v.
Treasury Commissioners, (1948) A.C. 534].
On this rationale itself, the tenancy rights of the shareholder which were being
used by the company, the companys use ended when the shareholders withdrew
their permission [Rajdhani Chit Fund P. Ltd. v. Mukesh Maheshwari (1999) 96 Com
Case 837 (Del)].
Thus, incorporation helps the property of the company to be clearly distinguished
from that of its members. However, in a partnership firm, the partners are the joint
owners of the firm property. Consequently, if there happens to be a change in the
membership of a partnership firm, its assets have to be transferred to the new
members.
(v) Transferability of Shares
The capital of a company is divided into parts, called shares. The shares are said
to be movable property and, subject to certain conditions, freely transferable, so that
no shareholder is permanently or necessarily wedded to a company. When the joint
stock companies were established, the object was that their shares should be
capable of being easily transferred, [In Re. Balia and San Francisco Rly., (1968) L.R.
3 Q.B. 588]. Section 82 of the Companies Act, 1956 enunciates the principle by
providing that the shares held by the members are movable property and can be
transferred from one person to another in the manner provided by the articles. If the


articles do not provide anything for the transfer of shares and the Regulations
contained in Table A in Schedule I to the Companies Act, 1956, are also expressly
excluded, the transfer of shares will be governed by the general law relating to
transfer of movable property.
A member may sell his shares in the open market and realise the money
invested by him. This provides liquidity to a member (as he can freely sell his shares)
and ensures stability to the company (as the member is not withdrawing his money
from the company). The Stock Exchanges provide adequate facilities for the sale and
purchase of shares.
However, by virtue of newly inserted Section 111A to the Companies Act, 1956 in
view of the Depositories Act, 1996, the shares in all the companies except private
companies, have been made freely transferable.
Further, as of now, in most of the listed companies, the shares are transferable
through Electrical mode i.e. through Depository Participants instead of physical transfers.
As soon as the shares are transferred, the transferee steps into the shoes of the
transferor and acquires all the rights in respect of those shares. In a partnership firm,
a partner cannot transfer his share in the capital of the partnership firm except with
the unanimous consent of all the partners. If a transfer is made against the will of the
partners, the transferee does not become a partner, although he has some rights in
the dissolution of the firm. [Refer Section 29 of the Indian Partnership Act, 1932].
Thus, the principle difference between a partnership and a company in this respect is
that, while, in the case of the former, transferability depends on express agreement
and is circumscribed by the legal and practical limitations; in the case of company it
exists to the fullest extent unless there is some express restriction.
(vi) Common Seal
On incorporation, a company acquires legal entity with 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 of the company is of very great importance. It acts as
the official signature of a company. The name of the company must be engraved on
its common seal. A rubber stamp does not serve the purpose. A document not
bearing common seal of the company is not authentic and has no legal force behind
it.
The person authorised to use the seal should ensure that it is kept under his
personal custody and is used very carefully because any deed, instrument or a
document to which seal is improperly or fraudulently affixed will involve the company
in legal action and litigation.
(vii) Capacity to Sue and Be Sued
A company being a body corporate, can sue and be sued in its own name. To sue,
means to institute legal proceedings against (a person) or to bring a suit in a court of
law. All legal proceedings against the company are to be instituted in its own name.
Similarly, the company may bring an action against anyone in its own name. A
companys right to sue arises when some loss is caused to the company, i.e. to the


property of the personality of the company. Hence, the company is entitled to sue for
damages in libel or slander as the case may be [Floating Services Ltd. v. MV San
Fransceco Dipaloa (2004) 52 SCL 762 (Guj)]. A company, as a person separate from
its members, may even sue one of its own members for libel.
A company has a right to seek damages where a defamatory material published
about it, affects its business. Where video cassettes were prepared by the workmen
of a company showing, their struggle against the companys management, it was
held to be not actionable unless shown that the cassette would be defamatory. The
court did not restrain the exhibition of the cassette. [TVS Employees Federation v.
TVS and Sons Ltd., (1996) 87 Com Cases 37]. The company is not held liable for
contempt committed by its officer. [Lalit Surajmal Kanodia v. Office Tiger Database
Systems India (P) Ltd., (2006) 129 Comp Cas 192 Mad]. In case of unincorporated
association an action may have to be brought in the name of the members either
individually or collectively.
(viii) Contractual Rights
A company, being a separate legal entity different from its members, can enter
into contracts for the conduct of the business in its own name. A shareholder cannot
enforce a contract made by his company; he is neither a party to the contract nor
entitled to the benefit of it, as a company is not a trustee for its shareholders.
Likewise, a shareholder cannot be sued on contracts made by his company. The
distinction between a company and its members is not confined to the rules of privity,
however, it permeates the whole law of contract. Thus, if a director fails to disclose a
breach of his duties to his company, and in consequence a shareholder is induced to
enter into a contract with the director which he would not have entered into had there
been disclosure, the shareholder cannot rescind the contract.
Similarly, a member of a company cannot sue in respect of torts committed
against it, nor can he be sued for torts committed by the company. [British Thomson-
Houston Company v. Sterling Accessories Ltd., (1924) 2 Ch. 33]. Therefore, the
company as a legal person can take action to enforce its legal rights or be sued for
breach of its legal duties. Its rights and duties are distinct from those of its constituent
members.
(ix) Limitation of Action
A company cannot go beyond the power stated in the Memorandum of
Association. The Memorandum of Association of the company regulates the powers
and fixes the objects of the company and provides the edifice upon which the entire
super-structure of the company rests. The actions and objects of the company are
limited within the scope of its Memorandum of Association. In order to enable it to
carry out its actions without such restrictions and limitations in most cases, sufficient
powers are granted in the Memorandum of Association. But once the powers have
been laid down, it cannot go beyond these powers unless the Memorandum of
Association is itself altered prior to doing so.
(x) Separate Management
As already noted, the members may derive profits without being burdened with
the management of the company. They do not have effective and intimate control


over its working and elect their representatives to conduct corporate functioning. In
other words, the company is administered and managed by its managerial personnel.
(xi) Voluntary Association for Profit
A company is a voluntary association for profit. It is formed for the
accomplishment of some public goals and whatsoever profit is gained is divided
among its shareholders. A company cannot be formed to carry on an activity against
public policy and having no profit motive.
(xii) Termination of Existence
A company, being an abstract and artificial person, does not die a natural death.
It has its existence only in contemplation of law. It is created by law, carries on its
affairs according to law throughout its life and ultimately is effaced by law. Generally,
the existence of a company is terminated by means of winding up. However, to avoid
winding up sometimes companies change their form by means of reorganisation,
reconstruction and amalgamation.
To sum up, a company is a voluntary association for profit with capital divisible
into transferable shares with limited liability, having corporate entity and a common
seal with perpetual succession.
2. BRIEF HISTORY OF COMPANY LAW IN INDIA AND ENGLAND

The history and development of Company Law in India is closely linked with that
of England and for that reason it becomes essential to have a brief account of the
history of English Company law for proper appreciation of our law.
Background of English Company Law
The history of modern company law in England began in 1844 when the Joint
Stock Companies Act was passed. The Act provided for the first time that a company
could be incorporated by registration without obtaining a Royal Charter or sanction by
a special Act of Parliament. The office of the Registrar of Joint Stock Companies was
also created. But the Act denied to the members the facility of limited liability. The
English Parliament in 1855 passed the Limited Liability Act providing for limited
liability to the members of a registered company. The Act of 1844 was superseded by
a comprehensive Act of 1856 which marked the beginning of a new era in company
law in England. This Act introduced the modern mode of creating companies by
means of Memorandum and Articles of Associations.
The first enactment to bear the title "Companies Act" was the Companies Act,
1862. By these Acts some of the modern provisions of a company were clearly laid
down. Firstly, two documents, namely, (a) the Memorandum of association, and (b)
the Articles of association formed the integral part for the formation of a limited
liability company. Secondly, a company could be formed with liability limited by
guarantee. Thirdly, any alteration in the object clause of the memorandum of
association was prohibited. Provisions for winding-up were also introduced. Thus, the
basic structure of the company as we know had taken shape. Sir Francis Palmer


described this Act as the magna carta of co-operative enterprises.
The Companies (Memorandum and Association) Act, 1890 made relaxation with
regard to change in the object clause under the leave of the Court obtained on the
basis of special resolution passed by the members in general meeting. Then the
liability of the directors of a company was introduced by the Directors Liability Act,
1890, and the compulsory audit of the companys accounts was enforced under the
Companies Act, 1900.
The concept of private company was introduced for the first time in the
Companies Act, 1908. The earlier ones were called public companies. Two
subsequent Acts were passed in 1908 and in 1929 to consolidate the earlier Acts.
The Companies Act, 1948 which was the Principal Act in force in England then was
based on the report of a Committee under Lord Cohen. The Act introduced inter alia
another new form of company known as exempt private company.
Another outstanding feature of the 1948 Act was the emphasis on the public
accountability of the company. Generally recognised principles of accountancy were
given statutory force and had to be applied in the preparation of the balance sheet
and profit and loss account. Further, the 1948 legislation extended the protection of
the minority (Section 210) and the powers of the Board of Trade to order an
investigation of the companys affairs (Sections 164175); and for the first time the
shareholders in general meeting were given power to remove a director before the
expiration of his period of office. The independence of auditors vis-a-vis the directors
was strengthened.
The 1948 Act was amended by the Companies (Amendment) Act, 1967. The
Amending Act was based upon the report and recommendations of the Jenkins
Committee presented in 1962.
The 1967 Act adopted and considerably extended in some respects, the
recommendations of the Committee as to disclosure. The Act abolished the exempt
private company, and required all limited companies to file accounts. More stringent
provisions were imposed in relation to directors interests in the company and
disclosure thereof.
The Companies Act, 1976 attempted to remedy a variety of defects which had
become evident in the application of the Acts of 1948 and 1967. The 1976 Act
strengthened the requirements of public accountability and those relating to the
disclosure of interests in the shares of the company.
The Companies Act, 1980 was a major measure of company law reform in
England. Insider dealing was made a criminal offence. The shareholders were given
a right of pre-emption in the case of new issues of shares in specified circumstances.
Dealings between the directors and their companies became greatly restricted and
maximum financial limits were introduced for such dealings. The protection to the
minority shareholders was extended by enabling them to petition for relief if their
position was unfairly prejudiced.
The Companies Act, 1981 introduced other important changes. For the purposes
of accounting and disclosure, companies were divided into small, medium-sized and


other companies and their disclosure requirements were differentiated accordingly.
The Law relating to the names of companies was simplified by the abolition, in
principle, of the approval of the name by the Department of Trade. The company was
authorised, subject to certain conditions, to issue redeemable equity shares and to
purchase its own shares. The 1981 Act further abolished the register of business
names which had to be kept under the Registration of Business Names Act, 1916.
Active steps were taken to prepare consolidating measures relating to the
Companies Acts 1948 to 1981. In November, 1981, the Department of Trade
published a consultative document entitled Consolidation of Companies Acts. In this
document the various methods of consolidation and their relative advantages for the
practice were discussed.
The whole of the existing statute relating exclusively to companies was
consolidated in the Companies Act, 1985, and the Companies Acts 1948 and 1983
repealed by the Companies Consolidation (Consequential Provisions) Act, 1985. At
the same time two minor consolidating enactments, the Business Names Act, 1985
and the Company Securities (Insider Dealing) Act, 1985, were passed to consolidate
certain provisions of the Companies Acts 1980 and 1981, which affected sole traders
and partnerships and persons other than companies as well as companies regulated
by the Companies Act, 1985. The whole of the present statute, therefore, was
contained in the Companies Act, 1985 and the two minor consolidating enactments
together with the temporary and transitional provisions of the Companies
Consolidation (Consequential Provisions) Act, 1985, all of which have come into force
from 1st July, 1985.
The U.K. company law has further been amended and has been substituted by
U.K. Companies Act, 2006 (which received Royal Assent on November 8, 2006). The
Act shall be brought into force in stages and circumscribes enhanced duties of
directors, simpler regime for private companies, increased use of e-communication,
enhanced auditor liabilities etc.
Development of Indian Company Law
Company Law in India, as indicated earlier, is the cherished child of the English
parents. Our various Companies Acts have been modelled on the English Acts.
Following the enactment of the Joint Stock Companies Act, 1844 in England, the first
Companies Act was passed in India in 1850. It provided for the registration of the
companies and transferability of shares. The Amending Act of 1857 conferred the
right of registration with or without limited liability. Subsequently this right was granted
to banking and insurance companies by an Act of 1860 following the similar principle
in Britain. The Companies Act of 1856 repealed all the previous Acts. That Act
provided inter alia for incorporation, regulation and winding up of companies and
other associations. This Act was recast in 1882, embodying the amendments which
were made in the Company Law in England upto that time. In 1913 a consolidating
Act was passed, and major amendments were made to the consolidated Act in 1936.
In the meantime England passed a comprehensive Companies Act in 1948. In 1951,
the Indian Government promulgated the Indian Companies (Amendment) Ordinance
under which the Central Government and the Court assumed extensive powers to
intervene directly in the affairs of the company and to take necessary action in the
interest of the company. The ordinance was replaced by an Amending Act of 1951.


The Companies Act, 1956 was enacted with a view to consolidate and amend the
earlier laws relating to companies and certain other associations. The Act came into
force on 1st April, 1956. The present Companies Act is based largely on the
recommendations of the Company Law Committee (Bhabha Committee) which
submitted its report in March, 1952. This Act is the longest piece of legislation ever
passed by our Parliament. Amendments have been made in this Act periodically. The
Companies Act consists of 658 Sections and 15 Schedules.
Full and fair disclosure of various matters in prospectus; detailed information of
the financial affairs of company to be disclosed in its account; provision for
intervention and investigation by the Government into the affairs of a company;
restrictions on the powers of managerial personnel; enforcement of proper
performance of their duties by company management; and protection of minority
shareholders were some of the main features of the Companies Act, 1956.
The Companies Act, 1956 has undergone changes by amendments in 1960,
1962, 1963, 1964, 1965, 1966, 1967, 1969, 1971, 1977, 1985, 1988, 1996, 1999,
2000, 2002 (Amendment), 2002 (Second Amendment), and 2006. The provisions of
Companies (Second Amendment) Act, 2002 are yet to be enforced except that
of definitions and the constitution of NCLT (National Company Law Tribunal).
The Companies Act, 1956 was also amended by enactment of Depositories Act,
1996.
Based on the recommendations of Shastri Committee, the Companies
(Amendment) Act, 1960 introduced several new provisions relating to various aspects
of company management which were overlooked in the 1956 Act.
The Companies (Amendment) Act, 1963 provided for the appointment of a
Companies Tribunal and constitution of the Board of Company Law Administration. It
also empowered the Central Government to remove managerial personnel involved
in cases of fraud, etc.
Based on the recommendations of the Vivian Bose Commission, the Companies
(Amendment) Act, 1965 introduced some of the major changes, such as clear
definition of the main and subsidiary objects of a company in its Memorandum of
Association; Strengthening the provisions relating to investigation into the affairs of
the company, etc.
The Companies Act was amended twice in 1966. These amendments consisted
of four sections only.
Two important changes were introduced by the Companies (Amendment) Act,
1969. The institutions of managing agents and secretaries and treasurers were
abolished with effect from April 3, 1970. Secondly, contributions by companies to any
political party or for any political purpose were prohibited.
The Companies (Amendment) Act, 1974 which came into force from February 1,
1975 had introduced some important and major changes in the Companies Act,
1956.
The object of the Amendment Act was to inject an element of public interest in
the working of the corporate sector. The important changes introduced by the


Amendment Act of 1974 are given below:
1. Deemed to be public limited companies.
2. Acceptance of deposits from the public to be in accordance with the Rules.
3. Maintenance of a separate account for unclaimed dividend by public limited
companies.
4. Control over foreign-owned companies brought within the purview of the Act.
5. Appointment of Company Law Board benches in metropolitan cities.
6. Power to prohibit the appointment of a sole-selling agent by Central
Government.
7. Appointment of a whole-time secretary.
The Companies (Amendment) Act of 1977 brought about certain changes in
Sections 58A, 220, 293, 620 and 634A. The amended Section 58A empowered the
Central Government to grant extension of time or to exempt any company in
deserving cases from all or any of the provisions of Section 58A. Section 293
empowered a company to make donations for charitable purposes upto 5 per cent of
its average net profit or upto Rs. 25,000 whichever was higher. This section as
amended by the Act of 1977 raised the ceiling to Rs. 50,000.
The Companies (Amendment) Act, 1985: The amending Act substituted Section
293A with a new section permitting Non-Government companies to make political
contributions, directly or indirectly.
With a view that legitimate dues of workers rank pari passu with secured
creditors in event of closure of the company and above even the dues to
Government, Sections 529 and 530 of the Companies Act, 1956, were amended and
a new Section 529A was introduced.
In order to give effect to the recommendations of the Committee on Subordinate
Legislations (Seventh Lok Sabha) that the Company Law Board should be
empowered to reassess compensation on appeal from the order of the prescribed
authority assessing the compensation payable under an order of amalgamation under
Section 396, and that the order of amalgamation itself may provide for the
continuation of any pending legal proceeding by or against the transferee company
on the lines of the existing provisions of Section 394 of the Act under which the High
Court orders amalgamation, Section 396 of the Act was amended.
The Companies (Amendment) Act, 1988: Based on the recommendations made
by the Expert Committee (Sachar Committee), the Companies (Amendment) Act,
1988 substantially amended the Companies Act, 1956 in order to streamline some of
the existing provisions of the Companies Act, 1956 and to ensure better working and
administration of the Act.
It was for the first time that the Companies Act provided that every public
company of a certain size shall have a managing or whole-time director. The
companies were also given freedom to fix the managerial remuneration on the basis


of certain limits.
The important changes introduced by the Amendment Act of 1988 were:
Definition of Secretary brought in line with the definition of Company Secretary
in the Company Secretaries Act, 1980 and includes an individual possessing
prescribed qualifications.
The concept of company secretary in practice was introduced for the first time in
the Companies Act. A practising secretary has been authorised to file declaration of
compliance under Sections 33 and 149. Every listed company is required to file
annual return under Section 161 which must also be signed by a practising secretary
apart from other signatories. In the absence of a company secretary, the practising
secretary may also certify that the requirements of Schedule XIII have been complied
with.
The amended Act, among other things, also set up an independent Company
Law Board to exercise such judicial and quasi-judicial functions, earlier being
exercised either by the Court or the Central Government.
It also dispensed with the requirement of getting Government approval for
managerial appointments and remuneration subject to the fulfillment of certain
statutory guidelines which were incorporated in the Act itself.
It delinked the rates of depreciation from the rates specified under the Income-tax
Act and laid down rates of depreciation in the Act itself to reflect the true and fair view
of the state of affairs of the company.
3. AMENDMENT BY MRTP ACT
The MRTP Amendment Act, 1991 retransferred Sections 30A to 30G of the
MRTP Act to the Companies Act as Sections 108-A to 108-I. Initially, these sections
were introduced in the Companies Act, 1956 by the Companies (Amendment) Act,
1974 to regulate the acquisition and transfer of shares of a body corporate owning
any undertaking to which the provisions of Part A of Chapter III of the MRTP Act
apply. They were intended to prevent acquisition or take-over of companies leading
to further concentration of economic power. Later, on the recommendation of Sachar
Committee that these provisions should find their place appropriately in the MRTP
Act they were transferred to Chapter III-A of MRTP Act as Sections 30A to 30G.
With the restructuring of the MRTP Act by the MRTP (Amendment) Act, 1991 and
consequential removal of Sections 26 to 30 of Part A of Chapter III, these sections
imposing restrictions on acquisition or transfer of shares were retransferred to the
Companies Act, 1956 as Sections 108-A to 108-I with a change in scope.
Accordingly, the provisions contained in Sections 108-A to 108-I would apply to
(i) undertakings where dominance would result as a consequence of
acquisition/transfer of shares and (ii) dominant undertakings if such acquisition of
shares has the effect of increase in their dominance.
A new Schedule XV has also been added to the Companies Act as a
consequence of Section 108B which provides that where the Central Government is
of the opinion that as a result of transfer of shares a change in the composition in


Board of directors is likely to take place, it may by order direct, where such shares
are held in a company engaged in any industry specified in Schedule XV, that such
shares shall be transferred to the Central Government or to such corporation owned
or controlled by that Government as may be specified in that direction.
4. AMENDMENTS MADE TO THE COMPANIES ACT BY THE DEPOSITORIES
ACT, 1996
(1) Every person holding equity share capital of a company and whose name is
entered as beneficial owner in the records of the depository shall be deemed
to be a member of the concerned company. [Section 41(3)]
(2) Section 83 was repealed, as requirement of distinguishing each share in a
company by an appropriate number is no more mandatory.
(3) Stamping of transfer instruments is not required where both the transferor
and transferee are entered as beneficial owners in the records of a
depository. [Section 111(13)]
(4) Power of company to refuse to register transfer of shares would apply to a
private company only. [Section 111(14)]
(5) The securities of a company other than a private company have been made
freely transferable. The transfer has to be effected immediately by the
company/depository. However, if it is provided that the transfer is in
contravention of SEBI Act/SICA the aggrieved party can move to
CLB
1
/Tribunal
2
to determine if the alleged contravention has taken place.
[Section 111A]
(6) The register of members shall indicate the shares held by a member in
demat mode but such shares need not be distinguished by a distinct
number. [Section 150(1)(b)].
(7) The register of debentureholders shall indicate the debentures held by a
holder in demat form but such debentures need not be distinguished by
distinct numbers.
(8) The company is required to indicate in the offer document that an investor
has the option to subscribe for securities in the demat mode.
(9) Sections 153, 153A, 153B, 187B, 187C and 372 of the Companies Act
made inapplicable to the securities held in a depository on behalf of the
beneficial owners.
5. THE COMPANIES (AMENDMENT) ACT, 1999SALIENT FEATURES
The Infrastructure Development Finance Company Limited recognised as
one of the Public Financial Institutions.
Companies had been allowed to buy-back their own securities.
Companies enabled to issue Sweat Equity shares.
Facility for nomination provided for the benefit of share/debenture/deposit
holders.

1
Existing.
2
Proposed. [by virtue of Companies (Second Amendment) Act, 2002]


An Investor Education and Protection Fund proposed to be established.
National Advisory Committee on Accounting Standards for companies
proposed to be established.
Companies freed from obtaining prior approval of Central Government for
their intercorporate investment/lending proposals.
6. THE COMPANIES (AMENDMENT) ACT, 2000SALIENT FEATURES
The major provisions of this Amendment Act, in brief, are as under:
(1) Private Companies and Public Companies to have a minimum paid-up
capital of Rupees one lakh and five lakh respectively. This is also applicable
to existing companies.
(2) Change of place of registered office from the jurisdiction of one Registrar of
Companies to another Registrar of Companies within the same state
requires confirmation from the Regional Director.
(3) Provisions relating to deemed public companies (Section 43A companies)
become inoperative and a new sub-section (2A) relating to conversion of a
public company to a private company on or after the commencement of
Companies (Amendment) Act, 2000 inserted in the Companies Act, 1956.
(4) SEBI entrusted with powers with regard to issue and transfer of securities
and non-payment of dividend by listed public companies.
(5) Certain measures included for protecting the interest of small depositholders
in a company.
(6) Preferential offer/Private placement of securities to 50 (fifty) persons or more
treated as public issue. This shall not apply to a preferential offer made by
public financial institutions and NBFCs.
(7) Provisions for issuing equity share capital with differential rights as to
dividend, voting or otherwise included in the Act.
(8) Provisions relating to shelf-prospectus and information memorandum
included in the Act.
(9) Every listed company making initial public offer of any security for a sum of
Rupees ten crores or more will have to issue the same only in a
dematerialised form.
(10) Specific provisions for appointment of Debenture Trustees, liability of the
company to create security and debenture redemption reserve included in
the Act.
(11) Provisions for appointment of Public Trustees by the Central Government
deleted with a view to enable the Trusts to directly exercise their voting
power. Similarly, provisions relating to declaration of beneficial interest by
registered holders also deleted.
(12) With a view to ensuring good corporate governance, voting through postal
ballot for important items (as may be notified) were prescribed.
(13) The period for disbursing dividend including interim dividend reduced to
thirty (30) days from the date of declaration of dividend. The amount of
dividend declared to be deposited in a separate bank account within five


days from the date of declaration of such dividend.
(14) Board of directors report to include a Directors Responsibility Statement to
highlight the accountability of directors with a view to ensure good corporate
governance.
(15) Private companies to be excluded in reckoning the number of companies
which an auditor can audit.
(16) A holder of security which carries voting rights in a company to be
disqualified for appointment as an auditor of the said company.
(17) Auditors to report in thick type or in italics their observations which have an
adverse effect on the functioning of the company.
(18) A public company having a paid-up share capital of five crore rupees or
more and one thousand or more small shareholders may appoint at least
one director elected by small shareholders (holding shares of nominal value
of Rs. 20,000 or less) on the Board of the said company.
(19) No person can hold office of director in more than 15 (fifteen) companies at
a time.
(20) Every public company having paid up capital of not less than rupees five
crores shall constitute Audit Committee of the Board.
(21) For the purpose of managerial remuneration the amount of depreciation to
be the same as provided in Profit and Loss Account of the Company.
(22) Companies with paid-up share capital of Rs. 10 lakhs or more and which are
not required to have wholetime secretary in their employment required to file
a Compliance Certificate from a Secretary in whole-time practice with
Registrar of Companies. A copy of such certificate shall also be attached
with Directors Report.
(23) Certain new expressions defined in the Act e.g. abridged prospectus, shelf
prospectus, depository, information memorandum, dividend etc.
(24) As a thumb rule, penal provisions (fiscal penalties) contained under various
sections of the Companies Act, 1956 were increased ten fold.
7. COMPANIES (AMENDMENT) ACT, 2002 AND COMPANIES (SECOND
AMENDMENT) ACT, 2002 SALIENT FEATURES
1. New Part IXA consisting of Section 581A to 581ZT relating to Producer
Companies inserted vide Companies (Amendment) Act, 2002 effective from
6.2.2003.
2. The existing Company Law Board is proposed to be dissolved and in its
place a National Company Law Tribunal (Tribunal) is to be constituted.
3. Substantial enhancement in the number of members of the Tribunal.
Similarly, the number of Benches would also increase.
4. The Tribunal will consist of a President and Judicial and Technical Members.
The maximum number of members should not exceed sixty-two. The actual
number will be decided by the Central Government, as it may deem fit. The
appointments will be done by the Government, by notification in the Official


Gazette.
5. Setting up of National Company Law Appellate Tribunal (Appellate Tribunal).
Appeals against the orders of the Tribunal can be filed with the Appellate
Tribunal. Further appeal against the orders of the Appellate Tribunal would
lie to the Supreme Court.
6. The Board for Industrial and Financial Reconstruction is to be abolished and
SICA will be repealed.
7. Transfer of all the powers from the BIFR to the Tribunal.
8. Transfer of certain powers of the High Court to the Tribunal.
9. Greater role for professionals in the administration of Company Law.
10. The Amendment Act seeks to transfer powers relating to winding up,
mergers and amalgamations from the Court to the Tribunal.
11. The definition of a sick industrial company to be changed and it shall mean
an industrial company which has:
(i) the accumulated losses in any financial year equal to fifty per cent or
more of its average net worth during four years immediately preceding
such financial years; or
(ii) failed to repay its debts within any three consecutive quarters on
demand for its repayment by a creditor or creditors of such company.
12. The Amendment Act has introduced a new provision for imposition of cess.
Under Sections 441A to 441G, every company will be required to pay cess
at such rate as may be decided by the Central Government. The amount so
collected is proposed to be utilised for the revival and the rehabilitation of
sick industrial companies. The amount will be first credited into the
Consolidated Fund of India. Later, as may be approved by the Parliament,
the amount so approved will be credited to a specially created Fund.
Assistance to sick industrial companies will be provided out of the said Fund.
The power to distribute the amount out of the said fund is vested in the
Tribunal.
13. Several powers that were earlier exercised by the Company Law Board are
to be transferred to the Central Government, including granting of approval
for shifting of registered office from one State to another State, extension of
time for filing of charges, permission for holding Annual General Meeting,
etc.
Only Sections 2 and 6 of the Companies (Second Amendment) Act, 2002
(relating to NCLT and constitutions of NCLT have come into force w.e.f. 1.4.03.
8. THE COMPANIES (AMENDMENT) ACT, 2006
The Companies (Amendment) Bill, 2006 was introduced and passed by the
Parliament in May, 2006. The Bill received President's assent on 29th May 2006.
Section 4 of the Act, which proposed to insert new Sections 610B, 610C, 610D and
610E was made effective from 16th September 2006 [vide S.O.No.1529E dated
14.9.2006]. Sections 2 and 3 of the Act pertaining to Director Identification Number


(DIN) have been made effective from 1st November 2006 [vide GSR 648(E) dated
19.10.2006].
Background
In the context of rapid developments witnessed in technology, the Ministry of
Corporate Affairs (MCA) decided to enable the operations carried out by the Ministry
and its field offices to be performed more efficiently and effectively through the use of
contemporary information technology and computers. The MCA, on the
recommendations of Department of Information Technology has implemented an e-
Governance initiative through a project named as MCA-21. This project aims at
providing the public, corporate entities and others an easy and secure online access
to the corporate information, including filing of documents and public access to the
information required to be in the public domain under the statute, at any time and
from anywhere. The filing and registration of documents is a statutory requirement
under the Act. At present, the Act lays down the procedures for filing of various
documents in physical form and the processes associated therewith.
While, the broad enabling framework for such an initiative is available under the
Information Technology Act, 2000 read with Companies Act, 1956, enabling
provisions would still be required to support certain online electronic processes which
have since become available due to technological advancement for various detailed
procedural requirements under the Companies Act, 1956.
It was, therefore, proposed to insert new sections 610B, 610C, 610D and 610E in
the Companies Act, 1956 so as to make provision for electronic filing system and for
payment of fees through electronic form under the said Act which are essential for the
successful implementation of the MCA-21 Project. The electronic system also
provides for multiple modes of payment of statutory fees.
The provisions of the Companies Act, 1956 allow an individual to be a director of
up to fifteen companies and such companies can be located in the jurisdiction in any
of the Registrars of Companies. A need has been recognized for individual identity of
person(s) intending to be directors of companies to be established. This would also
facilitate effective legal action against the directors of such companies under the law,
keeping in view the possibility of fraud by companies and the phenomenon of
companies that raise funds from the public and vanish thereafter. It was, therefore,
proposed to insert new sections 266A, 266B, 266C, 266D, 266E, 266F and 266G in
the Companies Act, 1956 so as to, inter alia, provide for allotment of a unique
Director Identification Number to any individual, intending to be appointed as a
director in a company or to any existing director of a company, for the purpose of his
identification as such, through electronic or other form and to provide for penalty for
any violation in this regard.
Salient features of the provisions of Companies (Amendment) Act, 2006 are as
follows:
Director Identification Number (DIN)
Director Identification Number (DIN) to be obtained by all existing directors
and every other person, intending to become a director.


DIN to be allotted by the Central Government within one month from the
receipt of application for allotment of DIN.
Individuals prohibited to apply, obtain or possess more than one DIN.
Every existing Director to intimate his DIN to the company or all companies
wherein he is a director, within one month of receipt of DIN.
Intimation of DIN, to the Registrar or any other officer or other specified
authority by every company, within one week of the receipt of intimation by
the Director. Intimation to be given in prescribed form and manner.
DIN to be quoted by every person or company while furnishing any return,
information or particulars required to be furnished under the Act, if such
return etc. relate to the director or contain any reference of the director.
Filing of applications, documents inspection etc. through electronic form
Rules may be framed by Central Government to provide for the following:
The applications, balance sheet, prospectus, return, declaration,
memorandum and articles of association, particulars of charges or any other
particulars or document required to be filed or delivered under this Act or
rules made thereunder, are to be filed through electronic form and
authenticated in a manner specified in the rules.
The document, notice, any communication or intimation, required to be
served or delivered under the Act, should be served or delivered through the
electronic form and authenticated in manner specified in the rules.
The applications, balance sheet, prospectus, return, register, memorandum
and articles of association, particulars of charges or any other document and
return filed under the Act or rules made thereunder shall be maintained by
Registrar in electronic form and registered or authenticated in manner
specified in the Rules.
The inspection of the MOA, AOA, register, index, balance-sheet, return or
any other document maintained in the electronic form, which is otherwise
available for such inspection under the Act or rules made thereunder, may
be made by any person through electronic form as may be specified in the
rules.
Fees, charges or other sums, payable under the Act or rules made
thereunder, shall be paid electronically and in such manner as may be
specified in the rules.
Registrar shall register change of registered office, alteration of MOA or
AOA, prospectus, issue certificate of incorporation or certificate of
commencement of business, register such document, issue such certificate,
record notice, receive such communication required to be registered or
issued or recorded or received, as the case may be, under this Act or rules
made thereunder by electronic form, in the manner as may be specified in
the rules.


Providing of value added services through electronic form
Central Government may provide such value added services through the
electronic form and levy such fees as may be prescribed.
Application of provisions of Information Technology Act, 2000
All the provisions of Information Technology Act, 2000 relating to the
electronic records (including the manner and format in which the electronic
records shall be filed), in so far as they are not inconsistent with this Act,
shall apply to the records in electronic form.
9. NATURE, FORM AND TYPES OF BUSINESS ENTERPRISES
Business enterprises can be broadly divided into two broad categories, namely,
one which is non-corporate in form and the other which has a corporate character.
Enterprises which fall in the former category are sole proprietorship, partnerships and
Hindu Undivided Family and business organisation which comprises the latter
category are companies and co-operative undertakings. The basic difference
between the corporate and the non-corporate form of organisation is that while a non-
corporate form of business can be started without registration, corporate bodies
cannot be set up without registration under the laws which govern their functioning.
Non-Corporate Form of Business Enterprises
(1) Sole proprietorship:
In this form of business organisation, an individual normally uses his own capital,
skill and intelligence to carry out some business activity. He is entitled to receive all
the profits and gains of his business and also assumes all the risk of ownership. The
sole proprietor exercises full control over the affairs of his business. As there is no
legal obligation to supply any information regarding his business to anyone, he can
maintain maximum secrecy in conducting his business affairs. This type of
organisation is particularly suitable for businesses which are small in size and where
risk and capital involved are not very large.
(2) Joint Hindu Family/Hindu Undivided Family:
In this form of business ownership, all members of HUF conduct business jointly
under the control of the head of the family who is known as Karta. Karta is basically
the senior most male member of the family. The joint Hindu family firm comes into
existence by the operation of Hindu Law and not by any contract.
(3) Partnership:
In this form of organisation, few like-minded persons pool up their resources to
form a partnership firm. To get a more precise view of the term partnership one
should analyse Section 4 of the Partnership Act, 1932, which defines partnership as
The relation between persons who have agreed to share profits of a business carried
on by all or any of them acting for all. This definition chiefly brings out the following
features of partnership:
(i) Contractual Relationship:- Since partnership arises out of agreement
between persons, only those persons who are competent to contract can be


partners.
(ii) Existence of business:- There can be no partnership without business. The
persons who have agreed to become partners must carry out some
business activity.
(iii) Sharing of profits:- The agreement to carry on business must be entered
into, with the object of making a profit and sharing it among all the partners.
(iv) Mutual agency:- The business must be carried on by all the partners or by
any one or more of them acting for all the partners. Thus each partner is
both an agent and a principal for all other partners.
Partnership is an ideal form of organisation for medium scale business
operations which require greater amount of capital and risks than sole proprietorship
or Hindu Undivided Family.
Corporate Form of Business Enterprises
(1) The Co-operative Organisation
Co-operative organisation is a voluntary association with unrestricted
membership and collectively owned funds, organised on democratic principle of
equality by persons of moderate means and incomes, who join together to supply
their needs and wants through mutual action, in which the motive of production and
distribution is service rather than profit. Besides being a form of ownership co-
operative organisations are a means of protecting the interests of the relatively
weaker sections of society against exploitation by big businesses operating for the
maximisation of profits. The basic feature which differentiates the co-operative
organisation from other form of business enterprises is that its primary motive is
service to the members rather than making profits. A co-operative society is required
to be registered under the Co-operative Societies Act, 1912. The co-operative
societies receive a number of special concessions from the law and the Government,
in order to encourage healthy development of Co-operatives.
By virtue of Companies (Amendment) Act, 2002 effective from 6th February,
2003, a new Part IXA has been added to the main Companies Act, 1956 in
connection with Producer Companies, the incorporation of which has now become
possible under the provisions of the Act. This part of the Act deals with the
corporatisation of cooperative societies.
(2) Company
This type of organisation is characterised by the fact that ownership and
management are separate. The capital of the company is provided by a group of
people called shareholders who entrust the management of the company in the
hands of persons known as the Board of directors. A company is an artificial legal
person created by process of law which makes it an entity separate and distinct from
its members who constitute it. As a natural consequence of incorporation and
transferability of shares, the company has perpetual succession. Thus, it can be said
that this form of organisation is suitable when the capital requirements of a business
are very large and the risks need to be spread among a larger number of persons.


10 COMPANY AS DISTINGUISHED FROM OTHER BUSINESS ENTERPRISES
Though there are a number of similarities between a limited company and other
forms of associations, there are a great number of dissimilarities as well. In both the
cases individuals are the subjects, and trading is generally the object. In the following
paragraphs, a limited company is distinguished from a partnership firm, a Hindu Joint
family business and a registered society.
Distinction between Company and Partnership
The principal points of distinction between a company and a partnership firm, are
as follows:
(1) A company is a distinct legal person. A partnership firm is not distinct from
the several persons who compose it.
(2) In a partnership, the property of the firm is the property of the individuals
comprising it. In a company, it belongs to the company and not to the
individuals comprising it.
(3) Creditors of a partnership firm are creditors of individual partners and a
decree against the firm can be executed against the partners jointly and
severally. The creditors of a company can proceed only against the
company and not against its members.
(4) Partners are the agents of the firm, but members of a company are not its
agents. A partner can dispose of the property and incur liabilities as long as
he acts in the course of the firms business. A member of a company has no
such power.
(5) A partner cannot contract with his firm, whereas a member of a company
can.
(6) A partner cannot transfer his share and make the transferee a member of
the firm without the consent of the other partners, whereas a companys
share can ordinarily be transferred.
(7) Restrictions on a partners authority contained in the partnership contract do
not bind outsiders; whereas such restrictions incorporated in the Articles are
effective, because the public are bound to acquaint themselves with them.
(8) A partners liability is always unlimited whereas that of shareholder may be
limited either by shares or a guarantee.
(9) A company has perpetual succession, i.e. the death or insolvency of a
shareholder or all of them does not affect the life of the company, whereas
the death or insolvency of a partner dissolves the firm, unless otherwise
provided.
(10) A company may have any number of members except in the case of a
private company which cannot have more than fifty members (excluding
past and present employee members). In a public company there must not
be less than seven persons and in a private company not less than two. On
the other hand, a partnership firm cannot have more than 20 members in
any business and 10 in the case of banking business.
(11) A company is legally required to have its accounts audited annually by a
chartered accountant, whereas the accounts of a firm are audited at the


discretion of the partners.
(12) A company, being a creation of law, can only be dissolved as laid down by
law. A partnership firm, on the other hand, is the result of an agreement and
can be dissolved at any time by agreement.
Distinction between Company and Hindu Joint Family Business
1. A company consists of heterogeneous members, whereas a Hindu
Undivided Family Business consists of homogenous members since it
consists of members of the joint family itself.
2. In a Hindu Joint Family business the Karta (manager) has the sole authority
to contract debts for the purpose of the business, other coparceners cannot
do so. There is no such system in a company.
3. A person becomes a member of Joint Hindu Family business by virtue of
birth. There is no provision to that effect in the company.
4. No registration is compulsory for carrying on business for gain by a Hindu
Joint Family even if the number of members exceeds twenty [Shyamlal Roy
v. Madhusudan Roy, AIR 1959 Cal. 380 (385)]. Registration of a company is
compulsory.
Distinction between Company and Corporation
Generally speaking, an association of persons incorporated according to the
relevant law and clothed with legal personality separate from the persons constituting
it is known as a corporation. The word corporation or words body corporate is/are
both used in the Companies Act, 1956. Definition of the same which is reproduced
below is contained in Clause (7) of Section 2 of the Act:
Body corporate or corporation includes a company incorporated outside India
but does not include
(a) a corporation sole;
(b) a co-operative society registered under any law relating to co-operative
societies; and
(c) any other body corporate not being a company which the Central
Government may, by notification in the Official Gazette, specify in this
behalf.
The expression corporation or body corporate is wider than the word
company.
A corporation sole is a single individual constituted as a corporation in respect of
some office held by him or function performed by him. The Crown or a Bishop under
the English law are examples of this type of corporation. It may be noted that though
a corporation sole is excluded from the definition for the purposes of the Companies
Act, it continues to be a legal person capable of holding property and becoming a
member of a company.
A society registered under the Societies Registration Act has been held by the
Supreme Court in Board of Trustees v. State of Delhi, A.I.R. 1962 S.C. 458, not to


come within the term body corporate under the Companies Act, though it is a legal
person capable of holding property and becoming a member of a company.
An industrial society formed under Industrial and Provident Societies Acts is not a
Company. [Great Northern Railway Co. v. Coal Co-operative Society, (1896) I Ch.
187]. In Board of Trustees, Ayurvedic and Unani Tibbia College, Delhi v. State of
Delhi, A.I.R. 1962 S.C. 458, the Supreme Court laid down the essence of a
corporation. It consists of (1) lawful authority of incorporation, (2) the persons to be
incorporated, (3) a name by which the persons are incorporated, (4) a place, and
(5) words sufficient in law to show incorporation. No particular words are necessary
for the creation of a corporation. Any expression showing an intention to incorporate
will be sufficient. It was held in that case that the old Board of Trustees of the
Ayurvedic and Unani Tibbia College of Delhi on being registered under the Societies
Registration Act, 1860 did not become a corporation within the meaning of Entry 44
of list I of the Seventh Schedule of the Constitution. It remained and continued to be
an unincorporated society though under the several provisions of the Societies
Registration Act, 1860 it had certain privileges, some of them being analogous to
those of corporations.
In view of the said decision it has been decided that such a society should not be
deemed to be a body corporate within the meaning of Section 2(7) of the
Companies Act, 1956, although such a society can be treated as a person having
seperate legal entity apart from the members constituting it and thereby capable of
becoming a member of a company under Section 41(2) of the Act. The expression
body corporate occurring in various provisions of the Companies Act viz. Sections
295, 303, 372 etc. should therefore be interpreted so as to exclude a society
registered under the Societies Registration Act from the scope of the expression
body corporate (Circular No. 8/48/2(7)/63-PR dated November 24, 1962). But the Oil
and Natural Gas Commission established under Section 3 of the Oil and Natural Gas
Commission Act, 1959 (43 of 1959) is to be treated as a body corporate by virtue of
the provision of Section 2(7)(c) of the Companies Act, 1956 under which the Central
Government issued a notification to that effect (vide Notification No. G.S.R. 1883
dated 23rd December, 1956).
11. ADVANTAGES OF CORPORATE FORM OF ENTERPRISE
As compared to other types of business associations, an incorporated company
has the following advantages:
A. Corporate Personality: Unlike a partnership firm, which has no existence
apart from its members, a company is a distinct legal or juristic person independent of
its members. Under the law, an incorporated company is a distinct entity, even the
one-man company as discussed above in Salomon & Co. Ltd., case is different from
its shareholders.
Section 34(2) of the Companies Act, 1956 provides that from the date of
incorporation, the subscribers to the memorandum and other members shall be a
body corporate by the name contained in the Memorandum, capable of exercising all
the functions of an incorporated company and having perpetual succession and a
common seal.


B. Limited Liability: The Companies Act provides that in the event of the
company being wound-up, the members shall have liability to contribute to the assets
of the company in accordance with the Act [Section 34(2)]. In the case of companies
limited by shares, no member is bound to contribute anything more than the nominal
value of the shares held by him which remains unpaid. The privilege of limiting the
liability is one of the principal advantages of doing business under the corporate form
of organisation.
C. Perpetual Succession: As stated in Section 34(2) of the Companies Act, an
incorporated company has perpetual succession. Notwithstanding any change in its
members, the company will be the same entity with the same privileges and
immunities, estate and possessions. The death or insolvency of individual members
does not in any way, affect the corporate entity, its existence or continuity. The
company shall continue to exist indefinitely till it is wound-up in accordance with the
provisions of the Companies Act. Members may come and members may go but the
company can go on forever.
D. Transferable Shares: Section 82 of the Companies Act provides The shares
or other interest of any member in a company shall be movable property, transferable
in the manner provided by the articles of the company. This encourages investment
of funds in the shares, so that the members may encash them at any time. Thus, it
provides liquidity to the investors as shares could be sold in the open market and in
stock exchange. It also provides stability to the company.
E. Separate Property: A company as a legal entity is capable of owning its funds
and other assets. The property of the company is not the property of the
shareholders, it is property of the company [Gramophone & Typewriter Co. v.
Stanley, (1906) 2 K.B. 856 at p. 869. The company is the real person in which all the
property is vested, and by which it is controlled, managed and disposed of. In the
eyes of law, even a member holding majority of shares or a managing director of a
company is held liable for criminal mis-appropriation of the funds or property of the
company, if he unauthorisedly takes it away and uses it for his personal purposes.
F. Capacity to Sue: As a juristic legal person, a company can sue in its name
and be sued by others. The managing director and other directors are not liable to be
sued for dues against a company.
G. Flexibility and Autonomy: The company has an autonomy and independence
to form its own policies and implement them, subject to the general principles of law,
equity and good conscience and in accordance with the provisions contained in the
Companies Act, Memorandum and Articles of Association. The company form of
management of business disassociates the ownership from the control of
business, and helps promote professional management and efficiency. The directors
and managers can carry on the business activities with freedom, authority and
accountability in accordance with the Company Law. Precisely this is the reason why
the Government has generally adopted the company form of management for its
various undertakings in preference to management through the departmental
undertakings.
12. DISADVANTAGES OF CORPORATE FORM OF ENTERPRISE


There are, however, certain disadvantages and inconveniences in Incorporation.
Some of these disadvantages are:
1. Formalities and expenses: Incorporation of a company is coupled with
complex, cumbersome and detailed legal formalities and procedures,
involving considerable amount of time and money. Such elaborate
procedures have been laid down to deter persons who are not serious about
doing business, as a company enjoys various facilities from the community.
Even after the company is incorporated, its affairs and working must be
conducted strictly in accordance with legal provisions. Thus various returns
and documents are required to be filed with the Registrar of Companies,
some periodically and some on the happening of an event. Certain books
and registers are compulsorily required to be maintained by a company.
Approval and sanction of the Company Law Board, the Government, the
Court, the Registrar of Companies or other appropriate authority, as the
case may be, is necessarily required to be obtained for certain corporate
activities. Certain corporate activities such as corporate meetings, accounts,
audit, borrowings, lending, investment, issue of capital, dividends etc. are
necessarily required to be conducted and carried out strictly in accordance
with the provisions of the Act and within the prescribed time. Any breach of
the legal provisions is followed by severe penal consequences. Other forms
of business organisations are comparatively free from these legal
complexities and procedural formalities.
2. Corporate disclosures: Notwithstanding the elaborate legal framework
designed to ensure maximum disclosure of corporate information, the
members of a company are having comparatively restricted accessibility to
its internal management and day-to-day administration of corporate working.
3. Separation of control from ownership: Members of a company are not
having as effective and intimate control over its working as one can have in
other forms of business organisation, say, a partnership firm. This is
particularly so in big companies in which the number of members is too large
to exercise any effective control over its day-to-day affairs. No member of a
company can act in his individual capacity for and on behalf of the company.
The members of a company are neither the owners nor the agents of the
company. Thus, the position of ownership of members is more passive in
nature. The members may not have an active and complete control over the
companys working as the partners may have over the firms affairs.
4. Greater social responsibility: Having regard to the enormous powers wielded
by the companies and the impact they have on the society, the companies
are called upon to show greater social responsibility in their working and, for
that purpose, are subject to greater control and regulation than that by which
other forms of business organisation are governed and regulated.
5. Greater tax burden in certain cases: In certain circumstances, the tax burden
on a company is more than that on other forms of business organisation. A
company is liable to tax without any minimum taxable limit as is prescribed
in the cases of registered partnership firms and others. Also it has to pay
income-tax on the whole of its income at a flat rate whereas others are taxed
on graduated scale or slab system. These tax implications may have crucial
bearing on a decision regarding the selection of any form of business


organisation and the time when the existing form of business organisation
should be changed to a new one. Thus, tax implications may direct the
adoption of the partnership form of business organisation as expedient at
the initial stage to be converted into a company later on, when the tax
implications may be more favourable because of the size of the organisation
and its scale of operations.
6. Detailed winding-up procedure: The Act provides elaborate and detailed
procedure for winding-up of companies which is more expensive and time
consuming than that which is applicable to other forms of business
organisation.
13. CONCEPT OF CORPORATE PERSONALITY
By the provision of law, a corporation is clothed with a distinct personality, yet in
reality it is an association of persons who are in fact, in a way, the beneficial owners
of the property of the body corporate. A company, being an artificial person, cannot
act on its own, it can only act through natural persons.
Lifting of or piercing through the corporate veil
Indeed, the theory of corporate entity is still the basic principle on which the
whole law of corporations is based. But as the separate personality of the company is
a statutory privilege, it must be used for legitimate business purposes only. Where a
fraudulent and dishonest use is made of the legal entity, the individuals concerned
will not be allowed to take shelter behind the corporate personality. The Court will
breakthrough the corporate shell and apply the principle of what is known as lifting of
or piercing through the corporate veil. The Court will look behind the corporate entity
and take action as though no entity separate from the members existed and make the
members or the controlling persons liable for debts and obligations of the company.
The corporate veil is lifted when in defence proceedings, such as for the evasion
of tax, an entity relies on its corporate personality as a shield to cover its wrong
doings. [BSN (UK) Ltd. v. Janardan Mohandas Rajan Pillai [1996] 86 Comp. Cas. 371
(Bom).].
However, the shareholders cannot ask for lifting veil for their purposes. This was
upheld in Premlata Bhatia v. Union of India (2004) 58 CL 217 (Delhi) wherein the
premises of a shop were allotted on a licence to the individual licence. She set up a
wholly owned private company and transferred the premises to that company with the
Government consent. She could not remove the illegality by saying that she and her
company were virtually the same person.
Statutory Recognition of Lifting of Corporate Veil
The Companies Act, 1956 itself contains some provisions (Sections 45, 147, 212,
247 and 542) which lift the corporate veil to reach the real forces of action. Taxation
Laws have also made deep inroads to crack the corporate shell for efficient
administration of tax laws. For the purpose of Wealth Tax and Estate Duty
Legislation, new statutory formulae have been enacted for shares of private
companies which substantially disregard the separate corporate entity and proceed
on the basis that the ownership of such corporate property belongs to the


shareholders. In terms of Income-tax Law, directors of private companies have been
made personally liable for the tax liabilities of such companies. The face of the
corporation is examined in order to pay regard to the economic realities behind the
legal facade.
Lifting of Corporate Veil under Judicial Interpretation
Ever since the decision in the Salomon v. Salomon & Co. Ltd., (1897) A.C. 22
normally Courts are reluctant or at least very cautious to lift the veil of corporate
personality to see the real persons behind it. Nevertheless, Courts have found it
necessary to disregard the separate personality of a company in the following
situations:
(a) Where the corporate veil has been used for commission of fraud or improper
conduct, Courts have lifted the veil and looked at the realities of the
situation. In Gilford Motor Co. v. Horne, (1933) 1 Ch. 935; a former
employee of a company made a covenant not to solicit its customers. He
formed a company which undertook solicitation. The company was
restrained by the Court. In J ones v. Lipman, (1962) I. W.L.R. 832, A
agreed to sell certain land to B. Pending completion of formalities of
the said deal, A sold and transferred the land to a company which he
had incorporated with a nominal capital of 100 and of which he and a
clerk were the only shareholders and directors. This was done in order
to escape a decree for specific performance in a suit brought by B. The
Court held that the company was the creature of A and a mask to avoid
recognition and that in the eyes of equity A must complete the
contract, since he had the full control of the limited company in which
the property was vested, and was in a position to cause the contract in
question to be completed.
(b) Where a corporate facade is really only an agency instrumentality. In Re.
R.G. Films Ltd. (1953) 1 All E.R. 615; an American company produced a
film in India technically in the name of a British Company, 90% of
whose capital was held by the President of the American company
which financed the production of the film. Board of Trade refused to
register the film as a British film which stated that English company
acted merely as the nominee of the American corporation.
(c) Where the doctrine conflicts with public policy: Courts lifted the corporate
veil for protecting the public policy. In Connors Bros. v. Connors (1940) 4
All E.R. 179, the principle was applied against the managing director
who made use of his position contrary to public policy. In this case the
House of Lords determined the character of the company as "enemy
company, since the persons who were de facto in control of its affairs,
were residents of Germany, which was at war with England at that
time. The alien company was not allowed to proceed with the action, as
that would have meant giving money to the enemy, which was
considered as monstrous and against public policy.
(d) For determining the character or status of the company the Court may
ignore the separate entity [Daimler Co. Ltd. v. Continental Tyre & Rubber
Co., (1916) 2 A.C. 307].


(e) Where the veil has been used for evasion of taxes and duties the Court
upheld the piercing of the veil to look at the real transaction. (Commissioner
of Income Tax v. Meenakshi Mills Ltd., A.I.R. 1967 S.C. 819). [India Waste
Energy Development Ltd. v. Government of NCT of Delhi, (2003) 114 Com
Cases 82 (Del)].
(f) Where it was found that the sole purpose for which the company was formed
was to evade taxes the Court will ignore the concept of separate entity, and
make the individuals liable to pay the taxes which they would have paid but
for the formation of the company. (Re.: Sir Dinshaw Manakjee Petit, A.I.R.
1927 Bombay 371).
The facts of the case are that the assessee was a wealthy man
enjoying large dividend and interest income. He formed four private
companies and agreed with each to hold a block of investment as an
agent for it. Income received was credited in the accounts of the
company but the company handed back the amount to him as a
pretended loan. This way he divided his income in four parts in a bid to
reduce his tax liability.
But it was held the company was formed by the assessee purely and
simply as a means of avoiding super-tax and the company was nothing
more than the assessee himself. It did no business, but was created
simply as a legal entity to ostensibly receive the dividends and
interests and to hand them over to the assessee as pretended loans.
The Court decided to disregard the corporate entity as it was being
used for tax evasion.
(g) Avoidance of welfare legislation is as common as avoidance of taxation and the
approach in considering problems arising out of such avoidance has necessarily
to be the same and, therefore, where it was found that the sole purpose for the
formation of the new company was to use it as a device to reduce the amount to
be paid by way of bonus to workmen, the Supreme Court upheld the piercing of
the veil to look at the real transaction (The Workmen Employed in Associated
Rubber Industries Limited, Bhavnagar v. The Associated Rubber
Industries Ltd., Bhavnagar and another, A.I.R. 1986 SC 1).
The facts of the case were that a new company was created wholly by
the principal company with no assets of its own except those
transferred to it by the principal company, with no business or income
of its own except receiving dividends from shares transferred to it by
the principal company i.e. only for the purpose of splitting the profits
into two hands and thereby reducing the obligation to pay bonus. The
Supreme Court of India held that the new company was formed as a
device to reduce the gross profits of the principal company and
thereby reduce the amount to be paid by way of bonus to workmen.
The amount of dividends received by the new company should,
therefore, be taken into account as assessing the gross profit of the
principal company.
(h) In quasi criminal cases, the Courts have sometimes applied the doctrine.
(i) In Kapila Hingorani v. State of Bihar, 2003(4) Scale 712, the petitioner


had alleged that the State of Bihar had not paid salaries to its
employees in PSUs etc. for long periods resulting in starvation deaths.
But the respondent took the stand that most of the undertakings were
incorporated under the provisions of the Companies Act, 1956, hence
the rights etc. of the shareholders should be governed by the
provisions of the Companies Act and the liabilities of the PSUs should
not be passed on to the State Government by resorting to the doctrine
of lifting the corporate veil. The Court observed that the State may not
be liable in relation to the day-to-day functioning of the PSUs but its
liability would arise on its failure to perform the constitutional duties
and the functions of these undertakings. It is so because, life means
something more than mere ordinal existence. The inhibition against
deprivation of life extends to all those limits and faculties by which life
is enjoyed.
(j) Where it is found that a company has abused its corporate personality for an
unjust and inequitable purpose, the court would not hesitate to lift the
corporate veil. Further, the corporate veil could be lifted when acts of a
corporation are allegedly opposed to justice, convenience and interests of
revenue or workman or are against public interest.
Thus, in appropriate cases, the Courts disregard the separate corporate
personality and look behind the legal person or lift the corporate veil.
Lifting the Corporate Veil of Small Scale Industry
Where small scale industries were given certain exemptions and the company
owning an industry was not controlled by any group of persons or companies, it was
held that it was permissible to lift the veil of the company to see whether it was the
subsidiary of another company and, therefore, not entitled to the proposed
exemptions. [Inalsa Ltd. v. Union of India, (1996) 87 Com. Cases. 599 (Delhi).]
Use of Corporate Veil for Hiding Criminal Activities
Where the defendant used the corporate structure as a device or facade to
conceal his criminal activities (evasion of customs and excise duties effected through
the company), the Court could lift the corporate veil and treat the assets of the
company as the realisable property of the shareholder. On the facts, there was a
prima facie case that the defendants controlled the two companies, that the
companies had been used for the fraudulent evasion of excise duty on a large
scale, that the defendant regarded the companies as carrying on a family
business and that they had benefited from companies cash in substantial
amounts and further no useful purpose would have been served by involving
the companies in the criminal proceedings. In all the circumstances it was
therefore appropriate to lift the corporate veil and treat the stock in the
companies warehouses and the companies motor vehicles as realisable
property held by the defendants. The court said that excise department is not
to be criticized for not charging the companies. The more complex commercial
activities become, the more vital it is for prosecuting authorities to be selective
in whom and what they charge, so that issues can be presented in as clear and
short form as possible. In the present case, it seemed that no useful purpose


would have been served by introducing into criminal proceedings the
additional complexities as to the corporate mind and with which charging the
companies would have involved. [H. and Others (Restraint Order : Realisable
Property), Re, (1996) 2 BCLC 500 at 511, 512 (CA).]
14. PERSONAL LIABILITY OF DIRECTORS OR MEMBERS
Notwithstanding the cardinal principles of limited liability and corporate
personality, the Companies Act, 1956 has specifically provided that in certain cases
the advantages of distinct entity and limited liability may not be allowed to be enjoyed.
Such cases are:
(i) Reduction of Membership : Where the number of members falls below the
statutory minimum (seven in the case of a public company and two in the
case of a private company), and the company carries on business for more
than 6 months while the number is so reduced, every person who is a
member of the company during the time the company so carries on business
after those six months and is aware of that fact, shall be severally liable for
the payment of companys debts contracted during that time. Thus, in this
case, the privilege of limited liability is lost by the shareholders (Section 45).
(ii) Mis-description of Name: Where an officer of a company signs on behalf of
the company any contract, bill of exchange, hundi, promissory note, cheque,
or order for money or goods, such person shall be personally liable to the
holder if the name of the company is not mentioned (Section 147). In a case,
the directors were held personally liable for a cheque signed by them in the
name of a company stating the company's name as LR Agencies Ltd.
whereas the real name of the company was L & R Agencies Ltd. (Hendon
v. Adelman & Others, 1973 New L.J. 637).
(iii) Subsidiary Company: A holding company is required to disclose to its
members the accounts of its subsidiaries (Sections 212 and 214). Though in
the eyes of law, a subsidiary is a separate legal person, under certain
circumstances, the court may not treat the subsidiary company as an
independent entity. Justice Kapur in Free Wheel (India) Ltd. v. Veda Mitra
(1969) held it may not be possible to put in a strait jacket of judicial
definition as to when the agent, subsidiary company, can really be treated as
a branch, or an agent, or a trustee of the holding company. Circumstances
such as the profits of the subsidiary company being treated as those of the
parent company, the control and conduct of the business of subsidiary
company vesting completely in the nominees of the holding
company..........may indicate that in fact the subsidiary company is only a
branch of the holding company.
Piercing the veil in holding subsidiary relationship.
In Merchandise Transport Limited v. British Transport Commission
[1982] 2 QB 173, a transport company wanted to obtain licences for its
vehicles, but it could not do so if it made the application in its own
name. It, therefore, formed a subsidiary company and the application
for licences was made in the name of the subsidiary. The vehicles were
to be transferred to the subsidiary. Held, the parent and the subsidiary


company were one commercial unit and the application for licences
was rejected.
The principle of lifting or piercing the veil is also applicable to cases of
holding company, subsidiary relationships, where in spite of their distinct
legal personalities, the facts and circumstances show that they are in realty
parts of one concern owned by a goup company. [The workmen employed in
Associated Rubber Industries Ltd., Bhavnagar v. The Associated Rubber
Industries Ltd. Bhavnagar another, AIR 1986 SC 1]. Corporate veil is
normally lifted in cases of holding subsidiary relationship with a view to
making the holding company liable for the comments of its subsidiary unless
it has guaranteed the subsidiarys debts. But the question of piercing the veil
was held irrelevant where the holding companys subsidiary had a
substantial interest, particularly when it had not accepted any such liability
[SAE (India) Ltd. v. EID Parry (India) Ltd. (1998) 18 SCL 481 (Mad)].
Further, in Industrial Development Corporation, Orissa v. Regional Provident
Fund Commissioner (2002) 112 Com Cases 527 (Ori), the Court said that a
holding company being an independent incorporated entity, was not an
employer of its subsidiarys workmen. The subsidiary was not a branch of
the holding company. Sums due from the subsidiary could not be recovered
from the holding company.
(iv) Fraudulent Conduct: Where in the course of winding-up of a company it
appears that any business of the company has been carried on with an
intent to defraud creditors of the company or any other person, or for any
fraudulent purpose, those who were knowingly parties to such conduct of
business may, at the discretion of the court, be made personally liable
without any limitation as to liability for all or any debts or other liabilities of
the company (Section 542).
According to a decision of the Supreme Court in India, corporate veil can be
lifted so as to expose any person to liability who have committed a fraud
upon the public from their sheltered position. In this case a large number of
persons were deceived by a company in a scheme of booking plots-flats
which was operated with utter dishonesty and fraud towards persons coming
into the scheme. Persons playing such frauds, though in the name of a
company, can be held personally liable Delhi Development Authority v.
Skipper Constructions Co. P. Ltd., (1997) 89 Com. Cases. 362 (SC). The
fact that they have been punished for contempt of court does not absolve
them from liability.
(v) Failure to return Application Money: In case of first allotment of shares in a
public company, if minimum subscription has not been received or the
company has not obtained certificate of commencement of business, the
directors shall be personally liable to pay money with interest, if application
money is not repaid within 130 days (unless they prove their ignorance)
[Section 69(5)].
(vi) Misrepresentation in Prospectus: In case of misrepresentation in a
prospectus, every director, promoter, and every other person who authorises
issue of such prospectus incurs liability towards those who subscribe for
share on the faith of untrue statement (Section 62).


(vii) Non-Payment of Tax: When any private company is wound-up, any tax
assessed on the company whether before or in course of liquidation in
respect of any income of any previous year cannot be recovered, every
person who was director of that company at any time during the relevant
previous year shall be jointly and severally liable for payment of tax.
A company transferred its business to another company which was
not taxable, but the company was carrying on some other business
also which was taxable. The company remained liable to pay the tax
applicable to such business and lifting of corporate will was permitted
even in the absence of any statutory provision in this regard [India
Waste Energy Development Ltd. v. Govt. of NCT of Delhi (2003) 114
Com Cases 82 (Del)].
(viii) Ultra vires Acts: Directors of a company will be personally liable for all those
acts which they have done on behalf of a company if they are ultra vires the
company.
15. ILLEGAL ASSOCIATION
In order to prevent the mischief arising from large trading undertakings being
carried on by large fluctuating bodies so that persons dealing with them did not know
with whom they were contracting, the law has put a ceiling on the number of persons
constituting an association or partnership. An unincorporated company, association
or partnership consisting of large number of persons has been declared illegal.
By virtue of Section 11 of the Companies Act, no company, association or
partnership consisting of more than 20 persons (10 in the case of banking business)
can be formed for the purpose of carrying on any business for gain, unless it is
registered as a company under the Companies Act, or is formed in pursuance of
some other Indian Law, or is a Joint Hindu Family carrying on business for gain.
Section 11 of the Act does not apply to the case of a single joint family carrying
on any business whatever may be the number of its members. But if two or more joint
hindu family firms carry on business together and the combined number of members
exceed 20, then their association will become illegal. In computing the number, minor
members of joint families are to be ignored. If by reason of minor members of such
joint families on attaining majority, the number of persons exceeds the statutory limit,
it will ipso facto become an illegal association. In this case the question arises as to
whether the penal provision of this section may be applied to that illegal association.
The liberal view under such circumstances seems to be exemption from the penal
provision since illegality supervenes at a subsequent stage. [Niraban v. Lalit, I.L.R.
(1938) 2 Cal. 368]. But by strict interpretation of the provisions of the said section one
may hold such illegal association liable.
In Babu Lal v. Laxmi Bharat Trading Co., A.I.R. 1966 Raj. 14 (D.B.), an
unregistered association consisting of 115 members was alleged to be formed
at the instance of Government to help it in distribution of grain among public. It
was established from evidence that an element of acquisition of gain was
present in its formation. It was, therefore, held that it was an illegal association
and came within the purview of Section 11 of the Act.


Associations, like charitable, religious or scientific, which are not formed for the
purpose of acquisition of gain are excluded from the scope of the section. [Inland
Revenue Commissioners v. Korean Syndicate, (1920) K.B. 598]. Foreign companies
are also excluded from the scope of this section. On discovery of illegality of an
association, the members may choose either to register it under the Act or to disclose
it immediately. In the absence of any such steps, they continue to be in the
association on paying of the penalty under this section. To protect the interest of the
outsiders this public mischief of unregistered large trading association is suppressed
by this section. It is with this end in view, an illegal association formed by combination
of two or more joint families ought to be governed by the provisions of the section.
The effect of non-registration of an association which falls within the terms of
Section 11 is that such association is illegal and has no existence in the eyes of law.
The law does not recognise it so much, so no relief can be granted either to the
association or to any of its members, as the contractual relationship on which it is
founded is illegal (Badri Prasad v. Nagarmal, A.I.R. 1959 S.C. 559).
Since, the law does not recognise it, an illegal association:
(i) cannot enter into any contract;
(ii) cannot sue any member, or outsider, not even if the company is
subsequently registered;
(iii) cannot be sued by a member, or an outsider for, it cannot contract any
debts;
(iv) cannot be wound up by order of Court. In fact, the Court cannot entertain a
petition for its winding up as an unregistered company, for if it did, it would
be indirectly according recognition to the illegal association (Raghubar Dayal
v. Sarafa Chamber A.I.R. 1954 All. 555).
However, an illegal association is liable to be taxed [Kumara Swamy Chattiar v.
Income Tax Officer (1957) I.T.R. 457].
The members of an illegal association are individually liable in respect of all acts
or contracts made on behalf of the association; they cannot either individually or
collectively, bring an action to enforce any contract so made, or to recover any debt
due to the association [Wilkinson v. Levison (1925) 42 T.L.R. 97].
Under Sub-sections (4) and (5) of Section 11, every member of an illegal
association is:
(i) personally liable for all liabilities incurred in carrying on the business of, or
by, the illegal association, and
(ii) punishable with fine up to Rs. 10,000.
16. NATURE OF CORPORATENESS
Company as person
Company is an artificial person created by law. It is not a human being but it acts
only through human beings. It is considered as a legal person which can enter into
contracts, possess properties in its own name, sue and can be sued by others etc. It


is called as an artificial person since it is invisible, intangible, existing only in the
contemplation of law. It is capable of enjoying rights and being subject to duties.
In the case of Union Bank of India v. Khader International Construction and
Other [(2001) 42 CLA 296 SC] the question which arose before the Court was
whether a company is entitled to sue as an indigent person under Order 33,
Rule 1 of the Civil Procedure Code, 1908. The aforesaid Order permits persons
to file suits under the Code as pauper/indigent persons if they are unable to
bear the cost of litigation. The appellant in this case had objected to the
contention of the company which had sought permission to sue as an indigent
person. The point of contention was that, the appellant being a public limited
company, it was not a person within the purview of Order 33, Rule 1 of the
Code and the person referred to only a natural person and not to other juristic
persons. The Supreme Court held that the word person mentioned in Order
33, Rule 1 of the Civil Procedure Code, 1908, included any company as
association or body of individuals, whether incorporated or not. The Court
observed that the word person had to be given its meaning in the context in
which it was used and being a benevolent provision, it was to be given an
extended meaning. Thus a company may also file suit as an indigent person.
Nationality and Residence of a Company
Though it is established through judicial decisions that a company cannot be a
citizen, yet it has nationality, domicile and residence. In Gasque v. Inland Revenue
Commissioners, (1940) 2 K.B. 88, Macnaghten. J. held that a limited company is
capable of having a domicile and its domicile is the place of its registration and that
domicile clings to it throughout its existence. He observed in this case:
It was suggested that a body corporate has no domicile. It is quite true that a
body corporate cannot have a domicile in the same sense as an individual. But by
analogy with a natural person the attributes of residence, domicile and nationality can
be given to a body corporate.
In Tulika v. Parry and Co., (1903) I.L.R. 27 Mad. 315, Kelly C.B. observed:
A joint stock company resides where its place of incorporation is, where the
meetings of the whole company or those who represent it are held and where its
governing body meets in bodily presence for the purposes of the company and
exercises the powers conferred upon it by statute and by the Articles of Association.
Thus, a company resides where the central control and management of its
business is exercised. [Swedish Central Rail Co. Ltd. v. Thomson, (1925) A.C. 495].
Its residence is primarily important in connection with taxation. A company is deemed
to be a person within the meaning of Section 2(31) of the Income Tax Act, 1961, so, it
is said to be resident in India in an accounting year if any one of the tests as laid
down in Section 6(3) of the Act is satisfied:
(a) It is an Indian Company which means that it is registered under the Indian
Companies Act and carries on business wholly in India; or
(b) The control and management of the affairs of the company is situated wholly
in India during the accounting year.
Residence is an important connecting factor between a company and the


governing legal system. It is on this basis that liability of a company to pay income-tax
is determined. Though the place of incorporation is considered as the primary
evidence of residence of a company, it is by no means the conclusive test. So, an
alternative test is applied to bring a company within the purview of a legal system in
which it operates business and earns a fabulous income. In Cesana Sulphur Co. v.
Nicholson (1876) I Ex. D. 428, the alternative test laid down is that the residence of a
Corporation is situated at the centre of control of the corporations affairs, even
though it may differ from the place of incorporation. In Swedish Central Railway v.
Thomson (ibid) the House of Lords has further extended the meaning of residence of
a corporation. It was held in this case that a company may have two residences
where control is divided between two major offices. But this view is not in conformity
with the test laid down in Section 6(3)(b) of the Indian Income Tax Act, 1961.
Company as a Citizen
The company, though a legal person, is not a citizen under the Citizenship Act,
1955 or the Constitution of India. In State Trading Corporation of India Ltd. v. C.T.O.,
A.I.R. 1963 S.C. 1811, the Supreme Court held that the State Trading Corporation
though a legal person, was not a citizen and can act only through natural persons.
Nevertheless, it is to be noted that certain fundamental rights enshrined in the
Constitution for protection of person, e.g., right to equality (Article 14) etc. are
available to company.
In R.C. Cooper v. Union of India, (ibid) also known as the Bank
Nationalisation case, the Supreme Court held that where the legislative
measures directly touch the company of which the petitioner is a shareholder,
he can petition on behalf of the company, if by the impugned action, his rights
are also infringed. In that case, the court entertained the petition under Article
32 of the Constitution at the instance of a director as shareholder of a company
and granted relief. It is, therefore, to be noted that an individuals right is not
lost by reason of the fact that he is a shareholder of the company.
In Bennet Coleman Co. v. Union of India, AIR 1973 SC 106, the Supreme Court
extended the rule by stating:
It is now clear that the Fundamental Rights of shareholders as citizens are not
lost when they associate to form a company. When their Fundamental Rights as
shareholders are impaired by State action their rights as shareholders are protected.
The reason is that the shareholders rights are equally and necessarily affected if the
rights of the company are affected.
In D.C.M. Company Limited v. Union of India and Others, [1983 5 Comp. Cas. 674;
2. Comp. L.J. 281 (S.C.)], the Supreme Court took the similar view on the matter.
The natural corollary of the above decisions is that the company acquires a
standing by impleading a shareholder with itself in an action.
But a company will be regarded as having enemy character, if the persons
having de facto control of its affairs are resident in an enemy country, or wherever
they may be, are acting under instructions from or on behalf of the enemy [Daimler
Co. Ltd. v. Continental Tyre Co., (1916) 2 A.C. 307 HL].


LESSON ROUND-UP

The word company is derived from the Latin word (Com = with or together; panis
= bread), and it originally referred to an association of persons who took their
meals together.
A company may be an incorporated company or a Corporation, or an
unincorporated company.
In the legal sense, a company is an association of both natural and artificial
persons incorporated under the existing law of a country.
Company is characterized by corporate personality, limited liability, perpetual
succession, separate property, transferability of shares, common seal, capacity to
sue and be sued, contractual rights, limitation of action, separate management,
termination of existence etc.
Company Law in India has been modelled on the English Acts.
The Companies Act, 1956 was enacted with a view to consolidate and amend the
earlier laws relating to companies and certain other associations.
Major amendments to Companies Act, 1956 have been made by MRTP Act,
Depositories Act, 1996, the Companies (Amendment) Acts, 1988, 1999, 2000,
2002 & 2006 apart from various other Amendments Acts.
The Ministry of Corporate Affairs (MCA) on the recommendations of Department
of Information Technology has implemented an e-Governance initiative through a
project named as MCA-21 wherein:
New sections have been inserted in the Companies Act, 1956 so as to make
provision for electronic filing system and for payment of fees through
electronic form under the said Act which are essential for the successful
implementation of the MCA-21 Project.
New sections were inserted in the Companies Act, 1956 to also provide for
allotment of a unique Director Identification Number to any individual,
intending to be appointed as a director in a company or to any existing
director of a company, for the purpose of his identification as such, through
electronic or other form and to provide for penalty for any violation in this
regard.
Business enterprises can be broadly divided into two broad categories, namely,
one which is non-corporate in form and the other which has a corporate
character.
Enterprises which fall in the former category are sole proprietorship, partnerships
and Hindu Undivided Family and business organization which comprises the
latter category are companies and co-operative undertakings.
A limited company can be distinguished from a partnership firm, a Hindu Joint
Family business and a registered society.
As compared to other types of business associations, an incorporated company
has the advantage of corporate personality, limited liability, perpetual succession,
transferable shares, separate property, capacity to sue, flexibility and autonomy.
There are, however, certain disadvantages and inconveniences in incorporation.
Some of these disadvantages are formalities and expenses, corporate
disclosures, separation of control from ownership, greater social responsibility,
greater tax burden in certain cases, detailed winding-up procedure.
By the provision of law, a corporation is clothed with a distinct personality, yet in


reality it is an association of persons who are in fact, in a way, the beneficial
owners of the property of the body corporate.
Where a fraudulent and dishonest use is made of the legal entity, the individuals
concerned will not be allowed to take shelter behind the corporate personality.
The Court will breakthrough the corporate shell and apply the principle of what is
known as lifting of or piercing through the corporate veil.
Notwithstanding the cardinal principles of limited liability and corporate
personality, the Companies Act, 1956 has specifically provided that in certain
cases the advantages of distinct entity and limited liability may not be allowed to
be enjoyed.
In order to prevent the mischief arising from large trading undertakings being
carried on by large fluctuating bodies so that persons dealing with them did not
know with whom they were contracting, the law has put a ceiling on the number
of persons constituting an association or partnership.
The company, though a legal person, is not a citizen under the Citizenship Act,
1955 or the Constitution of India. Though it is established through judicial
decisions that a company cannot be a citizen, yet it has nationality, domicile and
residence.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation).
1. A joint stock company is described as an artificial person created by law,
endowed with perpetual succession and common seal........ But it does not
differ from an ordinary individual in having a backbone and limbs. Comment
citing relevant case law.
2. Advice on the following:
(a) Four persons are the only members of a private company. All of them go
for a pleasure trip in a car and due to an accident all the four die. Does
the private company exist?
(b) The members of a private limited company consist of A and B who are
also its directors. On 4th August, 2000 A left India for a foreign
business tour and on 28th August, 2000 he died abroad. On 1st
September, 2000 B purchased on credit Rs. 10,000 worth of goods
from C on behalf of the company. C now proposes to make B
personally liable for the payment of the debt. Is B liable?
3. (a) What types of associations are prohibited by the Companies Act, and
what are the disabilities of such associations?
(b) What is a body corporate? What do you understand by corporate veil
and when is it disregarded?
(c) Members of a Limited Company may nevertheless have unlimited
liability. Comment.



4. State the consequences in each of the following cases giving reasons for
your answers:
(a) A Private Company has 60 members in total of which 10 are the
employees of the company. 5 of these employees leave the employment
of the company.
(b) A private firm has 20 partners, including a private company which is
having 30 shareholders.
5. The fundamental attribute of corporate personality is that the company is a
legal entity distinct from the members. Elucidate the above statement.
6. Discuss the principles of law laid down by the House of Lords in Salomon v.
Salomon & Co. Ltd.
7. What is corporate veil? State the circumstances when it can be lifted. Refer
to decided cases and provisions of the Companies Act, 1956.
8. Discuss briefly the history of Company Law in India. Also discuss how far
Company Law in India has been influenced by the English Company Law.
9. What are the advantages of an incorporated company compared to
partnership firms and unincorporated companies?
10. The Statutes relating to limited liability have probably done more than any
legislation of the last fifty years to further the commercial prosperity of the
country. Comment and give exceptions to the principle of Limited Liability.
11. What is the maximum number of persons who may lawfully form:
(a) a banking partnership.
(b) a partnership other than a banking partnership?
12. Write short notes on:
(a) Perpetual succession
(b) Transferability of shares
(c) Limited liability
(d) Corporate personality
(e) One man company.
13. A company transferred all the shares of another company held by it to its
newly incorporated wholly-owned public limited subsidiary investment
company.
During the year, the subsidiary company made no other investment or had
no source of income. By the transfer of the above shares, the holding
companys available surplus for payment of bonus to its workmen got
reduced and consequently rate of bonus come down.
Are the workmen of holding company entitled to get the dividend income of
subsidiary company included in holding companys profit and loss account
for the purpose of getting higher rate of bonus?


14. Examine the following and say whether they are correct or wrong:
(a) A company being an artificial person cannot own property and cannot
sue or be sued.
(b) Members are the owners of the companys undertaking.
(c) The term body corporate connotes a wider meaning than the term
company.
(d) Every member of an illegal association shall be personally liable for all
liabilities incurred in carrying on the business.
(e) A company is a juristic legal person.


Suggested Readings:
(1) Company LawPalmer
(2) Company LawAvtar Singh






























STUDY II
INCORPORATION AND ITS CONSEQUENCES-I
TYPES OF COMPANIES


LEARNING OBJECTIVES
This chapter explains various types of companies, viz. private companies, public
companies, producer companies. It classifies companies from the point of view of
incorporation and liability and also as associations not for profit, government
companies, foreign companies, holding and subsidiary companies, investment
companies, etc. It gives a brief study of statutory corporations along with their
characteristics. At the end of the lesson, you should be able to understand:
Meaning of a private company, its privileges and exemptions and its special
obligations.
Consequences of infringement of the articles of private companies.
Meaning of a public company, companies limited by shares, companies limited by
guarantee, unlimited company, associations not for profit.
Definition of Government companies and audit in Government companies.
Foreign companies, holding and subsidiary companies, determination of holding
subsidiary relationship and shareholding.
Distinction between investment companies, producer companies, finance
companies and public financial institutions.
Statutory corporations, their characteristics and their growth in India.
Which corporations are state?
Chartered companies in U.K.


1. INTRODUCTION
The Companies Act, 1956 provides for a variety of companies of which can be
promoted and registered under the Act. The three basic types of companies which
may be registered under the Act are:
(a) Private Companies;
(b) Public Companies; and
(c) Producer Companies.
Companies may be classified from the point of view of:
(i) Incorporation: There are three ways in which companies may be
incorporated.
(a) Chartered Companies: A company created by the grant of a charter by
45


the Crown is called a Chartered Company and is regulated by that
Charter. The East India Company and the Chartered Bank are examples
of Chartered Companies.
(b) Statutory Companies: These are constituted by special Act of
Parliament or State Legislature. The provisions of the Companies Act,
1956 do not apply to them. Examples of these types of companies are
Reserve Bank of India, Life Insurance Corporation of India, etc.
(c) Registered Companies: The companies which are incorporated under
the Companies Act, 1956 by getting themselves registered with ROC fall
under this category.
(ii) Liability: Under this category there are three types of companies:
(a) Unlimited Companies: In this type of company, the members are liable
for the company's debts in proportion to their respective interests in the
company and their liability is unlimited. Such companies may or may not
have share capital. They may be either a public company or private
company though these days, such companies are rare.
(b) Companies limited by guarantee: A company that has the liability of its
members limited to such amount as the members may respectively
undertake, by the memorandum, to contribute to the assets of the
company in the event of its being wound-up, is known as a company
limited by guarantee. The members of a guarantee company are, in
effect, placed in the position of guarantors of the company's debts up to
the agreed amount.
(c) Companies limited by shares: A company that has the liability of its
members limited by the memorandum to the amount, if any, unpaid on
the shares respectively held by them is termed as a company limited by
shares. For example, a shareholder who has paid Rs. 75 on a share of
face value Rs. 100, can be called upon to pay the balance of Rs. 25
only. Companies limited by shares are by far the most common and may
be either public or private.
Companies may also be classified as :
(a) Associations not for profit having licence under Section 25 of the Act;
(b) Government Companies;
(c) Foreign Companies;
(d) Holding and Subsidiary Companies;
(e) Investment Companies; and
(f) Producer Companies.
2. PRIVATE COMPANY
By virtue of Section 3(1)(iii), a private company means a company, which has a
minimum paid-up capital of one lakh rupees or such higher paid-up capital as may be
prescribed, and by its articles:
(a) restricts the right to transfer its shares, if any;
(b) limits the number of its members to fifty not including
(i) persons who, are in the employment of the company; and


(ii) 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;
(c) prohibits any invitation to the public to subscribe for any shares in, or
debentures of, the company; and
(d) prohibits any invitation or acceptance of deposits from persons other than its
members, directors or their relatives.
Provided that where two or more persons hold one or more shares in a company
jointly, they shall, for the purpose of this definition, be treated as a single member.
It must be noted that it is only the number of members that is limited to fifty. A
private company may issue debentures to any number of persons, the only condition
being that an invitation to the public to subscribe for debentures is prohibited.
The aforesaid definition of private limited company specifies the restrictions,
limitations and prohibitions, which must be expressly provided in the articles of
association of a private limited company. Section 26 of the Companies Act, provides that
a private limited company must necessarily have articles of its own. Section 27(3)
provides that in the case of a private company having share capital, the articles must
contain the matters specified in sub-clauses (a), (b) and (c) of clause (iii) of Sub-section
(1) of Section 3 of the Act and in the case of any other private company, the articles must
contain provisions relating to matters specified in sub-clause (b) and (c) of clause (iii) of
Sub-section (1) of Section 3.
The Articles of Association of a private company should contain one more
prohibition for any invitation or acceptance of deposits from persons other than its
members, directors or their relatives. It must be borne in mind that an invitation is not
prohibited but invitation to the public is prohibited. If a company invites a selected few
people e.g. employees, friends or relatives of directors, then it will not be invitation to
public.
With regard to the requirement of minimum paid-up capital of one lakh rupees for
a private company, Sub-section (3) of Section 3 of the Act had given two years
period, from the day the Amendment Act of 2000 came into force to the existing
companies within which they were required to enhance their paid-up capital to the
minimum required level. The Government is empowered to prescribe a higher
minimum paid-up capital at any time.
It was also stipulated that if any company fails to enhance its paid-up capital to
the minimum level as required, it shall be deemed to be a defunct company within the
meaning of Section 560 of the Act and its name shall be struck off from the register of
companies kept and maintained at the office of Registrar of Companies.
The words Private Limited must be added at the end of its name by a private
limited company.
Section 12 of the Act stipulates that any two or more persons associated for any
lawful purpose may, by subscribing their names to a Memorandum of Association
and otherwise complying with the requirements of the Act in respect of registration,
form an incorporated company, with or without limited liability. Section 252 further lays
down that a private company shall have at least two directors. The only two members


may also be the only two directors of a private company.
The Directors must exercise their power to refuse to register a transfer in respect of
a private company in good faith and for the benefit of a company and in accordance
with its articles. The power must not be exercised for some extraneous purpose.
A private company which is a subsidiary company of a public company has come
under the scope of a public company from the commencement of the Companies
(Amendment) Act, 2000, as per the amended definition of the term Public Company
under Section 3 of the Act.
Before the Companies (Amendment) Act, 2000 a private company could become
a deemed public company on criteria like turnover, shareholding of or by other bodies
corporate etc. under Section 43A of the Act.
The Companies (Amendment) Act 2000 made the provisions of Section 43A
relating to deemed public company, inapplicable except Sub-section (2A) which
provides that a deemed public company which wanted to convert into a private
company (as it had earlier converted from private company to deemed public
company), shall inform the Registrar, thereupon, the Registrar shall make the
necessary alterations in the certificate of incorporation and its memorandum of
association along with substituting the words private company for the words public
company, within four weeks from the date of application made by the company.
Privileges and Exemptions of Private Company
The Companies Act, 1956, confers certain privileges on private companies. Such
companies are also exempted from complying with quite a few provisions of the Act.
The basic rationale behind this is that since the private limited companies are
restrained from inviting capital and deposits from the public, not much public interest
is involved in their affairs as compared to public limited companies.
The private limited companies lose the privileges and exemptions the moment
they cease to be private companies. A private limited company, which is a subsidiary
of a public limited company, is a public company in accordance with the amended
definition of public company under Section 3 of the Act. Similarly, if a private
company which was a deemed public company under the provisions of Section 43A
of the Act on or before 13-12-2000 decides to become a private company, it has to
take steps provided in Sub-section (2A) of Section 43A of the Act. All the provisions
of Section 43A except Sub-section (2A) have become inoperative on and from 13-12-
2000.
The privileges and exemptions enjoyed by a private company or its advantages
over a public company are as follows:
Section Nature of exemptions/privileges
70(3) Statement in lieu of prospectus need not be delivered to the Registrar
before allotting shares.
Section Nature of exemptions/privileges


77(2) Financial assistance can be given for purchase of or subscribing for
its own shares or shares in its holding company.
81(3)(a) Further shares can be issued without passing special resolution or
obtaining Central Governments approval and without offering the
same necessarily to existing shareholders.
90(2) Provisions as to kinds of share capital (Section 85), further issue of
share capital (Section 86), voting rights (Section 87), termination of
disproportionate excessive rights (Section 89).
149(7) Business can be commenced immediately on incorporation without
obtaining a certificate of commencement from Registrar.
165(10) It is not necessary to hold a statutory meeting and to send statutory
report to shareholders or file the same with Registrar.
170(1) Articles of private company may provide for regulations relating to
general meetings without being subject to the provisions of
Sections 171 to 186.
192A Provisions regarding postal ballot are not applicable to private
companies and no requirement of small shareholders representative.
198(1) Any amount of managerial remuneration can be paid and the same is
not restricted to any particular proportion of the net profits.
204(6) Private company can appoint a firm or body corporate to an office or
place of profit under the company.
220(1)(a) No person other than a member can inspect or obtain copies of profit
and loss account of the private company.
224(1B) A person who is in full-time employment elsewhere, or a firm may be
appointed or reappointed as auditors of the private company, if such
a person or firm is, at the date of appointment or reappointment,
holding appointment as auditor of the specified number of companies
or more than the specified number of companies.
252(1) Small shareholders representative need not be present on the Board.
252(2) Private company need not have more than two directors.
255(1) A proportion of directors need not retire every year.
257(2) Statutory notice is not required for a person to stand for election as a
director.
259 Central Governments sanction is not required to effect increase in
the number of directors beyond 12 or the number fixed by Articles of
association.
Section Nature of exemptions/privileges
262 Private companies need not follow the proceeding in this section for
filling casual vacancies in the office of directors.


263(1) In passing resolution for election of directors, all directors can be
appointed by a single resolution.
264(3) Consent to act as director need not be filed with Registrar.
266(5) Restriction on appointment or advertisement of director as regards
consent and qualification of shares does not apply.
268 Central Governments sanction is not required to modify any provision
relating to appointment of managing, whole-time or non-rotating
directors.
269(2) Central Governments approval is not required for appointment of
managing or whole-time director or manager.
273 Directors of a private company need not possess any share
qualification in terms of Section 270.
274(1)(g) The prohibition against a person, disqualified under this section, does
not apply to a person, who is a director of a private company. Also
additional grounds for disqualification may be specified by way of
articles.
275 to 279 Restrictive provisions regarding total number of directorships which a
person may hold do not include directorships held in private company
which are not subsidiary of public company.
283(3) Additional grounds for vacation of office may be provided in the
Articles.
292A Audit Committee need not be constituted.
293(1) Certain restrictions on powers of Board of directors do not apply.
295(2) Prohibition against loans to directors does not apply.
300(2) Prohibition against participation in Board meetings by interested
director does not apply.
303(1) Date of birth of director need not be entered in the register of
directors.
309(9) There is no restriction on remuneration payable to directors.
310 Any change in remuneration of directors also does not require
Governments approval.
311 Any increase in the remuneration not being sitting fees beyond
specified limit of directors on appointment or reappointment does not
require Central Governments approval.
Section Nature of exemptions/privileges
316(1) A private company may appoint a person as its managing director
even if he is already a managing director or manager of one or more


companies without complying with Section 316.
317(4) &
388
Managing director can be appointed for more than five years at a
time.
349, 350 Provisions relating to method of determination of net profits and
& 355 ascertainment of depreciation do not apply
372A There is no restriction on making of loans or investments or giving
guarantee, etc.
388A Provisions of Sections 386 and 387, which restrict the number of
companies of which a person can be appointed as manager,
remuneration of the manager, etc., and also provisions of Sections
269, 310, 311, 312 and 317 do not apply.
409(3) Central Government cannot exercise its power to prevent change in
Board of directors which is likely to affect the company prejudicially.
416(1) Person can enter into contract on behalf of company as undisclosed
principal and need not give intimation to the other directors.
Special Obligations of a Private Company
In addition to the restrictions imposed on Private Companies as contained in
Section 3(1)(iii) of the Companies Act, a private company owes certain special
obligations as compared to a public company, which are as follows :
1. A private company, while filing its annual return with the Registrar of
Companies as required by Section 159, must also send with this return a
certificate stating that the company has not, since the date of last return
issued any invitation to the public to subscribe for its shares or debentures of
the company and that where the annual return discloses the fact that the
number of members of the company exceeds fifty, the excess comprises
wholly of persons who under sub-clause (b) of clause (iii) of Sub-section (1)
of Section 3 are not to be included in reckoning the number of fifty
[Section 161(2)(b)].
2. Unless the articles otherwise provide, a member of a private company
cannot appoint more than one proxy to attend and vote at a meeting of the
company [Section 176(1)(b)].
Consequences of Infringement of the Articles of Private Companies
Section 43 lays down that if a private company commits a default in complying
with any of the compulsory provisions required to be contained in its articles as
required under Section 3(1)(iii) [as enumerated earlier], it shall cease to be a private
company and the Act will apply to the company as if it were not a private company.
The proviso to Section 43, however, states that if the infringement of any of the
four conditions contained in the articles was accidental or due to inadvertance or due
to some other sufficient cause, and if the Company Law Board is satisfied that it is
just and equitable to grant relief it may relieve the company from the above


consequences, on such terms and conditions as seem just and expedient to the
Company Law Board, on the application of the company or of any other interested
person.
The consequences which arise on account of infringing the minimum number of
members in the case of private company are as under:
(a) Section 45: Several liability of members: Under Section 45, the members of
a private company will lose their limited liability if, in the normal
circumstances, their number falls below 2 and the company carries on
business for a period of more than 6 months from the date of such reduction.
(b) Section 433(d): Compulsory Winding up: This section states that the
reduction of members below 2 in the case of private company is a valid
ground for compulsory winding up.
(c) Section 439(4)(a): Contributorys Petition: This section states that a
contributory may present a petition for winding up of a private company if the
number falls below two.
3. PUBLIC COMPANY
By virtue of Section 3(1)(iv), a public company means a company which:
(a) is not a private company;
(b) has a minimum paid-up capital of five lakh rupees or such higher paid-up
capital as may be prescribed;
(c) is a private company which is a subsidiary of a company which is not a
private company.
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 shares
and debentures of a public company may be quoted on a Stock Exchange. The
number of members is not limited to fifty. It may be noted that in case of a public
company, the articles do not contain the restrictions provided in Sections 3(1)(iii) of
the Act.
Every public company existing on the commencement of the Companies
(Amendment) Act, 2000, with a paid-up capital of less than five lakh rupees, was
required to, within a period of two years from such commencement, enhance its paid-
up capital to five lakh rupees. Where a public company failed to do so, such company
was deemed to be a defunct company within the meaning of Section 560.
4. LIMITED COMPANY
Section 2(23) defines 'Limited Company'. It means a company limited by shares
or by guarantee.
The liability of the members, in the case of a limited company, may be limited
with reference to the nominal value of the shares, respectively held by them or to the
amount which they have respectively guaranteed to contribute in the event of
winding up of the company. Accordingly, a limited company can be further classified


into: (a) Company limited by shares, and (b) Company limited by guarantee.
Companies Limited by Shares
Under Section 12(2)(a), a company limited by shares is a registered company
where the liability of its members is limited by its Memorandum of Association to the
amount, if any, unpaid on the shares respectively held by them. Accordingly, no
member of a company limited by shares, can be called upon to pay more than the
nominal amount of the shares held by him. If his shares are fully paid-up, he has
nothing more to pay. But in the case of partly-paid shares, the unpaid portion is
payable at any time during the existence of the company on a call being made,
whether the company is a going concern or is being wound up. This is the essence of
a company limited by shares and is the most common form in existence.
Companies Limited by Guarantee
A company limited by guarantee or a "guarantee company" is a registered
company having liability of its members limited by its memorandum to such amount
as the member may respectively undertake to contribute to the assets of the
company in the event of its winding up. Clubs, trade associations and societies for
promoting different objects are examples of such a company. It should be noted that
a special feature of this type of company is that the liability of members to pay their
guaranteed amounts arises only when the company has gone into liquidation and not
when it is a going concern.
As regards the funds, a guarantee company without share capital obtains
working capital from other sources, e.g. fees or grants. But a guarantee company
having a share capital raises its initial capital from its members, while the normal
working funds would be provided from other sources, such as fees, charges,
subscriptions, etc.
The Memorandum of Association of every guarantee company must state that
every member of the company undertakes to contribute to assets of the company in
the event of its being wound up while he is member for the payment of the debts and
liabilities of the company contracted before he ceases to be a member, and of the
charges, costs and expenses of winding up, and for adjustment of the rights of the
contributories among themselves, such amount as may be required, not exceeding a
specified amount.
The Memorandum of a company limited by guarantee must state the amount of
guarantee. It may be of different denominations.
In case of a guarantee company having share capital the shareholders have two-
fold liability: to pay the amount which remains unpaid on their shares, whenever
called upon to pay, and secondly, to pay the amount payable under the guarantee
when the company goes into liquidation. The voting power of a guarantee company
having share capital is determined by the shareholding and not by the guarantee.
A guarantee company must include the word limited or the words private
limited as part of its name, and must register its articles, although it may adopt the
provisions of the Table D of Schedule I. It must also state the number of members
with which it proposes to be registered, although the number can be increased by


means of a resolution.
5. UNLIMITED COMPANY
As per Section 12(2) (c) an unlimited company" is a company not having any
limit on the liability of its members. Thus, the maximum liability of the member of such
a company, in the event of its being wound up, might stretch up to the full extent of
their assets to meet the obligations of the company by contributing to its assets.
However, the members of an unlimited company are not liable directly to the creditors
of the company, as in the case of partners of a firm. The liability of the members is
only towards the company and in the event of its being wound up only the Liquidator
can ask the members to contribute to the assets of the company which will be used in
the discharge of the debts of the company.
An unlimited company may or may not have share capital. The articles of
association of an unlimited company must state the number of members with which
the company is to be registered and if the company has share capital, the amount of
share capital with which the company is to be registered [Section 27(1)].
Under Section 32, a company registered as an unlimited company may
subsequently convert itself as a limited company, subject to the provision that any
debts, liabilities, obligations or contracts incurred or entered into, by or on behalf of
the unlimited company before such conversion are not affected by such changed
registration.
6. ASSOCIATION NOT FOR PROFIT
As per Section 13(1)(a), it is necessary that the name of every company shall
have the last words as Limited, if the company is registered with a limited liability.
However, Section 25 permits the registration, under a licence granted by the Central
Government, of associations not for profit with limited liability without being required
to use the word Limited or the words Private Limited after their names. This is of
great value to companies not engaged in business like bodies pursuing charitable,
educational or other purposes of great utility.
The Central Government may grant such a licence if :
(i) it is intended to form a company for promoting commerce, art, science,
religion, charity or any other useful object; and
(ii) the company prohibits payment of any dividend to its members but intends
to apply its profits or other income in promotion of its objects.
The company is registered without paying any stamp duty on its Memorandum
and Articles. On registration, the Association enjoys all the privileges of a limited
company, and is subject to all its obligations, except, those in respect of which
exemption by a special or general order is granted by the Central Government. A
licence may be granted by the Central Government under Section 25 of the Act on
such conditions and subject to such regulations as it thinks fit and those conditions
and regulations shall be binding on the body to which the licence is granted. The
Central Government may direct that such conditions and regulations shall be inserted
in the Memorandum, or in the Articles, or partly in the one and partly in the other.


A Company, which has been granted licence under Section 25 cannot alter the
provisions of its Memorandum with respect to its objects except with the previous
approval of the Central Government in writing.
An association registered under the Act, which has been granted a licence under
Sub-section (1) Section 25 is subject to all the obligations under the Act, except in
some cases where the Central Government has issued some notifications directing
exemption, to such licensed companies from various provisions of the Act, as
specified in those notifications.
The Central Government has issued the following orders directing the exemption
of companies licensed under Section 25 from the provisions of the Act specified
therein:
S.O. 1578 dated 1st July, 1961 In exercise of the powers conferred by Sub-
Section (6) of Section 25 of the Companies Act, 1956 (1 of 1956), the Central
Government hereby directs that a body to which a licence is granted under Section
25, aforesaid shall be exempt from the provisions of the said Act specified in column
(1) of the Table below to the extent specified in the corresponding entries in column
(2) of the said Table.
TABLE
Provisions of the Act Extent of exemption
(1) (2)
Section 2 (45) Not applicable to the extent to which it prescribes
qualifications for a Secretary, (See Notification dated
9.1.1976).
Section 147 The whole.
Section 160(1)(aa) The whole.
Section 166(2) The whole, provided that the time, date and place of each
annual general meeting are decided upon before-hand by
the Board of directors having regard to the directions, if
any, given in this regard by the company in general
meeting.
Section 171(1) A general meeting may be called by giving a notice in
writing of not less than 14 days.
Section 209(4-A) Books of account relating to a period of not less than four
years immediately proceeding the current year shall be
preserved.
(1) (2)
Section 219 Documents referred to in sub-clause (2) may be sent to
members not less than fourteen days before the date of
general meeting instead of 21 days.
Section 257 Shall not apply to companies which provide for election of
directors by ballot.
Section 264(1) The whole.


Section 280 The whole.
Section 282 The whole.
Section 285 Shall apply only to the extent that the Board of directors,
Executive committee or Governing Committee of such
companies shall hold at least one meeting within every six
calendar months.
Section 287 Shall apply only to the extent that the quorum for the Board
meeting shall be either eight members or of its total
strength whichever is less provided the quorum shall not be
less than two members in any case.
Section 299 Shall apply only to cases to which Sub-sections (1) and (3)
of Section 297 apply.
Section 301 A register shall be maintained only of contracts of which
Sub-sections (1) and (3) of Section 297 apply.
Section 303(2) The whole.
The following further exemptions have been added by Notification No. S.O.
2767 dated 5th August 1964:
Section 193 Minutes may be recorded within 30 days of the conclusion of
every meeting in case of companies where the articles of
association provide for confirmation of minutes by circulation.
Section 259 The whole.
Section 292 Matters referred to in clauses (c), (d) and (e) of Sub-section
(1) may be decided by the Board by circulation instead of at a
meeting.
Note that any exemption granted by the Central Government cannot be taken
advantage of, where the body concerned has, by its articles, made its own provision
in respect of the subject-matter of such exemption.
The Central Government may at any time revoke the licence whereupon the word
Limited or Private Limited as the case may be, shall have to be used as part of its
name and the company will lose the exemptions that might have been granted by the
Central Government. However, the Central Government can do so only after
providing such association an opportunity to be heard and the aggrieved association
can challenge the order of the Central Government under Article 226 of the
Constitution.
It is permissible for the Central Government to grant exemption either generally
or specifically to a particular company from one or more of the provisions of the Act
under Sub-section (6) of Section 25. Refer the Appendix given at the end of the study
lesson. Such exemption should normally be express and the Courts would be inclined
to cull out the implied exemption C.P. Singhania v. Garware Club House [2003] 46
SCL 650 (Bom.).
7. GOVERNMENT COMPANIES


Section 617 defines a Government company as any company in which not less
than fifty one per cent of the paid-up share capital is held by the Central Government,
or by any State Government or Governments or partly by the Central Government
and partly by one or more State Governments. A subsidiary of a Government
company is also treated as a Government company.
Notwithstanding all the pervasive control of the Government, the Government
company is neither a Government department nor a Government establishment
[Hindustan Steel Works Construction Co. Ltd. v. State of Kerala (1998) 2 CLJ 383].
Since employees of Government companies are not Government servants, they
have no legal right to claim that the Government should pay their salary or that the
additional expenditure incurred on account of revision of their pay scales should be
met by the Government. It is the responsibility of the company to pay them the
salaries [A.K. Bindal v. Union of India (2003) 114 Comp. Cas. 590 (SC)].
Exemptions
Section 620 of the Companies Act, 1956 empowers the Central Government to
direct by notification in the Official Gazette that any of the provisions of the Act shall
not apply to Government companies or apply only with such exceptions,
modifications and adaptations, as may be specified in the notification. However, the
provisions of Sections 618, 619 and 619A mandatorily apply to such companies.
In exercise of its powers under the above mentioned Section 620, the Central
Government has issued notifications modifying the operation of different provisions of
the Companies Act to Government companies some of which are as under :
1. Sections 17, 18, 19 and 186 shall apply to a Government company with the
substitution of the words Central Government for Court/CLB wherever it
occurs; and Section 166 shall apply with the substitution in the second
proviso to Sub-section (1) of the words Central Government for the word
Registrar, and in Sub-section (2) of Section 166 with the substitution of the
words such other place as the Central Government may approve in this
behalf for the words some other place within the city, town or village in
which the registered office of the company is situated".
Further Government companies are permitted to delete the word Private
from their name (Sections 21 and 23).
The Central Government has made various exemptions in the application of
the provisions of the Act to Government companies. Government companies
have been exempted from the following sections:
(i) Sections 255, 256 and 257 of the Act pertaining to appointment and
retirement of directors in companies wholly owned by the Government.
(ii) Sections 198, 259, 268, 269, 309, 310, 311, 387 and 388 of the Act
pertaining to appointment of managing/whole-time directors and
manager and their remuneration.
(iii) Proviso to Sub-section (1) of Section 297 of the Act requiring the
previous approval of the Central Government in respect of contracts
entered into by it with any other Government company.
(iv) Section 187C requiring disclosure of beneficial interest in shares of a


company.
(v) Section 205A requiring transfer of unpaid dividend to a special dividend
account shall not apply to a Government company in which the entire
paid-up share capital is held by the Central Government or by any state
Government or Governments or by the Central Government or by any
State Government or Governments or by the Central Government and
one or more State Governments. This is in supersession of an earlier
notification No. G.S.R. 231 dated the 31st January, 1978 [G.S.R. 580(E)].
(vi) Section 295 of the Act shall not apply to a Government company
provided that such company shall obtain the approval of the Ministry or
Department of the Central Government which is administratively
incharge of the company or, as the case may be, the State Government.
This is in supersession of an earlier notification No. S.O. 729 dated 24th
May, 1978 [G.S.R. 581(E)].
(vii) Sections 43A
*
, 149(2A), 205B, 263 to 266, 307, 308, 316, 317 and 386
of the Act shall not apply to a Government company in which the entire
paid-up share capital is held by the Central Government or by any State
Government or Governments or by the Central Government and one or
more State Governments [G.S.R. 577 (E)].
(viii) Sections 165, 187D*, 294 and Sub-sections (2) and (3) of Section 294AA
of the Act shall not apply to a Government company [G.S.R. 578(E)].
(ix) Section 108 of the Act shall not apply to a Government company [G.S.R.
579(E)].
2. It has further been notified that the following sections of the Companies Act,
1956 shall apply to Government companies with the modification that
instead of Court the application will be made to the Central Government.
(i) Sections 100, 101, 102 and 103 of the Act regarding reduction of capital
by a company.
(ii) Sections 391, 392 and 394 of the Act pertaining to amalgamation of
companies.
3. As a result of the above notifications Government companies will not have to
seek the approval of the Ministry of the Corporate Affairs for the appointment
of managing or whole-time directors and payment of remuneration to them.
Similarly, proposals for the reduction of capital and amalgamation of two or
more Government companies will be sanctioned by the Central Government
in the Ministry of Corporate Affairs instead of, by the High Court.
Therefore, the legal status of a Government company is not affected because the
share capital of the company is contributed by the Central or State Government and
all its shares are held by the President of India or Governor of a State or certain
nominated offices of the Government. [Heavy Engineering Mazdoor Union v. State of
Bihar (1969) 39 Com. Cas. 905 (SC)].
When the Government engages itself in trading ventures, particularly as
Government companies under the company law, it does not do so as a State but it
does so in essence as a company. A Government company is not a department of

*
Deleted


the Government. In Andhra Pradesh Road Transport Corporation v. ITO AIR
1964 SC 1486, the Andhra Pradesh State Road Transport Corporation claimed
exemption from taxation by invoking Articles 289 of the Constitution of India
according to which the property and income of the State are exempted from the
Union taxation. The Supreme Court, while rejecting the Corporations claim,
held that though it was wholly controlled by the State Government, it had a
separate entity and its income was not the income of the State Government.
The Court, observed that the companies which are incorporated under the
Companies Act, have a corporate personality of their own, distinct from that of
the Government of India. The land and buildings are vested in and owned by
the companies, the Government of India only owns the share capital.
In Hindustan Steel Works Construction Ltd. v. State of Kerala [1998] 2 Comp CLJ
383, it was held that inspite of all the control of the Government, the company is
neither a Government department nor a Government establishment, it is just an
agency of the Government, and hence not exempt from the purview of Kerala
Construction Workers Welfare Funds Act.
The employees of a Government Company are not the employees of the Central
or State Government. A Government Company may, in fact, be wound up like any
other company registered under the Companies Act. It may become insolvent or be
unable to pay its debts. That does not mean that the Government holding the shares,
viz, Central or State, as the case may be, has become bankrupt.
Audit in Government Companies
Section 619 of the Act, as amended by the Companies (Amendment) Act, 2000
provides that the auditor of a Government Company shall be appointed or
reappointed by the Comptroller and Auditor General of India (C. & A.G.). [Earlier such
auditors were appointed or reappointed by the Central Government on the advice of
Comptroller and Auditor General of India (C. & A.G.)].
The Comptroller and Auditor General has the power to direct the manner in which
the accounts are to be audited and to give instructions to the auditor in regard to any
matter relating to the performance of his function. The C. & A.G. may also conduct a
supplementary test audit by persons authorised by him. The auditor of the company
must submit a copy of his audit report to the C. & A.G., who may comment upon, or
supplement, the audit report. Such comments or supplementary report must be
placed before the annual general meeting of the company at the same time and in
the same manner as the auditors report.
In case of Government Companies, the Central Government must place before
both the Houses of Parliament an annual report on the working and affairs of each
Government company within three months of its annual general meeting together
with a copy of the audit report and any comments upon or supplement to such report
made by the Comptroller and Auditor General of India. Where a State Government is
a member of a Government company, the annual report is likewise to be placed
before the State Legislature (Section 619A).
Section 619B provides that the provisions of Section 619 shall apply to two other
classes of companies which are treated as Government companies for the purpose of


audit. Accordingly, the appointment of auditors of such companies can be made by
C&A.G. in which not less than 51% of the paid-up capital is held jointly by the
Government and Government company or companies. Only the provisions relating to
audit, applying to Government companies will apply to these companies. In respect of
all other matters these companies are in the same position and are governed by the
provisions of the Act in the same manner as other companies.
8. FOREIGN COMPANIES
A foreign company is a company which is incorporated in a country outside India
under the law of that other country and has a place of business in India. Sections 591
to 602 of the Act deal with such companies.
Foreign companies are of two classes namely :
(a) Companies incorporated outside India, which have established a place of
business in India after April 1, 1956; and
(b) Companies incorporated outside India, which established a place of
business in India before that date and continue to have an established place
of business in India.
Section 592 of the Act lays down that every foreign company which establishes a
place of business in India must, within 30 days of the establishment of such place of
business, file with the Registrar of Companies at New Delhi and also with
the Registrar of Companies of the State in which such place of business is situated:
(a) a certified copy of the charter, statutes, or memorandum and articles, of the
company, or other instrument constituting or defining the constitution of the
company; and if the instrument is not in the English language, a certified
translation thereof;
(b) the full address of the registered or principal office of the company;
(c) a list of the directors of the company and its secretary with full particulars of
their names, nationality, their addresses and business occupations;
(d) the names and addresses of one or more persons resident in India who are
authorised to accept service of process and any notices or other documents
required to be served on the company; and
(e) the full address of the principal place of business in India.
Every foreign company must conspicuously exhibit on the outside of its every
office or place of business in India its name ending with the words Limited or
Private Limited, as the case may be, if it is limited company, and the country of its
incorporation in English as well as in the local language. The prospectus issued in
India must also disclose the above information.
The same requirements as regards accounts and their filing and as also the
registration of the charges created in India are applicable to them, as to Indian
companies. No application form for shares or debentures can be issued in India
without a copy of the prospectus.


Section 584 of the Companies Act, 1956 provides further that when a foreign
company, which has been carrying on business in India, ceases to carry on such
business in India, it may be wound up as an unregistered company under Sections
582 to 590 of the Act, even though the company has been dissolved or ceased to
exist under the laws of the country in which it was incorporated.
Section 591 provides that where not less than 50% of the paid-up share capital
(whether equity or preference or partly equity and partly preference) of a company
incorporated outside India having an established place of business in India, is held by
one or more citizens of India or by one or more bodies corporate incorporated in
India, whether singly or in the aggregate, such company shall comply with such of the
provisions of this Act, as may be prescribed by the Central Government with regard
to the business carried on by it in India, as if it were a company incorporated in India.
As regards the applicability of the provisions of the Companies Act, the following
are to be noted :
(i) The provisions of Section 159 regarding (filling of annual returns) shall,
subject to such modifications or adaptations as may be made therein by the
rules made under the Act, apply to a foreign company having an established
place of business in India, as they apply to a company incorporated in India.
(ii) The provisions of Section 209 relating to the (maintenance of books of
account with respect to moneys received and expended, sales and purchase
made and liabilities incurred in the course of or in relation to its business in
India), Section 209A (inspection of accounts), Section 233A (Special audit),
Section 233B (audit of cost accounts), Section 234-246 (investigations), so
far as may be, apply only to the Indian business of a foreign company
having an established place of business in India as they apply to a company
incorporated in India.
As per Section 602(c), having a share transfer office or share registration office will
constitute a place of business. In Tovarishestvo Manufacture Liudvig Rabenek, Re
[1944] 2 All ER 556 it was held that where representatives of a company incorporated
outside the country frequently stayed in a hotel in England for looking after matter of
business, it was held that the company had a place of business in England.
A company under Section 592 had delivered to the Registrar of Companies at
Bombay, papers which were required to be delivered within 30 days of the
establishment of the place of business. Here, it was held that by delivering the
documents, the defendants could not deny that the company had established a place
of business within India [Framroze Rustomji Paymaster v. British Burmah Petroleum
Co. Ltd. [1976] 46 Comp. Cas. 587 (Bom.)].
In a certain case, it was held that mere holding of property cannot amount to
having a place of business.
A representative of a foreign company in India was merely receiving orders from
customers [P.J. Johnson v. Astrofiel Armadorn [1989] 3 Comp. LJ 1], it was held that
it was not a place of business.
The following activities are held as not constituting carrying on of business :


(1) carrying small transactions
(2) conducting meetings of shareholders or even directors
(3) operating bank accounts
(4) transferring of shares or other securities
(5) operating through independent contractors
(6) procuring orders
(7) creating or financing of debts, charges, etc. on property
(8) securing or collecting debts or enforcing claims to property of any kind.
9. HOLDING AND SUBSIDIARY COMPANIES
Holding and Subsidiary companies are relative terms. A company is a holding
company of another if the other is its subsidiary.
According to Section 4 of the Companies Act, a company shall be deemed to be
subsidiary of another, if and only if:
(a) that other controls the composition of its Board of directors; or
(b) that other:
(i) where the first-mentioned company is an existing company in respect of
which the holders of preference shares issued before commencement of
the Companies (Amendment) Act 1960, have the same right in all
respects as the holders of equity shares, exercises or controls more
than half of the total voting power of such company;
(ii) where the first-mentioned company is any other company, holds more
than half in the nominal value of its equity share capital, or
(c) the first mentioned company is a subsidiary of any company which is the
others subsidiary.
To illustrate, company A is a subsidiary of company B if, and only if:
1. company B (holding company) controls the composition of the Board of
directors of company A (subsidiary); or
2. company B (holding company) controls more than 50% voting power of
company A (subsidiary); or
3. Company B (holding company) holds more than half in the nominal value of
equity shares of company A (subsidiary); or
4. if company A (the subsidiary) is a subsidiary of company C which is
subsidiary of company B, then the company A is also a subsidiary of
company B.
5. If Company D is the subsidiary of company A then D will be the subsidiary of
company C and also of company B.
It may be noted that sufficient control may be obtained over a company by
acquiring sufficient equity share capital of that company. But, it is also possible to
obtain such control in regard to the composition of the Board of directors without an
investment in equity capital of the company. Say by way of an agreement in respect of


advancing funds to another company and in return gaining control over the Board of
directors. The first of the case envisaged in Section 4 is the case where a control is
obtained by a company in the matter of composition of the Board of directors of another
company. That would be sufficient to constitute the former as holding company and the
other as subsidiary. The second type of case is where more than half of the nominal
value of the equity share is held by another company. By virtue of such holding that
other company becomes a holding company and the one whose shares are so held
becomes a subsidiary company. The third case envisaged is where a subsidiary
company of holding company may be a holding company in relation to another
company. That other company is also a subsidiary of the holding company of the first-
mentioned subsidiary.
For the purpose of clause (a) above, the composition of Board of directors of a
company shall be deemed to be controlled by another company if, and only if, the
other company by the exercise of some power exercisable by it at its discretion,
without the consent or concurrence of any other person, can appoint or remove the
holders of all or a majority of directorship with respect to which any of the following
conditions is satisfied, viz:
(a) if a person cannot be appointed to a directorship, without the exercise in his
favour by that other company of such a power of appointment;
(b) if a persons appointment as a director follows necessarily from his
appointment as a director or manager of or to any other office or
employment in that other company; or
(c) if the directorship is held by an individual nominated by that other company
or by a subsidiary thereof.
In determining whether one company has a controlling interest in another
company or whether directors have a controlling interest in a company, it is not
necessary to consider whether the interest is a proprietary one and it may be a direct
or an indirect interest. The degree of control resulting from a 51 per cent holding is a
control within the Act. [British American Tobacco Company v. IRC, (1942) 12 Com
Cases 129, 134, 135 (CA)].
Where in a certain case, additional directors of a company were appointed as the
nominees of another company and these nominees constituted the majority of the
Board, the nominating company became the holding company within the meaning of
Section 4 of the Act.
Normally a subsidiary company cannot be a member of the holding company.
Where it was a member before it became a subsidiary, it shall not have the voting
right at a meeting, though it may exercise other rights of members (Section 42).
Section 4 envisages the holding of more than 50% of nominal value of the
subsidiarys equity capital. If the holding company holds more than half in nominal
value of the subsidiarys equity share capital, the relationship of holding company and
subsidiary subsists between them.
Determination of Holding-subsidiary relationship and shareholding
In determining whether a company is a subsidiary of another


(a) any shares held or power exercisable by that other company in a fiduciary
capacity shall be treated as not held or exercisable by it.
(b) Subject to the provisions of clauses (c) and (d), any shares held or power
exercisable
(i) by any person as a nominee for that other company; or
(ii) by, or by a nominee for, a subsidiary of that other company, not being a
subsidiary which is concerned only in a fiduciary capacity; shall be
treated as held or exercisable by that other company; or
(c) any shares held by virtue of the provisions of any debentures of the first-
named company or of a trust deed for securing issue of such debentures
shall be disregarded; and
(d) any shares held by way of security only for the purpose of a business
transaction entered into in the ordinary course of business, shall not be
treated as so held by that other company.
10. INVESTMENT COMPANIES
An investment company is a company, the principal business of which consists in
acquiring, holding and dealing in shares and securities. The word investment, no
doubt, suggests only the acquisition and holding of shares and securities and thereby
earning income by way of interest or dividend etc. But investment companies in
actual practice earn their income not only through the acquisition and holding but also
by dealing in shares and securities i.e. to buy with a view to sell later on at higher
prices and to sell with a view to buy later on at lower prices.
If a company is engaged in any other business to an appreciable extent, it will not
be treated as an investment company. The following two sets of legal opinions are
quoted below as to the meaning of an investment company:
According to one set of legal opinion, an "investment company" means company
which acquires and holds shares and securities with an intent to earn income only
from them by holding them. On the other hand, another school of legal opinion holds
that an Investment Company means a company, which acquires shares and
securities for earning income by holding them as well as by dealing in such shares
and other securities.
According to Section 2(10A) of the Insurance Act, 1938, an investment company
means a company whose principal business is the acquisition of shares, stocks,
debentures or other securities.
11. PRODUCER COMPANIES
Companies (Amendment) Act, 2002 had added a new Part IXA to the main
Companies Act, 1956 consisting of 46 new Sections from 581A to 581ZT.
According to the provisions as prescribed under Section 581A(l), a producer
company is a body corporate having objects or activities specified in Section 581B
and which is registered as such under the provisions of the Act. The membership of
producer companies is open to such people who themselves are the primary


producers, which is an activity by which some agricultural produce is produced by
such primary producers.
Objects of Producer Companies
In terms of Section 581B(1) the objects of a producer company registered under
this Act may be all or any of the following matters:
(a) production, harvesting, procurement, grading, pooling, handling, marketing,
selling, export of primary produce of the members or import of goods or
services for their benefit.
(b) processing including preserving, drying, distilling, brewing, vinting, canning
and packaging of the produce of its members.
(c) manufacturing, sale or supply of machinery, equipment or consumables
mainly to its members.
(d) providing education on the mutual assistance principles to its members and
others.
(e) rendering technical services, consultancy services, training, research and
development and all other activities for the promotion of the interests of its
members.
(f) generation, transmission and distribution of power, revitalisation of land and
water resources, their use, conservation and communications relatable to
primary produce.
(g) insurance of producers or their primary produce.
(h) promoting techniques of mutuality and mutual assistance.
(i) welfare measures or facilities for the benefit of the members as may be
decided by the Board.
(j) any other activity, ancillary or incidental to any of the activities referred to in
clauses (a) to (i) above or other activities which may promote the principles
of mutuality and mutual assistance amongst the members in any other
manner.
(k) financing of procurement, processing, marketing or other activities specified
in clauses (a) to (j) above, which include extending of credit facilities or any
other financial services to its members.
Further, under Section 581B(2) it has also been clarified that every producer
company shall deal primarily with the produce of its active members for carrying out
any of its objects specified above.
12. FINANCE COMPANIES
According to Rule 2(cc) of the Companies (Acceptance of Deposits) Rules, 1975,
a Financial Company means a non-banking company which is a financial institution
within the meaning of clause (c) of Section 45-I of the Reserve Bank of India Act,
1934 (2 of 1934).
A Financial institution has been defined under Section 45-I of the Reserve Bank


of India Act, 1934 as follows:
Financial institution means any non-banking institution which carries on as its
business or part of its business any of the following activities:
(i) the financing, whether by way of making loans or advances or otherwise, or
any activity other than its own;
(ii) the acquisition of shares, stocks, bonds, debentures or securities issued by
a Government or local authority or other marketable securities of the like
nature;
(iii) the letting or delivery of any goods to a hirer under hire-purchase agreement
as defined in clause (c) of Section 2 of the Hire-Purchase Act, 1972;
(iv) the carrying on of any class of insurance business;
(v) the managing or conducting or supervising as foreman, agent or in any other
capacity, of chits or kuries as defined in any law which is for the time being
in force in any state, or any business, which is similar thereto;
(vi) collecting for any purpose or under any scheme or arrangement by whatever
name called, monies in lumpsum or otherwise, by way of subscription or by
sale of units, or other instruments or in any other manner and awarding
prizes, gifts, whether in cash or in kind or disbursing monies in any other
way to persons from whom monies are collected or to any other person,
but does not include any institution, which carries on as its principal business:
(a) agricultural operations; or
(aa) industrial activity; or
(b) the purchase or sale of any goods (other than securities) or the providing of
any services; or
(c) the purchase, construction or sale of immovable property, so, however, that
no portion of the income of the institution is derived from the financing of
purchases, constructions or sales of immovable property by other persons;
Explanation: For the purposes of this clause, industrial activity means any
activity specified in sub-clauses (i) to (xviii) of clause (c) of Section 2 of the Industrial
Development Bank of India Act, 1964 (18 of 1964).
(d) firm means a firm as defined in the Indian Partnership Act, 1932 (9 of
1932);
(e) non-banking institution means a company, corporation or co-operative
society;
(f) non-banking financial company means
(i) a financial institution which is a company;
(ii) a non-banking institution which is a company and which has as its
principal business the receiving of deposits, under any scheme or
arrangement or in any other manner, or lending in any manner;
(iii) such other non-banking institution or class of such institutions, as the
bank may, with the previous approval of the Central Government and by
notification in the Official Gazette, specify.


The above definition of financial institutions has been set out in broad terms so
as to include chit or kuri, housing finance, as well as, loan, investment, miscellaneous
non-banking companies.
A non-banking institution has been defined in clause (e) of the said section to
mean a company, corporation, co-operative society or firm.
Thus, a financial company is a company or corporation or co-operative
society or firm which is a financial institution within the meaning of clause (c) of
Section 45-I of the Reserve Bank of India Act, 1934.
13. PUBLIC FINANCIAL INSTITUTIONS
The following Financial Institutions shall be regarded, for the purposes of the
Companies Act, as public financial institutions, namely:
1. The Industrial Credit and Investment Corporation of India Ltd. (ICICI Ltd.)
2. The Industrial Finance Corporation of India (IFCI Ltd.)
3. The Industrial Development Bank of India (IDBI).
4. The Unit Trust of India (UTI)
5. The Life Insurance Corporation of India (LIC)
6. The Infrastructure Development Finance Company Ltd.
Sub-section (2) of Section 4(A) empowers the Central Government to specify other
institutions, as it may think fit, to be a public financial institution by issuing a notification
in the Official Gazette. However, no institution shall be so specified unless:
(i) it has been established or constituted by or under any Central Act; or
(ii) not less than 51% of the paid-up share capital of such an institution is held
or controlled by the Central Government.
The Central Government has specified the following institutions amongst
others to be public financial institutions, namely:
(1) The Industrial Reconstruction Bank.
(2) The General Insurance Corporation of India (GIC).
(3) The National Insurance Company Ltd.
(4) The New India Assurance Co. Ltd.
(5) The Oriental Fire & General Insurance Co. Ltd.
(6) The United Fire & General Insurance Co. Ltd.
(7) The Shipping Credit & Investment Co. of India Ltd. (SCICI).
(8) Tourism Finance Corporation of India Ltd. (TFCI).
(9) IFCI Venture Capital Fund Limited
(10) Technology Development & Informations Co. of India Ltd.
(11) Power Finance Corporation Ltd.
(12) National Housing Bank (NHB).
(13) Small Industries Development Bank of India (SIDBI).


(14) Rural Electrification Corporation Ltd.
(15) Indian Railways Finance Corporation Ltd.
(16) Industrial Finance Corporation of India Ltd.
(17) Andhra Pradesh State Financial Corporation.
(18) Assam Financial Corporation.
(19) Bihar State Financial Corporation.
(20) Delhi Financial Corporation.
(21) Gujarat State Financial Corporation.
(22) Haryana Financial Corporation.
(23) Himachal Pradesh Financial Corporation.
(24) Jammu & Kashmir State Financial Corporation.
(25) Karnataka State Financial Corporation.
(26) Kerala Financial Corporation.
(27) Madhya Pradesh Financial Corporation.
(28) Maharashtra State Financial Corporation.
(29) Orissa State Financial Corporation.
(30) Punjab Financial Corporation.
(31) Rajasthan Financial Corporation.
(32) Tamilnadu Industrial Development Corporation Ltd.
(33) Uttar Pradesh Financial Corporation.
(34) West Bengal Financial Corporation.
(35) Indian Renewable Energy Development Agency Limited
(36) North Eastern Development Finance Corporation Ltd.
(37) Housing and Urban Development Corporation Limited.
(38) Export-Import Bank of India.
(39) National Bank for Agriculture and Rural Development (NABARD)
(40) National Cooperative Development Corporation (NCDC).
(41) National Dairy Development Board.
(42) The Pradeshiya Industrial and Investment Corporation of U.P. Limited.
(43) Rajasthan State Industrial Development and Investment Corporation
Limited.
(44) SICOM Limited
*
.
(45) West Bengal Industrial Development Corporation Limited.
(46) Tamil Nadu Industrial Development Corporation Limited.
(47) Punjab State Industrial Development Corporation Limited (PSIDC).
(48) EDC Limited.

*
State Industrial Development Corporation of Maharashtra Limited.


(49) Tamil Nadu Power Finance and Infrastructure Development Corporation
Limited.
(50) Tamil Nadu Urban Finance and Infrastructure Development Corporation
Limited.
(51) Kerala Power Finance Corporation Limited.
14. A BRIEF STUDY OF STATUTORY CORPORATIONS
A Company formed under an Act of Parliament or State Legislature is called a
Statutory Company/Corporation. The special enactment contains its constitution,
powers and scope of its activities. Change in its structure is possible only by a
legislative amendment. Such companies are usually formed to carry on the work of
some special public importance and for which the undertaking requires extraordinary
powers, sanctions and privileges. A major objective for incorporating statutory
corporations is to serve public interest. The need for establishing a statutory
corporation is that the State wishes to enter a field of human activity which has
traditionally been, or will in normal course be, undertaken by non-official persons and
groups. Such companies do not use the word limited as part of their names, e.g.,
Reserve Bank of India, LIC, etc. However, in respect of Insurance, Banking and
Electricity Supply companies incorporated and registered under the Companies Act,
the provisions of Insurance Act, Banking Regulation Act, and Electricity Supply Act
will prevail, respectively, when they are inconsistent with the provisions of the
Companies Act, 1956, applicable generally.
A Brief History of Growth of Statutory Corporations in India
As early as 1948, the Government of India had decided to organise the
enterprises as statutory corporations. The Industrial Policy Resolution of 1948 had
stated: Management of State enterprises will, as a rule, be through the medium of
public corporations under the statutory control of Central Government. In pursuance
of this, Damodar Valley Corporation, the Industrial Finance Corporation of India, the
Employees State Insurance Corporation, and now (defunct) the Rehabilitation
Finance Administration were created in 1948. In the same year, the Electricity Supply
Act was passed, under which electricity boards in various States have been
established.
In 1953, the two air corporations, namely, the Indian Airlines and Air India were
created under the Air Corporations Act. The State Bank of India was established in
1955, the Life Insurance Corporation in 1956, the Oil and Natural Gas Commission
was established in 1956 and it was set up simply by a resolution of the Central
Government and technically, it was, what is known as, a subordinate office of the
Ministry. However, it was vested with large powers and with handling of many crores
of rupees. It was only three years later in 1959 that ONGC became a statutory
corporation by the passing of an Act of Parliament.
Apart from these, the statutory corporation device has been used for enterprises
of a banking nature (for example, the Deposit Insurance and Credit Guarantee
Corporation, the Unit Trust of India, the Agricultural Refinance and Development
Corporation), and to provide enabling laws to create statutory bodies in various states
(for example the Road Transport Corporations Act, 1950, and the State Financial


Corporations Act, 1951). Two other Acts which established Central Public
Corporations, also permitted the State Governments, to establish their own statutory
bodies viz. The Warehousing Corporations Act, 1962 and the Food Corporations Act,
1964.
The 14 commercial Banks which were nationalised in 1969, were also made
autonomous corporations under the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970. However, after 1970, even those enterprises which were
nationalised, were not given the statutory corporation form, as was being done so far
in most cases. Only Government companies were created for dozens of enterprises
which were taken over after 1970. The only exception, where a statutory corporation
was favoured as against a joint stock company, is the International Airports Authority
of India for the development and management of the four international airports of
Chennai, Delhi, Kolkata and Mumbai.
Principal Characteristics of Statutory Corporations
The principal characteristics of a statutory corporation are as discussed below:
(i) It is owned by the State.
(ii) It is created by a special law of Parliament or State Legislature defining its
objects, powers and privileges and prescribing the form of management and
its relationship with Government departments.
(iii) Immunity from Parliamentary Scrutiny: A basic and fundamental
characteristic of a statutory corporation is its immunity from Parliamentary
enquiry into its day-to-day working, as distinct from matters of policy. As
stated by Professor Robson, It has long been recognised that while
Parliament has a right to discuss and determine matters of major policy
concerning the nationalised industries, the day-to-day conduct of their
business by the public corporations should be immune from Parliamentary
inquisition.
*

(iv) Freedom in regard to personnel: Another distinguishing characteristic of a
public corporation is that excluding the officers taken from the Government
department on deputation, its employees are not civil servants and are not
governed by Government regulations in respect of conditions of service.
They are also not entitled to the protection of Article 311 of the Constitution
of India. This applies to the members of the Board of directors and to other
employees. Though the statutory corporations are empowered to regulate
their personnel policies, many of them have borrowed wholly or partly civil
service rules of promotion, seniority, dismissal etc. The corporations are also
required to obtain prior approval of the Government for regulations regarding
terms and conditions of service of their employees, and also publish these
terms and conditions in the Gazette of India. For example, see Section 49(b)
of the LIC Act, Section 45(2)(b) of the Air Corporation Act and Section 37(2)
of the International Airports Authority Act. In the case of the ONGC, the Act
empowers the Government to make rules even for travelling and daily
allowances payable to employees [Section 31(2)(a)].
(v) A body corporate: Each statutory corporation is a body corporate and can

*
Robson W.A., Nationalised Industry and Public Ownership, Aller & Unwinc, London, 1960, p.28.


sue and be sued, enter into contracts and acquire property in its own name.
For example, the ONGC Act states: The commission shall be a body
corporate, having perpetual succession and a common seal with power to
acquire, hold and dispose of property and to contract and shall by the said
name sue and be sued [Section 3(2)]. After laying down the composition of
the Commission, the Act states the various functions of the Commission.
This is the standard formula for all the statutory corporations. The
corporations are given full powers necessary for carrying out their functions,
with some exceptions like approval for capital expenditure beyond
prescribed limits, and employment of categories of persons.
(vi) Distinct relation with the Government: The most important provision which
regulate the relationship of public corporation and Government is the latters
power to issue directions. The ONGC Act, for e.g. provides, In the
discharge of its functions under this Act, the Commission shall be bound by
such directions as the Central Government may, for reasons to be stated in
writing give it from time to time [Section 14(3)]. For the LIC the scope of
Government directions is restricted because these should relate to matter of
policy involving public interest [Section 21 of the LIC Act]. More or less the
same approach has been adopted by the Acts of other corporations.
(vii) Independent Finances: A major plank of autonomy of a statutory corporation
is its independence in respect of its finances. Except for appropriations to
provide capital or to cover losses, it is usually independent in its finances. It
obtains funds by borrowing either from the Government or, in some cases,
from the public and through revenues derived from the sale of goods and
services, and has the authority to use and re-use its revenue.
(viii) Commercial Audit: Except in the case of the banks, the financial institutions
and the LIC, where chartered accountants are auditors, in all the other
corporations, the audit has been entrusted to the Comptroller and Auditor
General of India (CAG). In brief, a statutory corporation is ordinarily not
subject to the budget, accounting and audit laws and procedure applicable
to Government departments.
(ix) Operation on business principles: In case of some corporations, the Acts lay
down that In the discharge of its functions the corporations shall act as far
as may be on business principles [Section 6(3) of the LIC Act]. Similar
provisions exist in the International Airports Authority Act (Section 11), and
the Air Corporations Act (Section 9). However, the practical implications of
these clauses are not clear.
15. WHAT CORPORATIONS ARE STATE?
The Courts in India until Raman Dayaram Shetty v. International Airport
Authority, A.I.R. 1979 S.C. 1628 considered the statutory character of the corporation
as a definitive criterion to identify it with STATE within the meaning of Article 12 of
the Constitution of India. In the case of Rajasthan State Electricity Board v. Mohan
Lal, A.I.R. 1967 S.C. 1857, the Electricity Board of Rajasthan constituted under the
Electricity Supply Act, 1948 was held to be other authority to which the provisions of
Part III (Fundamental Rights) of the Constitution were applicable. The Supreme Court
in this case held that the expression Other authorities will include Constitutional or


statutory authorities on whom powers are conferred by law.
But from International Airport Authority (ibid) case onwards there has been a
departure from the above trend. From this case onwards, the position has been
adopted that, how the corporation was born is not a relevant criterion, and it is
immaterial whether the corporation is statutory or is formed under the Companies
Act, Societies Registration Act, Co-operative Societies Act or any other Act. The
relevant criteria, according to the judgement delivered by Bhagwati J. in the
International Airport Authority case and later accepted in other cases including in
Som Prakash case are (1) the source of the share capital, (2) the extent of state
control over the corporation, and whether it is deep and pervasive. (3) whether the
corporation has monopoly status, (4) whether functions of the corporation are of
public importance and closely related to Governmental functions, and (5) whether
what belonged to a department of government formerly was transferred to the
corporation. None of these, it is stated, by itself is a conclusive test, nor is this an
exhaustive list of operational indices. There may be other indices as well. From all the
relevant factors, it is stated the Court should draw an inference whether the
corporation is an agency or instrumentality of the State.
In International Airport Authority case (ibid), the International Airport Authority
was held to be other authority for the purpose of Article 12 and therefore State and
for that reason was required to observe the principle of equality in its contractual
dealings. In Som Prakash v. Union of India A.I.R. 1981 S.C. 212, the Bharat
Petroleum Corporation was held to be a State and therefore amendable to the writ
jurisdiction of the Supreme Court for a breach of a fundamental right. In Ajay Hasia v.
Khalid Mujib, A.I.R. 1981 S.C. 487, the Regional Engineering College, Srinagar, was
considered to be State and bound by the principles of equality in the matter of
selection of students for admission.
16. CHARTERED COMPANIES IN THE U.K.
Chartered Companies are incorporated by Royal Charter, e.g., East India
Company. These companies are created and regulated by the Crown of England in
exercise of its ancient prerogatives. A Chartered Company is regulated by its charter
and the Companies Act does not apply to it (Ranjeet Kumar Chatterjee v. Union of
India, A.I.R. 1959 Cal 95). Chartered Companies for Public and Charitable purpose
are common in England, e.g. British Broadcasting Corporation, Bank of England, etc.

LESSON ROUND-UP
Three basic types of companies which may be registered under the Act are
private companies, public companies and producer companies.
From the point of view of incorporation, companies can be classified as chartered
companies, statutory companies and registered companies.
From liability point, companies can be categorized as unlimited companies,
companies limited by guarantee and companies limited by shares.
Companies can also be classified as associations not for profit having licence
under Section 25 of the Act, Government companies, foreign companies, holding
and subsidiary companies, investment companies and producer companies.


A private company has been defined under Section 3(1)(iii) of the Companies
Act, 1956 as one which has a minimum paid-up capital of one lakh rupees or
such higher paid-up capital as prescribed, and by its articles restricts the right to
transfer its shares, limits the number of its members, prohibits invitation to public
to subscribe or acceptance of deposits from persons other than members,
directors or their relatives.
The Companies Act, 1956 confers certain privileges on private companies. They
are also exempted from complying with quite a few provisions of the Act.
A private company owes certain special obligations as compared to a public
company.
Consequences of infringing the minimum number of members in a private
company are several liabilities of members, compulsory winding up,
contributorys petition for winding up.
A public company has been defined under Section 3(1)(iv) of the Act as a
company which is not a private company, has a minimum paid-up capital of five
lakh rupees or is a private company which is a subsidiary of a company which is
not a private company.
A limited company is a company limited by shares or by guarantee. An unlimited
company is a company not having any limit on the liability of its members.
Associations not for profit with limited liability are permitted to be registered under
a licence granted by the Central Government without using the word(s) Limited
or Private Limited.
Section 617 defines a Government company as a company in which not less than
fifty one per cent of the paid-up share capital is held by Central or State
Government or governments or partly by one and partly by others.
Auditor of a government company shall be appointed or reappointed by the
Comptroller and Auditor General of India (C.&A.G.)
A foreign company is a company which is incorporated in a country outside India
under the law of that other country and has a place of business in India.
A company is a holding company of another if the other is its subsidiary.
An investment company is a company, the principal business of which consists in
acquiring, holding and dealing in shares and securities.
A producer company is a body corporate having objects or activities specified in
Section 581B and which is registered as such under the provisions of the Act.
Section 581B(1) of the Act provides the objects for which a producer company
may be registered under the Act.
According to Rule 2(cc) of the Companies (Acceptance of Deposits) Rules, 1975,
a Financial Company means a non-banking company which is a financial
institution within the meaning of clause (c) of Section 45-1 of the Reserve Bank of
India Act, 1934.
The Central Government has specified certain institutions to be public financial
institutions under the powers given to it under sub-section (2) of Section 4(A).
A company formed under an Act of Parliament or State Legislature is called a
Statutory Company/Corporation.
Principal characteristics of Statutory Corporation are State ownership, creation by
special law, immunity from Parliamentary scrutiny, freedom in regard to
personnel, body corporate features, distinct relation with the Government,
independent finances, commercial audit and operation on business principles.




SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation).
1. State in brief the various kinds of companies which can be registered under
the Companies Act, 1956.
2. Define a private company and state the special privileges which it enjoys
under the Companies Act, 1956.
3. Discuss in brief disadvantages and obligations of a private company.
4. Define a public company and distinguish it from a private company.
5. What is a Government Company? Summarise the special provisions of the
Companies Act relating to Government Companies.
6. Write short notes on:
(a) Holding and Subsidiary companies.
(b) Investment Companies
(c) Finance Companies.
(d) Unlimited Companies.
7. Discuss in brief the law relating to statutory corporations.
8. What is a foreign company? Summarise the provisions of the Companies
Act relating to foreign companies.

Suggested Readings:
1. Guide to the Companies ActA. Ramaiya.
2. Law and Practice Relating to Government CompaniesS. Krishnamurthy.
3. Company Notices, Meetings and ResolutionsR. Suryanarayanan.























STUDY III
INCORPORATION AND ITS CONSEQUENCES-II
PROMOTERS AND FORMATION OF COMPANIES
A. PROMOTERS
LEARNING OBJECTIVES
This chapter explains the concept of promoters, their legal position, duties, liabiliti es
and their remuneration. It also enumerates the important steps which are to be
followed while forming a company. At the end of the lesson, you should be able to
understand:
Definition of a promoter and their legal position.
Promoters contract and the ratification thereof.
Duties of a promoter and the termination of their duties.
Remedies available to the company against the promoter.
Liabilities of promoters.
Remuneration of promoters.
Important steps in formation of companies.
Certificate of incorporation as conclusive evidence.

1. DEFINITION
The Companies Act, 1956, does not define the expression 'promoters' but the
word promoter has been used in Sections 62, 69, 76, 478 and 519 of the Companies
Act, 1956. According to SEBI (Substantial Acquisition of Shares & Takeover)
Regulations, 1997, promoter means:
(a) any person who is in control of the target company;
(b) any person named as promoter in any offer document of the target company
or any shareholding pattern filed by the target company with the stock
exchange pursuant to the Listing Agreement, whichever is later;
and includes any person belonging to the promoter group as mentioned in
Explanation I.
Provided that a director or officer of the target company or any other person shall
not be a promoter if he is acting as such merely in his professional capacity.
Explanation I: For the purpose of this clause, promoter group shall include:
(a) in case promoter is a body corporate:


(i)a subsidiary or holding company of that body corporate;
(ii)any company in which the promoter holds 10% or more of the equity capital or
which holds 10% or more of the equity capital of the promoter;
(iii)any company in which a group of individuals or companies or combinations
thereof who holds 20% or more of the equity capital in that company
also holds 20% or more of the equity capital of the target company; and
(b) in case the promoter is an individual:
(i)the spouse of that person, or any parent, brother, sister or child of that person
or of his spouse;
(ii)any company in which 10% or more of the share capital is held by the
promoter or an immediate relative of the promoter or a firm or HUF in
which the promoter or any one or more of his immediate relative is a
member;
(iii)any company in which a company specified in (i) above holds 10% or more, of
the share capital; and
(iv)any HUF or firm in which the aggregate share of the promoter and his
immediate relatives is equal to or more than 10% of the total.
Explanation II: Financial Institutions, Scheduled Banks, Foreign Institutional
Investors (FIIs) and Mutual Funds shall not be deemed to be a promoter or promoter
group merely by virtue of their shareholding.
Provided that the Financial Institutions, Scheduled Banks and Foreign
Institutional Investors (FIIs) shall be treated as promoters or promoter group for the
subsidiaries or companies promoted by them or mutual funds sponsored by them.
Before a company can be formed, there must be some persons who have an
intention to form a company and who take the necessary steps to carry that intention
into operation. Such persons are called 'promoters'. It is they who conceive the idea
of forming the company, and it is they who take the necessary steps to incorporate it
by registration, provide it with share and loan capital and acquire the business or
property which it is to manage.
The question whether one is a promoter or not will be determined with reference
to the nature of the role he/they play in implementing the objectives for which the
company is formed.
The promotion of a company is a comprehensive term denoting that process by
which a company is incorporated or brought into being as a corporate body, and
floated, or established financially as a going concern, by the issue of a prospectus.
The persons who assume the primary responsibility of matters relating to promotion
of a company are called Promoters.
The term "promoter" for the purpose of Section 62 of the Act means a promoter
who was a party to the preparation of the prospectus or the portion thereof containing
any untrue statement. This is a limited definition and does not help us to ascertain the
coverage of the term for the purposes of paras V(c) of Part I and 10(i)(d) and 11(iii) of
Part II of Schedule II and corresponding requirements to Schedule III and IV of the
Act.
75


The Act, however prohibits a person who is an undischarged insolvent from
taking part directly or indirectly in the promotion of a company.
Certain attempts have been made by the judiciary to define the term 'promoter'. It
was held in Twycross v. Grant, (1877) 2. C.P.D. 469 that 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". In Whaley Bridge
Calico Printing Co. v. Green (1880) 5 Q.B.D. 109, Bowen, L.J. held that the term
"promoter" is a term not of law but of business usually summing up in a single word a
number of business operations familiar to the commercial world by which a company
is generally brought into existence". But a person may be a promoter even if he has
undertaken a lesser active role in the formation of a company. Any person who
becomes a director, places shares or negotiates preliminary agreements, may be
covered by this term. Who constitutes a promoter in a particular case is, therefore, a
question of fact, there being no clear legislative or judicial definition. A company may
have several promoters. A promoter may be a natural person or a company.
It is clear from the foregoing that the word "promoter" is used in common
parlance to denote any individual, syndicate, association or partnership which has
taken all the necessary steps to create and mould a company and set it going. The
promoter originates the scheme for the formation of a company; gets together the
subscribers to the memorandum, gets the Memorandum and Articles prepared,
executed and registered, finds the bankers, brokers and legal advisers, finds the first
directors, settles the terms of preliminary contracts with vendors and agreement with
underwriters, and makes arrangement for preparation, advertisement and circulation
of the prospectus and placement of the capital. But a person who merely acts in a
professional capacity on behalf of the promoter, such as solicitor who draws up an
agreement or articles, an accountant or valuer who prepares figures or valuation on
behalf of a promoter, and who is paid for the same, is not a promoter.
A person who may have so acted in the formation of a company may well be
termed as a promoter. [Official Liquidator v. Velu Mudaliar, AIR (1938) Mad. 192]. It
was held in Re. Leeds and Hanley Theatre of Varieties Ltd. (1902) 2 CH. 809 that a
company can be liable as a promoter. The relationship between the promoter and the
company that he has floated must be deemed to be a fiduciary relationship from the
day the work of floating the company started [CIT v. Bijli Cotton Mills Ltd. (1953) 23
Com Cases 114, 120: AIR 1953 ALL 232]. It is a question of fact in each case at what
time a person begins or ceases to be a promoter [Glukstein case (1900) AC 240
(HL)]. The date upon which a person becomes a promoter can be a matter of great
importance to him and to the company, because once the relationship has been
established the promoter is in a fiduciary relationship towards the company, and once
the company has come into existence it will be able to take the necessary measures
to secure its position vis-a-vis the promoter. In all cases, it is relevant to identify the
promotional activities and the time when these are initiated by the person in question.
2. PROMOTERS' CONTRACT RATIFICATION THEREOF
Disclosure by promoters to the company should be through the medium of the
Board of Directors. As regards ratification of promoters contracts, the view taken in
Kelner v. Baxter LR (1886) 2 CP 174 was that the company could not ratify contract
made by a promoter before its incorporation. Specific performance of a contract may


be enforced against a company in respect of contracts entered into by promoters on
behalf of the company, if such a contract is warranted by the terms of incorporation
and the company has accepted the contract and communicated the acceptance to
the other party. (Section 15 of the Specific Relief Act, 1963). Section 19 of the same
Act provides that the other party can also enforce the contract if the company has
adopted it after incorporation and the contract is within the terms of incorporation.
As long as the company does not ratify, as required by the Specific Relief Act,
1963 the position remains the same as under the common law. In D.R. Patil v. A.S.
Dimilov AIR 1961 MP 4 AT 5, it was held that a promoter is personally liable to third
parties upon all contracts made on behalf of the intended company, until with their
consent, the company takes over this liability. The mere fact that it has been
constituted and registered does not discharge the promoter.
If the promoter commits a breach of duties, the company can either rescind the
contract or can compel him to account for any secret profits that he has made.
However, recession of a contract can only be done where the restitution in integrum
is still possible.
3. LEGAL POSITION OF A PROMOTER
While the accurate description of a promoter may be difficult, his legal position is
quite clear. A promoter is neither an agent of, nor a trustee for, the company because
it is not in existence. But he occupies a fiduciary position in relation to the company
and therefore requires full disclosure of the relevant facts, including any profit made
as held by Lord Cairns in Erlanger v. New Sombrero Phosphate Co. (39 LT 269).
Lindley L.J. in Lydney and Wigpool Iron Ore Co. v. Bird, (1866) 33 Ch. D. 85,
described the position of a promoter as follows:
"Although not an agent for the company, nor a trustee for it before its formation,
the old familiar principles of law of agency and of trusteeship have been extended
and very properly extended to meet such cases. It is well settled that a promoter of a
company is accountable to it for all money secretly obtained by him from it just as the
relationship of the principal and agent or the trustee and cestui que trust had really
existed between him and the company when the money was obtained".
Similarly, it was observed in Lagunas Nitrate Co. v. Lagunas Syndicate, (1899) 2
Ch. 392 that "promoters" stand in a fiduciary relation to the company they promote
and to those persons whom they induce to become shareholders in it".
The promoters undoubtedly stand in a fiduciary position. They have in their
hands the creation and moulding of the company. They have the power of defining
how and when and in what shape and under whose supervision it shall come into
existence and begin to act as a trading corporation [As per Lord Cairns in Erlanger v.
New Sombrero Phosphate Co., (1873) 3 App. Case 1218-1236]. In a series of similar
cases under the English Law it has been held that the promoters, being in a fiduciary
position, may not make, either directly or indirectly, any profit at the expense of the
company and that if he does make a profit in disregard of this rule, the company can
compel him to account for it. The promoters can be compelled to surrender the secret
profits [Emma Silver Mining Co. v. Grant, (1879) 11 Ch. D. and Erlanger v. New


Sombrero Phosphate Co, (1878) 3 A.C. 1218-1236 (supra)].
4. DUTIES OF A PROMOTER
The Companies Act, 1956, contains no provisions regarding the duties of
promoters. Section 62, 63 and 542 only impose liabilities on promoters for untrue
statement in the prospectus and fraudulent trading.
There are two fiduciary duties of a promoter, namely:
1. A promoter cannot make either directly or indirectly, any profit at the
expense of the company he promotes, without the knowledge and consent
of the company and that if he does so, in disregard of this rule, the company
can compel him to account for it. In relation to disclosure it may be noted
that part disclosure is worse than none. A promoter is not forbidden to make
profit but to make secret profit. He may make a profit out of promotion with
the consent of the company in the same way as an agent may retain a
profit obtained through his agency with his principal's consent.
In Gluckstein v. Barnes, (1900) A.C. 240 it was held that where a promoter
makes some profits in connection with a transaction to which company is a party and
does not make full disclosure of his profits; the company has the right to affirm the
contracts and promoter should handover his profits to the company.
2. A promoter is not allowed to derive a profit from the sale of his own property
to the company unless all material facts are disclosed. If a promoter
contracts to sell his own property to the company without making a full
disclosure, the company may either repudiate the sale or affirm the contract
and recover the profit made out of it by the promoter. Either way the
dishonest promoter is deprived of his advantage.
In Erlanger v. New Sombrero Phosphate Co., (1878) 3 A.C. 1218, a
syndicate of which E was the head purchased an island containing mines
of phosphate for 5,000. E then formed a company to buy this island. A
contract was made between X a nominee of the syndicate and the
company for its purchase at 1,10,000. The details of the sale were not
disclosed to the shareholders or to the independent Board of directors. The
company now sought to rescind the contract of sale. It was held that as there
had been no disclosure by the promoters of the profit they were making, the
company was entitled to rescind the contract.
It is not the profit made by the promoters which the law forbids, but the non-
disclosure of it. If full disclosure is made, as was done in Salomon v. Salomon & Co.
Ltd., the profit is admissible. As noted earlier, a promoter is allowed to make a profit
out of promotion with the consent of the company but the company being an artificial
person, the problem is to discover as to who may consent on behalf of the company.
It must be disclosed to an independent Board of directors, if there is one, but, if, as is
often the cases in a private company or a one-man company, the promoter is himself
one of the directors, it must be disclosed to the shareholders.
In case, therefore, the promoter wishes to sell his own property to the company,
he should either disclose the fact:


(a) to an independent Board of directors; or
(b) in the articles of association of the company; or
(c) in the prospectus; or
(d) to the existing and intended shareholders directly.
In addition to disclosing secret profits, a promoter has the duty to disclose to the
company any interest he has in a transaction entered into by him.
Promoters duties under the Indian Contract Act
Promoters duties cannot depend on a contract because at the time the
promotion begins, the company is not incorporated, and so cannot contract with its
promoters.
The promoter's duties must be the same as that of a person acting on behalf of
another individual without a contract of employment. If he does make any
misrepresentation in a prospectus he may be held guilty of fraud under Section 17 of
the Indian Contract Act and would be held liable for damages under Section 19 of
that Act.
Termination of Promoters' Duties
It is a general opinion that a promoter completes his duty the moment the
company that he promotes, is incorporated or when the Board of directors is appointed.
But, in reality it continues until the company has acquired the property for which it was
formed to manage and has raised its initial share capital, [Lagunas Nitrate Co. v.
Lagunas Syndicate Ltd. (Supra)] and the Board takes over the management of the
affairs of the company from the promoters.
5. REMEDIES AVAILABLE TO THE COMPANY AGAINST THE PROMOTER
If a promoter makes a secret profit or does not disclose it, the company has got a
remedy against him. This varies according to the circumstances, which can be
divided into two possible situations.
1. Where the promoter was not in a fiduciary position when he acquired the
property which he is selling to the company, but only when he sold it to the
company.
If a person acquires property or has had it before he takes any active steps in
the promotion of a company and sells it to the company at a profit, he is
entitled to retain that profit. Here the promoter, as in Salomon's case, has had
the property for a period of time. He can hardly be said to be in a fiduciary
relation to the company. As long as he makes a full disclosure of the fact that
the property is his and he is the real vendor, he may sell it to the company at a
profit. If, however, he fails to disclose this fact the company is entitled either to
rescind the contract or claim damages for breach of duty of disclosure.
2. Where the promoter was in fiduciary position when he acquired the property
and when he sold it to the company.
This may happen in any of the following circumstances:
(a)Where the promoter bought property with a view to sell it to the company


which he intends to promote, he occupies fiduciary position vis-a-vis the
company. He must disclose all the facts to the company.
(b)Where the promoter resells property to the company at an increased price, the
property which he purchased after he has commenced to act in the
capacity of a promoter, he cannot retain the profit which he has not
disclosed to the company.
(c)Where a person is a promoter for acquiring the property for the company, the
rules of agency will apply, so that any profit he makes will belong to the
company.
Where, therefore, the promoter bought the property with a view to sell it to the
company he promotes, the company may either
(a)rescind the contract and if he has made a profit on some ancillary transaction
that may also be recovered; or
(b)retain the property, paying no more for it than what the promoter has paid,
depriving him of his profit; or
(c)where the above remedies would be inappropriate, such as when the property
has been altered so as to render recession impossible and the promoter
has already received his inflated price, the company may sue him for
misfeasance (breach of duty to disclose). The measure of damages will
be the difference between the market value of the property and the
contract price.
6. LIABILITIES OF PROMOTERS
A promoter is subject to the following liabilities under the various provisions of the
Companies Act, 1956.
1. Section 56 and Schedule II of the Act lays down matters to be stated and
reports to be set out in the prospectus. The promoter(s) may be held liable
for the non-compliance of the provisions of this Section.
2. Under Section 62, a promoter is liable for any untrue statement in the
prospectus to a person who has subscribed for any shares or debentures on
the faith of the prospectus. Such a person may sue the promoter for
compensation for any loss or damage sustained by him. In the event of a
false statement in the prospectus the following consequences will follow:
(a)the allotment of shares may be set aside;
(b)the promoter may be sued for damages;
(c)he may be sued for compensation for misrepresentation under Section
62(1)(c) of the Act;
(d)he may be sued for damages by shareholders who have suffered by reason of
his non-compliance with the statutory requirements as to the contents of


the prospectus;
(e)he may become liable to criminal proceedings.
3. By virtue of Section 203, of the Companies Act, 1956 the Court may
suspend a promoter from taking part in the management of a company for a
period of 5 years if:
(a)he is convicted of any offence in connection with the promotion, formation or
management of a company; or
(b)in liquidation it appears that he:
(i) has been guilty of any offence for which he is punishable (whether he
has been convicted or not) under Section 542; or
(ii) while being an officer of the company, has otherwise been guilty of
any fraud or misfeasance in relation to the company or of any breach
of his duty to the company.
4. Besides civil liability, the promoters are criminally liable under Section 63
for the issue of prospectus containing untrue statements. Section 63
imposes severe penalty on promoters who make untrue and deceptive
statements in prospectus with a view to obtaining capital. The punishment
prescribed, is imprisonment for a term which may extend to two years or
with fine which may extend to Rs. 50,000/- or with both. A promoter can,
however, escape the punishment if he proves:
(i)that the statement was immaterial; or
(ii)that he had reasonable ground to believe, and did, up to the time of the issue
of prospectus, believe that statement was true.
5. A promoter may be liable to public examination like any other director or
officer of the company if the court so directs on a liquidator's report alleging
fraud in the promotion or formation of the company (Section 478).
6. A company may proceed against a promoter on action for deceit or breach
of duty under Section 543, where the promoter has misapplied or retained
any property of the company or is guilty of misfeasance or breach of trust in
relation to the company.
The following are some of the remedies available to the subscriber who is
deceived
(1) He may take proceedings to repudiate the contract and require repayment of
his money with interest.
(2) He may, in respect of any untrue statement in the prospectus, bring an
action against the directors and promoters for the recovery of compensation.
(3) He may, bring an action for damages against the directors and other
persons responsible for failure to disclose matters in a prospectus.
(4) He may, in respect of any untrue statement, bring an action against directors
or those who are responsible for the prospectus.
In addition to directors and promoters the liability under the section also attaches
to person who have authorised the issue of the prospectus. However, the words
cannot reasonably be held to apply to such persons as bankers, brokers,


accountants, solicitors and engineers who merely consent to their names appearing
as such in the prospectus.
Misrepresentation of facts: A promoter will be responsible for any misstatement
as to an existing fact. A calculation of future profits is not a statement of fact Bentley
v. Black, (1893) 9 TLR 580 (CA). But a misstatement as to purposes for which the
money to be raised and is to be applied is a misrepresentation of a present fact.
[Edgington v. Fitzmaurice, (1885) 29 Ch D 459: (1991-5) All ER Rep 59 (CA)].
Misstatements of Names of directors: If a director's name is misstated in the
prospectus, it is an important misrepresentation and the promoter can be held to be
liable, Metropolitan Coal Consumer's Association Ltd., Karberg's case, (1892) 3 Ch 1
(CA).
Representation true only at time of issue: Sometimes representations which were
true when the prospectus was issued, become false before the allotment is made. In
such cases, the fact ought to be communicated to the applicant otherwise the
applicant will not be able to rescind the contract. A promoter/director who knows that
a statement has become false is under a duty to disclose the truth and if he abstains,
he may be guilty of fraud. [Brownliey v. Campbell, (1880) 5 App. Cas 925;
Rajagopala Iyer v. The South Indian Rubber Works, AIR 1942 Mad 656; (1942) 12
Com Cases 203].
7. REMUNERATION OF PROMOTERS
A promoter has no legal right to claim promotional expenses for his services
unless there is a valid contract. Without such a contract he is not even entitled to
recover his preliminary expenses. [Re. English & Colonial Produce Company (1906)
2 Ch. 435 CA].
When a promoter makes proper disclosure, he may expect to be rewarded for his
efforts. Therefore, when the company is registered, it may (and usually does) pay or
agree to pay some remuneration for services rendered. In practice, a promoter is
remunerated in any of the following ways:
(a) He may sell his own property to the company for cash or against fully paid
shares in the company at an over valuation after making full disclosure to an
independent Board of directors or to the intended shareholders.
(b) He may be given an option to buy further shares in the company at par.
(c) He may take commission on the shares sold.
(d) He may take a grant of some shares in the company.
(e) He may be paid a lump-sum by the company.
(f) The articles may provide for a fixed sum to be paid to him. Such a provision
has no contractual effect and he cannot sue to enforce it, but if it is acted
upon, the company cannot recover its money.
Whatever be the nature of remuneration or benefit, it must be disclosed in the
prospectus, if paid, within 2 years preceding the date of the prospectus.
B. FORMATION OF COMPANIES
Important Steps


Before the promoter proceeds to incorporate a company, he has to decide the
following aspects:
(a) Types of Company
Under the Companies Act, 1956 only three types of companies can be
registered, viz., (i) Public companies; (ii) Private companies; and (iii) Producer
companies.
In this study, we shall concentrate only on the steps of incorporating Public and
Private limited companies. However, a separate lesson is being added to this study
material on all the aspects of Producer Companies. Students may refer to the said
study for the necessary knowledge of the topic on Producer Companies.
Section 12 of the Act provides that any seven or more persons, or where the
company to be formed will be a private company, any two or more persons,
associated for any lawful purpose may, by subscribing their names to the
Memorandum of Association and otherwise complying with the requirements of this
Act in respect of registration, form an incorporated company, with or without limited
liability.
These companies may further be classified as follows:
(i) Companies limited by shares;
(ii) Companies limited by guarantee with or without share capital; and
(iii) Unlimited companies with or without share capital.
(b) Application for Availability of Name of company
A company is identified by the name with which it is registered. The
Memorandum of Association of a company should, according to Section 13 of the
Act, state the name of the company. The promoters should decide upon at least five
suitable names apart from one main name, in the order of preference to afford
flexibility to the Registrar to ascertain the availability. The Registrar of Companies
shall furnish the information regarding availability of name within seven days of the
receipt of application. The name of a company must end with the word "Limited" in
the case of a public company and the words "private limited" in the case of a private
company. In the case of a Section 25 company, by obtaining a licence from the
Regional Director, the requirement as to the addition of the word "limited" or "private
limited" to the name can be dispensed with. According to Section 20 of the Act a
company cannot be registered with the name which is undesirable or which is
identical with or too nearly resembles the name of an existing company. A company
will not be allowed to use a name which is prohibited under the Emblems and Names
(Prevention of Improper Use) Act, 1950.
The Emblems and Names (Prevention of Improper Use) Act, 1950
An Act to prevent the improper use of certain emblems and names for
professional and commercial purposes.
Be it enacted by Parliament as follows:


1. Short title, extent of application and commencement: (1) This Act may be
called the Emblems and Names (Prevention and Improper Use) Act, 1950.
(2) It extends to the whole of India and also applies to citizens of India
outside India (3) It shall come into force on such date as the Central
Government may, by notification in the Official Gazette, appoint.
2. Definitions: In this Act, unless the context otherwise requires (a) "emblem"
means any emblem, seal, flag, insignia, coat-of-arms or pictorial
representation specified in the Schedule; (b) "competent authority" means
any authority competent under any law for the time being in force, to register
any company, firm, or other body of persons or any trade mark or design or
to grant a patent; (c) "name" includes any abbreviation of a name.
3. Prohibition of improper use of certain emblems and names: Notwithstanding
anything contained in any law for the time being in force, no person shall,
except in such cases and under such conditions as may be prescribed by
the Central Government, use or continue to use, for the purpose of any
trade, business, calling or profession, or in the title of any patent, or in any
trade mark or design, any name or emblem specified in the Schedule or any
colourable imitation thereof without the previous permission of the Central
Government or of such officer of Government as may be authorised in this
behalf by the Central Government.
4. Prohibition of registration of certain companies etc: (1) Notwithstanding
anything contained in any law for the time being in force, no competent
authority shall (a) register any company, firm or other body of persons
which bears any name; or (b) register a trade mark or design which bears
any emblem or name; or (c) grant a patent in respect of an invention which
bears a title containing any emblem or name, the use of which name or
emblem is in contravention of Section 3(2). If any question arises before a
competent authority whether any emblem is an emblem specified in the
schedule or a colourable imitation thereof, the competent authority may refer
the question to the Central Government, and the decision of the Central
Government thereon shall be final.
5. Penalty: Any person who contravenes the provisions of Section 3 shall be
punishable with fine which may extend to five hundred rupees.
6. Previous sanction for prosecution: No prosecution for any offence
punishable under this Act shall be instituted except with the previous
sanction of the Central Government or of any officer authorised in this behalf
by a general or special order of the Central Government.
7. Savings: Nothing in this Act shall exempt any person from any suit or other
proceeding which might apart from this Act be brought against him.
8. Power of the Central Government to amend the Schedule: The Central
Government may, by notification in the Official Gazette, add to or alter the
Schedule and any such addition or alteration shall have effect as if it had
been made by this Act.


9. Power to make rules: (1) The Central Government may, by notification in the
Official Gazette, make Rules to carry out the purposes of this Act.
THE SCHEDULE
[See Section 2(a) and 3]
1. The name, emblem or official seal of the United Nations Organisations.
2. The name, emblem or official seal of the World Health Organisation.
3. The Indian National Flag.
4. The name, emblem or official seal or emblem of the Government of India or
of any State or any insignia or coat-of-arms used by any such Government
or by a Department of any such Government.
5. The emblems of the St. John's Ambulance Association (India) and the
St. John's Ambulance Brigade (India) consisting of the device of a white
eight pointed cross embellished in the four principal angles alternatively with
a lion passant Quadrant and a Unicorn passant whether or not the device is
surrounded or accompanied by concentric circles or other decoration or by
lettering.
6. The name, emblem or official seal of the President, Governor, Sadar-i-
Riyasat or Republic or Union of India.
7. Any name which may suggest or be calculated to suggest (i) the patronage
of the Government of India or the Government of State, or (ii) connection
with any local authority or any corporation or body constituted by the
Government under any law for the time being in force.
8. The name, emblem or official seal of the United Nations Educational,
Scientific and Cultural Organisation.
9. The name or pictorial representations of Rashtrapati, Rashtra Bhawan,
Rashtrapati Bhavan, Raj Bhavan.
9A. The name or pictorial representation of Mahatma Gandhi or the Prime
Minister of India.
10. The medals, badges or decorations instituted by the Government from time
to time or the miniatures or replicas of such medals, badges or decorations
or the names of such medals, badges or decorations or the miniatures or
replicas thereof.
11. The name, emblem or the official seal of the International Civil Aviation
Organisation.
12. The word Interpol which is an integral part of the International Criminal
Police Organisation.
13. The name, emblem or official seal of the World Meteorological Organisation.
14. The name and emblem of the Tuberculosis Association of India.
15. The name, emblem and official seal of the International Atomic Energy


Agency.
16. The names "Ashoka Chakra" or "Dharma Chakra" or the pictorial
representation of Ashoka Chakra as used in the Indian National Flag or in
the official seal or emblem of the Government of India or of any State
Government or of a Department of any such Government.
17. The name of the Parliament or the Legislature of any State, or the Supreme
Court, or the High Court of any State, or the Central Secretariat, or the
Secretariat of any State Government or any other Government Officer or the
pictorial representation of any building occupied by any of the aforesaid
institutions.
18. The name and emblem of the Rama Krishna Math and Ramakrishna
Mission consisting of a swam floating on waters, with a Lotus in the
foreground and the rising sun in the background, the whole being encircled
by a hooded serpent, with the words [** ** **] superimposed on the bottom
portion.
19. The name and emblems of the Sri Sarda Math and Ramakrishna Sarda
Mission consisting of a swan (facing right) floating on waters, with a Lotus in
the foreground and the rising sun in the background, the whole being
encircled by a wild serpent (facing right) with the words [** ** **]
superimposed on the bottom portion.
20. The name of 'The Bharat Scouts and Guides' with its 'Emblem'.
21. The name and emblem of the International Olympic Committee consisting of
five inter-laced rings.
22. The name and the emblem of the National Youth Emblem which is in black
and white and carries the profiles of the faces of two onward looking young
persons- male and female - inscribed within a circle. Both faces are turning
towards the rights and the profile of the male face is in black and is situated
behind that of the female face. The back of profile of the female face forms
the tail and wing of a dove flying in the opposite direction with its beak
extending outside the circle and carrying a twig with leaf. The profile of the
dove is in white and the balance space of the profile of the female face is
covered with horizontal lines in black. The space between the black profile of
the male face and the circle is also covered by horizontal lines in black. The
space in between the profile of the dove and the circle to the left of the dove
is also in black. The leaf and twig is in black. One eye of the dove is shown
in the form of a dot.
For deciding the availability of names, the Department of Company Affairs (now
Ministry of Corporate Affairs) has issued guiding instructions dated 15.3.1962 and
further clarifications from time to time which are reproduced hereunder:

Guiding Instructions for Deciding Availability of Names for Registration
under the Companies Act, 1956
Source MCA Letter No. 10(19)-RS/61 dated 15.3.62
A name which falls within the categories mentioned below will not generally be


made available.
1. If it is not in consonance with the principal objects of the LLP as set out in its
Incorporation document. This does not necessarily mean that every name
should be indicative of its objects but when there is some indication of
business in the name then it should be in conformity with its objects.
2. If the company/companies main business is finance unless the name is
indicative of that particular financial activities viz. Chit Funds/Investments/
Loans etc.
3. If it includes any word or words which are offensive to any section of the
people.
4. If the proposed name is the exact Hindi translation of the name of an
existing company in English especially an existing company with a
reputation.
5. If the proposed name has a close phonetic resemblance to the name of a
company in existence, for example, J.K. Industries Ltd., Jay Kay Industries
Limited.
6. If the name is only a general one, like Cotton Textile Mills Ltd. or Silk
Manufacturing Limited and not specific like Calcutta Cotton Textiles Mills
Limited or Lakshmi Silk Manufacturing Company Limited.
7. If it includes the word Co-operative, Sahakari or the equivalent of word 'co-
operative' in the regional languages of the country.
8. If it attracts the provisions of the Emblems and Names (Prevention of
Improper Use) Act, 1950 as amended from time to time i.e., use of improper
names, prohibited under this Act.
9. If it connotes Government's participation or patronage, unless circumstances
justify to, e.g., a name may be deemed undesirable in certain context if it
includes any of the words such as National, Union, Central, Federal,
Republic, President, Rashtrapati, Small Scale Industries, Cottage Industries
etc.
10. If the proposed name contains the words 'British India'.
11. If the proposed name implies association or connection with Embassy or
Consulate which suggests connection with local authorities such as
Municipal, Panchayat, Delhi Development Authority or any other body
connected with the Union or State Government.
12. If a proposed name implies association or connection with or patronage of a
National hero or any person held in high esteem or important personages
who are occupying important positions in Government so long as they
continue to hold such positions.
13. If the proposed name is vague like D.I.M.O. Limited or I.V.N.R. Private
Limited or S.S.R.P. Limited.
14. If it resembles closely the popular or abbreviated descriptions of important
companies like Tisco (Tata Iron & Steel Company Limited), H.M.T.
(Hindustan Machine Tools), I.C.I. (Imperial Chemical Industries), Texmaco
(Textile Machinery Corporation), WIMCO (Western India Match Company)


etc. In some cases the first word or the first few words may be the key words
and care should be taken that they are not exploited. Such words should not
be allowed even though they have not been registered as trade mark.


14A. Where the existing companies are stated and found to be well-known in their
respective fields by their abbreviated names these companies may be
allowed to change their names by way of abbreviation. Earlier prior approval
of Regional Director was necessary for such change of name. However from
16.2.1995 the DCA vide Circular No. 1/95 F.No. 14.6.94-CL-V, dated
16.2.95 has delegated this power to ROC.
15. If it is different from the name/names of the existing company/companies
only to the extent of having the name of a place within brackets before the
word 'limited', for example, Indian Press (Delhi) Limited should not be
allowed in view of the existence of the company named Indian Press
Limited.
16. If the proposed name includes common words like 'Popular' 'General'
'Janta', if they are in the same state doing the same business. But in case of
companies in different business in the same state and in all cases when the
registered office of the company is in different States, the name might be
allowed. For instance if there is 'Popular Drug House Private Limited'
existing another company by the name of 'Popular Plastic Private Limited'
should not be objected to.
17. If it includes name of registered Trade mark, unless the consent of the owner
of the trade mark has been produced by the promoters. It may not be possible
in all cases to check up the proposed name with the trade mark however if the
Registrars are in the knowledge or some interested party/parties bring to their
notice a trade mark which is included in the proposed name then it should not
be allowed unless a no-objection certificate is obtained from the party who has
registered the trade mark in its own name.
18. If a name is identical with or too nearly resembles the name by which a
company in existence has been previously registered. However, if a proposed
company is to be under the same management or in the same group and likes
to have a closely resembling name to the existing companies under the same
management or group with a view to have advantage of the goodwill attached to
the management or group name, such a name may be allowed.
Even in the case of unregistered companies or firms which have built up a
reputation over a considerable period, the principle (that if a name is
identical with or too closely resembles the name by which a company has
been previously registered and is in existence, it should not be allowed)
should be observed as far as practicable. In view of the difficulty in checking
up whether a proposed name is identical with or too nearly resembles the
name of an unregistered company or a firm of repute, it should at least be
ensured that a proposed name is not allowed if it is identical with or too
nearly resembles the name of a firm within the knowledge of the Registrar.


The cases of foreign companies of repute should also be similarly treated
even if there are no branches of such companies in India.
A few illustrations of closely resembling names are given below for guidance. The
names as proposed in column I should not (normally) be made available in view of
the Companies in existence as shown in Column 2.


Proposed Name
Existing Company with too nearly


resembling names

(1)

(2)

1. Hindustan Motor & General Hindustan Motor Limited
Finance Company.
2. The National Steel Mfg. Co. National Steel Works
Private Limited
3.Trade Corporation of India LimitedState Trading Corporation of India Limited
4.Viswakarma Engineering Works Vishwakarma Engineers (India) Private
Private Limited Limited
5.General Industrial Financing & General Financial & Trading Corporation
Trading Co. Ltd.
Limited
6.India Land & Finance Limited Northern India Land & Finance Limited
7. United News of India Ltd. United News Papers Limited
8.Hindustan Chemicals & FertilizersHindustan Fertilizers Limited
Limited

19. If it is identical with or too nearly resembles the name of the company in
liquidation, since the name of a company in liquidation, is borne on the
register till it is finally dissolved. A name which is identical with or too closely
resembles the name of a company dissolved as a result of liquidation
proceedings should also not be allowed for a period of 2 years from the date
of such dissolution since the dissolution of the company could be declared
void within the period aforesaid by an order of the Court under Section 559
of the Act.
Further as a company which is dissolved in pursuance of an action under
Section 560 of the Act can be revived by an order of the Court before the
expiry of 20 years from the publication in the Official Gazette of the company
being so struck off, it is considered desirable to stop or conditionally allow
the registration of a proposed name which is identical with or too nearly
resembling of such dissolved company for a period indicated below. Since,
the period of 20 years as prescribed under the law is considered an unduly
long period, the registration of a proposed name which is identical with or
too nearly resembles the name of a company dissolved in pursuance of


Section 560 should not be allowed for a period of first five years only. During
the next five years, such a proposed name may be allowed subject to the
condition that in the event of the dissolved company being restored to life by
an order of the Court, the new company would have to change its name.
After a lapse of ten years, names identical with or too nearly resembling
those of the dissolved companies may be allowed without any such
condition.
20. If it is different from the name of existing company merely by the addition of
words like 'New', 'Modern', 'Non' etc. Names such as 'New Bata Shoe
Company', Nav Bharat Electronic'. etc., should not be allowed. Different
combination of the same words also requires careful consideration. If there
is a company in existence by the name 'Builders and Contractors Limited'
the name "Contractors and Builders Limited" should not ordinarily be
allowed.
21. If it includes words like 'Bank', 'Investment', 'Insurance' and 'Trust', 'Banking'.
These words may, however, be allowed in cases where the circumstances
justify it. In cases of Banking Companies, the Reserve Bank of India should
be consulted and its advice should be taken before a name is allowed for
registration. The purpose of such consultation is to prevent small banking
companies from misleading the general public by adopting the names of
some well-established and leading banks functioning elsewhere than in
India.
22. If the name includes the word 'Industries' or 'Business' unless the name is
indicative of the business of the proposed company for otherwise it serves
as a lever for the company to diversify its activities.
23. If it includes proper name which is not a name or surname of a director
Such names should not be allowed except for valid reasons. For example,
for sentimental reasons, sometimes the names of relatives such as wife, son
and daughter of the director may have to be allowed provided one other
word suggested, makes the name quite distinguishable.
24. If it is intended or likely to produce a misleading impression regarding the
scope or scale of its activities which would be beyond the resources at its
disposal. For example, names like Water Development Corporation of India
Private Ltd., Telefilm of India Private Ltd., etc. All India Scales Organisation
Ltd., International Import and Export Company Ltd., etc. should not be
allowed when the authorised capital is to be only a few lacs and the area of
operation limited to a State. Words like 'International', 'Hindustan', 'India',
'Bharat', Continental', 'Asiatic', may be allowed only if the scope and scale of
business of the proposed company justify the use of such words. However,
the words 'Jai Hind', 'Jai Bharat', 'Nav Bharat', 'New India', etc. included in
the proposed name need not stand the same test as 'Hindustan', 'India' etc.
(as they do not give the same sense). Similarly, the word, Bharat, India, etc.
if stated in the brackets before the word 'limited' or 'private limited' need not
stand the same test as the words 'India' etc. put at the beginning of the
name. Also the word 'India' or 'Bharat' in brackets before the word 'limited' or
private limited' does not necessarily mean that the company is an Indian
Branch of some foreign company, such as 'Marsden Electricals (India)
Private Limited'.


25. If the proposed name includes the word 'State' along with the name of the
State such as 'Kerala State Company Limited' it should not be allowed as it
would give an impression of the Kerala State Government participating in
the share capital of the proposed company. However, if the name of a State
only is included without the addition of the word 'State' in the proposed
name, then it may be allowed as it is not likely to give the impression that the
company has the State Government's interest in it.
26. If the proposed name includes the word 'Corporation', unless the Company
could be regarded as a big sized company. However, the words
'Corporation' and 'Company' may be regarded as closely resembling for
purposes of allowing a new name. If for example, a company by the name of
'Rajasthan Finance Corporation' already exists, 'Rajasthan Finance
Company' should be regarded as undesirable within the meaning of Section
20 of the Act.
27. If the proposed name includes words like French, British, German etc.,
unless the promoters satisfy that there is some form of collaboration and
connection with the foreigners of that particular country or place, the name
of which is incorporated in the name. Thus, the name 'German Tool
Manufacturing Company Ltd.' should not be allowed unless the company
has some connection with Germany.
28. Even where, except for the first word, all the other words of the proposed
name are similar to those of an existing company, the first word should be
considered to be sufficient to distinguish it from the name of an existing
company. For example, "Oriental ........ Limited".
Vide notification dated 13.3.1989 the department has with a view to maintain
uniformity clarified that the following guidelines be followed in the use of key words as
part of the name, while making available the proposed names under Sections 20 and
21 of the Companies Act, 1956.

Key Words
Required
Authorised



Capital (Rs.)

(1) Corporation

5 crores
(2)International Globe, Universal, Continental, Inter-
continental, Asiatic, Asia, being the first word of
the name.

1 crore
(3)If any of the words at (2) above is used within the
name (with or without brackets)
50 lacs
(4)Hindustan, India, Bharat, being the first word of the name 50 lacs


(5)If any of the words at (4) above is used within the
name (with or without brackets)
5 lacs
(6) Industries/Udyog

1 crore
(7)Enterprises, Products, Business, Manufacturing
10 lacs

The names with key words at serial nos. (6) and (7) may be considered when the
company proposes to deal in various business activities or the company is already
carrying on various business activities (in case of change of name).
The Department of Company Affairs (now Ministry of Corporate Affairs) has
issued further guiding instructions/clarifications through general Circular No. 3/90
dated 27.8.1990 and 6/99 dated 13.5.1999, which are reproduced below:
Circular No. 13/90 dated 27.8.1990
It has been decided that the words "Venture Capital/Venture Capital
Company/Venture Capital Fund/Venture Capital Finance Company" or such similar
name, as part of the proposed name of a company be only allowed when the
company or promoters have obtained approval from the Department of Economic
Affairs or such authority as may be nominated by the Government, in this behalf.
NAME AVAILABILITY GUIDELINES CHANGES
[Issued by the Ministry of Law, Justice and Company Affairs Department of
Company Affairs, Vide No. 5/35/98; CLV. General Circular No. 6/99 dated
13.5.1999].
Names starting with small letters/having small letters
In the past the name-search for allowing names for companies used to be a
manual search based on list of names already in existence on a particular date,
names made available by different ROCs (which used to be circulated periodically)
etc. The name search is no longer manual. It has become a computerised operation
in all ROC offices. In view of this, some of the old constraints (like alphabetical listing)
which could be a restrictive factor in the manual system do not exist under the
present computerised system.
ROCs may therefore now allow names starting with small alphabets (like i2
Technologies ..... Ltd., etc.) as such names are being increasingly used by many
companies in other countries. It should, however, be ensured that the names starting
with small alphabets does not have phonetic or visual resemblance to the name of a
company in existence.
Change of name by companies on Computer Software business
In recent times it appears that quite a few companies whose principal object was
not computer software and who had actually been involved in financing activities


have changed their names to indicate as if they were in the business of computer
software. For this purpose they have included words like "Infosys; Software;
Systems; Infosystem; Computers; Cyber; Cyberspace etc." in their names.
In order that investors are not misled by the strategy adopted by a few
companies, ROCs are hereby advised that in future they should allow change of
name to companies to reflect the business of software only if a substantial portion of
their income (as reflected from their audited accounts or accounts certified by a
Chartered Accountant) is derived from software business. If this is not proved then
such change of name should not be allowed.
Companies in Insurance Sector
It may be recalled that in Guideline No. 21 you have been advised not to allow
the word 'bank', 'banking', 'investment', 'insurance', and 'trust' unless circumstances
justify it. As you may be aware, the insurance sector is likely to be opened for entry
by Private Sector. The activities of the Insurance Sector would be regulated by the
Insurance Regulatory Authority which has already been set up.
In view of this, in partial modification of the abovementioned Guidelines, it is
hereby clarified that ROCs may allow companies to be registered by them with the
word 'insurance' or 'risk corporation' as part of the name only after consulting the
Reserve Bank of India and Insurance Regulatory Authority (Jeevan Bharti Building,
Tower 1, Connaught Circus, New Delhi-110001) as the case may be.

[Department clarification, dated 30.6.2000 Attention is invited to this
Department's Circular No. 6 of 1999 (5/35/98-CL.V) dated 13th May, 1999 in regard to
allowability of names for entrepreneurs seeking to promote companies for providing
insurance services. In terms of the above circular, such names were being given only
after consulting the Insurance Regulatory Authority until now. Consequent on the
coming into force of the Insurance Regulatory Development Authority Act, 1999 w.e.f.
19th April 2000, the Department has received a reference from the Insurance
Regulatory Authority advising that the embargo on registration of names by new
companies could be lifted. In view of this all ROCs are advised that they may allow
names with words insurance/assurance or risk corporation as part of the name without
any need to consult the Insurance Regulatory Authority. It is hereby clarified that such
names can be allowed only to new companies and do not apply to change of name as
existing companies are not allowed to carry on any insurance activity (Circular No. 5,
dated 30.6.2000)].
In partial modification of General Circular No. 5/2000 dated 30th June, 2000, it is
hereby further clarified that since the Insurance Regulatory and Development Authority
has notified the Insurance Regulatory and Development Authority (Insurance Brokers)
Regulations, 2002 permitting private sector companies to carry on the insurance
brokers business, the Registrar of Companies may permit change of name of existing
companies on their changing the objects to undertake the business of insurance
brokers also. (Circular No. 19, dated 25.4.2003).
Use of Generic Names


Guideline No. 5 relates to inadvisability of allowing companies to have only
generic names without any other proper noun preceding/succeeding it. Under this
category would come the word 'Y2K' (i.e. Year 2000).
It may kindly be noted that this is a generic one and cannot be allowed for any
company as a 'stand alone' name.
The Companies (Central Government's) General Rules and Forms, 1956 vide
Rule 4A, require the promoters of a company under a proposed name to make an
application in e-Form No. 1A, to the Registrar of Companies of the State in which the
registered office of the proposed company is to be situated, for ascertaining as to
whether the proposed name is undesirable within the meaning of Section 20 of the
Act. A fee of Rs. 500 is to be paid along with e-Form 1A [fee can be remitted
electronically (by using a credit card or by electronic bank transfer) or by cash/draft,
by challan generated electronically on submission of form].
In case the name is undesirable, the registrar may reject the same or ask for
resubmission of the application with new names or calls for further information,
ordinarily within three days of receipt of the application. The applicant shall be given
only upto two opportunities for re-submission of their proposal against the fee paid in
the first instance for name availability after the original application is filed.
Where the Registrar informs the promoters of the company that the name is not
undesirable, such name shall be available for adoption by the promoters of the
company for a period of sixty days from the date the name is allowed. If the name so
allowed is not adopted on or before the expiry of the period of sixty days from the
date it is allowed, the applicant may apply for extension for retention of such name for
a further period of thirty days on payment of fifty per cent of the fee prescribed for the
application at the initial stage. No further extension will be granted after expiry of
ninety days from the date the name is allowed in the first instance. The name allowed
shall lapse after expiry of sixty or ninety days, as the case may be, from the date it is
allowed first.
Name allowed by the Registrar before November 19, 2007, if not adopted, shall
lapse after the expiry of a period of six months from the date on which the name was
initially allowed or renewed. However, in case the name has not been renewed
earlier, the applicant on or before the date of expiry, may apply for one time extension
of such name for a further period of thirty days on payment of fifty per cent of the fee
prescribed for the application at the initial stage.
To avoid the unhealthy practice of pre-emption of names by the promoters, the Deptt.
(Now Ministry of Company Affairs) has vide Notification dated 5.1.1990 advised the
Registrar of Companies to register the company only in cases where the promoters, as
per the availability of name application are also subscribers to the Memorandum and
Articles of Association of the proposed company at the time of its registration.
The Department (Now Ministry) has decided vide circular No. 1/95 dated
16.2.1995 that so long as there is one common promoter both in the name availability
application and the subscription clause of the Memorandum and Articles of
Association and others mentioned in application have no objection, the Registrar may
register the company.
(c) Preparation of Memorandum and Articles of Association


The Memorandum of Association is the constitution of a company. It is a
document, which amongst other things, defines the area within which the company
can act. It is, therefore, required to state the object for which the company has been
formed, the business that it would undertake, the liability, the capital which it shall be
allowed to raise, the nature of liability of its members, the name of the State where
the registered office of the company shall be located etc.
The other important document is the Articles of Association which contains the
rules and regulations relating to the internal management of a company.
(d) Vetting of Memorandum and Articles, Printing, Stamping and Signing of
the same
The draft of the Memorandum and Articles should be prepared and typed before
printing the Memorandum and Articles of Association of a company. It is usual for the
promoters to approach the Registrar of Companies concerned for vetting the draft
Memorandum and Articles as the Registrar of Companies may propose some
changes. It has been clarified by the Department vide Circular No. 128(HCC) 64
dated 27.7.1964 that though it may not be possible for the Registrars to accept a
definite commitment in this regard, the Registrar should to the extent possible, offer
their help and advice to those who may approach them in drawing up the
Memorandum and Articles. This would be specially desirable in cases where
promoters have no prior experience on company formation. For vetting the
Memorandum and Articles no fee is required to be paid by the promoters. The
promoters may make a written request on plain paper enclosing a copy of the draft
Memorandum and Articles, and after the vetting by the Registrar, the Memorandum
and Articles may be printed as required under Section 15 of the Act.
The Memorandum and Articles have to be stamped and the value of stamp
differs from State to State as per respective State Stamp laws.
Section 15 also stipulates that every Memorandum should be signed by each
subscriber who should add his address, description and occupation, if any, in the
presence of at least one witness who shall attest the signature and shall likewise add
his address, description and occupation, if any. In case of companies having share
capital, the subscribers to the Memorandum should at least take one share each and
they have to state clearly the number and nature of shares taken by them. Where
necessary one witness can attest the signatures of all subscribers.
The Articles of Association should also be signed separately by subscribers. The
signatures of the subscribers in the Articles of Association are also to be attested by
a witness.
However, it is not necessary that only the subscribers should sign the
Memorandum and Articles. An agent may sign the Memorandum on behalf of a
subscriber if he is authorised by a Power of Attorney in this behalf.
It has also been clarified by the Department (Now Ministry) that when an executant
of a Memorandum of Association is illiterate, he should give his thumb impression or
mark which should be described as such by the subscriber or person writing for him.
The latter should place the name of the executant against or below the mark and


authenticate it by his own signature. He should also write against the name of the
subscriber, the number of shares taken by him. Such person should also read and
explain the contents of the documents to the executant and make an endorsement to
that effect on the document. Both the Memorandum and Articles of Association should
be dated and it should be ensured that the date given on the documents is any date
after the date of their stamping. After the documents are stamped, signed and dated,
they should be printed. Computer/Offset printing of Memorandum and Articles of
Association is also accepted and taken on record by the Registrar of Companies.
However, the same should be neatly and legibly printed and should be in compliance
with the requirements of the Act. Zerox copies are not allowed to be filed for the
purposes of registration of Companies. [Letter No. 8/31/15/80-CL.V dated 30.4.1981].
Under the MCA-21 system also, the Memorandum and Articles of Association are
required to be printed, stamped, signed physically and submitted physically at ROC
office. A scanned copy of the duly stamped and executed memorandum and articles is
also required to be attached with e-Form 1 and submitted electronically. However, they
are not required to be filed as attachment for a company licensed under Section 25 as
they are already attached with e-form 24.
(e) Power of Attorney
With a view to fulfill the various formalities that are required for incorporation of a
company, the promoters may appoint an attorney empowering him to carry out the
instructions/requirements stipulated by the Registrar. This requires execution of a
Power of Attorney on a non-judicial stamp paper of a value prescribed in the
respective State Stamp Laws.
(f) Additional Documents Required
(i) e-Form No. 29: Consent of directors
As per Section 266, in the case of a public limited company having share capital, a
person shall not be capable of being appointed a director by the Articles of Association
unless, he has, before the registration of the Articles, either himself or through his
agent, signed and filed with the Registrar his consent in writing to act as director of the
company. Therefore, where the Articles of a public company having share capital name
a person as a director, he must file his consent as an attachment to e-Form 32.
(ii) e-Form No. 18: Notice of Registered address
Under Section 146, a company shall as from the day on which it begins to carry
on business, or as from the 30th day after the day of its incorporation whichever is
earlier, should have a registered office. Where the location of the registered office is
finalised prior to Incorporation of a company by the promoters, the promoters can
also file along with the Memorandum and Articles, the notice of situation of the
Registered office in eForm No. 18 of the Companies (Central Government's) General
Rules and Forms (Amendment) Rules, 2006. Where the location of the registered
office is not finalised, e-Form No. 18 can be filed later but within 30 days from the
date of incorporation.
(iii) e-Form No. 32: Particulars of Directors
Where a company by its Articles of Association appoints any person(s) who are


to act as a director, manager or secretary it may also file their particulars, in
duplicate, in e-Form No. 32 of the Companies (Central Government's) General Rules
and Forms (Amendment) Rules, 2006, with the Registrar at the time of registration.
However, e-Form No. 32 can also be filed within 30 days of the registration of the
company or appointment of first directors.
(g) Statutory Declaration in e-Form No. 1
Section 33(2) requires that a declaration in e-Form No. 1 of the Companies
(Central Government's) General Rules and Forms (Amendment) Rules, 2006, by an
advocate of the Supreme Court or a High Court, or an attorney or pleader entitled to
appear before the High Court or a Secretary or a Chartered Accountant practising in
India who is engaged in the formation of a company or by a person named in the
Articles as a director, manager, or secretary of a company, that all the requirements
of the Companies Act, 1956 and the rules thereunder have been complied with in
respect of registration and matters precedent and incidental thereto to be filed with
the Registrar. The Registrar may accept such a declaration as sufficient evidence of
such compliance.
The above declaration should be on a non-judicial stamp paper of appropriate
value with reference to the State in which the office of the Registrar of Companies is
situated. Alternatively, non-judicial special adhesive stamps may also be affixed to
the declaration. e-Form 1 is to be filed electronically and the original duty filled in and
signed e-Form 1 on stamp paper are required to be sent to the concerned ROC
simultaneously, failing which the filing will not be considered and legal action will be
taken.
(h) Payment of Registration Fees
The fee prescribed for registration of company is required to be paid to the
Registrar. The quantum of registration fees depends on the nominal capital of the
company to be incorporated in case of companies having share capital which has
been prescribed in Schedule X to the Act.
(i) Certificate of Incorporation
If all the documents mentioned above are complete and the Registrar of
Companies is satisfied that all the requirements, aforesaid, have been complied
with by the company and that it is authorised to be registered under the Act, he
shall retain and register the Memorandum and Articles, if any. On the registration of
the memorandum of a company, the Registrar shall certify under his hand that the
company is incorporated and, in the case of a limited company that the company is
limited company. From the date of Incorporation mentioned in the Certificate of
Incorporation, such of the subscribers to the Memorandum and other persons, as
may from time to time be members of the company, shall be a body corporate by
the name contained in the Memorandum, capable forthwith of exercising all the
functions of an incorporated company and having perpetual succession and a
common seal, but with such liability on the part of the members to contribute to
assets of the company in the event of its being wound up as mentioned in the Act
(Section 34).


A company on registration by the Registrar of Companies becomes a separate
legal entity notwithstanding the fact that there was only one governing director who
also held a majority of the shares of the company. The separate legal entity enabled
a director, representing the company, to enter into a contract of employment with
himself in his individual capacity [Lee v. Lee's Air Farming Ltd., (1961) 31 Com Cases
233, 246, 248, 249: (1960) 3 All ER 420 (PC)]. Two companies which are
incorporated with the same set of shareholders are nevertheless distinct and
separate entities. [Patinson v. Bindhya Debi, AIR 1933 Pat 196].
A company may also act, as several banking companies are actually doing, as
trustee, executor or administrator, provided its constitution, i.e., its Memorandum of
Association permits or authorises the doing of such business.
The advantage of Incorporation is that the company never ceases to exist. It has
perpetual succession and remains in existence however often its members change,
until it is dissolved by liquidation. The company has an identity and existence
independent of the estate and undertakings owned by it, so that even if the estate is
taken over by the Government, that does not constitute a taking over of the
management of the company. [Gopalpur Tea Co. Ltd. v. Peshok Tea Co. Ltd., (1982)
52 Com Cases 239, 241 (Cal)].
A company incorporated under the Companies Act, is not created by the
Companies Act, but comes into existence in accordance with the provisions of the
Act. It is not a statutory body because it is not created by statute. It is a body created
in accordance with the provisions of the statute. [Sukhdev Singh v. Bhagat Ram,
(1975) 45 Comp. Cases 285, 297: AIR 1975 SC 1331].
In State Trading Corporation of India Ltd. v. CTO (1963) 33 Comp. Cases 1057 it
was held that a company is a legal person, but it is not a 'citizen' so as to claim the
fundamental rights granted to citizens by the Constitution. This is the effect of Section
2(f) of the Citizenship Act of 1955 which expressly excludes a company or
association or body of individuals from citizenship. The effect in reference to the
Constitution of India is that while companies can claim the benefit of all the
fundamental rights which are guaranteed to "persons", they cannot claim the benefit
of fundamental freedom listed in Article 19 which are guaranteed to citizens only.
Conclusive Evidence
According to Section 35 of the Act, a Certificate of Incorporation given by the
Registrar in respect of any association shall be conclusive evidence that all the
requirements of the Act have been complied with in respect of registration and
matters precedent and incidental thereto, and that the association is a company
authorised to be registered and duly registered under the Act. The Certificate of
Incorporation is conclusive evidence that everything is in order as regards registration
and that the company has come into existence from the earliest moment of the day of
incorporation stated therein with rights and liabilities of a natural person, competent to
enter into contracts [Jubilee Cotton Mills Ltd. v. Lewis, (1924) (A.C. 958)]. The validity
of the registration cannot be questioned after the issue of the certificate. In Moosa v.
Ebrahim ILR (1913) 40 Cal. 1 (P.C.) the Memorandum of Association of a


company was signed by two adults and by a guardian of the other 5
subscribers, who were minors. The Registrar, however, registered the company
and issued under his hand a Certificate of Incorporation. It was contended that
this Certificate of Incorporation should be declared void. Lord Macnaughten
said: "Their Lordships will assume that the conditions of registration
prescribed by the Indian Companies Act were not duly complied with; that
there were no seven subscribers to the Memorandum and that the Registrar
ought not to have granted the certificate. But the certificate is conclusive for
all-purpose. Thus, the certificate prevents anyone from alleging that the
company does not exist".
It is for the purpose of incorporation only that the certificate was made conclusive
by the legislature and the certificate cannot legalise the illegal object contained in the
Memorandum. Where the object of a company is unlawful, it has been held that the
certificate of registration is not conclusive for this purpose, [Performing Right Society
Ltd. v. London Theatre of Varieties (1992) 2 KB 433].
Even if the two signatures to a Memorandum were written by one person, or were
forged, the certificate would be conclusive that the company was duly incorporated.
So too, if the signatories were all minors, the certificate would still be conclusive,
Hammond v. Prentice Bros., (1920) 1 Ch 201 and Bowman v. Secular Society Ltd.
1917 AC 406, 438.




LESSON ROUND-UP
Though the Companies Act, 1956, does not define the expression promoters,
SEBI (Substantial Acquisition of Shares and Takeover) Regulation, 1997 has
defined it.
Promoters are generally the persons who assume the primary responsibility of
matters relating to promotion of a company.
A promoter is neither an agent of, nor a trustee for, the company because it is not
in existence. But he occupies a fiduciary position in relation to the company.
A promoter is not forbidden to make profit but to make secret profit.
Disclosure by promoters to the company should be through the medium of the
Board of Directors.
A promoter is not allowed to derive a profit from the sale of his own property to
the company unless all material facts are disclosed.
In addition to disclosing secret profits, a promoter has the duty to disclose to the
company any interest he has in a transaction entered into by him.
If a promoter makes a secret profit or does not disclose any profit, the company
has remedies against him, varying according to circumstances.
A promoter may be held liable for non-compliance of provisions of Section 56
and Schedule II of the Act and for any untrue statement in the prospectus.
He may be suspended by the court from taking part in the management of a
company for a period of 5 years in circumstances specified under Section 203.
A promoter is criminally liable under Section 63. He may be made liable to public
examination if the court so orders.
A company may proceed against a promoter on action for deceit or breach of
duty under Section 543.
A promoter has no legal right to claim promotional expenses for his services
unless there is a valid contract.
Whatever be the nature of remuneration or benefit, it must be disclosed in the
prospectus, if paid, within 2 years preceding the date of the prospectus.
The first step to be taken by a promoter in incorporating a company is to decide
on the type of company to be incorporated. Further, the promoter should apply for
availability of name of company, prepare the memorandum and articles of
association and get them vetted, printed, stamped and signed. The promoter
should then execute power of attorney and file any additional documents
required. He should then file statutory declaration and pay the registration fees.
On the registration of the memorandum of a company, the Registrar shall certify
under his hand that the company is incorporated and, in the case of a limited
company that the company is limited company.
The certificate of incorporation is conclusive evidence that everything is in order
as regards registration and that the company has come into existence from the
earliest moment of the day of incorporation stated therein.


SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation)
1. Who is a promoter? Write a note on the duties and liabilities of promoters.
2. What are the remedies available to the Company against a promoter?
3. What does 'conclusive evidence' means in relation to certificate of
incorporation? Discuss the same citing case laws?
4. "A promoter is not a trustee or agent for the company but he stands in a
fiduciary position towards it." Discuss.
5. State the legal position of a promoter?
6. What are the remedies available to the company against the promoter?
7. What steps are required to be taken for the formation of a public limited
company?


Suggested Readings:
1. Guide to the Companies Act A. Ramaiya
2. Guide to Memorandum, Articles and Incorporation of Companies M.C.
Bhandari & R.D. Makheeja.
3. Company Law & Practice A.K. Majumdar and G.K. Kapoor.
4. Company Law B.K. Sengupta.





















STUDY IV
INCORPORATION AND ITS CONSEQUENCES - III
MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION
LEARNING OBJECTIVE
This chapter explains in detail the Memorandum of Association and Articles of
Association, their purpose, contents and registration. It also discusses the alterations
that can be carried out in the Memorandum and Articles of Association and effect of
such alterations. Memorandum of Association has been distinguished from Articles of
Association herein. It also explains the legal effect of these documents and the
doctrine of indoor management.
At the end of the lesson, you should be able to understand:
Memorandum of Association, its purpose and contents, its printing and signing.
Name clause, situation clause, objects clause, liability clause, capital clause,
association clause and subscription clause.
Doctrine of ultra-vires.
Alteration of memorandum of association involving alterations of name clause or
registered office clause or object clause or liability clause or capital clause.
Articles of association, its nature and registration, statutory requirements and its
contents.
Alteration of articles of association and its effect.
Distinction between memorandum and articles.
Legal effect and interpretation of memorandum and articles of association.
Doctrine of indoor management and exceptions to it.

1. MEMORANDUM OF ASSOCIATION
The Memorandum of Association is a document which sets out the constitution of
the company and is therefore the foundation on which the structure of the company is
based. It defines the scope of the companys activities and its relations with the
outside world. Its purpose, as observed by Lord Macmillan is to enable the
shareholders, creditors and those who deal with the company to know what is the
permitted range of enterprise.
The first step in the formation of a company is to prepare a document called the
memorandum of association. It is a vital document. In fact memorandum is one of the
most essential pre-requisites for incorporating a registered company under the Act.
This is evidenced in Section 12 of the Act, which provides the mode of forming an
incorporated company and states that in the case of a public company, any seven or
more persons, and in the case of a private company, any two or more persons,
associated for any lawful purpose, may by subscribing their names to a memorandum
and complying with the other requirements of this Act in respect of registration, may
form an incorporated company, with or without limited liability. To subscribe means to
102


append ones signature or mark a document as an approval or attestation of its
contents. According to Section 2(28) of the Companies Act, memorandum means
memorandum of association of a company as originally framed or altered from time to
time in pursuance of any previous companies law or this Act. This definition does not
state the nature of this document nor is indicative of its importance. Section 13 of the
Act specifies in clear terms the contents of this important document which is a charter
of the company.
The memorandum of association of a company contains the fundamental
provisions of the companys constitution. It contains the essential conditions upon
which the company can be incorporated. In this respect, it is companys charter of its
existence and operations and is of supreme importance in determining its powers. It
defines as well as confines the powers of the company. It not only shows the objects
of formation but also determines the utmost possible scope of its operations beyond
which its actions cannot go. THE MEMORANDUM OF ASSOCIATION, observed
Palmer, is a document of great importance in relation to the proposed company.
In the celebrated case of Ashbury Railway Carriage & Iron Co. Ltd. v. Riche,
(1875) L.R. 7 H.L. 653, Lord Cairn observed: The memorandum of association
of a company is its charter and defines the limitations of the powers of the
company.......... it contains in it both that which is affirmative and that which is
negative. It states affirmatively the ambit and extent of vitality and powers
which by law are given to the corporation, and it states negatively, if it is
necessary to state, that nothing shall be done beyond that ambit.........
[Egyptian Salt and Soda Co. Ltd. v. Port Said Salt Association Ltd. (1931) A.C.
677]
2. PURPOSE OF MEMORANDUM
The purpose of the object clause in the memorandum is two fold. First, the
intending shareholder before making investment in the company should know the
field in, or the purpose for which it is going to be used and what risk he is taking in
making the investment. The second purpose is that anyone dealing with the company
will know without doubt what is the permitted range of activities of the company
[Cotman v. Brougham (1918) A.C. 514].
Sections 12 to 23 of the Act prescribe the particulars to be mentioned in a
memorandum of association and other requirements. It is the constitution of the
company in its relation to the outside world. The company cannot depart from the
provisions of the memorandum however great the necessity be. If it enters into
contract or engages in any trade or business which is beyond the powers conferred
on it by the memorandum, such a contract or the act will be ultra vires the company
and hence void.
3. FORM OF MEMORANDUM OF ASSOCIATION
Section 14 of the Companies Act provides that the memorandum of association
should be in any one of the Forms specified in Tables B, C, D and E of Schedule I to
the Companies Act, 1956, as may be applicable in relation to the type of company
proposed to be incorporated or in a Form as near thereto as the circumstances admit.
The Form in Table B is applicable in the case of companies limited by shares; the Form


in Table C is applicable to companies limited by guarantee and not having a share
capital; the Form in Table D is applicable to the companies limited by guarantee and
having a share capital; whereas the Form in Table E is applicable to unlimited
companies. A company may either adopt any of the model Forms of the memorandum
of association mentioned above, as may be applicable to it, or it may prepare it in any
other Form, but the same should be as near thereto as the circumstances may admit.
(See Annexures I, II, III and IV given at the end of this Study).
4. CONTENTS OF MEMORANDUM
As per Section 13, the memorandum of a limited company must state the
following:
(1) (a)the name of company with Limited as its last word in the case of a public
company; and Private Limited as its last word in the case of a private
company;
(b)the state in which the registered office of the company is to be situated;
(c)in the case of a company in existence immediately before the commencement
of the Companies (Amendment) Act, 1965, the objects of the company;
(d)in the case of a company formed after such commencement:
(i) the main objects of the company to be pursued by the company on
its incorporation; and objects incidental or ancillary to the attainment
of the main objects;
(ii) other objects of the company not included in sub-clause (i); and
(e)in the case of companies (other than trading corporations) with objects not
confined to one State, the States to whose territories the objects extend;
(2) The memorandum of a company limited by shares or by guarantee shall
also state that the liability of its members is limited.
(3) The memorandum of a company limited by guarantee shall also state that
each member undertakes to contribute to the assets of the company in the
event of its being wound up while he is a member or within one year after he
ceases to be a member, for payment of the debts and liabilities of the
company, or of such debts and liabilities of the company as may have been
contracted before he ceases to be a member, as the case may be, and of
the costs, charges and expenses of winding up, and for adjustment of the
rights of the contributories among themselves; such amount as may be
required not exceeding a specified amount.
(4) In the case of a company having a share capital
(a)unless the company is an unlimited company, the memorandum shall also
state the amount of share capital with which the company is to be
registered and the division thereof into shares of a fixed amount;
(b)no subscriber of the memorandum shall take less than one share; and
(c)each subscriber of the memorandum shall write opposite to his name the
number of shares he takes.


The above clauses are compulsory and are designated as conditions
prescribed by the Act, on the basis of which a company is incorporated.
It is to be noted that the Companies Act, 1956 shall override the provisions in the
memorandum of a company, if the latter contains anything contrary to the provisions
in the Act (Section 9).
5. PRINTING AND SIGNING OF MEMORANDUM
As per Section 15 of the Companies Act, 1956, the memorandum must be
printed, divided into paragraphs numbered consecutively and signed by seven
subscribers (two in the case of the private company) in the presence of at least one
witness who shall attest the signatures. Each subscriber must state his address and
occupation and the number of shares he takes opposite his name. Only a person sui
juris, i.e., capable of entering into contract on his own can subscribe to the
memorandum. Both artificial and natural persons can subscribe to memorandum. The
memorandum must be stamped according to the Stamp Act of the State in which the
registered office of the company is to be situated.
Where a company is a subscriber to the memorandum of association, it
must be signed by a duly authorised agent. [Whitley Partners Ltd. Re (1886) 32 Ch
D 337].
One witness can attest all the signatures provided he is not himself a subscriber
to the memorandum [Seal v. Claridges, (1881) 7 QBD 516]. If the attestation of a
memorandum of association which has been registered turns out to be irregular at a
later stage it does not render the same void [Chotalal v. Dal Sukhram, (1892) ILR 17
Bom 472].
Subscription induced by misrepresentation
A subscriber to the memorandum cannot, after the issue of the certificate of
incorporation, repudiate his subscription on the ground that he was induced to sign by
misrepresentation [Re Metal Constituents Ltd., Lord Lurgans case - Re, (1902) 1 Ch
707].
Computer Printing
The Department of Company Affairs (now Ministry of Corporate Affairs) is of the
view that offset printing is one of the methods of printing developed recently. This
system is as good as normal printing and hence there does not appear any objection
in accepting the same by the Registrar for the purpose of Registration (Circular No.
3/81, F. No. 8/31/15/80-CI-V, dated 15.12.1981). Computer printing is also
recognised for this purpose [Selvarajan & Co. v. ROC (1987) 62 Com Cases 200 :
(Mad)].
The Department of Company Affairs (now Ministry of Corporate Affairs) vide its
letter No. 8/31/15/80 CL-V dated 30.4.1981 has stated that xerox copies of the
Memorandum and Articles of Association can not be accepted for the purposes of
registration of companies.
It has now been decided by the Government that with effect from 22.6.1993, the
Registrar of Companies shall accept computer laser printed documents for purposes


of registration of documents if these are neatly and legibly printed. This will be an
additional option available to public to use laser print besides offset printing for
submitting the memorandum and articles for registration of companies. [Press Note
No. 2/93, CLV, dated 22.6.1993].
Pursuant to the MCA-21 project, the soft copies of the Memorandum of
Association and Articles of Association should be filed alongwith e-form 1. The
various clauses of a memorandum of association are discussed hereunder:
6. NAME CLAUSE
A company being a legal entity must have a name of its own to establish its
separate identity. The name of the company is a symbol of its independent corporate
existence. The first clause in the memorandum of association of the company states
the name by which a company is known. The company may adopt any suitable name
provided it is not undesirable.
Section 20 provides that no company shall be registered by a name which, in the
opinion of the Central Government, is undesirable. A name which is identical with or
too nearly resembles, the name by which a company in existence has been
previously registered, will be deemed to be undesirable. [Lords Insullations India Pvt.
Ltd. v. Regional Director, DCA, Chennai & Another (2004) 122 comp. Cas. 892
(Mad.)] However, merely that few words are common may not render the name too
identical and thus undesirable. [Society of Motor Manufacturers & Traders Limited v.
Motor Manufacturers & Traders Mutual Assurance Limited [1925] 1 Ch. 675].
The Registrar must make preliminary enquiries to ensure that the name allowed
by him is not misleading or intended to deceive with reference to its Objects Clause
[Methodist Church v. Union of India, (1985) 57 Com. Cas. 443 (Bombay)]. The
Registrar is not, however, required to carry out any elaborate investigation at the time
of registration of the company. Unless the purpose of the company appears to be
unlawful ex-facie or is transparently illegal or prohibited by any statute, it cannot be
regarded as unlawful association [T.V. Krishna v. Andhra Prabha (P) Ltd., (1960) 30
Comp. Cas. 437 (AP)].
The object is to prevent the use of name likely to mislead the public. For
example, a company will not be allowed to use a name which is prohibited under the
Emblems and Names (Prevention of Improper Use) Act, 1950, or suggestive of any
connection with Government or of State patronage where there is none.
In case, despite these rules, a company is registered by a name so similar to that
of another company that the public are likely to be misled or deceived the Court may
grant an injunction restraining it from using that name. Thus, in Ewing v. Buttercup
Margarine Co. Ltd. (1917) 2 Ch. 1, the plaintiff, who carried on business under
the name of the Buttercup Dairy Co., obtained an injunction against the
defendant on the grounds that the public might think that the two businesses
were connected, the word Buttercup being a fancy one.
The rule will apply also to foreign companies or traders, whose goods are
imported into the country, as it was applied in the case of La Societe Anonyme
Panchard at Levessor v. Panchard Levessor Motor Co. Ltd., (1901) 2 Ch. 513.


The plaintiffs were a French company carrying on business in Paris as motor
car manufacturers and were using the name Panchard in connection with
motors of their manufacture. They objected to the use of the word Panchard
in the name of the defendant company on the ground that the principal object
of the defendants was to injure wrongfully and fraudulently the plaintiffs
business by passing off their goods as those of the plaintiffs manufacture and
succeed even though they had no agencies in England but had a market for
their goods there.
Section 22 provides that if by inadvertence or otherwise a name has been
registered which is identical with or too nearly resembles the name of an existing
company, the company may change it by passing an ordinary resolution and after
obtaining previous written approval of the Central Government as to the changed
name. The Central Government is empowered to direct a company, within 12 months
of its registration, to rectify its name if by inadvertence it has been registered with a
name similar to that of an existing company. If a company is so directed by the
Central Government, it must change the name within 3 months of the direction and
with the previous written approval of the Central Government.
In the case of Atlas Cycles (Haryana) Ltd. v. Atlas Products Pvt. Ltd [146 (2008)
DLT 274 (DB)]. Use of the brand name as corporate name was settled. Both the
plaintiff and the defendant companies belong to same family. The Appellant-plaintiff
was the proprietor of the trade mark in the name Atlas. The Respondent-defendant
company containing the name Atlas in its corporate name started dealing in
bicycles. The plaintiff objected the use of the name Atlas by the defendant
company. The Defendants are restrained from using the word Atlas in their
corporate/trade name in respect of bicycles and bicycle parts.
Where a company is directed to change the name, the court cannot directly tell
the Registrar to effect the change in the name of the company. The court can only
direct the company to do so. The company cannot simply file the court order
regarding the change, it will have to follow the prescribed procedure. [Halifax Plc v.
Halifax Repossessions Ltd. (2004) 2 BCLC 455 (CA)].
As a company cannot be registered with a name which is undesirable or which is
identical with or too nearly resembles the name of the existing company, the
availability of the name is required to be ascertained from the Registrar. However, the
Registrar shall not register a company with the words stock exchange as part of its
name without obtaining principle approval or no objection of SEBI in order to ensure
that the investors are not misled by such names while dealing with members of
unrecognised stock exchange. (Circular No. 3 dated 12/4/96).
But mere similarity of name is not in itself enough to give a right to an injunction.
As held in D.W. Boulay v. D.W. Boulay, (1868) LR 2 (PC), the law does not give a
person a right to prevent the use of a name by another person. In the case of
companies, however, registration will be refused only if there is likelihood of
deception or confusion.
A person cannot be permitted to name a company even after his personal name
if that name resembles the name of an existing company. [K.G. Khosla Compressors
Ltd. v. Khosla Extraktions Ltd., (1986) 1 Comp LJ 211 : AIR 1986 Del 181]
In the case of incorporation of an Asset Management Company (AMC), the
Memorandum and Articles of Association are required to be vetted and approved by


the Securities and Exchange Board of India (SEBI) before these documents are
registered by the Registrar of Companies.
It may be noted that the Department (now MCA) has vide its circular No. 1/90
dated 5.1.1990 earlier directed the Registrars of Companies to register a
company only in cases where the promoters as per availability of name
application, are also the subscribers to the memorandum and articles of
association of the proposed company at the time of its registration. In case of any
change in the names amongst the subscribers, the changed subscribers are
advised to make fresh application for availability of name. The Registrar may,
however, allow the same name, if otherwise available, after three months from the
date when the name was allowed to the original promoters(s). It is understood
that adherence to this procedure would not provide for any scope for pre-emption
of names by persons.
The above instructions have been modified and the old practice reverted to with
effect from 16th February, 1995, vide Department of Company Affairs (now MCA)
Circular No. 1/95 (File No. 14/6/94-CL-VI) dated 16.2.1995. In terms of the revised
instructions, so long as there is atleast one promoter common both in the name
availability application and the subscription clause of memorandum and articles of
association and others have no objection, the company may be registered by the
Registrar of Companies.
The Deptt. of Company Affairs (now Ministry of Corporate Affairs) vide its Circular
No. 6/99, dated 13.5.99 has advised ROCs that they should allow change of name to
companies to reflect the business of software only if a substantial portion of their
income (as rejected from their audited accounts or accounts certified by a chartered
accountant) is derived from software business. If this is not proved, then such change
of name should not be allowed.
Similarly, ROCs have been directed (vide Press Release dated 14.2.2000 issued
by PIB) not to allow registration of name with words mutual funds to NBFCs and
Nidhis. It was clarified that companies declared as Nidhis and Mutual Benefits
Societies under Section 620A of the Act are not mutual funds.
Publication of Name
The name of the company and the address of its registered office must be
painted or affixed outside every office or place at which its business is carried on, in a
conspicuous position and in letters easily legible in English and in the language in
general use in the locality. The name must also be engraved on the companys
common seal. Further, the name of the company and the address of the registered
office must be mentioned in legible characters in all business letters, in all its bill
heads and in all its notices and other official publications, as well as in all negotiable
instruments (Section 147).
Department of Company Affairs (now MCA) has clarified that expression of its
name in English alone, in addition to the expression in the local language will be a
sufficient compliance with the requirements of the section.
The MCA has also clarified that a share certificate is not an official publication of
a company within the meaning of Section 147 of the Act [Circular No. 3/73/8/10(147)/
72-CC-V dated 3.2.1973].


The words outside of every office do not mean outside the premises in which the
office is situated [Dr. H.L. Batliwalla Sons & Company Ltd. v. Emperor (1941) 11
Comp Cas. 154 : AIR 1941 (Bom.) 97]. Where office is situated within a compound,
the display outside the office room though inside the building is sufficient.
When Limited Dropped
The Central Government may by licence permit the registration of a company with
limited liability, without using the word limited as part of its name, if it is formed for the
promotion of commerce, art, science, religion, charity or any other useful object, and
prohibits distribution of its income as dividend to its members (Section 25).
7. SITUATION CLAUSE
The name of the State in which the registered office of the company is to be situated
must be given in the memorandum. But the exact address of the registered office is not
required to be stated therein. This can be filed with the Registrar of Companies
separately in e-Form No. 18 within 30 days of incorporation of the company.
Registered Office
Within 30 days of incorporation or on the day when it commences business,
whichever is earlier, the company must have a registered office to which all
communications and notices may be sent. The company must also give notice of the
situation of the registered office to the Registrar.
8. OBJECTS CLAUSE
The third compulsory clause in the memorandum sets out the objects for which
the company has been formed. All companies registered after the coming into force
of the Companies (Amendment) Act, 1965, must divide their objects clause into two
sub-clauses, namely:
(i) Main objects: This sub-clause contains the main objects of the company to
be pursued on its incorporation and objects incidental or ancillary to the
attainment of the main objects.
(ii) Other objects: This sub-clause must state other objects which are not
included in the Main objects and which may be pursued by the company at
anytime in the future.
The objects clause is of great importance because it determines the purpose and
the capacity of the company. It indicates the purpose for which the company has
been set up and its actual capability, besides its sphere of activities. It states
affirmatively the ambit and extent of powers of the company and its states negatively
that nothing should be done beyond that ambit and that no attempt shall be made to
use the corporate life for any other purpose than that which is so specified. The
purpose of the objects clause is to enable the persons dealing with the company to
know its permitted range of activities. The acts beyond this ambit are ultra vires and
hence void. Even the entire body of shareholders cannot ratify such acts.
Although express powers are necessary, a company may do anything which is
incidental to and consequential upon the powers specified, and the act will not be
ultra vires [Attorney General v. G.E. Rly. Co., (1880) 5 A.C. 473]. Thus, a trading
company has an implied power to borrow money, draw and accept bills of exchange
in the ordinary form, but a railway company cannot issue bills although it may borrow
money.


The subscribers to the memorandum of association enjoy almost unrestricted
freedom to choose the objects. The only restriction is that objects should not be
illegal and against the provisions of the Companies Act, 1956.
Power under Section 17(5) cannot be used by Company Law Board
1
/Central
Government
2
to impose unreasonable conditions on the company.
The power should be used to subserve a general objective namely, investor
protection at large and should not be used to serve the purpose of a section of the
investors. A.K.G. Acoustics (India) Ltd., In re. [1996] 10 SCL 334 (CLB-Delhi).
It is on the basis of the main objects clause that the concerned Registrar of
Companies enquires as to the objects intended to be pursued by the company either
immediately or within a reasonable time after its incorporation. The Registrar must
satisfy himself by reference to certain documents, information or explanations
furnished by the company.
The terms incidental or ancillary in the same clause mean activity arising out of or
directly connected to the main activity. For example, the production of by-products is
incidental to the manufacture of the main products and also the powers of the company
to pursue its objects, the power to borrow etc. Whether an activity is incidental or
ancillary to the main activity will have to be determined on a case to case basis.
The memorandum of association of a company is its charter defining the objects
of its existence and operations. As pointed out in Cotman v. Brougham 1918 AC 514,
its purpose is to to enable the shareholders, creditors and those dealing with the
company to know what is the permitted range of enterprise. The objects clause or
clauses in the memorandum are to be so construed as to confer on the company all
powers reasonably required to the attainment of the objects. A memorandum of
association like any other document must be read fairly and its importance derived
from a reasonable interpretation of the language which it employs [Egyptian Salt
and Soda Co. Ltd. v. Port Said Salt Association Ltd. AC 677: (1931) 1 Com.
Cases 285 : AIR 1931 PC 182; 62 MLJ 163; Deuchar v. Gas, Light and Coke
Co., (1925) AC 691)]. The natural and ordinary meaning of the language used in
several clauses should be taken into consideration for determining whether a
particular transaction does or does not fall within the objects stated in the
memorandum [Bell Houses Ltd. v. City Wall Properties Ltd. (1966) 36 Com Case 779:
(1966) 2 All ER 674 (CA)].
It is ultra vires for a company to act beyond the limits of its memorandum. Any
attempted departure will be invalid and cannot be validated even if assented to by all
the shareholders of the company. By ultra vires is meant an act or transaction of a
company, which though it may not be illegal, is beyond the companys powers by
reason of not being within the objects of the memorandum of association. The
memorandum is, so to speak, the area beyond which a company cannot travel.
[Ashbury Railway Carriage and Iron Company v. Riche, (1875) LR 7 HL 653]. An act
beyond the objects mentioned in the memorandum is ultra vires and void and cannot
be ratified [Dr. Lakshmanaswami Mudaliar A. v. LIC (1963) Comp LJ 248 : 1963 33

1
. Existing.
2
. Proposed.


Com Cases 420 : AIR 1963 SC 1185]. Where no connection or nexus exists between
the exercise of a power and the attainment of an object, exercise of power will be
ultra vires [Radha Cinema & Co. v. Chitralipi Films, 1974 Tax LR 2180 (Cal)].
9. DOCTRINE OF ULTRA VIRES
In the case of a company whatever is not stated in the memorandum as the
objects or powers is prohibited by the doctrine of ultra vires.
*
As a result, an act which
is ultra vires is void, and does not bind the company. Neither the company nor the
other contracting party can sue on it. Also, as stated earlier, the company cannot
make it valid, even if every member assents to it.
The general rule is that an act which is ultra vires the company is incapable of
ratification. An act which is intra vires the company but outside the authority of the
directors may be ratified by the company in proper form [Rajendra Nath Dutta v.
Shilendra Nath Mukherjee, (1982) 52 Comp. Cas. 293 (Cal.)].
The rule is meant to protect shareholders and the creditors of the company. But if
the act is ultra vires (beyond the powers of) the directors only, the shareholders can
ratify it. Or if it is ultra vires the articles of association, the company can alter its
articles in the proper way.
The doctrine of ultra vires was first enunciated by the House of Lords in a
classic case, Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1878) L.R. 7
H.L. 653.
The memorandum of the company in the said case defined its objects thus:
The objects for which the company is established are to make and sell, or lend
or hire, railway plants............ to carry on the business of mechanical engineers
and general contractors............
The company entered into a contract with M/s. Riche, a firm of railway
contractors to finance the construction of a railway line in Belgium. On
subsequent repudiation of this contract by the company on the ground of its
being ultra vires, Riche brought a case for damages on the ground of breach of
contract, as according to him the words general contractors in the objects
clause gave power to the company to enter into such a contract and, therefore,
it was within the powers of the company. More so, because the contract was
ratified by majority of shareholders.
The House of Lords held that the contract was ultra vires the company and,
therefore, null and void. The term general contractor was interpreted to
indicate as the making generally of such contracts as are connected with the
business of mechanical engineers. The Court held that if every shareholder of
the company had been in the room and had said, That is a contract which we
desire to make, which we authorise the directors to make, still it would be
ultra vires. The shareholders cannot ratify such a contract, as the contract was
ultra vires the objects clause, which by Act of Parliament, they were prohibited
from doing.

*
The word ultra means beyond and the word vires means the powers, ultra vires.


However, later on, the House of Lords held in other cases that the doctrine
of ultra vires should be applied reasonably and unless it is expressly
prohibited, a company may do an act which is necessary for or incidental to the
attainment of its objects. Section 13(1)(d) of the Companies Act, 1956 provides that
incidental to or ancillary to the main objects be stated in the memorandum. However,
even when such incidental objects are not stated, they would be allowed by the
principle of reasonable construction of the memorandum.
Justice Shah (afterwards C.J.) in the case A. Lakshmanaswami Mudaliar v.
L.I.C., A.I.R. 1963 S.C. 1185, upheld the doctrine of ultra vires. In this case, the
directors of the company were authorised to make payments towards any
charitable or any benevolent object, or for any general public or useful object.
In accordance with shareholders resolution the directors paid Rs. 2 lacs to a
trust formed for the purpose of promoting technical and business knowledge.
The companys business having been taken over by L.I.C., it had no business
left of its own.
The Supreme Court held that the payment was ultra vires the company.
Directors could not spend companys money on any charitable or general
objects. They could spend for the promotion of only such charitable objects as
would be useful for the attainment of the companys own objects. It is pertinent
to add that the powers vested in the Board of directors, e.g., power to borrow
money, is not an object of company. The powers must be exercised to promote
the companys objects. Charity is allowed only to the extent to which it is
necessary in the reasonable management of the affairs of the company. Justice
Shah held: There must be proximate connection between the gift and the
companys business interest. Thus gifts to foster research relevant to the
companys activities and payments to widows of ex-employees on the
footing that such payments encourage persons to enter the employment of the
company have been upheld as valid and intra vires.
A bank or any other person lending to a company for purposes ultra vires the
memorandum cannot recover [National Provincial Bank v. Introductions Ltd., (1969) 1
All. E.R. 887].
Further, in the case of Bell Houses Ltd. v. City Wall Properties Limited (1966) 36
Comp. Cas 779, the objects clause included a power to carry on any other trade or
business whatsoever which can, in the opinion of the Board of directors, be
advantageously carried on by the company. The Court have held the same to be in
order.
Corporate charitable spending under Section 293(1)(e) and ultra vires rule
Section 293(1)(e) of the Companies Act, 1956 has statutorily authorised the
Board of directors, with the consent of the company in general meeting, to contribute
for any charitable or other purpose any amount not exceeding Rs. 50,000/- (fifty
thousand) in one financial year or five per cent of the average net profits during the
preceding three financial years whichever is greater. Therefore, no question as to
vires of such payments is likely to arise. But, directors have no right to give charity
out of the companys money unless it would lead to the promotion of the companys
objects.


Loans, borrowings, guarantees and ultra vires rule
An ultra vires borrowing does not create a relationship of a debtor and creditor. In
a case, a company had accepted deposits from outsiders which was outside the
scope of the Memorandum. When the company was ordered to be wound up, a
question was raised whether the depositors were creditors of the company and
whether the contributories could be asked to contribute towards payment of deposits.
The Court held that the relationship between the company and the depositors was
not that of debtor and creditor. But if the lender had lent the amount for discharging
lawful expenses, he may recover the amount.
A bank or other person lending to company being aware that same is being made
for purposes ultra vires the memorandum cannot recover. Introductions Ltd. v.
National Provincial Bank Ltd. (1969) 1 All ER 887 : (1969) 2 Comp LJ 28 affirming
(1968) 2 All ER 1221. But nothing prevents the company from repaying the money,
though it cannot recover the money re-paid. If the lender had lent the money for
discharging any debts or liabilities of the company lawfully incurred, the lender may
recover the amount lent for discharging such debts and liabilities. [Cunliffe Brooks &
Co. v. Blackburn Bldg. Society, (1884) 9 App Cases 857 (HL)]. Where money is
borrowed intra vires but is afterwards misapplied by a director, the lenders right to
recover from the company is not affected [David Payne & Co. Ltd. In re (1904) 2 Ch.
608 : (1904-7) All ER (Rep) Ext-1501 (CA)].
Whether a transaction is ultra vires the company, it can be decided on the basis
of the following:
(1) if a transaction entered into by a company falls within the objects, it is not
ultra vires and hence not void;
(2) if a transaction is outside the capacity of the company, it is ultra vires;
(3) if a transaction is in excess or abuse of the companys powers, such
transaction will be set aside by the shareholders;
(4) if a third party who has knowledge that a transaction entered into is ultra
vires the company but was in excess of the companys powers, cannot
enforce such transactions.
Implied Powers
The powers exercisable by a company are to be confined to the objects specified
in the memorandum. While the objects are to be specified, the powers exercisable in
respect of them may be express or implied and need not be specified.
Every company may necessarily possess certain powers which are implied, such
as, a power to appoint and act by agents, and where it is a trading company, a power
to borrow and give security for the purposes of its business, and also a power to sell.
Such powers are incidental or properly to be inferred from the powers expressed in
the memorandum. [Oakbank Oil Co. v. Crum (1882) 8 App Cas 65]. The principle
underlying the exercise of such powers is that a company, in carrying on the business
for which it is constituted, must be able to pursue those things which may be
regarded as incidental to or consequential upon that business. [See Egyptian Salt
and Soda Co. v. Port Said Salt Association, (Supra)].


Powers which are not implied
The following powers have been held not to be implied and it is, therefore,
prudent in case where deemed necessary, to include them expressly in the objects
clauses:
(1) acquiring any business similar to companys own business. [Ernest v.
Nicholls, (1857) 6 HLC 40];
(2) entering into agreement with other persons or companies for carrying on
business in partnership or for sharing profit, joint venture or other
arrangements. Very clear powers are necessary to justify such transaction
[Re European Society Arbitration Act (1878) 8 Ch 679];
(3) taking shares in other companies having similar objects. [Re Barneds
Banking Co., ex parte and The Contract Corporation (1867) 3 Ch. App. 105.
Re William Thomas & Co. Ltd. (1915) 1 Ch 325];
(4) taking shares of other companies where such investment authorises the
doing indirectly that which will not be intra vires if done directly;
(5) promoting other companies or helping them financially [Joint Stock Discount
Co. v. Brown, (1869) LR 8 EQ 381];
(6) a power to sell and dispose of the whole of a companys undertaking;
(7) a power to use funds for political purposes;
(8) a power to give gifts and make donations or contribution for charities not
relating to the objects stated in the memorandum;
(9) acting as a surety or as a guarantor.
(10) Amalgamation cannot be denied to a company merely because its
memorandum of association does not provide for it [Eita India Ltd. In Re
(1997) 24 CLA 37 (Cal.)]
Shareholders right in respect of ultra vires acts
An ultra vires contract is as null and void as that of contract with a minor [Steel
Equipment & Construction Co. (P) Ltd. Re (1968) 38 Com. Cases 82, (1967) 1 Comp
LJ 172 (Cal)].
A shareholder can get back the money paid by him to the company under an
ultra vires allotment of shares. A transferee of shares from him would not have been
so allowed. [Margarate Linz v. Electric Wire Co. of Salestine Ltd. (1948) 18 Com.
Cases 201, 205 : AIR 1949 PC 51].
Effects of ultra vires Transactions
(i) Void ab initio The ultra vires acts are null and void ab initio. The company
is not bound by these acts. Even the company cannot sue or be sued upon
[Ashbury Railway Carriage and Iron Company v. Riche (Supra)].
Ultra vires contracts are void ab initio and hence cannot become intra vires
by reason of estoppel or ratification.


(ii) Injunction: The members can get an injunction to restrain the company
wherein ultra vires act has been or is about to be undertaken [Attorney
General v. Gr. Eastern Rly. Co., (1880) 5 A.C. 473].
(iii) Personal liability of Directors: It is one of the duties of directors to ensure
that the corporate capital is used only for the legitimate business of the
company and hence if such capital is diverted to purposes foreign to
companys memorandum, the director will be personally liable to replace it.
In Jehangir R. Modi v. Shamji Ladha, [(1866-67) 4 Bom. HCR (1855)], the
Bombay High Court held: A shareholder can maintain an action against the
directors to compel them to restore to the company the funds of the
company that have by them been employed in transactions that they have
no authority to enter into, without making the company a party to the suit.
In case of deliberate misapplication, criminal action can also be taken for
fraud.
However, a distinction must be drawn between transactions which are ultra
vires the company and the transactions which are ultra vires the directors,
where the directors exceed their authority and do something, the same may
be ratified by the general body of the shareholders. Provided the company
has the capacity to do that transaction as per its memorandum of
association.
(iv) Where a companys money has been used ultra vires to acquire some
property, the companys right over such property is held secure and the
company will be the right party to protect the property. This is because,
though the property has been acquired for some ultra vires object it
represents the money of the company.
(v) Ultra vires borrowing does not create the relationship of creditor and debtor
and the only possible remedy in such case is in rem and not in personam [In
Re. Madras Native Permanent Fund Ltd., (1931) 1 Comp. Cas. 256 (Mad.)].
10 LIABILITY CLAUSE
The fourth compulsory clause must state that liability of the members is limited, if
it is so intended that the company be limited by shares or by guarantee. The effect of
this clause is that, in a company limited by shares, no member can be called upon to
pay more than what remains unpaid. If his shares are fully paid up, his liability is nil.
Where a shareholder holding a Rs. 100 share has paid Rs. 75 on it, he can be called
upon to pay the balance of Rs. 25. In case, he has paid the full value of Rs. 100,
he cannot be required to pay anything more even if the company owes huge debts to
its creditors.
In a company limited by guarantee, the liability clause will state the amount which
each member should undertake to contribute to the assets of the company in the
event of liquidation of the company. He cannot be called upon to pay anything before
the company goes into liquidation.
The liability of each subscriber is equal to the total amount due on the shares
subscribed for by him. The liability will neither be discharged by his taking a transfer
of the shares allotted to any other persons nor by the allotment to him of any shares


credited as fully paid up to which some other person is entitled [Migottis case, Re
South Blackpool Hotel Co., (1867) LR 4 EL 238].
11. CAPITAL CLAUSE
This is the fifth compulsory clause which must state the amount of the capital with
which the company is registered, unless the company is an unlimited company. The
shares into which the capital is divided must be of fixed value, which is commonly
known as the nominal value of the share. The capital is variously described as
nominal, authorised or registered.
The amount of nominal capital is determined having regard to the present as well
as future requirements of the company with reference to its objects. The usual way to
state the capital in the memorandum is: The capital of the company is Rs. 10,00,000
divided into 1,00,000 equity shares of Rs. 10 each. This amount lays down the
utmost limit beyond which the company cannot issue shares without altering the
memorandum as provided by Section 94 of the Companies Act, 1956.
If there are both equity and preference shares, then the division of the capital is
to be shown under these two heads. A company is not authorised to issue capital
beyond its authorised/nominal/registered capital. If it receives applications for shares
beyond the shares covered by the authorised capital, the amount received on excess
number of shares should be returned.
Out of the issued capital, the total amount actually subscribed or agreed to be
subscribed is known as subscribed capital, and this subscribed capital again may be
wholly paid or partly paid in which latter case the balance would be payable on future
calls when made. The amount actually paid by the shareholders is called the paid-up
capital.
According to Section 148 of the Act, if the amount of the authorised capital, of the
company is stated in any notice, advertisement, official publication, business letter,
bill head or letter paper, it shall also contain a statement in an equally prominent
position and in conspicuous characters of the amount of the capital which has been
subscribed and the amount paid-up.
In the case of an unlimited company which has a share capital divided into shares
of definite amount, although liability of each member is unlimited as against the
creditors of the company, the liability on the shares is the only liability to the company,
so long as it is going concern [Cf. Re Mayfair Property Co., (1898) 2 Ch 28].
12. ASSOCIATION CLAUSE AND SUBSCRIPTION
The memorandum concludes with the subscription clause in which there is a
declaration of association. The subscribers to the memorandum declare: We, the
several persons whose names and addresses subscribed, are desirous of being
formed into a company in pursuance of this memorandum of association, and we
respectively agree to take the number of shares in the capital of the company set
opposite our respective names. Then follow the names, address, occupations of the
subscribers, and the number of shares each subscriber has taken and his signatures
attested by a witness.


The statutory requirements regarding subscription of memorandum are that:
(a) the memorandum must be signed by each subscriber in the presence of at
least one witness who must attest the signatures;
(b) each subscriber must take at least one share;
(c) each subscriber must write opposite his name the number of shares which
he agrees to take (Section 13).
Note: Each subscriber to the memorandum must pay for the shares for which he
has subscribed: and he cannot, after the registration of the company, repudiate his
liability to subscribe, even on the ground that he was induced to sign by
misrepresentation. Pursuant to Section 3 of the Act, the subscribers to the
memorandum must subscribe minimum shares of which paid up amount should be
not less than the paid-up capital required thereunder.
13. ALTERATION OF MEMORANDUM OF ASSOCIATION
The memorandum of association of a company may be altered in the following
respects:
(1) By changing its name (Sections 21 to 24).
(2) By altering it in regard to the State in which the registered office is to be
situated or its objects (Section 17).
(3) By altering its share capital (Section 94).
(4) By reorganising its share capital (Sections 391 to 396).
(5) By reducing its capital (Section 100).
(6) By making the liability of the directors unlimited (Section 322).
For the purpose of amendment different clauses of the memorandum are broadly
classified into two parts, namely,
(a) part relating to conditions, and
(b) part relating to other provisions.
The conditions part of the memorandum cannot be amended except by way of
procedure expressly laid down in the Companies Act, 1956 [See Section 16(1)]. The
provisions relating to the name clause, registered office clause, the objects clause,
limited liability clause, subscribers share clause as provided in Section 13 of the
Companies Act, 1956 or any other specific provisions contained in the Act are to be
regarded as the conditions contained in the memorandum [Section 16(2)]. For the
alteration of those conditions in the memorandum of association, a rigid procedure is
to be followed and strict compliance of the procedure is demanded by law. Failure to
comply with the express provisions made under the Act for the purpose of alteration
of the conditions contained in the memorandum will be deemed as a nullity.
Other provisions which are found included in the memorandum including those
relating to appointment of a managing director or manager fall in the category of other
provisions in the memorandum [See Section 16(3)]. These may be generally altered
in the same manner as the articles of the company unless there are any specific
directions as to the procedure to be followed made in the Act. Thus, procedure to be


followed as provided in the articles is adhered to for this purpose. The procedure for
the alteration of the compulsory clauses or conditions of the memorandum is
discussed in detail in the following paragraphs.
14. ALTERATION OF NAME CLAUSE
The name of the company can be changed by a special resolution and with the
approval of the Central Government. Approval of the Central Government is not
necessary if the change relates to the addition/deletion of the word private to the
name. The powers of the Central Government to accord approval to the change of
name which were earlier delegated to the Regional Directors have been delegated to
the Registrar of Companies w.e.f. 1.7.1985, vide Notification No. GSR 507 dated
24.6.1985. For this purpose an application is required to be made to the Registrar in
e-Form No. 1A with a fee of Rs. 500/- to ascertain availability of name. The period of
validity is sixty days. The change must be communicated to the Registrar by filing e-
Form No. 23 prescribed under the Companies (Central Governments) General Rules
and Forms, 1956 (as amended) alongwith a printed or typewritten copy of the special
resolution and explanatory statement within 30 days of the passing thereof. Also as
per the instructions for filling e-form 23, the memorandum and articles of association
of a company are also required to be attached. The change in name has to be
sanctioned in the light of guidelines prescribed by the Central Government in this
behalf. The change of name is not permitted during the pendency of a petition before
the Company Law Board
1
/Central Government
2
under Section 17.
As per existing guidelines, the companies well-known in their respective field by
abbreviated names, are allowed to change their names by way of abbreviation (e.g.
ABC Ltd.) with the approval of the Ministry of Corporate Affairs after following the
requirement of Section 21 of the Companies Act, 1956. It was decided that any such
change of name would require only the approval of Regional Director concerned. The
companies were however, required to make applications in e-Form No. 1A for
availability of the proposed changed names to the concerned Registrar of
Companies. This power has been delegated to the Registrar of Companies.
It may be noted that the abbreviated name will not be allowed for adoption by a
new company proposed to be incorporated under the Act [Press Note No. 1/93, dated
5.5.1993 and Circular No. 4/93; F.No. 3/14/93-CL. V, dated 31.3.1993 of Department
of Company Affairs].
Provided that nothing in this section shall apply to a Government Company
where the change in its name consists only in the deletion of the word Private there
from - (Notification GSR No. 1649 dated 13.11.1965).
Under Section 22 of the Act, rectification of the name of the company is required
to be carried out if, through inadvertence or otherwise, a company is registered by a
name which is identical with or too nearly resembles the name of a company already
in existence. The rectification of the name must also be carried out if the Central
Government so directs within a period of 12 months from the date of registration of
the company. The direction of the Central Government is required to be complied

1
Existing.
2
Proposed.


with within a period of 3 months from the date thereof. Any default in complying with
the direction by the Government render the company and its officers in default liable
for punishment with fine which may extend to one thousand rupees for every day
during which default continues. The powers and functions of the Central Government
to direct ratification of name under Section 22 of the Act has since been delegated to
Regional Directors at Calcutta, Bombay, Madras and Kanpur w.e.f. 1.7.85, vide
Notification No. GSR 506(E) dated 24.6.85.
SEBI vide its circular No. SMDRP/POLICY/CIR-8/99 dated April 26, 1999 had
provided that companies who change their name suggesting any new line of business
(including software business), shall disclose the turnover and income, etc., from such
new activities separately in the quarterly/annual results required to be
submitted/published. It was further provided that companies which have changed
their names after January 1, 1998 or change the name hereafter shall make such
disclosures and shall continue to make these disclosures for a period of 3 years from
the date of change in the name.
In addition to these provisions, it has now been decided that all listed companies
which decide to change their names shall be required to comply with the following
conditions:
1. A time period of atleast 1 year should have elapsed from the last name
change.
2. Atleast 50% of its total revenue in the preceding 1 year period should have
been accounted for by the new activity suggested by the new name.
3. The new name along with the old name shall be disclosed through the web
sites of the respective stock exchange/s where the company is listed and
also through the EDIFAR web site for a continuous period of one year, from
the date of the last name change. (SEBI/MRD/Policy/AT/Cir-20/2004 dated
April 30, 2004).
A company finding out that another company has been or is about to be
registered under the same name as itself may have a common law right to restrain
the newcomer from the use of that name as the intention of misleading third parties is
clear [Turton v. Turton, (1889) 42 Ch D 128; Reddaway v. Banham, (1896) AC 199].
It will also be able to restrain a company from using a name with which it has been
registered if, owing to the fact that its name is the same as or closely similar to that of
a company already existing [North Cheshire and Manchester Brewery Co. v.
Manchester Brewery Co., (1899) AC 83]. The original company can show that
persons have dealt with the second company believing it to be the old one [Ouvah
Ceylon Estates v. Uva Ceylon Rubber Estates, (1910) 27 TLR 24]. The Andhra
Pradesh High Court held in Sidhvi Constructions (India) Pvt. Ltd. v. Registrar of
Companies that where a company is registered by a name identical with the name of
the company registered earlier, the petition for change of name should be made
within 12 months. A petition made after 12 months shall be rejected pursuant to
limitation under Section 22 of the Companies Act, 1956.
The Registrar will enter the new name in his register and issue a fresh certificate
of incorporation and the change of name will be effective only thereafter. The
changed name should be noted in each copy of the memorandum and articles of
association.


15. EFFECT OF CHANGE
The change of name will not affect any rights and obligations of the company, or
legal proceedings commenced under the old name. Pursuant to Section 23(3), the
change of name shall not affect any rights or obligations of the company, or render
defective any legal proceedings by or against it, and any legal proceedings which
might have been continued or commenced by or against the company by its former
name may be continued by or against the company by its new name.
However, where a company changes its name and the new name has been
registered by the Registrar, the commencing of legal proceedings in the former name
is not competent [Malhati Tea Syndicate Ltd. v. Revenue Officer, (1973) 43 Comp.
Cas. 337]. In spite of a change in name the entity of the company continues. The
company is not dissolved nor does any new company come into existence. If any
legal proceeding is commenced, after change in the name, against the company in its
old name, it is a case of a company not in existence. It is not an incurable defect and
plaint can be amended to substitute the new name [Pioneer Protective Glass Fibre
(P) Ltd. v. Fibre Glass Pilkington Ltd., (1986) 60 Comp. Cas. 707 (Cal.)].
The courts have held that proceedings commenced by the company in its former
name can be continued under its new name [Solvex Oils and Fertilizers v. Bhandari
Cross-Fields (P) Ltd., (1978) 48 Com Cases 260 (P & H)].
In Economic Investment Corporation Ltd. v. CIT (WB) AIR (1970) 40 Comp Case
I (Cal.), it was held that by change of name, the constitution of the company is not
changed, only the name changes. It is not similar to the reconstitution of a
partnership which means creation of a new legal entity altogether.
16. ALTERATION OF REGISTERED OFFICE CLAUSE
(a) Change within the local limits of same town
Section 146 of the Act provides that a company can change its registered office
from one place to another within the local limits of the city, town or village, where it is
situated, by a Board resolution. A notice of the change is required to be given to the
Registrar in e-Form No. 18 within 30 days of such change. This does not involve
alteration of memorandum.
(b) Change from one city to another within the same State
If the registered office is to be shifted from one city, town or village to another
city, town or village within the same State, a special resolution has to be passed in
the general meeting of the company and a printed or type-written copy of the special
resolution alongwith the explanatory statement has to be filed with e-Form No. 23
within 30 days. Also within 30 days of the change of the registered office a notice to
the Registrar should be given of the new location of the office in e-Form No. 18. This
change of the registered office also does not involve alteration of memorandum.
(c) Change within the same State from the jurisdiction of one Registrar of
Companies to the jurisdiction of another Registrar of Companies
Section 17A provides that confirmation by the Regional Director will be necessary
for changing registered office of a company from one place to another if the change


of registered office is from the jurisdiction of one Registrar to the jurisdiction of
another within the same State. For this purpose, the company is required to make an
application in e-Form No. 1AD.
The Regional Director, after hearing the parties shall pass necessary orders
within 4 weeks from the date of the receipt of the application. Thereafter, the
company concerned shall file a copy of the said orders to Registrar of Companies
(ROC) within 2 months from the date of the confirmation order by Regional Director.
The said ROC shall record the ordered changes in its records, while the ROC of the
state where the registered office of the company was previously situated, shall
transfer all the documents and papers to the present ROC.
(d) Change of Registered office from one State to another
The change of registered office from one State to another State involves
alteration of memorandum, and the change can be effected by a special resolution of
the company which must be confirmed by the Company Law Board
1
/Central
Government
2
(Section 17).
The copy of petition to Company Law Board
1
/Central Government
2
is also
required to be submitted to the Chief Secretary of the State Government in which the
present registered office is situated.
According to Section 17(1), a company may, by special resolution alter the
provisions of its memorandum so as to change the place of its registered office from
one State to another or alter the objects of the company so far as may be required to
enable it:
(a) to carry on its business more economically and more efficiently;
(b) to attain its main objects by new or improved means;
(c) to enlarge or change the local area of its operations;
(d) to carry on some business which under existing circumstances may
conveniently or advantageously be combined with the business of the
company.
(e) to restrict or abandon any of the objects specified in the memorandum;
(f) to sell or dispose of the whole, or any part of the undertaking, or of the
undertakings, of the company; where a company feels it has grown so big or
that management has become difficult and uneconomical, it may alter its
objects to sell or dispose of any of its undertakings.
(g) amalgamate with any other company or body of persons - Section 17(1) and
(2).
The alteration of the provisions of memorandum relating to the change of the
place of its registered office from one State to another shall not take effect unless it is
confirmed by the Company Law Board
1
/Central Government
2
on petition
[Section 17(2)].

1
Existing.
2
Proposed.




Before confirming the alteration, the Company Law Board
1
/Central Government
2

must be satisfied:
(a) that sufficient notice has been given to every debenture holder of the
company, and to every other person or class of persons whose interest will,
in the opinion of the Company Law Board
1
/Central Government
2
, be affected
by the alteration. (The Company Law Board
1
/Central Government
2
may in
the case of any persons or class of persons, for special reasons, dispense
with the notice); and
(b) that, with respect to every creditor who, in the opinion of the Company Law
Board
1
/Central Government
2
, is entitled to object to the alteration, and who
signifies his objection in the manner directed by the Company Law
Board
1
/Central Government
2
, either his consent to the alteration has been
obtained or his debt or his claim has been discharged or has been
determined, or has been secured to the satisfaction of the Company Law
Board
1
/Central Government
2
[Section 17(3)].
The Company Law Board
1
/Central Government
2
shall cause notice of the petition
for confirmation of the alteration to be served on the Registrar who shall also be given
a reasonable opportunity to appear before the Company Law Board
1
/Central
Government
2
and state his objections and suggestions, if any, with respect to the
confirmation of the alteration [Section 17(4)].
The Company Law Board
1
/Central Government
2
may make an order confirming
the alteration on such terms and conditions, if any, as it thinks fit, and may make such
order as to costs as it thinks proper [Section 17(5)].
The Company Law Board
1
/Central Government
2
shall, in exercising its powers
under the section have regard to the rights and interests of the members of the
company and of every class of them, as well as to the rights and interests of the
creditors of the company and of every class of them [Section 17(6)].
The Company Law Board
1
/Central Government
2
may, if it thinks fit, adjourn the
proceedings in order that an arrangement may be made to its satisfaction for the
purchase of the interests of dissentient members; and may give such directions and
make such orders as it thinks fit for facilitating or carrying into effect, any such
arrangement provided that no part of the capital of the company, may be expended in
any such purchase [Section 17(7)].
Regulation 36 of Company Law Board Regulations, 1991 lays down the provision
regulating petition to Company Law Board under Section 17 of the Companies Act.
While confirming the resolution altering the situation clause of the memorandum
of association, the Company Law Board cannot substitute its own wisdom or
judgement for the corrective wisdom or judgement of the company expressed in
special resolution [Zuari Agro Chemical Limited v. E.S. Wadia and others, (1974) 44
Comp. Cas. 465).
According to Section 17(3), the Company Law Board
1
/Central Government
2
must
be satisfied, before confirming the alteration in the memorandum that sufficient notice

1
Existing.
2
Proposed.


has been given to every person whose interest, in the opinion of the Company Law
Board
1
/Central Government
2
; will be affected by the alteration. No notice of the
petition is required to be served on the State, but in view of the wider language of
Section 17, the Company Law Board
1
/Central Government
2
may direct notice to be
served on the State if it is of the view that the interest of the State will be affected by
the alteration. Where the alteration is affected by changing the registered office from
one State to another State, the loss of revenue in one State would be accompanied
by increase in revenue in the other and in such a case the interest of a particular
State ought not to be considered but it is the interest of the country as a whole which
should be considered. The decision to shift the registered office of the company to
another state being a domestic matter rests with shareholders and the company is
the best judge of how to run its business more economically, efficiently or
conveniently, even though it would result in loss of revenue to the state. [Satyashree
Balaji Wires & Cables (P) Ltd., In re (2006) 71 CLA 231 (CLB)]..
A company was allowed to shift its registered office from Bihar to West Bengal
inspite of the fact that Bihar Government had granted lease of land for the companys
factory on the condition that it would not shift its registered office. The CLB also held
that interest free loans, sales tax, electricity and other subsidies would have no
bearing on the shifting [Usha Beltron Re, (2000) 27 SCL 124]
17. ALTERATION OF OBJECTS CLAUSE OF THE COMPANY
Earlier for changing the objects of the company, the confirmation of Company
Law Board
1
/Central Government
2
was required. However, the Companies
(Amendment) Act 1996 w.e.f. 1.3.1997 has done away with this requirement.
Consequently pursuant to Section 17(1) (as discussed earlier) a company can
change its object clause by passing a special resolution and confirmation of
Company Law Board
1
/Central Government
2
for the same is not required. However
the requirement of confining the alteration to the seven points formula of sub-section
(1) remains applicable:
(1) To carry on its business more efficiently and economically [Section 17(1)(a)]
When a company is not in fact carrying on any business, it cannot alter its
objects under this clause [Re, Drages Ltd. (1942) 1 All ER 194]
The true legal position, observed the Delhi High Court, is that the business
must remain substantially the same, and the additions, alterations and
changes should only be steps-in-aid to improve the efficiency of the
company. [Delhi Bharat Grain Merchant Assn. Ltd., In re. (1974) 44 Comp.
Cas. 214 (Delhi)].
(2) To attain its main purpose by new or improved means [Section 17(1)(b)]
The expression used is to attain its main purpose. Under this head an
alteration can be made only to enable the company to attain its main
purpose, not any purpose [Kirkadly Caf Co. 1921 SC 681].
(3) To enlarge or change the local area of its operation [Section 17(1)(c)]
When the alteration was intended to enlarge the area of the companys
operation, the order of confirmation imposed a condition that the companys

1
Existing.
2
Proposed.


name indicating that its business was carried on in a particular area should
be changed. [In Indian Mechanical Gold Extracting Company, In re. (1891) 3
Ch. 538].
In this case, the companys business was confirmed to India. It wanted to
enlarge its operations. It was permitted to do so on the condition that the
word Indian was also dropped from its name.
(4) To carry on some business, which under existing circumstances, may
conveniently or advantageously be combined with the business of the
company [Section 17(1)(d)]
This clause has a wide scope and allows a company to diversify, the only
condition being that the alteration should not be prejudicial to or destructive
of the existing business.
The general considerations in this regard were stated by Lawrence, J. in
Patent Tyre Company Ltd., In re. (1923) 2 Ch. 222 at 228:
It is essentially a business proposition, whether an additional business can
or cannot be conveniently carried on under existing circumstances, with the
business of the company. The additional business, of course must not be
destructive of or inconsistent with the existing business, it must leave the
existing business substantially what it was before, but the additional
business may be one which is different from the original business and yet
may well be conveniently and advantageously combined with the business
which is being carried on.
However in New Asiatic Insurance Co. Ltd. In re. (1967) 37 Comp. Cas. 331
(Punj.) it was held that confirmation of alteration of objects is not to be refused
only because new business is wholly different from existing business.
(5) To restrict or abandon any of the objects specified in the memorandum.
For deleting any portion of the objects clause, the procedure laid down in
this clause have to be followed. The word restrict or abandon have been
held as not including in the case of a charitable company, substitution of one
kind of beneficiary of charity with another. [Hampstead Garden Suburb Trust
Ltd., In re., (1908) 2 Ch. 287].
(6) To sell or dispose of the whole or any part of the undertaking or any of the
undertakings [Section 17(1)(f)].
If a company wishes to cut-back i.e. where it feels it has diversified in
various directions and that management of the company has become
difficult or uneconomical, it may alter its objects to sell or dispose of whole or
part of its undertaking(s).
(7) To amalgamate with any other company or body corporate [Section 17(1)(g)]
Where a company asked for a bare power to amalgamate by altering its
memorandum of association, it was held that there was no scope for
interlocutory relief of injunction. [Hari Krishna Lohia v. Hoolungoree Tea Co.
Ltd. (1970) 40 Comp. Cases. 458].


A company doing jute business can alter its memorandum so as to do business
in rubber if that can conveniently and efficiently be carried on with the existing
business [Juggilal Kamlapat Jute Mills Co. Ltd. v. Registrar of Companies (1966) 1,
Comp. L.J. 292].
In the matter of Geo Rubber Exports Limited (Company Petition No.
90/17/SRB/1991 decided on 20.8.1991) the Company Law Board dealt with the
question whether the alteration of object clause of Memorandum of
Association was in accordance with the provisions of Section 17(1) of the Act
in case where the company was not carrying on any business at the time of
alteration. The Board observed that there was no prohibition in Section 17 that
the company should not be allowed to change its objects clause to enable it to
take some new business unless it has actually translated any of its objects as
set out in the Memorandum of Association into business. What is contemplated
in Section 17(1)(d) is that if there is some existing business, it has to be
ensured that the new business to be embarked upon can conveniently or
advantageously be combined with the existing business under the existing
circumstances and the new business is not inconsistent with or destructive of
the existing business. In the instant case it had become difficult for the
company which was incorporated for carrying on the business of Rubber
Products to start that business because of adverse international market
conditions. It therefore had altered its objects clause to carry on the business
of a aqua farming, marine products. The CLB observed that if alteration was
passed by a special resolution of shareholders and there was no objection
from any creditor or shareholder and there was no objection from any other
person and the business proposed to be carried on is not illegal, the company
can alter its memorandum, even before starting any business.
However, it was held that a distillery business cannot successfully petition for
being allowed to combine cinema business, because this cannot conveniently and
efficiently be carried on together [Punjab Distillery Industries Ltd. v. Registrar of
Companies (1963) 83 Comp. Cas. 811].
The validity of a resolution to undertake new business had to be examined in
connection with the companys legitimate business and not in connection with an
unauthorized business, though the company was actually carrying on that business.
Thus, where a company was manufacturing hinges without any authority in the
memorandum and it wanted to combine with it, the production of sewing machines
also, it was held that Section 17(1)(d) would not cover such a case. [Link Electro
Mechanical Works (P) Ltd. v. Registrar of Companies U.P. (1963) 2 Comp LJ 111
(All)]. Also, an object negatively expressed, e.g. that the company shall not
undertake the following objects could not, in the opinion of CLB, be allowed [Balaji
Mutual Benefit Ltd., Re. (1994) 4 Comp. LJ.]
18. REGISTRATION OF ALTERATION
A company shall file with the Registrar, a special resolution passed by it within
one month of the date of passing of such resolution in relation to clauses (a) to (g) of
Section 17(1) or a certified copy of the Order of the Company Law Board
1
/Central

1
Existing.


Government
2
made under Sub-section (5) confirming the alteration within 3 months
from the date of order, as the case may be together with the printed copy of the
altered memorandum and the Registrar shall register them and certify the registration
under his hand within one month from the date of filing of such documents [Section
18(1)]. No such alteration as is referred to in Section 17 (i.e., alteration of objects
clause or shifting of the registered office from one State to another) shall have effect
until it is registered with the Registrar in accordance with the provisions of Section 18
[Section 19(1)]. Section 19(2) provides that where these documents required to be
filed are not so filed with the Registrar within the time allowed under Section 18, the
alteration and the order of Central Government made under Section 17(5) and all
proceedings connected therewith, shall, at the expiry of such period, become void
and inoperative. However the CLB/Central Government, may on sufficient cause
shown, revive the order on application made within a further period of one month.
In the case of alteration of the memorandum for shifting the registered office from
one State to another, certified copy of the order of the Company Law Board
1
/Central
Government
2
shall be filed by the company with the Registrar of each of the States
and each of them shall register it and certify the registration.
The certificate shall be conclusive evidence that all the requirements of this Act with
respect to the alteration and confirmation thereof have been complied with. The Registrar
of the State from which the registered office is transferred will send to the Registrar of the
other State all the documents relating to the company registered in his office.
The time taken by the Bench Officer in supplying certified copy of the order of the
Company Law Board
1
/Central Government
2
to the party concerned shall be excluded
by the Registrar of Companies. [Section 640A] [See Saroja Mills Ltd. v. Registrar of
Companies, (1964) 34 Com Cases 336 : (1964) 1 Comp LJ 103 (Mad)]. Time taken
for drawing an order and for furnishing copy of the order by the Court should also be
excluded. [Beauty Art Dyers & Cleaners (P) Ltd. v. Registrar of Companies, (1974) 44
Com Cases 460 (Bom)].
The Ministry of Corporate Affairs has clarified that the date of order for the
purpose of Section 18 shall be the date on which the CLB approves and signs the
formal order, and not the date of last hearing.
In Kwality Ice Creames (India) P. Ltd., In re. [(2009) 148 Comp Cas 631 (CLB)], it was
held that objection of ex employees of the company on the ground of pendency of court
cases could not be said to be a valid ground to stall the shifting of the registered office of the
company as such transfer would not adversely affect the proceedings of court cases.
In the case of Shivalik Steels & Alloys Pvt. Ltd. v. Registrar of Companies
(Company Petition No. 73/18(4)/91-CLB dated 23.9.1991), the Company filed,
certified copy of the order of Company Law Board approving alteration of objects
clause in the memorandum of association of the company (as earlier the confirmation
of Company Law Board was necessary), with the Registrar of Companies after a
lapse of five months as against three months stipulated in Section 18(1) of the Act.
The matter however remained with the Registrar for four years without any
registration. When the company approached the Registrar for registration of the
amended objects clauses as approved by the Company Law Board whose order had

2
Proposed.


been filed, the Registrar advised the company to seek fresh orders of the Company
Law Board or have the earlier order revived.
The Company Law Board observed that Section 19(2) leaves no scope for the
order to be kept valid and operative excepting when the CLB revives the order on
sufficient cause shown. This revival is possible only within a further period of one
month after the expiry of a period of three months. In the present case since a total
period of five months had already expired, the order as well as the proceedings
connected therewith had become void and inoperative by mere expiration of time.
The Board further observed that it is not vested with any power under any section
of the Act to revive an order under Section 17 which by operation of law had become
void and inoperative. When an order had become void by operation of law, extension
of time cannot in any way help because the order no longer exists. The company was
therefore advised by the Board to undergo the whole process under Section 17 once
again even though it would have preferred to avoid a small company repeating whole
process but was helpless.
Again, in the case of Shivalik Steels & Alloys Pvt. Ltd. v. Registrar of Companies
(Company Petition No. 73/18(4)/91- CLB dated 23.9.91- CLB decided on 23.9.91), the
alteration of situation clause was approved by the Company Law Board and a certified
copy of the order was filed with the Registrar within time but without the requisite
documents i.e. a printed copy of the memorandum of association as altered, Form No.
21 of the Companies (Central Governments) General Rules and Forms, 1956 and the
requisite fee. The Registrar did not register the alteration and advised the company to
seek condonation of delay under Section 18(4) in filing other documents. The Board
granted extension of time for registration of the alteration on the grounds that Form 21
is merely in the nature of a covering letter and does not provide for any additional
information. Supplying a copy of the altered memorandum is again in the nature of a
formality for record purposes. Thus in effect the object contemplated under Section
18(1) is served with filing of the certified copy of the Order of CLB. However, technically
the filing is not complete and hence the Registrar cannot register the alteration without
the compliance with the formalities though mere failure to file the accompanying
documents does not nullify the filing of the basic documents.
The main spirit behind Section 18(3) of the Companies Act, 1956 in regard to the
filing of the Courts (presently CLB) order confirming the transfer of the companys
registered office from one State to another State with the Registrar of the Companies
of each State is that the Registrar of Companies from whose State the registered
office is transferred should keep the Court (presently CLB) order duly registered in his
office as an evidence to such shifting and should transfer all other records of the
company to the Registrar of Companies to whose State the Registered Office has
been so shifted. The other Registrar of Companies will register the other copy of the
Court (presently CLB) order and keep that order with the records transferred to him
by his counterpart.
A question has been raised about the applicability of Sections 18 and 637B of the
Companies Act, 1956 to a case where there has been delay on the part of a company
in filing copy of the CLB order under Section 17 in respect of shifting of the registered
office of the company from one State to another. The above matter has since been


examined very carefully. The Department (now Ministry) is of the view that an order
by the CLB under Section 17(1) relating to the shifting of the registered office from
one State to another comes under Section 18(3) and will, therefore, be governed
by the procedure prescribed thereunder. In other words, Sub-section (3) of Section
18 is an independent Sub-section and will cover only cases which relate to the
transfer of the registered office from one State to another State. Such cases will,
therefore, not be covered by the provisions of Sections 18(1) and 18(4). Since no
time limit has been prescribed under Section 18(3), the provisions of Section 637B(b)
will also not apply to such cases. In terms of the above view, a company continues to
remain on the register of the ROC of the State from which it is proposed to shift and
also in respect of which it has got an order of CLB under Section 17(1) till it files the
aforesaid order with him and the ROC certifies under his hands about such transfer.
Section 17(4) empowers the Company Law Board
1
/Central Government
2
to
extend the time for registration beyond three months by such period as it thinks
proper. An application under this Sub-section should mention that - (1) the delay in
filing the certified copy of the order may please be condoned and the documents
already filed may please be ordered to be taken on record; (2) the alteration of the
memorandum as sanctioned may please be ordered to be registered by the
Registrar; and (3) the CLB may pass any other order that it considers necessary
[Shiv Prakash Janakraj & Co. Pvt. Ltd. v. Registrar of Companies (1963) 2 Comp.
L.J. 228 (Punj)].
Under Section 637B(b), the Central Government has been empowered to
condone delay in filing any document with the Registrar. In view of the express
provisions made in Sections 18(4) and 19, the delay in filing the order of Company
Law Board
1
/Central Government
2
beyond the permissible time limit cannot be
condoned by Central Government.
19. ALTERATION OF LIABILITY CLAUSE
Ordinarily, the limited liability clause of a company cannot be altered so as to
make the liability unlimited, unless the articles permit such alteration by a special
resolution to make the liability of the directors or of any one director or manager
unlimited. In such case, however, the liability of the person holding office as director
or manager before such alteration shall not be made unlimited until the expiry of this
present term. His liability for the unexpired period of the present term can be made
unlimited only if he gives his consent to his liability becoming unlimited (Section 323).
Section 32 permits an unlimited company to register as a limited company. On
alteration, the Registrar shall close the former registration of the company and the
new registration shall take effect as if it were the first registration. The registration of
an unlimited company as a limited company shall not, however, affect any debts,
liabilities, obligations or contracts incurred or entered into, before the conversion. The
whole procedure for forming a new company will have to be followed in respect of the
above sections.

1
Existing.
2
Proposed.


20. ALTERATION OF CAPITAL CLAUSE
(a) A company can make the following types of alterations by an ordinary
resolution, if authorised by its articles to do so (Section 94):
(i)increase its share capital by issue of new shares;
(ii)consolidate existing shares into shares of larger denomination;
(iii)sub-divide its shares or any of them into shares of smaller amount than is
fixed by memorandum such that the proportion between the amount
paid and unpaid shall remain the same.
(iv)convert fully-paid shares into stock or vice versa; and
(v)cancel unissued shares and to that extent diminish the amount of its share
capital. Such cancellation shall not, however, be deemed as reduction of
share capital.
All such alterations do not require the confirmation by the Company Law
Board. These alterations are, however, required to be notified giving
details of the share consolidated, divided, converted, sub-divided,
redeemed or cancelled or the stock reconverted, as the case may be,
and a copy of the resolution should be filed with the Registrar within 30
days of the passing of the resolution.
The Registrar shall record the notice and make any alteration which may be
necessary in the company memorandum or articles or both. It must be
noted that cancellation of shares does not amount to reduction of share
capital.
(b) Increase in Share Capital: A limited company having a share capital can
increase its share capital by such amount as it thinks expedient subject to
the fulfilment of the following conditions:
(i)The articles of the company should contain powers authorising the company
to increase its capital.
(ii)A resolution must be passed by the company in a general meeting. An
ordinary resolution will do.
(iii)A notice of increase in capital is required to be filed by the company with the
Registrar within 30 days after the passing of the resolution and the
Registrar shall thereupon record the increase and also make any
alterations which may be necessary in the companys article or
memorandum or both.
(iv)The notice to be given to the Registrar should include particulars of the class
of shares affected and the conditions, if any, subject to which the new
shares have been or are to be issued.
The share capital of a company shall stand increased automatically without
the procedure mentioned above being followed in the following circumstances:
(i)Where the Central Government has, by an order made under Sub-section (4)
of Section 81 of the Act, directed that any debenture or loan or any part
thereof shall be converted into shares of the company.


(ii)Where any public financial institution, in pursuance of option attached to
debentures issued or loans raised by the company, proposes to convert
such debentures or loans or part thereof into shares in the company,
and such conversion results an increase in the authorised share capital
in the company, and the Central Government issues a direction in this
behalf.
(c) Reduction of capital: Share capital of a company can be reduced in any of
the following ways:
(i)By extinguishing or reducing the liability on share capital not paid-up;
(ii)By refunding surplus of the paid-up capital;
(iii)By writing off the lost capital;
(iv)By any other method approved by the Court.
A company can reduce its share capital by any of the above mentioned
methods, only when the following conditions are fulfilled:
(i)The articles of the company permit such a reduction.
(ii)The company passes a special resolution for reducing share capital.
(iii)The company also obtains confirmation of the resolution by the Court.
Being a domestic affair, the Companies Act permits the companies to decide the
extent, mode etc. of reduction of its share capital. With a view, however, to safeguard
the interests of the creditors and the minority shareholders as also to ensure that the
scheme of reduction is fair and reasonable, it is provided that the scheme of
reduction of the company shall be subject to the approval of the Court. Before putting
its seal of confirmation on the scheme, it is the duty of the Court to see that the
procedure adopted is formally correct, the creditors are not prejudiced and the
scheme is fair and equitable between the different classes of shareholders.
However, the above mentioned procedure is not called for:
(a) Where redeemable preference shares are redeemed in accordance with the
provisions of Section 80.
(b) Where any shares are forfeited for non-payment of calls.
[Students are advised to refer Study VI and VII for details].
ARTICLES OF ASSOCIATION
21. NATURE OF ARTICLES
According to Section 2(2) of the Companies Act, 1956, articles means the
articles of association of a company as originally framed or as altered from time to
time in pursuance of any previous company law or of this Act. It also includes the
regulations contained in Table A in Schedule I of the Act, in so far as they apply to
the company.
The articles of association of a company are its by-laws or rules and regulations
that govern the management of its internal affairs and the conduct of its business.


The articles play a very important role in the affairs of a company. It deals with the
rights of the members of the company inter se. They are subordinate to and are
controlled by the memorandum of association. The general functions of the articles
have been aptly summed up by Lord Cairns, L.C. in Ashbury Railway Carriage and
Iron Co. Ltd. v. Riche, (1875) L.R. 7 H.L. 653 as follows:
The articles play a part subsidiary to the memorandum of association. They
accept the memorandum of association as the charter of incorporation of the
company, and so accepting it, the articles proceed to define the duties, rights and
powers of governing body as between themselves and the company at large, and the
mode and form in which business of the company is to be carried on, and the mode
and form in which changes in the internal regulations of the company may from time
to time be made.......... The memorandum, is as it were.......... the area beyond which
the action of the company cannot go; inside that area shareholders may make such
regulations for their own governance as they think fit.
Thus, the memorandum lays down the scope and powers of the company, and
the articles govern the ways in which the objects of the company are to be carried out
and can be framed and altered by the members. But they must keep within the limits
marked out by the memorandum and the Companies Act.
The articles regulate the internal management of the affairs of the company by
way of defining the powers of its officers and establishing a contract between the
company and the members and between the members inter se. This contract
governs the ordinary rights and obligations incidental to membership in the company
[Naresh Chandra Sanyal v. The Calcutta Stock Exchange Association Ltd., AIR 1971
SC 422, (1971) 41 Com Cases 51]. But the Articles of Association of a company are
not law and do not have the force of law. In Kinetic Engineering Ltd. v. Sadhana
Gadia, (1992) 74 Com Cases 82 : (1992) 1 Comp LJ 62 (CLB), the CLB held that if
any provision of the articles or the memorandum is contrary to any provisions of any
law, it will be invalid in toto.
Articles Subordinate to Memorandum
The following companies must have their own articles viz. unlimited companies,
companies limited by guarantee and private companies limited by shares under the
Companies Act. The articles of a company are subordinate to and controlled by the
memorandum of association and any clause in the Articles going beyond the
memorandum will be ultra vires. But the articles are only internal regulations, over
which the members of the company have full control and may alter them according to
what they think fit. Only care has to be taken to see that regulations provided for in
the articles do not exceed the powers of the company as laid down by its
memorandum [Ashbury v. Watson, (1885) 30 Ch. D 376 (CA)]. Articles that go
beyond the companys sphere of action are inoperative, and anything done under the
authority of such article is void and incapable of ratification.
But neither the articles nor the memorandum can authorise the company to do
anything so as to contravene any of the provisions of the Act. [See Re Peveril Gold
Mines, (1989) 1 Ch 122 (CA)].


Articles in relation to Memorandum
The functions of the Articles in relation to the Memorandum have already been
summed up in the Ashbury Railway Carriage case and even though the articles are
subordinate to the memorandum yet if there be any ambiguity in the memorandum,
the articles may be used to explain it but not so as to extend the objects. [Re. South
Durham Brewery Company (1885) 3 Ch. D 261]. The memorandum of a company
was not clear as to the classes of shares to be issued by a company, the articles
made clear the doubt by giving the power to the company to issue shares of different
classes.
The relationship between the two documents was further emphasised in
Guinness v. Land Corporation of Ireland, (1882) 22 Ch D 349, where it was
observed: The memorandum contains the fundamental conditions upon which
alone the company is allowed to be incorporated. They are conditions introduced
for the benefit of the creditors, and the outside public, as well as of the
shareholders. The articles of association are the internal regulations of the
company. How can it be said that in all cases the fundamental conditions of the
charter of incorporation, and the internal regulations of the company are to be
construed together..... In any case it is, as it seems to me, certain that for anything
which the Act of Parliament says shall be in the memorandum you must look the
memorandum alone. If the legislature has said one instrument is to be dominant
you cannot turn to another instrument and read it in order to modify the provisions
of the dominant instrument. Where the memorandum clearly establishes the rights
of shareholders, a reference in the memorandum to the articles and an ambiguity
said to arise from the construction of the articles should not be used to depart from
the clear meaning of the memorandum so as to diminish those rights [ Scottish
National Trust Co. Ltd. 1928 SC 499 (Scot); Kinetic Engineering Ltd. v. Sadhana
Gadia, (1992) 1 Comp LJ 62 (CLB)].
22. REGISTRATION OF ARTICLES
Section 26 of the Companies Act, 1956 provides that a public company limited by
shares may at its option register its articles of association signed by the same
subscribers as to the memorandum, or alternatively it may adopt all or any of the
regulations contained in Table A of First Schedule of the Act. If articles are not
registered, automatically Table A applies, and if registered, Table A applies except in
so far as it is excluded by the articles. To avoid any confusion, normally every public
company delivers its articles alongwith the memorandum for registration. Further it
will be specifically stated therein that Table A will not apply. The articles of a private
company must contain the four restrictions as contained in Section 3(1)(iii). The
articles of association of an unlimited company should state the number of members
with which the company is to be registered and if the company has a share capital,
the amount of share capital with which it is to be registered [Section 27(1)].
In the case of a company limited by guarantee the articles shall state the number
of members with which it is to be registered [Section 27(2)].
A company limited by guarantee or a private company limited by shares or an
unlimited company must register their articles. The companies limited by guarantee
or unlimited company might adopt any of the appropriate regulations of Table C, D


and E respectively in Schedule I (Section 29). (See Annexure II, III and IV given at
the end of this Study).
23. STATUTORY REQUIREMENTS
Section 30 requires that the articles must be printed, divided into paragraphs,
numbered consecutively, stamped adequately, signed by each subscriber to the
memorandum and duly witnessed and filed along with the memorandum. The articles
must not contain anything illegal or ultra vires the memorandum, nor should it be
contrary to the provisions of the Companies Act, 1956.
24. CONTENTS OF ARTICLES
The articles set out the rules and regulations framed by the company for its own
working. The articles should contain generally the following matters:
1. Exclusion wholly or in part of Table A.
2. Adoption of preliminary contracts.
3. Number and value of shares.
4. Issue of preference shares.
5. Allotment of shares.
6. Calls on shares.
7. Lien on shares.
8. Transfer and transmission of shares.
9. Nomination.
10. Forfeiture of shares.
11. Alteration of capital.
12. Buy back.
13. Share certificates.
14. Dematerialisation.
15. Conversion of shares into stock.
16. Voting rights and proxies.
17. Meetings and rules regarding committees.
18. Directors, their appointment and delegations of powers.
19. Nominee directors.
20. Issue of Debentures and stocks.
21. Audit committee.
22. Managing director, Whole-time director, Manager, Secretary.
23. Additional directors.
24. Seal.
25. Remuneration of directors.
26. General meetings.


27. Directors meetings.
28. Borrowing powers.
29. Dividends and reserves.
30. Accounts and audit.
31. Winding up.
32. Provision regarding common seal.
33. Capitalisation of reserves.
Utmost caution must be exercised in the preparation of the articles of association
of a company. At the same time, certain provisions of the Act are applicable to the
company "notwithstanding anything to the contrary in the articles". Therefore, the
articles must contain provisions in respect of all matters which are required to be
contained therein so as not to hamper the working of the company later.
25. PROVISION IN ARTICLES AS REGARDS EXPULSION OF A MEMBER
The proviso to Section 29 provides that nothing in Section 29 shall be deemed to
prevent a company from including any additional matters in its Articles, in so far as
they are not inconsistent with the provisions contained in the Form in any of the
Tables C, D and E, which might have been adopted by the company.
In the light of this proviso, if there is a provision in the Articles empowering the
Directors of the company to expel any member of the company under any of the
given conditions, then such a provision shall be totally inconsistent with the provisions
of Section 29 of the Act.
But the Stock exchanges, registered under the provisions of the Companies Act,
can carry such a provision in its Articles, because the Companies Act is a general law
whereas the Securities Contracts Regulation (SCR) Act is a special law. The
regulation of stock exchanges is done by SCR Act and SEBI Act and not by
Companies Act. Hence, the Articles of Stock Exchange may provide for additional
matters as per SCR Act, which may not be possible for inclusion in the Articles of a
company as per the provisions of the Companies Act. [Madras Stock Exchange Ltd.
v. S.S.R. Rajkumar (2003) 116 Comp. Cas. 214 (Mad.)].
26. ALTERATION OF ARTICLES OF ASSOCIATION
A company has a statutory right to alter its articles of association. But the power
to alter is subject to the provisions of the Act and to the conditions contained in the
memorandum. Section 31 provides that subject to the provisions of the Act and the
conditions contained in its memorandum, a company may, by special resolution, alter
its articles, and adds that any alteration so made shall be as valid as if originally
contained in the articles. However, no alteration made in the articles which has the
effect of converting a public company into private company shall have effect unless
such alteration has been approved by the Central Government. [Proviso to Section
31(1)].
The right to alter the articles is so important that a company cannot in any
manner, either by express provisions in the articles or by independent contract,


deprive itself of the powers to alter its articles [Walker v. London Tramway Co. (1879)
12 Ch. D. 705].
However, in spite of the power to alter its articles, a company can exercise this
power subject only to certain limitations. These are:
1. The alteration must not exceed the powers given by the memorandum. In
the event of conflict between the memorandum and the articles, it is the
memorandum that will prevail.
2. The alteration must not be inconsistent with any provisions of the
Companies Act or any other statute.
Similarly, where a resolution was passed expelling a member and
authorising the director to register the transfer of his shares without an
instrument of transfer, the resolution was held to be invalid as being against
the provisions of the Act [Madhava Ramachandra Kamath v. Canara
Banking Corporation [1941] 11 Comp. Cas. 78 (Mad)].
On the other hand, articles may impose on the company conditions stricter
than those provided under the law; for example, they may provide that a
matter should be passed by a special resolution when the Act requires it to
be passed by an ordinary resolution.
3. The Articles must not include anything which is illegal or opposed to public
policy.
4. The alteration must be bona fide for the benefit of the company as a whole.
The alteration will not, however, be bad merely because it inflicts hardship
on an individual shareholder.
In Allen v. Gold Reefs of West Africa Limited [1900] 1 Ch. 656, a
company had a lien on all shares not fully paid-up for calls due to the
company. There was only one shareholder A, who owned fully paid-
up shares. He also held partly paid shares in the company. A died. The
company altered its articles by striking the words fully paid-up and
thus giving itself a lien on all shares - whether fully paid-up or not. The
legal representative of A challenged the alteration on the ground that
the alteration had retrospective effect. Held that, the alteration was
good, as it was done bona fide for the benefit of the company as a
whole, even though the alteration had a retrospective effect.
An alteration in the articles was made by a company to expropriate shares
held by any member who was in business competition with the company.
One member challenged the alteration. The alteration was held to be valid,
as it was bona fide for the benefit of the company [in Side Bottom v.
Kershaw Leese & Co. (1920) Ch. 154 (C.A.)].
5. The alteration must not constitute a fraud on the minority by a majority. If the
alteration is not for the benefit of the company as a whole, but for majority of
shareholders, then the alteration would be bad. In other words, an alteration
to the articles must not discriminate between the majority shareholders and
the minority shareholders so as to give the former an advantage over the


latter. [All India Railway Mens Benefit Fund v. Jamadar Baheshwarnath Bali
(1945) 15 Comp. Cas. 142 (Nag.)]
In a company shareholders holding 98% of the shares passed a special
resolution that upon the request of holders of 9/10
th
of the issued
shares, a shareholder shall be bound to sell and transfer of his share
to the nominee of such holder at a fair value. The alteration was held to
be invalid since it amounted to oppression of minority [Brown v.
British Abrasive Wheel Co. (1919) 1 Ch. 290].
In Mathrubhumi Printing & Publishing Co. Ltd. v. Vardhaman Publishers Ltd.
[1992] 73 Comp. Cas. 80 (Ker.), the Kerala High Court held that no majority
of shareholders can, by altering the article retrospectively, affect, the
prejudice of the consenting owners of shares, the right already existing
under a contract nor take away the right accured, e.g., after a transfer of
share is lodged, the company cannot have a right of lien so as to defeat the
transfer.
6. An alteration of articles to effect a conversion of a public company into a
private company cannot be made without the approval of the Central
Government [Section 31].
7. Articles cannot be altered so as to compel an existing member to take or
subscribe for more shares or in any way increase his liability to contribute to
the share capital, unless he gives his consent in writing (Section 38).
8. By effecting alteration in its articles, a company cannot defeat escape from
its contractual obligation with any person. The company will always be liable
in such a case.
9. The Articles of Association cannot be altered so as to have retrospective
effects. The articles only operate from the date of the amendment [Pyare Lal
Sharma v. Managing Director, J.K. Industries Ltd. (1989) 3 Comp. L.J. (SL)
70].
10. The alteration must not be inconsistent with an order of the Court under
Sections 397 or 398 and 404.
11. In the case of listed companies, earlier articles cannot be altered except with
the approval of Stock Exchange(s) concerned.
12. Amendment of Articles relating to Managing, Whole-time director and non-
rotational directors requires Central Governments approval. (Section 268)
Subject to the foregoing conditions, the Articles in a company can be altered and
no clause can be included in the Articles that it is not alterable. Persons who become
members of a company have no right to assume that the Articles will always remain
in a particular form.
Of course a section or a class of shareholders cannot be unfairly or oppressively
treated. Thus, though the requisite majority of members could pass a special
resolution to alter the Articles and if the alteration has the effect of making a fraud on
the minority, the minority shareholders not being less than the number specified in


Section 397 and 398 could move the Court for redressing their grievances. The
Courts have entertained such applications from shareholders even where they are
smaller in number [See Menier N. Hooper Telegraph Works (1874) 9 Ch. App. 350].
As already mentioned, a company is not prevented from altering its Articles on
the ground that such an alteration would be breach of a contract but an action for
damages may lie against the company. [Southern Foundries v. Shirlaw, quoted
above].
The discussion on the above matter will not be complete without referring to the
rule in Foss v. Harbottle (1843) 2 Hare 461 where the court held that no individual
shareholder nor a minority of shareholders in a company can take it upon himself or
themselves to remedy an alleged wrong involved in the actions of directors if the said
wrongful act is something which the majority can regularise and approve of.
Effect of Altered Articles
Alteration binds members in the same way as original articles. The provision of
Section 36 providing that the articles shall bind the company and the members to the
same extent as if they had been signed by the company and by each member,
means the articles as originally framed, or as they may from time to time stand
altered are valid under the provisions of the Act. There is clear power to alter the
articles, and as altered, they bind members just in the same way as did the original
articles.
After considering the scheme of the Companies Act, the Department (now
Ministry) is of the view that amendment of articles of association of a company
providing for expulsion of a member by the management is opposed to the
fundamental principles of the company jurisprudence and is ultra vires of the
company. Such a provision is repugnant to the various provisions in the Companies
Act pertaining to the rights of a member in a public limited company and cuts across
the scheme of the Act as it has the effect of rendering nugatory the powers of the
Central Government under Section 111 and the powers of the courts under Sections
107 and 395 and is, therefore, void by the operation of the provisions of Section 9.
The articles of association is a contract between the company and its members
setting out the rights of members inter se under the contract and expulsion of a
member is not only a violation of this contract but it is also opposed to the principles
of natural justice. Moreover, under Section 23 of the Indian Contract Act, any
agreement which is contrary to any law or opposed to public policy would be deemed
to be unlawful and void.
The Supreme Court in the case of Bajaj Auto Ltd. v. N.K. Firodia [1974] 41
Comp. Cas. 1 has laid down the law as to the conditions on the basis of which
directors could refuse a person to be admitted as a member of the company. The
principles laid down by the Supreme Court in this case, even though pertain to the
refusal by a company to the admission of a person as a member of the company, are
applicable even with greater force to a case of expulsion of an existing member. As,
under article 141 of the Constitution, the law declared by the Supreme Court is
binding on all courts within the territory of India, any provision pertaining to the
expulsion of a member by the management of a company which is against the law as
laid down by the Supreme Court will be illegal and ultra vires. In the light of the


aforesaid position, it is clarified that assumption by the Board of directors of a
company of any power to expel a member by amending its articles of association is
illegal and void [Circular : Letter No. 32/75, dated 1.11.1975].
In considering application for conversion of public company into a private
company the guiding criterion is whether a proposal would be in the best interests of
the company itself and that there is a large measure of agreement among the
shareholders to the proposed conversion. In particular, an attempt is made to
ascertain if the proposal is prompted merely by a desire to overcome the restrictions
imposed by some of the provisions of the Companies Act, which apply only to public
companies, e.g., Sections 295, 372, etc., or if the conversion is generally needed for
carrying on the business of the company more efficiently. A company, having more
than 25 shareholders, is advised to obtain the written consent of all the shareholders
who had not voted for the conversion before Governments approval is considered.
To protect the interests of unsecured creditors, the Department (now Ministry) has
also been insisting on companies obtaining the consent to conversion of every
creditor to whom the company owes substantial amounts.
27. DISTINCTION BETWEEN MEMORANDUM AND ARTICLES
The main points of distinction between the memorandum and articles are given
below:
1. Memorandum of association is the charter of the company and defines the
fundamental conditions and objects for which the company is granted
incorporation. Articles of association are the rules and regulations framed to
govern this internal management of the company.
2. Clauses of the memorandum cannot be easily altered. They can only be
altered in accordance with the mode prescribed by the Act. In some of the
cases, alteration requires the permission of the Company Law Board or the
Court. In the case of articles of association, members have a right to alter
the articles by a special resolution. Generally there is no need to obtain the
permission of the Court or the Company Law Board for alteration of the
articles.
3. Memorandum of association cannot include any clause contrary to the
provisions of the Companies Act. The articles of association are subsidiary
both to the Companies Act and the memorandum of association.
4. The memorandum generally defines the relation between the company and
the outsiders, while the articles regulate the relationship between the
company and its members and between the members inter se.
5. Acts done by a company beyond the scope of the memorandum are
absolutely void and ultra vires and cannot be ratified even by unanimous
vote of all the shareholders. But the acts of the directors beyond the articles
can be ratified by the shareholders.
28. LEGAL EFFECT OF THE MEMORANDUM AND ARTICLES
The memorandum and articles, when registered, bind the company and its
members to the same extent as if they have been signed by the company and by


each member to observe and be bound by all the provisions of the memorandum and
of the articles. Also, all moneys payable by any member to the company under the
memorandum or articles shall be a debt due from him to the company (Section 36).
We shall examine the extent to which the memorandum and articles bind:
(a) the members to the company;
(b) the company to the members;
(c) the members inter se; and
(d) the company to outsiders.
Members Bound to the Company
The memorandum and articles constitute a contract binding the members of the
company. The members, as members, are bound to the company. Each member
must, therefore, observe the provisions of the memorandum and articles.
Each member is bound by the covenants of the Memorandum as originally made
and as altered from time to time Malleson v. National Insurance Co. In another case,
the shareholders could not enter into an agreement which was contrary to or
inconsistent with the articles of association of the company [V.B. Rangaraj v. V.B.
Gopalkrishnan (1992) 73 Comp. Cas 201 (SC)].
In Borelands Trustee v. Steel Brother and Co. Ltd. (1901) 1 Ch. 279, the
articles of a company contained a clause that on the bankruptcy of a member
his shares would be sold to other persons and at a price fixed by the directors.
B, a shareholder was adjudicated bankrupt. His trustee in bankruptcy claimed
that he was not bound by these provisions and should be at liberty to sell the
shares at their true value. It was held that the trustee was bound by the articles,
as the shares were purchased by B in terms of the articles.
Company Bound to the Members
Since the articles constitute a contract binding the company to its members in
their capacity as members, a member can bring an action against the company for
infringement by it of the memorandum or articles. For example, an individual member
can sue the company for an injunction restraining it from improper payment of dividend
[Hoole v. Great Western Railway (1867) 3 Ch. D. 262]. Further, the company is
bound to individual members in respect of their ordinary rights as members, e.g. the
right to receive share certificate in respect of shares allotted to them, or to receive
notice of general meeting, etc. Normally, action for breach of articles against the
company can be brought only by a majority of the members. Individual or minority
members cannot bring such a suit except when it is intended for enforcement of
personal rights of members or to prevent the company from doing any ultra vires or
illegal act, fraud, or oppression and mismanagement.
Member Bound to Member
As between the members inter se each member is bound by the articles to the
other members but that does not mean the memorandum and articles create an
express contract among the members of the company. Thus, a member of a


company has no right to bring a suit to enforce the articles in his own name against
any other member or members. It is the company alone which can sue the offender
so as to protect the aggrieved member. It is in this way that the rights of members
inter se are regulated. A shareholder may, however, sue in his own name to restrain
another, or others from doing fraudulent or ultra vires acts.
Articles do not affect or regulate the rights arising out of a commercial contract,
with which the members have no concern, i.e., rights completely outside the
companys relationship.
Company not Bound to Outsiders
The term outsider signifies a person who is not a member of the company even
if he is a director of or solicitor to the company. Even in regard to members, the
articles bind the company to them in their capacity as members.
As between outsiders and the company, neither the memorandum nor the
articles would give any contractual rights to outsiders against the company or its
members even though the names of outsiders are mentioned in those documents in
connection with the arrangements that the company might have contemplated for
carrying on its business. The articles do not confer any contractual rights even
upon a member in a capacity other than that of a member. To succeed, the
party suing must prove a contract outside and independent of the articles [Eley
v. Positive Life Insurance Co., (1876) 1 E.X.D. 88].
In this case the articles provided that the solicitor to the company would
not be removed from office except for misconduct. Eley acted as solicitor to
the company and also became a member of the company. The company
discontinued his services and then he sued the company for damages for
breach of contract. It was held that he had no cause of action because the
articles did not constitute any contract between the company and himself. His
action was dismissed.
This rule, however, proved to be rather harsh and so the Courts later on
modified it. The modified rule is as follows:
While the articles cannot create a contract between the company and any
person other than a member in his capacity as a member, they may indicate the
basis upon which contracts may be made by the company. If such a contract is
entered into whether with a member of the company or any other person, the
conditions stated in the articles will be tacitly adopted by that contract, unless
expressly negatived or varied by the contract itself.
[Swable v. Port Darwin Gold Mining Co., (1889) 1 Meg. 385]. In this case, the
articles provided for the payment to each director, by way of remuneration, a
specified sum per annum. By a special resolution, the company reduced this with
retrospective effect from the end of the preceeding year. The plaintiff thereupon
resigned and sued the company for three months remuneration for service prior to
the date of his resignation. The Court held that he was entitled to recover on the
footing of an implied contract in the terms of the clause. The articles, said Lord
Esher, do not themselves form a contract, but from them you get the terms upon


which the director is serving.
The question sometimes arises as to whether directors are bound by whatever is
contained in the articles. In case the directors contravene the provisions in the
articles, the directors render themselves liable to an action by members. On the other
hand, members can also ratify acts of directors. If any loss is incurred by the
company, directors are liable to reimburse to the company any loss so incurred.
29. CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES
The memorandum and articles, when registered, become public documents and
can be inspected by anyone on payment of nominal fee. Therefore, every person who
contemplates entering into a contract with a company has the means of ascertaining
and is consequently presumed to know, not only the exact powers of the company
but also the extent to which these powers have been delegated to the directors, and
of any limitations placed upon the exercise of these powers. In other words, every
person dealing with the company is deemed to have a constructive notice of the
contents of its memorandum and articles. In fact, he is regarded not only as having
read those documents but also as having understood them according to their proper
meaning [Griffith v. Paget, (1877) Ch. D. 517]. Consequently, if a person enters into a
contract which is beyond the powers of the company, as defined in the memorandum,
or outside the limits set on the authority of the directors, he cannot, as a general rule,
acquire any rights under the contract against the company [Mohony v. East Holyfrod
Mining Co., (1875) L.R. 7 H.L. 869]. For example, if the articles provide that a bill of
exchange to be effective must be signed by two directors, a person dealing with the
company must see that it is so signed; otherwise he cannot claim under it.
In another case, the articles required that all documents should be signed by the
managing director, secretary and the working director on behalf of the company. A
deed of mortgage was executed by the secretary and the working director only and
the Court held that no claim would lie under such a deed. The court said that the
mortgagee should have consulted the articles before the deed was executed.
Therefore, even though the mortgagee may have acted in good faith and the money
borrowed applied for the purpose of the company, the mortgage was nevertheless
invalid, Kotla Venkataswamy v. Rammurthy, AIR 1934 Mad 579; The doctrine of
indoor management protects third parties who are entitled to an assurance that all the
procedural aspects of a transaction are carried out.
Outsiders dealing with incorporated bodies are bound to take notice of limits
imposed on the corporation by the memorandum or other documents of constitution.
Nevertheless they are entitled to assume that the directors or other persons
exercising authority on behalf of the company are doing so in accordance with the
internal regulations as set out in the Memorandum & Articles of Association.
The impact of this doctrine on practical relations is thus stated in HALSBURY: A
company is subject to the rule that, where the conduct of a party charged with a
notice shows that he had suspicions of a state of facts the knowledge of which would
affect his legal rights, but that he deliberately refrained from making inquiries, he will
be treated as having had notice, though he is not entitled to claim for his own
advantage, [Jones v. Smith, (1841) 1 Hare 43].


30. MONEY PAYABLE BY MEMBERS IS A DEBT [SUB-SECTION (2) OF
SECTION 36]
Though all money payable under the memorandum or articles by members is a
debt due, the liability on the debt is not enforceable, unless proper notice is given in
accordance with articles. [Pabna Dhana-Bhandar Co. Ltd. v. Foyezud din Mia (1933)
3 Com Cases 41 : AIR 1932 Cal 716].
31. INTERPRETATION OF MEMORANDUM AND ARTICLES
Articles should be construed as a business document so as to give business
efficacy preference to a construction which will prove unworkable [Holmes v. Keyes
(Lord) (1958) 2 All ER 129 (CA);]. Where the conduct of the parties reveals that there
has been some practice in vogue for several years which was accepted by everyone
concerned without any challenge or question, then that practice in the course of long
years in itself becomes an indication that the rules or articles which are framed by
way of internal management were understood in that sense [Krishnaswamy (S) v.
South India film Chamber of Commerce, AIR 1969 Mad 42 : (1968) 1 Comp LJ 75;
cited in Sunil Dev v. Delhi and District Cricket Assn., (1990) 2 Comp LJ 245, 255 :
(1994) 80 Comp. Cases 174 (Del)].
The memorandum must like any other document be construed according to
accepted principles applicable to the interpretation of all legal documents. No rigid
canon of construction is to be applied to such a document. Like any other document,
it must be read fairly and its import derived from a reasonable interpretation of the
language which it employs. [A Lakshamanaswami Mudaliar v. LIC of India (1963) 33
Comp. Cases 420, 430 (SC); Egyptian Salt & Soda Co. v. Port Said Salt Assn.,
(1931) AC 677 : AIR 1931 PC 182)].
The memorandum and articles must be read together in the event of any
ambiguity. In Angostura Bitters & Co. Ltd. v. Kerr, (1933) AC 550 : (1934) 4 Comp
Cases 1; the Privy Council held : Except in respect of such matters as must be
statutory provided for by the conjunction with the articles. The two documents must
be read together at all events so far as may be necessary to explain any ambiguity
appearing in the terms of the memorandum or to supplement it upon any matter as to
which it is silent quoted with approval by the Supreme Court in A.
Lakshmanaswami Mudaliar v. LIC of India Ltd. (1963) SC 1185.
This rule proved too inconvenient for business transactions and hindred the
smooth flow of business. The rigour of the rule was therefore lightened by judicial
pronouncement in the Royal British Bank v. Turquand, (1856) 119 E.R. 886.
32. DOCTRINE OF INDOOR MANAGEMENT
While the doctrine of constructive notice seeks to protect the company against
the outsiders, the principal of indoor management operates to protect the outsiders
against the company.
According to this doctrine, as laid down in Royal British Bank v. Turquand, (1856)
119 E.R. 886, persons dealing with a company having satisfied themselves that the
proposed transaction is not in its nature inconsistent with the memorandum and
articles, are not bound to inquire the regularity of any internal proceedings. In other


words, while persons contracting with a company are presumed to know the
provisions of the contents of the memorandum and articles, they are entitled to
assume that the provisions of the articles have been observed by the officers of the
company. It is no part of the duty of an outsider to see that the company carries out
its own internal regulations.
In Royal British Bank v. Turquand, the directors of a banking company were
authorised by the articles to borrow on bonds such sums of money as should
from time to time, by resolution of the company in general meeting, be
authorised to borrow. The directors gave a bond to Turquand without the
authority of any such resolution. It was held that Turquand could sue the
company on the strength of the bond, as he was entitled to assume that the
necessary resolution had been passed. Lord Hatherly observed : Outsiders
are bound to know the external position of the company, but are not bound to
know its indoor management.
Section 290 Provides for the Validity of Acts of Directors - Acts done by a person
as a director shall be valid, notwithstanding that it may afterwards be discovered that
his appointment was invalid by reason or any defect or disqualification or had
terminated by virtue of any provisions contained in this Act or in the articles:
Provided that nothing in this section shall be deemed to give validity to acts done
by a director after his appointment has been shown in the company to be invalid or to
have terminated.
The object of the section is to protect persons dealing with the company -
outsiders as well as members by providing that the acts of a person acting as director
will be treated as valid although it may afterwards be discovered that his appointment
was invalid or that it had terminated under any provision of this Act or the Articles of
the company [Ram Raghubir Lal v. United Refineries (Burma) Ltd., (1932) 2 Com
Cases 359; AIR 1931 Rang 139].
Section 292 may be compared with Regulation 80 of Table A to Schedule I, it
validates the bona fide acts of the de facto directors [Charles Joseph v. Kyauktaga
Grant Co., (1935) 5 Com Cases 265 : AIR 1935 Rang 76]. They can claim relief if the
acts involve them into any liability or penalty, e.g. where on account of reduction of
capital, the directors qualification shares also became reduced below the prescribed
value and the directors continued to act unawares, they would be entitled to be
relieved [Section 633]. [Gilt Edge Safety Glass Ltd. Re, (1940) 10 Com Cases 244
(Ch D)].
Relation of company with members and outsiders
The validation of the acts of unqualified directors may apply to circumstances
from two different angles : (1) as between outsiders, strangers and the company as in
Royal British Bank v. Turquand, (1956) 5 E&B 327, British Asbestos Co. Ltd. v. Boyd.
(1903) 2 Ch 439 : (1900-3) All ER Rep 323; and Ram Buran Singh v. Mufassil Bank
Ltd. AIR 1925 All 206; and (2) in relation to the internal affairs of the company as in
Dawson v. African Consolidated Land & Trading Co., (1898) 1 Ch 6 (CA), where calls
made by unqualified directors were held valid. Even if the public documents of the
company, and the facts which are apparent, would make it clear that a director was


not duly qualified to act, this will not oust the effect of the Section 290 (British
Asbestos case) (supra). Similarly in Boschoek Proprietary Co. Ltd., v. Fuke, (1906) 1
Ch 148, a resolution of a general meeting convened by de facto directors was upheld.
Forgery and incompetent acts
This section does not apply where the act itself is not in the competence of the
Board of directors, e.g. compromising unpaid calls under the guise of forfeiture, the
transaction being ultra vires and invalid [Bhagirath Spinning & Wvg. Co. v. Balaji
Bhavani Pawar, AIR 1930 Bom. 267].
Directors not aware of their disqualification
The allotment and forfeiture of shares made by the directors who continued to act
even after they were disqualified but were not aware of it, were saved by the Section
292. [Shiromani Sugar Mills Ltd. v. Debi Prasad, (1950) 20 Comp Cas 296: AIR 1950
All 508]. Where this section does not save the situation, the company may in general
meeting ratify allotment of shares even if made by de facto directors with mala fide
intentions [Bamford v. Bamford, (1969) 39 Com Cases 838 : (1969) 2 WLR (1107)
(CA) and an appeal (1969) : 1All ER 969].
Where the directors in question were not aware of the fact that by virtue of certain
provisions in the articles, they had vacated their office, their acts in passing
resolutions for starting certain business transactions were held to be valid [Seth
Mohan Lal v. Grain Chambers Ltd., (1968) 38 Comp Cases 543 : AIR 1968 SC 772;
Shiromani Sugar Mills Ltd. v. Debi Prasad, (Supra).]
It is important to remember that the doctrine of constructive notice, can be
invoked by the company and it does not operate against the company. It operates
against the person who has failed to inquire but does not operate in his favour. But
the doctrine of indoor management can be invoked by the person dealing with the
company and cannot be invoked by the company.
An outsider is entitled to act on a certified copy of the resolution of the Board of
directors delegating the powers of borrowing money to the managing director subject
to the limitation mentioned therein [C.K. Siva Sankara Panicker v. Kerala State
Financial Corporation, (1980) 50 Comp. Cas. 817 (Ker.)].
33. EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT
The above noted doctrine of indoor management is, however, subject to certain
exceptions. In other words, relief on the ground of indoor management cannot be
claimed by an outsider dealing with the company in the following circumstances.
1. Where the outsider had knowledge of irregularity The rule does not
protect any person who has actual or even an implied notice of the lack of
authority of the person acting on behalf of the company. Thus, a person
knowing fully well that the directors do not have the authority to make the
transaction but still enters into it, cannot seek protection under the rule of
indoor management. In Howard v. Patent Ivory Co. (38 Ch. D 156), the
articles of a company empowered the directors to borrow upto one
thousand pounds only. They could, however, exceed the limit of one


thousand pounds with the consent of the company in general meeting.
Without such consent having been obtained, they borrowed 3,500
pounds from one of the directors who took debentures. The company
refused to pay the amount. Held that, the debentures were good to the
extent of one thousand pounds only because the director had notice or
was deemed to have the notice of the internal irregularity.
2. No knowledge of memorandum and articles Again, the rule cannot be
invoked in favour of a person who did not consult the memorandum and
articles and thus did not rely on them. In Rama Corporation v. Proved Tin
& General Investment Co. (1952) 1All. ER 554, T was a director in the
company. He, purporting to act on behalf of the company, entered into
a contract with the Rama Corporation and took a cheque from the
latter. The articles of the company did provide that the directors could
delegate their powers to one of them. But Rama Corporation people
had never read the articles. Later, it was found that the directors of the
company did not delegate their powers to T. The Plaintiff relied on the
rule of indoor management. Held, they could not because they even
did not know that power could be delegated.
3. Forgery The rule of indoor management does not extend to transactions
involving forgery or to transactions which are otherwise void or illegal ab
initio. In the case of forgery it is not that there is absence of free consent but
there is no consent at all. The person whose signatures have been forged is
not even aware of the transaction, and the question of his consent being
free or otherwise does not arise. Consequently, it is not that the title of the
person is defective but there is no title at all. Therefore, howsoever clever
the forgery might have been the personates acquire no rights at all. Thus,
where the secretary of a company forged signatures of two of the
directors required under the articles on a share certificate and issued
certificate without authority, the applicants were refused registration
as members of the company. The certificate was held to be nullity and
the holder of the certificate was not allowed to take advantage of the
doctrine of indoor management [Rouben v. Great Fingal Consolidated
(1906) AC 439].
Forgery, in the case of a company, can take different forms. It may, besides
forgery of the signatures of the authorised officials, include the execution of
a document towards the personal discharge of an officials liability instead of
the liability of the company. Thus, a bill of exchange signed by the manager
of a company with his own signature under words stating that he signed on
behalf of the company, was held to be forgery when the bill was drawn in
favour of a payee to whom the manager was personally indebted
[Kreditbank Cassel v. Schenkers Ltd. (1927) 1 KB 826]. The bill in this case
was held to be forged because it purported to be a different document from
what it was in fact; it purported to be issued on behalf of the company in
payment of its debt when in fact it was issued in payment of the managers
own debt.
4. Negligence The doctrine of indoor management, in no way, rewards
those who behave negligently. Thus, where an officer of a company does


something which shall not ordinarily be within his powers, the person dealing
with him must make proper enquiries and satisfy himself as to the officers
authority. If he fails to make an enquiry, he is estopped from relying on the
Rule. In Al Underwood v. Benkof Liverpool (1924) 1 KB 775, a person who
was a sole director and principal shareholder of a company paid into his own
account cheques drawn in favour of the company. Held, that, the bank
should have made inquiries as to the power of the director. The bank was
put upon an enquiry and was accordingly not entitled to rely upon the
ostensible authority of director.
Similarly, in B. Anand Behari Lal v. Dinshaw & Co. (Bankers) Ltd. AIR 1942
Oudh 417, an accountant of a company transferred some property of a
company in favour of Anand Behari. On an action brought by him for
breach of contract, the Court held the transfer to be void. It was observed
that the power of transferring immovable property of the company could
not be considered within the apparent authority of an accountant.
5. Again, the doctrine of indoor management does not apply where the
question is in regard to the very existence of an agency. In Varkey Souriar v.
Keraleeya Banking Co. Ltd. (1957) 27 Comp. Cas. 591 (Ker.), the Kerala
High Court held that the doctrine of indoor management cannot apply
where the question is not one as to scope of the power exercised by an
apparent agent of a company but is in regard to the very existence of the
agency.
6. This Doctrine is also not applicable where a pre-condition is required to be
fulfilled before company itself can exercise a particular power. In other
words, the act done is not merely ultra vires the directors/officers but ultra
vires the company itself Pacific Coast Coal Mines v. Arbuthnot (1917) AC
607.

ANNEXURES
ANNEXURE I
TABLE B
MEMORANDUM OF ASSOCIATION OF A COMPANY LIMITED BY SHARES
1st - The name of the company is The Eastern Steam Packet Company Limited
2nd - The registered office of the company will be situated in the State of
Bombay.
3rd - (a) The main objects to be pursued by the company on its incorporation are
the conveyance of passengers and goods in ships or boats between such places as
the company may from time to time determine.
(b) The objects incidental or ancillary to the attainment of the above main objects
are the acquisition, construction, building, setting-up and provision of establishments
for repairing ships, or boats, for the training of personnel required for the running of
ships or boats and the doing of all such other things as are conducive to the
attainment of the foregoing main objects.
(c) The other objects for which the company is established are carrying on the
business of carriers by land and air and the running of hotels for tourists.


4th - The liability of members is limited.
5th - The share capital of the company is two hundred thousands rupees, divided
into one thousand shares of two hundred rupees each.
We, the several persons whose names and addresses are subscribed, are
desirous of being formed into a company in pursuance of this memorandum of
association, and we respectively agree to take the number of shares in the capital of
the company set opposite our respective names.

Names, addresses, descriptions and Number of
shares taken
occupations of subscribers
by each subscriber

1

2

1. A.B. of .............., Merchant ... ... ...
200
2. C.D. of .............., Merchant ... ... ...
25
3. E.F. of .............., Merchant ... ... ...
30
4. G.H. of .............., Merchant ... ... ...
40
5. I.J. of .............., Merchant ... ...
... 15
6. K.L. of .............., Merchant ... ...
... 5
7. M.N. of .............., Merchant ... ... ...
10


Total shares taken 325

Dated the ....................................................... day of .............................. 20................
Witness to the above signatures.
X.Y. of ......................................
ANNEXURE II
TABLE C
MEMORANDUM AND ARTICLES OF ASSOCIATION OF A COMPANY
LIMITED BY GUARANTEE AND NOT HAVING A SHARE CAPITAL
Memorandum of Association
1st - The name of the company is The Mutual Calcutta Marine Association
Limited.


2nd - The registered office of the company will be situated in the State of West
Bengal.
3rd - (a) The main objects to be pursued by the company on its incorporation are
the mutual insurance of ships belonging to members of the company.
(b) The objects incidental or ancillary to the attainment of the above main objects
are providing for the welfare of employees or ex-employees of the company and the
making, drawing, accepting, endorsing, executing and issuing of any negotiable or
transferable documents and the doing of such other things as are conducive to the
attainment of the foregoing main objects.
(c) The other objects for which the company is established are Buildings,
equipping and maintaining charitable hospitals, running of schools and undertaking
any other social service.
4th - The liability of members is limited.
5th - Every member of the company undertakes to contribute to the assets of the
company in the event of its being wound up while he is a member, or within one year
after he ceases to be a member, and the costs, charges and expenses of winding up
and for the adjustment of the rights of the contributories among themselves, such
amount as may be required, not exceeding one hundred rupees.
We, the several persons whose names and addresses are subscribed, are
desirous of being formed into a company, in pursuance of this memorandum of
association.

Names, addresses, descriptions and occupations of subscribers

1. A.B. of ... ...
... ... , Merchant
2. C.D. of ... ...
... ... , Merchant
3. E.F. of ... ...
... ... , Merchant
4. G.H. of ... ...
... ... , Merchant
5. I.J. of ... ...
... ... , Merchant
6. K.L. of ... ...
... ... , Merchant
7. M.N. of ... ...
... ... , Merchant

Dated the ........................................................ day of .............................. 20................
Witness to the above signatures.
X.Y. of ......................................


Articles of Association of a Company Limited by Guarantee
and not having a Share Capital
Interpretation
1. (1)In these articles :
(a) The Act means the Companies Act, 1956.
(b) The Seal means the common seal of the company.
(2)Unless the context otherwise requires, words or expressions contained in
these regulations shall bear the same meaning as in the Act or any
statutory modification thereof in force at the date at which these
regulations become binding on the company.
Members
2. The number of members with which the company proposes to be registered is
500 but the Board of directors may, from time to time, whenever the company or the
business of the company requires it, register an increase of members.
3. The subscribers to the memorandum and such other persons as the Board
shall admit to membership shall be members of the company.
General Meetings
4. All general meetings other than annual general meetings shall be called
extraordinary general meetings.
5. (1)The Board may, whenever it thinks fit, call an extraordinary general meeting.
(2)If at any time there are not within India directors capable of acting, who are
sufficient in number to form a quorum, any director or any two members
of the company may call an extraordinary general meeting in the same
manner as nearly as possible, as that in which such a meeting may be
called by the Board.
Proceedings at General Meetings
6. (1)No business shall be transacted at any general meeting unless a quorum of
members is present at the time when the meeting proceeds to business.
(2)Save as herein otherwise provided, five members present in person shall be a
quorum.
7. (1)If within half an hour from the time appointed for holding the meeting a
quorum is not present, the meeting, if called upon the requisition of
members, shall be dissolved.
(2)In any other case, the meeting shall stand adjourned to the same day in the
next week, at the same time and place, or to such other day and at such
other time and place as the Board may determine.
(3)If at the adjourned meeting a quorum is not present within half an hour from
the time appointed for the meeting, the members present shall be a
quorum.
8. The chairman, if any, of the Board shall preside as chairman at every general


meeting of the company.
9. If there is no such chairman, or if he is not present within fifteen minutes after
the time appointed for holding the meeting, or is unwilling to act as chairman of the
meeting, the directors present shall elect one of the their number to be chairman of
the meeting.
10. If at any meeting no director is willing to act as chairman or if no director is
present within fifteen minutes after the time appointed for holding the meeting, the
members present shall choose one of their number to be chairman of the meeting.
11. (1)The chairman may, with the consent of any meeting at which a quorum is
present, and shall, if so directed by the meeting, adjourn the meeting
from time to time and from place to place.
(2)No business shall be transacted at any adjourned meeting other than the
business left unfinished at the meeting from which the adjournment took
place.
(3)When a meeting is adjourned for thirty days or more, notice of the adjourned
meeting shall be given as in the case of an original meeting.
(4)Save as aforesaid, it shall not be necessary to give any notice of an
adjournment or of the business to be transacted at an adjourned
meeting.
12. In the case of an equality of votes, whether on a show of hands or on a poll,
the chairman of the meeting at which the show of hands takes place, or at which the
poll is demanded, shall be entitled to a second or casting vote.
13. Any business other than that upon which a poll has been demanded may be
proceeded with, pending the taking of the poll.
Votes of Members
14. Every member shall have one vote.
15. A member of unsound mind, or in respect of whom an order has been made
by any Court having jurisdiction in lunacy, may vote, whether on a show of hands or
on a poll, by his committee or other legal guardian, and any such committee or
guardian may, on a poll, vote by proxy.
16. No member shall be entitled to vote at any general meeting unless all sums
presently payable by him to the company have been paid.
17. (1)No objection shall be raised to the qualification of any voter except at the
meeting or adjourned meeting at which the vote objected to is given or
tendered, and every vote not disallowed at such meeting shall be valid
for all purposes.
(2)Any such objection made in due time shall be referred to the chairman of the
meeting, whose decision shall be final and conclusive.
18. A vote given in accordance with the terms of an instrument of proxy shall be
valid, notwithstanding the previous death or insanity of the principal or the revocation
of the proxy or of the authority under which the proxy was executed:


Provided that no intimation in writing of such death, insanity, revocation or
transfer shall have been received by the company at its office before the
commencement of the meeting or adjourned meeting at which the proxy is used.
Board of Directors
19. The number of the directors and the names of the first directors shall be
determined in writing by the subscribers of the memorandum or a majority of them.
20. (1)The remuneration of the directors shall, in so for as it consists of monthly
payment, be deemed to accrue from day-to-day.
(2)The directors may also be paid all travelling, hotel and other expenses
properly incurred by them:
(a) in attaining and returning from meetings of the Board or any
committee thereof or general meetings of the company; or
(b) In connection with the business of the company.
Proceedings of Meetings of Board
21. (1) The Board of directors may meet for the despatch of business, adjourn
and otherwise regulate its meetings, as it thinks fit.
(2) A director may, and the manager or secretary on the requisition of a director
shall, at any time, summon a meeting of the Board.
22. (1) Save as otherwise expressly provided in the Act, questions arising at any
meeting of the Board shall be decided by a majority of votes.
(2) In case of an equality of votes, the chairman shall have a second or casting
vote.
23. The continuing directors may act notwithstanding any vacancy in the Board;
but if and so long as their number is reduced below the quorum fixed by the Act for a
meeting of the Board, the continuing directors or director may act for the purpose of
increasing the number of directors to that fixed for the quorum, or of summoning a
general meeting of the company, but for no other purpose.
24. (1) The Board may elect a chairman of its meetings and determine the
period for which he is to hold office.
(2) If no such chairman is elected, or if at any meeting the chairman is not
present within five minutes after the time appointed for holding the meeting, the
directors present may choose one of their number to be chairman of the meeting.
25. (1) The Board may, subject to the provisions of the Act, delegate any of its
powers to committees consisting of such members of its body as it thinks fit.
(2) Any committee so formed shall, in the exercise of the powers so delegated,
conform to any regulations that may be imposed on it by the Board.
26. (1) A committee may elect a chairman of its meetings.
(2) If no such chairman is elected, or if at any meeting the chairman is not


present within five minutes after the time appointed for holding the meeting, the
members present may choose one of their number to be chairman of the meeting.
27. (1) A committee may meet and adjourn as it thinks proper.
(2) Questions arising at any meeting of a committee shall be determined by a
majority of votes of the members present, and in case of an equality of votes, the
chairman shall have a second or casting vote.
28. All acts done by any meeting of the Board or of a committee thereof, or by
any person acting as a director, shall, notwithstanding that it may be afterwards
discovered that there was some defect in the appointment of any one or more of such
director or of any person acting as aforesaid, or that they or any of them were
disqualified, be as valid as if every such director or such person had been duly
appointed and was qualified to be a director.
29. Save as otherwise expressly provided in the Act, a resolution in writing,
signed by all the members of the Board or a committee thereof for the time being
entitled to receive notice of a meeting of the Board or committee, shall be a valid and
effectual as if it had been passed at a meeting of the Board or committee, duly
convened and held.
Manager or Secretary
30. (1) A manager or secretary may be appointed by the Board for such term, at
such remuneration and upon such conditions as it may think fit; and any manager or
secretary so appointed may be removed by the Board.
(2) A director may be appointed as manager or secretary.
31. A provision of the Act or these regulations requiring or authorising a thing to
be done by or to a director and the manager or secretary shall not be satisfied by its
being done by or to the same person acting both as director and as, or in place of,
the manager or secretary.
The Seal
32. (1) The Board shall provide for the safe custody of the seal.
(2) The seal of the company shall not be affixed to any instrument except by the
authority of a resolution of the Board of directors, and except in the presence of at
least two directors and of the secretary or such other person as the Board may
appoint for the purpose; and those two directors and the secretary or other person as
aforesaid shall sign every instrument to which the seal of the company is so affixed in
their presence.

Names, addresses, descriptions and occupations of subscribers

1. A.B. of ... ...
... ... , Merchant
2. C.D. of ... ...
... ... , Merchant
3. E.F. of ... ...


... ... , Merchant
4. G.H. of ... ...
... ... , Merchant
5. I.J. of ... ...
... ... , Merchant
6. K.L. of ... ...
... ... , Merchant
7. M.N. of ... ...
... ... , Merchant

Dated the ........................................................ day of .............................. 20................
Witness to the above signatures.
X.Y. of ......................................
ANNEXURE III
TABLE D
MEMORANDUM AND ARTICLES OF ASSOCIATION OF A COMPANY
LIMITED BY GUARANTEE AND HAVING A SHARE CAPITAL
Memorandum of Association
1st - The name of the company is The Snowy Range Hotel Company Limited.
2nd - The registered office of the company will be situated in the State of West
Bengal.
3rd - (a) The main objects to be pursued by the company on its incorporation are
facilitating of travelling in the Snowy Range, by providing hotels and conveyances by
sea and by land for the accommodation of travellers.
(b) The objects incidental or ancillary to the attainment of the above main objects
are conducting coaching classes in catering, hotel management, etc., and the doing
of such other things as are conducive to the attainment of the foregoing main
objects.
(c) The other objects for which the company is established are running a
publishing house and the publishing of periodicals/magazines/newspapers catering to
various interest pertaining to the objects aforesaid.
4th - The Liability of members is limited.
5th - Every member of the company undertakes to contribute to the assets of the
company in the event of its being wound up while he is a member, or within one year
after he ceases to be a member for payment of the debts and liabilities of the
company, contracted before he ceases to be a member, and the costs, charges and
expenses of winding up the same and for the adjustment of the rights of the
contributories among themselves, such amount as may be required, not exceeding
fifty rupees.
6th - The share capital of the company shall consist of five hundred thousand


rupees divided into five thousands shares of one hundred rupees each.
We, the several persons whose names and addresses are subscribed, are
desirous of being formed into a company in pursuance of this memorandum of
association, and we respectively agree to take the number of shares in the capital of
the company set opposite our respective names.

Names, addresses, descriptions and Number of
shares taken
occupations of subscribers
by each subscriber

1

2
1. A.B. of .............., Merchant ... ... ...
200
2. C.D. of .............., Merchant ... ... ...
25
3. E.F. of .............., Merchant ... ... ...
30
4. G.H. of .............., Merchant ... ... ...
40
5. I.J. of .............., Merchant ... ...
... 15
6. K.L. of .............., Merchant ... ...
... 5
7. M.N. of .............., Merchant ... ... ...
10


Total shares taken 325

Dated the ....................................................... day of .............................. 20................
Witness to the above signatures.
X.Y. of ......................................
Articles of Association of a Company Limited by Guarantee and
having a Share Capital
1. The number of members with which the company proposes to be registered is
100, but the directors may from time to time register an increase of members.
2. All the articles of Table A in Schedule I annexed to the Companies Act, 1956,
shall be deemed to be incorporated with these articles and to apply the company.

Names, addresses, descriptions and occupations of subscribers

1. A.B. of ... ...
... ... , Merchant


2. C.D. of ... ...
... ... , Merchant
3. E.F. of ... ...
... ... , Merchant
4. G.H. of ... ...
... ... , Merchant
5. I.J. of ... ...
... ... , Merchant
6. K.L. of ... ...
... ... , Merchant
7. M.N. of ... ...
... ... , Merchant

Dated the ........................................................ day of .............................. 20................
Witness to the above signatures.
X.Y. of ......................................
ANNEXURE IV
TABLE E
MEMORANDUM AND ARTICLES OF ASSOCIATION OF
AN UNLIMITED COMPANY
Memorandum of Association
1st - The name of the company is The Patent Stereotype Company.
2nd - The registered office of the company will be situated in the State of West
Bengal.
3rd - (a) The main objects to be pursued by the company on its incorporation are
the working of a patent method of founding and casting stereotype plates of which
method P.Q. of Bombay is the sole patentee.
(b) The objects incidental or ancillary to the attainment of the above main objects
are purchasing, taking on lease or licence or concession or otherwise, lands,
buildings, works and any rights and privileges or interest therein for establishing the
necessary workshop/factories and the doing of such other things as are conducive to
the attainment of the foregoing main objects.
(c) The other objects for which the company is established are conducting
research in any field pertaining to the science of metallurgy and turning to account
the results of the same.
We, the several persons whose names and addresses are subscribed, are
desirous of being formed into a company in pursuance of this memorandum of
association, and we respectively agree to take the number of shares in the capital of
the company set opposite our respective names.



Names, addresses, descriptions and Number of
shares taken
occupations of subscribers
by each subscriber

1

2

1. A.B. of .............., Merchant ... ... ...
3
2. C.D. of .............., Merchant ... ... ...
2
3. E.F. of .............., Merchant ... ... ...
1
4. G.H. of .............., Merchant ... ... ...
2
5. I.J. of .............., Merchant ... ...
... 2
6. K.L. of .............., Merchant ... ...
... 1
7. M.N. of .............., Merchant ... ... ...
1


Total shares taken 12

Dated the ....................................................... day of .............................. 20................
Witness to the above signatures.
X.Y. of ......................................
Articles of Association of an Unlimited Company
1. The number of members with which the company proposes to be registered is
20, but the directors may from time to time register an increase of members.
2. The share capital of the company is twenty thousand rupees, divided into
twenty shares of one thousand rupees each.
3. The company may by special resolution:
(a)increase the share capital by such sum to be divided into shares of such
amount as the resolution may prescribe;
(b)consolidate its shares into shares of a larger amount than its existing shares;
(c)sub-divide its shares into shares of a smaller amount than its existing shares;
(d)cancel any shares which at the date of the passing of the resolution have not
been taken or agreed to be taken by any person;
(e)reduce its share capital in any way.
4. All the articles of Table A in Schedule I to the Companies Act, 1956, except


articles (36, 37, 38, 39, 44, 45 and 46) shall be deemed to be incorporated with these
articles and to apply to the company.

Names, addresses, descriptions and occupations of subscribers

1. A.B. of ... ...
... ... , Merchant
2. C.D. of ... ...
... ... , Merchant
3. E.F. of ... ...
... ... , Merchant
4. G.H. of ... ...
... ... , Merchant
5. I.J. of ... ...
... ... , Merchant
6. K.L. of ... ...
... ... , Merchant
7. M.N. of ... ...
... ... , Merchant

Dated the ........................................................ day of .............................. 20................
Witness to the above signatures.
X.Y. of ......................................

LESSON ROUND-UP
The Memorandum of Association is a document which sets out the constitution of
the company and is the foundation on which the structure of the company stands.
It defines as well as confines the powers of the company. If the company enters
into contract or engages in any trade or business which is beyond the powers
conferred on it by the memorandum, such a contract or the act will be ultra vires
the company and hence void. However, the Companies Act, 1956 shall override
the provisions in the memorandum of a company, if the latter contains anything
contrary to the provisions in the Act.
The first clause in the memorandum of association of the company states the
name by which the company is known. The company may adopt any suitable
name provided it is not undesirable. The second clause is situation clause.
Accordingly, within 30 days of incorporation or on the day when it commences
business, whichever is earlier, the company must have a registered office to
which all communications and notices may be sent.
The objects clause is of great importance because it determines the purpose and
the capacity of the company. An act beyond the objects mentioned in the
memorandum is ultra vires and void and cannot be ratified.
The fourth clause must state that liability of the members is limited, if it is so
intended that the company be limited by shares or by guarantee. Fifth clause
must state the amount of the capital with which the company is registered, unless
the company is an unlimited company. The memorandum concludes with the
subscription clause in which there is a declaration of association.
The memorandum of association of a company may be altered by changing its
name, altering it in regard to the State in which the registered office is to be


situated or its objects, altering or reorganizing its share capital, reducing its
capital or making the liability of the directors unlimited.
The change of name will not affect any rights and obligations of the company, or
legal proceedings commenced under the old name.
Alteration of Registered Office Clause can be change of registered office within
the local limits of same town or from one city to another within the same state or
within the same state from the jurisdiction of one Registrar of Companies to the
jurisdiction of another Registrar of Companies or from one state to another.
Objects clause of the company may be altered to enable it to carry on its
business more economically and more efficiently; to attain its main objects by
new or improved means; to enlarge or change the local area of its operations; to
carry on some business which under existing circumstances may conveniently or
advantageously be combined with the business of the company; to restrict or
abandon any of the objects specified in the memorandum; to alter its objects to
sell or dispose of any of its undertakings where a company feels it has grown so
big or that management has become difficult and uneconomical; or to
amalgamate with any other company or body of persons.
No alteration of objects clause or shifting of the registered office from one state to
another shall have effect unless it is registered with registrar in accordance with
provisions of Section 18 of the Act.
The limited liability clause of a company cannot be altered so as to make the
liability unlimited, unless the articles permit such alteration by a special resolution
to make the liability of the directors or of any one director or manager unlimited.
Being a domestic affair, the Companies Act permits the companies to decide the
extent, mode etc. of reduction of its share capital, subject to the approval of the
court.
Articles means the articles of association of a company as originally framed or as
altered from time to time in pursuance of any previous company law or of this Act.
It also includes the regulations contained in Table A in Schedule I of the Act, in so
far as they apply to the company.
The memorandum lays down the scope and powers of the company and the
articles govern the ways in which the objects of the company are to be carried out
and can be framed and altered by the members.
The articles must be printed, divided into paragraphs, numbered consecutively,
stamped adequately, signed by each subscriber to the memorandum and duly
witnessed and filed along with the memorandum. They must not contain anything
illegal or ultra vires the memorandum and should not be contrary to the
provisions of the Companies Act, 1956.
A company has a statutory right to alter its articles of association. But the power
to alter is subject to the provisions of the Act and to the conditions contained in
the memorandum. Any alteration so made shall be as valid as if originally
contained in the articles.
The memorandum of association and articles of association can be clearly
distinguished from each other.
The memorandum and articles, when registered, bind the company and its
members to the same extent as if they have been signed by the company and by
each member to observe and be bound by all the provisions of the memorandum
and of the articles.
As per doctrine of constructive notice, every person dealing with the company is
deemed to have a constructive notice of the contents of its memorandum and


articles. Outsiders dealing with incorporated bodies are bound to take notice of
limits imposed on the corporation by the memorandum or other documents of
constitution. Nevertheless they are entitled to assume that the directors or other
persons exercising authority on behalf of the company are doing so in
accordance with the internal regulations as set out in the Memorandum & Articles
of Association.
While the doctrine of constructive notice seeks to protect the company against
the outsiders, the doctrine of indoor management operates to protect the
outsiders against the company. While persons contracting with a company are
presumed to know the provisions of the contents of the memorandum and
articles, they are entitled to assume that the provisions of the articles have been
observed by the officers of the company. However, there are certain exceptions
to doctrine of indoor management.
SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation.)
1. What do you understand by the memorandum of association? What is its
purpose?
2. Memorandum of association is a charter of the company. Comment upon
the statement and explain the clauses which are included in a memorandum
of association of a company.
3. What is registered office of a company? Within how much time a company
must have a registered office?
4. What do you understand by the doctrine of ultra-vires? Discuss the
decided case Ashbury Railway & Iron Co. v. Riche.
5. What is the importance of the objects clause of the memorandum of
association? If a company undertakes to do anything which is not either
expressly or impliedly provided for by the objects clause, what would be the
consequences?
6. The power of altering the articles is wide, yet it is subject to a large number
of limitations. Explain.
7. Discuss the extent to which articles of association binds:
(a)the members to the company,
(b)the company to the members,
(c)the members among themselves, and
(d)the company to the outsiders.
8. Distinguish Articles from Memorandum.
9. What is the meaning and significance of the doctrine of Indoor
Management. Discuss with reference to decided case Royal British Bank v.
Turquand.




Suggested Readings:
(1) Guide to the Companies Act A. Ramaiya.
(2) Guide to Memorandum Articles and Incorporation of Companies M.C.
Bhandari & R.D. Makheeja.









































STUDY V
INCORPORATION AND ITS CONSEQUENCES - IV
CONTRACTS AND CONVERSIONS
LEARNING OBJECTIVES
This chapter explains the various types of contracts entered into by a public and
private company viz. preliminary or pre-incorporation contracts, provisional contracts,
contracts made after obtaining certificate to commence business. It also explains the
concept of common seal. It gives the procedure for conversion of a private company
into a public company and vice versa. It further gives provisions for commencement of
business by a company, both when it has issued a prospectus and when it has not
issued prospectus. At the end of the lesson, you should be able to understand:
Preliminary or pre-incorporation contracts and provisional contracts.
Contracts made after obtaining certificate of commencing business in case of
public company and after incorporation in case of private company.
Common seal.
Conversion of private company into public company.
Conversion of public company into private company.
Commencement of business where company has issued prospectus, where
company has not issued prospectus.
Commencement of new business by an existing company.
1. PRELIMINARY CONTRACTS
A company being an artificial person can contract only through its agents. A
contract will be binding on a company only, if it is made on its behalf by any person
acting under its authority, express or implied. The powers of the company are defined
by its Memorandum of Association and any contract made beyond the limits laid
down in the Memorandum of Association, will be ultra vires to the company and void
even if all the shareholders assent to it.
When the company is being formed, the promoters, purporting to act on behalf of
the company, enter into contracts for the purchase of property, or for securing the
services of managers or other experts. Such contracts are obviously made before the
incorporation of the company.
There are three situations as discussed below in the case of a public company in
which contracts are made:
(a) Contracts made on behalf of the company before its incorporation
preliminary or pre-incorporation contracts.
(b) Contracts made after incorporation but before obtaining the certificate to
commence businessprovisional contracts.
(c) Contracts made after obtaining the certificate to commence business.
However, in the case of a private company, there are only two situations in which
159


contracts are made, i.e. contracts made on behalf of companies before incorporation
and contracts made after incorporation, since a private company can commence its
business immediately after obtaining a certificate of incorporation. Hence, there is no
need for provisional contracts in the case of a Private company.
(a) Pre-incorporation Contracts
In Penningtons Company Law, the position is stated as under:
Although a contract made before the companys incorporation cannot bind the
company, it is not wholly denied of legal effect. It takes effect as a personal contract
with the persons who purport to contract on the companys behalf and they are liable
to pay damages for failure to perform the promises made in the companys name,
even though the contract expressly provides that only the companys paid-up capital
shall be answerable for performance.
Preliminary contracts are contracts purported to be made on behalf of a company
before its incorporation. Before incorporation, a company is non-existent and has no
capacity to contract. Consequently, nobody can contract as agent on its behalf
because an act which cannot be done by the principal himself cannot be done by him
through an agent. Hence, a contract by a promoter purporting to act on behalf of a
company prior to its incorporation never binds the company because at the time the
contract was concluded the company was not in existence. Therefore it has no legal
existence. Even if the parties act on the contract it will not bind the company.
[Northumberland Avenue Hotel Co., (1886) 33 Ch.D. 16 (CA)]. Thus even if the
company takes some benefit from a contract which is made before its incorporation,
the contract is not binding on the company [In Re. English and Colonial Produce Co.
(1906) 2; Ch. 435]. Further even after incorporation such a purported contract cannot
be ratified by the company (Kelner v. Baxter (1866) L.R. 2 C.P. 174]. The persons
purporting to act as agents on behalf of the company would be personally liable. In
Kelner v. Baxter (ibid) three persons A, B and C purported to enter into a contract as
agents on behalf of a company before its incorporation for the purchase of certain
goods from Kelner and signed it : A, B and C, Directors. The company later
obtained the certificate of incorporation but collapsed before the money was paid for
the goods which were supplied to it by Kelner. It was held that A, B and C were
personally liable on the agreement and no subsequent ratification by the company
would relieve them from that liability without the assent of Kelner.
Even if the company takes some benefit from a contract purported to have been
made before its formation, the contract is not binding on the company. The promoters
alone, therefore, remain personally liable for any contract they purport to make on
behalf of the company, unless the company enters into the contract in terms of such
agreement after incorporation. A company cannot ratify a pre-incorporation contract,
but it is open to it to enter into a new contract after its incorporation to give effect to a
contract made before its formation [Howard v. Patent Ivory Co. (1888) 38 Ch.D.]
Since the pre-incorporation contract is a nullity, even the company cannot sue the
vendor of property if he fails to carry out such a contract.
In India, however, Sections 15 and 19 of the Specific Relief Act, 1963, have
considerably alleviated the difficulty. Section 15(h) provides that where the promoters
of a company have, before its incorporation, entered into a contract for the purposes


of the company, and such contract is warranted by the terms of incorporation, the
company may, if it has accepted the contract, and has communicated such
acceptance to the other party to the contract, obtain specific performance of the
contract. Under Section 19(e) under similar circumstances, specific performance may
be enforced against the company by the other party to the contract.
The Court of Appeal in Cotronic (UK) Ltd. v. Dezonie, (1991) BCLC 721 (CA),
held that an agent cannot sue the other party under a contract which he makes in the
name of the company but he can certainly make claims if he has rendered some
services and sue for those services.
A company cannot acquire shares prior to its incorporation. Where a company
was named as the transferee in the share transfer forms prior to its incorporation, it
was held that such transfers could not be registered. [Inlec Investment (P) Ltd. v.
Dynamatic Hydraulics Ltd., (1989) 3 Comp LJ 221, 225 (CLB)].
Pre-incorporation shares subscription
Any pre-incorporation agreement to subscribe to shares of a company to be
formed, cannot be enforced and is usually revocable unless accepted by the
company after its formation.
(b) Provisional Contracts
In the case of a private company the question of provisional contracts does not
arise as it can commence business immediately on its incorporation.
In the case of a public company, contracts made after incorporation but before
the grant of certificate of commencement of business are provisional and are not
binding on the company until the company is entitled to commence business on the
grant of the certificate. But on the issue of the certificate to commence business such
contracts automatically become binding i.e. without any ratification Sub-section (4)
of Section 149.
If, therefore, a public company is wound up before it is entitled to commence
business the persons who have rendered services or supplied goods or materials to
the company can have no claim against it [In Re. Electrical Manufacturing Co. (1906)
2 Ch. 390].
(c) Contracts made after issue of Certificate of Commencement of Business in
the case of Public Company, and after Incorporation in the case of Private
Company
A company can do all such acts, as by its Memorandum, it is expressly or
impliedly authorised, to do. Any purported act, which is not so authorized, is ultra
vires the company, and the company cannot enforce it, nor can the other party
enforce it against the company. Such a contract cannot be ratified even if every
member of the company assents to it, as it is void ab initio. This rule is commonly
known as the Doctrine of Ultra Vires. Ultra vires means "beyond the powers". The
powers of the company are derived from its Memorandum of Association and the
statute constituting it. Consequently, only those contracts which are intra vires or


within the powers of the company will be valid and binding.
Where a contract is intra vires the company but ultra vires the directors, the
company may be liable and may even ratify it. According to the rule in Royal British
Bank v. Turquand (1856) 6 E and B 327, so long as the act done by the directors is
not inconsistent with the memorandum and articles, an outsider is entitled to assume
that the directors have acted properly. (Detailed discussion on Doctrine of Ultra Vires
is already given in Study IV).
2. COMMON SEAL
Since a body corporate is not a living person who can sign, therefore every
company should necessarily have an instrument known as common seal which is
used for making a physical impression to act as its signature on certain important
documents. Pursuant to Section 147(1)(b), every company shall have its name
engraven in legible characters on its seal. Since, Section 147(1)(b) provides that the
name of the company should be engraven, it appears that the seal should be made of
metal.
Common seal and contracting under common seal: The following deeds and
contracts are not valid unless made under the seal of the company:
(i) Power of attorney which would be required to be made in favour of a person
to execute the deeds on behalf of the company;
(ii) Share certificates;
(iii) Share warrants;
(iv) Any deed as required by the Articles.
3. CONVERSION OF A PRIVATE COMPANY INTO A PUBLIC COMPANY
The conversion of a private company into a public company can be grouped
under the following heads:
(i) By choice or volition;
(ii) By default.
(i) Conversion by choice or volition (Section 44)
In accordance with Section 44 of the Companies Act, 1956 the conversion of a
Private Company into a Public Company by choice will require the following:
(a) Alteration of its Articles of Association by special resolution in such a
manner that they no longer include the restrictive provisions of Section
3(1)(iii).
(b) Alteration of name of the company by special resolution by deleting the word
private.
(c) Filing of copy of special resolution along with explanatory statement in e-
Form No. 23 along with fee prescribed under Schedule X to the Companies
Act.


(d) Filing of prospectus or statement in lieu of prospectus with the Registrar.
(e) Increase the number of members to atleast seven and the number of
directors to atleast three.
(f) Enhancement of paid-up capital to atleast rupees five lakhs or such higher
paid-up capital as may be prescribed.
(ii) Conversion by default
Under Section 43 of the Companies Act, 1956, if a private limited company fails
to comply with any of the four restrictive provisions required by Section 3(1)(iii) to be
incorporated in its articles, the company ceases to be a private company and ceases
to have the privileges and exemptions conferred on it by the Act as a private
company. It becomes a public company and all the provisions of the Act applicable to
such companies become applicable to it. However the Company Law Board
1
/Central
Government
2
has been vested with power to grant relief in suitable cases where it is
satisfied that the infringement of the conditions was accidental and it is just and
equitable to grant relief.
4. PRIVATE COMPANY (WHICH IS A SUBSIDIARY OF PUBLIC COMPANY)
DEEMED TO BE A PUBLIC COMPANY
On and from the commencement of the Companies (Amendment) Act, 2000, a
private company which is a subsidiary of a public company, is treated as a public
company by virtue of change in the definition of the public company under
Section 3(1)(iv) of the Companies Act, 1956. It places such a private company at the
same level as that of a public company and thereby demarcates between a private
company and a private company which is not a subsidiary of a public company. Such
private companies are deprived of certain privileges and exemptions to which a private
company is entitled.
5. CONVERSION OF A PUBLIC COMPANY INTO A PRIVATE COMPANY
A public company can be converted into a private company only after the
approval of the Central Government. It cannot be treated as a private company till the
Central Government accords its approval.
Conversion of a public company into a private company will require:
(i) Passing of a special resolution authorising the conversion and altering the
Articles so as to include the matters specified in Section 3(1)(iii).
(ii) Changing the name of the company by special resolution as required by
Section 21.
(iii) Obtaining the approval of the Central Government as required by Section
31. Proviso to Section 31(1) provides that no alteration made in the Articles
which has the effect of converting a public company shall have effect unless
such alteration has been approved by the Central Government.

1
. Existing.
2
. Proposed.


(iv) Filing of printed copy of the articles as altered within one month of the
receipt of the approval of the Central Government with the Registrar of
Companies.
6. COMMENCEMENT OF BUSINESS
A private company or a company having no share capital may commence
business and exercise its various powers immediately after it is incorporated. Once it
has received its Certificate of Incorporation, nothing further is required.
A public company, on the other hand, must obtain a certificate of commencement
of business from the Registrar before it can commence business or exercise its
borrowing powers. In order to obtain this certificate, the company must comply with
Section 149 of the Companies Act. If the company has issued a prospectus then
Section 149(1) applies and if it has not issued a prospectus, Section 149(2)
applies.
A public company having share capital, must obtain certificate to commence
business from the Registrar of Companies before it commences its business or
exercise its borrowing powers. In order to obtain this certificate, the company must
comply with the provisions of the Section 149 of the Companies Act, 1956.
Commence any business does not mean merely the business for which the
company was started, but it includes the power to borrow and any transaction
including sale, and purchase of property, etc. [Kishangarh Electric Supply Co., Ltd. v.
United State of Rajasthan, AIR 1960 Raj. 49]. But Commencement of business
does not include taking of preliminary steps, entering into provisional contracts and
allotment of shares.
The certificate is conclusive evidence that a company is entitled to commence
business.
Once a certificate to commence business has been issued to a company a writ
cannot be issued to cancel the certificate of a company under the Companies Act,
1956 [Muluk Mohamed v. Capital Stock Exchange Kerala Ltd. (1991) 72 Com Cases
333 (Ker)].
In case of a private company, there is no requirement to obtain a certificate to
commence business. It can start business immediately on its incorporation.
The effect of this section is to make the Public company, not bound by any
contract or transaction until and unless the company is entitled to commence
business. [See Re Otto Electrical Manufacturing Co., (1905) Ltd., Jenkins Claim
(1906) 2 Ch. 390].
A contract made before incorporation of a company will not bind the company
unless a new contract embodying the terms of the old one or adopting the old one is
made afresh. [See Natal Land and Colonisation Co. v. Pauline Colliery and
Development Syndicate, 1904 AC 120].
In case of a Public limited company, contracts entered into by the company itself
after incorporation will become binding on the company only on its becoming entitled


to commence business. The expression provisional, means that the contract will not
be binding on the company until the certificate of commencement of business is
granted by the Registrar. If it is liable to be avoided on grounds of fraud or
misrepresentation, the company may question its validity.
Where the company has issued a prospectus
Section 149(1) provides that if a company having a share capital has issued a
prospectus inviting public to subscribe for its shares, it shall not commence any
business or exercise any borrowing powers unless:
(a) shares held subject to the payment of the whole amount thereof in cash
have been allotted to an amount not less in the whole than the minimum
subscription.
(b) every director of the company has paid to the company, on each of the
shares taken or contracted to be taken by him and for which he is liable to
pay in cash, a proportion equal to the proportion payable on application and
allotment on the shares offered for public subscription.
(c) no money is, or may become, liable to be repaid to applicants for any shares
or debentures which have been offered for public subscription by reason of
any failure to apply for, or to obtain, permission for the shares or debentures
to be dealt in on any recognised stock exchange; and
(d) there has been filed with the Registrar a duly verified declaration by one of
the directors or the secretary, or where the company has not appointed a
secretary, a secretary in whole-time practice, in the prescribed form (e-Form
No. 19) that clauses (a), (b) and (c) mentioned above have been complied
with.
Where the company has not issued a prospectus
If a public company having share capital has not issued a prospectus,
Section 149(2) requires that it shall not commence any business or exercise any
borrowing powers unless:
(a) it has filed with the Registrar a statement in lieu of prospectus;
(b) every director of the company has paid to the company on each of the
shares taken or contracted to be taken by him and for which he is liable to
pay in cash, the same proportion as is payable on application and allotment
on the shares payable in cash;
(c) there has been filed with the Registrar duly verified declaration by one of the
directors or the secretary or where the company has not appointed a
secretary, a secretary in wholetime practice in the prescribed form (e-Form
No. 20), that clause (b), as stated above, has been complied with.
When the company has complied with the aforesaid conditions, the Registrar of
Companies will issue a certificate to commence business.
Section 149 of the Companies Act further provides for penalty. If any company
commences business or exercises borrowing powers in contravention of this Section,
then every person who is in default shall be liable to a fine which may extend to


Rs. 5,000/- for every day of default.
The certificate to commence business entitles the company to commence
business given in the main objects clause of the Memorandum of Association. No
business given in the other objects clause can be commenced without obtaining
prior approval of the shareholders by way of special resolution. However, the Central
Government, may on an application made by the Board of directors, allow a company
to commence business in the other objects clause, even after an ordinary resolution
is passed by the company in general meeting.
7. COMMENCEMENT OF NEW BUSINESS BY AN EXISTING COMPANY
Section 13 requires that every company formed on or after October 15, 1965
must state in its memorandum (i) the main objects to be pursued by the company on
its incorporation and objects incidental or ancillary to the attainment of the main
objects; (ii) other objects not included in (i) above, separately. Section 149 prohibits a
company from commencing any business stated under other objects without
obtaining the prior approval of the shareholders in general meeting by a special
resolution. It also requires the filing with the Registrar a declaration in e-Form
No. 20A verified by one of the directors or the secretary or where the company has
not appointed a secretary, a secretary in whole-time practice, that the approval by
special resolution has been given by the company in general meeting. The Central
Government, may, however, on application by the Board of directors allow the
company to commence new business, even if the special resolution is not passed by
the company in general meeting, but passed by a simple majority [Section 149(2B)].
In this connection, the Department of Company Affairs now Ministry of Corporate
Affairs, has clarified that new business means a business which is not germane to the
existing business carried on by the company. The guiding criterion, therefore, is
whether the new activity is germane to the original business or not. In case the reply
is yes, no special resolution is necessary and vice versa.

LESSON ROUND-UP
Preliminary contracts are contracts purported to be made on behalf of a company
before its incorporation.
A company cannot ratify a pre-incorporation contract, but it is open for the
company to enter into a new contract after its incorporation to give effect to a
contract made before its formation.
In case of a public company, contracts made after incorporation but before the
grant of certificate of commencement of business are provisional and are not
binding on the company until the company is entitled to commence business on
the grant of the certificate. There is no need for provisional contracts in the case
of a private company.
Only those contracts which are intra vires or within the powers of the company
will be valid and binding. Where a contract is intra vires the company but ultra
vires the directors, the company may be liable and may even ratify it.
Pursuant to Section 147(1)(b), every company shall have its name engraved in
legible characters on its seal.
Conversion of a private company into a public company can be grouped as
conversion by choice or volition and by default.
On and from the commencement of the Companies (Amendment) Act, 2000, a


private company which is a subsidiary of a public company, is treated as a public
company.
A public company can be converted into a private company only after the
approval of the Central Government.
A private company or a company having no share capital may commence
business and exercise its various powers immediately after it is incorporated. A
public company, on the other hand, must obtain a certificate to commence
business from the Registrar before it can commence business or exercise its
borrowing powers.
The certificate is conclusive evidence that a company is entitled to commence
business.
The certificate to commence business entitles the company to commence
business given in the main objects clause of the Memorandum of Association.
Where a company having a share capital has issued a prospectus inviting public
to subscribe for its shares or has not issued a prospectus, Sections 149(1) and
(2), respectively require that it shall not commence any business or exercise any
borrowing powers unless complying with the provisions provided therein.
For commencement of new business by an existing company, the guiding
criterion is whether the new activity is germane to the original business or not. In
case the reply is yes, no special resolution is necessary and vice versa.
SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to the questions are not be
submitted for evaluation).
1. (a)Discuss the legal effects of pre-incorporation contracts and provisional
contracts.
(b)A company cannot ratify a pre-incorporation contract though it is open to it to
enter into fresh contract Discuss.
2. A, a furniture dealer, entered into a contract with the company for the
furnishing of the offices of the company. The company went into liquidation
before it could obtain certificate of commencement of business. Can A
claim in the winding-up for the price of the furniture supplied to the
company?
3. What are the requirements for conversion of a public company into a private
company?
4. Can contracts before incorporation be enforced against the company?
5. State the provisions for conversion of a private company into a public
company.
6. Write short notes on:
(a)Pre-incorporation contracts;
(b)Commencement of business;
(c)Common Seal;
(d)Conversion by default under Section 43 of the Companies Act, 1956.

Suggested Readings:
1. A Guide to Companies Act A. Ramaiya
2. Company Law & Practice A.K. Majumdar & G.K. Kapoor


STUDY VI
FINANCIAL STRUCTURE AND MEMBERSHIP-I
CONCEPT OF CAPITAL AND FINANCING OF COMPANIES

LEARNING OBJECTIVES
This lesson explains the concept of capital and various sources of capital. It gives the
meaning of shares and different kinds of shares. The lesson also gives provisions
regarding issue of shares at premium and discount. Provisions for issue of sweat
equity shares, bonus shares, rights issue, and employee stock option scheme under
the Companies Act as well as SEBI guidelines are explained herein.
At the end of the lesson, you should be able to understand:
Meaning of the term capital and its classification.
Meaning and nature of shares, kinds of shares viz., equity share capital and
preference share capital, comparison between equity and preference shares.
Issue of sweat equity shares.
Various sources of capital.
SEBI (Disclosure and Investor Protection) Guidelines, 2000.
Issue of shares/securities at premium/discount.
Further issue of shares, right issue, bonus shares.
Employee stock option scheme.
SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme)
Guidelines, 1999.
SEBI (Issue of Sweat Equity) Regulations, 2002.

1. MEANING OF THE TERM CAPITAL
The term Capital has variety of meanings. It may mean one thing to an
economist, one to an accountant, while another to a businessman or a lawyer. A
layman views capital as the money, which a company has raised by issue of its
shares. It uses this money to meet its requirements by way of acquiring business
premises and stock-in-trade, which are called the fixed capital and the circulating
capital respectively.
The phrase loan or borrowed capital is sometimes used to mean money
borrowed by the company and secured by issuing debentures. This, however, is not
the proper use of the word capital.
In relation to a company limited by shares, the word capital means the share
capital i.e., the capital in terms of rupees divided into specified number of shares of a
fixed amount each. For e.g. share capital of a company is Rs. 1,00,000 which can be
divided into 10,000 shares of Rs. 10 each or 1,000 shares of Rs. 100 each,
whichever is feasible to the company.
Share capital is not an essential clause for the formation of a company under the
Companies Act but where the memorandum provides for Share Capital, it is
synonymous with the term Capital and the memorandum must state the amount of
168


capital and its division into various types, number and value of shares. Companies
limited by guarantee or unlimited companies or companies u/s 25 need not have
share capital.
2. USE OF THE WORD CAPITAL IN DIFFERENT SENSES
In Company Law, the Capital is the share capital of a company, which is
classified as:
(a) Nominal, Authorised or Registered Capital: This is the sum stated in the
memorandum of association of a company limited by shares as the capital of
the company with which it is registered. It is the maximum amount which the
company is authorized to raise by issuing shares. This is the capital, on which
it had paid the prescribed fee at the time of registration, hence also called
Registered Capital. As and when this is increased, fees for such increase will
have to be paid to the Registrar in accordance with table in Schedule X
appended to the Companies Act. This is divided into shares of uniform
denominations. The amount of nominal capital is fixed on the basis of the
projections of fund requirements of the company for its business activities.
(b) Issued Capital: It is that part of the authorised or nominal capital which the
company issues for the time being for public subscription and allotment. This
is computed at the face or nominal value.
(c) Subscribed Capital: It is that portion of the issued capital at face value which
has been subscribed for or taken up by the subscribers of shares in the
company. It is clear that the entire issued capital may or may not be
subscribed.
(d) Called up Capital: It is that portion of the subscribed capital which has been
called up or demanded on the shares by the company e.g., where Rs. 5 has
been called up on each of 40,000 shares of a nominal value of Rs. 10, the
called up capital is Rs. 2,00,000.
(e) Uncalled Capital: It is the total amount not yet called up or demanded by the
company on the shares subscribed, which the shareholders are liable to pay
as and when called, e.g., in the above case, uncalled capital is Rs. 2,00,000.
(f) Paid-up-Capital: It is the part of the total called up amount which is actually
paid by the shareholder e.g., in (d) above, if only Rs. 1,90,000 is actually
paid by the shareholders the paid-up capital is taken as Rs. 1,90,000 only.
(g) Unpaid Capital: It is the total of the called-up capital remaining unpaid i.e.,
Rs. 10,000 from (f) above or the difference between called up and paid-up
capital.
(h) Reserve Capital: It is that part of the uncalled capital of a company which the
limited company has decided by special resolution in terms of Section 99 of
the Companies Act, 1956, not to call except in the event and for the purpose
of the company being wound up. For instance, in the above example, out of
the Rs. 5 per share uncalled capital, Rs. 2 per share may be resolved to be
kept as reserve capital. (Reserve capital should not be confused with capital
reserve, which is created out of profits).


(i) Capital Reserve: Capital Reserve is created out of profits or earnings which
are not ordinarily distributed among shareholders of the company as
opposed to revenue reserve which is free for distribution to members.
Statutory Capital Reserves are the securities premium account and the
capital redemption reserve account. Non-Statutory Capital Reserve may
arise in many ways, e.g., where a fund is set aside out of the profits to
replace assets which are wearing out, such as heavy machinery, or where
reserve is created out of profits made on sale or revaluation of assets.
Reserve created out of revaluation of assets is also known as capital
reserve.
(j) Capital Assets: These assets constitute fixed capital and circulating or
working capital. Fixed capital assets comprises of assets acquired for
retention and use, e.g., building and machinery. Circulating or working
capital assets consists of assets manufactured or acquired for sale at a
profit.
(k) Preference and Equity Share Capital: The share capital of a public company
may consist of only two kinds of shares-preference shares and equity
shares. Equity share capital may be with similar rights or with different rights
as to dividend, voting or otherwise in accordance with the Companies (Issue
of Share Capital with Differential Voting Rights) Rules, 2001. A preference
share has a preference in regard to payment of fixed amount of dividend or
fixed rate of dividend and preferential right of the repayment of capital in the
event of winding up of company. With regard to payment of dividend,
preference shares may be cumulative or non-cumulative. Equity
shareholders are entitled to the residue of the divisible profits, if any, after
the preference shareholders have received their fixed rate of dividend
(Section 85).
(l) Fixed and Circulating Capital: Fixed capital comprises of that part of capital
which is invested in fixed assets acquired for retention and use, e.g., land,
buildings, plant and machinery, whereas circulating or floating capital is that
part of capital which is invested in acquiring current assets like stock of
goods, bills of exchange, cash, etc. It is required for use in the day-to-day
business operations and keeps on circulating.
(m) Working Capital: Working Capital is represented by the excess of current
assets over current liabilities.
(n) Loan or Debenture Capital: It is the capital raised by a company by the issue
of debentures. It is a borrowing and not a capital in the true sense of the term.
It is the money borrowed and so is a debt due by the company. The debenture
holders are, therefore, the creditors of the company and not shareholders.
3. MEANING AND NATURE OF A SHARE
Section 2(46) of the Act defines a share as a share in the share capital of a
company, and includes stock except where a distinction between stock and shares is
expressed or implied. In Borlands Trustee v. Steel Bros., (1901) 1 Ch. 279, Farewell


J., defined share as the interest of a shareholder in the company measured by a sum
of money, for the purpose of liability, in the first place, and of dividend in the second,
but also consisting of a series of mutual covenants entered into by all the
shareholders inter se in accordance with the Companies Act.
In the Commissioner of Income-tax v. Standard Vaccum Oil Company, (1966) 1
Comp. LJ 187 (S.C.), the Supreme Court of India approved the above definition of
share wherein it has observed By a share in the company is meant not any sum of
money but an interest measured by a sum of money and made up of diverse rights
conferred on its holders by the articles of the company which constitute between him
and the company.
Stating differently, a share is a right to participate in the profits made by a
company, while it is a going concern and declares a dividend, and in the assets of
company when it is wound up. [Bacha Guzdar v. CIT 57 Bom. L.R. 617 (SC)].
In its nature, a share is not a sum of money but a bundle of rights and liabilities; it
is an interest measured by a sum of money. These rights and liabilities are regulated
by the articles of a company. In India, a share is regarded as goods. Section 82 of the
Companies Act provides that a share or other interest of any member in a company is
a movable property transferable in the manner provided by the articles of the
company. According to the Sale of Goods Act, 1930, Goods means any kind of
movable property other than actionable claim and money, and includes stock and
shares. According to Section 83 of the Companies Act, 1956 each share in a
company having a share capital shall be distinguished by its appropriate number but
this provision shall not apply to shares held with depository.
4. KINDS OF SHARES
Section 86 of the Companies Act, 1956 as amended by the Companies
(Amendment) Act, 2000 permits a company limited by shares to issue two classes of
shares, namely:
(a) Equity share capital
(i)with voting rights; or
(ii)with differential rights as to dividend, voting or otherwise in accordance with
such rules and subject to such conditions as may be prescribed.
(b) Preference Share Capital
The amendment enables companies to issue a variety of equity shares with
differential rights etc. to meet the varied requirements of investors. Consequent upon
the substitution of Section 86 with new section empowering companies to issue
shares with differential rights, Section 88 prohibiting issue of shares with
disproportionate rights has been deleted.
The Companies (Amendment) Act, 2000 has, by substituting Section 86 of the
Act, empowered companies to issue equity share capital with differential rights as to
dividend, voting or otherwise in accordance with the Companies (Issue of Share
Capital with Differential Voting Rights) Rules, 2001.


Pursuant to these Rules, a company limited by shares may issue shares with
differential rights as to dividend, voting or otherwise if it satisfies the condition laid
down in Rule 3, which include inter alia:
(i) it has distributable profits in the three financial years preceding the year in
which it is decided to issue such shares;
(ii) it has not defaulted in the filing of annual accounts and annual returns in
those three preceding financial years;
(iii) it has not failed to repay its deposits or interest or redeem debentures on
due dates or to pay dividend or to meet investors grievances;
(iv) the articles of the company authorise such an issue;
(v) shareholders approval at a general meeting has been obtained and through
Postal Ballot in case of a listed company;
(vi) it has not been convicted for an offence under SEBI Act, 1992; SCRA, 1956;
FEMA, 1999;
(vii) the explanatory statement to the notice states the matters as stipulated in
Rule 3(9).
Also, such a company is required to maintain a register as under Section 150 of
the Act, to include particulars of differential rights to which the holder is entitled.
The text of these Rules is given hereunder:
COMPANIES (ISSUE OF SHARE CAPITAL WITH DIFFERENTIAL
VOTING RIGHTS) RULES, 2001
[Issued by the Ministry of Law, Justice and Company Affairs, (Department of
Company Affairs) Vide F.No. 1/13/2000.-CL.V; Published in the Gazette of India
Extraordinary Part II, Section 3, Sub-section (i) dated 9-3-2001]
NOTIFICATION
G.S.R. 167 (E) In exercise of the powers conferred by sub-clause (ii) of clause (a)
of Section 86 read with clause (a) and (b) of Sub-section (1) of Section 642 of the
Companies Act, 1956, the Central Government hereby makes the following rules,
namely:
1. Short title and commencement
(1) These rules may be called the Companies (Issue of Share Capital with
Differential Voting Rights) Rules, 2001.
(2) They shall come into force on the date of their publication in the Official
Gazette.
2. Definitions
(1) In these rules, unless the contexts otherwise requires
(a)Act means the Companies Act, 1956 (1 of 1956),
(b)differential voting rights includes rights as to dividend or voting.
(c)financial year means financial year as defined under clause (17) of Section 2
of the Act.


(2) Words and expressions used and not defined in these rules but defined in
the Companies Act, 1956 shall have the same meaning respectively
assigned to them in that Act.
3. Conditions: Every company limited by shares may issue with differential rights as
to dividend, voting or otherwise, if
(1) The company has distributable profits in terms of Section 205 of the
Companies Act, 1956 for preceding three financial years preceding the year
in which it was decided to issue such shares.
(2) The company has not defaulted in filing annual accounts and annual returns
for three financial years immediately preceding the financial year of the year
in which it was decided to issue such share.
(3) The company has not failed to repay its deposits or interest thereon on due
date or redeem its debentures on due date or pay dividend.
(4) The Articles of Association of the company authorises the issue of shares
with differential voting rights.
(5) The company has not been convicted of any offence arising under,
Securities Exchange Board of India Act, 1992, Securities Contracts
(Regulation) Act, 1956, Foreign Exchange Management Act, 1999.
(6) The company has not defaulted in meeting investors grievances.
(7) The company has obtained the approval of shareholders in General Meeting
by passing resolution as required under the provision of sub-clause (a) Sub-
section (1) of Section 94 read with Sub-section (2) of the said section.
(8) The listed public company obtained approval of shareholders through Postal
Ballot.
(9) The notice of the meeting at which resolution is proposed to be passed is
accompanied by an explanatory statement stating
(a)the rate of voting right which the equity share capital with differential voting
right shall carry;
(b)the scale or in proportion to which the voting rights of such class or type of
shares will vary;
(c)the company shall not convert its equity capital with voting rights into equity
share capital with differential voting rights and the shares with
differential voting rights into equity share capital with voting rights;
(d)the shares with differential voting rights shall not exceed 25% of the total
share capital issued;
(e)that a member of the company holding any equity share with differential voting
rights shall be entitled to bonus shares, right shares of the same class;
(f)the holders of the equity with different voting rights shall enjoy all other rights
to which the holder is entitled to excepting right to vote as indicated in
(a) above.
4. Register: Every company referred to in Rule 3 shall maintain a registrar as
required under Section 150 of the Act containing the particulars of differential rights to
which the holder is entitled to.


5. PREFERENCE SHARES OR PREFERENCE SHARE CAPITAL
Section 85(1) of the Companies Act, 1956 provides that a preference share or
preference share capital is that part of share capital which fulfills both the following
requirements:
(a) With respect to dividend, it carries a preferential right to be paid a fixed
amount or an amount calculated at a fixed rate, which may be either free of
or subject to income-tax.
(b) With respect to capital, it carries on winding up or re-payment of capital a
preferential right to be repaid the amount of the capital paid-up or deemed to
have been paid-up whether or not there is preferential right to the payment
of either or both of the following amounts, namely:
(i)any money remaining unpaid, in respect of the amount specified in clause (a)
up to the date of winding up or re-payment of capital; and
(ii)any fixed premium or premium on any fixed scale specified in the
memorandum or articles of the company.
6. TYPES OF PREFERENCE SHARES
Preference shares may be of various types, namely:
(a) Participating or non-participating: Participating preference shares are those
shares which are entitled to a fixed preferential dividend and, in addition,
they carry a right to participate in the surplus profits along with equity
shareholders after dividend at a certain rate has been paid to equity
shareholders. For example, after 20% dividend has been paid to equity
shareholders, the preference shareholders may share the surplus profit
equally with equity shareholders. Again in the event of winding up, if after
paying back both the preference and equity shareholders there is still any
surplus left then the participating preference shareholders get additional
share in the surplus assets of the company. Unless expressly provided,
preference shareholders get only the fixed preferential dividend and nothing
more. The right to participate may be given either in the memorandum or
articles or by virtue of their terms of issue.
(b) Cumulative and non-cumulative shares: With regard to the payment of
dividends, preference shares may be cumulative or non-cumulative. A
cumulative preference share confers a right on its holder to claim fixed
dividend of the past and the current year(s) and out of future profits. The
dividend keeps on accumulating until it is fully paid. The non-cumulative
preference share gives right to its holder to a fixed amount or a fixed
percentage of dividend out of the profits of each year. If no profits are
available in any year, the shareholders get nothing, nor they can claim,
unpaid dividend in any subsequent year.
Preference shares are cumulative unless expressly stated to be non-
cumulative. Dividends on preference shares, like equity shares, can be paid
only out of profits.
(c) Redeemable and irredeemable Preference Shares: Subject to an authority in
the articles of association, a public limited company may issue redeemable


preference shares to be redeemed either at a fixed date or after a certain
period of time during the life time of the company provided the company
complied with the following conditions laid down in Section 80 of the Act.
(i)the articles must provide for the issue of such shares;
(ii)they may be redeemed only out of profits available for dividend or out of the
proceeds of a fresh issue of shares made for the purpose of redemption;
(iii)if premium is payable on redemption, it must have been provided for out of
profits or out of companys securities premium account, before the
shares are redeemed;
(iv)no such shares can be redeemed unless they are fully paid;
(v)where the shares are redeemed otherwise than out of the proceeds of the
fresh issue, a sum equal to the nominal amount of the shares redeemed
shall be transferred out of profits which would otherwise have been
available for dividend, to the Capital Redemption Reserve Account.
This fund may also be applied by the company in paying up unissued
shares of the company to be issued to the members of the company as
fully paid shares.
It may be noted that redemption of preference shares in pursuance of this section
is not to be taken as reducing the amount of the authorised capital of the company.
Provisions of the Act with regard to reduction of capital are not required to be
complied with. Also, where a company has redeemed preference shares, it has the
power to issue new shares upto the nominal amount of the shares redeemed with the
result the share capital of the company shall not be deemed to have been increased
with the issue of new shares. It may be further noted that notice of redemption of
preference shares must be sent to the Registrar under Section 95 of the Act.
The Companies (Amendment) Act, 1996 has however prohibited the issue of any
preference share which is irredeemable or is redeemable after the expiry of the
period of twenty years from the date of its issue.
According to Section 80A(1) of the Companies Act, all preference shares which
are irredeemable, shall be redeemed by the company within a period not exceeding
five years from such commencement, or which is not redeemable before the expiry of
ten years from the date of issue thereon in accordance with the terms of its issue and
which had not been redeemed before such commencement, shall be redeemed by
the company on the date on which such share is due for redemption or within a
period not exceeding ten years from such commencement, whichever is earlier.
Where, however, a company is not in a position to redeem any such shares
(henceforth called unredeemed preference shares) within the period mentioned
above and to pay the dividend due thereon, it may with the consent of the Company
Law Board, on a petition issue further redeemable preference shares (in other words,
make a fresh issue) equal to the amounts due (including the dividend due) and on
issue of such further shares the unredeemed preference shares shall be deemed to
have been redeemed. Default in complying with the provisions of this Section makes
the company punishable with fine extending to Rs. 10,000 for every day during which
such default continues and every officer of the company in default shall be
punishable with imprisonment for a term extending upto 3 years and also to fine.


The Amendment Act of 1988 introduced a new Section 80A which provides for
the compulsory redemption of irredeemable preference shares existing before the
commencement of the Companies (Amendment) Act, 1988. Therefore, Section 80A
has no relevance for shares issued after coming into force of the Amendment Act,
1988.
7. EQUITY SHARES
In accordance with the provisions of Section 85(2) of the Companies Act, Equity
Share Capital means with reference to any such company, any share capital which
is not preference share capital. Thus, a share or share capital which does not satisfy
the definition of preference share capital, is equity (ordinary) share capital. Equity
shareholders receive dividends out of profits as recommended by the Board of
directors and as declared by the shareholders in an annual general meeting, only
after due allowance for depreciation has been made and after preference shares, if
any, have been paid their fixed dividend. Under Section 86, equity shares may be
issued with differential rights as to dividend, voting or otherwise in accordance with
the Companies (Issue of Share Capital with Differential Voting Rights) Rules 2001.
Subject to the provisions of Section 87 of the Companies Act, the equity
shareholders are entitled to voting rights in proportion to the paid-up equity capital,
whereas preference shareholders have a right to vote only on resolution placed
before the company which directly affects the rights attached to their preference
shares. However, holders of preference shares can vote on every resolution placed
before the general meeting, in the case of cumulative preference shares, where
dividend is not paid for more than two years, and in the case of non-cumulative
preference shares, where dividend is not paid for a period of two years immediately
preceding the meeting or for any three years in the preceding six years.
8. PREFERENCE SHARES COMPARED WITH EQUITY SHARES
(1) Preference shares are more like debentures than like equity shares.
Preference shares are entitled to a fixed rate of dividend like the interest
payable at a fixed rate on the debentures. The rate of dividend on equity
shares depends upon the amount of profit available and the funds
requirements of the company for future expansion etc.
(2) Dividend on the preference shares is paid in preference to the equity shares.
In other words, the dividend on equity shares is paid only after the
preference dividend has been paid.
(3) The preference shares have preference to equity shares with regard to the
payment of capital on winding up.
(4) If the preference shares are cumulative, the dividend not paid in any year
are accumulated and until such arrears of dividend are paid, equity
shareholders are not paid any dividend.
(5) Redeemable preference shares may be redeemed by the company but
equity shares cannot be redeemed except under a scheme involving
reduction of capital or buy back of its own shares.
(6) The voting rights of preference shareholders are restricted. An equity
shareholder can vote on all matters affecting the company but a preference


shareholder can vote only when his special rights as a preference
shareholder are being varied or their dividend is in arrears.
(7) A company may issue rights shares or bonus shares to the companys
existing equity shareholders but it is not so in case of preference
shareholders.
Whether equity shares already issued can be converted into redeemable preference
shares
In Chowgule & Co. (P) Ltd. 1972 Tax LR 2163 the Judicial Commissioner of Goa,
relying on the judgment in the case of St. James Court Estates Ltd. [1994] Ch. 6, held
that where the equity shares are sought to be converted into redeemable preference
shares it was necessary to adopt the process of reduction of capital under Sections
100-104 of the Companies Act, 1956.
9. ISSUE OF SWEAT EQUITY SHARES
Sweat equity shares mean equity shares issued by a company to its employees
or directors at a discount or for consideration, other than cash for providing know-how
or making available right in the nature of intellectual property rights or value additions,
by whatever name called. Section 79A [inserted by the Companies (Amendment) Act,
1999] permits issue of such equity shares to employees or directors in recognition of
their contribution for providing know-how etc. as aforesaid. As the contribution made
by employees/directors results in increased profits to the company for a number of
years, sweat equity shares, provide a new form of adequate return. For the purpose
of issue of sweat equity shares, company means a company which is incorporated,
formed and registered under this Act and includes its subsidiary company
incorporated outside India.
Intellectual property rights are the exclusive property rights, which can be
prevented from use by others without the authorization of the owners and include
patents for invention, industrial designs, copyrights in literacy/scientific etc. matters,
registered or pending trade marks etc.
Value additions refer to the increase in value of companys products etc. in
economic terms, which is attributable to the efforts of an employee or a director, in
any manner.
Notwithstanding anything contained in Section 79, a company can issue sweat
equity shares, of a class of shares already issued, if the following conditions are
satisfied:
(i) the issue has been authorised by a special resolution passed by the
company in the general meeting.
(ii) the following are clearly specified in the resolution:
(a)number of shares
(b)current market price
(c)consideration, if any
(d)class or classes of directors or employees to whom such equity shares are to


be issued.
(iii) as on the date of issue, atleast one year should have elapsed from the date
on which the company was entitled to commence business.
(iv) a company whose shares are listed on a recognized stock exchange issuing
sweat equity shares should comply with the regulations made in this behalf
by SEBI.
(v) a company whose shares are not so listed should issue sweat equity shares
in compliance with the rules made in this behalf.
The text of SEBI (Issue of Sweat Equity) Regulations, 2002 and Unlisted
Companies (Issue of Sweat Shares) Rules, 2003 are given as Annexure.
10. SOURCES OF CAPITAL
Raising of Capital from Promoters
When a company has been registered and has received the Certificate of
Incorporation from the Registrar of Companies, it is ready to raise capital sufficient to
commence business and to carry on its business satisfactorily.
A company raises its share capital in the first instance by issuing shares. Initially
it is mostly raised from the promoters/directors of the company and their friends/
relatives. It may repeat this process of raising capital as many times as required
during its existence and for expansion of its business. A private company obtains the
necessary capital from promoters, friends and relatives by private placements/
arrangement as public at large can not be invited to subscribe to its share capital but
where, large amount of capital is needed to run an enterprise, a public company is
formed and the promoters normally intend to approach the general public for a
greater part of the capital required by the company. It is no doubt possible for a public
company also to raise the necessary capital by Private Placement (not made to more
than forty-nine persons at a time) without inviting the general public to subscribe to its
share capital. But public companies raise major portion of their capital from the public
at large on account of its various advantages.
Raising of Capital from Public
Broadly speaking, there are three methods by which a company can raise capital
from the public:
(a) By issuing a prospectus: This is the most obvious method by which a
company seeks to raise capital from the public. It invites offers from
members of the public to subscribe for its shares or debentures, through the
prospectus. An investor studies the prospectus and, if convinced, about the
prospects of the company, applies for shares.
(b) By an offer for sale or by deemed prospectus: Here the company offers or
agrees to allocate shares or debentures at a price to a financial institution or
an Issue House for sale to the public. The Issuing House publishes a
document called an Offer For Sale with an application form attached
offering to the public shares or debentures for sale at a price higher than
what its holder(s) had paid for them or at par. This document is deemed to
be prospectus in law [Section 64(1)]. On receipt of applications from the


public, the Issue House renounces the allotment of the number of shares
mentioned in the application in favour of the applicant purchaser who
becomes a direct holder of the shares.
(c) By placing of shares: A private limited company is prohibited by the Act and
the Articles from inviting the public for subscription of shares or debentures.
It also need not file a statement in lieu of prospectus. Its shares are issued
privately to a small number of persons known/related to the promoters. A
public company can also raise capital by private placement whereby a
broker or an underwriter finds persons, normally his clients, who wish to buy
the shares. He acts merely as an agent and his function is simply to procure
buyers for the shares, i.e. to place them. Since no public offer is made,
there is no need to issue any prospectus in this case.
Raising Capital from Existing Shareholders
The capital is also raised by issue of rights shares (Section 81) to the existing
shareholders. In this case the shares are allotted to the existing equity shareholders
in proportion to their original shareholding, e.g., two share against every lot of five
shares held by a member. For this purpose, the companies are required to issue
letter of offer as per provisions of the Act and SEBI Guidelines.
Public Issue of Shares
Public Issue of shares means the selling or marketing of shares for subscription
by the public by issue of prospectus. For raising capital from the public by the issue of
shares, a public company has to comply with the provisions of the Companies Act,
1956, the Securities Contracts (Regulation) Act, 1956 including the Rules made
thereunder and the guidelines and instructions issued by the concerned Government
authorities, the Stock Exchanges and the SEBI etc. Management of a public issue
involves coordination of activities and cooperation of a number of agencies such as
managers to the issue, underwriters, brokers, registrar to the issue; solicitors/legal
advisors, printers, publicity and advertising agents, financial institutions, auditors and
other Government/Statutory agencies such as Registrar of Companies, Reserve
Bank of India, SEBI etc. The whole process of issue of shares can be divided into two
(i) pre-issue activities and (ii) post issue activities. All activities beginning with the
planning of capital issue till the opening of the subscription list are pre-issue activities
while all activities subsequent to the opening of the subscription list may be called
post issue activities.
The public issue of securities may be and is usually made:
1. by prospectus, and issuance of securities in physical form, which shall not
be listed on any stock exchange, or
2. by prospectus and issuance of securities in dematerialised format.
Since only the demat shares are being admitted for dealings on the stock
exchanges, hence the securities can be issued only with the purpose of alloting the
shares in Demat Form.
Further, the public issue of securities can be through normal and existing method
and fully or partly by following Book Building method.


11. SEBI (DISCLOSURE AND INVESTOR PROTECTION) GUIDELINES, 2000
SEBI has issued a compendium containing consolidated Guidelines, circulars,
instructions relating to issue of capital effective from January 27, 2000. These
guidelines framed by SEBI are applicable to all public issues by listed and unlisted
companies, all offers for sale and rights issues by listed companies, whose equity
share capital is listed, except in case of rights issues where the aggregate value of
securities offered does not exceed Rs. 50 lakhs. However, in case of rights issue,
where the aggregate value of securities offered is less than Rs. 50 lakhs, the
company shall prepare the letter of offer in accordance with the disclosure
requirements specified in these guidelines and file the same with SEBI for its
information and for being put on the SEBI website. Also, unless it is otherwise stated,
all provisions of the guidelines applicable to public issues by unlisted companies shall
also apply to offers for sale to the public by unlisted companies.
SEBI Guidelines for Issue of Equity Shares
The important aspects of SEBI Guidelines, with reference to issue of equity
shares are as under:
A company cannot issue securities if it has been prohibited from accessing the
capital market by order/direction of SEBI. Also, a company cannot make a public
issue of securities unless it has made an application for listing of those securities in
the stock exchange. A company should enter into an agreement with a depository for
dematerializations of securities already issued or proposed to be issued to the
public/existing shareholders and give an option to subscribers/shareholders/investors
to receive the security certificates or hold securities in dematerialized form with a
depository.
A draft prospectus should be filed by a company with SEBI through an eligible
Merchant Banker, atleast 30 days prior to the filing of prospectus with the Registrar
and if any changes are specified by SEBI, the same should be carried out before
filing the prospectus with ROC.
An unlisted company which is coming out with a public issue should satisfy the
conditions spelt out in the Guidelines. Further, a company should, as on the date of
filing of draft offer document and final offer document should have obtained a credit
rating from at least one credit rating agency registered with SEBI and disclosed in the
offer document. Also, it should not be in the list of willful defaulters of RBI, and should
not have defaulted in payment of interest or repayment of principal in respect of
debentures issued to the public, for a period of more than 6 months. A listed company
should confirm to banking company, corresponding new bank, infrastructure company,
rights issue by listed company etc. are exempt from eligibility norms.
A public or rights issue of equity share or any security convertible into equity
share, unless all the existing partly paid-up shares, have been fully paid or forfeited in
the specified manner. Also, firm arrangements of finance, through verifiable means
towards 75% of the stated means of finance, should have been made.
The public/rights issue by listed companies and public issue by unlisted
companies may be freely priced. Differential pricing may be resorted to for applicants


in firm allotment category, provided the price at which security is offered to them, is
higher than the price at which securities are offered to public.
The issuer company can mention a price band of 20% in the offer documents
filed with the Board and actual price can be determined at a later date before filing of
the offer document with ROCs. In case the Board of Directors has been authorized to
determine the offer price within a specified price band, such price shall be determined
by a resolution to be passed by the Board of Directors. However, in case of listed
companies, the Lead Merchant Bankers should ensure that, a 48 hours notice of the
meeting of the Board of Directors for passing resolution for determination of price is
given to the Designated Stock Exchange. In case of rights issue, issue price or price
band may not be disclosed in the draft letter of offer filed with the Board. Issue price
may be determined anytime before fixation of record date in consultation with
designated stock exchange. In any case, the final offer document should contain only
one price and one set of financial projections, if any.
An eligible company shall be free to make public or rights issue of equity shares
in any denomination determined by it in accordance with Sub-section (4) of
Section 13 of the Companies Act, 1956 and in compliance with the following and
other norms as may be specified by SEBI from time to time.
(i) In case of initial public offer by an unlisted company:
(a)if the issue price is Rs. 500/- or more, the issuer company shall have a
discretion to fix the face value below Rs. 10/- per share subject to the
condition that the face value shall in no case be less than Re. 1 per
share.
(b)if issue price is less than Rs. 500 per share, the face value shall be
Rs. 10/- per share.
(ii) The disclosure about the face value of shares (including the statement about
the issue price being X times of the face value) shall be made in the
advertisement, offer documents and in application forms in identical font size
as that of issue price or price band.
The promoters should contribute not less than 20% of post-issue capital, in case
of a public issue by an unlisted company and in case of public issues by listed
companies, the promoters should participate either to the extent of 20% of the
proposed issue or ensure post-issue shareholding to the extent of 20% of the post-
issue capital.
The entire promoters contribution including premium must be received at least
one day prior to the issue opening date and kept in an escrow account with a
scheduled commercial bank and should be released to the company only along with
public issue proceeds. However, if the promoters contribution is brought before the
public issue and is deployed by the company, it shall disclose the use of such funds
in the cash flow statement.
If the promoters minimum contribution exceeds Rs. 100 crores, the promoters
can bring in Rs. 100 crores before the opening of the issue and balance contribution
in advance on pro rata basis before the calls are made on public.


A copy of the resolution of the Board of Directors of the company, allotting the
shares or convertible instruments to promoters against the moneys received alongwith
a Chartered Accountants certificate certifying that the promoters contribution has been
brought in, alongwith the names and addresses of friends, relatives and associates
who have contributed to the promoters quota alongwith subscription made by each of
them, should be filed with SEBI, before the opening of the issue.
The minimum promoters contribution is subject to lock-in-period of 3 years from
the date of commencement of commercial production or date of allotment in the
public issue whichever is later.
Any contribution made by promoters over and above the minimum contribution
shall be subject to a lock-in-period of 1 year in case of all the companies.
Shares held by promoter(s) which are locked-in, can be transferred to and
amongst promoter/promoter group or to a new promoter or persons in control of the
company, subject to continuation of lock-in in the hands of transferees for the
remaining period and compliance of Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997, as applicable.
Shares held by the person other than the promoters, prior to Initial Public Offering
(IPO), which are locked-in as per these Guidelines, may also be transferred to any
other person holding shares which are locked in subject to continuation of lock-in in
the hands of transferees for the remaining period and compliance of Securities and
Exchange Board of India (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997, as applicable.
The securities which are subject to lock-in shall carry inscription non-
transferable along with duration of specified non-transferable period mentioned in the
face of the security certificate.
The lead merchant banker shall ensure that for public issue, offer documents and
other issue materials are dispatched to various stock exchanges, brokers,
underwriters, bankers etc. in advance and that in case of rights issue, abridged letters
of offer are dispatched to all shareholders atleast one week before the issue opening
date. Every company making a public issue is required to appoint a compliance
officer and intimate the name of the compliance officer to SEBI. Compliance Officer
shall directly liaise with SEBI with regard to compliance with various laws, rules
regulations, and other directives issued by SEBI and investor complaints related
matters.
In case of a public issue by an unlisted company, at least 10% or 25% of the post
issue capital should be offered to the public and a listed company making public
issue should make the net offer of at least 10% or 25% of the issue size to the public.
The calls in which subscription is proposed to be called should be structured in
such a manner that the entire subscription money is called within 12 months from the
date of allotment unless the size of the issue is more than Rs. 500 crores. The
subscription money shall be forfeited if the investor fails to pay the call money within
12 months. Where the issue size exceeds Rs. 500 crores, the company should make
arrangements for monitoring of the use of proceeds of the issue.


The issue must open within 3 months from the date of issuance of the
observation letter by SEBI, if any or within 3 months from 31st day from the date of
filing of draft offer document with SEBI, if no observation letter is issued. However,
this requirement shall not apply to a shelf prospectus. Subscription must be kept
open for at least three working days and not more than 10 working days and
operation of subscription list be disclosed in the prospectus. Rights issue should be
kept open for at least 30 days and not more than 60 days.
The allotment shall be on a proportionate basis within the specified categories
rounded off to the nearest integer subject to a minimum allotment being equal to the
minimum application size as fixed and disclosed by the issuer. Reservation for Retail
individual investor should be made as per the Guidelines.
Irrespective of the level of subscription, the post-issue lead merchant banker
shall ensure the submission of the post-issue monitoring reports in the specified
format and should be submitted within 3 working days from the due dates as given in
the Guidelines.
Chapter XVII of the guidelines empowers SEBI to issue directions to the persons
concerned, the stock exchanges and the intermediaries.
In case of the violation of these guidelines, SEBI has been empowered to direct
the persons concerned to refund any money collected under an issue to the investors
with or without requisite interest as the case may be and not to access the capital
market for a particular period. In respect of violations by stock exchanges, SEBI can
direct the exchange concerned not to list or permit trading in the securities and to
forfeit the security deposit by the issuer company. In case of violations by
intermediaries, SEBI may suspend or cancel the certificate of registration of any
intermediary who fails to exercise due diligence or fails to comply with the obligations
entrusted under the guidelines or who is alleged to have updated any of these
guidelines. SEBI is under an obligation to follow the specified procedures provided
under the regulations dealing with such intermediaries.
For details of public issue of shares by listed companies, students are advised to
refer to the text of SEBI (Disclosure and Investor Protection) Guidelines, 2000 and
study material of Securities Laws, and Regulation of Financial Markets.
12. PREFERENTIAL ISSUE BY EXISTING LISTED COMPANIES
All issues of capital by listed companies whose equity share capital is listed on
any stock exchange by way of equity shares/FCDs/PCDs or any other financial
instruments on a preferential basis which would be converted into or exchanged with
equity shares at a later date to any select group of persons shall comply with the
requirements of Chapter XIII of SEBI (DIP) Guidelines, 2000. Accordingly, the offer
prices of shares issued on preferential basis should not be less than the higher of the
average of the weekly high and low of the closing price of related shares quoted on
the stock exchange during the six months or two weeks preceding the relevant date,
and the relevant date for this purpose refers to a date 30 days prior to the date of
annual general meeting convened in terms of Section 81(1A) of Companies Act, 1956
to consider the proposed issue.
In case of issue of warrants on preferential basis with an option to apply and get


shares allotted, the price of resultant shares will also be determined in the above
manner. However the issuer may adopt relevant date as mentioned above or a date
thirty days prior to the date on which the warrant holders become entitled to apply for
the shares. At least ten percent of price of shares to be issued against warrants should
be paid on the date of their allotment to exercise options for purchasing shares in lieu of
warrants and this is to be adjusted against the price payable subsequently for
acquisition of shares and if the option to acquire shares is not exercised, the whole of
the amount so paid shall stand forfeited. In case of warrants/PCDs/FCDs/or any other
financial instruments with a provision for allotment of equity shares at a future date
either through conversion or otherwise, the currency of instruments shall not exceed
beyond 18 months from the date of issue of relevant instrument. Further, a listed
company shall not make any preferential allotment of equity shares, FCDs, PCDs or
any other financial instrument which may be converted into or exchanged with equity
shares at a later date unless it has obtained the Permanent Account Number of the
proposed allottees.
FCDs/PCDs/Shares acquired by way of conversion of warrants or other financial
instruments issued on preferential basis to promoter/promoter group are subject to
lock-in-period of three years from the date of their allotment. Also, the instruments
allotted on preferential basis to any person including promoters/promoters group shall
be locked-in for a period of one year from the date of allotment. The company shall
place a certificate, duly signed from statutory auditors of company in the general body
meeting of the shareholders, to the effect that the preferential issue is in accordance
with the requirements contained in SEBI guidelines. Copies of the auditors certificate
should also be laid before the meeting of the shareholders convened to consider the
proposed issue.
No listed company can make a preferential issue of instruments to any person
unless the entire shareholding of such person(s) in the company, if any, is held by
him in dematerialized form. The entire pre-preferential shareholding of such allottees
should be locked-in from the relevant date upto six months from the date of
preferential allotment. The locked in shares/instruments may be transferred to and
amongst promoter/promoters group or to a new promoter(s) or person(s) in control of
the company, subject to continuation of lock-in in the hands of transferee and
compliance of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
1997. Allotment pursuant to any resolution passed at a meeting of shareholders
granting consent for preferential issues should be completed within a period of fifteen
days from the date of passing of the resolution or if any Central Government order is
pending, within 15 days of such approval. The equity shares and securities
convertible into equity shares at a later date, so allotted should be made fully paid-up
at the time of meeting.
In case of preferential allotment of shares to promoters, their relatives, associates
and related entities for consideration other than cash, valuation of the assets forming
the consideration should be done by an independent qualified valuer and the
valuation report should be submitted to the exchanges where shares of the issuer
company are listed.
Preferential allotment of shares made to FIIs should also conform with the
Guidelines issued by the Government of India/Board/Reserve Bank of India in
addition to SEBI Guidelines.


The SEBI Guidelines for preferential allotment are not applicable in case of the
following:
(i) further shares allotted in pursuance to the merger and amalgamation
scheme approved by the High Court.
(ii) further shares allotted to a person/group of persons in accordance with
provisions of rehabilitation packages approved by BIFR. However, lock-in-
period continues to apply for shares to promoters/promoter group, unless
otherwise stated in BIFR order.
(iii) further shares are allotted to All India Public Financial Institutions in
accordance with the provisions of the loan agreements signed prior to
August 4, 1994.
13. ISSUE OF SHARES/SECURITIES AT A PREMIUM
A company may issue securities at a premium when it is able to sell them at a
price above par or above nominal value, e.g. Rs. 100 shares at a price of Rs. 110,
thereby earning a premium of Rs. 10 per share irrespective of the fact whether the
securities are listed on Stock Exchange or not (Section 78).
The Companies Act, 1956, does not stipulate any conditions or restrictions
regulating the issue of securities by a company at a premium. However, the
Companies Act does impose conditions regulating the utilisation of the amount of
premium collected on securities. Firstly, the premium cannot be treated as profit and
as such the amount of premium is not available for distribution as dividend. Secondly,
the amount of premium whether received in cash or in kind must be kept in a
separate account, known as the Securities Premium Account. Thirdly, the amount of
premium is to be maintained with the same sanctity as the share capital.
Where a company issues shares at a premium, even though the consideration
may be other than cash, a sum equal to the amount or value of the premium must be
transferred to the securities premium account. [Head (Henry) & Co. Ltd. v. Ropner
Holding Ltd. (1951) 2 All ER 994: (152) Ch 124 (Ch D)].
Securities premium account is to be maintained and the securities premium
cannot be used otherwise than for the specific purposes mentioned in Section 78(2).
[CIT v. Allahabad Bank Ltd., (1969) 39 Com Cases 760, 763: AIR 169 SC 1058].
These purposes are specified in Sub-section (2) and they do not include distribution
by way of dividend. [Brown v. Gaumont British Picture Corpn. Ltd., (1937) 2 all ER
699: (1937) Ch 402].
The annual balance-sheet must disclose the amount of share premium
(securities premium) as a separate item and if it is, partly or wholly disposed of, must
indicate how it is disposed of or exhausted. [See Schedule VI Part I].
Any premium paid does not give the shareholder any preferential rights in case of
a winding up. Monies in the securities premium account cannot be treated as free
reserves, as they are in the nature of capital reserve [See Departmental Circular
No. 3/77 dated 15.4.1977].


In accordance with the provisions of Section 78(2) of the Act, the securities
premium can be utilised only for:
(a) issuing fully paid bonus shares to members;
(b) writing off the balance of the preliminary expenses of the company;
(c) writing off commission paid or discount allowed, or the expenses incurred on
issue of shares or debentures of the company; and
(d) for providing for the premium payable on redemption of any redeemable
preference shares or debentures of the company.
When shares are issued at a premium the provisions of Section 78 of the Act are
to be complied with. Other steps involved in issue of shares are the same as those
for the procedure for issue of shares. A private company and an unlisted company
not making a public issue is at liberty to issue capital at a premium as may be
decided by the Board of directors.
14. ISSUE OF SHARES AT A DISCOUNT
A company may issue shares at a price less than the nominal value of shares i.e.
at a discount. However, the Companies Act discourages issue of shares at a
discount. Allotment of shares at a discount without complying with the stringent
requirements of the Act is ultra vires and the allottees who have been put on the
register of members become liable to pay the full value of their shares.
Section 79 provides that a company may issue shares at a discount provided it
satisfies the following conditions:
(a) the shares must be of the class already issued;
(b) at least one year must have elapsed since the company became entitled to
commence business;
(c) the issue must be authorised by resolution of the general meeting of the
company specifying maximum rate of discount at which shares are to be
issued;
(d) the resolution must be confirmed by the Company Law Board.
(e) the rate of discount cannot exceed 10 per cent or such higher percentage as
is permitted by the Company Law Board in special cases;
(f) the shares must be issued within two months of the sanction by the
Company Law Board or within such extended time as the Company Law
Board may allow; and
(g) every prospectus relating to the issue of shares must contain the particulars
of the discount allowed on the issue of the shares, or of so much of that
discount as has not been written off at the time of issue of the prospectus.
If a default is made then the company, and every officer who is in default shall be
liable to a fine up to Rs. 500.
Note: Rules regarding issue of shares at a discount do not apply to debentures
since debentures, not being in the nature of the share capital, may be issued at a
discount if the ultimate objective is not to convert them into shares.


It may be noted that provision is made for allowing a higher discount than ten per
cent in proper cases, where the permission of the Company Law Board is obtained
therefor.
It is no longer necessary to disclose the issue of such shares or particulars of the
discount allowed thereon, in any balance-sheet of the company, issued subsequent
to the issue of the shares.
Issue of shares in lieu of a bonus payable on debentures out of profits was held
to be a discount issue when profits had not in fact been made [Famatina
Development Corpn. Ltd. v. Bury (1910) AC 439 (HL)]. An agreement to allot one fifth
of every increase of capital as consideration for property acquired was held to be
ultra vires [Hong Kong and China Gas Co. Ltd. v. Glen (1914) 1 Ch 527: (1914-15)
ALL ER Rep 1002]. Where a valid contract is made by the company for allotment of
shares in consideration of specific property or of services of substantial value, the
court will not, as long as the contract stands, examine, whether the consideration is
clearly not equivalent to the nominal value of the shares or is apparently illusory or
colourable the shares have to be treated as issued at a discount. Making the
shareholder liable for full payment [Gardner v. Iredale, (1912) 1 Ch 700 Wragg Ltd.
Re (1897) 1 Ch 796, 836: ALL ER Rep 398 (CA); Hongkong and China Gas
Company Ltd. v. Glen (1914) 1. Ch. 527].
Where shares are issued at a price lower than the market price but above par
value and not below the nominal value of the shares, such an issue is not an issue at
a discount. At a discount means at a price less than the nominal value.
The fact that the market quotation for the shares is already below par would not
justify issuing shares at a price less than the nominal value.
The requirement that the shares issued at a discount should be of a class already
issued is presumably to enable the approving authority to judge by reference to the
market value of the existing shares, whether the proposed discount is reasonable or
not.
And the provision fixing the minimum period of one year after the commencement
of business is probably to ensure that a reasonable time has elapsed in which the
value of existing shares may be established.
Where partly paid shares are forfeited for non payment of further call, if they are
realloted not as partly paid shares but as fully paid shares, the reallotment will
amount to allotment at a discount and will, therefore, be invalid. [Biochemical and
Synthetic Products Ltd. v. ROC, (1962) 32 Com Cases 32 Com Cases 654: AIR 1962
AP 459].
Where shares are issued at a discount contrary to the provisions of the section
79, not only the directors authorising the unathorised issue but also the allotees, if
their names have been entered in the register of members and they have accepted
the allotment, will be liable to the company for the full amount of the shares. Full
value of the shares can be recovered by the liquidator in the winding up of the
company. [Welton v. Saffrey, (1897) AC 299]. Where share certificates have been
issued showing full payment and the shares have been transferred to a bona fide


transferee, the company would have to treat him as a fully paid shareholder and in
such a case the company can receive from the directors an amount equal to the
discount allowed on those shares. [Hirsche v. Sims (1894) AC 654 (PC) See also.
London Trust Co. v. Mackenzie (1893) 62 LJ Ch. 870].
15. FURTHER ISSUE OF SHARES
Section 81 of the Companies Act provides for the issue of Rights Shares and
states that whenever at any time after expiry of two years from the incorporation of a
company or after the expiry of one year from the first allotment of shares, whichever is
earlier, it is proposed to increase the subscribed capital by allotment of further shares,
such shares shall be offered to the existing holders of equity shares in proportion to the
capital paid-up on their shares at the time of further issue. For listed companies, the
information as regards the quantum of such issue and the proportion in which rights
shall be offered shall be supplied to the concerned Stock Exchanges in advance.
The company must give notice to each of the equity shareholders, giving him
option to take the shares offered to him by the company. The shareholder must be
informed of the number of shares he has opted to buy giving him at least 15 days to
decide. If the shareholder does not convey to the company his acceptance of the
companys offer of further shares he shall be deemed to have declined the offer.
Unless the articles of the company otherwise provide, the directors must state in the
notice of offer of rights shares the fact that the shareholder has also the right to
renounce the offer in whole or in part, in favour of some other persons.
If a shareholder has neither renounced in favour of another person nor accepted
the shares himself, the Board of directors may dispose of the shares so declined in
such manner as it thinks would be most beneficial to the company.
Section 81(1A) deals with issue of shares to persons other than existing
shareholders and provides that a company can issue further shares to persons other
than existing shareholders in any manner whatsoever provided
(1) the company in General Meeting passes a special resolution to this effect.
(2) where only an ordinary resolution has been passed, the approval of the
Central Government is obtained by the Board of directors stating that the
proposal is most beneficial to the company.
The restrictions contained in Section 81 of the Act regarding issue of further
shares do not apply to:
(i) a private company;
(ii) increase of the subscribed capital of public company caused by the exercise
of an option attached on debentures issued or loans raised by the company
to convert such debentures or loans into shares of the company or to
subscribe for shares in the company [Section 81(3)].
Provided the terms containing such an option:
(a) have been approved by the Central Government before the issue of
debentures or raising of loans is in conformity with the rules made by the
Government; and


(b) have been approved by a special resolution passed in the general meeting
before the issue of debentures or raising of loans in cases where the
debentures have not issued to or loans raised from the Government or any
institutions specified by the Government.
(c) conversion of part or whole of the debentures issued to or loans raised from
the Government in shares of the company in pursuance of a direction issued
by the Central Government in public interest on such terms and conditions
as appear to be fair and reasonable to the Central Government even if such
debentures/loans do not contain a term providing for option for conversion of
debentures/loans into shares of the company.
Under the Public Companies (Terms of Issue of Debentures and Raising of
Loans with Option to Convert Debentures or Loans into Shares) Rules, 1977 as
modified by Amendment Rules, 1978, the terms of issue of debentures or the term of
raising of loans by a public company which include a term providing for an option to
convert such debentures or loans or any part thereof into shares in the company or to
subscribe for shares in the company shall not require the approval of the Central
Government under clause (a) of the proviso to Sub-section (3) of the Section 81 of
the Act, if such terms conform to the following requirements, namely:
(a) the debentures or loans may be issued or raised either through private
subscriptions or through the issue of a prospectus to the public;
(b) a public financial institution defined in the Act either underwrites or
subscribes or sanctions the whole or part of the issue of debentures or the
raising of loans, as the case may be;
(c) having regard to the financial position of the company the terms of issue of
the debentures or the terms of the loans, as the case may be, the rate of
interest payable on the debentures or loans, the capital of the company, its
loans, liabilities, its reserves, its profits during the immediately preceding five
years and the current market price of shares of the company, as may be
applicable, the financial institutions provide for the terms including the term
providing for an option to convert such debentures or loans or any part
thereof into shares in the company or to subscribe for shares therein, either
at par or at a premium not exceeding twenty-five percent of the face value of
the shares.
This section is intended to cover cases where the directors decide to increase the
capital by issuing further shares within the authorised limit, because it is within that limit
that the directors can decide to issue further shares, unless, of course, they are precluded
from even doing that by the Articles of Association of the company. Accordingly, the
section becomes applicable only when the directors decide to increase the capital within
the authorised limit, by issue of further shares. [Nanalal Zaver v. Bombay Life Assurance
Co. Ltd., AIR 1950 SC 172: (1950) 20 Com Cases 179].
The above judgement was followed by the Supreme Court in Needle Industries
(India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (1981) 51 Com Cases 743
at 816: AIR 1981 SC 1298: (1982) 1 Comp LJ1. The Court pointed out that the
directors of a company must exercise their powers for the benefit of the company. The
directors are in a fiduciary position and if they does not exercise powers for the benefit


of the company but simply and solely for personal aggrandisement and to the detriment
of the company, the court will interfere and prevent the directors from doing so.
The power to issue shares need not be used only when there is a need to raise
additional capital, although this is its primary purpose. The power can be used to
create a sufficient number of shareholders to enable a company to exercise statutory
powers, or to enable it to comply with statutory requirements. [See Needle Industries
(India) Ltd. v. Needle Industries Newey (India) Holding Ltd. (supra).
On the question whether the date of the first allotment is the one on which shares
being part of the issue, are allotted for the first time, the Department of Company
Affairs, now Ministry of Corporate Affairs has clarified that one year specified in the
section is to be counted from the date on which the company has allotted any share
for the first time.
Although the term holders of the equity shares is used in Sub-section (1)(a) and
members in Sub-section (1-A)(b) of Section 81 that the two terms are synonymous
and mean persons whose names are entered in the register of members [Balkrishan
Gupta v. Swadeshi Polytex Ltd. (1985) 58 Com Cases 563: AIR 1985 SC 520]. In
Worldwide Agencies (P) Ltd. v. Margaret T. Desor, (1990) 67 Com Cases 607: AIR
1990 SC 737, it was held that persons who have become entitled to the shares of a
deceased member can exercise all the membership rights of the deceased
irrespective of the fact whether their name is in the register of members or not.
The shares offered to the existing shareholders under Section 81 in proportion to
their respective shareholding are known as rights shares and the whole issue is
called the rights issue. There may be many pending transfers at the time when a
rights issue takes place. This raises the question whether the transferor to apply for
the rights shares for the benefit of the transferee. The Supreme Court considered this
question in Mathalone (R) v. Bombay Life Assurance Co. Ltd. AIR 1953 SC 385:
(1954) 24 Com Cases 1 and said that after the transfer form has been executed the
transferor cannot be compelled to undertake any additional financial burden in
respect of the shares at the instance of the transferee where, after the transfer of
shares, but before the company had registered the transfer, the company offered
rights shares to its members. The Supreme Court held that the transferor could not
be compelled by the transferee to take up on his behalf the rights shares offered to
the transferor and all that he could require the transferor to do was to renounce the
rights issue in the transferees favour.
16. RIGHTS ISSUE
Rights issue as identified in the SEBI Guidelines is an issue of capital under
Section 81(1) of the Companies Act, 1956 to be offered to the existing shareholders
of the company through a letter of offer. A listed company cannot make any issue of
security through a rights issue where the aggregate value of securities including
premium, if any, exceeds Rs.50 lacs, unless it has filed a draft letter of offer with the
Board, through an eligible Merchant Banker, atleast 30 days prior to the filing of letter
of offer with Designated Stock Exchange (DSE). If within 30 days from the date of
filing of draft letter of offer, the Board specifies changes, if any, in the draft letter of
offer, the issuer or lead Merchant Banker should carry out such changes before filing
the draft letter of offer with DSE. In case the aggregate value of the securities offered


is less than Rs.50 lacs, it should be ensured that a letter of offer is prepared in
accordance with disclosure requirements of SEBI guidelines and the same is filed
with SEBI for information and for being put on SEBI website. As in this case, the price
or price band is not necessarily to be disclosed in the draft letter of offer filed with the
Board, the issue price may be determined anytime before fixation of the record date
in consultation with Designated Stock Exchange. The funds collected against rights
issue can be utilized by the issuer company against rights issue only after satisfying
designated stock exchange that minimum 90% subscription has been received.
It should be certified that the requirements with respect to issue of securities in
dematerialized form, partly paid up shares to be made fully paid up, firm
arrangements of finance through verifiable means, pricing by listed companies,
composite issue of capital at differential prices, freedom to determine denomination of
shares, Memorandum of Understanding Inter re allocation of responsibilities of
Merchant Bankers, Competence and Appointment of Intermediaries, further issue of
capital etc. are complied mutatis mutandis, as in the case of public issue.
In a rights issue, the abridged letter of offer should be dispatched to all
shareholders atleast one week before the date of opening of issue except where a
specific request for letter of offer is received from any shareholder.
The minimum subscription in case of rights issue should be ensured as under:
(i) for non-underwritten rights issue
if a minimum subscription of 90% of issue is not received, the entire
subscription should be refunded to applicants within 42 days from the
date of closure of the issue. A delay of more than 8 days after the
specified time shall attract interest as given in section 73 of the
Companies Act, 1956.
(ii) for underwritten rights issue
if a minimum subscription of 90% of issue including devolvement of
underwriters is not received, the entire subscription should be refunded
to applicants within 42 days from the date of issue. A delay of more than
8 days after the specified time shall attract interest as given in section
73 of the Companies Act, 1956.
Withdrawal of rights issue after announcement of record date in relation to such
issue is not permitted. If such withdrawal has been made, no application for listing of
any securities of the company should be made for a minimum period of 12 months
from the record date. However, for the shares resulting from the conversion of
PCDs/FCDs/Warrants issued prior to the announcing of record date in relation to
rights issue listing may be granted by the concerned stock exchanges. It should be
ensured that the quantum of issue through a rights issue (as in case of public issue)
dues not exceed the amount specified in the prospectus/letter of offer.
17. BONUS SHARES
A company may, if its Articles provide, capitalize its profits by issuing fully-paid
bonus shares. The issue of bonus shares by a company is a common feature. When
a company is prosperous and accumulates large distributable profits, it converts


these accumulated profits into capital and divides the capital among the existing
members in proportion to their entitlements. Members do not have to pay any amount
for such shares. They are given free. The bonus shares allotted to the members do
not represent taxable income in their hands. [Commissioner of Income Tax, Madras
v. A.A.V. Ramchandra Chettiar (1964) 1 Mad CJ 281]. Issue of bonus shares is a
bare machinery for capitalizing undistributed profits. The vesting of the rights in the
bonus shares takes place when the shares are actually allotted and not from any
earlier date.
Advantages of Issuing Bonus Shares
1. Fund flow is not affected adversely.
2. Market value of the Companys shares comes down to their nominal value
by issue of bonus shares.
3. Market value of the members shareholdings increases with the increase in
number of shares in the company.
4. Bonus shares is not an income. Hence it is not a taxable income.
5. Paid-up share capital increases with the issue of bonus shares.
Pursuant to the provisions of Section 78 of the Companies Act, 1956, securities
premium account can be used in utilising unissued shares of the company to be
issued to its members as fully-paid bonus shares. Other free reserves created out of
the profits during earlier years like general reserve, capital redemption reserve
account [Section 80(5)], devolvement rebate reserve etc. can be utilised by company
for issue of fully paid bonus shares to its members.
There are no guidelines on issuing bonus shares by private or unlisted
companies. However, the SEBI has issued guidelines for Bonus Issue which are
contained in Chapter XV of the SEBI (Disclosure and Investor Protection) Guidelines,
2000 with regard to bonus issues by listed companies.
When a company has accumulated free reserves and is desirous of bridging the
gap between the capital and fixed assets, it issues bonus shares to its equity
shareholders. Such an issue would not place any fresh funds in the hands of the
company. On the contrary, after a bonus issue it would become necessary for the
company to earn more to effectively service the increased capital. The shareholder
will, however, be benefitted by way of higher return on investment and more number
of shares in their hands.
The following conditions must be satisfied before issuing bonus shares:
(a) Bonus Issue must be authorised by the articles of the company. Such a
provision is generally there in articles of almost all the companies as they
adopt Table A of Schedule 1 of the Act (Regulation 96).
(b) Bonus Issue must be sanctioned by shareholders in general meeting on
recommendation of the Board of directors of the company.
(c) Guidelines issued by SEBI must be complied with.
(d) Authorised Capital must be increased where necessary.
18. SEBI (DISCLOSURE AND INVESTOR PROTECTION) GUIDELINES, 2000


PERTAINING TO BONUS ISSUE
1. Rights of FCD/PCD holders
The proposed bonus issue should not dilute the value or rights of the fully or
partly convertible debentures.
If the conversion of FCD/PCD is pending, the reservation of shares out of bonus
issue is to be made in proportion to the convertible part of FCDs or PCDs. The
shares so reserved may be issued at the time of conversion of such debentures on
the same terms on which the rights or bonus issues were made.
2. Out of Free Reserves
The bonus issue is to be made out of free reserves built out of the genuine profits
or securities premium collected in cash only.
3. Revaluation Reserves
The reserves created by revaluation of fixed assets should not be capitalised.
These reserves are in fact capital reserves. However, if the assets are subsequently
sold and the profits are realised, such profits could be utilised for capitalisation
purposes. In fact the Government has in the past approved issue of bonus shares out
of capital reserves representing realised capital profits.
Although, bonus guidelines do not apply to existing private/closely held and
unlisted companies, the Department of Company Affairs has vide its Circular No. 9/94
dated 6.9.1994 prohibited these Companies from issuing bonus shares out of the
reserves created by revaluation of fixed assets.
4. Bonus Issue not to be in lieu of Dividend
Bonus issue should not be made in lieu of dividend.
5. Fully Paid Shares
If there are any partly paid-up shares, these shares should be made fully paid-up
before the bonus issue is made.
6. No Default in respect of Fixed Deposits/Debentures
The company should not have defaulted in the payment of any interest or
principal in respect of its fixed deposits and interest on debentures or on redemption
of debentures.
7. Statutory Dues of the Employees
The company should not have defaulted in the payment of its statutory dues to
the employees such as contribution to provident fund, gratuity, bonus, minimum
wages, workmens compensation, retrenchment compensation, payments to contract
labour, etc.
8. Implementation of Proposal within Six Months


The bonus issue should be made within a period of six months from the date of
approval of the Board of directors. The company cannot reverse the decision once it
has been taken by the Board of directors.
9. Provision in Articles of Association
The Articles of Association of the Company should provide for capitalisation of
reserves and if not a General Body Meeting of the company is to be held and a
special resolution making provisions in the Articles of Association for capitalisation
should be passed.
10. Authorised Capital
If consequent upon the issue of bonus shares, the subscribed and paid-up capital
of the company exceed the authorised share capital, a General Meeting of the
company should be held to pass necessary resolution for increasing the authorised
capital.
11. Certificate
A certificate duly signed by the issuer company and counter signed by statutory
auditor or by company secretary in practice to the effect that the provisions of the
guidelines have been complied with shall be forwarded to the SEBI.
Steps in Issue of Bonus Shares
A company issuing bonus shares should ensure that the issue is in conformity
with the guidelines for bonus issue laid down by SEBI (Disclosure and Investor
Protection) Guidelines, 2000.
The procedure for issue of bonus shares by a listed company is enumerated
below:
1. Ensure that if conversion of FCDs/PCDs is pending, similar benefit has been
extended to the holders of such FCDs/PCDs, through reservation of shares
in proportion of such convertible part of FCDs/PCDs. The shares so
reserved may be issued at the time of conversion(s) of such debentures on
the same terms on which the bonus issue was made.
2. Ensure that bonus issue has been made out of free reserves built out of the
genuine profits or securities premium collected in cash only.
3. Ensure that reserves created by revaluation of fixed assets are not
capitalised.
4. Ensure that the company has not defaulted in payment of interest or
principal in respect of fixed deposits and interest on existing debentures or
principal on redemption thereof or in respect of the payment of statutory
dues of the employees such as contribution to provident fund, gratuity,
bonus etc.
5. Ensure that the bonus issue is not made in lieu of dividend.
6. There should be a provision in the articles of association of the company
permitting issue of bonus shares; if not, steps should be taken to alter the
articles suitably.


7. The share capital as increased by the proposed bonus issue should be well
within the authorised capital of the company; if not, necessary steps have to
be taken to increase the authorised capital.
8. Finalise the proposal and fix the date for the Board Meeting for considering
the proposal and for authorising the taking up of incidental and attendant
matters.
9. If there are any partly paid-up shares, ensure that these are made fully paid-
up before the bonus issue is recommended by the Board of directors.
10. The date of the Board Meeting at which the proposal for bonus issue is
proposed to be considered should be notified to the Stock Exchange(s)
where the companys shares are listed.
11. Hold the Board Meeting and get the proposal approved by the Board.
12. The resolution to be passed at the General Meeting should also be approved
by the Board in its meeting. The intention of the Board regarding the rate of
dividend to be declared in the year after the bonus issue should be indicated
in the resolution for bonus issue to be passed by members in general
meeting.
13. Immediately after the Board meeting intimate the Stock Exchange(s)
regarding the outcome of the Meeting.
14. SEBI Guidelines provide that the proposal for bonus issue must be
implemented within six months from the date of announcement by the Board
of directors of bonus issue. Thus, the company must make the bonus issue
within six months from the date of the Board Meeting at which the
announcement of the bonus issue is made. The company cannot change
the proposal once it has been announced.
15. Arrangements for convening the general meeting should then be made
keeping in view the requirements of the Companies Act, with regard to
length of notice, explanatory statement etc. Also three copies of the notice
should be sent to the Stock Exchange(s) concerned.
16. Hold the general meeting and get the resolution for issue of bonus shares
passed by the members. A copy of the proceedings of the meeting is to be
forwarded to the concerned Stock Exchange(s).
17. In consultation with the Regional Stock Exchange fix the date for closure of
register of members or record date and get the same approved by the Board
of directors. Issue a general notice under Section 154 of Companies Act in
respect of the fixation of the record date in two newspapers one in English
language and other in the language of the region in which the Registered
Office of the company is situated.
18. Give 42 days notice to the Stock Exchange(s) concerned before the date of
book closure/record date.
19. After the record date process the transfers received and prepare a list of
members entitled to bonus shares on the basis of the register of members
as updated. This list of allottees is to be approved by the Board or any
Committee thereof. The list usually serves as allotment list and on this basis


the allotment is to be made to the eligible members.
20. File return of allotment with the Registrar of Companies within 30 days of
allotment (Section 75 of the Companies Act). Also intimate Stock
Exchange(s) concerned regarding the allotments made.
21. Ensure that the allotment is made within six months of the date on which the
Board of directors approved the bonus issue.
22. Get the share certificates printed, prepared and issued to the allottees as
per the provisions of Companies (Issue of Share Certificates) Rules, 1960.
23. Submit an application to the Stock Exchange(s) concerned for listing the
bonus shares allotted.
19. EMPLOYEE STOCK OPTION SCHEME
The term Employee Stock Option (ESOP) has been defined under Sub-section
(15A) of Section 2 of the Companies Act, 1956, according to which employee stock
option means the option given to the whole-time directors, officers or employees of a
company, which gives such directors, officers or employees the benefit or right to
purchase or subscribe at a future date, the securities offered by the company at a
pre-determined price.
SEBI has issued SEBI (Employee Stock Option Scheme and Employee Stock
Purchase Scheme) Guidelines, 1999 according to which Employee Stock Option
Scheme means a scheme under which the company grants option to its employees
and option means a right but not an obligation granted to an employee in pursuance
of ESOS to apply for shares of the company at a pre-determined price.
The issue of ESOPs would be subject to approval by shareholders through a
special resolution. In cases of employee being offered more than 1% shares, a
specific disclosure and approval would be necessary in the annual general meeting.
A minimum period of one year between grant of options and its vesting has been
prescribed. After one year, the period during which the option can be exercised would
be determined by the company.
The operation of the ESOP Scheme would have to be under the superintendence
and direction of a Compensation Committee of the Board of directors in which there
would be a majority of independent directors. With the specific approval of the
shareholders, the scheme would be allowed to cover the employees of a subsidiary
or a holding company.
20. SEBI (EMPLOYEE STOCK OPTION SCHEME AND EMPLOYEE STOCK
PURCHASE SCHEME) GUIDELINES, 1999
In November 1997, SEBI constituted a Group to review the existing regulations
relating to Employee Stock Options Plans (ESOP) and recommend changes
thereto.
The Group submitted its report in June 1999 and has recommended Guidelines
to be called SEBI (Employee Stock Option Scheme and Employee Stock Purchase
Scheme) Guidelines, 1999. The Guiding Principles for the Group in recommending


the guidelines was the important role that Employee Stock Options play in rewarding
and motivating employees, in attracting and retaining the best talent, and in ensuring
employee commitment and performance. In several knowledge based industries.
Indias competitive strength is derived from the skills and talent of its people and
Employee Stock Options are critical to the success of Indian companies in the global
market place.
The Group also took note of the fact that the typical employee in India is not a
hard-nosed investor. To bring a significant number of employees on board a stock
option scheme, has to be sufficiently attractive to convince the average skeptical
employee. While a liberal stock option scheme would lead to earning dilution for
existing shareholders, it could be beneficial.
The Guidelines as made effective by SEBI since 19th June, 1999 as amended,
are reproduced hereunder:
SEBI (EMPLOYEE STOCK OPTION SCHEME AND EMPLOYEE STOCK
PURCHASE SCHEME) GUIDELINES, 1999 AS AMENDED
The amended guidelines are provided hereunder:
1. Short title and commencement
1.1 These Guidelines have been issued by Securities and Exchange Board of India
under Section 11 of the Securities and Exchange Board of India Act, 1992.
1.2 These Guidelines may be called the Securities and Exchange Board of India
(Employee Stock Option Scheme and Employee Stock Purchase Scheme),
Guidelines, 1999.
2. Definitions
2.1 In these Guidelines, unless otherwise defined:
(1) employee means:
(a)a permanent employee of the company working in India or out of India; or
(b)a director of the company, whether a whole time director or not; or
(c)an employee as defined in sub-clause (a) or (b) of a subsidiary, in India or out
of India, or of a holding company of the company.
(2) employee compensation means the total cost incurred by the company
towards employee compensation including basic salary, dearness allowance, other
allowances, bonus and commissions including the value of all perquisites provided,
but does not include:
(a)the fair value of the option granted under an Employee Stock Option Scheme;
and
(b)the discount at which shares are issued under an Employee Stock Purchase
Scheme.
(2A) employee stock option means the option given to the whole-time directors,
officers or employees of a company which gives such directors, officers or
employees, the benefit or right to purchase or subscribe at a future date, the
securities offered by the company at a predetermined price.


(3) employee stock option scheme (ESOS) means a scheme under which a
company grants employee stock option.
(4) employee stock purchase scheme (ESPS) means a scheme under which
the company offers shares to employees as part of a public issue or otherwise.
(4a) ESOS shares means shares arising out of exercise of options granted
under ESOS.
(4b) ESPS shares means arising out of grant of shares under ESPS.
(5) exercise means making of an application by the employee to the company
for issue of shares against option vested in him in pursuance of the ESOS.
(6) exercise period means the time period after vesting within which the
employee should exercise his right to apply for shares against the option vested in
him in pursuance of the ESOS.
(7) exercise price means the price payable by the employee for exercising the
option granted to him in pursuance of ESOS.
(7a) fair value of an option means the fair value calculated in accordance with
Schedule III.
(8) grant means issue of option to employees under ESOS.
(9) independent director means a director of the company, not being a whole
time director and who is neither a promoter nor belongs to the promoter group.
(9a) intrinsic value means the excess of the market price of the share under
ESOS over the exercise price of the option (including up-front payment, if any).
(10) market price means the latest available closing price, prior to the date of
the meeting of the Board of Directors in which options are granted/shares are issued,
on the stock exchange on which the shares of the company are listed. If the shares
are listed on more than one stock exchange then the stock exchange where there is
highest trading volume on the said date shall be considered.
(11) option grantee means an employee having right but not an obligation to
exercise in pursuance of the ESOS.
(12) promoter means:
(a)the person or persons who are in over-all control of the company;
(b)the person or persons who are instrumental in the formation of the company
or programme pursuant to which the shares were offered to the public;
(c)the person or persons named in the offer document as promoter(s). Provided
that a director or officer of the company if they are acting as such only in
their professional capacity will not be deemed to be a promoter.
[Explanation: Where a promoter of a company is a body corporate, the promoters
of that body corporate shall also be deemed to be promoters of the company.]
(13) promoter group means:


(a)an immediate relative of the promoter (i.e. spouse of that person, or any
parents, brother, sister or child of the person or of the spouse);
(b)persons whose shareholding is aggregated for the purpose of disclosing in the
offer document shareholding of the promoter group.
(14) share means equity shares and securities convertible into equity shares
and shall include American Depository Receipts (ADRs), Global Depository Receipts
(GDRs) or other depository receipts, representing underlying equity shares or
securities convertible into equity shares.
(15) vesting means the process by which the employee is given the right to
apply for shares of the company against the option granted to him in pursuance of
ESOS.
(16) vesting period means the period during which the vesting of the option
granted to the employee in pursuance of ESOS takes place.
All other expressions unless defined herein shall have the same meaning as
have been assigned to them under the Securities and Exchange Board of India Act,
1992 or the Securities Contracts (Regulation) Act, 1956 or the Companies Act, 1956,
SEBI (Disclosure and Investor Protection) Guidelines, or any statutory modification or
re-enactment thereof, as the case may be.
3. Applicability
3.1 These Guidelines shall apply to any company whose shares are listed on any
recognised stock exchange in India.
PART A ESOS
4. Eligibility to participate in ESOS
4.1 An employee shall be eligible to participate in ESOS of the company.
4.2 An employee who is a promoter or belongs to the promoter group shall not be
eligible to participate in the ESOS.
4.3 A director who either by himself or through his relative or through any body
corporate, directly or indirectly holds more than 10% of the outstanding equity shares
of the company shall not be eligible to participate in the ESOS.
5. Compensation Committee
5.1 No ESOS shall be offered unless the disclosures, as specified in Schedule IV are
made by the company to the prospective option grantees and the company
constitutes a Compensation Committee for administration and superintendence of the
ESOS.
5.2 The Compensation Committee shall be a Committee of the Board of directors
consisting of a majority of independent directors.
5.3 The Compensation Committee shall, inter alia, formulate the detailed terms and
conditions of the ESOS including:


(a) the quantum of option to be granted under an ESOS per employee and in
aggregate.
(b) the conditions under which option vested in employees may lapse in case of
termination of employment for misconduct;
(c) the exercise period within which the employee should exercise the option
and that option would lapse on failure to exercise the option within the
exercise period;
(d) the specified time period within which the employee shall exercise the
vested options in the event of termination or resignation of an employee.
(e) the right of an employee to exercise all the options vested in him at one time
or at various points of time within the exercise period;
(f) the procedure for making a fair and reasonable adjustment to the number of
options and to the exercise price in case of corporate actions such as rights
issues, bonus issues, merger, sale of division and others. In this regard
following shall be taken into consideration by the compensation committee:
(i)the number and the price of ESOS shall be adjusted in a manner such that
total value of the ESOS remains the same after the corporate action.
(ii)for this purpose global best practices in this area including the procedures
followed by the derivative markets in India and abroad shall be
considered.
(iii)the vesting period and the life of the options shall be left unaltered as far as
possible to protect the rights of the option holders.
(g) the grant, vest and exercise of option in case of employees who are on long
leave, and
(h) the procedure for cashless exercise of options.
5.4 The Compensation Committee shall frame suitable policies and systems to
ensure that there is no violation of:
(a) Securities and Exchange Board of India (Insider Trading) Regulations, 1992;
and
(b) Securities and Exchange Board of India (Prohibition of Fraudulent and
Unfair Trade Practices relating to the Securities Market) Regulations, 1995,
by any employee.
6. Shareholder approval
6.1 No ESOS can be offered to employees of a company unless the shareholders of
the company approve ESOS by passing a special resolution in the general meeting.
6.2 The explanatory statement to the notice and the resolution proposed to be
passed in general meeting for ESOS shall, inter alia, contain the following
information:
(a) the total number of options to be granted;
(b) identification of classes of employees entitled to participate in the ESOS;
(c) requirements of vesting and period of vesting;
(d) maximum period (subject to clause 9.1) within which the options shall be


vested;
(e) exercise price or pricing formula;
(f) exercise period and process of exercise;
(g) the appraisal process for determining the eligibility of employees to the
ESOS;
(h) maximum number of options to be issued per employee and in aggregate;
(i) a statement to the effect that the company shall conform to the accounting
policies specified in clause 13.1;
(j) the method which the company shall use to value its options whether fair
value or intrinsic value;
(k) the following statement:
In case the company calculates the employee compensation cost using the
intrinsic value of the stock options, the difference between the employee
compensation cost so computed and the employee compensation cost that
shall have been recognized if it had used the fair value of the options, shall
be disclosed in the Directors report and also the impact of this difference on
profits and on EPS of the company shall also be disclosed in the Directors
report.
6.3 Approval of shareholders by way of separate resolution in the general meeting
shall be obtained by the company in case of:
(a) grant of option to employees of subsidiary or holding company and,
(b) grant of option to identified employees, during any one year, equal to or
exceeding 1% of the issued capital (excluding outstanding warrants and
conversions) of the company at the time of grant of option.
7. Variation of terms of ESOS
7.1 The company shall not vary the terms of the ESOS in any manner, which may be
detrimental to the interests of the employees.
7.2 The company may by special resolution in a general meeting vary the terms of
ESOS offered pursuant to an earlier resolution of a general body but not yet
exercised by the employee provided such variation is not prejudicial to the interests of
the option holders.
7.3 The provisions of clause 6.3 shall apply to such variation of terms as they do to
the original grant of option.
7.4 The notice for passing special resolution for variation of terms of ESOS shall
disclose full details of the variation, the rationale therefor, and the details of the
employees who are beneficiary of such variation.
7.5 A company may re-price the options which are not exercised whether or not they
have been listed if ESOSs were rendered unattractive due to fall in the price of the
shares in the market.
Provided that the company ensures that such re-pricing shall not be detrimental
to the interest of employees and approval of shareholders in General Meeting has


been obtained for such re-pricing.
8. Pricing
8.1 The companies granting option to its employees pursuant to ESOS will have the
freedom to determine the exercise price subject to conforming to the accounting
policies specified in clause 13.1
Provided that in case the company calculates the employee compensation cost
using the intrinsic value of the stock options, the difference between the employee
compensation cost so computed and the employee compensation cost that shall
have been recognized if it had used the fair value of the options, shall be disclosed in
the Directors report and also the impact of this difference on profits and on Earning
Per Share of the company shall also be disclosed in the Directors report.
9. Lock-in period and rights of the option-holder
9.1 There shall be a minimum period of one year between the grant of options and
vesting of options.
Provided that in a case where options are granted by an ESOS in lieu of options
held by the same person under an ESOS in another company which has merged or
amalgamated with the first mentioned company the period during which the options
granted by the transferor company were held by him shall be adjusted against the
minimum visiting period required under this clause.
9.2 The company shall have the freedom to specify the lock-in period for the shares
issued pursuant to exercise of option.
9.3 The employee shall not have right to receive any dividend or to vote or in any
manner enjoy the benefits of a shareholder in respect of option granted to him, till
shares are issued on exercise of option.
10. Consequence of failure to exercise option
10.1 The amount payable by the employee, if any, at the time of grant of option:
(a) may be forfeited by the company if the option is not exercised by the
employee within the exercise period; or
(b) the amount may be refunded to the employee if the option are not vested
due to non-fulfillment of condition relating to vesting of option as per the
ESOS.
11. Non transferability of option
11.1 Option granted to an employee shall not be transferable to any person.
11.2 (a) No person other than the employee to whom the option is granted shall be
entitled to exercise the option.
(b) Under the cashless system of exercise, the company may itself fund or permit
the empanelled stock brokers to fund the payment of exercise price which shall be
adjusted against the sale proceeds of some or all the shares, subject to the provision
of the Companies Act.


11.3 The option granted to the employee shall not be pledged, hypothecated,
mortgaged or otherwise alienated in any other manner.
11.4 In the event of the death of employee while in employment, all the option
granted to him till such date shall vest in the legal heirs or nominees of the deceased
employee.
11.5 In case the employee suffers a permanent incapacity while in employment, all
the option granted to him as on the date of permanent incapacitation, shall vest in
him on that day.
11.6 In the event of resignation or termination of the employee, all options not vested
as on that day shall expire. However, the employee shall, subject to the provision of
clause 5.3(b) shall be entitled to retain all the vested options.
12. Disclosure in the Directors Report
12.1 The Board of Directors, shall, inter alia, disclose either in the Directors Report or
in the annexure to the Directors Report, the following details of the ESOS:
(a) options granted;
(b) the pricing formula;
(c) options vested;
(d) options exercised;
(e) the total number of shares arising as a result of exercise of option;
(f) options lapsed;
(g) variation of terms of options;
(h) money realised by exercise of options;
(i) total number of options in force;
(j) employee wise details of options granted to:
(i)senior managerial personnel;
(ii)any other employee who receives a grant in any one year of option amounting
to 5% or more of option granted during that year.
(iii)identified employees who were granted option, during any one year, equal to
or exceeding 1% of the issued capital (excluding outstanding warrants
and conversions of the company at the time of grant.
(k) Diluted Earnings Per Share (EPS) pursuant to issue of shares on exercise of
option calculated in accordance with Accounting Standard (AS) 20 Earnings
Per Share.
(l) Where the company has calculated the employee compensation cost using
the intrinsic value of the stock options, the difference between the employee
compensation cost so computed and the employee compensation cost that
shall have been recognized if it had used the fair value of the options, shall
be disclosed. The impact of this difference on profits and on EPS of the
company shall also be disclosed.
(m) Weighted-average exercise prices and weighted-average fair values of


options shall be disclosed separately for options whose exercise price either
equals or exceeds or is less than the market price of the stock.
(n) A description of the method and significant assumptions used during the
year to estimate the fair values of options, including the following weighted-
average information:
(i)risk-free interest rate,
(ii)expected life,
(iii)expected volatility,
(iv)expected dividends, and
(v)the price of the underlying share in market at the time of option grant.
12.2 Until all options granted in the three years prior to the IPO have been exercised
or have lapsed, disclosures shall be made either in the Directors Report or in an
Annexure thereto of the information specified in clause 12.1 in respect of such
options also.
12.3 Until all options granted in the three years prior to the IPO have been exercised
or have lapsed, disclosure shall be made either in the Directors Report or in an
Annexure thereto of the impact on the profits and on the EPS of the company if the
company had followed the accounting policies specified in clause 13 in respect of
such options.
13. Accounting Policies
13.1 Every company that has passed a resolution for an ESOS under clause 6.1 of
these guidelines shall comply with the accounting policies specified in Schedule I.
13.2 Where a scheme provides for graded vesting, the vesting period shall be
determined separately for each portion of the option and shall be accounted for
accordingly.
14. Certificate from Auditors
14.1 In the case of every company that has passed a resolution for an ESOS under
clause 6.1 of these guidelines, the Board of Directors shall at each annual general
meeting place before the shareholders a certificate from the auditors of the company
that the scheme has been implemented in accordance with these guidelines and in
accordance with the resolution of the company in the general meeting.
15. Options outstanding at Public Issue
15.1 The provisions of the Securities and Exchange Board of India (Disclosure and
Investor Protection) Guidelines prohibiting initial public offering by companies having
outstanding warrants and financial instruments shall not be applicable in case of
outstanding option granted to employees in pursuance of ESOS.
15.2 If any option is outstanding at the time of an initial public offering by a company,
the promoters contribution shall be calculated with reference to the enlarged capital
which would arise on exercise of all vested options.


15.3 If any options granted to employees in pursuance of pre-IPO ESOS are
outstanding at the time of IPO, the IPO document of the company shall disclose all
the information specified in clause 12.1 and also the following information:
(a) The impact on the profits and on the EPS of the last three years if the
company had followed the accounting policies specified in clause 13 in
respect of options granted in the last three years.
(b) The intention of the holders of shares allotted on exercise of option granted
under ESOS or allotted under ESPS, to sell their shares within three (3)
months after the date of listing of shares in such IPO (aggregate number of
shares intended to be sold by option holders), if any, has to be disclosed. In
case of ESOS the same shall be disclosed regardless of whether the shares
arise out of options exercised before or after the IPO.
(c) Specific disclosures about the intention to sell shares arising out of ESOS or
allotted under ESPS within three (3) months after the date of listing, by
directors, senior managerial personnel and employees having ESOS or
ESPS shares amounting to more than 1% of the issued capital (excluding
outstanding warrants and conversions), which inter alia shall include name,
designation and quantum of ESOS or ESPS shares and quantum they
intend to sell within three (3) months.
(d) A disclosure in line with the clause 12 and 19 of these guidelines, regarding
all the options/shares issued in last three (3) years (separately for each
year) and on a cumulative basis for all the options/shares issued prior to
date of the prospectus.
PART B ESPS
16. Eligibility to participate in ESPS
16.1 An employee shall be eligible to participate in the ESPS.
16.2 An employee who is a promoter or belongs to the promoter group shall not be
eligible to participate in the ESPS.
16.3 A director who either by himself or through his relatives or through any body
corporate, directly or indirectly holds more than 10% of the outstanding equity shares
of the company shall not be eligible to participate in the ESPS.
17. Shareholder Approval
17.1 No ESPS shall be offered to employees of the company unless the shareholders
of the company approve ESPS by passing special resolution in the meeting of the
general body of the shareholders.
17.2 The explanatory statement to the notice shall specify:
(a) the price of the shares and also the number of shares to be offered to each
employee.
(b) the appraisal process for determining the eligibility of employee for ESPS.
(c) Total number of shares to be issued.
17.3 The number of shares offered may be different for different categories of


employees.
17.4 The special resolution shall state that the company shall conform to the
accounting policies specified in clause 19.2.
17.5 Approval of shareholders by way of separate resolution in the general meeting
shall be obtained by the company in case of:
(a) allotment of shares to employees of subsidiary or holding company and,
(b) allotment of shares to identified employees, during any one year, equal to or
exceeding 1% of the issued capital (excluding outstanding warrants and
conversions) of the company at the time of allotment of shares.
18. Pricing and Lock-in
18.1 The company shall have the freedom to determine price of shares to be issued
under an ESPS, provided they conform to the provisions of clause 19.2.
18.2 Shares issued under an ESPS shall be locked in for a minimum period of one
year from the date of allotment.
Provided that in a case where shares are allotted by a company under a ESPS in
lieu of shares acquired by the same person under an ESPS in another company
which has merged or amalgamated with the first mentioned company, the lock in
period already undergone in respect of shares of the transferor company shall be
adjusted against the lock-in required under this clause.
18.3 If the ESPS is part of a public issue and the shares are issued to employees at
the same price as in the public issue, the shares issued to employee pursuant to
ESPS shall not be subject to any lock-in.
19. Disclosure and Accounting Policies
19.1 The Directors Report or Annexure thereto shall contain, inter alia, the following
disclosures:
(a) the details of the number of shares issued in ESPS;
(b) the price at which such shares are issued;
(c) employee-wise details of the shares issued to:
(i)senior managerial personnel;
(ii)any other employee who is issued shares in any one year amounting to 5% or
more shares issued during that year;
(iii)identified employees who were issued shares during any one year equal to or
exceeding 1% of the issued capital of the company at the time of
issuance;
(d) diluted Earning Per Share (EPS) pursuant to issuance of shares under
ESPS; and
(e) consideration received against the issuance of shares.
19.2 Every company that has passed a resolution for an ESPS under clause 17.1 of
these guidelines shall comply with the accounting policies specified in Schedule II.


20. Preferential Allotment
20.1 Nothing in these guidelines shall apply to shares issued to employees in
compliance with the Securities and Exchange Board of India Guidelines on
Preferential Allotment.
21. Part D of Clarification XIV of DIP Guidelines.
22. Listing
Automatic Listing
SEBI, vide its Press Release bearing ref. No. PR 16/2001 dated 17/11/2001 informed
that to further facilitate the issue of ESOS and ESPS, it has agreed at a meeting of
Stock Exchanges that the exchanges would grant automatic listing of all securities
under the said scheme. This will alleviate the need of the company required to
approach stock exchanges time and again for listing of small quantities of securities
under the said scheme.
22.1 The shares arising pursuant to an ESOS and shares issued under at ESPS shall
be listed immediately upon exercise in any recognized stock exchange where the
securities of the company are listed subject to compliance of the following:
(a) The ESOS/ESPS is in accordance with these Guidelines.
(b) In case of an ESOS the company has also filed with the concerned stock
exchanges, before the exercise of option, a statement as per Schedule V
and has obtained in-principle approval from such Stock Exchanges.
(c) As and when ESOS/ESPS are exercised the company has notified the
concerned Stock Exchanges as per the statement as per Schedule VI.
22.2 The shares arising after the IPO, out of options granted under any ESOS framed
prior to its IPO shall be listed immediately upon exercise in all the recognised stock
exchanges where the equity shares of the company are listed subject to compliance
with clause 15.3 and, where applicable, clause 22.2A.
22.2A (a) No listed company shall make any fresh grant of options under any ESOS
framed prior to its IPO and prior to the listing of its equity shares (hereinafter in this
clause referred to as pre-IPO scheme) unless:
(i) such pre-IPO scheme is in conformity with these guidelines; and
(ii) such pre-IPO scheme is ratified by its shareholders in general meeting
subsequent to the IPO.
Provided that the ratification under item (ii) may be done any time prior to grant of
new options under such pre -IPO scheme.
(b) No change shall be made in the terms of options issued under such pre-IPO
schemes, whether by repricing, change in vesting period or maturity or otherwise,
unless prior approval of the shareholders is taken for such change.
Provided that nothing in this sub-clause shall apply to any adjustments for
corporate actions made in accordance with these guidelines.


22.3 For listing of shares issued pursuant to ESOS or ESPS the company shall make
application to the Central Listing Authority as per SEBI (Central Listing Authority
Regulations, 2003 and obtain the in-principle approval from Stock Exchanges where
it proposes to list the said shares.
22.4 The provisions relating to lock-in of pre -IPO shares specified in SEBI
(Disclosure and Investor Protection) Guidelines, 2000 shall not be applicable to the
shares allotted to employees other than promoters before the IPO under a pre-IPO
ESOS/ESPS, subject to compliance with clauses 15.3 and 22.2.
22.5 The ESOS/ESPS shares held by the promoters prior to Initial Public offering
shall be subject to lock-in as per the provisions of SEBI (Disclosure and Investor
Protection) Guidelines, 2000.
22.6 The listed companies shall file the ESOS or ESPS Schemes through EDIFAR
filing.
22.7 When holding company issues ESOS/ESPS to the employee of its subsidiary,
the cost incurred by the holding company for issuing such options/shares shall be
disclosed in the notes to accounts of the financial statements of the subsidiary
company.
22.7A In a case falling under clause 22.7, if the subsidiary reimburses the cost
incurred by the holding company in granting options to the employees of the
subsidiary, both the subsidiary as well as the holding company shall disclose the
payment or receipt, as the case may be, in the notes to accounts to their financial
statements.
22.8 The Company shall appoint a registered Merchant Banker for the
implementation of ESOS and ESPS as per these guidelines till the stage of framing
the ESOS/ESPS and obtaining in -principal approval from the stock exchanges in
accordance with clause 22.1 (b).
22A. ESOS/ESPS through Trust Route
22A.1 In case of ESOS/ESPS administered through a Trust, the accounts of the
company shall be prepared as if the company itself is administering the ESOS/ESPS.
23. Commencement of the Guidelines
23.1 These guidelines shall come into force with effect from 19th June, 1999 and will
be applicable to the options/shares granted/allotted on or after 19th June, 1999
unless otherwise specified in the Guidelines.
SCHEDULE I
(Clause 13.1)
Accounting Policies for ESOS
(a) In respect of options granted during any accounting period, the accounting
value of the options shall be treated as another form of employee compensation in
the financial statements of the company.
(b) The accounting value of options shall be equal to the aggregate, over all
employee stock options granted during the accounting period, of the intrinsic value of


the option or, if the company so chooses, the fair value of the option.
(c) Where the accounting value is accounted for as employee compensation in
accordance with b, the amount shall be amortised on a straight-line basis over the
vesting period.
(d) When an unvested option lapses by virtue of the employee not conforming to
the vesting conditions after the accounting value of the option has already been
accounted for as employee compensation, this accounting treatment shall be
reversed by a credit to employee compensation expenses, equal to the amortized
portion of the accounting value of the lapsed options and a credit to deferred
employee compensation expense equal to the unamortized portion.
(e) When a vested option lapses on expiry of the exercise period, after the fair
value of the option has already been accounted for as employee compensation, this
accounting treatment shall be reversed by a credit to employee compensation
expenses.
The accounting treatment specified above can be illustrated by the following
numerical example:
Suppose a company grants 500 options on 1/4/1999 at Rs. 40 when the market
price is Rs. 160, the vesting period is two and a half years, the maximum exercise
period is one year. Also suppose that 150 unvested options lapse on 1/5/2001, 300
options are exercised on 30/6/2002 and 50 vested options lapse at the end of the
exercise period. The accounting value of the option being:
500 x (160-40) = 500 x 120 = 60,000
The accounting entries would be as follows:
1/4/1999
Deferred Employee Compensation 60,000
Expense Employee Stock Options Outstanding 60,000
(Grant of 500 options at a discount of Rs. 120 each)
31/3/2000
Employee Compensation Expense 24,000
Deferred Employee Compensation Expense 24,000
(Amortisation of the deferred compensation over two
and a half years on straight-line basis)
31/3/2001
Employee Compensation Expense 24,000
Deferred Employee Compensation Expenses 24,000
(Amortisation of the deferred compensation over two
and a half years on straight-line basis)
1/5/2001
Employee Stock Options Outstanding 18,000


Employee Compensation Expense 14,400
Deferred Employee Compensation Expense 3,600
(Reversal of compensation accounting on lapse of
150 unvested options)
31/3/2002
Employee Compensation Expense 8,400
Deferred Employee Compensation Expense 8,400
(Amortisation of the deferred compensation over two
and a half years on straight-line basis)
30/6/2002
Cash 12,000
Employee Stock Options Outstanding 36,000
Paid Up Equity Capital 3,000
Share Premium Account 45,000
(Exercise of 300 options at an exercise price of Rs. 40
each and an accounting value of Rs 120 each)
1/10/2002
Employee Stock Options Outstanding 6,000
Employee Compensation Expense 6,000
(Reversal of compensation accounting on lapse of 50 vested
options at the end of exercise period)
The T-Accounts for Employee Stock Options Outstanding and Deferred
Employee Compensation Expense would be as follows:
Employees Stock Options Outstanding Account
Date Particulars Amount
(Rs.)
Date Particulars Amount
(Rs.)
1.5.2001 Employee
Compensation/
Deferred
Compensation



18,000
1.4.1999 Deferred
Compensation

60,000
30.6.2002 Paid-up
Capital/Share
Premium


36,000

1.10.2002 Employee
Compensation

6,000

______
60,000 60,000
Deferred Employees Compensation Expense Account
Date Particulars Amount Date Particulars Amount


(Rs.) (Rs.)
1.4.1999 ESOS
Outstanding

60,000
31.3.2000 Employee
Compensation

24,000
31.3.2001 Employee
Compensation

24,000
1.5.2001 ESOS
Outstanding

3,600

______
31.3.2002 Employee
Compensation

8,400
60,000 60,000
Employee Stock Options Outstanding will appear in the Balance Sheet as part
of Net Worth or Shareholders' Equity. Deferred Employee Compensation will
appear in the Balance Sheet as a negative item as part of Net Worth or
Shareholders' Equity.
SCHEDULE II
(Clause 19.2)
Accounting Policies for ESPS
(a) In respect of shares issued under an ESPS during any accounting period, the
accounting value of the shares so issued shall be treated as another form of
employee compensation in the financial statements of the company.
(b) The accounting value of shares issued under ESPS shall be equal to the
aggregate of price discount over all shares issued under ESPS during any accounting
period:
Explanation: For this purpose:
Price discount means the excess of the market price of the shares over the price
at which they are issued under the ESPS.
The accounting treatment prescribed above can be illustrated by the following
numerical example:
Suppose a company issues 500 shares on 1/4/1999 under an ESPS at Rs. 40
when the market price is Rs. 160. The accounting value of the shares being:
500 x (160-40) = 500 x 120 = 60,000
The accounting entry would be as follows:
1/4/1999
Cash 20,000
Employee Compensation Expense 60,000
Paid Up Equity Capital 5,000
Share Premium Account 75,000
(Issue of 500 shares under ESPS at a price of


Rs. 40 each when market price is Rs. 160)
SCHEDULE III
(Clause 2.1)
(i) The fair value of a stock option is the price that shall be calculated for that
option in an arms length transaction between a willing buyer and a willing
seller.
(ii) The fair value shall be estimated using an option-pricing model (for example,
the Black-Scholes or a binomial model) that takes into account as of the
grant date the exercise price and expected life of the option, the current
price in the market of the underlying stock and its expected volatility
expected dividends on the stock, and the risk-free interest rate for the
expected term of the option.
(iii) The fair value of an option estimated at the grant date shall not be
subsequently adjusted for changes in the price of the underlying stock or its
volatility, the life of the option, dividends on the stock, or the risk-free interest
rate.
(iv) Where the exercise price is fixed in Indian Rupees, the risk-free interest rate
used shall be the interest rate applicable for a maturity equal to the expected
life of the options based on the zero-coupon yield curve for Government
Securities.
(v) The expected life of an award of stock options shall take into account the
following factors:
(a)The expected life must at least include the vesting period.
(b)The average lengths of time similar grants have remained outstanding in the
past. If the company does not have a sufficiently long history of stock
option grants, the experience of an appropriately comparable peer group
may be taken into consideration.
(c)The expected life of ESOSs should not be less than half of the exercise period
of the ESOSs issued until and unless the same is supported by
historical evidences with respect to ESOSs issued by the company
earlier.
(vi) If the company does not have a sufficiently long history of traded stock
prices to estimate the expected volatility of its stock, it may use an estimate
based on the estimated volatility of stocks of an appropriately comparable
peer group.
(vii) The estimated dividends of the company over the estimated life of the option
may be estimated taking into account the companys past dividend policy as
well as the mean dividend yield of an appropriately comparable peer group.
(viii) Justification shall be given for significant assumptions. If at the time of
further issue of ESOS/ESPS there are any changes in the assumptions
reasons for the same shall be given.
SCHEDULE IV


Disclosure Document
(Clause 5.1)
Part A: Statement of Risks
All investments in shares or options on shares are subject to risk as the value of
shares may go down or go up. In addition, employee stock options are subject to the
following additional risks:
1. Concentration: The risk arising out of any fall in value of shares is
aggravated if the employees holding is concentrated in the shares of a
single company.
2. Leverage: Any change in the value of the share can lead to a significantly
larger change in the value of the option as an option amounts to a levered
position in the share.
3. Illiquidity: The options cannot be transferred to anybody, and therefore the
employees cannot mitigate their risks by selling the whole or part of their
options before they are exercised.
4. Vesting: The options will lapse if the employment is terminated prior to
vesting. Even after the options are vested, the unexercised options may be
forfeited if the employee is terminated for gross misconduct.
Part B: Information about the company
1. Business of the company: A description of the business of the company on
the lines of item V(a) of Part I of Schedule II of the Companies Act.
2. Abridged financial information: Abridged financial information for the last five
years for which audited financial information is available in a format similar
to that required under item B(1) of Part II of Schedule II of the Companies
Act. The last audited accounts of the company should also be provided
unless this has already been provided to the employee in connection with a
previous option grant or otherwise.
3. Risk Factors: Management perception of the risk factors of the company in
accordance with item VIII of Part I of Schedule II of the Companies Act.
4. Continuing disclosure requirement: The option grantee should receive
copies of all documents that are sent to the members of the company. This
shall include the annual accounts of the company as well as notices of
meeting and the accompanying explanatory statements.
Part C: Salient Features of the Employee Stock Option Scheme
This Part shall contain the salient features of the employee stock option scheme
of the company including the conditions regarding vesting, exercise, adjustment for
corporate actions, and forfeiture of vested options. It shall not be necessary to include
this Part if it has already been provided to the employee in connection with a previous
option grant, and no changes have taken place in the scheme since then. If the
option administrator (whether the company itself or an outside securities firm
appointed for this purpose) provides advisory services to the option grantees in


connection with the exercise of options or sale of resulting shares, such advice must
be accompanied by an appropriate disclosure of concentration and other risks. The
option administrator should conform to the code of conduct appropriate for such
fiduciary relationships.
SCHEDULE V
(Clause 22.1)
INFORMATION REQUIRED IN THE STATEMENT TO BE FILED
WITH STOCK EXCHANGE
Description of Stock Option Scheme
1. Authorized Share Capital of the Company:
2. Issued Share Capital of the Company as on date of
Institutional of the Scheme/amending of the
Scheme.
3. Date of Institution of the Scheme/amending of the
Scheme
4. Validity period of the Scheme
5. Date of notice of AGM/EGM for approving the
Scheme/for amending the Scheme/for approving
grants under Clause 6.3(a) or (b) of the SEBI
(ESOS and ESPS) Guidelines.
6. Date of AGM/EGM approving the
Scheme/amending the Scheme/approving grants
under Clause 6.3(a) or (b) of the SEBI (ESOS and
ESPS) Guidelines.
7. Kind of security granted as Options under the
Scheme
8. Identity of classes of persons eligible under the
scheme.
Permanent employees
Permanent employees outside India
Permanent employees of subsidiary
Permanent employees of holding
Whole-time directors
Independent directors
9. Total number of securities reserved under the
scheme:
10. Number of securities entitled under each option
11. Total number of options to be granted:
12. Maximum number of Options to be granted per


employee in each grant and in aggregate:
13. Exercise price or pricing formula:
14. Whether any amount payable at the time of grant of
the Options? If so, quantum of such amount.
15. Lock-in period under the Scheme
Lock-in period between grant and vesting
Lock-in period after exercise
16. Vesting period under the Scheme
17. Maximum period within which the options shall be
vested.
18. Exercise Period under the plan:
19. Whether employee can exercise all the Options
Vested at one time? Yes/No
20. Whether employee can exercise vested Options at
various points of time within the exercise period? Yes/No
21. Whether scheme provides for the procedure for
making a fair and reasonable adjustment to the
number of options and to the exercise price in case
of right issues, bonus issues and other corporate
actions? Clause in Scheme describing such
adjustment:
22. Description of the appraisal process for determining
the eligibility of employees under the scheme.
23. The specified time period within which vested
options are to be exercised in the event of
termination or resignation of an employee.
24. The specified time period within which options are
to be exercised in the event of the death of the
employee:
25. Whether Plan provides for conditions under which
option vested in employees may lapse in case of
termination of employment for misconduct? Clause
in Scheme describing such adjustment:
26. Whether Plan provides for conditions for the grant,
vesting and exercise of option in case of employees
who are on long leave? Clause in scheme
describing such adjustment.
27. Whether amount paid/payable by the employee at
the time of the grant of the Option will be forfeited if
the employee does not exercise the option within


the exercise period? Clause in scheme describing
such adjustment:
28. Details of approval of shareholders pursuant to
Clause 6.3 of the SEBI (ESOS and ESPS)
Guidelines with respect to:
Grant of options to employees of subsidiary or
holding company.
Grant of options to identified employees, during any
one year, equal to or exceeding 1% of the
issued capital (excluding outstanding warrants
and conversions) of the company at the time of
grant of the option:
29. Details of the variation made to the scheme along
with the rationale therefore and details of the
employees who are beneficiary of such variation:
Company Secretary
Place:
Date:
Documents to be filed with registration statement
Copy of Stock Option Scheme/Amended Stock Option Scheme, certified by
company secretary.
Copy of Notice of AGM/EGM for approving the Scheme/for amending the
Scheme/for approving grants under Clause 6.3(a) or (b) of the SEBI (ESOS
and ESPS) Guidelines, certified by the company secretary.
Copy of resolution of shareholders for approving the Scheme/for amending
the scheme/for approving grants under Clause 6.3(a) or (b) of the SEBI
(ESOS and ESPS) Guidelines, certified by the company secretary.
List of Promoters as defined under the SEBI (ESOS and ESPS) Guidelines.
Copy of latest Annual Report.
Certificate of Auditor on compliance with SEBI (ESOS and ESPS)
Guidelines.
Specimen copy of Share certificate.
Any other relevant documents.
Undertakings
A. The undersigned company hereby undertakes:
(1) To file, a post-effective amendment to this statement to include any material
information with respect to the scheme of distribution not previously
disclosed in the statement or any material change to such information in the
statement.


(2) To notify, the concerned stock exchanges on which the securities of the
company are listed, of such issue of securities pursuant to the exercise of
options under the scheme mentioned in this statement, in the prescribed
form, as amended from time to time.
(3) That the company shall conform to the accounting policies specified in
clause 13.1 of the SEBI (ESOS and ESPS) Guidelines.
(4) That the Scheme confirms to the SEBI (ESOS and ESPS) Guidelines.
(5) That the company has in place systems/codes/procedures to comply with
the SEBI (Insider Trading) Regulations.
Signatures
Pursuant to the requirements of the SEBI Act/guidelines, the company certifies
that it has reasonable grounds to believe that it meets all the requirements for the
filing of this form and has duly caused this statement to be signed on its behalf by the
undersigned, thereunto, duly authorized.
Name of the company
Sd/-
Name of the Compliance Officer
Designation
Date:
Place:
Certification by Registered Merchant Bankers, pursuant to clause 22.8 of SEBI
(ESOS & ESPS) Guidelines, 1999:
Certified that the scheme conforms to the SEBI (Employee Stock Option Scheme
& Employee Stock Purchase Scheme) Guidelines, 1999.
Authorised Signatory
Name of Merchant Banker
Date:
Place:
SCHEDULE VI
(Clause 22.1)
Format of Notification for Issue of Shares under the Stock Option Plans
1. Company Name and Address of Registered Office :
2. Name of the Exchanges on which the companys
shares are listed :
3. Filing date of the Statement referred in clause
22.1.b of guidelines with stock exchange :
4. Filing Number, if any :
5. Title of the Stock Option Scheme pursuant to which
shares are issued, if any :


6. Kind of Security to be listed :
7. Par value of the shares :
8. Date of issue of shares :
9. Number of shares issued :
10. Share Certificate no., if applicable :
11. Distinctive number of the share, if applicable :
12. ISIN Number of the shares if issued in Demat :
13. Exercise Price per share :
14. Premium per share :
15. Total Issued Shares after this issue :
16. Total Issued Share capital after this issue :
17. Details of any lock-in on the shares :
18. Date of expiry of lock-in :
19. Whether shares identical in all respects to existing
shares. If not, when will they become identical? :
20. Details of Listing fees, if payable :
Signature of Company Secretary/Compliance Officer
Date:
Place:
ANNEXURE
SECURITIES AND EXCHANGE BOARD OF INDIA (ISSUE OF SWEAT EQUITY)
REGULATIONS, 2002
S.O. No. 1031(E).In exercise of the powers conferred by Section 30 of the
Securities and Exchange Board of India Act, 1992 (15 of 1992) read with clause (d) of
Sub-section (1) of Section 79A of the Companies Act, 1956 (1 of 1956) as inserted by
Companies (Amendment) Act, 1999 (1 of 1999), the Board, hereby, makes the
following regulations, namely:
CHAPTER I
PRELIMINARY
1. Short title and commencement
(a) These regulations shall be called the Securities and Exchange Board of India
(Issue of Sweat Equity) Regulations, 2002.
(b) These regulations shall come into force on the date of their publication in the
Official Gazette.
2. Definitions
(1) In these regulations, unless the context otherwise requires:


(a)Act means the Securities and Exchange Board of India Act, 1992;
(b)associate includes a person,
(i) who directly or indirectly by himself or in combination with relatives,
exercises control over the company; or,
(ii) whose employee, officer or director is also a director, officer or
employee of another company;
(c)Board means the Board as defined in clause (a) of Sub-section (1) of Section
2 of the Act;
(d)control shall include the right to appoint majority of the directors or to control
the management or policy decisions exercisable by a person or persons
acting individually or in concert, directly or indirectly, including by virtue
of their shareholding or management rights or shareholders or voting
agreements or in any other manner;
(e)company means a company as defined in the Companies Act, 1956;
(f)director means, a director as defined in Sub-section (13) of Section 2 of the
Companies Act, 1956;
(g)employee means:
(i) a permanent employee of the company working in India or abroad or
(ii) a director of the company, whether a whole time director or not.
(h)ESOS means an Employees Stock Option Scheme as defined in Securities
and Exchange Board of India (Employees Stock Option Scheme and
Employees Stock Purchase Scheme) Guidelines, 1999;
(i)insider means an insider as defined in clause (e) of regulation 2 of Securities
and Exchange Board of India (Prohibition of Insider Trading)
Regulations, 1992;
(j)merchant banker means a merchant banker registered under Section 12 of
the Act;
(i)promoter means promoter as defined in clause (h) of sub-regulation (1) of
regulation 2 of the Securities and Exchange Board of India (Substantial
Acquisition of shares and Takeovers) Regulations, 1997;
(l)registrar means a registrar to an issue and includes a share transfer agent
registered under Section 12 of the Act;
(m)securities means securities as defined in clause (h) of Section 2 of the
Securities Contracts (Regulation) Act, 1956 (42 of 1956);
(n)statutory auditor means an auditor appointed by a company under Section
224 of the Companies Act, 1956 (1 of 1956);
(o)Recognised Stock Exchange means a stock exchange which has been
granted recognition under Section 4 of the Securities Contracts
(Regulation) Act, 1956 (42 of 1956);
(p)sweat equity shares means sweat equity shares as defined in Explanation II
of Sub-section (1) of Section 79A of the Companies Act, 1956;
(q)"Schedule" means a schedule to these Regulations;


(r)valuer means a Chartered Accountant or a merchant banker appointed to
determine the value of the intellectual property rights or other value
addition;
(2) Words and expressions not defined in these regulations shall have the same
meaning as have been assigned to them under the Act or the Securities Contracts
(Regulation) Act, 1956 or the Companies Act, 1956, or any statutory modification or
re-enactment thereof, as the case may be.
3. Applicability
Nothing contained in these regulations shall apply to an unlisted company.
Provided the unlisted company coming out with initial public offering and seeking
listing of its securities on the stock exchange, pursuant to issue of sweat equity
shares, shall comply with the Securities and Exchange Board of India (Disclosure and
Investor Protection) Guidelines, 2000.
CHAPTER II
ISSUE OF SWEAT EQUITY BY A LISTED COMPANY
4. Sweat equity shares may be issued to employee promoter
A company whose equity shares are listed on a recognised stock exchange may
issue sweat equity shares in accordance with Section 79A of Companies Act, 1956
and these Regulations to its:
(a) Employees
(b) Directors
5. Special Resolution
(1) For the purposes of passing a special resolution under clause (a) of Sub-
section (1) of Section 79A of the Companies Act, 1956 the explanatory statement to
be annexed to the notice for the general meeting pursuant to Section 173 of the
Companies Act, 1956 shall contain disclosures as specified in the Schedule.
(2) The issue of sweat equity shares to promoters shall be subject to the
requirements specified in Regulation 6 of these Regulations.
6. Issue of Sweat Equity Shares to Promoters
(1) In case of issue of sweat equity shares to promoters, the same shall also be
approved by simple majority of the shareholders in General Meeting.
Provided that for passing such resolution, voting through postal ballot as
specified under Companies (Passing of the Resolution by Postal Ballot) Rules, 2001
shall also be adopted.
Provided further that the promoters to whom such Sweat Equity Shares are
proposed to be issued shall not participate in such resolution.
(2) Each transaction of issue of Sweat Equity shall be voted by a separate


resolution.
(3) The resolution for issue of Sweat Equity shall be valid for a period of not more
than twelve months from the date of passing of the resolution.
(4) For the purposes of passing the resolution, the explanatory statement shall
contain the disclosures as specified in the Schedule.
7. Pricing of Sweat Equity Shares
(1) The price of sweat equity shares shall not be less than the higher of the
following:
(a) The average of the weekly high and low of the closing prices of the related
equity shares during last six months preceding the relevant date; or
(b) The average of the weekly high and low of the closing prices of the related
equity shares during the two weeks preceding the relevant date.
Explanation: "Relevant date" for this purpose means the date which is thirty days
prior to the date on which the meeting of the General Body of the shareholders is
convened, in terms of clause (a) of Sub-section (1) of Section 79A of the Companies
Act.
(2) If the shares are listed on more than one stock exchange, but quoted only on
one stock exchange on the given date, then the price on that stock exchange shall be
considered.
(3) If the share price is quoted on more than one stock exchange, then the stock
exchange where there is highest trading volume during that date shall be considered.
(4) If shares are not quoted on the given date, then the share price on the next
trading day shall be considered.
8. Valuation of intellectual Property
(1) The valuation of the intellectual property rights or of the know-how provided or
other value addition mentioned in Explanation II of Sub-section (1) of Section 79A of
the Companies Act, 1956 shall be carried out by a merchant banker.
(2) The merchant banker may consult such experts and valuers, as he may deem
fit having regard to the nature of the industry and the nature of the property or other
value addition.
(3) The merchant banker shall obtain a certificate from an independent Chartered
Accountant that the valuation of the intellectual property or other value addition is in
accordance with the relevant accounting standards.
9. Accounting Treatment
(1) Where the sweat equity shares are issued for a non-cash consideration, such
non-cash consideration shall be treated in the following manner in the books of
account of the company:
(a) where the non-cash consideration takes the form of a depreciable or


amortizable asset, it shall be carried to the balance sheet of the company in
accordance with the relevant accounting standards; or
(b) where clause (a) is not applicable, it shall be expensed as provided in the
relevant accounting standards.
10. Placing of Auditors Certificate Before Annual General Meeting
In the general meeting subsequent to the issue of sweat equity, the Board of
Directors shall place before the shareholders, a certificate from the auditors of the
company that the issue of sweat equity shares has been made in accordance with
the Regulations and in accordance with the resolution passed by the company
authorizing the issue of such Sweat Equity Shares.
11. Ceiling on Managerial Remuneration
The amount of Sweat Equity shares issued shall be treated as part of managerial
remuneration for the purposes of Sections 198, 309, 310, 311 and 387 of the
Companies Act, 1956 if the following conditions are fulfilled:
(i) the Sweat Equity shares are issued to any director or manager; and,
(ii) they are issued for non-cash consideration, which does not take the form of
an asset which can be carried to the balance sheet of the company in
accordance with the relevant accounting standards.
12. Lock-in of sweat equity shares
(1) The Sweat Equity shares shall be locked in for a period of three years from
the date of allotment.
(2) The Securities and Exchange Board of India (Disclosure and Investor
Protection) Guidelines, 2000, on public issue in terms of lock-in and computation of
promoters contribution shall apply if a company makes a public issue after it has
issued sweat equity.
13. Listing
The Sweat Equity issued by a listed company shall be eligible for listing only if
such issue are in accordance with these regulations.
14. Applicability of Takeover
Any acquisition of Sweat Equity Shares shall be subject to the provision of
Securities and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997.
CHAPTER III
GENERAL OBLIGATIONS
15. Obligations of the Company
(1) The company shall ensure that
(a)The Explanatory Statement to the notice for general meeting shall contain


certain disclosures as are specified under clause (b) of Sub-section (1)
of Section 79A of the Companies Act, 1956 and sub-regulation (1) of
Regulation 5.
(b)Auditors certificate as required under Regulation 10 shall be placed in the
general meeting of shareholders.
(2) The company shall within seven days of the issue of sweat equity, issue or
send statement to the recognized stock exchange, disclosing:
(i)number of sweat equity shares;
(ii)price at which the sweat equity shares are issued;
(iii)total amount invested in sweat equity shares;
(iv)details of the persons to whom sweat equity shares are issued; and,
(v)the consequent changes in the capital structure and the shareholding pattern
after and before the issue of sweat equity.
16. Action against intermediaries
The Board may, on failure of the merchant banker to comply with the obligations
under these regulations or failing to observe due diligence in respect of valuation of
intellectual property or value addition, initiate action against the merchant banker in
terms of Securities and Exchange Board of India (Merchant Bankers) Regulations,
1992.
CHAPTER IV
PENALTIES AND PROCEDURE
17. Power of the Board to order inspection or investigation
(1) The Board may, suo-motu or upon information received by it, cause an
inspection to be made of the books of account or other books and papers of any
company or an investigation to be made in respect of the conduct and affairs of any
person associated with the process of Sweat Equity, by appointing an officer of the
Board not below the rank of Assistant General Manager for the purpose of conducting
inspection and not below the rank of Division Chief for the purpose of conducting on
investigation.
Provided that no such inspection or investigation shall be made except for the
purposes specified in sub-regulation (2).
(2) The purposes referred to in sub-regulation (1) are the following, namely:
(a)to ascertain whether there are any circumstances which would render any
person guilty of having contravened any of these regulations or any
directions issued thereunder;
(b)to investigate into any complaint of any contravention of the regulation,
received from any investor, or any other person;
(3) An order passed under the sub-regulation (1) shall be sufficient authority for


the Inspecting or Investigating Officer to undertake the inspection or investigation, as
the case may be and on production of an authenticated copy of the order, the person
concerned shall be bound to carry out the duty imposed in Regulation 18.
18. Duty to produce records, etc.
(1) It shall be the duty of every person in respect of whom an inspection or
investigation has been ordered under regulation 17, to produce before the Inspecting
or the Investigating Officer such book, accounts and other documents in his custody
or control and furnish him with such statements and information as the said officer
may require from the purposes of the inspection or investigation.
(2) Without prejudice to the generality of the provisions of sub-regulation (1),
such person shall
(a) extend to the Inspecting or Investigating Officer reasonable facilities for
examining any books, accounts and other documents in his custody or
control (whether kept manually or in computer or in any other form)
reasonably required for the purposes of the inspection or investigation;
(b) provide such Inspecting or Investigating Officer copies of such books,
accounts and records which, in opinion of the Officer, are relevant to the
inspection or investigation or, as the case may be, allow him to take out
computer printouts thereof.
(c) provide such assistance and co-operation as may be required in connection
with the inspection or investigation and furnish information relevant to such
inspection or investigation as may be sought by such officer.
(3) The Inspecting or Investigating Officer shall for the purpose of inspection or
investigation, have the full powers:
(a) of summoning and enforcing the attendance of persons;
(b) to examine orally and to record on oath the statement of the persons
concerned, any director, partner, member or employee of such person.
19. Submission of Report to the Board
(1) The Inspecting or Investigating Officer shall, on completion of the inspection
or Investigation after taking into account all relevant facts and circumstances, submit
a report to the Board.
(2) On the receipt of report under sub-regulation (1), the Board may initiate such
action as it may be deemed fit to do in the interests of investors and the securities
market.
20. Power of the Board to issue directions
The Board may in the interests of the securities market and without prejudice to
its right to initiate action including criminal prosecution under Section 24 of the Act or
Section 621 of Companies Act, 1956 give such directions as it deems fit including:
(a) directing the person concerned not to further deal in securities in any
particular manner;


(b) directing the person concerned to sell or divest the sweat equity shares
acquired in violation of the provisions of these Regulations or any other law
or regulations;
(c) prohibiting the persons concerned, from accessing the securities market;
(d) directing the disgorgement of any ill-gotten gains or profit or avoidance of
loss.;
(e) restraining the company from making a further offer for sweat equity.
SCHEDULE
[Under Regulation 6(4)]
The explanatory statement to the notice and the resolution proposed to be
passed in the general meeting for approving the issuance of sweat equity shall, inter
alia, contain the following information:
(a) The total number of shares to be issued as sweat equity.
(b) The current market price of the shares of the company.
(c) The value of the intellectual property rights or technical know how or other
value addition to be received from the employee or director along with the
valuation report/basis of valuation.
(d) The names of the employees or directors or promoters to whom the sweat
equity shares shall be issued and their relationship with the company.
(e) The consideration to be paid for the sweat equity.
(f) The price at which the sweat equity shares shall be issued.
(g) Ceiling on managerial remuneration, if any, which will be affected by
issuance of such sweat equity.
(h) A statement to the effect that the company shall conform to the accounting
policies as specified by the Board.
(i) Diluted Earning Per Share pursuant to the issue of securities to be
calculated in accordance with International Accounting Standards/standards
specified by the Institute of Chartered Accountants of India.
UNLISTED COMPANIES (ISSUE OF SWEAT EQUITY SHARES) RULES, 2003
GSR 923(E), DATED 4.12.2003
In exercise of the powers conferred by proviso to Sub-section (1) of Section 79A
of the Companies Act, 1956 (1 of 1956) read with sub-section (1) of Section 642 of
the said Act, the Central Government hereby makes the following rules, namely:
1. Short title and commencement
(a) These regulations shall be called the Unlisted Companies (Issue of Sweat
Equity Shares) Rules, 2003.


(b) They shall come into force on the date of their publication in the Official
Gazette.
2. Definitions
In these rules, unless otherwise defined,
(i) Asset means a resource controlled by the company and from which future
economic benefits are expected to flow to the company;
(ii) employee means:
(a)a permanent employee of the company working in India or out of India; or
(b)a director of the company, employed as a whole-time director or executive
director of a company;
(iii) intangible Asset means an identifiable non-monetary asset, without
physical substance, held for use in the production or supply of goods or
services, for rental to others, or for administrative purposes;
(iv) share price means price of a share on a given date arrived on the net
worth basis;
(v) value addition means anticipated economic benefits derived by the
enterprise from expert and/or professional for providing know-how or making
available rights in the nature of intellectual property rights, by such person to
whom sweat equity is issued for which the consideration is not paid or
included in
(a)the normal remuneration payable under the contract of employment, in the
case of an employee and/or
(b)monetary consideration payable under any other contract, in the case of non-
employee.
3. Applicability
These Rules shall be applicable to issue of sweat equity shares by all unlisted
companies.
4. Special resolution
(1) For the purpose of passing a special resolution under Clause (a) of Sub-
section (1) of Section 79A of the Companies Act, 1956 (1 of 1956); the explanatory
statement to be annexed to the notice for the general meeting pursuant to
Section 173 of the said Act shall contain particulars as specified below:
(i) the date of the meeting at which the proposal for issue of sweat equity
shares was approved by the Board of Directors of the company;
(ii) the reasons/justification for the issue;
(iii) the number of shares, consideration for such shares and the class or
classes of persons to whom such equity shares are to be issued;
(iv) the value of the sweat equity shares alongwith valuation report/basis of


valuation and the price at which the sweat equity shares will be issued;
(v) the names of persons to whom the equity will be issued and the persons
relationship with the company;
(vi) ceiling on managerial remuneration, if any, which will be affected by
issuance of such equity;
(vii) a statement to the effect that the company shall conform to the accounting
policies specified by the Central Government; and
(viii) diluted earning per share pursuant to the issue of securities to be calculated
in accordance with the Accounting Standards specified by the Institute of
Chartered Accountants of India.
(2) Approval of shareholders by way of separate resolution in the general
meeting shall be obtained by the company in case of grant of shares to identified
employees and promoters, during any one year, equal to or exceeding 1% of the
issued capital (excluding outstanding warrants and conversion) of the company at the
time of grant of the sweat equity shares.
5. Register of shares
The company shall maintain a Register of Sweat Equity Shares issued under
Section 79A in the Form specified in Schedule annexed to these rules.
6. Restriction on issue of sweat equity shares
The company shall not issue sweat equity shares for more than 15% of total paid
up equity share capital in a year or shares of the value of 5 crores of rupees,
whichever is higher except with the prior approval of the Central Government.
7. Disclosure in the Directors Report
The Board of Directors, shall, inter alia, disclose either in the Directors Report on
in the annexure to the Directors Report, the following details of issue of sweat equity
shares:
(a) Number of shares to be issued to the employees or the directors;
(b) conditions for issue of sweat equity shares;
(c) the pricing formula;
(d) the total number of shares arising as a result of issue of sweat equity
shares;
(e) money realised or benefit accrued to the company from the issue of sweat
equity shares;
(f) diluted Earnings Per Share (EPS) pursuant to issuance of sweat equity
shares.
8. Pricing of Sweat Equity Shares


The price of sweat equity shares to be issued to employees and directors shall
be at a fair price calculated by an independent valuer.
9. Issue of Sweat Equity Shares for consideration other than cash
Where a company proposes to issue sweat equity shares for consideration other
than cash, it shall comply with following:
(a) The valuation of the intellectual property or of the know-how provided or
other value addition to consideration at which sweat equity capital is issued,
shall be carried out by a valuer;
(b) the valuer shall consult such experts as he may deem fit, having regard to
the nature of the industry and the nature of the property or the value
addition;
(c) the valuer shall submit a valuation report to the company giving justification
for the valuation;
(d) a copy of the valuation report of the valuer shall be sent to the shareholders
with the notice of the general meeting;
(e) the company shall give justification for issue of sweat equity shares for
consideration other than cash, which shall form part of the notice sent for the
general meeting; and
(f) the amount of Sweat Equity shares issued shall be treated as part of
managerial remuneration for the purposes of Sections 198, 309, 310, 311
and 387 of the Companies Act, 1956 if the following conditions are fulfilled:
(i)the Sweat Equity shares are issued to any director or manager; and
(ii)they are issued for non-cash consideration, which does not take the form of
an asset which can be carried to the balance sheet of the company in
accordance with the relevant accounting standards.
10. Lock-in of sweat equity shares
Sweat equity shares issued to employees or directors shall be locked in for a
period of three years from the date of allotment.
11. Certificate from auditors
In the case of every company that has allotted shares under these Rules, the
Board of Directors shall at each annual general meeting place before the
shareholders a certificate from the auditors of the company/practising company
secretary that sweat equity shares have been allotted in accordance with the
resolution of the company in the general meeting and these Rules.
12. Accounting policies
(1) Where the sweat equity shares are issued for a non-cash consideration, such
non-cash consideration shall be treated in the following manner in the books of
account of the company:
(a) where the non-cash consideration takes the form of a depreciable or


amortizable asset, it shall be carried to the balance sheet of the company in
accordance with the relevant accounting standards; or
(b) where clause (a) is not applicable, it shall be expensed as provided in the
relevant accounting standards.
(2) In respect of sweat equity shares issued during accounting period, the
accounting value of sweat equity shares shall be treated as another form of
compensation to the employee or the director in the financial statement of the
company.
SCHEDULE
Register of Sweat Equity Shares
[Pursuant to Rule 5]
The register of sweat equity shares issued by the company to be kept in the
following format:
S. No. Folio No./ certificate
No.
Date of passing of
resolution
Date of issue of
sweat equity shares
1 2 3 4




Name of the
allottee
Status of the allottee
whether director or
employee
Reference to entry
in register of
members
Number of sweat
equity shares issued
5 6 7 8




Face value of
the shares
Price at which
shares issued
Total consideration
paid by employee/
director
Lock in period till
which date
9 10 11 12




LESSON ROUND-UP
Share capital of a company can be classified as nominal, authorized or registered
capital; issued and subscribed capital; called up and uncalled capital; preference
and equity share capital; fixed and circulating capital; working capital; loan or
debenture capital etc.
A share is defined as a share in the share capital of a company, including stock


except where a distinction between stock and shares is expressed or implied.
The Companies Act, 1956 permits a company limited by shares to issue two classes
of shares, namely equity share capital and preference share capital.
A preference share or preference share capital is that part of share capital which
carries a preferential right with respect to both dividend and capital.
Preference shares may be of various types, namely participating and non-
participating, cumulative and non-cumulative shares, redeemable and
irredeemable preference shares.
Equity share capital means all share capital which is not preference share capital.
Sweat equity shares means equity shares issued by a company to its employees or
directors at a discount or for consideration, other than cash for providing know-
how or making available right in the nature of intellectual property rights or value
additions, by whatever name called.
There are various sources of capital such as raising of capital from promoters, from
public, from existing shareholders and raising of capital through public issue of
shares.
SEBI has issued SEBI (Disclosure and Investor Protection) Guidelines, 2000, a
compendium containing consolidated Guidelines, circulars, instructions relating to
issue of capital effective from January 27, 2000.
A company may issue securities at a premium when it is able to sell them at a price
above par or above nominal value.
A company may issue shares at a price less than the nominal value of shares i.e. at a
discount.
The Companies Act provides for the issue of rights shares. Accordingly, whenever at
any time after expiry of two years from the incorporation of a company or after the
expiry of one year from the first allotment of shares, whichever is earlier, it is
proposed to increase the subscribed capital by allotment of further shares, such
shares shall be offered to the existing holders of equity shares in proportion to the
capital paid-up on their shares at the time of further issue.
A company can issue further shares to persons other than existing shareholders in
accordance with relevant provisions provided under the Companies Act.
A company may, if its Articles provide, capitalize its profits by issuing fully paid
bonus shares. There are no guidelines on issuing bonus shares by private or
unlisted companies. However, the SEBI has issued guidelines for Bonus Issue
which are contained in Chapter XV of the SEBI (Disclosure and Investor
Protection) Guidelines, 2000 with regard to bonus issues by listed companies. A
company issuing bonus shares should ensure that the issue is in conformity with
these guidelines.
Employee stock option means the option given to the whole-time directors, officers or
employees of a company, which gives such directors, officers or employees the
benefit or right to purchase or subscribe at a future date, the securities offered by
the company at a pre-determined price. In respect of these, SEBI has issued
SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme)
Guidelines.





SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to the questions are not be
submitted for evaluation).
1. Discuss the various kinds of share capital. How is the preference share
capital distinguished from equity share capital?
2. Define and explain the term share. What are the different classes of shares
which a company may issue?
3. State the provisions of the Companies Act, 1956, relating to issue of shares
at premium and at discount.
4. Discuss in brief SEBI Guidelines for Public Issue of Shares?
5. Discuss the procedure for issue of further shares to existing shareholders
under Section 81(1) of the Companies Act.
6. What is the difference between Reserve Capital and Capital Reserve?
7. Can a company issue shares with differential voting rights? If so, how?


Suggested Readings:
1. A. Ramaiya Guide to Companies Act.
2. ICSI Publication Guidance Note on SEBI Guidelines.
3. ICSI Publication Manual on Capital Issue (In the light of SEBI Guidelines).
4. SEBI (Disclosure and Investor Protection) Guidelines, 2000.
5. A.K. Majumdar and Dr. G.K. Kapoor Company Law and Practice.

















STUDY VII
FINANCIAL STRUCTURE AND MEMBERSHIP - II
ALTERATION OF SHARE CAPITAL

LEARNING OBJECTIVES
This lesson explains the alteration of share capital of a company and the powers of
the company to do so. It defines stock and differentiates it from a share. It also
discusses reduction of share capital and various circumstances when it can be done.
The lesson gives provisions regarding buy-back of shares by a company, conditions
under which it can be done and prohibitions in respect of it.
At the end of the lesson, you should be able to understand:
Alteration of company and power of alteration to company.
Nature of stock and difference between stock and share.
Reduction of share capital and types of reduction of capital commonly adopted.
Reduction of share capital without sanction of the court, reduction when company
is defunct, reduction when company is unlimited.
Diminution of share capital not treated as reduction of share capital.
Creditors right to object to reduction and liability of members in respect of
reduced share capital.
Power of company to purchase its own securities (buy-back of securities) and
conditions for buy-back.
Prohibition for buy-back in certain circumstances.
SEBI (Buy-Back of Securities) Regulations, 1998.
Private Limited Company and Unlisted Public Limited Company (Buy-Back of
Securities) Rules, 1999.

1. ALTERATION OF SHARE CAPITAL
Section 94 of the Companies Act, 1956 provides that a company limited by
shares or guarantee and having a share capital may, if so authorised by its articles,
alter, by an ordinary resolution, its share capital in the following ways:
(a) It may increase the share capital by such amount, as it thinks expedient, by
issuing new shares;
(b) It may consolidate and divide, all or any of its existing shares into a larger
denomination than of its existing shares e.g., by consolidating ten shares of
Rs. 10 each into one share of Rs. 100 each;
(c) It may sub-divide its existing shares into smaller denomination than fixed by
its Memorandum but it must keep the existing proportion between the paid-
up and unpaid-up amount e.g., one share of Rs. 100 each, Rs. 60 paid up
and be sub-divided into ten shares of Rs. 10 each, Rs. 6 paid-up per share.
(d) It may convert all or any of its fully paid-up shares into stock or reconvert
232


stock into fully paid-up shares of any denomination.
(e) It may cancel shares which have not been taken up or agreed to be taken by
any person and diminish the amount of the share capital by the amount of
the shares so cancelled. However, such cancellation of shares, will not be
deemed to be a reduction of share capital, within the meaning of Section
100 of the Companies Act, 1956. In other words, it is cancellation of
unissued share capital not being taken or agreed to be taken up by any
person.
In order to alter its capital clause in the Memorandum, the company requires
authority in its articles. But if the articles give no power to this effect, the articles must
be amended by a special resolution before the power to alter the capital clause can
be exercised by the company [Re. Patent Invert Sugar Co. (1885) 31 Ch. D. 166].
Further, the powers to alter capital clause should be exercised bona fide and in the
interest of the company and not for the benefit of any group. An ordinary resolution
will be enough for altering capital clause in the Memorandum of Association.
Notice of alteration of capital must be given to the Registrar of Companies in e-
Form No. 5 within thirty days of such alteration who will register the change and make
necessary alterations in the Memorandum. Default in this case will make the
company and every officer of the company liable to a fine extending up to Rs. 500 per
day during which the default continues (Section 95).
Where the nominal capital in a company stands altered by order of the Central
Government under Section 94A, the company shall file the necessary forms (5 & 21)
with the Registrar of Companies for the increase in capital alongwith the fees for such
increase.
Under Section 94A of the Act, the share capital of a company stands
automatically increased in the following two situations:
(i) When the Central Government, by its order made under Section 81(4) of the
Act, directs that any debentures issued to, or the loans obtained from the
Government by a company or any part thereof shall be converted into
shares in the company, on such terms and conditions as are considered
reasonable in the circumstances; and
(ii) Where the Central Government, on an application made by the public
financial institutions, directs that the debentures issued for loans raised by
the company or any part thereof should be converted into shares of the
company in pursuance of the exercise of the option attached to such
debentures or loans issued to or granted by the Financial Institutions.
2. POWER OF ALTERATION
As mentioned earlier, the powers under this section can be exercised by the
members only if authorised by the articles. But there is no reason why in a single
meeting both a special resolution amending the articles and a resolution for exercise
of any of the powers under this section should not be passed. In Re North Cheshire
Brewery Co., 1920 WN 149. Re Metropolitan Cementry Co., (1934) SC 65 the
company passed special resolution to reduce and also to increase its capital and the
Court, while confirming the former, refused to include a reference to the latter as the


company was not authorised by its articles to increase its capital and strict
compliance with the Act was necessary. The court could conform the latter also if it
had the words to the effect of consequential to the former resolution of authority.
The power should be exercised bona fide in the interest of the company and not
for benefitting any group. [Needle Industries (India) Ltd. v. Needle Industries Newey
(India) Holding Ltd. (1981) 1 Com Cases 743 (SC)].
The consent of meeting of classes of shareholders will not be required as the
increase of any kind of share capital cannot be said to vary or affect class rights.
The increased capital may consist of preference shares, provided that this is not
inconsistent with rights given by the Memorandum of Association. [Andrews v. Gas
Meter Co. (1897) 1 Ch 361: (1895) All Eng. Rep 1280 (CA)]. The notice convening
the meeting to pass the resolution for increase must specify the amount of the
proposed increase [Mac Connell v. E. Prill & Co. Ltd., (1916) 2 Ch 57 : (1916-17) All
Eng. Rep Ext 1344].
Where shares were issued beyond the authorised amount and a resolution was
subsequently passed at a general meeting ratifying the issue, it was held that
although the original issue was not in accordance with the articles, the ratification was
effective and the allottees were bound [Sewells case (1868) 3 Ch App 131].
Consolidation and sub-division may be effected by the same resolution [North
Cheshire Borewery Co. Ltd.
In Castiglione Erskine & Co. Ltd., (1958) 2 All ER 455 : (1958) 28 Com Cases
452 (Ch D), it was held that cancellation of unissued shares or of shares issued but
not taken up by any person, may be effected without seeking confirmation of the
Court.
Under Section 94(1) it is open to a limited company to cancel shares which have
not been taken or agreed to be taken by any person but a resolution for such
cancellation is required to be passed by the company in general meeting under
Section 94(2) [Surendra Maganlal Mehta v. Reliance Textile Ind. Ltd., (1982) 3 Comp
LJ 103 (Bom)].
It is not the function of the Court to interfere with the Companys power to
consider a resolution for cancelling the unissued portion of its share capital. The
exercise of power by a company to cancel the unissued shares cannot be restrained
by an injunction [Swindon Town Football Co. Ltd, 1990 BCLC 467 (Ch D)].
3. NATURE OF STOCK
Section 94 allows the company to convert its fully paid-up shares into stock, and
it is, therefore, important to understand the nature of stock and the advantages which
it may have.
Section 2(46) of the Act in defining a share, states that share includes stock
except where a distinction between stock and shares is expressed or implied. Thus
by converting shares into stock, a shareholder is known as a stockholder. A
stockholder has the same rights as to dividends as a shareholder.


It should be noted that (i) only fully paid-up shares can be converted into stock,
and (ii) no direct issue of stock by a company is lawful. It is only the conversion of
fully-paid shares into stock, that is allowed by Section 94(1)(c) and not a direct issue
of stock.
After shares are converted into stock, the stockholder may own Rs. 1,000 worth
of stock where formerly he held one hundred shares of Rs. 10 each. Thus, though his
investment in the company remains the same, the interest of the stockholder in the
company is described differently.
Difference between Share and Stock
1. Shares in physical form bear distinct numbers, whereas stocks are the
consolidated value of share capital.
2. Shares may or may not be fully paid-up. Stock is always fully paid-up.
3. Shares have a nominal value, stock does not have any nominal value.
4. All shares are of equal denomination whereas denomination of stocks vary.
5. Stock cannot be issued in the first instance, whereas shares are issued to
the public initially. On conversion of shares into stock, the provisions of the
Act governing the shares shall cease to apply to the share capital as it is
converted into stock (Section 96).
6. Stock is divisible into any amount required. Thus, it is possible to transfer
Rs. 50.87 worth of stock, while it is never possible to transfer a fraction of a
share.
4. REDUCTION OF SHARE CAPITAL
Reduction of capital means reduction of issued, subscribed and paid-up capital of
the company. Section 100 provides for the reduction of share capital, if the articles of
the company so authorise. If there is no such clause in the articles, these must be
altered by a special resolution giving the company the power to reduce capital.
In the case of SIEL Ltd., In re. [(2008) 144 Comp Cas 469 (Del)], the view was
that reduction of the share capital of a company is a domestic concern of the
company and the decision of the majority would prevail. If the majority by special
resolution decides to reduce the share capital of the company, it has the right to
decide to reduce the share capital of the company and it has the right to decide how
this reduction should be effected. While reducing the share capital, the company can
decide to extinguish some of its shares without dealing in the same manner with all
other shares of the same class. A selective reduction is permissible within the frame
work of law for any company limited by shares.
The need for reducing capital may arise in various circumstances for example
trading losses, heavy capital expenses and assets of reduced or doubtful value. As a
result, the original capital may either have become lost or a capital may find that it
has more resources than it can profitably employ. In either case, the need may arise
to adjust the relation between capital and assets [Indian National Press (Indore) Ltd.,
In re. (1989) 66 Com Cases 387, 392 (MP)].


The mode of reduction, as laid down in Section 100 of the Companies Act, is as
follows:
A company limited by shares or a company limited by guarantee and having a
share capital may, if authorised by its articles, by special resolution, and subject to its
confirmation by the Court on petition, reduce its share capital in any way and in
particular:
(a) by reducing or extinguishing the liability of members in respect of uncalled or
unpaid capital e.g., where the shares are of Rs. 100 each with Rs. 75 paid-
up reduce them to Rs. 75 fully paid-up shares and thus relieve the
shareholders from liability on the uncalled capital of Rs. 25 per share;
(b) by paying off or returning paid-up capital not wanted for the purposes of the
company, e.g., where the shares are fully paid-up, reduce them to Rs. 75
each and pay back, Rs. 25 per share;
(c) by paying off the paid-up capital on the conditions that it may be called up
again so that the liability is not extinguished;
(d) by following a combination of any of the preceding methods;
(e) by writing off or cancelling the capital which has been lost or is under
represented by the available assets e.g. a share of Rs. 100 fully paid-up is
represented by Rs. 75 worth of assets. In such a situation reality can be re-
introduced by writing off Rs. 25 per share. This is the most common method
of reduction of capital. The assets side of the balance sheet may include
useless assets which are cancelled. On the other hand in the liability side
share capital is reduced.
In the case of Elpro International Ltd., In re [(2009) 149 Comp Cas 646 (Bom.)], a
company proposed to extinguish and cancel 8,89,169 shares held by shareholders
constituting 25 per cent, of the issued and paid up share capital and return capital to
such shareholders at Rs. 183 per equity share of Rs. 10 each so cancelled and
extinguished in accordance with Section 100 of the Act. According to the scheme as
approved by the shareholders, the reducing of 25 percent, of the issued and paid up
capital was to take place from amongst 3,835 share holders which included 112
shareholders who voted for the resolution, and 3,723 shareholders who did not object
to the resolution. It was held that a selective reduction of share capital is legally
permissible. The shareholders who did not cast their votes were those who had
abstained from voting at the meeting. Moreover, there was no objection from any of
the shareholders to the proposed reduction.
The Act does not prescribe the manner in which the reduction of capital is to be
effected. Nor is there any limitation of the power of the Court
1
/Tribunal
2
to confirm the
reduction except that it must first be satisfied that all the creditors entitled to object to
the reduction have either consented or been paid or secured [British and American
Trustee and Finance Corpn. v. Couper, (1894) AC 399, 403: (1991-4) All ER Rep
667].

1
Existing.
2
Proposed.


When exercising its discretion, the Court
1
/Tribunal
2
must ensure that the
reduction is fair and equitable [British and American Trustee Corpn. v. Couper, (1894)
(ibid)]. In short the Court
1
/Tribunal
2
shall consider the following, while sanctioning the
reduction:
(i) The interests of creditors must be safeguarded;
(ii) The interests of shareholders must be considered; and
(iii) Lastly, the public interest must be considered as well.
Reduction of share capital without sanction of the Court
1
/Tribunal
2

The following are cases which amount to reduction of share capital and where no
confirmation by the Court
1
/Tribunal
2
is necessary:
(a) Surrender of shares Surrender of shares means the surrender to the
company on the part of the registered holder of shares already issued.
Where shares are surrendered to the company, whether by way of
settlement of a dispute or for any other reason, it will have the same effect
as a transfer in favour of the company and amount to a reduction of capital.
But if, under any arrangement, such shares, instead of being surrendered to
the company, are transferred to a nominee of the company then there will be
no reduction of capital [Collector of Moradabad v. Equity Insurance Co. Ltd.,
(1948) 18 Com Cases 309 : AIR 1948 Oudh 197]. Surrender may be
accepted by the company under the same circumstances where forfeiture is
justified. It has the effect of releasing the shareholder whose surrender is
accepted from further liability on shares.
The Companies Act contains no provision for surrender of shares. Thus
surrender of shares is valid only when Articles of Association provide for the same
and:
(i) where forfeiture of such shares is justified; or
(ii) when shares are surrendered in exchange for new shares of same nominal
value.
Both forfeiture and surrender lead to termination of membership. But in the
former case, it is at the initiative of company and in the latter case at the initiative of
member or shareholder.
(b) Forfeiture of shares A company may if authorised by its articles, forfeit
shares for non-payment of calls and the same will not require confirmation of
the Court
1
/Tribunal
2
.
Where power is given in the articles, it must be exercised strictly in accordance
with the regulations regarding notice, procedure and manner stated therein,
otherwise the forfeiture will be void. Forfeiture will be effected by means of Board
resolution. The power of forfeiture must be exercised bona fide and in the interest of
the company.

1
Existing.
2
Proposed.


Note: Detailed procedure regarding forfeiture has been discussed in Study
Lesson-XI.
(c) Diminution of capital Where the company cancels shares which have not
been taken or agreed to be taken by any person [Section 94(1)(3)].
(d) Redemption of redeemable preference shares.
(e) Purchase of shares of a member by the Company under Section 402.
(f) Buy-back of its own shares under Section 77A.
Reduction of capital when company is defunct
The Registrar of Companies has been empowered under Section 560 to strike off
the name of the company from register on the ground of non-working. Therefore,
where the company has ceased to trade, and Registrar exercises his power under
Section 560 a reduction of capital cannot be prevented. [Great Universal Stores Ltd.,
Re (1960) 1 All ER 252 : (1960)].
Reduction of capital of unlimited company
An unlimited company to which Section 100 does not apply, can reduce its
capital in any manner that its Memorandum and Articles of Association allow
[Borough Commercial and Bldg. Society, (1893) 2 Ch 242]. It is not governed by
Sections 94 and 100 of the Act. Section 13 does not provide that its capital shall be
stated in the Memorandum. However, even if its capital is stated in the Memorandum,
the Companies Act impliedly gives power to the member to alter it.
Equal Reduction of Shares of One Class
Where there is only one class of shares, prima facie, the same percentage
should be paid off or cancelled or reduced in respect of each share, but where
different amounts are paid-up on shares of the same class, the reduction can be
effected by equalising the amount so paid-up. [Marwari Stores Ltd. v. Gouri Shanker
Goenka, (1936) 6 Com Cases 285]. The same principle is to be followed where there
are different classes of shares [Bannatyne v. Direct Spanish Telegraph Co., (1886)
34 Ch D 287].
It is, however, not necessary that extinguishment of shares in all cases should
necessarily result in reduction of share capital. Accordingly where reduction is not
involved Section 100 would not be attracted [Asian Investments Ltd. Re, (1992) 73
Com Cases 517, 523 (Mad)].
Qualification shares of directors
Where the directors are required to hold qualification shares, care must be taken
that the effect of a reduction does not disqualify any director.
Creditors Right to Object to Reduction
After passing the special resolution for the reduction of capital, the company is
required to apply to the Court
1
/Tribunal
2
by way of petition for the confirmation of the
resolution under Section 101. Where the proposed reduction of share capital involves

1
Existing.
2
Proposed.


either (i) diminution of liability in respect of unpaid share capital, or (ii) the payment to
any shareholder of any paid-up share capital, or (iii) in any other case, if the
Court
1
/Tribunal
2
so directs, the following provisions shall have effect:
The creditors having a debt or claim admissible in winding up are entitled to
object. To enable them to do so, the Court
1
/Tribunal
2
will settle a list of creditors
entitled to object. If any creditor objects, then either his consent to the proposed
reduction should be obtained or he should be paid off or his payment be secured.
The Court
1
/Tribunal
2
, in deciding whether or not to confirm the reduction will take into
consideration the minority shareholders and creditors.
A Company might decide to return a part of its capital when its paid-up share
capital is in excess of its needs. It is not simply handed over to shareholders in
proportion to their holdings. Their class rights will be considered with the
Court
1
/Tribunal
2
treating the reduction as though it was analogous to liquidation.
Therefore, the preference shareholders who have priority to return of capital in
liquidation will be the first to have their share capital returned to them in a share
capital reduction, even if they prefer to remain members of the company.
Confirmation and Registration
Section 102 of the Act states that if the Court
1
/Tribunal
2
is satisfied that either the
creditors entitled to object have consented to the reduction, or that their debts have
been determined, discharged, paid or secured, it may confirm the reduction. The
Court
1
/Tribunal
2
may also direct that the words and reduced be added to the
companys name for a specified period, and that the company must publish the
reasons for the reduction, and the causes which led to it, with a view to giving proper
information to the public.
The Courts
1
/Tribunals
2
order confirming the reduction together with the minutes
giving the details of the companys share capital, as altered, should be delivered to
the Registrar who will register them. The reduction takes effect only on registration of
the order and minutes, and not before. The Registrar will then issue a certificate of
registration which will be a conclusive evidence that the requirements of the Act have
been complied with and that the share capital is now as set out in the minutes. The
Memorandum has to be altered accordingly.
Conclusiveness of certificate for reduction of capital
Where the Registrar had issued his certificate confirming the reduction, the same
was held to be conclusive although it was discovered later that the company had no
authority under its articles to reduce capital [Re Walkar & Smith Ltd., (1903) 88 LT
792 (Ch D)]. Similarly, in a case the special resolution for reduction was an invalid
one, but the company had gone through with the reduction. It was held that the
reduction was not allowed to be upset [Ladiess Dress Assn. v. Pulbrook, (1900) 2
QB 376].
Diminution of share capital is not a reduction of capital

1
Existing.
2
Proposed.


In the following cases, the diminution of share capital is not to be treated as
reduction of the capital:
(i) Where the company cancels shares which have not been taken or agreed to
be taken by any person [Section 94(1)(e)];
(ii) Where redeemable preference shares are redeemed in accordance with the
provisions of Section 80;
(iii) Where any shares are forfeited for non-payment of calls and such forfeiture
amounts to reduction of capital.
(iv) Where the company buys-back its own shares under Section 77A of the Act.
In all these cases, the procedure for reduction of capital as laid down in Section
100 is not attracted.
Liability of Members in respect of Reduced Share Capital
On the reduction of share capital, the extent of the liability of any past or present
member on any call or contribution shall not exceed the difference between the
amount already paid on the share, or the reduced amount, if any, which is deemed to
have been paid thereon by the member, and the amount of the shares fixed by the
scheme of the reduction.
If, however any creditor entitled to object to the reduction of share capital is not
entered in the list of creditors by reason of his ignorance of the proceedings for
reduction and after the reduction, the company is unable to pay his debt or claim,
then:
(a) every member at the time of registration of the Courts order for reduction is
liable to contribute for the payment of that debt or claim, an amount not
exceeding the amount which he would have contributed on the day before
registration of the order and minutes; and
(b) if the company is wound up, the Court
1
/Tribunal
2
on the application by the
creditor and on proof of his ignorance, may settle a list of contributories and
make and enforce calls and orders on the contributories, settled on the list,
as if they were ordinary contributories in a winding up.
It is further provided that, if any officer of the company knowingly conceals the
name of any creditor entitled to object to the reduction; or knowingly misrepresents
the nature or amount of the debt or claim of any creditor; or abets or is privy to any
such concealment or misrepresentation as aforesaid, he shall be liable to be
punishable with imprisonment upto one year, or with fine or with both (Section 105).
5. COMPANY PROHIBITED TO BUY ITS OWN SHARES OR TO FINANCE
THEIR PURCHASE
Section 77(1) provides that a company limited by shares, or by guarantee and
having a share capital cannot buy its own shares as that would involve a reduction of
share capital without the courts consent; nor may a company do so indirectly, by
getting another person to buy the shares on its behalf. Furthermore, a public

1
Existing.
2
Proposed.


company or its subsidiary must not finance the purchase by any other person of its
own shares or those of its holding company. There are, however, certain exceptions
to this rule. The exceptions are:
(a) A company may redeem its redeemable preference shares under Section 80
of the Act.
(b) A banking company may lend money in the ordinary course of business.
(c) A company may provide financial assistance:
(i)where it is provided, in accordance with a scheme, for the purchase of fully-
paid shares in the company or its holding company, being a purchase by
trustees of or for shares to be held by or for the benefit of employees of
the company including directors holding salaried posts;
(ii)where the loan is advanced to the bona fide employees of the company, other
than directors or manager, to enable them to purchase fully paid-up
shares for amounts not exceeding six months salary or wages of such
employees.
(d) A company may buy its own shares from any member in pursuance of a
Courts order under Section 402 of the Companies Act.
By implication, an unlimited company can purchase its own shares. Article 3(e) of
Table E, Schedule I to the Act gives power to such companies to reduce its shares in
any way (Re. Borough Commercial and Building Society, (1893) 2 Ch 242). Similarly,
forfeiture for non-payment of calls and valid surrender do not involve purchase of
shares by the company. Any valuable consideration paid out of the companys assets
amounts to a transaction of purchase. [Ramesh B. Desai v. Bipin Vadilal Mehta
(2006) 5 SCC 638 : (2006) 132 Comp Cas 479].
6. POWER OF COMPANY TO PURCHASE ITS OWN SECURITIES (BUY-BACK
OF SECURITIES)
The Companies (Amendment) Act, 1999 had introduced the provisions which
allow the companies to buy-back their own shares. For this purpose, Sections 77A,
77AA and 77B were inserted in the Companies Act, 1956.
Section 77A(1) provides that:
Notwithstanding anything contained in this Act, but subject to the provisions of
Sub-section (2) of this section and Section 77B, a company may purchase its own
shares or other specified securities (hereinafter referred to as buy-back) out of:
(i) its free reserves; or
(ii) the securities premium account; or
(iii) the proceeds of any shares or other specified securities:
Provided that no buy-back of any kind of shares or other specified securities shall
be made out of the proceeds of an earlier issue of the same kind of shares or same
kind of other specified securities.
The buy-back of shares or securities may be in any one or more of the following


modes:
(i) Purchasing from existing security holders on a proportionate basis (tender
offer method).
(ii) Purchasing from the open market (through Stock Exchanges).
(iii) Purchasing from odd-lot holders.
(iv) Purchasing from securities issued to employees under Scheme of Stock
Option or Sweat Equity.
Negotiated buy-back transactions are not permitted i.e. all shareholders must
have same right of participation in the buy-back operations and it cannot be restricted
to any shareholder or group of shareholders.
Conditions for Buy-back
The conditions of buy-back of shares are as under:
(a) the buy-back is authorised by its articles;
(b) a special resolution has been passed in general meeting of the company
authorising the buy-back;
However, the said special resolution shall not be required to be passed if the
following conditions are satisfied:
(i) the buy back is or for less than 10% of the total paid up equity capital and
free reserves of the company, and
(ii) a resolution authorising the buy back is passed at a meeting of the Board.
Provided that no company can come out with a fresh proposal to buy back its
shares if within a period of 365 days from the date of the preceding offer of buy back.
(c) the buy-back is or less than twenty-five per cent of the total paid-up capital
and free reserves of the company:
Provided that the buy-back of equity shares in any financial year shall not
exceed twenty-five per cent of its total paid-up equity capital in that financial
year;
(d) the ratio of the debt owed by the company is not more than twice the capital
and its free reserves after such buy-back:
Provided that the Central Government may prescribe a higher ratio of the
debt than that specified under this clause for a class or classes of
companies.
Explanation: For the purposes of this clause, the expression debt includes
all amounts of unsecured and secured debts;
Vide Notification GSR No. 479(E) dated 12th June, 2003, the Central
Government has notified that the debt equity ratio of Listed Housing Finance
Companies for the purposes of Section 77A(2)(d) of the Companies Act,
1956 as amended shall be such as may be specified by the National


Housing Bank.
(e) all the shares or other specified securities for buy-back are fully paid-up;
(f) the buy-back of the shares or other specified securities listed on any
recognised stock exchange is in accordance with the regulations made by
the Securities and Exchange Board of India in this behalf;
(g) the buy-back in respect of shares or other specified securities other than
those specified in clause (f) is in accordance with the guidelines as may be
prescribed.
The other provisions to be complied with are as under:
(1) The explanatory statement accompanying the notice convening the general
meeting at which this special resolution will be passed should contain all the
relevant particulars of the buy-back such as:
(a)a full and complete disclosure of all material facts;
(b)the necessity for the buy-back;
(c)the class of security intended to be purchased under the buy-back;
(d)the amount to be invested under the buy-back;
(e)the time limit for completion of buy-back.
(2) The buy-back operations should be completed within 12 months of the date
of passing of the special resolution or a resolution passed by the Board.
(3) A declaration of solvency in the prescribed Form No. 4A of Companies
(Central Government's) General Rules and Forms, 1956 verified by an
affidavit and signed by two directors, one of whom must be the Managing
Director, where there is one, has to be filed with the Registrar of Companies
and SEBI. In case of unlisted companies, the declaration is required to be
filed only with the Registrar of Companies.
(4) After completion of buy-back operation the securities must be extinguished
and physically destroyed within 7 days of the last date of completion of buy-
back.
(5) After completion of buy-back, the company shall not make a further issue of
shares or other specified securities for a period of 6 months except by way
of bonus issue or in discharge of subsisting obligations such as conversion
of options/obligations already given.
(6) A prescribed return in e-Form No. 4C has to be filed with the Registrar of
Companies and SEBI within 30 days after completion of the buy-back
operations. In the case of unlisted companies, the same is required to be
filed only with the Registrar of Companies.
(7) The company has to maintain a register of the securities so bought, the


consideration paid for the securities bought-back, the date of cancellation of
securities, the date of extinguishing and physically destroying of securities
and such other particulars as may be prescribed.
(8) For contravention of the provisions of Section 77A or any rules made
thereunder, the company or any officer thereof is punishable with fine upto
Rs. 50,000 and/or imprisonment upto two years.
(9) For the purposes of this section :
(a)Specified securities includes employees stock option or other securities as
may be notified by the Central Government from time to time.
(b)Free reserves shall have the meaning assigned to it in Clause (b) of
Explanation to Section 372A.
Explanation to Section 372A provides that "Free reserves" means those
reserves which, as per latest audited balance-sheet of the company, are free
for distribution as dividend and shall include balance to the credit of
securities premium account but shall not include share application money.
(10) Where a company purchases its own shares out of free reserves, then a
sum equal to the nominal value of the share so purchased shall be
transferred to the capital redemption reserve account referred to in clause
(d) of the proviso to Sub-section (f) of Section 80 and details of such transfer
shall be disclosed in the balance-sheet. (Section 77AA)
In D-Link (India) Ltd. v. SEBI [(2008) 85 SCL 385 (SAT)], the shareholders of a
company passed a special resolution authorizing the company to buy-back its fully
paid-up equity shares. However, the appellant took no further steps to buy-back the
equity shares. It was held that the first question was as to whether the company was
under any obligation to go ahead with the buy-back after its shareholders had passed
a special resolution in the EGM authorizing it to buy-back its fully paid-up equity
shares. On a reading of the provisions of section 77A and the relevant provisions of
the buy-back regulations it is clear that a company is under no obligation to buy-back
its securities even if its shareholders have passed a special resolution authorizing it
to buy-back on the terms and conditions mentioned in the resolution. Section 77A is
only an enabling provision and all that it mandates is that no company shall buy-back
its own securities unless it is authorized by its articles and also by its shareholders.
But even where the shareholders pass a special resolution, it does not become
obligatory for the company to buy-back the shares. The passing of a special
resolution by the shareholders is the first step by which they authorize the company
and the second step would be the decision of the company to buy-back by making an
offer to its shareholders.
For listed companies, SEBI has framed SEBI (Buy-back of Securities)
Regulations, 1998.
For Private Limited Companies and Unlisted Public Companies, the Central
Government has issued Private Limited Company and Unlisted Public Limited
Company (Buy-back of Securities) Rules, 1999.
7. PROHIBITION FOR BUY-BACK IN CERTAIN CIRCUMSTANCES


Section 77B provides that, no company shall directly or indirectly purchase its
own shares or other specified securities:
(a) through any subsidiary company including its own subsidiary companies; or
(b) through any investment company or group of investment companies; or
(c) if a default, by the company, in repayment of deposit or interest payable
thereon, redemption of debentures, or preference shares or payment of
dividend to any shareholder or repayment of any term loan or interest
payable thereon to any financial institution or bank, is subsisting; or
(d) if the company has not complied with provisions of Sections 159, 207 and
211.

LESSON ROUND-UP
A company limited by shares or guarantee and having a share capital may alter
its share capital in any of the ways provided under the Companies Act. These
powers can be exercised by the members only if authorized by the articles.
The Companies Act allows a company to convert its fully paid-up shares into
stock. Share includes stock except where a distinction between stock and shares
is expressed or implied. A stockholder has the same rights as to dividends as a
shareholder.
Reduction of capital means reduction of issued, subscribed or paid-up capital of
the company. Various modes of reduction have been laid down in the Companies
Act.
A company limited by shares or a company limited by guarantee and having a
share capital may, if authorized by its articles and subject to its confirmation by
the Court/Tribunal on petition, reduce its share capital. While sanctioning such
reduction, interests of creditors, shareholders and public should be safeguarded.
Surrender of shares, forfeiture of shares, diminution of capital, redemption of
preference shares, purchase of shares by member, buy-back of own shares amount
to reduction of share capital but no confirmation by the Court/Tribunal is necessary.
Where the company has ceased to trade and Registrar exercises his power to
strike off the name of the company from the register on the ground of non-
working, a reduction of capital cannot be prevented.
Where there is only one class of shares, the same percentage should be paid off
or cancelled or reduced in respect of each share, but where different amounts are
paid-up on shares of the same class, the reduction can be effected by equalizing
the amounts so paid-up. The same principle is to be followed where there are
different classes of shares.
Where the directors are required to hold qualification shares, care must be taken
that the effect of a reduction does not disqualify any director.
The creditors having a debt or claim admissible in winding up are entitled to object
in reduction. If any creditor objects, then either his consent to the proposed
reduction should be obtained or he should be paid off or his payment be secured.
The Registrar will then issue a certificate of registration which will be conclusive
evidence that the requirements of the Act have been complied with and that the
share capital is now as set out in the minutes. The Memorandum has to be
altered accordingly.
In certain cases, diminution of share capital is not to be treated as reduction of


the capital.
On the reduction of share capital, the extent of the liability of any past or present
member on any call or contribution shall not exceed the difference between the
amount already paid on the share, or the reduced amount, if any, which is
deemed to have been paid thereon by the member, and the amount of the shares
fixed by the scheme of the reduction.
A company limited by shares, or by guarantee and having a share capital cannot
buy its own shares as that would involve a reduction of share capital without the
courts consent; nor may a company do so indirectly, by getting another person to
buy the shares on its behalf.
A public company or its subsidiary must not finance the purchase by any other
person of its own shares or those of its holding company. There are, however,
certain exceptions to this rule.
Certain provisions introduced in the Companies Act allow the companies to buy-
back their own shares, subject to the conditions and in any of the modes provided
therein. They also provide for prohibition for buy-back in certain circumstances.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation).
1. Distinguish between share and stock.
2. What are the methods for reduction of share capital of a company?
3. How can a company reduce its share capital without sanction of the court/
tribunal?
4. Write short notes on:
(i)Diminution of share capital
(ii)Surrender of shares
(iii)Forfeiture of shares
5. Explain in detail, the provisions as regards buy-back of securities by the
companies.


Suggested Readings :
1. Buy-Back of Shares Law, Practice and Procedure Jayant M. Thakur
2. Buy-Back of Shares T.P. Ghosh
3. A Guide to Companies Act. A. Ramaiya
4. Company Law & Practice A.K. Majumdar and G.K. Kapoor
5. Guidance Note on Buy Back of Securities ICSI Publication







STUDY VIII
FINANCIAL STRUCTURE AND MEMBERSHIP - III
PROSPECTUS

LEARNING OBJECTIVES
The lesson explains the meaning and definition of prospectus, shelf prospectus,
information memorandum and red-herring prospectus along with relevant provisions
under the Companies Act and SEBI guidelines. The lesson also discusses abridged
prospectus and letter of offer and abridged letter of offer.
At the end of the lesson, you should be able to understand:
Meaning and definition of prospectus.
When Prospectus is not required to be Issued.
Statement in lieu of Prospectus.
Dating and Registration of Prospectus.
Shelf Prospectus, Information Memorandum and Red-herring prospectus.
Contents and disclosures in prospectus as per Companies Act and SEBI
Guidelines.
Abridged Prospectus and disclosures therein.
Letter of offer and Abridged letter of offer and its contents.
Golden Rule or Golden Legacy.
Deemed Prospectus.
Liability for untrue statement.
Remedies for misrepresentation in prospectus.
Penalty for fraudulently inducing to invest money.
Prohibition of allotment of shares in fictitious name.

1. MEANING AND DEFINITION OF PROSPECTUS
Section 2(36) defines a prospectus as any document described or issued as a
prospectus and includes any notice, circular, advertisement or other document
inviting deposits from the public or inviting offers from the public for the subscription
or purchase of any shares in, or debentures of a body corporate. The following
ingredients may be said to constitute a prospectus:
(a) there must be an invitation to the public;
(b) the invitation must be made by or on behalf of the company or in relation to
an intended company;
(c) the invitation must be to subscribe or purchase;
(d) the invitation must relate to shares or debentures or such other instrument.
In essence, it means that a prospectus is an invitation issued to the public to offer
for purchase/subscribe shares or debentures of the company (Immugan v. Ranga
247


Ram, A.I.R. 1934 Mad. 641). Any advertisement offering shares or debentures of the
company for sale to the public is a prospectus. In Pramatha Nath Sanyal v. Kali
Kumar Dutt, A.I.R. 1925 Cal. 714, an advertisement was inserted in a newspaper
stating: Some shares are still available for sale according to the terms of the
prospectus of the company which can be obtained on application. This was
held to be a prospectus as it invited the public to purchase the shares. The
directors were, therefore, penalised, for not complying with the requirements of
filing a copy thereof with Registrar of Companies. But to be a prospectus, it must be
issued to the public, and the provisions of the Act will not be attracted unless the
prospectus is issued to the public. A single private communication does not satisfy
the term issue [Nash v. Lynde (1929) A.C. 158]. In this case, several copies of a
document marked strictly confidential and containing particulars of a proposed issue
of shares, were sent accompanied by application form by the managing director who,
in turn, gave it to a client who passed it on to a relation. Thus, the document was
passed on privately through a small circle of friends of the directors. The House of
Lords held that there had been no issue to the public and any action for
compensation by the allottee for loss sustained by reason of an omission in the
document, failed.
Similarly, a circular issued by a company to the shareholders of other
companies to acquire their shares held in those companies and issue its own
shares in exchange of those shares did not amount to be a prospectus, as there
is no public issue [Govt. Stock and Other Securities Investment Co. Ltd. v.
Christopher, (1956) I.W.L.R. 237]. It was pointed out that the circular did not
involve an offer for the purchase of any shares. The shares in question were
unissued shares of new company, so that they could not be the subject of an
offer for purchase. Thus, the circular was not a prospectus, but only the
communication of an offer to exchange shares in the new company for shares in
the other existing companies. But the issue need not be to the public at large.
Public is a general word, and includes any section of the public. This means that if a
document inviting persons to buy shares is issued, for example, to all advocates, or to
all doctors, or to all foreigners living in India, or to all Indian citizens, or to all
shareholders in a particular company, it will still be deemed to be issued to the public
within the meaning of the Act [In Re. South of England Natural Gas and Petroleum Co.
Ltd., (1911) 1 Ch. 573]. In this case, 3,000 copies of a document in the form of a
prospectus were sent out and distributed among the members of certain gas
companies only. It was held that it was a prospectus issued to the public.
A document is deemed to be issued to the public, if the invitation to subscribe for
share capital is such as to be open to any one who brings his money and applies in
prescribed form, whether the prospectus was addressed to him or not. The test is not
who receives the document, but who can apply for shares in response to the
invitation contained in it.
However, an issue will not be Public if-
(i) it is directed to a specified person or a group of persons, and
(ii) it is not calculated to result in the shares or debentures becoming available
to other persons.


Thus, if a private company after increasing its share capital allots new shares
declined by its members, to persons approved by the directors, the offer so made is
not regarded as one made to the public.
In Rattan Singh v. Managing Director, Moga Transport Co. Ltd. (1959) 29 Comp.
Cas 165 it was held that offer to buy ones kith and kin cannot be considered to be an
invitation to public. Offer to buy shares made to an individual as such is not within the
definition of the word public as used in Section 67. In the case of a private company,
the maximum number of members cannot exceed 50. Where a company offers
shares to selective persons, it cannot be said to be extending an invitation to buy
shares to the public. In all cases the determination of the question of an offer being
made to the public, depends upon the facts and language of the notice on the
particular circumstances of each case.
It is obligatory to issue a prospectus, containing the prescribed particulars, except
when the shares are not offered to the public, or when the shares are offered to
existing shareholders as rights issue, or when the issue relates to shares which are in
all respects uniform with shares previously issued and quoted in a stock exchange
[See Section 56(5)].
2. INVITATION TO PUBLIC
One of the ingredients of a prospectus is to make invitation to the public to
subscribe for shares in or debentures of a body corporate which is construed as
including a reference to any section of the public, whether selected as members or
debenture-holders of the company or as clients of the person issuing the prospectus.
(Section 67). However, exceptions have been provided under Sub-section (3) of
Section 67.
Section 67(3) of the Companies Act, 1956 provides that no offer or invitation shall
be treated as made to the public by virtue of Sub-section (1) or Sub-section (2) as the
case may be, if the offer or invitation can properly be regarded in all the
circumstances
(a) as not being calculated to result, directly or indirectly, in the shares or
debentures becoming available for subscription or purchase by persons
other than those receiving the offer or invitation; or
(b) otherwise as being a domestic concern of the persons making and receiving
the offer or invitation;
A proviso to Section 67(3) had been inserted by the Companies (Amendment)
Act, 2000 according to which an offer or invitation to subscribe for shares or
debentures made to fifty or more persons shall be treated as an offer or invitation
made to the public. In such a case the company has to comply with all the provisions
contained in the Act and the SEBIs guidelines for making a public issue. The newly
inserted proviso to Sub-section (3) of Section 67 will make private placement under
the purview of public issue if such offer or invitation is made to or subscribed for by
fifty persons or more. However this proviso to Section 67(3) does not apply to the
non-banking financial companies or public financial institutions specified in
Section 4A of the Companies Act, 1956.


3. WHEN PROSPECTUS IS NOT REQUIRED TO BE ISSUED?
In the following cases although the shares are offered and application forms
issued, a prospectus containing all the details required under Section 56 is not
necessary:
(i) Where a person is a bona fide invitee to enter into an underwriting
agreement with regard to shares or debentures; [Section 56(3)].
(ii) where the shares or debentures are not offered to public; [Section 56(3)].
(iii) where the issue relates to shares or debentures uniform in all respects, with
the shares or debentures already issued and dealt in or quoted at a
recognised stock exchange; [Section 56(5)].
(iv) where the shares or debentures are offered to the existing holders of shares
or debentures respectively; [Section 56(5)].
(v) where any prospectus is published as a newspaper advertisement ordinarily
called prospectus announcement, it shall not be necessary to specify the
contents of the memorandum, or the names etc. of the signatories to the
memorandum, or the number of shares subscribed for by them (Section 66).
However, the guidelines issued by SEBI as to the code of advertisement
must be adhered to.
As per the SEBI (Disclosure and Investor Protection) Guidelines, 2000, a Letter
of Offer has to be filed as offer document in case of a rights issue.
It further provides that no listed issuer company shall make any rights issue of
securities, where aggregate value of such securities, including premium, if any,
exceeds Rs. 50 lacs, unless a draft letter of offer has been filed with the Board such
draft letter of offer has to be filed through a Merchant Banker, at least 30 days prior to
the filing of offer with the Designated Stock Exchange (DSE). The contents of a
specimen Letter of Offer are given later in the study.
As per Section 56(5)(a) of the Companies Act, 1956, the issue of further shares
by a company to its members with the right to renounce them in favour of third parties
does not require registration of a prospectus. The offer of further shares with right of
renunciation is a personal decision of the persons receiving the offer. Renouncing the
offer is not made by the company with intent to inform the public and, therefore, the
letter of offer to shareholder with right of renunciation does not require registration
with the Registrar of Companies.
4. STATEMENT IN LIEU OF PROSPECTUS
All public companies either issue a prospectus or file a statement in lieu of
prospectus. A private company as such does not produce either document. But when
a private company converts itself into a public company it must either file a
prospectus if issued or file statement in lieu of prospectus.
Section 70(1) states that a public company having a share capital which:
(a) does not issue a prospectus on or with reference to its formation; or


(b) has issued a prospectus but has not proceeded to allot any of the shares
offered to the public for subscription, shall not allot any of its shares or
debentures unless at least 3 days before the first allotment of either shares
or debentures, it has delivered to the Registrar a statement in lieu of
prospectus in accordance with Schedule III of the Act duly signed by every
person named therein as a director or proposed director of the company or
by his agent authorised in writing.
The statement in lieu of prospectus contains similar particulars as are required
for a prospectus and should also fulfil similar conditions. No minimum subscription is
required to be given, as this document does not relate to an offer to issue a fixed
number of shares at a fixed price to the subscribers.
If a statement in lieu of prospectus is not delivered, the company and every
director shall be liable to a fine up to Rs. 10,000. Section 70(5) imposes exactly the
same criminal liability, penalties and defences as Section 63 in respect of a
prospectus, and the common law remedy of damages for deceit and equitable
remedy of recession also apply in the same way.
5. DATING AND REGISTRATION OF PROSPECTUS AS PER PROVISIONS
CONTAINED IN COMPANIES ACT, 1956
1. Prospectus must be dated: This provides prime facie evidence of the date of
its publication. Section 55 of the Act states that the date of prospectus shall,
unless the contrary is proved, be taken as the date of the publication of the
prospectus. The date of publication of the prospectus must be contrasted
with the date of issue of prospectus. The date of issue is the date on which
the prospectus first appears as an advertisement.
2. A copy of prospectus must be filed with the Registrar on or before its
publication: The copy sent for registration must be signed by every person
who is named in the prospectus as a director or a proposed director of the
company or by his agent authorised in writing. The experts consent, a copy
of every contract under clause 16 of Schedule II and adjustment under
clause 32 of the said Schedule should be attached to the prospectus. Where
the prospectus is issued in more than one language, a copy of it as issued in
each language should be delivered to the Registrar (Emperor v. Bengal Salt
Co., 40 C.W.N. 320: A.I.R. 1936 Calcutta 33).
3. The following documents must be attached to the copy of prospectus filed
with the Registrar:
(a)the consent of the expert mentioned in the prospectus, if his report is included
in the prospectus;
(b)a copy of every contract relating to the appointment or remuneration of a
managing director or manager;
(c)a copy of every material contract not being a contract entered into in the
ordinary course of business of the company entered into within two
years of the issue of the prospectus;


(d)a written statement relating to the adjustments, if any, in respect of figures of
any profits or losses, and assets and liabilities.
(e)the consent in writing of the person, if any, named in the prospectus as the
auditor, legal adviser, attorney, solicitor, issue house, banker, managers
to the issue or broker of the company to act in that capacity;
(f)the consent of director under Section 266 in respect of new directors, if any,
named therein;
(g)a copy of the underwriting agreement if any, should also be filed as required
by Section 76(1)(b)(v).
4. The prospectus must contain a statement that a copy has been delivered for
registration, also indicating the requisite documents (giving names) delivered
with it.
5. The prospectus must be issued within 90 days of its registration either by
newspaper advertisement or otherwise.
6. The consent of the expert should be obtained: If the prospectus includes a
statement purporting to be made by an expert, a consent in writing of that
expert should be obtained and this fact be stated in the prospectus. It should
also state that the consent given has not been withdrawn.
The expert should not be one who is himself engaged or interested in the
formation, promotion, or management of the company. He should be
unconnected with the formation or management of the company.
7. The company and every person who knowingly issues a prospectus without
delivering a copy thereof to the Registrar for the registration shall be
punishable with fine up to Rs. 50,000.
6. WHEN REGISTRAR MUST REFUSE REGISTRATION
Section 60(3) provides that the Registrar shall not register a prospectus if
(a) it is not dated Section 55;
(b) it does not comply with the requirements of Section 56 as to the matters and
reports to be set out in it;
(c) it contains statements or reports of experts engaged or interested in the
formation or promotion or management of the company Section 57;
(d) it includes a statement purported to be made by an expert without a
statement that he has given and has not withdrawn his consent to the
manner of its inclusion therein;
(e) it does not contain consent in writing of directors, a copy of the documents
mentioned in Section 60(1) has been filed or does not comply with regard to
the fact that a copy of it has been filed with Registrar;
(f) it is not accompanied by the consent in writing of the auditor, legal adviser,
attorney, solicitor, Issue House, banker, managers to the issue or broker, if
named in prospectus to act in that capacity Section 60(3).


7. SHELF PROSPECTUS
The concept of shelf prospectus had been introduced by the Companies
(Amendment) Act, 2000 by insertion of new Section 60A.
Shelf prospectus means a prospectus issued by any financial institution or bank
for one or more issues of securities or class of securities specified in the prospectus.
Accordingly as per Section 60A
1. Any public financial institution, public sector bank or scheduled bank whose
main object is financing shall file a shelf prospectus. Financing for this
purpose means making loans to, or subscribing in the capital of a private
industrial enterprise engaged in infrastructural financing or such other
company as the Central Government may notify in this behalf.
2. A company filing a shelf prospectus with the Registrar shall not be required
to file prospectus afresh at every stage of offer of securities by it within the
period of validity of such shelf prospectus, which is one year from the date of
opening of the first issue of securities.
3. A company filing a shelf-prospectus shall be required to file an information
memorandum on all material facts relating to new charges created, changes
in the financial position as have occurred between the first offer of securities,
previous offer of securities and succeeding offer of securities within such
time as may be prescribed by the Central Government prior to making of
second or subsequent offer of securities under the shelf prospectus. For this
purpose of Section 60A(3), Rule 4CCCA of the Companies (Central
Government's) General Rules and Forms, 1956 prescribes a period of three
months. [Notification No. GSR 96(E) dt. 14.2.01].
4. An information memorandum shall be issued to the public along with shelf
prospectus filed at the stage of the first offer of securities and such
prospectus shall be valid for a period of one year from the date of opening of
the first issue of securities under that prospectus:
Provided that where an update of information memorandum is filed every
time an offer of securities is made, such memorandum together with the
shelf prospectus shall constitute the prospectus.
The concept of shelf prospectus will save expenditure and time of the companies
in issuing a new prospectus every time they wish to issue securities to the public
within a period of one year.
SEBI has vide SEBI/CFD/DIL/DIP/12/2004/8/4 dated April 8, 2004 prescribed
additional norms in SEBI (Disclosure and Investor Protection) Guidelines, 2000 by
adding a new Chapter XII-A relating to shelf-prospectus which provides:
1. Applicability
(a) This chapter shall apply to issues of securities to be made by public sector
banks, scheduled commercial banks and public financial institutions
pursuant to a shelf prospectus proposed to be issued in terms of Section
60A of the Companies Act, 1956.


(b) Unless otherwise specified in this Chapter, the provisions of these
Guidelines relating to public issues shall apply in respect of such issues.
2. Procedure
(i) A public sector bank, scheduled commercial bank or public financial
institution proposing to issue a shelf prospectus shall file a draft shelf
prospectus with the Board.
(ii) Where a draft shelf prospectus is filed with the Board, the provisions of
Chapter V of these Guidelines shall apply as if it were a draft prospectus
filed under these Guidelines.
(iii) The shelf prospectus shall, in addition to other requisite disclosures as per
these Guidelines, also disclose the aggregate amount proposed to be raised
through all the stages of offers of securities made under the shelf prospectus.
(iv) The observation letter issued by the Board shall be valid for a period of 365
days from the date of issuance.
3. Information memorandum
(i) A public sector bank, scheduled commercial bank or public financial
institution shall file the shelf prospectus after incorporating the updations in
terms of information memorandum in respect of the second or any
subsequent offer of securities with the Board.
(ii) The shelf prospectus as updated in terms of the above clause shall be uploaded
on the website of SEBI and on the website of the lead merchant bankers.
(iii) The public sector bank, scheduled commercial bank or public financial
institution shall open the particular stage of offer of securities after filing the
information memorandum/shelf prospectus as updated in terms of Clause (i)
with the Registrar of Companies and with the Board.
8. INFORMATION MEMORANDUM
Section 60B of the Companies Act, 1956 speaks about Information
Memorandum. It is a kind of prospectus which has its relevance in the book building
process. A company going for a public issue has to issue a draft prospectus to
publicize the issue in the form of a circular, advertisement or a prospectus. This
prospectus is called an information memorandum and shall contain all particulars that
are required to be included in a prospectus except the number and price of issues.
This prospectus is required to be filed with SEBI which may incorporate some
changes to it. After that, a company has to file a red-herring prospectus to the
Registrar and SEBI at least three days prior to the opening of the issue. Both the red-
herring prospectus and the information memorandum shall contain all the particulars
that are required to be given in the prospectus except the number and price of issue.
If there is any variation between the red-herring prospectus and the information
memorandum, the same has to be highlighted and has to be individually intimated to
the persons invited to subscribe to the issue of securities.
9. RED-HERRING PROSPECTUS
"Red-herring prospectus" means a prospectus which does not have complete
particulars on the price of the securities offered and the quantum of securities offered.


The information memorandum and red-herring prospectus carry same obligations as
are applicable in the case of prospectus. Every variation between the information
memorandum and the red-herring prospectus shall be highlighted by the issuer
company and shall be individually intimated to the persons invited to subscribe to the
securities.
Section 60B(7) provides that the applicant or proposed subscriber shall exercise
his right to withdraw from the application on any intimation of variation within seven
days from the date of such intimation and shall indicate such withdrawal in writing to
the company and the underwriters.
The company or underwriters or bankers shall not encash subscription moneys
or post-dated cheques or stock-invest received in advance, before the date of
opening of the issue, without having individually intimated the prospective subscribers
of the variation and without having offered an opportunity to such prospective
subscribers to withdraw their application and cancel their post-dated cheques or
stock-invest or return of the subscription paid.
If a company or underwriter or banker to the issue acts contrary to this stipulation
i.e. without giving enough information of any variations or the particulars of withdrawing
the offer or opportunity for cancelling the post-dated cheques or stock invest, such
action shall be void and the applicant shall be entitled to receive a refund or return of
his post-dated cheques or stock invests or subscription money or cancellation of
application. The applicants are entitled to receive back their original applications and
interest at the rate of 15% from date of encashment till payment or realisation.
Once the offer for securities is closed, a final prospectus stating therein the total
capital raised whether by way of debt or share capital, the closing price of the
securities and any other details which are not complete in the red-herring prospectus
shall be filed with SEBI in the case of listed public company and in any other case
with the Registrar of companies only.
10. CONTENTS OF PROSPECTUS/DISCLOSURES IN PROSPECTUS
A. As per Companies Act, 1956
Section 56 requires every prospectus to disclose the matter as specified in
Schedule II to the Companies Act.
The Central Government has vide Notification No. 666(E) dated 3.10.1991
amended Schedule II. The matters to be stated in the prospectus under the revised
Schedule II are divided into 3 parts which are as under:
PART I
I. General Information
(a) Name and address of registered office of the company.
(b) (i)Consent of the Central Government for the present issue and declaration of
the Central Government about non-responsibility for financial soundness
or correctness of statements.


(ii)Letter of intent/industrial licence and declaration of the Central Government
about non-responsibility for financial soundness or correctness of
statements.
(c) Names of Regional Stock Exchanges and other stock exchanges where
application made for listing of present issue.
(d) Provisions of Sub-section (1) of Section 68A of the Companies Act relating
to punishment for fictitious applications.
(e) Statement/Declaration about refund of the issue if minimum subscription of
90 per cent is not received within 90 days from closure of the issue.
(f) Declaration about the issue of allotment letters/refunds within a period of 10
weeks and interest in case of any delay in refund at the prescribed rate
under Section 73(2)/(2A).
(g) Date of opening of the issue.
Date of closing of the issue.
Date of earliest closing of the issue.
(h) Name and address of auditors, and lead managers.
(i) Name and address of trustees under debenture trust deed (in case of
debenture issue).
(j) Whether rating from CRISIL or any rating agency has been obtained for the
proposed debenture/preference shares issue.
If no rating has been obtained this should be answered as No.
If yes, the rating should be indicated.
(k) Underwriting of the issue.
(Names and address of the underwriters and the amount underwritten by
them).
(Declaration by Board of Directors that the underwriters have sufficient
resources to discharge their respective obligations).
(l) A statement by the Board of Directors stating that
(i)all monies received out of issue of shares or debentures to public shall be
transferred to a seperate bank account other than the bank account
referred to in Sub-section (3) of Section 73.
(ii)details of all monies utilised out of the issue referred to in sub-item (i) shall be
disclosed under an appropriate separate head in the balance sheet of
the company indicating the purpose for which such monies had been
utilised; and
(iii)details of all unutilised monies out of the issue of shares or debentures, if any
offered to in sub-item (i) shall be disclosed under an appropriate
separate head in the balance sheet of the company indicating the form
in which such unutilised money have been invested.
II. Capital Structure of the Company
(a) Authorised, issued, subscribed and paid-up capital.
(b) Size of present issue giving separately reservation for preferential allotment
to promoters and others.


(c) Paid-up Capital:
(i)after the present issue.
(ii)after conversion of debentures (if applicable).
III. Terms of the Present Issue
(a) Terms of payments.
(b) Rights of the instrument holders.
(c) How to apply-availability of forms, prospectus and mode of payment.
(d) Any special tax benefits for company and its shareholders.
IV. Particulars of the Issue
(a) Objects.
(b) Project cost.
(c) Means of Financing (including contribution of promoters).
V. Company, Management and Project
(a) History and main objects and present business of the company.
(b) Subsidiary(ies) of the company, if any (For financial data refer to auditors
report in Part II).
(c) Promoters and their background.
(d) Names, addresses and occupation of manager, managing director and other
directors including nominee directors, whole-time directors, (giving their
directorship in other companies).
(e) Location of project.
(f) Plant and machinery, technology, process etc.
(g) Collaboration, any performance guarantee or assistance in marketing by the
collaborators.
(h) Infrastructure facilities for raw materials and utilities like water, electricity etc.
(i) Schedule of implementation of the project and progress made so far, giving
details of land acquisition, civil works, installation of plant and machinery,
trial production, commercial production etc.
(j) The products:
(i)Nature of the Product(s) Consumer/Industrial and end users.
(ii)Approach to marketing and proposed marketing set up.
(iii)Export possibilities and export obligations, if any.
(In case of a company providing any service particulars, as applicable, be
furnished).
(k) Future Prospects expected capacity utilisation during the first three years
from the date of commencement of production, and the expected year when
the company would be able to earn cash profits and net profits.


Stock market data for shares/debentures of the company [high/low price in each
of the last 3 years and monthly high/low during the last six months (where
applicable)].
VI. Following particulars in regard to the company and other listed companies
under the same management within the meaning of Section 370(1B) which
made any capital issue during the last three years:
Name of the company
Year of issue
Type of issue
(Public/rights/composite)
Amount of issue
Date of closure of issue
Date of completion of delivery of share/debenture certificates
Date of completion of the project, where object of the issue was financing of a
project.
Rate of dividend paid.
VII. (a) Outstanding Litigation Pertaining to
(i)matters likely to affect operation and finances of the company including
disputed tax liabilities of any nature; and
(ii)criminal prosecution launched against the company and the directors for
alleged offences under the enactments specified in paragraph 1 of Part I
of Schedule XIII to the Companies Act, 1956.
(b) Particulars of default, if any, in meeting statutory dues, institutional dues,
and towards instrument holders like debentures, fixed deposits and arrears
on cumulative preference shares etc. (also give the same particulars by the
same private promoters and listed on stock exchanges).
(c) Any material development after the date of the latest balance-sheet and its
impact on performance and prospects on the company.
VIII. Management Perception of Risk Factors (e.g., sensitivity to foreign
exchange rate fluctuations, difficulty in availability of raw materials or in
marketing of products, cost/time over-run, etc.).
PART II
(A) General Information
1. Consent of Directors, Auditors, Solicitors/Advocates, Managers to Issue
Registrar of Issue, Bankers to the Company, Bankers to the Issue and
Experts.
2. Expert opinion obtained, if any.
3. Change, if any, in directors and auditors during the last three years, and
reasons thereof.


4. Authority for the issue and details of resolution passed for the Issue.
5. Procedure and time schedule for allotment and issue of certificates.
6. Names and addresses of the Company Secretary, Legal Advisers, Lead
Managers, Co-Managers, Auditors, Bankers to the company, Bankers to the
issue and Brokers to the issue.
(B) Financial Information
Reports to be set out:
1. A report by the auditors of the company with respect to
(a)profits and losses and assets and liabilities, in accordance with sub-clause (2)
or (3) of this clause, as the case may require; and
(b)the rates of the dividends, if any, paid by the company in respect of each
class of shares in the company for each of the five financial years
immediately preceding the issue of the prospectus, giving particulars of
each class of shares of which such dividends have been paid and
particulars of the cases in which no dividends have been paid in respect
of any class of shares for any of those years;
and if no accounts have been made up in respect of any part of the period of
five years ending on a date three months before the issue of the prospectus,
containing a statement of that fact (and accompanied by a statement of the
accounts of the company in respect of that part of the said period up to a
date not earlier than six months of the date of issue of the prospectus
indicating the profit or loss for that period and the assets and liabilities
position as at the end of the period together with a certificate from the
auditors that such accounts have been examined and found correct by them.
The said statement may indicate the nature of provision or adjustment made
or yet to be made).
2. If the company has no subsidiaries, the report shall
(a)so far as regards profits and losses, deal with the profits or losses of the
company (distinguishing items of a non-recurring nature) for each of the
five financial years immediately preceding the issue of the prospectus;
and
(b)so far as regards assets and liabilities, deal with the assets and liabilities of
the company at the last date to which the accounts of the company were
made up.
3. If the company has subsidiaries, the report shall
(a)so far as regards profits and losses, deal separately with the companys
profits or losses as provided by sub-clause (2) and in addition deal
either
(i) as a whole with the combined profits and losses of each subsidiaries,
so far as they concern members of the company; or
(ii) individually with the profits or losses of each subsidiary, so far as
they concern the members of the company.
or, instead of dealing separately with the companys profits and losses, deal
as a whole with the profits or losses of the company, and so far as they


concern members of the company, with the combined profits or losses
of its subsidiaries; and
(b)so far as regards assets and liabilities, deal separately with the companys
assets and liabilities as provided by sub-clause (2) and in addition, deal
either
(i) as a whole with the combined assets and liabilities of its subsidiaries,
with or without the companys assets and liabilities; or
(ii) individually with the assets and liabilities of each subsidiaries;
and shall indicate as respects the assets and liabilities of the subsidiaries,
the allowance to be made for persons other than members of the company.
4. If the proceeds, or any part of the proceeds, of the issue of the shares or
debentures are or is to be applied directly or indirectly
(i)in the purchase of any business; or
(ii)in the purchase of an interest in any business and by reason of that purchase,
or anything to be done in consequence thereof, or in connection
therewith; the company will become entitled to an interest as respects
either the capital or profits and losses or both, in such business
exceeding fifty percent, thereof;
a report made by accountants (who shall be named in the prospectus)
upon
(a)the profits or losses of the business for each of the five financial years
immediately preceding the issue of the prospectus; and
(b)the assets and liabilities of the business at the last date to which the accounts
of the business were made up, being a date not more than one hundred
and twenty days before the date of issue of the prospectus.
5. (1)If
(a) the proceeds, or any part of the proceeds, of the issue of the shares
or debentures are or is to be applied directly or indirectly in any
manner resulting in the acquisition by the company of shares in any
other body corporate; and
(b) by reason of that acquisition or anything to be done in consequence
thereof or in connection therewith, that body corporate will become a
subsidiary of the company;
a report made by accountants (who shall be named in the prospectus) upon

(i) the profits or losses of the other body corporate for each of the five
financial years immediately preceding the issue of the prospectus;
and
(ii) the assets and liabilities of the other body corporate at the last date
to which its account were made up.
(2)The said report shall
(a) indicate how the profits or losses of the other body corporate dealt
with by the report would, in respect of the shares to be acquired,
have concerned members to the company and what allowance would


have fallen to be made, in relation to assets and liabilities so dealt
with for holders of other shares, if the company had at all material
times held the shares to be acquired; and
(b) where the other body corporate has subsidiaries deal with the profits
or losses and the assets and liabilities of the body corporate and its
subsidiaries in the manner provided by the sub-clause (2) above in
relation to the company and its subsidiaries.
6. Principal terms of loan and assets charged as security.
(C) Statutory and other Information
1. Minimum subscription.
2. Expenses of the issue giving separately fee payable to:
(a)Advisors.
(b)Registrars to the issue.
(c)Managers to the issue.
(d)Trustees for the debenture holders.
3. Underwriting commission and brokerage.
4. Previous issue for cash.
5. Previous public or rights issue, if any: (during last five years)
(a)Date of Allotment : Closing Date :
Date of Refunds :
Date of listing on the stock exchange:
(b)If the issue(s) at premium or discount and the amount thereof.
(c)The amount paid or payable by way of premium, if any, on each share which
had been issued within the two years preceding the date of the
prospectus or is to be issued, stating the dates or proposed dates of
issue and, where some shares have been or are to be issued at a
premium and other shares of the same class at a lower premium, or at
par or at a discount, the reason for the differentiation and how any
premiums received have been or are to be disposed of.
6. Commission or Brokerage on previous issue.
7. Issue of shares otherwise than for cash.
8. Debentures and redeemable preference shares and other instruments
issued by the company outstanding as on the date of prospectus and terms
of issue.
9. Option to subscribe.
9A. The details of option to subscribe for securities be dealt with in a depository.
10. Purchase of property.
(i)As respects any property to which this clause applies
(a) the names, addresses, descriptions and occupation of the vendors;


(b) the amount paid or payable in cash, shares or debentures, to the
vendor; and, where there is more than one separate vendor, or the
company is a sub-purchaser, the amount so paid or payable to each
vendor, specifying separately the amount, if any, paid or payable for
goodwill.
(c) the nature of the title or interest in such property acquired or to be
acquired by the company;
(d) short particulars of every transaction relating to the property
completed within the two preceding years, in which any vendor of the
property to the company or any person who is, was at the time of the
transaction, a promoter, or a director or proposed director of the
company had any interest, direct or indirect, specifying the date of
the transaction and the name of such promoter, director or proposed
director and stating the amount payable by or to such vendor,
promoter, director or proposed director in respect of the transaction.
(ii)The property to which sub-clause (i) applies is a property purchased or
acquired by the company or proposed to be purchased or acquired,
which is to be paid for wholly or partly out of the proceeds of the issue
offered for subscription by the prospectus or the purchase or acquisition
of which has not been completed at the date of issue of the prospectus,
other than property
(a) the contract for the purchase or acquisition whereof was entered into
in the ordinary course of the companys business, the contract not
being in contemplation of the issue nor the issue in consequence of
the contract; or
(b) as respects which the amount of the purchase money is not
material.
(iii)For the purpose of this clause, where a vendor is a firm, the members of the
firm shall not be treated as separate vendors.
(iv)If the company proposes to acquire a business which has been carried on for
less than three years, the length of time during which the business has
been carried on.
Any amount or benefit paid or given within two preceding years or intended
to be paid or given to any promoter or officer and consideration for payment
of giving of the benefit.
11. (i)Details of Directors, proposed directors, whole-time directors, their
remuneration, appointment and remuneration of managing directors,
interests of directors, their borrowing powers and qualification shares.
Any amount or benefit paid or given within the two preceding years or
intended to be paid or given to any promoter or officer and consideration
for payment of giving of the benefit.


(ii)The dates, parties to, and general nature of:
(a) every contract appointing or fixing the remuneration of a managing
director or manager whenever entered into, that is so say, whether
within or more than, two years before the date of the prospectus;
(b) every other material contract, not being a contract entered into in the
ordinary course of the business carried on or intended to be carried
on by the company or a contract entered into more than two years
before the date of the prospectus.
A reasonable time and place at which any such contract or a copy thereof
may be inspected.
(iii)Full particulars of the nature and extent of the interest, if any, of every director
or promoter:
(a) in the promotion of the company; or
(b) in any property acquired by the company within two years of the date
of the prospectus or proposed to be acquired by it.
Where the interest of such a director or promoter consists in being a member
of a firm or company, the nature and extent of the interest of firm or a
company, with a statement of all sums paid or agreed to be paid to him
or to the firm or company in cash or shares or otherwise by any person
either to induce him to become, or to qualify him as, a director, or
otherwise for services rendered by him or by the firm or company.
12. Rights of members regarding voting, dividend, lien of shares and the
process for modification of such rights and forfeiture of shares.
13. Restrictions, if any on transfer and transmission of shares/debentures and
on their consolidation/splitting.
14. Revaluation of assets, if any, (during last 5 years).
15. Material contracts and inspection of documents e.g.
A.Material contracts.
B.Documents.
C.Time and place at which the contracts together with documents will be
available for inspection from the date of prospectus until the date of
closing of the subscription list.
PART III
Provisions applying to Parts I and II of the Schedule
16. Every person shall, for the purpose of this Schedule, be deemed to be a
vendor who has entered into any contract, absolute or conditional, for the sale or
purchase or for any option of purchase, of any property to be acquired by the
company, in any case where:
(a) the purchase money is not fully paid at the date of the issue of the
prospectus;


(b) the purchase money is to be paid or satisfied, wholly or in part, out of the
proceeds of the issue offered for subscription by the prospectus;
(c) the contract depends for its validity or fulfillment on the result of that issue.
17. Where any property to be acquired by the company is to be taken on lease,
this Schedule shall have effect as if the expression vendor included the lessor, the
expression purchase money included the consideration for the lease, and the
expression sub-purchaser included a sub-lessee.
18. If in the case of a company which has been carrying on business, or of a
business which has been carried on for less than five financial years, the accounts of
the company or business have only been made up in respect of four such years,
three such years, two such years or one such year, Part II of this Schedule shall have
effect as if references to four financial years, three financial years, two financial years
or one financial year, as the case may be, were substituted for references to five
financial years.
19. Where the five financial years immediately preceding the issue of prospectus
which are referred to in Part II of this Schedule or in this part cover a period of less
than five years, references to the said five financial years in either part shall have
effect as if reference to a number of financial years the aggregate period covered by
which is not less than five years immediately preceding the issue of the prospectus
were substituted for references to the five financial years aforesaid.
20. Any report required by Part II of this Schedule shall either:
(a) indicate by way of note any adjustments as respects the figures of any
profits or losses or assets and liabilities dealt with by the report which
appear to the persons making the report necessary; or
(b) make those adjustments and indicate that adjustments have been made.
21. Any report by accountants required by Part II of this Schedule:
(a) shall be made by accountants qualified under this Act for appointment as
auditors of the company; and
(b) shall not be made by any accountant who is an officer or servant, or a
partner or in the employment of an officer or servant, of the company or of
the companys subsidiary or holding company or of a subsidiary of the
companys holding company.
For the purposes of this clause, the expression officer shall include a proposed
director but not an auditor.
22. Inspection of documents: Reasonable time and place at which copies of all
balance sheets and profit and loss accounts, if any, on which the report of the
auditors is based, and material contracts and other documents may be inspected.
Note: Term year wherever used hereinearlier, means financial year.
[Declaration: That all the relevant provisions of the Companies Act, 1956, and the
guidelines issued by the Government or the guidelines issued by the Securities and
Exchange Board of India established under section 3 of the Securities and Exchange
Board of India Act, 1992, as the case may be, have been complied with and no


statement made in prospectus is contrary to the provisions of the Companies Act,
1956 or the Securities and Exchange Board of India Act, 1992 or rules made
thereunder or guidelines issued, as the case may be.]
Place:
Date: Signatures of directors
B. Disclosures as per SEBI Guidelines
After the repeal of Capital Issues (Control) Act in 1992 the Securities and
Exchange Board of India (SEBI) had issued a set of guidelines to regularise the
capital market in the country. These guidelines at large aimed at investor protection
through disclosures in prospectus. These guidelines which were issued by SEBI vide
GL/IP No. 1/SEBI/PMD-92-93 with effect from 11.6.92 had made it mandatory for all
companies issuing shares, debentures or other instruments to public to make
appropriate disclosures in the prospectus or offer document.
However, SEBI has issued a compendium containing consolidated Guidelines,
Circulars, Instructions relating to issue of capital effective from January 27, 2000. The
compendium titled SEBI (Disclosure and Investor Protection) Guidelines, 2000 has
replaced the original guidelines issued in 1992 and clarifications thereof. (These
guidelines have been amended from time to time). Section I of Chapter VI of the
guidelines deals with contents of the offer document. The following major disclosures
are to be made in the prospectus/letter of offer as per these guidelines:
1. The offer document shall contain all material information which shall be true
and adequate so as to enable the investors to make informed decision on
the investments in the issue.
The offer document shall also contain the information and statements
specified here and shall as far as possible follow the order in which the
requirements are listed in this chapter and summarized in Schedule VIIA:
Provided that in case of public issue by listed company other than a fast
track issue, information relating to details of share capital issued, major
shareholders, Key Managerial Personnel and Financial Information of Group
Companies, in respect of entities not covered under Section 370(1)(B) of the
Companies Act, 1956 may not be disclosed in the prospectus, if the
following conditions are fulfilled:
(a)The issuer company has been filing periodic statements in regard to financial
results and shareholding pattern with the Designated Stock Exchange
and ROC for last 3 years and are available on website.
(b)The issuer company has in place an investor grievance handling mechanism.
(c)The Lead Merchant Banker has certified compliance of (a) and (b) above:
Provided further that where the issuer company is complying with the
aforesaid proviso, if shall
(a)furnish to the Board an undertaking along with the draft prospectus, which
shall also be incorporated in the prospectus.
(b)make a copy of the offer document of the immediately preceding public or
rights issue available to the public.


The draft offer document and final offer document shall be approved by the
Board of Directors of the issuer company and signed by all the Directors
(including the Managing Director), Chief Executive Officer and Chief
Financial Officer of the issuer company. They shall also certify that all the
disclosures made in the other document are true and correct.
2. Cover Pages
2.1.1Front Outer Cover Page
(a) The front cover page of the prospectus shall be white and no
patterns or pictures shall be printed on this page.
(b) The cover page paper shall be of adequate thickness (preferably
minimum 100 gcm. quality).
2.1.2The front outer cover page of the prospectus shall contain the following details
only:
(a) The word Prospectus
(b) The name of the issuer company and address of the registered office
of the company along with telephone, fax number and E.mail
address.
(c) The nature, number, price and amount of the instruments offered.
(d) (i) The Risks in relation to the first issue (wherever applicable)
shall be incorporated in a box format in case of initial public
issue:
This being the first issue of the company, there has been
no formal market for the securities of the company. The
issue price (has been determined and justified by the Lead
Merchant Banker and the issuer company as stated under
justification of Premium paragraph-in case of premium
issue) should not be taken to be indicative of the market
price of the equity shares after the shares are listed. No
assurance can be given regarding an active or sustained
trading in the shares of the company nor regarding the price
at which the equity shares will be traded after listing.
(ii) In case of issue proposed to be listed on the Over the
Counter Exchange of India and/or where market maker has
been appointed the concluding sentence of the above risk
factor shall read as under:
No assurance can be given regarding the price at which the
equity shares of the company will be traded after listing.
(e) The following general risk shall be incorporated:
Investment in equity and equity related securities involve a degree
of risk and investors should not invest any funds in this offer unless
they can afford to take the risk of losing their investment. Investors
are advised to read the risk factors carefully before taking an
investment decision in this offering. For taking an investment
decision, investors must rely on their own examination of the issuer
and the offer including the risks involved. The securities have not


been recommended or approved by Securities and Exchange Board
of India (SEBI) nor does SEBI guarantee the accurancy or adequacy
of this document.
Specific attention of investors shall be invited to the summarised and
detailed statement of Risk Factors by indicating their page number(s)
in the General Risks.
(f) Issuers Absolute Responsibility clause shall be incorporated as
under:
The issuer, having made all reasonable inquiries, accepts
responsibility for and confirms that this offer document contains all
information with regard to the issuer and issue, which is material in
the context of the issue, that the information contained in the offer
document is true and correct in all material aspects and is not
misleading in any material respect, that the opinions and intentions
expressed herein are honestly held and that there are no other facts,
the omission of which make this document as a whole or any of such
information or the expression of any such opinions or intentions
misleading in any material respect.
(g) (i) The name and address of only of the Lead Merchant Banker
who files the offer document with Board along with its
telephone, fax number, E.mail address shall appear on the
front out cover page.
(ii) the names of the other Lead Merchant Bankers, Co-
Managers, etc. may be mentioned on the back cover page.
(iii) If more than one merchant banker are associated with the
issue, the inter se allocation of responsibility of each
Merchant Banker as demarcated and submitted to the
Board, shall be disclosed in the offer document.
(h) The name and address of the Registrar of the issue along with the
telephone number and fax number.
(i) Issue Opening Date
(j) Credit Rating, if applicable
(k) Statement indicating whether IPO grading has been opted for.
(l) Name/s of stock exchanges where listing of the securities is
proposed and the details of in-principle approval for listing obtained
from the stock exchanges.
2.2Front Inside Cover Page
2.2.1 Index shall appear on the Front Inside Cover Page
2.3Inner Cover Pages
2.3.1 The other risk factors shall be printed in clear readable font
(preferably of minimum point 10 size) starting on the first inner cover
page to be numbered page i (and, if need be, shall continue on
subsequent pages ii, iii, etc. as distinct from the page number of the
offer document proper which would run as 1, 2, 3 etc.) in addition to


appearing in the Part of the Prospectus.
2.3.2 (i) The risk factors shall be classified as those which are
specific to the project and internal to the issuer company
and those which are external and beyond the control of the
issuer company.
(ii) The risk factor shall be determined on the basis of their
materiality.
(iii) Materiality shall be decided taking the following factors into
account:
(a) some events may not be material individually but may be
found material collectively.
(b) some events may have material impact qualitatively instead
of quantitatively.
(c) some events may not be material at present but may not be
material at present but may be having material impacts in
future.
(iv) the risk factors shall appear in the offer document in the
following manner:
(1) Risks envisaged by management.
(2) Proposals, if any, to address the risks.
2.4Back Cover Pages
2.4.1 Back inside Cover Page and Back Outside Cover Page shall be in
white.
2.4.2 Any notes required to be given prominence shall appear
immediately after the Risk Factors wherever they appear.
SECTION I
3. General Information :
3.1Name and address of registered office of the issuer company.
3.2Letter of intent/industrial license and declaration of the Central Govt./RBI
about non-responsibility for financial soundness or correctness of
statements.
3.3Disclaimer Clause
3.3.1 A prospectus shall contain the following disclaimer clause in bold
capital letters:
It is to be distinctly understood that submission of offer document to
SEBI should not in any way be deemed or construed that the same
has been cleared or approved by SEBI. SEBI does not take any
responsibility either for the financial soundness of any scheme or the
project for which the issue is proposed to be made or for the
correctness of the statements made or opinions expressed in the
offer document. Lead Merchant Banker, ___________ has certified that


the disclosures made in the offer document are generally adequate
and are in conformity with SEBI (Disclosures and Investor Protection)
Guidelines in force for the time being. Their requirement is to
facilitate investors to take an informed decision for making
investment in the proposed issue.
It should also be clearly understood that while the issuer Company is
primarily responsible for the correctness, adequacy and disclosure of
all relevant information in the offer document, the Lead Merchant
Banker is expected to exercise Due Diligence to ensure that the
company discharges its responsibility adequately in this behalf and
towards this purpose, the Lead Merchant Banker has furnished to
SEBI a Due Diligence Certificate dated))___________in accordance with
SEBI (Merchant Bankers) Regulations, 1992 which reads as follows:
(i) We have examined various documents including those
relating to litigation like commercial dispute, patent disputes,
disputes with collaborators etc. and other material in
connection with the finalisation of the offer document
pertaining to the said issue;
(ii) On the basis of such examination and the discussions with
the Company, its Directors and other officers, other
agencies, independent verification of the statements
concerning the objects of the issue, projected profitability,
price justification and the contents of the documents
mentioned in the Annexure and other papers furnished by
the company.
We confirm that:
(a) the offer document forwarded to SEBI is in conformity with
the documents, material and paper relevant to the issue;
(b) all the legal requirements connected with the said issue, as
also the guidelines, instructions, etc. issued by SEBI, the
Government and any other competent authority in this
behalf have been duly complied with; and
(c) the disclosures made in the offer document are true, fair
and adequate to enable the investors to make a well
informed decision as to the investment in the proposed
issue.
(iii) We confirm that beside ourselves, all the intermediaries
named in the prospectus are registered with SEBI and till
date such registration is valid.
(iv) We have satisfied ourselves about the worth of the
underwriters to fulfill their underwriting commitments.
The filing of offer document does not, however, absolve the company
from any liabilities under Section 63 or 68 of the Companies Act,
1956 or from the requirement of obtaining such statutory of other
clearances as may be required for the purpose of the proposed


issue. SEBI, further reserves the right to take up, at any point of time,
with the lead merchant banker(s) any irregularities or lapses in offer
document.
3.4Disclaimer Statement from the Issuer
A statement to the effect that the issuer accepts no responsibility for the
statements made otherwise than in the prospectus or in the
advertisement or any other material issued by or at the instance of the
issuer and that anyone placing reliance on any other source of
information would be doing so at his own risk should be incorporated.
3.5Filing of offer document with the Board and ROC
(a) Under this head, the office of the Board where the offer document
has been filed shall be mentioned.
(b) The ROC where copy of the offer document, having attached thereto
the Material Contracts and Documents referred to elsewhere in the
offer document, has been filed shall also be mentioned.
3.6Names of the designated stock exchange and other stock exchanges where
application has been made for listing of present issue, shall be
mentioned.
3.7Provisions of Sub-section (1) of Section 68A of the Companies Act, relating to
punishment for fictitious applications, shall be mentioned.
3.8Minimum Subscription Clause.
Following statement shall appear:
3.8.1 For Non-underwritten Public Issues
If the company does not receive the minimum subscription of 90% of
the issued amount on the date of closure of the issue, or if the
subscription level falls below 90% after the closure of issue on
account of cheques having being returned unpaid or withdrawal of
applications, the company shall forthwith refund the entire
subscription amount received. If there is delay beyond 8 days after
the company becomes liable to pay the amount, the company shall
pay interest as per Section 73 of the Companies Act 1956.
3.8.2 For Underwritten Public Issues
If the company does not receive the minimum subscription of 90% of
the net offer to public including devolvement of Underwriters within
60 days from the date of closure of the issue, the company shall
forthwith refund the entire subscription amount received. If there is a
delay beyond 8 days after the company becomes liable to pay the
amount, the company shall pay interest prescribed under Section 73
of the Companies Act. 1956.
3.8.3 For Composite Issues
The Lead Merchant Banker shall ensure that the requirement of
minimum subscription is satisfied both jointly and severally, i.e.,
independently for both rights and public issues.


If the company does not receive the minimum subscription in either
of the issues the company shall refund the entire subscription
received.
3.8.4 Offer For Sale
The requirement of minimum subscription shall not be applicable to
offer for sale.
3.8.5 Public issues by infrastructure companies
3.8.5.1 The requirement of minimum subscription shall not be
applicable to an eligible infrastructure company, provided
disclosures regarding the alternate source of funding is
made in the offer documents.
3.9Declaration about the issue of allotment letters or refunds within a period of 10
weeks and interest in case of any delay in refund at the prescribed rate
under Section 73(2)/73(2A) of the Companies Act, shall be mentioned.
3.10Issue Schedule
(a) Date of opening of the issue
(b) Date of closing of the issue
(c) Date of earliest closing of the issue.
3.11Intermediaries and auditors
(a) Name and address of auditors and lead managers.
(b) Name and address of registrars to the issue.
(c) Name and address of the trustee under debenture trust deed (in
case of debenture issue).
3.12Credit Rating
(a) The credit rating from a credit rating agency for the proposed issue of
debt security including convertible instruments.
(b) If the rating has been obtained from more than one credit rating
agencies, disclosures shall be made of all ratings including
unaccepted rating.
(c) All the credit ratings obtained during the previous three years before
filing of the offer document for any of its listed debt-securities at the
time of accessing the market through a rated debt-security shall be
disclosed.
3.13IPO Grading:
(a) Name of the credit rating agency from which grading has been
obtained for the proposed IPO of equity shares or any other security
which may be converted into or exchanged with equity shares at a
later date and the grading so obtained, including unaccepted grades.
(b) If grading has been obtained from more than one credit rating
agency, disclosure shall be made of all the grades so obtained,
including unaccepted grades.
(c) The rationale/description of the grading/s so obtained, as furnished
by the credit rating agency/ies.


3.14Underwriting of the issue
(a) Names and addresses of the underwriters and the amount
underwritten by them;
(b) Declaration by board of directors of the issuer company that the
underwriters have sufficient resources to discharge their respective
obligations.
3.15Compliance Officer
(a) The name, address telephone number, fax and E-mail number and
address of Compliance Officer.
(b) The investors attention shall also be invited to contact the
compliance officer in case of any pre-issue/post-issue related
problems such as non-receipt of letter of allotment/share certificates/
refund orders/cancelled stockinvests, etc.
4. Capital Structure of the company
4.1The lead merchant banker shall present the capital structure in the following
manner:
(i) (a) Authorised issued subscribed and paid up capital (number
instruments, description, aggregate nominal value);
(b) Size of present issue giving separately, promoters
contribution, firm allotment/reservation for specified
categories and net offer to public (Number of instruments,
descriptions, aggregate nominal value and issue amount
shall be given in that order, Name of group companies to be
given, in case, reservations has been made for
shareholders of the group companies);
(c) Paid-up capital
(i) after the issue;
(ii) after conversion of securities (if-applicable);
(d) Share Premium Account (before and after the issue).
4.2Notes to Capital Structure
After the details of capital structure, the following notes shall be incorporated:
(a) Note relating to promoters contribution and lock-in period stating
date of allotment, date when made fully paid up, nature of allotment
(rights, bonus, etc.) number of securities, face value of securities,
issue price of securities, percentage of promoters contribution of total
issued capital and the date up to which the securities are locked-in.
(b) An illustrative format of promoters contribution and lock-in is
specified in Schedule VIII.
(i) percentage of contribution by the promoters whose names
figured in the prospectus as promoters in the paragraph on
Promoters and their background and the date up to which
the securities are locked-in.
(ii) An illustrative format of promoters contribution whose name


figures in prospectus is specified in Schedule IX.
(c) Statement that promoters contribution has been brought in not less
than the specified minimum lot and from persons defined as
promoters under the Guidelines.
(d) Statement that the promoters undertake to accept full conversion, if
the promoters contribution is in terms of the same optionally
convertible security as is being offered to the public.
(e) Details of all buy-back and stand by and similar arrangements for
purchase of securities by promoters, directors and lead merchant
bankers shall be disclosed.
(f) An over-subscription to the extent of 10% of the net offer to public
can be retained for the purpose of rounding off to the nearer multiple
of 100 while finalised the allotment.
(g) A disclosure to the effect that the securities offered through this
public/rights issue shall be made fully paid-up or may be forfeited
within 12 months from the date of allotment of securities in the
manner specified manner.
(h) A note stating that:
(a) unsubscribed portion in any reserved category may be
added to any other reserved category.
(b) The unsubscribed portion, if any, after such inter se
adjustments amongst the reserved categories shall be
added back to the net offer to the public.
(i) In case of under-subscription in the net offer to the public portion spill
over to the extent of under subscription shall be permitted from the
reserved category to the net public offer portion.
(j) Following details regarding major shareholders:
(i) names of the ten largest shareholders as on the date of
filling of the prospectus with the Registrar of Companies;
(ii) number of shares held by shareholders at (i) above
including number of shares which they would be entitled to
upon exercise of warrant, option, rights to convert a
debenture, loan or other instrument;
(iii) particulars as in (i) and (ii) above as on a date two years
prior to the date of filing the prospectus with the Registrar of
the Companies;
(iv) particulars as in (i) and (ii) above as on a date 10 days prior
to the date of filing of the prospectus with the Registrar of
Company;
(v) if the issuer company has made an initial public offering
within the immediately preceding two years, the above
information shall be given separately indicating the names
of persons who acquired shares by subscription to the
public issue and those who acquired the shares by
allotment on a firm basis or by private placement.
(k) The details of:


(i) the aggregate shareholding of the Promoters groups and of
the directors of the Promoters, where the promoter is a
company;
(ii) aggregate number of securities purchased or sold by the
Promoters Group and the directors of the promoter during a
period of six months preceding the date on which the draft
prospectus is filed with Board and to be updated by
incorporating the information in this regard till the time of
filing the prospectus with the Registrar of the Company;
(iii) the maximum and minimum price at which purchase and
sales referred to in (ii) above were made along with the
relevant dates.
(l) In the event of it not being possible to obtain information regarding
sales and purchase of securities by any relative of the promoters, a
statement to that effect shall be made in the prospectus on the basis
of the transfers recorded in the books of the company.
Explanation I
For the purpose of sub-clauses (i) and (iii) of clause (k) above, the term
promoter shall include
(a) the person or persons who are in over-all control of the company.
(b) the person or persons who are instrumental in the formulation of a plan or
programme pursuant to which the securities are offered to the public.
(c) the persons or persons named in the prospectus as promoter(s):
Provided that a director/officer of the issuer company or person, if they are
acting as such merely in their professional capacity shall not be included in
the Explanation.
Explanation II
Promoter Group shall include
(a) the promoter;
(b) an immediate relative of the promoter (i.e. any spouse of that persons, or
any parent, brother, sister or child of the persons or of the spouse); and
(c) in case promoter is a company
(i)a subsidiary or holding company of that company;
(ii)any company in which the promoter holds 10% or more of the equity capital or
which holds 10% or more of the equity capital of the Promoter;
(iii)any company in which a group of individuals or companies or combinations
thereof who holds 20% or more of the equity capital in that company
also holds 20% or more of the equity capital of the issuer company; and
(d) in case the promoter is an individual
(i)any company in which 10% or more of the share capital is held by the
promoter or an immediate relative of the promoter or a firm of HUF in
which the Promoter or any one or more of his immediate relative is a


member;
(ii)any company in which a company specified in (i) above, holds 10% or more,
of the share capital;
(iii)any HUF or firm in which the aggregate share of the promoter and his
immediate relatives is equal to or more than 10% of the total; and
(e) all persons whose shareholding is aggregated for the purpose of disclosing
in the prospectus shareholding of the promoter group.
Explanation III
The Financial Institution, Scheduled Banks, Foreign Institutional Investors (FIIs)
and Mutual Funds shall not be deemed to be a promoter or promoter group merely by
virtue of the fact that 10% or more of the equity of the issuer company is held by such
institution.
Provided that the Financial Institutions, Scheduled banks, Foreign Institutional
Investors, shall be treated as promoters or promoter group for the subsidiaries or
companies promoted by them or for the mutual fund sponsored by them.
5. Terms of the present issue
5.1Terms of Payments
5.1.1 The caption interest in case of Delay in Despatch of
Allotment/Refund Orders in case of public issues shall appear and
shall contain the following statement:
The company agrees that as far as possible allotment of securities
offered to the public shall be made within 30 days of the closure of
public issue. The company further agrees that it shall pay interest @
15% per annum if the allotment letters/refund orders have not been
despatched to the applicants within 30 days from the date of closure
of the issue. However applications received after the closure of issue
in fulfillment of underwriting obligations to meet the minimum
subscription requirement, shall not be entitled for the said interest.
5.2Arrangement for Disposal of Odd Lots
5.2.1 (a) Any arrangements made by the issuer company for
providing liquidity for and consolidation of the shares held in
odd lots, particularly when such odd lots arise on account of
issues by way of rights, bonus, conversion of debentures/
warrants etc. shall be intimated to the shareholders/
investors.
(b) The company is free to make arrangement for providing
liquidity in respect of odd lot shares through any investment
or finance company, broking firms or through any other
agency and the particulars of such arrangement if any, may
be disclosed in the offer documents related to the
concerned issue of capital.
5.2.2 Lead Merchant Banker shall ascertain whether the companies
coming for fresh issue of capital propose to set up trusts in order to


provide service to the investors in the matter of disposal of odd lot
shares of the company held by them and if so, disclosures relating to
setting up and operating of the trust shall be contained in the offer
document.
5.2.3 Whenever any issue results in issue of shares in odd lots, the issuer
company, shall as far as possible issue certificates in the
denomination of 1-2-5-10-20-50 shares.
5.3Rights of the instrument holders:
5.4How to apply-availability of forms, prospectus and mode of payment.
5.4.1 Application by mutual funds
(a) Lead Merchant Bankers shall clearly incorporate necessary
disclosures under the heads Procedure for applications by
mutual funds and Multiple Applications to indicate that a
separate application can be made in respect of each scheme
of an Indian mutual fund registered with the Board and that
such applications shall not be treated as multiple applications.
(b) The applications made by the AMCs or custodians of a
Mutual Fund shall clearly indicate the name of the
concerned scheme for which application is being made.
5.4.2 Applications by NRIs
The Lead merchant banker shall ensure the following disclosures:
(a) the name and address of at least one place in India from
where individual NRI applications can obtain the application
forms.
(b) NRI applicants may please note that only such applications
as are accompanied by payment in free foreign exchange
shall be considered for allotment under the reserved
category. The NRIs who intend to make payment through
Non-Resident Ordinary (NRO) account shall use the form
meant for Resident Indians and shall not use the forms
meant for reserved category.
5.4.3 Disclosures about Stockinvests
(a) The disclosures regarding manner of obtaining and mode of
drawing stockinvests, non-utilisation of stockinvests by third
party, time period of utilisation of stockinvests by the
purchasers and disposal of applications accompanied by
stock invest as specified by the RBI shall be incorporated at
the appropriate places in the offer document.
(b) Name of the bank through which the stockinvests shall be
realised, shall be given in the prospectus.
(c) The following paragraph shall be incorporated at the
appropriate places in the prospectus.
Registrars to the issue have been authorised by the
company (through resolution of the Board passed on_____)
to sign on behalf of the company to realise the proceeds of


the Stockinvest from the issuing bank or to affix non-
allotment advice on the instrument or cancel the Stockinvest
of the non allottees or partially successful allotees who have
enclosed more than one stockinvest. Such cancelled
stockinvest shall be sent back by the Registrars directly to
the investors.
5.5Despatch of Refund Orders
The company shall disclose the mode in which it shall make refunds to
applicants in case of over subscription, in the prospectus and abridged
prospectus:
Provided that where the company proposes to make use of more than one
mode of making refunds to applicants, the respective cases where each
such mode will be adopted shall be disclosed.
The permissible modes are:
(a) In case of applicants residing in any of the centres specified by the
Board by crediting of refunds to the bank accounts of applicants
through electronic transfer of funds, permitted by the RBI.
(b) In case of other applicants by dispatch of refund orders by
registered post, where the value is Rs. 1,500 or more, or under
certificate of posting in other cases, and
(c) In case of any category specified by the Board Crediting of refunds
in any other electronic manner permissible under the Banking Laws.
5.6Undertaking by the issuer Company
5.6.1 The following undertaking by the issuer company shall be
incorporated in the offer document.
(a) that the complaints received in respect of the issue shall be
attended by the issuer company expeditiously and
satisfactorily;
(b) that all steps for completion of the necessary formalities
from listing and commencement of trading at all stock
exchanges where the securities are to be listed are taken
within 7 working days of finalisation of basis of allotment;
(c) that the issuer company shall apply in advance for the listing
of equities on the conversion of Debentures/Bonds;
(d) (i) that funds required for making refunds to unsuccessful
applicants as per the mode(s) disclosed shall be made
available to the Registrar to the issue by the issuer.
(ii) that where refunds are made through electronic transfer of
funds, a suitable communication shall be sent to the
applicant within 30 days or 15 days of closure of the issue,
as the case may be, giving details of the bank where
refunds shall be credited along with the amount and
expected date of electronic credit of refund.
(e) that the promoters contribution in full, wherever required,


shall be brought in advance before the issue opens for
public subscription and the balance, if any, shall be brought
in pro rata basis before the calls are made on public;
(f) that the certificates of the securities/refund orders to the
non-resident Indians shall be despatched within specified
time.
(g) that no further issue of securities shall be made till the
securities offered through this offer document are listed or
till the application moneys are refunded on account of non-
listing, under subscription etc.
(h) that necessary cooperation with the credit rating agency(ies)
shall be extended in providing true and adequate information
till the debt obligations in respect of the instrument are
outstanding.
5.6.2 In case of a debenture trustee, the company shall also give
undertakings to the following effect in the offer document:
(i) that the company shall forward the details of utilization of
the funds raised through the debentures duly certified by the
statutory auditors of the company, to the debenture trustees
at the end of each half-year.
(ii) that the company shall disclose the complete name and
address of the debenture trustee in the annual report.
(iii) that the company shall provide a compliance certificate to the
debenture holders (on yearly basis) in respect of compliance
with the terms and conditions of issue of debentures as
contained in the offer document, duly certified by the
debenture trustee.
(iv) that the company shall furnish a confirmation certificate that
the security created by the company in favour of the
debentureholders is properly maintained and is adequate
enough to meet the payment obligations towards the
debentureholders in the event of default.
5.7Utilisation of Issuer Proceeds
5.7.1 A statement by the Board of Directors of issuer company to the effect
that
(a) all moneys received out of issue of shares or debentures to
public shall be transferred to separate bank account other
than the bank account referred to in Sub-section (3) of
Section 73.
(b) details of all monies utilised out of the issue referred to in
sub-items (i) shall be disclosed under an appropriate
separate head in the balance sheet of the company
indicating the purpose for which such moneys had been
utilised; and
(c) details of all unutilised monies out of the issue of shares or
debentures, if any, referred to in sub-item (i) shall be


disclosed under an appropriate separate head in the
balance-sheet of the company indicating the form in which
such unutilised money have been invested.
5.7.2 The offer document shall contain a statement of the Board of
Directors of the issuer company to the effect that
(i) the utilisation of monies received under promoters
contribution and from firm allotments and reservations shall
be disclosed under an appropriate head in the balance
sheet of the company indicating the purpose for which such
monies have been utilised,
(ii) the details of all unutilised monies out of the funds received
under promoters contribution and from firm allotments and
reservations shall be disclosed under a separate head in the
balance sheet of the company indicating the form in which
such utilised monies have been invested.
5.8Any special tax benefits for company and its shareholders.
6. Particulars of the Issue
6.1Objects:
6.1.1 Whether the company proposes to raise funds for a purpose like
fixed asset creation and/or for rotation such as working capital etc.
shall be disclosed clearly in the offer document.
6.1.2 Whether the company proposes to raise funds for a purpose like
fixed asset creation, the requirement of funds shall also be disclosed
clearly.
6.2Project Cost:
(a) Where the company proposes to undertake more than one activity
i.e. diversification, modernisation, expansion etc. the total project
cost shall be given activity-wise.
(b) Where the company is implementing the project in a phased manner,
the cost of each phase including the phase, if any, which has already
been implemented shall be separately given.
(c) The total project cost shall reflect the cost involved in each of the
projects mentioned under the section on Objects of the issue.
6.3Means of financing:
(a) An undertaking shall be given in the offer document by the issuer
company confirming firm arrangements of finance through verifiable
means towards 75% of the stated means of finance, excluding the
amount to be raised through Public/Rights issue, have been made.
(b) The balance portion of the Means of Finance for which no firm
arrangement has been made shall be mentioned without
specification.
6.4Appraisal:
6.4.1 (a) The scope of purpose of the appraisal along with the date of
appraisal shall be disclosed in the offer document.


(b) The offer document shall contain the cost of the project and
means of finance as per the appraisal report.
(c) The weaknesses and threats, if any, given in the appraisal
reports, shall be disclosed in the offer document by way of
risk factors.
6.5Deployment of funds in the project:
(a) Actual expenditure incurred on the project (in cases of companies
raising capital for a project) upto a date not earlier that 2 months from
the date of filing the prospectus with Registrar of Companies.
(b) Means and source of financing including details of bridge loan or
other financial arrangement, which may be repaid from the proceeds
of the issue.
(c) Year wise break up of the expenditure proposed to be incurred on
the said project.
(d) Investment avenues in which the management proposes to deploy
issue proceeds pending its utilisation in the proposed project.
6.6Name of monitoring agency, if applicable, to be disclosed.
7. Company, Management and Project:
7.1History and main objects and present business of the company
7.2Subsidiary(ies) of the company, if any
7.3Promoters and their Background
(a) (i) A complete profile of the promoters including their age,
educational qualifications, experience in the business or
employment and in the line of business, proposed in the
offer document, their business and financial activities,
photograph, voter ID Number, Driving Licence Number shall
be disclosed.
(ii) A disclosure, confirming that the Permanent Account
Number, Bank Account Number and Passport Number of
the promoters have been submitted to the stock exchanges
on which securities are proposed to be listed, at the time of
filing the draft offer document to them.
(b) In case, the promoters are companies, history of the companies and
the promoters of the companies shall be furnished.
(c) Details in change of management of the companies if any, including
details of the persons who are holding the controlling interest
together with the applicability and compliance of Securities and
Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997.
7.4Key Managerial Personnel
(a) A paragraph on the key managerial personnel shall be incorporated
giving full details of the personnel recruited as on the date of filing of
the offer document with the Board indicating name, date of joining,


qualification, details of previous employment etc.
(b) The Lead Merchant Banker shall verify and ensure that the persons
whose name appears in the para are in the employment of the
company as permanent employees.
(c) Any change otherwise than by way of retirement in the normal
course in the key senior managerial personnel particularly in charge
of production, planning, finance and marketing within one year prior
to the date of filing the offer document with the Board shall be
disclosed.
7.5Names, address and occupation of manager, managing director, and other
directors (including nominee-directors, whole-time directors) (giving their
directorships in other companies).
7.6Location of the Project
7.7Plant and machinery, technology, process, etc.
(a) Details in a tabular form to be given shall include the machines
required to be bought by the company, cost of the machines, name
of the suppliers, the date of placement of order and the date/
expected date of supply.
(b) In case of machines yet to be delivered, the date of quotations relied
upon for the cost estimates given, shall also be mentioned.
(c) Percentage and value terms the plant and machinery for which
orders are yet to be placed shall be stated and also be given by way
of a risk factor.
(d) Details of second hand machinery bought/proposed to be brought, if
any, including the age of the machines, balance estimated life etc.
shall also be given.
7.8Collaboration, any performance guarantee or assistance in marketing by the
collaborators.
7.8.1 Following information regarding persons/entities with whom technical
and financial agreements have been entered into to be given.
(a) place of registration and year of incorporation;
(b) paid-up share capital;
(c) turnover of the last financial year of operation;
(d) general information regarding such persons relevant to the
issuer.
7.9Infrastructure facilities for raw materials and utilities like water, electricity etc.
7.10Schedule of implementation of the project and progress made so for, giving
details of land acquisition, civil works, installation of plant and
machinery, trial production, date of commercial production, etc.
7.11The products
7.11.1 Nature of the products-consumer/industrial and end users
7.11.2 (a) Market including details of the competition, past production


figures for the industry existing installed capacity, past
trends and future prospects regarding exports (if,
applicable) demand and supply forecasts (if given, should
be essentially with assumptions unless sources from a
market research agency of repute), etc. to be given.
(b) Source of data used shall be mentioned.
7.11.3 Approach to marketing and proposed marketing set up.
7.11.4 Export possibilities and export obligations, if any (in case of a
company providing any service particulars, as applicable, be
furnished).
7.12Future prospects
7.12.1 Capacity and Capacity Utilisation
(a) A table shall be incorporated giving the existing installed
capacities for each product, capacity utilisation for these
products in the previous 3 years, proposed capacities
for existing as well as proposed products and the
assumptions for future capacity utilisation for the next three
years (from the date of commencement of commercial
production) in respect of existing as well as proposed
products.
(b) If the projected capacity utilisation is higher than the
average capacity utilisation by more than 25% during the
previous 3 years, how the company proposes to achieve the
projected level of capacity utilisation in view of its failure to
achieve levels of similar capacity utilisation in the past, shall
be stated.
7.13Stock Market Data
7.13.1 Particulars of:
(a) high, low and average market prices of the share of the
company during the preceding three years.
(b) monthly high and low prices for the six months preceding
the date of filing the draft prospectus with Board which shall
be updated till the time of filing the prospectus with the
Registrar of Company/Stock Exchange concerned;
(c) number of shares traded on the days when the high and low
prices were recorded in the relevant stock exchange during
said period of (i) and (ii) above;
(d) the stock market data referred to above shall be shown
separately for period marked by a change in capital
structure, with such period commencing from the date the
concerned stock exchange recognises the change in the
capital structure (e.g. when the shares have become ex-
rights or ex-bonus);


(e) the market price immediately after the date on which the
resolution on the Board of Directors approving the issue
was approved;
(f) the volume of securities traded in each month during the six
months preceding the date on which the prospectus is filed
with ROC; and
(g) to volume of business transacted along with high, low and
average prices of shares of the company shall also be
stated for respective periods.
8. Management Discussion and Analysis of the Financial Condition and
Results of the Operations as Reflected in the Financial Statements.
8.1A summary of past financial results after adjustments as given in the auditors
report for the past three years containing significant items of income and
expenditure shall be given.
8.2An analysis of reasons for the changes in significant items of income and
expenditure shall also be given, inter alia, containing the following:
(a) unusual or infrequent events or transaction;
(b) significant economic changes that materially effected or are likely to
effect income from continuing operations;
(c) known trends or uncertainties that have had or are expected to have
a material advise impact on sales, revenue or income from
continuing operations;
(d) future changes in relationship between costs and revenues, in case
of events such as future increase in labour or prices that will cause a
material change are known;
(e) the extent to which material increases in net sales or revenue are
due to increased sales volume, introduction of new products or
services or increased sales prices;
(f) total turnover of each major industry segment in which the company
operated;
(g) status of any publicly announced new products or business segment;
(h) the extent to which business is seasonal;
(i) any significant dependence on a single or few suppliers or
customers;
(j) competitive conditions.
8.3A statement by the directors whether in their opinion there have arisen any
circumstances since the date of the last financial statements as
disclosed in the prospectus which materially and adversely affect or is
likely to affect the trading or profitability of the company, or the value of
its assets, or its ability to pay its liabilities within the next twelve months.
8.4One standard financial unit shall be used in the offer document.
9. Financial Information of Group Companies
9.1The following information for the last 3 years based on the audited statements


in respect of all the companies, firms, ventures, etc. promoted by the
promoters irrespective of whether these are covered under Section
370(1)(B) of the Companies Act, 1956 shall be given, wherever
applicable:
(a) Date of incorporation;
(b) Nature of activities;
(c) Equity Capital;
(d) Reserves (excluding revaluation reserve);
(e) Sales;
(f) Profit after tax (PAT);
(g) Earnings per share (EPS); and
(h) Net Asset Value (NAV);
(i) The highest and lowest market price of shares during the preceding
six months with suitable disclosures for changes in capital structure
during the period and the market value on the date of filing the
prospectus with the Registrar of Companies;
(j) If any of the companies has made public or rights issue in the
preceding three years, the issue price of the security, the current
market price and particulars of changes in the capital structure, if
any, since the date of issue and a statement regarding the cost and
progress of implementation of the project in comparison with the cost
and implementation schedule given in the offer document;
(k) Information regarding adverse factors related to the company and in
particular regarding:
(i) whether the company has become a sick company within
the meaning of the Sick Industrial Companies (Special
Provisions) Act, 1995 or is under winding up;
(ii) whether the company has made a loss in the immediately
preceding year and if so, the profit or loss figures for the
immediately preceding three years.
9.2 (a) In case, the issuer company has more than five listed group
companies, the financial information may be restricted to the five
largest listed companies to be determined on the basis of market
capitalisation one month before the date of filing draft prospectus
with the Board.
(b) The information regarding company(ies) which has become BIFR
company or is under winding up or has a negative net worth shall be
provided.
9.3If the promoters have disassociated themselves from any of the
companies/firms during preceding three years the reasons therefor and
the circumstances leading to the disassociation shall be furnished
together with the terms of such disassociation.
9.4 (a) In case there are common pursuits among these companies, the
reasons and justification for the same shall be spelt out and the
conflict of interest situations shall be stated.


(b) The related business transactions within the group shall also be
mentioned.
(c) The significance of these transactions on the financial performance
of the company/companies shall be stated.
9.5Sales or purchase between companies in the promoter group when such
sales or purchases exceed in value in the aggregate 10% of the total
sales or purchases of the issuer and also disclose material items of
income or expenditure arising out of transactions in the promoter group.
10. Following particulars in regard to the company and other listed companies
under the same management within the meaning of Section 370(1)(B) of
the Companies Act, 1956 which made any capital issue during the last three
years shall be given:
(a)Name of the Company
(b)Year of Issue
(c)Type of Issue (Public/Rights/Composite)
(d)Amount of issue
(e)Date of closure of issue
(f)Date of completion of delivery of share/debenture certificates
(g)Rate of dividend paid.
11. Promise vis-a-via Performance
11.1Issuer Company
(a) A separate para entitled Promise v. Performance - Last three
issues shall be given indicating whether all the objects mentioned in
the respective offer Documents relating to the earlier issues by the
company were met and whether all projections made in the said offer
documents were achieved.
(b) If not, non-achievement of objects/projections shall be brought out
distinctly. Shortfall and delays shall be quantified.
11.2Listed Ventures of Promoters
(a) A separated para on issues of groups/associate companies entitled
Promise v. Performance-Last one issue of group/associate
companies shall be given indicating whether all the objects
mentioned in the respective offer Documents relating to group/
associates companies were met and whether all projections made in
the offer documents were achieved.
(b) If not non-achievement of objects/projections shall be brought out
distinctly. Shortfall and delay shall be quantified.
12. Projections
(i)No forecast or projections relating to financial performance of the issuer
company shall be given in the offer document.
13. Basis for Issue Price
13.1Following information shall be disclosed for all issues irrespective of the issue
price.


(a) Earning per share i.e. EPS pre-issue for the last three years (as
adjusted for changes in capital).
(b) P/E pre-issue.
(c) Average return on net worth in the last three years.
(d) Minimum return on increased net worth required to maintain pre-
issue EPS.
(e) Net Asset value per share based on last balance sheet.
(f) Net Asset value per share after issue and comparison thereof with
the issue price.
(g) An illustrative format of disclosure in respect of basis for issue price
is given in Schedule XV.
(h) Comparison of all the accounting ratios of the issuer company as
mentioned above with the industry average and with the accounting
ratios of the peer group i.e. companies of comparable size in the
same industry. (Indicate the source from which industry average and
accounting ratios of the peer group has been taken).
Provided that the projected earnings shall not be used as a
justification for the issue price.
Provided further that the accounting ratios disclosed in the
prospectus in support of basis of the issue price shall be calculated
after giving effect to the consequent increase in capital on account of
compulsory conversions outstanding, as well as on the assumption
that the options outstanding, if any, to subscribe for additional capital
will be exercised.
13.2 (i) The issuer company and the lead merchant banker shall provide the
accounting ratios as mentioned above to justify the basis of issue
price:
Provided that, the lead merchant banker shall not proceed with the
issue in case the accounting ratios mentioned above, do not justify
the issue price.
(ii) In case of book built issues, the offer document shall state that the
final price has been determined on the basis of the demand from the
investors.
14. Outstanding litigations or Defaults
(a)All pending litigations in which the promoters are involved defaults to the
financial institutions/banks, non-payment of statuary dues and dues
towards instrument holders like debenture holders, fixed deposits, and
arrears on cumulative preference shares by the promoters and the
companies/firms promoted by the promoters, shall be listed in the
prospectus together with the amount involved and the present status of
such litigations/defaults. The likely adverse effect of these litigations/
defaults, etc. on the financial performance of the company shall also be
mentioned.
(b)Further, the cases of pending litigations etc. in respect of companies/
firms/ventures with which the promoters were associated in the past but


are no longer associated shall also be disclosed in case their name(s)
continue to be associated with particular litigation(s).
(c) (i) The above information is required to be furnished in addition to the
litigations against the company or against any other company whose
outcome could have a materially adverse effect on the position of the
company.
(ii) Further, all the litigations against the promoter or directors involving
violation of statutory regulations or criminal offence shall be furnished
in the offer document.
(d) (i) The pending proceedings initiated for economic offences against the
directors, the promoters, companies and firms promoted by the
promoters shall be disclosed separately indicating their present
status.
(ii) The details of the past cases in which penalties were imposed by the
concerned authorities.
(e)Outstanding litigations, defaults, etc., pertaining to matters likely to affect
operations and finances of the company including disputed tax liabilities,
prosecution under any enactment in respect of Schedule XIII to the
Companies Act, 1956 (1 of 1956) shall be furnished in the prospectus in
the prescribed format.
(f)The lead merchant banker shall ensure to appropriately incorporate in the
prospectus and as risk factor(s), information regarding pending
litigations, defaults, non payment of statutory dues, proceedings initiated
for economic offences/Civil offences (including the past cases, if found
guilty), any disciplinary action taken by the Board/Stock exchanges
against the company/Promoters and their other business venture
(irrespective of the fact whether they fall under the purview of Section
370(1B) of the Companies Act, 1956)/Directors.
(g)The name(s) of small scale undertaking(s) or any other creditors to whom the
company owes a sum exceeding Rs. 1 lakh which is outstanding more
than 30 days; and
(h) (i) If any of the above mentioned litigations, etc., arise after the filing of
the offer document, the facts shall be incorporated appropriately in
the prospectus (and as risk factors).
(ii) In case there are no such cases a distinct negative statement is
required to be made in this regard in the prospectus.
15. Risk factors and management perception on the same, if any.
16. Disclosure on Investor Grievances and Redressal System
The offer documents shall disclose the arrangements or any mechanism
evolved by the company for redressal of investor grievances.
(i)The company shall disclose the time normally taken by it for disposal of
various types of investor grievances.
(ii)Similar disclosure shall be made in regard to the listed companies under the
same management within the meaning of Section 370(1B) of the


Companies Act for the period of 3 years prior to the date of filing of the
offer documents with ROC/Stock Exchange.
SECTION II
17. General Information
71.1Consent of directors, auditors, solicitors/advocates, managers to the issue,
Registrar of Issue, Bankers of the company, bankers to the issue and
experts.
17.2Expert opinion obtained, if any.
17.3Change, if any, in directors and auditors during the last three years, and
reasons, thereof.
17.4Authority for the issue and details of resolution passed for the issue.
17.5Procedure and time of schedule for allotment and issue of certificates.
17.6Names and address of the company secretary, legal adviser, lead managers,
co-managers, auditors, bankers to the company, bankers to the issue
and brokers to the issue.
18. Financial Information
18.1A report by the auditors of the company with respect to
(a) Profits and losses and assets and liabilities, in accordance with
requirements mentioned in (ii) and (iii), as the case may require; and
(b) The rates of dividends, if any, paid by the company in respect of
each class of shares in the company for each of the five financial
years immediately preceding the issue of the prospectus, giving
particulars of each class of shares on which such dividends have
been paid and particulars of the cases in which no dividends have
been paid in respect of any class of shares for any of those years
and, if no accounts have been made up in respect of any part of the
period of five years ending on a date three months before the issue
of the prospectus, containing a statement of that fact (and
accompanied by a statement of the accounts of the company in
respect of that part of the said period up to a date not earlier than six
months of the date of issue of the prospectus indicating the profit or
loss for that period and the assets and liabilities position as at the
end of that period together with a certificate from the auditors that
such account have been examined and found correct by them. The
said statement may indicate the nature of provision or adjustments
made or are yet to be made).
18.2If the company has no subsidiaries, the report shall
(a) so far as regards profits and losses, deal with the profits or losses of
the company (distinguishing items of a non-recurring nature) for each
of the five financial years immediately preceding the issue of the
prospectus; and
(b) so far as regards assets and liabilities, deal with the assets and


liabilities of the company and the last date to which the accounts of
the company were made up.
18.3If the company has subsidiaries, the report shall
(a) so far as regards profits and losses, deal separately with the
companys profits or losses as provided in 18.2 above and in addition
deal either
(i) as a whole with the combined profits or losses of its
subsidiaries, so far as they concern members of the
company; or
(ii) individually with the profits or losses of each subsidiary so
far as they concern members of the company:
or, instead of dealing separately with the companys profits
or losses, deal as a whole with the profit or losses of the
company, and, so far as they concern members of the
company, with the combined profits or losses of its
subsidiaries; and
(b) so far as regard assets and liabilities, deal separately with the
companys assets and liabilities as provided in (ii) above and in
addition, deal either
(i) as a whole with the combined assets and liabilities of its
subsidiaries, with or without the companys assets and
liabilities; or
(ii) individually with the assets and liabilities of each
subsidiaries;
and shall indicate as respects the assets and liabilities of the
subsidiaries, the allowance to be made for persons other than
members of the company.
18.4If the proceeds, or any part of the proceeds, of the issue of the shares or
debentures are or is to be applied directly or indirectly
(a) in the purchase of any business; or
(b) in the purchase of an interest in any business and by reason of that
purchase, or anything to be done in consequence thereof, or in
connection therewith; the company will become entitled to an interest
as respects either the capital of profits and losses or both, in such
business exceeding fifty percent thereof;
(c) a report made by accountants (who shall be named in the
prospectus) upon
(i) the profits or losses of the business of each of the five
financial years immediately preceding the issue of the
prospectus; and


(ii) the assets and liabilities of the business at the last date to
which the accounts of the business were made up, being a
date not more than one hundred and twenty days before the
date of the issue of the prospectus.
18.5If
(a) the proceeds, or any part of the proceeds, of the issue of the shares
or debentures are or is to be applied directly or indirectly in any
manner resulting in the acquisition by the company of shares in any
other body corporate; and
(b) by reason of that acquisition or anything to be done in consequence
thereof or in connection therewith, that body corporate will become a
subsidiary of the company; and
(c) a report made by accountants (who shall be named in the
prospectus) upon
(i) the profits or losses of the other body corporate for each of
the five financial years immediately preceding the issue of
the prospectus; and
(ii) the assets and liabilities of the other body corporate at the
last date to which its account were made up.
(iii) the said report shall
(a) indicate how the profits or losses of the other body
corporate dealt with by the report would, in respect of
shares so acquired, have concerned members of the
company and what allowance would have fallen to be made,
in relation to assets and liabilities so dealt with for holders of
other shares, if the company and at all material times held
the shares to be acquired; and
(b) where the other body corporate has subsidiaries deal with
the profits or losses and the assets and liabilities of the body
corporate and its subsidiaries in the manner provided by
sub-clause (2) above in relation to the company and its
subsidiaries.
18.6Principal terms of the loan and assets charged as security.
18.7Other provisions relating to accounts of the issuer company:
(a) All the significant accounting policies and standards followed in the
preparation of the financial statements shall be disclosed.
(b) Statement of Assets and Liabilities and Profit and Loss or any other
financial information shall be incorporated after making the following
adjustments, wherever quantification is possible:
(i) Adjustment/rectification for all incorrect accounting practices
or failures to make provisions or other adjustments which
resulted in audit qualifications;


(ii) Material amounts relating to adjustments for previous years
shall be identified and adjusted in arriving at the profits of
the years to which they relate irrespective of the year in
which the even triggering the profit or loss occurred;
(iii) (a) Where there has been a change in accounting policy, the
profits or losses of the earlier years (required) to be shown
in the offer document(s) and of the year in which the change
in the accounting policy has taken place shall be re-
computed to reflect what the profits or losses of those years
would have been if a uniform accounting policy was
followed in each of these years.
(b) If an incorrect accounting policy is followed, the re-
computation of the financial statements shall be in
accordance with correct accounting policies;
(iv) (a) Statement of profit or loss shall disclose both the profit or
loss arrived at before considering extraordinary items and
after considering the profit or loss from extraordinary items.
(b) An illustrative format of the disclosure of profits and losses
on this basis is specified at Schedule X.
(v) The Statement of assets and liabilities shall be prepared
after deducting the balance outstanding on revaluation
reserve account from both fixed assets and reserves and
the networth arrived at after such deductions.
(vi) A suggested format of assets and liabilities is specified at
Schedule XI.
(c) The turnover disclosed in the Profit and Loss Statement shall be
bifurcated into:
(i) turnover of products manufactured by the company;
(ii) turnover of products traded in by the company; and
(iii) turnover in respect of products not normally dealt in by the
company but included in (ii) above, shall be mentioned
separately.
(d) The offer document shall disclose details of Other Income in all
cases where such income (net of related expenses) exceeds 20% of
the net profit before tax, including:
(i) the sources and other particulars of such income; and
(ii) an indication as to whether such income is recurring or non-
recurring, or has arisen out of business activities/other than
the normal business activities.
(e) (i) Changes (with quantification wherever possible) in the
activities of the issuer which may have had a material effect
on the statement of profit/loss for the five years.
(ii) Disclosure of these changes in the activities of the company
shall include discontinuance of lines of business, loss of
agencies or markets and similar factors.


(f) The following accounting ratios shall be given for each of the
accounting periods for which financial information is given.
(i) Earning per Share : This ratio shall be calculated after
excluding extraordinary items.
(ii) Return on net worth : This ratio shall be calculated
excluding revaluation reserves.
(iii) Net Assets Value per share. This ratio shall be calculated
excluding revaluation reserves.
(g) (i) A capitalisation Statement showing total debt net worth, and
the debt/equity ratios before and after the issue is made
shall be incorporated.
(ii) In case of any change in the share capital since the date as
of which the financial information has been disclosed in the
offer document, a note explaining the nature of the change
shall be given.
(iii) An illustrative format of the Capitalisation Statement is
specified at Schedule XIII.
(h) (i) Break-up of total outstanding unsecured loans taken by the
company, promoters/group companies/associate companies
and others shall be given in the offer documents.
(ii) In respect of each such unsecured loan of the former
category, the terms and conditions including interest rates
and the repayment schedule.
(iii) If the loan can be recalled by the lenders at any time the
fact to be given as a risk factor.
(iv) Profits after tax are often affected by the tax shelters which
are available.
(v) Some of these are of a relatively permanent nature (for
example, tax holidays for new undertaking).
(vi) Tax provisions are also affected by timing differences which
can be reversed in the future (for example the difference
between book depreciation and tax depreciation).
(vii) For a proper understanding of the future tax incidence,
these factors shall be identified and explained through
proper disclosures.
(viii) An illustrative format of statement in respect of tax shelter is
specified in Schedule XII.
18.8 (a) The Issuer Company, if it so desires may include in the offer
document, the financial statements prepared on the basis of more
than one accounting standards subject to disclosure of the material
differences arising because of differences in the accounting policies
of two different accounting standards.
(b) Management Discussion and Analysis (MDA) and Accounting and
other Ratios shall be based on the Financial statements prepared on
the basis of Indian Accounting Standards. In addition, the issuer


company may present MDA based on other Accounting Standards.
19. Statutory and other information
19.1Minimum Subscription
19.2Expenses of the issue giving separately fee payable to
(a) Advisers
(b) Registrars to the issue
(c) Managers to the issue
(d) Trustees for the debenture-holders
19.3Underwriting commission and brokerage
19.4Previous issue for cash
19.5Previous public or rights issue, if any:
(during last five years)
(a) Date of allotment Closing Date :
Date of refunds
Date of listing on the stock exchange:
(b) If the issue(s) at premium or discount and the amount thereof
(c) The amount paid or payable by way of premium, if any, on each
share which had been issued within the two years preceeding the
date of the prospectus or is to be issued, stating the dates or
proposed dates of issue and, where some shares have been or are
to be issued at a premium and other shares of the same class at a
lower premium or at par or at a discount, the reasons for the
differentiation and how any premiums received have been or are to
be disposed off.
19.6Commission or brokerage on previous issue.
19.7Issue of shares otherwise than for cash.
19.8Debentures and redeemable preference shares and others and instruments
issued by the company outstanding as on the date of prospectus and
terms of issue.
19.9Option to subscribe
(a) The details of option to subscribe for securities to be dealt with in a
depository.
(b) The lead merchant banker shall incorporate a statement in the offer
document and in the application form to the effect that the investor
shall have an option either to receive the security certificates or to
hold the securities in dematerialised form with a depository.
19.10Purchase of property
(a) As respects any property to which this clause applies
(i) the names, address, descriptions and occupations of the
vendors;
(ii) the amount paid or payable in cash, shares or debentures to
the vendor and, where there is more than one separate


vendor, or the company is a sub-purchaser, the amount so
paid or payable to each vendor, specifying separately the
amount, if any, paid or payable for goodwill;
(iii) the nature of the title or interest in such property acquired or
to be acquired by the company;
(iv) short particulars of every transaction relating to the property
completed within the two preceding years, in which any
vendor of the property to the company or any person who is,
or was at the time of the transaction, a promoter, or a
director or proposed director of the company had any
interest, direct or indirect, specifying the date of the
transaction and the name of such promoter, director or
proposed director and stating the amount payable by or to
such vendor, promoter, director or proposed director in
respect of the transaction.
(b) The property to which sub-clause (a) applies is a property purchased
or acquired by the company or proposed to be purchased or
acquired, which is to be paid for wholly or partly out of the proceeds
of the issue offered for subscription by the prospectus or the
purchase or acquisition of which has not been completed at the date
of issue of the prospectus, other than property
(i) the contract for the purchase or acquisition whereof was
entered into in the ordinary course of the companys
business, the contract not being made in contemplation of
the issue nor the issue in consequence of the contract; or
(ii) as respects which the amount of the purchase money is not
material.
(c) for the purpose of this clause, where a vendor is a firm, the members
of the firm shall not be treated as separate vendors.
(d) if the company proposes to acquire a business which has been
carried on for less than three years, the length of time during which
the business has been carried on.
19.11Following details may be given in the offer document:
(a) (i) Details of directors, proposed directors, whole-time
directors, their remuneration, appointment and remuneration
of managing directors, interests of directors, their borrowing
powers and qualification shares.
(ii) Any amount or benefit paid or given within the two
preceding years or intended to be paid or given to any
promoter or officer and consideration for payment of giving
of the benefit.
(b) The dates, parties to, and general nature of
(i) every contract appointing or fixing the remuneration of
managing director or manager whenever entered into, that
is to say, whether within or more than, two years before the
date of the prospectus;


(ii) every other material contract, not being a contract entered
into in the ordinary course of the business carried on or
intended to be carried on by the company or a contract
entered into more than two years before the date of the
prospectus.
(iii) A reasonable time and place at which any such contract or
a copy thereof may be inspected.
(c) Full particulars of the nature and extent of the interest, if any, of
every director or promoter
(i) in the promotion of the company; or
(ii) in any property acquired by the company within two years of
the date of the prospectus or proposed to be acquired by it.
(iii) Where the interest of such a director or promoter consists in
being a member of a firm or a company, the nature and
extent of the interest of the firm or company, with a
statement of all sums paid or agreed to be paid to him or to
the firm or company in cash or shares or otherwise by any
person either to induce him to become, or to qualify him as,
a director, or otherwise for services rendered by him or by
the firm or company, in connection with the promotion or
formation of the company.
19.12Rights of members regarding voting, dividend, lien on shares and the process
for modification of such rights and forfeiture of shares.
19.13Restrictions, if any, on transfer and transmission of shares/debentures and on
their consolidation/splitting.
19.14Revaluation of assets, if any (during last five years).
19.15Material contracts and inspection of documents, e.g.
(a) Material contracts
(b) Documents
(c) Time and place at which the contract together with documents will be
available for inspection from the date of prospectus until the date of
closing of subscription list.
11. APPLICATION WITH PROSPECTUS
Section 56(3) states that no application form can be issued for shares or
debentures unless it is accompanied by a memorandum containing such salient
features of prospectus as may be prescribed. There are, however, four exceptions to
this rule:
(a) where the offer is made in connection with the bona fide invitation to a
person to enter into an underwriting agreement with respect to the shares or
debentures;
(b) where the shares or debentures are not offered to the public;
(c) where the offer is made only to the existing members or debenture holders
of the company with or without a right to renounce;


(d) where the shares or debentures offered are in all respects uniform with
shares or debentures already issued and quoted on a recognised stock
exchange.
The Department of Company Affairs (Now, Ministry of Corporate Affairs) vide its
circular number 1/92 dated 9.1.1992, in order to ensure compliance of the provisions of
Section 56(3), had directed that the share application form should be a part of the
abridged prospectus, being attached to it along a perforated line. The abridged
prospectus and the share application form were allowed to bear the same printed
number. The investor may detach the share application form along the perforated line
after he has had an opportunity to study the contents of the abridged prospectus before
submitting the same to the company or its designated bankers. However, as a
consequence of this circular, representations were made to the Government pointing
out that only one application form attached to every abridged prospectus might
increase the printing cost and that the abridged prospectus with two application forms
forming part of the same be allowed to be issued. The Government accepted the
suggestion and vide its circular no. 3/92 dated 10/4/92 has allowed companies and
their Merchant Bankers to print two application forms, accompanying the abridged
prospectus, being attached to it along the perforated line bearing separate printed
numbers. The Department however directed that care should be taken that the
abridged prospectus is printed in such a way that it is easily readable. Contravention of
Section 56(3) is punishable with fine which may extend to Rs. 50,000.
12. ABRIDGED PROSPECTUS
The Central Government has simultaneously with the revision of Schedule II
prescribed that salient features of prospectus for the purposes of Section 56(3) of the
Act. For the purpose, Rule 4CC has been inserted in the Companies (Central
Governments) General Rules and Forms, 1956. As per rule 4CC, the salient features
required to be included in the abridged prospectus shall be in Form 2A.
Form 2A requires information to be given under nine heads detailed below
besides the statements on refund of application money in the event the minimum
subscription is not received or on payment of interest if there is delay in refund of
excess application money.
I. General Information
Under the head general information, the name and address of registered office of
the company, name(s) of the Stock Exchange(s) at which the issue is listed, opening,
closing and earliest closing dates of the issue, name and address of lead managers,
name and address of trustees under debentures trust deeds (in case of
debenture/issue), Rating for the debenture/preference shares, if any, obtained from
CRISIL or any recognised rating agency are required to be given.
II. Capital Structure of the Company
Under this head, particulars of issued, subscribed and paid-up capital, size of
present issue giving separately reservations for preferential allotment to promoters
and others and paid-up capital after the present issue and after conversion of
debentures, if applicable, are required to be stated.


III. Terms of the Present Issue
Under this head, the authority for the issue, terms of payment and procedure,
time schedule for allotment and issue of certificates, procedure for applying including
availability of forms, prospectus and mode of payment and special tax benefits to
company and shareholders under the Income-tax Act, are required to be stated.
IV. Particulars of the Issue
Under the head, objects of the issue, the project cost and means of financing
including contribution of promoters are to be specified.
V. Company, Management and Project
Under this head, the following information are required to be stated.
(a) History, main objects and present business of the company.
(b) Background of the promoters, managing director/whole-time director and
names of nominees of institutions, if any, on the Board of directors.
(c) Location of the project.
(d) Plant and machinery, technology, process, etc.
(e) Collaboration, performance guarantee, if any, or assistance in marketing by
the collaborators.
(f) Infrastructure facilities for raw materials and utilities like water, electricity,
etc.
(g) Schedule of implementation of the project and progress made so far, giving
details of land acquisition, execution of civil works, installation of plant and
machinery, trial production, date of commercial production, if any.
(h) The products
(i)Nature of Product(s) Consumer, industrial and end users.
(ii)Existing, licensed and installed capacity of the product, demand of the
product-existing and estimated in the coming years as estimated by a
Government authority or by any other reliable institution, giving the
source of information.
(iii)approach to marketing and proposed marketing set up.
In case of company providing services, relevant information in regard to
nature/extent of services, etc. are to be furnished.
(i) Future prospects The expected year when the company would be able to
earn net profit, declare dividend.
VI. Financial performance of the Company for the last 5 years
Under the head financial performance of the company, information based on
the audited annual accounts is required to be given under the following heads for the
last five years:
(a) Balance sheet data: equity capital, reserves (state revaluation reserve, the


year of revaluation and its monetary effect on assets) and borrowings.
(b) Profit & Loss data: Sales, gross profit, net profit, dividend paid, if any.
(c) Any change in accounting policies during the last three financial years and
their effect on the profits and the reserves of the company.
(d) Stock market quotation of shares/debentures of the company, if any
(high/low price in each of the last three years and monthly high/low price
during the last six months).
VII. Payments/Refunds
Under this head, the company is required to disclose whether all payments
specifically as to refunds, debentures, fixed deposits, interest on fixed deposits,
debenture interest, institutional dues have been paid up to date. In case, payments/
refunds have not been made, details of the arrears, if any, are required to be stated.
VIII. Particulars of Companies under the Same Management
Under this, the following particulars in regard to the listed companies under the
same management within the meaning of Section 370(1B) which made any capital
issue in last three financial years as required to be stated:
(a) Name of the Company; (b) Year of issue; (c) Type of issue (public/right/
composite); (d) Amount of issue; (e) Date of closure of issue; (f) Date of despatch of
share/debenture certificate completed; (g) Date of completion of the project, where
object of the issue was financing of project; and (h) Rate of dividend paid.
IX. Managements Perception of Risk Factors
Under this head, the company is required to specify the risk factors which the
management perceives, e.g., sensitivity to foreign exchange rate fluctuations,
difficulty in availability of raw materials of in marketing of products, cost/time overrun.
Declaration
Lastly the directors are required to make declaration as under:
If the company does not receive application money for at least 90 per cent of the
issued amount, the entire subscription will be refunded within ninety days from the
date of closure of the issue. If there is delay in the refund of application money for
more than 8 days after the company becomes liable to pay the excess amount, the
company will pay interest for the delayed period at the prescribed rates in Sub-
sections (2) and (2A) of Section 73. No statement made in this form shall contravene
any of the provisions of the Companies Act, 1956 and the rules made thereunder.
13. ADDITIONAL DISCLOSURES IN ABRIDGED PROSPECTUS AND LETTER
OF OFFER
The Securities and Exchange Board of India (SEBI) have modified its guidelines
regarding disclosure in the Abridged Prospectus and Letter of offer. The revised
guidelines provide that the Abridged Prospectus and Letter of Offer shall also
disclose, in addition to the existing requirements, the following items which are
required to be disclosed in the offer document:


The abridged prospectus shall contain the disclosures as specified under
Section I of Chapter VI of SEBI (Disclosure and Investor Protection) Guidelines, 2000.
The disclosure requirements as specified shall also be applicable in case of
abridged prospectus.
1. General Information
(i) Name and address of registered office of the company.
(ii) Name/s of stock exchanges where listing of the securities is proposed.
(iii) Date of opening, closing and earliest closing of the issue.
(iii) (a) Statement indicating whether IPO grading has been opted for.
(iv) Disclaimer Clause.
(v) Name and address of lead managers.
(vi) Name and address of registrars of the issue.
(vii) Name and address of trustee under debenture trust deed (in case of
debenture issue)
(viii) Rating for the proposed debenture/preference shares issue, if any, obtained
from any other Credit Rating Agency.
(ix) (a)The name, address, telephone number, fax number and address of
Compliance Officer.
(b)The investors attention shall also be invited to contact the compliance officer
in case of any pre-issue/post-issue related problems such as non-
receipt of letters of allotment/share certificates/refund orders/cancelled
stockinvests, etc.
(x) Provisions of Sub-section (1) of Section 68A of the Companies Act, relating
to punishment for fictitious applications.
(xi) Declaration about the issue of allotment letters/refund within a period of 30
days and interest in case of delay in dispatching refund/allotment letters @
15% p.a. as at the rate as pay be specified.
(xii) Risk Factors and Issue Highlights.
(xiii) The Risk Factors and management perception on the same shall be printed
along with issue Highlights with equal treatment in printing in all respects.
2. Capital Structure of the Company
Following details shall appear:
(i) Authorised, issued, subscribed and paid-up capital (Number of instruments
description, aggregate nominal value);
(ii) Size of present issue giving separately promoters contribution, firm
allotment/reservation for specified categories and net offer to public;
(Number of instruments, description, aggregate nominal value and issue
amount shall be given in that order, Name(s) of group companies to be given,
in case reservation has been made for shareholders of the group companies);
(iii) Paid-up Capital:
(i)after the issue;


(ii)after conversion of securities (if applicable);
(iv) Share Premium Account (before and after the issue).
A disclosure to the effect that the securities offered through this public/rights
issue shall be made fully paid up or forfeited within 12 months from the date of
allotment of securities in a specified manner.
3. Terms of the Present Issue
(i) Authority for the issue, terms of payment and procedure and time schedule
for allotment and issue of certificates.
(ii) The caption Interest in Case of Delay in Despatch of Allotment Letters/
Refund Orders in Cash of Public Issues shall appear.
(iii) How to apply-availability of forms, prospectus and mode of payment.
(iv) Applications by NRIs:
(a)In the application form meant for Indian Public, the declaration relating to
nationality and Residentship shall be shown prominently as under:
Nationality and Residentship (Tick whichever is applicable)
(i) I am/We are Indian National(s) resident in India and I am/we are not
applying for the said equity shares as nominee(s) of any person
resident outside India or Foreign National(s).
(ii) I am/We are Indian National(s) resident in India and I am/we are
applying for the said equity shares as Power of Attorney holder(s) of
Non-Resident Indian(s) mentioned below on non-repatriation basis.
(iii) I am/We are Indian National(s) resident outside India and I am/we
are applying for the said equity shares on my/our own behalf on non-
repatriation basis.
(b)The application form meant for NRIs shall not contain provision for payment
through NR(O) accounts.
(i) On the face of the form, the following legend shall be printed in a
box:
Attention NRI Applicants : Payment must be made through their
Non-Residents External (NRE)/Foreign Currency Non Resident
(FCNR) account or through cheques/drafts sent from abroad and
drawn on convertible rupee account in India. Forms accompanied by
cheques drawn on NR(O) accounts are liable to be rejected.
(c)Attention of NRIs shall be invited to the following :
(i) The name and address of at least one place in India from where
individual NRI applicants can obtain the application forms.
(ii) Such applications as are accompanied by payment in free foreign
exchange shall be considered for allotment under the reserved
category.
(iii) Such NRIs who wish to make payment through Non-Resident
Ordinary (NRO) account shall use the form meant for Resident


Indians and shall not use the form meant for reserved category.
(d)The application form should contain necessary instruction/provision for the
following:
(i) Instructions to applicants to mention the number of application forms
on the reverse of the instruments to avoid misuse of instruments
submitted along with the applications for shares/debentures in public
issues.
(ii) Provision in the application form for inserting particulars relating to
savings bank/current account number and the name of the bank with
whom such account is held, to enable printing of the said details in
the refund orders or for refunds through Electronic Clearing System:
Provided that in case of an issue made in the dematerialized form,
bank account details are not required. It would be taken from the
date provided by him to the depository.
(iii) Disclosure of PAN/GIR number irrespective of the amount for which
application/bid is made.
(iv) Giving an option to investors to either receive securities in the form of
physical certificates or hold them in dematerialised form.
(v) any special tax benefit for company and its shareholders.
4. Particulars of the Issue
(i) Objects
(ii) Project Cost
(iii) Means of financing
5. Company, Management and Project
(i) History and main objects and present business of the company;
(ii) Promoters and their Background;
(iii) Names, address and occupation of manager, managing director, and other
directors (including nominee-directors, whole-time directors) giving their
directorships in other companies;
(iv) Location of the Project;
(v) Plant and machinery, technology, process, etc.;
(vi) Collaboration, any performance guarantee or assistance in marketing by the
collaborators;
(vii) Infrastructure facilities for raw materials and utilities like water, electricity, etc.;
(viii) Schedule of implementation of the project and progress made so far, giving
details of land acquisition, civil works, installation of plant and machinery,
trial production, date of commercial production etc.;
(ix) The products
(a)Nature of the product/s-consumer/industrial and end users;
(b)Market including details of the competition, past production figures for the
industry, existing installed capacity, past trends and future prospects
regarding exports (if applicable), demand and supply forecasts (if given,


should be essentially with assumptions unless sourced from market
research agency of repute), etc. to be given;
(c)Source of data used shall be mentioned;
(d)Approach to marketing and proposed marketing set up;
(e)Export possibilities and export obligations, if any (in case of a company
providing any service particulars, as applicable, be furnished);
(x) Future prospects;
(xi) Stock Market Data;
Particulars of:
(a)high, low and average market prices of the share of the company during the
preceding three years;
(b)monthly high and low prices for the six months preceding the date of filing the
draft prospectus with Board which shall be updated till the time of filing
the prospectus with the Registrar of Company/Stock exchange
concerned;
(c)number of shares traded on the days when the high and low prices were
recorded in the relevant stock exchange during said period of (a) and (b)
above;
(d)the stock market data referred to above shall be shown separately for period
marked by a change in capital structure, with such period commencing
from the date the concerned stock exchange recognises the change in
the capital structure (e.g. when the shares have become ex-rights or ex-
bonus);
(e)the market price immediately after the date on which the resolution of the
Board of Directors approving the issue was approved;
(f)the volume of securities traded in each month during the six months
preceding the date on which the offer document is filed with ROC;
(g)Along with high, low and average prices of shares of the company, details
relating to volume of business transacted should also be stated for
respective periods.
6. Following particulars in regard to the listed companies under the same
management within the meaning of Section 370(1B) which made any capital
issue in the last three years
(i) Name of the company
(ii) Year of issue
(iii) Type of issue (public/rights/composite)
(iv) Amount of issue
(v) Date of closure of issue
(vi) Date of despatch of share/debenture certificate completed
(vii) Date of completion of the project, where object of the issue was financing of
a project
(viii) Rate of dividend paid.


7. Basis for Issue Price
(i) Following information shall be disclosed:
(a)Earnings per share i.e. EPS pre-issue for the last three years (as adjusted for
changes in capital);
(b)P/E pre-issue;
(c)Average return on net worth in the last three years;
(d)Minimum return on increased net worth required to maintain pre-issue EPS;
(e)Net Asset Value per share based on last balance sheet;
(f)Net Asset Value per share after issue and comparison thereof with the issue
price.
(g)Comparison of all the accounting ratios of the issuer company as mentioned
above with the industry average and with the accounting ratios of the
peer group i.e. companies of comparable size in the same industry.
(Indicate the source from which industry average and accounting ratios
of the peer group has been taken).
Provided that projected earnings shall not be used a justification for the issue
price in the offer document.
Provided further that the accounting ratios disclosed in the prospectus in
support of basis of the issue price shall be calculated after giving effect
to the consequent increase of capital on account of compulsory
conversions outstanding, as well as on the assumption that the options
outstanding, if any, to subscribe for additional capital will be exercised.
(ii) The issuer company and the lead merchant banker shall provide the
accounting ratios as mentioned above to justify the basis of issue price:
Provided that, the lead merchant banker shall not proceed with the issue in
case the accounting ratios mentioned above, do not justify the issue price.
(iii) In case of book built issues, the offer document shall state that the final price
has been determined on the basis of the demand from the investors.
8. Management perceptions of risk factors (e.g. Sensitivity to foreign
exchange rate fluctuations, difficulty in availability of raw material or in
marketing of products, cost/time overrun).
9. Outstanding Litigations
10. Whether all Payment/Refunds, Debentures, Deposits of banks or
companies, interest on Deposits, Debenture Interests, Institutional Dues
have been paid up to date
11. If not, details of the arrears if any to be stated.
12. Any material development after the date of the latest balance sheet and its
impact on performance and prospects of the company.
13. Expert opinion obtained if any
14. Change, if any, in directors and auditors during the last three years and
reasons thereof


15. Option to Subscribe
(a) The details of option to subscribe for securities to be dealt in a depository.
(b) The lead merchant banker shall incorporate a statement in the offer
document and in the application form to the effect that the investor shall
have an option either to receive the security certificates or to hold the
securities in dematerialised form with a depository.
(c) In case of public issues by unlisted companies, the lead merchant banker
shall incorporate a statement in the offer documents that the trading in the
securities shall be in dematerialised form only for all the investors.
16. Material contracts and time and place of inspection
17. Financial Performance of the Company for the Last years: (Figures to be
taken from the audited annual accounts in tabular form)
(a) Balance Sheet Data : Equity Capital, Reserves (State Revaluation Reserve,
the year of revaluation and its monetary effect on assets) and borrowings;
(b) Profit and Loss data : Sales, Gross profit, Net profit, dividend paid, if any;
(c) Any change in accounting policies during the last three years and their effect
on the profits and the reserves of the company;
(d) Lead Merchant Banker shall ensure that the financial information about the
issuer company appearing in the abridged prospectus, is as per Auditors
Report of the prospectus.
18. Statements after minimum subscription clause
(a) Minimum subscription clause shall appear followed by the statement given
below:
(b) No statement made in this Form shall contravene any of the provisions of
the Companies Act, 1956 and the rules made thereunder.
14. CONTENTS OF THE LETTER OF OFFER
The Letter of Offer shall disclose the following items:
1. Cover pages
The front and back cover pages of the letter of offer shall comply with the
requirement specified as in case of Abridged Prospectus.
2. General Information
(i) Name and address of registered office of the company.
(ii) Issue listed at : [Name (s) of the Stock Exchanges].
(iii) Opening, closing dates of the issue.
(iv) Name and address of Lead Merchant Bankers.
(v) Name and address of Trustees under Debenture Trust Deeds (in case of
debenture/issue).


(vi) Rating for the Debenture/Preference Shares, if any, obtained from any
Credit Rating Agency.
(vii) Provisions of Sub-section (1) of Section 68A of the Companies Act, 1956
relating to punishment for fictitious applications.
(viii) Declaration about the issue of allotment letters/refunds within a period of 7
weeks and interest in case of delay in refund at the prescribed rate under
Section 73(2)/(2A).
(ix) Declaration by the Board of Directors stating that all monies received out of
issue of shares or debentures through an offer document shall be
transferred to a separate bank account other than the bank account referred
to in Sub-section (3) of Section 73.
(x) Minimum Subscription Clause : The minimum subscription clause shall be
incorporated as under:
(xi) For Non-underwritten Rights Issue
(i)If the company does not receive the minimum subscription of 90% of the
issue, the entire subscription shall be refunded to the applicants within
forty two days from the date of closure of the issue.
(ii)If there is delay in the refund of subscription by more than 8 days after the
company becomes liable to pay the subscription amount (i.e. forty two
days after closure of the issue) the company will pay interest for the
delayed period, at rates prescribed under Sub-sections (2) and (2A) of
Section 73 of the Companies Act, 1956.
(xii) For Underwritten Rights Issue
(i)If the Company does not receive minimum subscription of 90% of the issue
including devolvement of underwriters, the entire subscription shall be
refunded to the applicants within forty two days from the date of closure
of the issue.
(ii)If there is delay in the refund of subscription by more than 8 days after the
company becomes liable to pay the subscription amount (i.e. forty two
days after closure of the issue), the company will pay interest for the
delayed period, at prescribed rates in Sub-section (2) and (2A) of
Section 73 of the Companies Act, 1956.
3. Capital structure of the company
(a) Issued, subscribed and paid-up capital
(b) Size of present issue
(c) Paid up capital
(i)After the present issue
(ii)After the conversion of debentures (if applicable)
(d) (i)Details of promoters holding (pre-issue and post issues) and the lock-in.
(ii)Pre and Post Issue shareholding pattern.
(iii)Promoters intention to subscribe to their entire rights entitlement.


4. Terms of the present issue
(i) Authority for the issue, terms of payments and procedure and time schedule
for allotment and issue of certificates.
(ii) How to apply-availability of forms, letter of offer and mode of payment.
(iii) Special tax benefits to company and shareholders under the Income-tax Act,
if any.
5. Particulars of the issue
(i) Object of the issue
(ii) Project Cost
(iii) Means of financing (including contribution of promoters).
6. Company, management and project
(i) History, main objects and present business of the company.
(ii) Background of promoters, Managing Director/Whole-time Director and
names of nominees of institutions if any, on the Board of Directors including
key management personnel.
(iii) Location of the project.
(iv) Plant and machinery, technology, process etc.
(v) Collaboration, performance guarantee if any, or assistance in marketing by
the collaborators.
(vi) Infrastructure facilities for raw materials and utilities like water, electricity,
etc.
(vii) Schedule of implementation of the project and progress made so far, giving
details of land acquisition, execution of civil works, installation of plant and
machinery, trial production, date of commercial production, if any.
(viii) The products
(i)Nature of product(s)-consumer/industrial and end users.
(ii)Existing, licensed and installed capacity of the product, demand of the
product-existing, and estimated in the coming years as estimated by a
Government authority or by any other reliable institution, giving source
of the information.
(iii)Approach to marketing and proposed marketing set up (in case of company
providing services, relevant information in regard to nature/extent of
services etc. to be furnished).
(ix) Future prospects The expected year when the company would be able to
earn net profit, declare dividend.
(x) Change, if any, in directors and auditors during the last three years and
reasons thereof.
7. Financial performance of the company for the last five years


(Figures to be taken from the audited annual account in tabular form).
(i) Balance Sheet Data : Equity Capital, Reserves (State Revaluation
Reserve, the year of revaluation and its monetary effect on assets) and
borrowings.
(ii) Profit and Loss data : Sales, Gross profit, Net profit, Dividend paid if any.
(iii) Any change in accounting policies during the last three years and their effect
on the profits and the reserves of the company.
(iv) Stock market quotation of shares/debentures of the company, if any,
(high/low price in each of the last three years and monthly high/low price
during the last six months).
(v) Details of any pending litigations, defaults against the company, these group
companies and the business relationship of these companies with the
issuing company.
(vi) Promise versus performance for the earlier Public/Rights issues of the
Company or group companies.
(vii) Financial performance of the subsidiary company/group company.
(viii) The accounting ratios as mentioned in case of Prospectus.
Provided that, the lead merchant banker shall not proceed with the issue in
case the accounting ratios mentioned above, do not justify the issue price.
In case of book built issues, the offer document shall state that the final price
has been determined on the basis of the demand from the investors.
(ix) Risk Factors and management perception of risk factors.
8. The information for the period between the last date of the balance sheet
and profit and loss account sent to the shareholders and up to the end of
the last but one month preceding the date of the letter of offer shall be
furnished
(i) Working results of the company under following heads
(a) (i) Sales/turnover
(ii) Other income
(b)Estimated gross profit/loss (excluding depreciation and taxes)
(c) (i) Provision for depreciation
(ii) Provision for taxes
(d) (i) Estimated net profit/loss
(ii) Material changes and commitments, if any, affecting financial
position of the company.
(iii) Week-end prices for the last four weeks; current market price; and
highest and lowest prices of equity shares during the period with the
relative dates.


9. Following particulars in regard to the listed companies under the same
management within the meaning of Section 370(1B) which made any capital
issue in the last three years:
(a) Name of the company.
(b) Year of issue.
(c) Type of issue (rights).
(d) Amount of issue
(e) Date of closure of issue.
(f) Date of despatch of share/debenture certificate completed.
(g) Date of completion of the project, where object of the issue was financing of
a project.
(h) Rate of Dividend paid.
10. Management discussion and analysis of the financial conditions and
results of the operations as reflected in the financial statement
Any material development after the date of the latest balance sheet and its
impact on performance and prospectus of the company.
11. Outstanding litigation
12. Expert opinion obtained if any
13. Statutory and other information
(i) Option to Subscribe
(a)The details of option to subscribe for securities to be dealt in depository.
(b)The lead merchant banker shall incorporate a statement in the offer document
and in the application form to the effect that the investor shall have an
option either to receive the security certificates or to hold the securities
in dematerialised form with a depository.
(ii) Material contracts and time and place of inspection.
14. Undertaking by Directors
No statement made in this Form shall contravene any of the provisions of the
Companies Act, 1956 and the rules made thereunder. All the legal requirements
connected with the said issue as also the guidelines, instructions etc. issued by SEBI,
Government and any other competent authority in this behalf have been duly
complied with.

Signature of Directors Place :...................................
Date :...................................



Provided that information in terms of certain clauses may not be disclosed here, if
the following conditions are fulfilled:
(a) The issuer company has been filing periodic statements in regard to
financial results and shareholding pattern.
(b) The issuer company has in place an investor grievance handling
mechanism.
(c) Lead Merchant Banker has certified compliance of (a) and (b) above.
In such case, issuer company shall furnish to Board an undertaking and make a
copy of the offer document of the immediately preceding public or rights issue
available to the public.
15. ABRIDGED LETTER OF OFFER
In the case of right issues under the SEBI (Disclosure & Investor Protection)
Guidelines, 2000 lead merchant banker shall ensure that the abridged letters of offer
are dispatched to all shareholders at least one week before the date of opening of the
issue.
Provided that where a specific request for letter of offer is received from any
shareholder, the lead merchant banker shall ensure that the letter of offer is made
available to such shareholder.
SEBI (Disclosure & Investor Protection) Guidelines, 2000 provides for the
disclosures required to be made in an abridged letter of offer.
CONTENTS OF THE ABRIDGED LETTER OF OFFER
The abridged letter of offer shall contain disclosures as specified in Section II of
this Chapter.
Provided that where certain condition laid down in the guidelines are satisfied,
certain clauses specified under Section II of this chapter shall not apply.
The abridged letter of offer shall also include the following disclosures:
(a) Provisions pertaining to applications relating to advertisement for rights post-
issues.
(b) Rights entitlement ratio.
(c) Fractional entitlements.
(d) Renunciation.
(e) Application for Additional equity shares.
(f) Intention of promoters to subscribe to their rights entitlement.
(g) Statement that a copy of the offer document of the immediately preceding
public or rights issue is made available to the public.
16. VOLUNTARY STATEMENT IN PROSPECTUS
In addition to the compulsory particulars, any other information may be, and usually
is, volunteered. This information may relate to the terms of the issue of shares of the


company on the Stock Exchange. The intending buyer of shares is entitled to all true
disclosures in the prospectus. A prospectus must therefore, tell the truth, the whole
truth and nothing but the truth. Also, it must not conceal any fact which ought to be
disclosed. In brief, the true nature of the companys venture and the position should be
disclosed. This is called the golden rule as to the framing of prospectus.
It is thus obligatory on the part of those responsible for the issue of prospectus
not only to state accurately all the relevant facts but also not to omit any fact which
may be relevant for the prospective investor to know about the company.
17. THE GOLDEN RULE OR GOLDEN LEGACY
It is the duty of those who issue the prospectus to be truthful in all respects. This
Golden Rule was enunciated by Kinderseley, V.C. in New Brunswick, etc., Co. v.
Muggeridge, (1860) 3 LT 651, and has come to be known as the golden legacy.
Those who issue a prospectus hold out to the public great advantages which will
accrue to the persons who will take shares in the proposed undertaking. Public is
invited to take shares on the faith of the representation contained in the prospectus.
The public is at the mercy of company promoters. Everything must, therefore, be
stated with strict and scrupulous accuracy. Nothing should be stated as a fact which
is not so and no fact should be omitted, the existence of which might in any degree
affect the nature or quality of the privileges and advantages which the prospectus
holds out as inducement to take shares. In short, the true nature of the companys
venture should be disclosed. If concealment of any material fact has prevented an
adequate appreciation of what was stated, it would amount to misrepresentation.
Thus, even if every specific statement is literally true, the prospectus may be false if
by reason of the suppression of other material facts, it conveys a false impression.
In R.V. Kylsant (1932) K.B. 442, all statements in the prospectus were literally
true but it failed to disclose that the dividends stated in it as paid, were not paid out of
trading profits, but out of realized capital profits (secret reserves). The statement that
the company had paid dividends for a number of years was true. But the company
has incurred losses for all those years (1921-27) and no disclosure was made of this
fact. The prospectus was held to be false in material particulars and the managing
director and chairman, who knew that it was false, were held guilty of fraud.
18. DEEMED PROSPECTUS OFFER FOR SALE OF EXISTING SHARES
In general, the provisions of the Companies Act are restricted to cases where
the invitation is made by or on behalf of the company for subscription of its shares. As
such it was possible at one time for a company to evade the statutory provisions
relating to prospectus by allotting shares or debentures to the public by issuing a
document inviting the public to purchase shares or debentures from them; but no
document or prospectus as such, was issued by the company.
Section 64 now covers such a document also and it is treated as a prospectus
issued by the company. Accordingly, an offer for sale is a prospectus, within the
meaning of the Act, and it is deemed to have been issued by the company.
Section 64(1) provides that where a company allots or agrees to allot any existing
shares or debentures with a view to their being offered for sale to the public, any
document by which the offer of sale to the public is made shall for all purposes be


deemed to be a prospectus issued by the company. It may be noted that such offer of
sale is made by existing shareholders to disinvest their whole or part of shareholding.
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:
(a) 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
(b) the whole consideration was not received by the company at the time when
the offer was made by the Issue House.
The offer for sale must set out all the details required to be inserted in a
prospectus. It should also state the net amount of consideration received by the
company on the shares or debentures to which the offer relates; and state the place
and time at which the relevant contracts may be inspected [Section 62(3)].
Since all the provisions which apply to prospectus issued by a company apply to
such a document, it must disclose everything truthfully. A person who makes the offer
will be liable for any mis-statement in that document in the same manner as persons
who authorise the issue of a false prospectus. The persons who accept the offer in
respect of those shares or debentures are deemed to be subscribers. The persons
making the offer will be deemed to be persons named in prospectus of a company for
fulfilling the requirements relating to registration of prospectus under Section 60.
19. LIABILITY FOR UNTRUE STATEMENT
It is now clear that a prospectus must be complete and perfect in all details or in
other words nothing should be omitted and nothing must be untrue in a prospectus.
Where an untrue statement occures in a prospectus, there may arise (i) civil
liability (ii) criminal liability. Every person who is a director of the company at the time
of the issue of the prospectus, every promoter of the company and every person,
including an expert, who has authorised the issue of a prospectus shall be liable.
Since the liability of these persons is to the allottee of shares, we may discuss this
matter under the heading remedies for mis-statements in a prospectus.
What is an Untrue Statement?
It is essential to know as to what constitutes an untrue statement. To protect the
interests of prospective investors in the shares or debentures of a company, the law
ascribes a wider meaning to this term. Whether a statement is untrue or not is to be
judged by the context in which it appears and the totality of impression it would create.
Thus, Section 65 of the Act provides that a statement included in a prospectus shall be
deemed to be untrue, if the statement is misleading in the form and content in which it
is included. It also provides that where the omission from a prospectus of any matter is
calculated to mislead, the prospectus shall be deemed, in respect of such omission, to
be a prospectus in which an untrue statement is included.
The expression Included with reference to a prospectus means included in the
prospectus itself or contained in any report or memorandum appearing on the face
thereof or by reference incorporated therein or issued therewith. Even if every word
included in the prospectus is time, the suppression of material facts may cause the


prospectus to be fraudulent. In Ren v. Kylsant (1932) 1 K B 422, one of the
Statements in a prospectus disclosed that dividend was paid for a number of years
which was true but the prospectus did not mention that dividends was paid out of
capitalised profits. This being a material fact, the prospectus was false.
Onus for Proof of Mis-statement
The burden of proof in a suit by an allottee that he has been misled by the mis-
statement in the prospectus lies on the allottee. He must prove the following :
(i) the misrepresentation was of a fact;
(ii) it was in respect of a material fact. What is a material statement of fact will
depend upon the circumstances of each case. Statement in the prospectus
that a particular mine was in operation and making large returns [Reese
River Silver Mining Co. v. Smith, (1869) L.R. 4 H.L. 64] and that no
promotion money was to be paid [Lodwick v. Earl of Perth, (1884) I.T.L.R.]
were held to be material statements of fact and liability attached for making
untrue statement;
(iii) he acted on the misrepresentation; and
(iv) he suffered damages in consequence.
20. REMEDIES FOR MISREPRESENTATION IN PROSPECTUS
A company is responsible for a statement in prospectus only if it is shown that the
prospectus was issued by the company or by some one with the authority of the
company, e.g., the Board of directors. The company is also liable even though the
prospectus is issued by the promoters, the Board ratifies and adopts the issue, for the
prospectus is the basis of the contract for shares.
The first remedy against the company is to rescind the contract. A person who
takes shares on the faith of a prospectus containing false statements, may apply to
the Court for the contract to be set aside, and his name to be struck off from the
register of members. He may also claim his money back. But the allottee must act
within a reasonable time, before any proceedings to wind up the company have been
commenced, and before he does anything after notice of misrepresentation which is
inconsistent with the right to rescind. He will lose his right to rescind if he attempts to
sell the shares or attends a general meeting of the company, or receives dividends.
The second remedy against the company is to sue for damages for deceit. This
suit is founded on the tort of deceit, and is not a case of fraud on the part of directors
or promoters. The allottee may recover damages from the company for any loss he
may have suffered if the invitation to take shares is emanating from the company and
the persons making it on behalf of the company have fraudulently mis-represented
material facts. The allottee cannot both retain the shares and get damages against
the company. In actual practice, however, suits for damages against the company are
rarely filed. Damages are generally claimed from the directors, promoters and other
persons who authorised the issue of the prospectus.
Remedies against Directors or Promoters
A person who subscribed for shares on the faith of a false prospectus may claim
from directors or promoters:


(i) damages for fraudulent misrepresentation,
(ii) compensation under Section 62 of the Act,
(iii) damages for non-compliance with the requirements of Section 56 of the Act.
(i) Damages for fraudulent misrepresentation
An allottee may sue the director for damages for deceit, if there are fraudulent
misrepresentation in the prospectus. But the directors will not be liable for damages
for mis-statement if they believed them to be true [Derry v. Peek, (1889) 14 AC 337].
A tramway company incorporated by a Special Act had power to move its
tramways by animal power and with the consent of the Board of Trade by steam
power. A prospectus was issued by the directors stating that the company, under the
Special Act, had the right to use steam power. P took shares on the strength of this
statement. Afterwards, the Board of Trade refused its consent, and the company was
wound up. P sued the directors for damages for fraud. Held, the directors were not
liable, since the statement as to steam power had been made in the honest belief that
it was true. The promoters were under the impression that once the Act of Parliament
authorised the use of steam, the consent of the Board of Trade would be practically
concluded.
(ii) Compensation for untrue Statement (Section 62)
An allottee is also entitled to claim compensation from directors, promoters and
any other persons who authorised the issue of the false prospectus, for damages
sustained by reason of any untrue statement in it. The following persons are liable to
pay compensation for loss or damage sustained by reason of untrue statement
included in a prospectus:
(i) every person who is a director of the company at the time of issue of
prospectus;
(ii) every person who has authorised himself to be named and is named in the
prospectus either as a director, or as having agreed to become a director,
either immediately or after an interval of time;
(iii) every person who is a promoter of the company; and
(iv) every person who has authorised the issue of the prospectus;
Provided where a person named in the prospectus has given a consent in
the manner required for the issue of prospectus, shall not, by reason of
having given such consent, be liable as a person who has authorised the
issue of prospectus except in respect of untrue statement, if any, purporting
to be made by him as an expert [Section 62(1)].
When civil liability avoided [Section 62(2)]
No person shall be liable for civil action if he proves:
(i) that having consented to become a director he withdrew his consent before
the issue of the prospectus, and that it was issued without his authority or
consent; or
(ii) that the prospectus was issued without his knowledge or consent, and that
on becoming aware of its issue, he forthwith gave reasonable public notice


that it was issued without his knowledge or consent; or
(iii) that after the issue of prospectus and before allotment thereunder, he on
becoming aware of any untrue statement therein, withdrew his consent to
the prospectus and gave reasonable public notice of the withdrawal and of
the reason therefore; or
(iv) that as regards every untrue statement not purporting to be made on the
authority of an expert or of a public official document or statement, he had
reasonable ground to believe, and did up to the time of allotment of shares
or debentures believe, that the statement was true; and
(v) that as regards every untrue statement purporting to be a statement by an
expert or contained in what purports to be a copy or extract from a report or
valuation of an expert, it was correct and fair representation of the
statement, or a correct copy and fair extract from the report or valuation; and
he had reasonable ground to believe and did up to the time of the issue of
the prospectus believe, that the person making the statement was
competent to make it and that person had given the consent required by
Section 58, to the issue of prospectus and had not withdrawn that consent
before delivery of a copy of the prospectus for registration, or, before
allotment thereunder; and
(vi) that as regards every untrue statement purporting to be a statement made
by an official person or contained in what purports to be a copy of or extract
from a public official document, it was a correct copy of or correct and fair
extract from the document:
Provided that the exceptions mentioned above shall not apply in the case of
a person liable, by reason of his having a consent required of him by
Section 58, as a person who has authorised the issue of the prospectus in
respect of an untrue statement purporting to be made by him as an expert.
When an expert is not liable [Section 62(3)]
A person who, would be liable by reason of his having given a consent required
of him by Section 58 as a person who has authorised the issue of a prospectus in
respect of an untrue statement purporting to be made by him as an expert, shall not
be so liable, if he proves that:
(a) having given his consent under Section 58 to the issue of the prospectus he
withdrew it in writing before delivery of a copy of the prospectus for
registration; or
(b) after delivery of a copy of the prospectus for registration and before
allotment thereunder, he, on becoming aware of the untrue statement,
withdrew his consent in writing and gave reasonable public notice of the
withdrawal and of the reason therefor; or
(c) he was competent to make the statement and that he had reasonable
ground to believe, and did up to the time of the allotment of the shares or
debentures, believed, that the statement was true.
When directors entitled to indemnify


Section 62(4) provides that where:
(a) the prospectus specifies the name of a person as a director of the company,
or as having agreed to become a director thereof, and he has not consented
to become a director, or has withdrawn his consent before the issue of the
prospectus, and has not authorised or consented to the issue thereof; or
(b) the consent of a person is required under Section 58 to the issue of the
prospectus and he either has not given that consent or has withdrawn it
before the issue of the prospectus;
the directors of the company excluding those without whose knowledge or
consent the prospectus was issued, and every other person who authorised
the issue thereof, shall be liable to indemnify the person referred to in
clause (a) or clause (b), as the case may be, against all damages, costs
and expenses to which he may be made liable by reason of his name
having been inserted in the prospectus or of the inclusion therein of a
statement purporting to be made by him as an expert, as the case may
be, or in defending himself against any suit or legal proceeding brought
against him in respect thereof;
Provided that a person shall not be deemed for the purposes mentioned
above to have authorised the issue of a prospectus by reason only of his
having given the consent required by Section 58 to the inclusion therein of a
statement purporting to be made by him as an expert.
(c) Section 62(5) provides that every person who becomes liable to make any
payment as aforesaid may recover contribution, as in cases of contract, from
any other person, who, if sued separately, would have been liable to make
the same payment, unless the former person was, and the latter person was
not guilty of fraudulent misrepresentation.
(iii) Liability under Section 56
An omission from a prospectus of a matter required to be stated under Section
56 may give rise to an action for damages at the instance of a subscriber for shares,
who has suffered loss thereby, even if the omission does not make the prospectus
false or misleading. But the plaintiff must prove that he has sustained damage by
reason of the omission of a matter required to be stated in the prospectus.
A director or other person sued under Section 56 may defend himself by
showing:
(a) that he had no knowledge of the matter not disclosed; or
(b) that the contravention arose out of an honest mistake of fact; or
(c) in the opinion of the Court, non-compliance or contravention was not
material or that the person sued ought reasonably to be excused, having
regard to all the circumstances of the case.
Criminal Liability for Mis-statement in Prospectus
According to Section 63 of the Companies Act, 1956, where a prospectus


includes any untrue statement, every person who has authorised the issue of the
prospectus shall be punishable with:
(a) imprisonment for a term which may extend to two years; or
(b) fine which may extend to Rs. 50,000; or
(c) both (a and b).
However, where a person who has authorised the issue of prospectus proves,
either that the statement was immaterial or that he had reasonable ground to believe,
and did, up to the time of issue of prospectus believe, that the statement was true,
may be relieved from the criminal liability.
According to Sub-section (2) of Section 63, an expert who has given the consent
as required by Section 58, shall not be deemed for the purpose of Section 63, to have
authorised the issue of prospectus.
Who is Entitled to Remedies?
The right to claim compensation for any loss or damage sustained by reason of any
untrue statement in a prospectus is available only to a person who has subscribed for
shares or debentures on the faith of the prospectus containing untrue statement. The
word subscribed denotes that the shares were acquired directly from the company by
allotment. A subsequent purchaser of shares in the open market has no remedy
against the company or the directors or promoters. Also, a subscriber to the
memorandum cannot seek relief, as the company cannot be said to be in existence
when he signed the memorandum, and he cannot be said to have been influenced by
any statement, in the prospectus. Again, liability under a prospectus can only arise
when the prospectus has been issued, and only in favour of persons who subscribe for
shares in response to it and relied upon the statement made therein.
If, however, a prospectus is issued with the object of inducing persons to buy
shares in the open market, any person who buys on the strength of the false
representation made in it, has a right of action for fraudulent misrepresentation
against the company. But the purchaser must have been directly induced by the false
statement in the prospectus and nothing else. Two cases may be noted:
(i) In Peek v. Gurney (1873) 43 L.J. Ch. 19, a deceitful prospectus was issued
by the directors on behalf of the company. P received a copy of it but did not
take any shares originally in the company. The allotment of shares to
applicants was completed, and several months afterwards he bought 2,000
shares on the stock exchange. His action against the directors for deceit
was rejected. It was observed by the Court that the office of a prospectus is
to invite persons to become allottees, and, allotment having been
completed, such office is exhausted and liability to allottees does not follow
the shares into the hands of subsequent transferees.
(ii) In Andrews v. Mockford (1869) I.Q.B. 372, the directors sent to A, a
prospectus of the company which they knew would be a sham in order to
induce A to purchase shares therein. A did not subscribe for the shares at
that time. The prospectus, having produced but a scanty subscription for


shares, the directors thereupon fraudulently published a telegram in
newspaper. A believing in the truth of the telegram was induced to purchase
shares in the open market. The directors were held liable for the systematic
fraud. The function of the prospectus was not exhausted, and the false
telegram was brought into play by defendants to reflect back upon and
countenance the false statements in the prospectus.
Further, by reason of the decision of the House of Lords in Hedley Byrne Co. v.
Hellers & Partners, (1964) A.C. 465, a person may become liable for holding out a
false statement to any one whom he knew or ought to have known would act in
reliance upon the statement.
21. PENALTY FOR FRAUDULENTLY INDUCING TO INVEST MONEY
Additional criminal liability of imprisonment up to 5 years or fine up to
Rs. 1,00,000 or both is provided by Section 68 against any person who, either
knowingly or recklessly has made a false, deceptive or misleading statement,
promise or forecast or had by dishonestly concealing material facts, induced another
person to enter into, or to offer to enter into:
(a) any agreement for or with a view to acquiring, disposing of, subscribing for,
or underwriting shares or debentures; or
(b) any agreement, the purpose or pretended purpose of which is to secure a
profit to any of the parties from the yield of shares or debentures or by
reference to fluctuations in the value of shares or debentures.
22. PROHIBITION OF ALLOTMENT OF SHARES IN FICTITIOUS NAME
Impersonation for the acquisition of shares has been made an offence
punishable with imprisonment. Section 68A makes the following acts punishable with
imprisonment for a term extending to 5 years:
(a) making an application to a company for acquiring or subscribing for any
shares therein under fictitious name; or
(b) inducing a company to allot, or register any transfer of shares therein to him,
or to any other person in a fictitious name.
It is obligatory for every company to prominently display these provisions in every
issue of a prospectus as well as in the forms of application for shares. The object of
this penal provision is to eradicate the practice of allotting shares to fictitious or non-
existing persons.
LESSON ROUND-UP
Prospectus has been defined as any document described or issued as a
prospectus and includes any notice, circular, advertisement or other document
inviting deposits from the public or inviting offers from the public for the
subscription or purchase of any shares in, or debentures of a body corporate.
One of the ingredients of a prospectus is to make invitation to the public to
subscribe for shares in or debentures of a body corporate which is construed as


including a reference to any section of the public, whether selected as members
or debenture-holders of the company or as clients of the person issuing the
prospectus. However, there are exceptions to it.
All public companies either issue a prospectus or file a statement in lieu of
prospectus. A private company as such does not produce either document.
Companies Act provides provisions for dating and registration of prospectus.
Shelf prospectus means a prospectus issued by any financial institution or bank
for one or more issues of securities or class of securities specified in the
prospectus.
Information Memorandum means a process undertaken prior to the filing of a
prospectus by which a demand for the securities proposed to be issued by a
company is elicited and the price and the terms of issue for such securities is
assessed by means of a notice, circular, advertisement or document.
Red-herring prospectus means a prospectus which does not have complete
particulars on the price of the securities offered and the quantum of securities
offered.
Companies Act and SEBI guidelines provide for contents and disclosures
required in a prospectus.
No application form can be issued for shares or debentures unless it is
accompanied by a memorandum containing such salient features of prospectus
as may be prescribed. There are, however, certain exceptions to this rule.
The Companies (Central Governments) General Rules and Forms, 1956 provide
for the salient features required to be included in the abridged prospectus. The
Securities and Exchange Board of India (SEBI) have modified its guidelines
regarding disclosure in the Abridged Prospectus and Letter of Offer to include
certain additional items.
In the case of right issues under the SEBI (Disclosure & Investor Protection)
Guidelines, 2000 lead merchant banker shall ensure that the abridged letters of
offer are dispatched to all shareholders within the time prescribed therein.
In addition to the compulsory particulars, any other information may be, and
usually is, volunteered.
It is the duty of those who issue the prospectus to be truthful in all respects.
An offer for sale is a prospectus, within the meaning of the Act, and it is deemed
to have been issued by the company.
A prospectus must be complete and perfect in all details or in other words nothing
should be omitted and nothing must be untrue in a prospectus. Where an untrue
statement occurs in a prospectus, there may arise (i) civil liability (ii) criminal
liability. Every person who is a director of the company at the time of the issue of
the prospectus, every promoter of the company and every person, including an
expert, who has authorised the issue of a prospectus, shall be liable.
The burden of proof in a suit by an allottee that he has been misled by the mis-
statement in the prospectus lies on the allottee.
A company is responsible for a statement in prospectus only if it is shown that the
prospectus was issued by the company or by some one with the authority of the
company. The company is also liable if though the prospectus is issued by the
promoters, the Board ratifies and adopts the issue.
A person who subscribed for shares on the faith of a false prospectus may claim


from directors or promoters damages for fraudulent misrepresentation,
compensation, damages for non-compliance with the requirements of the Act.
Where a prospectus includes any untrue statement, every person who has
authorised the issue of the prospectus shall be punishable with imprisonment,
fine or both.
The right to claim compensation for any loss or damage sustained by reason of
any untrue statement in a prospectus is available only to a person who has
subscribed for shares or debentures on the faith of the prospectus containing
untrue statement.
Additional penalty is also leviable under the Act for fraudulently inducing to invest
money.
Impersonation for the acquisition of shares has been made an offence under the
Companies Act, punishable with imprisonment.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation).
1. What is a prospectus? Is the issue of a prospectus compulsory on the part of
a company?
2. What amounts to a mis-statement in a prospectus? What are the remedies
available to a subscriber who has taken shares on the basis of a mis-
statement in a prospectus?
3. Discuss the liability of a company for untrue statements or omissions in its
prospectus.
4. Discuss the civil as well as criminal liability of persons who authorise the
issue of a false prospectus.
5. Explain the legal provisions relating to issue and registration of a
prospectus?
6. What are the remedies open to an allottee of shares who have had applied
for them on the faith of a false and misleading prospectus and what are the
defences available to the directors of the company who have issued such a
prospectus?
7. Discuss in detail the contents and the form of a prospectus.
8. Who is deemed to be an expert in relation to the prospectus of a company?
What conditions must be satisfied before a report by an expert can be
published therein? Is there any remedy available to the allottee of the shares
who has been induced to take shares on the faith of an untrue statement of
an expert in the prospectus?
9. Prospectus is the window through which company is displayed without
distortion. Comment. Distinguish a prospectus from statement in lieu of
prospectus.
10. Write short notes on:


(a)Statement in lieu of prospectus;
(b)Prospectus by implication;
(c)Registration of a prospectus.
(d)Shelf prospectus.
(e)Information Memorandum.
(f)Red-herring prospectus.


Suggested Readings:
(1) Guide to Companies Act A. Ramaiya
(2) SEBI (Disclosure and Investor Protection) Guidelines, 2000. (Updated)




































STUDY IX
FINANCIAL STRUCTURE AND MEMBERSHIP-IV
DEBT CAPITAL
LEARNING OBJECTIVES
This lesson explains the borrowing powers of the company and the various types of
charges on the companys property. Work involved in raising of working capital from
banks and raising loans from financial institutions and debentures, their
characteristics and issues and redemptions, along with reissue of redeemed
debentures is also discussed herein. The lesson also lists out the Developments in
Corporate Debt Financing and the new instruments in Money Market.
At the end of this lesson, you should be able to understand:
Borrowing power of the company.
Unauthorized or ultra vires borrowing.
Intra vires borrowing but outside the scope of agents authority.
Charge on uncalled capital, book debts.
Promissory notes and bills of exchange.
Types of borrowing.
Work involved in relation to raising of working capital from banks and raising
loans from financial institutions.
Debentures: characteristics, kinds, debenture stock, debenture trust deed,
debenture redemption reserve, issue of debentures.
SEBI guidelines pertaining to issue of debentures.
Register of debenture holders.
Remedies open to debenture holders.
Distinction between debenture and shares.
Redemption of debentures and re-issue.
Public sector bonds and foreign bonds, brokerage.
Developments in corporate debt financing.
New instruments in money market.

1. BORROWING
To borrow is to receive with an implied or express intention of returning the same.
Borrowing necessarily implies repayment at some time and under some
circumstances [Re. Southern Brazilian Rio (1905) 2 Ch. 78]. Borrow includes the
raising of money by the grant of annuities. [Article 366(4) of the Constitution of India].
Power of Company to Borrow
A company, like an individual, may have to borrow for the exigencies of its
business. The power of a company to borrow money is implied in the case of all
trading companies. [General Auction Estate Co. v. Swith (1891) Ch 432]. Non-trading
companies, however, must be expressly authorised to borrow by their memorandum.
321


A power to borrow money cannot be implied [Baronness Wenlork v. River Dee (1885)
10 App Cas 354]. In practice, all types of companies, trading and non-trading, are
given express power to borrow by their articles which can fix up the maximum
amount which can be borrowed and give security. A power to borrow money, whether
express or implied, includes the power to charge the assets of the company as
security to the lender.
Section 149(1) of the Companies Act provides that in case of a public company,
borrowing powers are not exercisable until the company is entitled to commence
business. In case of a private company, this is not the case. The power of the
company to borrow is exercised by its directors, who cannot borrow more than the
sum authorised. The powers to borrow money and to issue debentures can
only be exercised by the Directors at a duly convened meeting. Pursuant to
Section 292(1)(b) & (c) directors have to pass resolution at a duly convened Board
Meeting to borrow moneys. The power can, however, be delegated by a resolution
passed at a duly convened meeting of the directors to a committee of directors,
managing director, manager or any other officer of the company. The resolution must
specify the total amount upto which the moneys may be borrowed by the delegates.
Often the power of the company to borrow is unrestricted, but the authority of
the directors acting as its agents is limited to a certain extent. For example, Section
293(1)(d) of the Act prohibits the Board of directors of a public company from
borrowing a sum which exceeds the aggregate of the paid-up share capital of the
company and its free reserves unless they have received the prior sanction of the
company in general meeting.
It is further provided in Section 293(4) that the acceptance of deposits by a
banking company, in the ordinary course of its business, of deposits of money from
the public, repayable on demand or otherwise, shall not be deemed to be borrowing
of moneys by the banking company within the meaning of clause (d) of Sub-section
(1) of Section 293. It is important at this stage to distinguish between, borrowing
which is ultra vires the company and borrowing which is intra vires the company but
outside the scope of the directors authority.
The provisions of Sub-section (5) of Section 293 clearly lay down that debts
incurred in excess of the limit fixed by clause (d) of Sub-section (1) shall not be valid
unless the lender proves that he lent his money in good faith and without knowledge
of the limit imposed by Sub-section (1) being exceeded.
He cannot assume that the consent of the company in general meeting has been
given. Neither the rule in Royal British Bank v. Turquand, (1856) 6 E&B 327 nor the
series of decisions relating to ratification by shareholders will apply. If the condition in
Sub-section (1) is not satisfied, the debt in excess of the limit is not valid or effectual,
unless the lender proves that he advanced the loan in good faith and without
knowledge that the limit imposed by that clause had been exceeded.
If the borrowing by the directors is ultra vires their powers, the directors may, in
certain circumstances, be personally liable for damages to the lender, on the ground
of the implied warranty given by them, that they had power to borrow [Firbanks
Executors v. Humphreys, (1886) 18 QBD 54; Garrard v. James, 1925 Ch. 616].
However, the money may be followed in the hands of the company, and if paid to the


companys creditors, the lender may be subrogated to the rights of the creditors
[Blackbum Building Society v. Cunlife Brooks & Co. (1882) 22 Ch.D 61: (1881-5) All
ER Rep Ext. 1280].
Sometimes it happens that a power to borrow exists but is restricted to a stated
amount, in such a case if by a single transaction an amount in excess is borrowed,
only the excess would be ultra vires and not the whole transaction [Deonarayan
Prasad Bhadani v. Bank of Baroda, (1957) 27 Com Cases 223 (Bom)]. The
acquiescence of all shareholders in excess loans contracted by directors beyond their
powers but not ultra vires the powers of the company would be sufficient to validate
such excess debts. [Sri Balasaraswathi Ltd. v. Parameswara Aiyar, (1956) 26 Com
Cases 298, 308: AIR 1957 Mad 122].
If the borrowing is unauthorised, the company will be liable to repay, if it is shown
that the money had gone into the companys coffers [Lakshmi Ratan Cotton Mills Co.
Ltd. v. J.K. Jute Mills Co. Ltd., (1957) 27 Com Cases 660: AIR 1957 All 311].
The consent of the company in general meeting may be in the shape of a formal
resolution in a general meeting, Re, Express Engineering Works Ltd., (1920) 1 Ch
446; or by the acquiescence of all the shareholders without a meeting. [Parker and
Cooper Ltd. v. Reading, (1926) Ch 975: (1926) All ER Rep 232].
Unauthorised or Ultra Vires Borrowing
Where a company borrows without the authority conferred on it by the articles or
beyond the amount set out in the Articles, it is an ultra vires borrowing. Any act which
is ultra vires the company is void. Here the behaviour of the directors, as the
companys agents, can have no effect whatsoever on the validity of the loan for no
agent can have more capacity than his principal. No agent can have a power which is
not with the principal. If, therefore, the borrowing is ultra vires the company so that
the company has no capacity to undertake it, the lender can have no rights at
common law [Sinclain v. Brouguham (1914) 88 LJ Ch 465]. No debt is created and
any security which may have been created in respect of the borrowing, is also void.
The lender cannot sue the company for the repayment of the loan.
Ultra vires borrowings cannot even be ratified by a resolution passed by the
company in general meeting. However, equity assists the lender where the common
law fails to do so. If the lender has parted with his money to the company under an
ultra vires borrowing, and is, therefore, unable to sue for its return, or enforce any
security granted to him, he nevertheless has, in equity, the following remedies:
(a) Injunction and Recovery
Under the equitable doctrine of restitution he can obtain an injunction provided he
can trace and identify the money lent, and any property which the company has bought
with it. Even if the monies advanced by the lender cannot be traced, the lender can
claim repayment if it can be proved that the company has been benefitted thereby.
(b) Subrogation
Where the money of an ultra vires borrowing has been used to pay off lawful
debts of the company, he would be subrogated to the position of the creditor paid off
and to that extent would have the right to recover his loan from the company.


Subrogation is allowed for the simple reason that when a lawful debt has been paid
off with an ultra vires loan, the total indebtedness of the company remains the same.
By subrogating the ultra vires lender the Court is able to protect him from loss, while
debt burden of the company is in no way increased. But the subrogated creditor will
not enjoy the priority of the original creditor [Re Wirenhan Mold and Cohmahs Quay
Rly (1879) 1 Ch 440].
(c) Suit against Directors
The lender may be able to sue the directors for breach of warranty of authority,
especially if the directors deliberately misrepresented their authority [Executors v.
Himphreys (1866) QBD 64].
Intra vires Borrowing but Outside the Scope of Agents Authority
A distinction should always be made between a companys borrowing powers
and the authority of the directors to borrow. Where the directors exceed their
authority, the excess part may not be ultra vires and may be only irregular depending
upon the facts and circumstances. The company will be liable if the excess is within
the directors ostensible authority and the lender acted in good faith or if the
transaction was ratified by the company. Thus, where the directors mortgaged the
companys property exceedings the limits of their authority, it was held that the
lending bank was entitled to retain possession and to claim institution before it could
be compelled to surrender possession [Deonarayan Prasad Bhadani v. Bank of
Baroda Ltd. (1957) 27 Com. Cases 223, 239 (Bom.)].
Where the borrowing is intra vires the company but outside the authority of the
directors e.g. where the articles provide that the directors shall have the power only
up to Rs.100 lacs and prior approval of the shareholders would be required to borrow
beyond Rs. 100 lacs; any borrowing beyond Rs. 100 lacs without shareholders
approval i.e. ultra vires the directors can be ratified by the company and become
binding on the company. The company would be liable, particularly if the money has
been used for the benefit of the company. Here the legal position is quite clear. The
company has power or capacity to borrow, but the authority of the directors is
restricted either by the articles of the company or by the statute, and they have
exceeded it. The company may, if it wishes, ratify the agents act in which case the
loan binds the company and the lender as if it had been made with companys
authority in the first place.
On the other hand, the company may refuse to ratify the agents act. Here the
normal principles of agency apply. The doctrine of Indoor Management (also known
as rule in Royal British Bank v. Turquand (1856) CI & B 327) shall protect the lender,
provided he can establish that he advanced the money in good faith. A third-party
who deals with an agent knowing that the agent is exceeding his authority has no
right of action against the principal. Bearing in mind that the memorandum and
articles are public documents, the contents of which the third-party is deemed to
know, he will obviously have no right of action against the company if the agents lack
of authority is obvious from reading them. But a third-party is not effected by secret
restrictions on the agents authority, as the lack of authority is not clear from the
public documents and the lender can not be aware of it from some other source.


Therefore, the company will be liable.
The position may be clarified with the help of a few decided cases.
(i) In V.K.R.S.T. Firm v. Oriental Investment Trust Ltd., AIR 1944 Mad 532
under the authority of the company, its managing director borrowed large
sums of money and misappropriated it. The company was held liable. Where
the borrowing is within the powers of the company, the lender will not be
prejudiced simply because its officer have applied the loan to unauthorised
activities, if the lender had no knowledge of the intended misuse.
(ii) In T.R. Pratt. (Bom) Ltd. v. E.D. Sassoon and Co. Ltd., (1936) 6 Comp. Cas.
90, there was no limit on the borrowing for business in the memorandum of
the company. But the directors could not borrow beyond the limit of the
issued share capital of the company without the sanction of the general
meeting. The directors borrowed money from the plaintiff beyond their
powers. It was held that the money having been borrowed and used for the
benefit of the principal either in paying its debts, or for its debts, or for its
legitimate business, the company cannot repudiate its liability on the ground
that the agent had no authority from the company to borrow. When these
facts are established a claim on the footing of money had been received
would be maintainable.
It was also held that under the general principle of law when an agent
borrows money for a principal without the authority of the principal, but if the
principal takes benefit of the money so borrowed or when the money so
borrowed have gone into the coffers of the principal, the law implies a
promise to repay. In that connection it was observed that there appears to
be nothing in law which makes this principle inapplicable to the case of a
joint stock company and even in cases where the directors or the managing
agent had borrowed money without there being authorisation for the
company, if it has been used for the benefit of the company, the company
cannot repudiate its liability to pay.
(iii) In Equity Insurance Co. Ltd. v. Dinshaw & Co., AIR 1940 Oudh 202, it was
held that where the managing agent of a company who is not authorised to
borrow, has borrowed money which is not necessary, neither bona fide, nor
for the benefit of the company, the company is not liable for the amount
borrowed.
(iv) In Suraj Babu v. Jaitly & Co. AIR 1946 All 372, P & Co., were the managing
agents of L & Co., which was in liquidation. P the manager borrowed a sum
of money from J in his own name. In one letter to J he indicated that the loan
was for a requirement of L & Co. and that company had actually benefitted.
It was held that there was no intention to bind the company. The mere fact
that the company had benefitted was not in itself sufficient to bind the
company.
(v) In Krishnan Kumar Rohatgi and Others v. State Bank of India and Others,
(1980) 50 Comp. Cas 722, the company borrowed an amount of Rs. 5 lakhs
from the Bank under a Promissory Note. The repayment was guaranteed by
a person by executing a guarantee in favour of the company. The company


used to make payments towards loan and the promissory note used to be
renewed from time to time. In the suit for recovery, the company contended
that the pro- note was executed by the Chairman without there being a
resolution of the Board of directors authorising the Chairman to execute the
pro-note as required under Section 292(1)(c) of the Act. Rejecting these
contentions the Patna High Court held that in cases where the directors
borrow funds without their having authorisation from the company and if the
money has been used for the benefit of the company, the company cannot
repudiate its liability to repay. Under the general principles of law, when an
agent borrows money for a principal without the authority of the principal but
the principal takes the benefit of the money so borrowed or when the money
so borrowed has gone into the coffers of the principal, the law implies a
promise to be paid by the principal.
Borrowing on Security of Property
The power to borrow includes the power to give security, which may take the
form of a mortgage, a charge, hypothecation, lien, guarantee, pledge etc. The
creditors position becomes safer when security is given, for he will not only be able
to sue the company for the amount of money which he has lent to it, but he will also
be able to enforce his security, i.e., claim that the property charged belongs to him to
the extent of the total amount due to him.
A loan taken by a company may be secured by any of the following:
(a) A legal mortgage of specific part of its property;
(b) An equitable mortgage by deposit of title deeds;
(c) A mortgage of movable property;
(d) Bonds;
(e) Promissory notes and bills of exchange;
(f) A charge on uncalled capital;
(g) A charge on calls made but not paid;
(h) A floating charge;
(i) Debentures or debenture stock;
(j) A mortgage of book debts (but not of book);
(k) A charge on a ship or any share in a ship;
(l) A charge on goodwill or a patent or a licence under a patent, or a trade
mark, or on a copyright;
(m) A pledge of goods.
Charging of uncalled capital and of book debts need explanation at this stage,
because a company has no implied power to mortgage its uncalled capital.
Charge on Uncalled Capital
A company may charge its uncalled capital if its articles or memorandum
authorise it to charge it. The memorandum may give an express power to charge
uncalled capital, or the power may be so wide that it can be inferred by implication.
For example, in Newton v. Debentureholders of Anglo-Australian Investment Co.,


(1895) A.C. 224, the memorandum authorised the company to borrow upon any
security of the company. It was held that the power was wide enough to include a
charge on uncalled capital.
However, a company cannot mortgage or charge any part of its reserve capital,
i.e., such portion (if any) of its uncalled capital as is incapable of being called up
except in the event of winding up of the company (Sections 98 and 99).
Charge on Book Debts
A company may create a mortgage or a charge, including a floating charge, on
any of its book-debts. Book-debts are debts arising in a business which in the
ordinary course of business would be entered into the books of account of company,
although they may not have been so entered. A letter directing moneys payable
under a contract to be remitted to the companys bankers with whom the company
had an overdraft containing the words, these instructions to be regarded as
irrevocable, unless the bank should consent to their cancellation, has been held to
be a charge on book debts. [In Re, Kent and Sussex Saw Mills Ltd. (1947) Ch. 177].
But an assignment of a part of book debts is not a charge on the book debt [Ashby
Warner & Co. v. Simmons (1936) W.N. 212].
Promissory Notes and Bills of Exchange
In order to make the company liable on such instrument it must appear clearly on
the face of the instrument that it was intended to be drawn, accepted, made or
endorsed on behalf of the company. But if a director signs a negotiable instrument
without excluding personal liability to the holder of the instrument e.g. if a promissory
note is executed in the form, We X and Y, the directors of A Ltd. promise to
pay......., the directors shall be liable on it and not the company. Again, when a
promissory note was endorsed in this manner: Mitter and Sons, Managing Agents,
Lister Antiseptic Co. Ltd., it was held that the intention to involve the responsibility of
the company was not clear from the endorsement and the managing agents were
held liable [Sreelal Mangtulal v. Lister Antiseptic Pressing Co. Ltd., AIR 1925 Cal.
1062]. But when a promissory note was executed on a paper the top of which bore
the rubber stamp of the company and was signed Joshi, Treasurer, an intention to
bind the company was held to be clear [Poona Chitrasala Press v. Gajanan Industrial
& Tramway Co., AIR Bom. 29].
In Siva Gurupatha v. Padmavati, AIR 1941 Mad. 417, it was held that when in a
promissory note written in Indian language a person after giving his own description
adds that he is an agent of another, it means that he is acting as the others agent in
the matter of execution of the document.
In P. Rangaswamy Reddiar and another v. R. Krishnaswamy Reddiar and
another, (1973) 43 Comp. Cas. 232, the promissory note was written in Tamil
language and in the description of the promissory note the promissory was stated as
Shri Rajagopal Bus Transport, proprietor Ramanatha Reddiar. Hence, it was
contended by the appellant that since the promissory note was not executed in the
name of the company or for and on behalf of the company, the suit is not
maintainable against company. Rejecting the contention of the appellant, the Madras
High Court observed: Since the promissory note is in Tamil and the description is


Shri Rajagopal Bus Transport, proprietor Ramanatha Reddiar, the intention is made
clear in the instrument itself and shows that the instrument was executed on behalf of
the company.
Types of Borrowings
A. Long Terms Borrowings - Funds borrowed for a period ranging for five years
or more are termed as long-term borrowings. The long-term borrowings may
be made from All India Financial Institutions or jointly from Financial
Institutions and Banks. Where the borrowings are made from financial
institutions and a bank, by charging the same assets to both of them, there
shall have to be executed a pari passu agreement amongst them.
B. Short Term Borrowings - Funds needed to be borrowed for a short period
say for a period upto one year or so are termed as short term borrowings.
Working capital needs are covered by obtaining loans from commercial
banks on the securities of inventories, goods in process, finished goods
book debts etc.
C. Medium Term Borrowings - Where the funds to be borrowed are for a period
ranging from two to five years, such borrowings are termed as medium term
borrowings. The commercial banks normally finance purchase of land,
machinery, vehicles etc.
We have mentioned the types of borrowings a company may make. Thus,
monies may be borrowed in one or more of the following methods namely:
(i) Loans from Financial Institutions and Banks:
(ii) Issue of Debentures;
(iii) Issue of Bonds; and
(iv) Public Deposits.
The company may borrow with or without security. Loans from financial
institutions and banks are secured by assets of the company. This will be discussed
in length later in this Study. Debentures and bonds are also generally, but not
necessarily, fully secured. The deposits from public are unsecured and they rank pari
passu with other unsecured creditors.
2. BANK-BORROWINGS
Raising of short-term loans does not involve much procedure. On completion of
the negotiations with banks, the proposed borrowing is approved by the Board of
directors, the draft resolution of which is generally supplied by the bank. The Board
will also approve of the drafts of the various documents to be executed in regard to
the borrowing and also authorise one or more of the directors and the Secretary
(depending on the provisions in the Articles of Association of the company) to
execute and deliver to the bank the documents and other deeds to be executed in
connection with the borrowing. Further the resolution would also provide for the
delegation of powers for operation of the account, and communication of the
resolution to the bank.
Work involved in relation to Raising of Working Capital from Banks and Raising
Loans from Financial Institutions


Working Capital: Working capital may be defined as the excess of current and
liquid assets over current liabilities of a business, having regard to reasonable
provision for contingencies so as to enable it to conduct its operations normally and
free from financial embarrassment and to avoid losses consequent upon incurring
commitments beyond its capacity in the ordinary course of events.
This definition has to be construed very broadly. The facts and circumstances of
each case must be considered. It may be possible to carry on business with a small
margin or even a deficiency in a case where goods are sold for cash, whilst being
bought on credit terms, or where the sale credit period is shorter than the purchase
credit period. On the other hand, the position may be on the reverse to such
favourable circumstances, and the gap may be covered by short-term financing, bank
overdrafts and bills of exchange.
As long as there exists a reserve of strength in the form of assets which can be
converted into cash without undue delay or loss, lack of working capital will not be
detrimental to the business. The assets included in the working capital are (1) liquid
(cash in hand, cash at bank, readily realisable investments); (2) near liquid (bank
deposits where notice of withdrawal is required; and investments which are not so
readily realisable as those in (1) above; and (3) other current assets like debtors, bills
receivable, stocks, etc. which may be classified under (1) or (2) above according to
the particular facts of the case.
Approaching Banks for Working Capital Requirements
Before approaching a bank or banks, it is necessary that keeping in view the
peculiarities of the trade, industry or business one is working for, one has to assess
the working capital requirements of the company, which is done on consideration of
the following facts:
normal average period of credit given to an approved debtor by the
business;
the amount of stock that is required to feed the business with special
attention to the rapidity of turnover;
provision for meeting the peak load of expenses, having regard to the
amount of cash in hand, cash at bank or other credit facilities available
(Particularly in seasonal business);
the running expenses of the business; and
credit worthiness of the business upon which depends the extent to which
recourse can be had to short-term borrowing through a temporary overdraft.
Once having come to an approximate figure of the working capital requirements
of the business, one must approach the companys present banker and have an
informal discussion with the Manager of the concerned Branch. If the requirement is
very large, one may resort to consortium borrowing, i.e. borrowing from more than
one bank. After having discussed the details of the working capital requirements, a
formal loan application has to be moved. If the bank approve the working capital
facility in the form of cash credit against pledge of stocks of finished goods, semi-
finished goods, stores of raw materials, spares, components etc. and/or the book
debts; bill discounting limit; guarantee limit and/or the letters of credit limit, a letter of


intent is issued by the bank or the banks through the lead bank.
Thereafter, the documentation stage comes. The Board of directors of the
company meets and accepts the letter of intent of the bank(s) and authorises the
managing director and/or the company secretary or any other director to convey
acceptance of the company of the terms and conditions of the letter of the bank and
to execute documents for securing the working capital facilities.
For working capital limits, the following documents are usually required by the
banks to be executed by the borrowing company:
loan agreement (incorporating all the limits sanctioned);
deed of hypothecation (involving all the assets that are offered by the
borrowing company as security);
demand promissory note for the entire amount of all the limits;
personal collateral guarantee or guarantees of the managing director and/or
other directors and/or guarantees by subsidiary and/or holding companies.
After the documents have been executed, the company secretary has to file with
the Registar of Companies e-Form No. 8 containing particulars or modification of the
charge, as the case may be created by the company on the companys properties in
favour of the bank or the banks together with prescribed enclosures and the filing fee.
This has to be done within thirty days of the execution of the documents. Particulars
of the charge are also to be entered in the Register of Charges maintained by the
company under Section 143 of the Companies Act, 1956.
Thereafter the bank or the banks shall open a cash credit account in the name of
the company in their books and credit the said account with the cash credit
sanctioned limit and the company may draw amounts on the basis of the drawing
power worked out every month by the bank or the banks through the lead bank on
the basis of the stock statements supplied to it/them. The other limits, namely the bill
discounting, guarantee and the letters of credit, may be utilised by the company as
and when needed.
Raising Loans from Financial Institutions
The Government of India have set up certain Central Financial Institutions
namely the Industrial Finance Corporation of India Ltd., the Industrial Development
Bank of India and the Industrial Credit and Investment Corporation of India Ltd. The
various State Governments have also set up State Financial Corporations. These
financial institutions together with certain other institutions like the Unit Trust of India,
Life Insurance Corporation of India and the General Insurance Corporations provide
long-term loans and finance to trade, business and industry. Many companies utilise
the financial assistance provided by the various financial institutions, depending upon
their requirements and availability. They select one or more institution(s) for the
purpose.
The basic source of corporate funds is the shareholders money in the form of
share capital. Other sources are borrowings in the form of debentures, public


deposits, inter-corporate borrowings, loans and financial accommodation from
directors, working capital from banks and long and medium-term loans from financial
institutions. These loans are taken when a companys own funds are insufficient or
when it plans to undertake modernisation of its existing plant and machinery, to set
up a new industrial undertaking or to diversify its existing production activity by
expanding vertically or horizontally.
The first step in the direction of securing loan from a financial institution is to
prepare a detailed project report giving under various heads the desired information
on the basis of which the financial institution concerned may be able to assess the
economic viability of the project and the capacity of the company to repay the loan
together with interest on agreed rate.
The project report must set up the present activities of the company, the various
products being manufactured by it, their market demand and acceptability, the
goodwill and image created by the company and the place it has secured in
community of undertakings engaged in the manufacture of items in its product line.
The present management of the company, educational and technical qualifications of
the Managing Director, if any, and the managerial personnel including the directors
are also included. Details of their other directorships and the types and quality of
services they are rendering to the company shall also be stated in the report if it is an
existing company, its balance sheets for the previous three to five years are also
required to be attached to the Project Report. Projects of operations for the next five-
ten years, based on sound assumption/possibilities, shall also form an important part
of the project report.
The total cost of the project, viz., cost of land, if land has to be acquired, landed
cost of plant and machinery proposed to be installed, names, addresses and
proforma invoices of the manufacturers and suppliers of the various machines
together with the names, addresses and experience of the technical consultants who
have advised for the procurement of the said plant and machinery and who are going
to install them in the proposed factory site, must also be given.
The available funds with the company in the form of shareholders money,
available reserves, internal generation of funds and other long-term borrowings must
also be stated in the Project Report together with the financial gap, which is proposed
to be covered by loan from the financial institutions(s).
An application in the standard format will then be submitted to the financial
institution or the lead financial institution. If it is proposed to take loan from more than
one financial institution, the application will be submitted to the institution which is
going to meet the major portion of the applicant companys demand, which will be
known as the lead institution. The application will be accompanied by the Project
Report and copies of the previous three to five years balance sheets and other
required documents. The application will be considered in detail by the institution or
the institutions, as the case may be.
Thereafter, the financial institution(s) will invite representatives of the applicant
company for a detailed discussion of the application. This meeting should be
attended by the company through the company secretary assisted by technical
personnel, who are fully equipped to satisfactorily answer to the probable queries by


the representatives of the financial institution(s). If some additional information,
documents etc. are required to be submitted by the financial institution(s), they should
be submitted at the earliest possible. In the meantime, the company secretary must
keep his liaison and public relations with the managers of the financial institution(s) in
the top gear so that the application is further processed by them quickly and a report
formulated by them for submission to the Board(s) of directors of the concerned
financial institution(s) without any loss of time.
After the Board(s) of directors of the financial Institution(s) has/have approved the
application of the company, the concerned institution shall inform the company by a
letter of intent that the Financial Institution(s) is/are agreeable to release the applied
loan on certain terms and conditions, which are usaully contained in the letter.
On receipt of such a letter from the concerned financial institution, the company
secretary shall in consultation with the Managing director convene a board meeting of
the company to consider the letter of intent and approve the same and also to
authorise the managing director/executive director or the company secretary to
convey to the financial institution acceptance of the loan on the specified terms and
conditions and also to authorise the managing director/executive or the company
secretary to execute the required documents and also to give security in the required
form to have the loan released/disbursed.
The company secretary conveys the acceptance of the company and secures the
drafts of the loan documents and gets them ready on the required non-judicial stamp
papers for final execution.
For term loans, the usual security demanded by the Financial Institutions is legal
mortgage or equitable mortgage or the joint equitable mortgage, as the case may be,
by deposit of title deeds of the companys properties. The usual documents executed
for term loans are the loan agreement, letter of undertaking, legal mortgage or a
memorandum of entry of the equitable mortgage, deed of hypothecation, demand
promissory note, letter of continuation etc. as may be demanded by the concerned
financial institution. Constant liaison with the Legal Department of the Financial
Institution will facilitate quicker finalisation of these documents and their quicker
execution too.
After having executed the documents, the company secretary shall arrange for
the release of the loan amount through a special Non-lien account to be opened by
the company either with its existing banker or with bank as per the choice of the
Financial Institution(s). Through that account, cheques will be issued only for
expenses as were incorporated in the Project Report and as had been sanctioned by
the Financial Institution(s) and periodical statements of accounts shall have to be
submitted to the institution(s), if required. The company secretary shall also file with
the Registrar of Companies, within thirty days of the execution of the loan documents,
e-Form No. 8 containing particulars of the charge or modification of the existing
charge, if any, together with the certified true copy of documents. He shall also make
entries of the particulars or the modification of the charge in the Register of Charges
maintained by the company.
3. DEBENTURES


A debenture is a document given by a company under its seal as an evidence of
a debt to the holder usually arising out of a loan and most commonly (but not
necessarily) secured by a charge. A document which, either creates a debt or
acknowledges it, is a debenture. It is an evidence of a debt to the holder, which is
normally but not necessarily secured by a charge over the property. It is an
acknowledgement of (or an instrument) a debt by a company to some person or
persons. It does not carry any voting rights at any general meeting of the company
(Section 117).
The term debenture has been defined in Section 2(12) of the Act, to include
debenture stock, bonds and any other securities of a company, whether constituting a
charge on the assets of the company or not. When, a debenture is one of a series of
limited number, each for a like amount of principal described as debentures all
ranking pari-passu, by each of which the company promises to pay back a sum of
money together with interest at a fixed rate, company may charge all its property
present and future. In the absence of pari-passu clause, debentures will rank for
priority for purposes of re-payment etc., according to the date of issue and if all of
them were issued on the same date, according to numbers. The conditions regarding
transfer and mode of repayment of the principal amount are also mentioned in the
debentures. Section 82 of the Act provides that debentures, alongwith shares, in a
company shall be a movable property transferable in the manner provided by the
Articles of the company.
The following kinds of documents have been held to be debentures: a legal
mortgage of freehold and leasehold land, [Knightsbridge Estates Trust Ltd. v. Byrne,
1940 AC 613: (1940) 2 All 401]; a series of income-bonds by which a loan to the
company was repayable only out of its profits [Lemon v. Austin Friars Investment
Trust Ltd. 1926 Ch 1 (CA)]; a note by which a company undertook to pay a loan but
gave no security, [British India Steam Navigation Co. v. IRC, (1881) 7 QBD 165]; and
a receipt or a certificate for a deposit made with a company (other than a bank) when
the deposit was repayable after a fixed period after it was made, [United Dominions
Trust Ltd. v. Kirkwood, (1966) 2 QB 43].
The point to be noted as regards the definition of debenture is that it is so wide as
to include any security of a company whether constituting a charge on the companys
assets or not [Cf. Pearl Assurance Co. Ltd. v. West Midlands Gas Board, (1950) 2 All
ER 844 (ChD)].
Fixed deposit is not debenture The Department of Company Affairs has
clarified that a fixed deposit receipt may be regarded as a security but not as a
debenture within the meaning of this sub-section [Departments Letter No. 8/2/58-PR,
dated 10-12-1958].
Characteristics of Debentures
The usual features of a debenture are as follows:
1. A debenture is usually in the form of a certificate (like a share certificate)
issued under the common seal of the company.
2. The certificate is an acknowledgement by the company of its indebtedness
to a holder.


3. A debenture usually provides for the payment of a specified principal sum at
a specified date. But that is not essential. A company may issue perpetual or
irredeemable debentures with no undertaking to pay. Section 120 of the Act
states that debentures are not invalid simply because they are made
irredeemable only on the happening of a contingency, however remote, or
on the expiration of a period, however long.
4. A debenture usually provides for payment of interest until the principal sum
is paid back.
5. A debenture is, as a rule, one of a series, although a single debenture is not
uncommon. There may be a single debenture issued to one person.
6. A debenture generally contains a charge on an undertaking of the company,
or on some class of its assets or on some part of its profits. Again, this is not
an essential element. A debenture which creates no such charge is perfectly
valid.
7. The debentures carry no voting rights at any meeting of the company
(Section 117).
Kinds of Debentures
Debentures may be of different kinds which are as follows:
1. Redeemable Debentures: Debentures are generally redeemable, that is to
say, they are issued on the terms that the company is bound to repay the
amount of the debenture, either at a fixed date, or upon demand, or after
notice, or under a system of periodical drawings. Redeemable debentures
can be re-issued. This power is expressly given by Section 121. This section
provides that unless any contrary provision is contained in the articles or in
the conditions of issue or unless there is a resolution showing an intention to
cancel the redeemed debentures, the company has power to re-issue the
same debentures or issue other debentures in their place. The person who
has been re-issued the debentures shall have the same rights and priorities
as if the debentures had never been redeemed.
2. Perpetual or Irredeemable Debentures: A Debenture in which no time is
fixed for the company to pay back the money, although it may pay back at
any time it chooses, is an irredeemable debenture. The debenture holder
cannot demand payment as long as the company is a going concern and
does not make default in making payment of the interest. But all debentures,
whether redeemable or irredeemable become payable on the company
going into liquidation.
3. Registered and Bearer Debentures: Registered debentures are made out in
the name of a particular person, whose name appears on the debenture
certificate and who is registered by the company as holder on the Register
of debenture holders. Such debentures are transferable in the same manner
as shares by means of a proper instrument of transfer duly stamped and
executed and satisfying the other requirements specified in Section 108 of
the Act. Bearer debentures, on the other hand, are made out to bearer, and
are negotiable instruments, and so transferable by mere delivery like share
warrants. The person to whom a bearer debenture is transferred become a
holder in due course and unless contrary is shown, is entitled to receive


and recover the principal and the interest accrued thereon. [Calcutta Safe
Deposit Co. Ltd. v. Ranjit Mathuradas Sampat (1971) 41 Comp. Cas 1063].
4. Secured and Unsecured or Naked Debentures: Where debentures are
secured by a mortgage or a charge on the property of the company, they
are called secured debentures. Where they are not secured by any
mortgage or charge on any property of the company they are said to be
naked or unsecured debentures.
5. Convertible Debentures: Where the debentures are convertible, partly or
wholly, into the shares of a company after a specified time, either as a result
of exercise of option or in terms of the issue, they are called convertible
debentures.
4. PUBLIC COMPANIES (TERMS OF ISSUE OF DEBENTURES AND OF
RAISING OF LOANS WITH OPTION TO CONVERT SUCH DEBENTURES OR
LOANS INTO SHARES) RULES, 1977
In exercise of the powers conferred by Section 642 read with clause (a) of the
proviso to sub-clause (3) of Section 81 of the Companies Act, 1956 the Central
Government hereby makes the following rules, namely:
1. Short title and commencement:
(i)These rules may be called the Public Companies (Terms of and issues of
Debentures and Raising of Loans with Option to Convert such
Debentures or Loans into Shares) Rules, 1977.
(ii)They shall come into force on the date of their publication in the Official
Gazette.
2. Definitions:
In these rules, unless the context otherwise requires:
(a)Act means the Companies Act, 1956;
(b)Public financial institution means:
(i) any of the financial institutions specified in Sub-section (1) of
Section 4A of the Act;
(ii) any of the other institutions specified by the Central Government to
be public financial institutions under Sub-section (2) of the said
Section 4A.
(c)Scheduled Bank means a bank included in the Second Schedule to the
Reserve Bank of India Act, 1934, but does not include co-operative
banks, regional rural banks and foreign banks.*
3. Particulars regarding the terms of issue of debentures or the terms of raising
of loans by a public company.
The terms of issue of debentures or the terms of raising of loans by a public
company which include a term providing for an option to convert such debentures or
loans or any part thereof into shares in the company or to subscribe for shares in the
company shall not require the approval of the Central Government under clause (a)
of the proviso to Sub-section (3) of Section 81 of the Act, if such terms conform to the
following requirements, namely:


(a) the debentures or loans may be issued or raised either through private
subscription or through the issue of a prospectus to the public;
(b) a public financial institution or scheduled bank either underwrites or
subscribes to or sanctions the whole or part of the issue of debentures or the
raising of loans, as the case may be;
(c) When and where necessary, the consent of the Central Government under
the provisions of the Capital Issues (Control) Act, 1947 (20 of 1947), is
obtained for the issue of shares consequent upon the conversion of
debentures or loans into equity capital; [Consequent upon abolition of
controller of capital issues and deletion of the CIC Act, 1947, and
establishment of the Securities and Exchange Board of India under the
Securities and Exchange Board of India, Act, 1992, the SEBI (Disclosure and
Investor Protection) Guidelines should be followed and complied with for
issuing shares consequent upon the conversion of debentures or loans into
equity capital.
(d) Having regard to the financial position of the company the terms of the issue
of the debentures or the terms of the loans, as the case may be, the rate of
interest payable on the debentures or loans, the capital of the company, its
loans, liabilities, its reserves, its profits during the immediately preceding five
years and the current market price of the shares of the company, as may be
applicable, the public financial institutions or scheduled banks as the case
may be, provide for the terms including the term providing for an option to
convert such debentures or loans or any part thereof, into shares in the
company or to subscribe for shares therein, either at par or at a premium not
exceeding twenty-five percent of the face value of the shares.
Provided that a public financial institution or a scheduled bank shall not convert
all or any part of such debentures or loans unless:
(a) the company that has issued the debentures or raised the loan, has
defaulted in the repayment/redemption of, or payment of interest on, such
loans or debentures; and
(b) such scheduled bank or public financial institution has given the company
notice of its intention to convert such loans or debentures atleast 30 days
prior to the intended date of conversion.
Public Financial Institutions
The following institutions have been specified as public financial institutions
under Section 4A(1) of the Companies Act, 1956, and are relevant for the purposes
of Rules 2(b) and 3 of the Public Companies (Terms of Issue of Debentures and
Raising of Loans with option to Convert such Debentures into Shares) Rules:
1. The Industrial Credit and Investment Corporation of India Limited, a
company formed and registered under the Companies Act, 1913 (7 of 1913);
2. The Industrial Finance Corporation of India, established under Section 3 of
the Industrial Finance Corporation Act, 1948 (15 of 1948);
3. The Industrial Development Bank of India, established under Section 3 of
the Industrial Development Bank of India Act, 1964 (18 of 1964);


4. The Life Insurance Corporation of India, established under Section 3 of the
Life Insurance Corporation Act, 1956 (31 of 1956);
5. The Unit Trust of India, established under Section 3 of the Unit Trust of India
Act, 1963 (52 of 1963);
6. The Infrastructure Development Finance Company Ltd., a company formed
and registered under this Act;
Besides, various other public financial institutions are specified by the Central
Government under Section 4A(2) from time to time.
Debenture Stock
A company, instead of issuing debentures, each in respect of separate and
distinct debt, may raise one aggregate loan fund or composite stock known as
debenture stock. Accordingly, a debenture stock is a borrowed capital consolidated
into one mass for the sake of convenience. Instead of each lender having a separate
bond or mortgage, he has a certificate entitling him to a certain sum being a portion of
one large loan. It is generally secured by a trust deed. As in the case of shares, a
person may subscribe for, or transfer any amount even a fraction amount. Debenture
stock is the indebtedness itself, and the debenture stock certificate furnishes
evidence of the title or interest of the holder in the indebtedness. Debenture is the
document which furnishes evidence of the debt. Debenture stock must be fully paid,
while debenture may or may not be fully paid.
Difference between Debenture and Debenture Stock - The difference between
debenture and debenture stock is that while 'debenture' is the description of an
instrument, 'debenture stock' is the description of a debt or sum secured by an
instrument. In the words of LORD LINDLEY, it is borrowed capital consolidated into
one mass for the sake of convenience.
Distinction between Debenture and Loan - A debenture means a document which
creates or acknowledges a debt. A loan creates a right in the creditor to demand
repayment, and the substance of a debt is a liability upon the debtor to repay the
money [Ram Ratan Karmarkar v. Amulya Charan Karmarkar, 56 CWN 728 at p. 729].
Debenture Trust Deed
The Companies (Amendment) Act, 2000 had inserted Section 117A after
Section 117 of the Companies Act, 1956, which provides that
(1) A trust deed for securing any issue of debentures shall be in such form and
shall be executed within such period as may be prescribed.
(2) A copy of the trust deed shall be open to inspection to any member or
debenture holder of the company and he shall also be entitled to obtain
copies of such trust deed on payment of such sum as may be prescribed.
(3) If a copy of the trust deed is not made available for inspection or is not given
to on demand by, any member or debentureholder, the company and the
officer of the company who is in default shall be punishable for each offence,
with fine which may extend to five hundred rupees for every day during
which the offence continues.
A trust deed is one of several instruments required to be executed to secure


redemption of debentures and payment of interest on due dates. The trust deed
should be in the form and be executed within such period as may be prescribed.
Besides, the SEBI (Debenture Trustees) Rules 1993 and the SEBI (Debenture
Trustees) Regulations 1993 are applicable to the listed companies. The aforesaid
Rules provide that a debenture trustee should be registered with SEBI by obtaining a
certificate of registration in accordance with the conditions provided therein. The
aforesaid Regulations inter alia provide procedure for registration, responsibilities
and obligations of debenture trustees and also prescribe contents of trust deed.
When a series of debentures are issued to numerous debentureholders, a trust
deed is drawn up. Under the terms of the deed the company undertakes to pay the
debentureholders their principal and interest, and normally charge its property as
security and declares a trust in favour of the debentureholders. The properties of the
companies are mortgaged or charged to trustees. When a trust deed is executed,
many of the conditions endorsed on the debenture are embodied in the trust deed
and the security is enforced by the trustee instead of by the debenture holders. The
trustees are bound to exercise due care and diligence to protect the interests of the
debentureholders.
Under Section 119 of the Act, trustees of the trust deed for debentureholders are
made liable for breach of trust where they do not exercise due care and diligence
required of them as trustees. Therefore, any term in the trust deed which exempts the
trustee from his liability to indemnify for breach of trust is void and has no legal effect.
Advantages of Trust Deed
The trust deed has some advantages as follows:
(a) If the company makes default, the trustees are then ready to take necessary
steps, instead of leaving it to the initiative of some debentureholders.
(b) The trustee is normally given the power to sell and thus realise the security
without the aid of the Court.
(c) The legal estate is vested in the trustee, and where necessary, the mortgage
or charge is registered. This prevents a subsequent legal mortgage from
priority.
(d) The title deeds of the mortgaged property are deposited with trustees and
the company is prevented from misusing these title deeds for any purpose.
(e) The trustees ensure that the mortgaged property is kept insured and
maintained in proper condition.
Appointment of Debenture Trustees and Duties of Debenture Trustees
Section 117B was inserted by Companies (Amendment) Act, 2000. As per this
Section, no company shall issue a prospectus or a letter of offer to the public for
subscription of its debentures, unless the company has, before such issue, appointed
one or more debenture trustees for such debentures and the company has, on the
face of the prospectus or the letter of offer, stated that the debenture trustee or
trustees have given their consent to the company to be so appointed.


Provided that no person shall be appointed as a debenture trustee, if he
(a) beneficially holds shares in the company;
(b) is beneficially entitled to moneys which are to be paid by the company to the
debenture trustee;
(c) has entered into any guarantee in respect of principal debts secured by
debentures or interest thereon.
The functions of the debenture trustees shall generally be to protect the interest
of holders of debentures (including the creation of securities within the stipulated
time) and to redress the grievances of holders of debentures effectively [Sub-section
(2)]
As per Sub-section (3) in particular, and without prejudice to the generality of the
foregoing functions, a debenture trustee may take such other steps as he may deem
fit
(a) to ensure that the assets of the company issuing debentures and each of
the guarantors are sufficient to discharge the principal amount at all times;
(b) to satisfy himself that the prospectus or the letter of offer does not contain
any matter which is inconsistent with the terms of the debentures or with the
trust deed;
(c) to ensure that the company does not commit any breach of covenants and
provisions of the trust deed;
(d) to take such reasonable steps to remedy any breach of the convenants of
the trust deed or the terms of issue of debentures;
(e) to take steps to call a meeting of holders of debentures as and when such
meeting is required to be held.
Where at any time the debenture trustee comes to a conclusion that the assets of
the company are insufficient or are likely to become insufficient to discharge the
principal amount as and when it becomes due, the debenture trustee may file a
petition before the Company Law Board
1
/Central Government
2
and the Company
Law Board
1
/Central Government
2
may, after hearing the company and any other
person interested in the matter, by an order, impose such restrictions on the incurring
of any further liabilities as the Company Law Board
1
/Central Government
2
thinks
necessary in the interests of holders of the debentures [Sub-section 4)].
However, in case of revival and rehabilitation of a sick industrial company, the
administrative authority shall be Tribunal
2
instead of Central Government
1
.
The duties of a debenture trustee has been described in detail in the
Regulation 15 of the SEBI (Debenture Trustee) Regulations, 1993. On the appointment
of a Debenture trustee, the above conditions are required to be complied with. Where
the company is a listed company, the SEBI Regulations should also be followed.
Liability of Company to Create Security and Debenture Redemption Reserve
Section 117C was inserted by the Companies (Amendment) Act, 2000.
According to this section

1
Existing.
2
Proposed.


(1) Where a company issues debentures, it shall create a debenture redemption
reserve for the redemption of such debentures, to which adequate amounts
shall be credited, from out of its profits every year until such debentures are
redeemed.
(2) The amounts credited to the debenture redemption reserve shall not be
utilised by the company except for the purpose aforesaid.
(3) The company referred to in Sub-section (1) shall pay interest and redeem
the debentures in accordance with the terms and conditions of their issue.
(4) Where a company fails to redeem the debentures on the date of maturity,
the Company Law Board
1
/Tribunal
2
may, on the application of any or all the
holders of debentures shall, after hearing the parties concerned, direct, by
order, the company to redeem the debentures forthwith by the payment of
principal and interest due thereon.
(5) If default is made in complying with the order of the Company Law
Board
1
/Tribunal
2
under Sub-section (4), every officer of the company who is
in default, shall be punishable with imprisonment which may extend to three
years and shall also be liable to a fine of not less than five hundred rupees
for every day during which such default continues.
The debenture redemption reserve is required to be created for both, accrued
and unaccrued debentures. In the case of partly-paid debentures, Debenture
Redemption Reserve is to be created for non-convertible portion only.
Debenture Redemption Reserve (DRR)
(i) Section 117C of the Act requires every company to create a DRR to which
adequate amount shall be credited out of its profits every year until such
debentures are redeemed and shall utilize the same exclusively for
redemption of a particular set or series of debentures only. There is no
obligation on the part of the company to create DRR if there is no profit for
that particular year. However, vide Circular No. 9/2002 dated 18th April,
2002, Department of Company Affairs has clarified that:
(a)No DRR is required for debentures issued by AIFIs (All India Financial
Institutes) regulated by Reserve Bank of India and banking companies
for both public as well as privately placed debentures. For other FIs
within the meaning of Section 4A of the Act, DRR will be as applicable to
NBFCs registered with RBI.
(b)For NBFCs registered with the RBI under Section 45-IA of the RBI Act, 1997,
the adequacy of DRR will be 50 per cent of the value of debentures
issued through public issue as per present SEBI guidelines and no DRR
is required in the case of privately placed debentures.
(c)For manufacturing and infrastructure companies, the adequacy of DRR will be
50 per cent of the value of the debentures issued through public issue
and 25 per cent for privately placed debentures.
(d)Section 117C will apply to debentures issued and pending to be redeemed

1
Existing.
2
Proposed.


and as such DRR is required to be created for debentures issued prior
to 13th December 2000 and pending redemption subject to clarifications
issued herein.
(e)Section 117C will apply to non-convertible portion of debentures issued
whether they are fully or partly convertible.
(ii) DCA has clarified that for housing finance companies registered with the
National Housing bank under Housing Finance Companies (NHB)
Directions, 2001 adequacy of DRR will be 50% of the value of debentures
issued through public issues. No DRR is required in the case of privately
placed debentures. (Circular No. 4/2003 dt. 16.2.03).
Issue of Debentures
The power to issue debentures is usually set out in the memorandum. The
debentures can be issued in the same manner as shares in a company. But unlike
shares, they can be issued at a discount without any restriction, if articles so
authorise, the reason being that they do not form part of the capital of the Company.
They can also be issued at a premium. The Companies Act, 1956 places no
restriction in this regard. Interest payable on them is a debt and can be paid out of
capital. There is no ceiling, minimum or maximum, for the rate of interest payable on
debentures. Any rate of interest, though justifiable, can be paid on the debentures.
Even zero rate of interest debentures can be issued. In the case of unsecured
debentures which amounts to be deposits, the rate of interest should be within the
maximum limit prescribed by the Rules. All sums allowed by way of discount must be
stated in every balance sheet of the company until written-off. Section 122 of the Act
provides that specific performance of a contract to give debentures may be enforced
by an order of the Court against the company and that the company may specifically
enforce against anyone an agreement to take debentures. No company is permitted
to issue debentures carrying voting rights at any general meeting of the company.
Where payment for debentures was to be made by instalments and on the
debentureholders failure to pay an instalment, the company had declared his
debenture to be forfeited, the debenture ceased to be specifically enforceable. [Kuala
Pahi Rubber Estates v. Mowbray, (1914) 111 LT 1072].
5. SEBI GUIDELINES PERTAINING TO ISSUE OF DEBENTURES
Chapter X of the SEBI (Disclosure and Investor Protection) Guidelines 2000
states that a company offering Convertible/Non-convertible debt instruments through
an offer document, shall comply with the following provisions in addition to the
relevant provisions contained in the other chapters of these guidelines.
1. Requirement of credit rating
No public or rights issue of debt instruments (including convertible instruments)
shall be made unless credit rating of not less than investment grade from a credit
rating agency has been obtained from not less than two registered credit rating
agencies and disclosed in the offer document. Where credit ratings are obtained from
more than two credit rating agencies, all the credit rating/s, including the unaccepted
credit ratings, shall be disclosed. All the credit ratings obtained during the three (3)
years preceding the public or rights issue of debt instrument (including convertible


instruments) for any listed security of the issuer company shall be disclosed in the
offer document.
2. Requirement in respect of Debenture Trustee
No company shall issue a prospectus or a letter of offer to the public for
subscription of its debentures unless the company has appointed one or more
debentures/trustees for such debentures in accordance with the Companies Act,
1956. The names of the debenture trustees shall be stated in the offer documents
and also in all the subsequent periodical communications sent to the
debentureholders.
A trust deed shall be executed by the issuer company in favour of the debenture
trustees within three months of the closure of the issue. Trustees to the debenture
issue shall be vested with the requisite powers for protecting the interest of
debenture-holders including a right to appoint a nominee director on the Board of the
company in consultation with institutional debentureholders.
The merchant banker shall, along with the draft offer document, file with the
Board, certificates from their bankers of the company that the assets on which
security is to be created are free from any encumbrances and the necessary
permissions to mortgage the assets have been obtained or a No-objection Certificate
from the Financial Institutions or banks for a second or pari passu charge in cases
where assets are encumbered.
The merchant banker shall also ensure that the security created is adequate to
ensure 100% asset cover for the debentures.
The debenture trustee shall ensure compliance of the following:
(a) It shall obtain reports from the lead bank; regarding monitoring progress of
the project.
(b) It shall monitor utilization of funds raised in debenture issue.
(c) The trustees shall obtain a certificate from the companys auditors:
(i)in respect of utilisation of funds during the implementation period of projects;
(ii)in the case of debentures for working capital, certificate shall be obtained at
the end of each accounting year.
(d) Debenture issues by companies belonging to groups for financing,
replenishing funds or acquiring shareholding in other companies shall not be
permitted.
Explanation: The expression replenishing of funds or acquiring shares in
other companies shall mean replenishment of funds or acquiring
shareholding of other companies in the same group. In other words, the
company shall not issue debentures for acquisition of shares/providing loan
to any company belonging to the same group. However, the company may
issue equity shares for purposes of repayment of loan to or investment in
companies belonging to the same group.
(e) The debenture trustees shall supervise the implementation of the conditions
regarding creation of security for the debentures and debenture redemption
reserve.


3. Creation of Debenture Redemption Reserve (DRR)
For the redemption of the debentures issued, the company shall create
debenture redemption reserve in accordance with the provisions of the Companies
Act, 1956.
4. Distribution of Dividends
(a) In case of the companies which have defaulted in payment of interest on
debentures or redemption of debentures or in creation of securities as per
the terms of issue of the debentures, any distribution of dividend shall
require approval of the debenture trustees and the lead institution, if any.
(b) In the case of existing companies prior permission of the lead institution for
declaring dividend exceeding 20% or as per the loan covenants is necessary
if the company does not comply with institutional condition regarding interest
and debt service coverage ratio.
(c) (i)Dividends may be distributed out of profits of particular years only after
transfer of the requisite amount in the DRR.
(ii)If residual profits after transfer to the DRR are inadequate to distribute
reasonable dividends, the company may distribute dividends out of the
general reserve.
5. Redemption
The issuer company shall redeem the debentures as per the offer document.
6. Disclosure and Creation of Charge
The offer document shall specifically state the assets on which security shall be
created and shall also state the ranking of the charges. In case of second or residual
charge or subordinated obligation, the offer document shall clearly state the risks
associated with such subsequent charge. The relevant consent for creation of
security such as pari passu letter, consent of the lessor of the land in case of
leasehold land, etc., shall be obtained and submitted to the debenture trustee before
opening of issue of debenture.
The offer document shall state the security/asset cover to be maintained. The
basis for computation of the security/asset cover, the valuation methods and
periodicity of such valuation shall also be disclosed. The security/asset cover shall be
arrived at after reduction of the liabilities having a first/prior charge, in case the
debentures are secured by a second or subsequent charge.
The issue proceeds shall be kept in an escrow account until the documents for
creation of security as stated in the offer document, are executed.
If the issuing company proposes to create a charge for debentures of maturity of
less than 18 months, it shall file with the Registrar of Companies particulars of the
charge under the Companies Act:
Provided that, where no charge is to be created on such debentures, the issuer
company shall ensure compliance with the provisions of the Companies (Acceptance
of Deposits) Rules, 1975, as, unsecured debentures/bonds are treated as deposits


for purposes of these rules. The proposal to create a charge or otherwise in respect
of such debentures, may be disclosed in the offer document along with its
implications.
7. Requirement of letter of option
Where the company desires to rollover the debentures issued by it, it shall file
with SEBI a copy of the notice of the resolution to be sent to the debentureholders for
the purpose, through a merchant banker prior to dispatching the same to the
debentureholders. The notice shall contain disclosures with regard to credit rating,
necessity for debentureholders resolution and such other terms which SEBI may
specify. Where the company desires to convert the debentures into equity shares it
shall file with SEBI a copy of the letter of option to be sent to debentureholders with
the Board, through a merchant banker, prior to dispatching the same to the
debentureholders. The letter of option shall contain disclosures with regard to option
for conversion, justification for conversion price and such other terms which SEBI
may specify.
(A) Roll over of Non-Convertible Portions of Partly Convertible Debentures
(PCDs)/Non-Convertible Debentures (NCDs), by company not being in
defaultThe non-convertible portions of PCDs or the NCDs issued by a
listed company, the value of which exceeds Rs. 50 lacs, can be rolled over
without change in the interest rate subject to Section 121 of the Companies
Act, 1956 and subject to the following conditions, if the company is not in
default:
(a)A resolution to this effect is passed by postal ballot, having the assent from
not less than 75% of the debenture-holders.
(b)The company shall redeem the debentures of all the dissenting
debentureholders, who have not assented to the resolution.
(c)Before roll over of any NCDs or non-convertible portion of the PCDs, at least
two credit ratings of not less than investment grade, shall be obtained
within a period of six months prior to the due date of redemption and
communicated to debenture holders before roll over.
(d)Fresh trust deed shall be executed at the time of such roll over.
(e)Fresh security shall be created in respect of such debentures to be rolled
over:
Provided that if the existing trust deed or the security documents provide for
continuance of the security till redemption of debentures fresh security may
not be created.
(B) Roll over of Non-Convertible portions of Partly Convertible Debentures
(PCDs)/Non-Convertible Debentures (NCDs), by the company being in
defaultThe non-convertible portions of PCDs and the NCDs issued by a
listed company, the value of which exceeds Rs. 50 lacs, can be rolled over
without change in the interest rate subject to Section 121 of the Companies
Act, 1956 and subject to the following conditions, where the company is in
default:
(a)A resolution to this effect is passed by postal ballot, having the assent from
not less than 75% of the debenture-holders.


(b)The company shall send an Auditors certificate on the cash flow of the
company with comments on the liquidity position of the company to all
debenture holders, along with the notice for passing the said resolution.
(c)The company shall redeem the debentures of all the dissenting debenture
holders, who have not assented to the resolution.
(d)The debenture trustee shall decide on whether the company is required to
create fresh security and execute fresh trust deed in respect of such
debentures to be rolled over:
Provided that if the existing trust deed or the security documents provide for
continuance of the security till redemption of debentures, fresh security and
fresh trust deed need not be created.
(C) In case of conversion of instruments (PCDs/FCDs, etc.), into equity capital
(i)In case the convertible portion of any instruments such as PCDs, FCDs, etc.
issued by a listed company, the value of which exceeds Rs. 50 lakhs
and whose conversion price was not fixed at the time of issue, the
holders of such instruments shall be given a compulsory option of not
converting into equity capital.
(ii)Conversion shall be done only in cases where the instrument-holders have
sent their positive consent and not on the basis of the non-receipt of
their negative reply:
Provided that where issues are made and cap price with justification thereon
is fixed beforehand in respect of any instruments by the issuer and
disclosed to the investors before issue, it will not be necessary to give
an option to the instrument-holder for converting the instruments into
equity capital within the cap price.
(iii)In cases where an option is to be given to such instrument-holders and if any
instrument-holder does not exercise the option to convert the
debentures into equity at a price determined in the general meeting of
the shareholders, the company shall redeem that part of the debentures
at a price which shall not be less than its face value, within one month
from the last date by which option is to be exercised.
(iv)The provision of sub-clause (iii) above shall not apply if such redemption is to
be made in accordance with the terms of the issue originally stated.
The debenture trustee shall submit a certificate of compliance with the
aforesaid (A, B and C) as the case may be, to the merchant banker which
shall be filed with the Board within 15 days of the closure of the rollover or
conversion.
In case of issue of debentures fully or partly convertible, irrespective of the value
made in the past, where conversion was to be made at a price to be determined by
CCI and the consent order does not provide for a specific premium or a cap price for
conversion, the draft letter of option to the debentureholders filed with the Board shall
contain justification for the conversion price.
Companies may issue unsecured/subordinated debt instrument/ obligations


(which are not public deposits as per the provisions of Section 58A of the
Companies Act, 1956 or such other notifications, guidelines, circular, etc., issued by
RBI, DCA or other authorities:
Provided that such issue shall be subscribed by Qualified Institutional Buyers or
other investor who has given positive consent for subscribing to such unsecured/
subordinated debt instruments/obligation.
8. Other requirements
(1) No company shall issue FCDs having a conversion period of more than 36
months, unless conversion is made optional with put and call option.
(2) If the conversion takes places at or after 18 months from the date of
allotment, but before 36 months, any conversion in part or whole of the
debenture shall be optional at the hands of the debentureholder.
(3) No issue of debentures by an issuer company shall be made for acquisition
of shares or providing loan to any company belonging to the same group.
This Sub-clause shall not apply to the issue of fully convertible debentures
providing conversion within a period of eighteen months.
(4) The premium amount and time of conversion shall be determined by the
issuer company and disclosed.
(5) The interest rate for debentures can be freely determined by the issuer
company.
9. Additional disclosures in respect of debentures
The offer document shall contain:
(a) The premium amount on conversion, time of conversion.
(b) In case of PCDs/NCDs, redemption amount, period of maturity, yield on
redemption of the PCDs/NCDs.
(c) Full information relating to the terms of offer or purchase including the
name(s) of the party offering to purchase the khokhas (non-convertible
portion of PCDs).
(d) The discount at which such offer is made and the effective price for the
investor as a result of such discount.
(e) The existing and future equity and long-term debt ratio.
(f) Servicing behaviour on existing debentures, payment of due interest on due
dates on terms loans and debentures.
(g) That the certificate from a financial institution or bankers about their no-
objection for a second or pari passu charge being created in favour of the
trustees to the proposed debenture issues has been obtained.
6. REGISTER OF DEBENTUREHOLDERS
Section 152 of the Act requires every company to keep a register of debenture
holders giving the following particulars:
(a) The name, address and occupation of each debenture holder;
(b) The number of debentures held by each debentureholder together with their


distinctive numbers except where such debentures are held with a
depository and the amount paid or agreed to be considered as paid;
(c) The date at which each person was entered in the register as a debenture
holder; and
(d) The date at which any person ceased to be a debentureholder.
Besides, face value, rate of interest, due date of payment of interest and
redemption may also be stated.
As in the case of a register of members, a company having more than 50
debenture holders must keep an index of the names of the debentureholders unless
the register is kept in such a form as to constitute itself an index. The register can be
closed by the company after giving 7 days notice by advertisement for a period not
exceeding 45 days in a year but not exceeding 30 days at a time. The register is
open to inspection by the members and debentureholders and by any other person
on payment of nominal charges.
7. REMEDIES OPEN TO DEBENTUREHOLDERS
Pursuant to Sub-section (3) of Section 117C, the company is bound to pay
interest and redeem the debentures in accordance with the terms and conditions of
their issue.
Under Sub-section (4) if a company fails to redeem the debentures on the date of
maturity the Company Law Board (CLB)
1
/Tribunal
2
may, on the application of anyone
or all the holders of debentures, after hearing the parties concerned, direct by order,
the company to redeem the debentures forthwith by the payment of principal and
interest thereon.
Sub-section (5) provides that if default is made in complying with the order of the
CLB
1
/Tribunal
2
, every officer of the company who is in default, shall be punishable
with imprisonment which may extend to three years and shall also be liable to a fine
of not less than five hundred rupees for every day during which such default
continues.
This remedy is made available to the holders of debentures whether they are
secured or unsecured. Any debentureholder can apply to the CLB
1
/Tribunal
2
for
passing an order of payment the company which has defaulted. The CLB
1
/Tribunal
2

shall, while issuing order to the company, take into account the circumstances under
which it has failed to redeem the debentures and the order of the CLB
1
/Tribunal
2
shall
mention about the ways and means for redemption of the debentures by the
company.
Besides, Section 274(1)(g) imposes a disqualification on the directors of a
company which has failed to redeem its debentures on due date and such failure
continues for one year or more. Such person shall not be eligible to be appointed as
a director of any other public company for period of five years from the date from
which the company has failed to redeem the debentures.

1
Existing.
2
Proposed.
1
Existing.
2
Proposed.


Secondly, the unsecured debentures amount to deposits under Section 58A of
the Act. Section 372A(4) provides that the company, which has defaulted in
complying with the provisions of Section 58A, shall not directly or indirectly (i) make
any loan to any body corporate; (ii) give guarantee or provide security in connection
with a loan made to a body corporate; and (iii) invest in securities of any other body
corporate.
The remedies available to a debentureholder vary according to whether he is
secured or unsecured. Naturally, he will have wider protection if he is a secured
creditor. Following remedies are available to debentureholders:
(a) Where the debentures are not secured: If the principal or interest due in
respect of any debenture which is not secured by a charge on any assets of
a company is in arrears, the debentureholder as an unsecured creditor:
(i)may sue the company for his principal and/or interest, obtain judgement, and,
if the judgement debt is not paid, take execution proceedings against the
company's property;
(ii)may, if he wishes, file petition under Section 439 for a winding up of the
company by the Court.
(b) Where debentures are secured: A secured debenture holder has both the
above remedies. In addition, the following courses are also open to him:
(i)He can exercise any of the powers which are given to him by the debentures
trust deed, without applying to the Court. Usually those powers include a
power to appoint receiver, and a power to sell the companys property.
(ii)He can apply to the Court for the appointment of a receiver, if the conditions
give him this power and those conditions are fulfilled.
A receiver can be appointed by a debentureholder when the document of
appointment is handed to him by a person authorised to do so and the
receiver accepts the appointment.
(iii)He can apply to the Court to foreclose the interest of the company in the
assets charged. This order of foreclosure will terminate the interest of
the company in the property and the debentureholder will become the
owner. The order for foreclosure may extend even to the uncalled
capital of the company [Sadler v. Worley, (1894) 2 Ch 170]. But this
remedy is not usual, all the debentureholders of every class are parties
to the action, Continental Oxygen Co., Elias v. Continental Oxygen Co.,
(1897) 1 Ch 511.
(iv)He can have the charged property sold through trustees if the debenture trust
deed provides for such a sale and if the trustee has an express or
implied power of sale out of court over the fixed assets.
The holder of one of a series of debentures cannot sell the property charged,
unless the debentures contain an express power of sale [Blanker v.
Herts and Essex Waterworks Co., (1889) 41 Ch D 399].
A pledgee has a right to sell pledged property if the obligation secured by the
pledge is not met [Richardson Re (1885) 30 Ch D 396 (CA); Hardwick
Re, (1886) 17 QBD 690 (CA); Morritt Re, (1886) 18 QBD 222 (CA)].


A legal mortgagee of stocks and shares traded on the Stock Exchange has a
right to sell them when the obligation secured by the mortgage is not
met [Wilson v. Tooker, (1714) 5 Bro Parl Cas 193, HL L 2 EF 622];
(v)If the company goes into winding up, the debentureholder can value his
security and if it is insufficient, he can prove for the balance of his debt
or he can give up the security and prove for the whole debt.
Debentureholder can present a petition for winding up as he is a creditor for the
amount of his principal and interest, but not for any premium payable on redemption,
unless the debenture expressly so provides. [Consolidated Goldfields of South Africa
v. Simmer and Jack East Ltd., (1913) 82 LJ Ch 214].
If a debentureholder owes a debt to the company which he is unable to pay, he
cannot set off the debt against his claims with the company. He must first pay up
everything he owes to the company and then claim his debts.
The rights of a debentureholder and the obligations, which the company has
towards its debentureholders, depend essentially upon the terms of the agreement
between the company and the trustees of such debentures. The debentureholders
are beneficiaries under the debenture trust deed. In the circumstances although the
remedy to enforce the debenture securities may vest in trustees, the
debentureholders, as beneficiaries, would be entitled to enforce convenants
[Narotamdas T. Toprani v. The Bombay Dyeing & Mfg. Company Ltd. and Others].
In Four Maids Ltd. v. Dudley Marshal Properties Ltd., (1957) Ch 317 at 320,
Harman J. observed The mortgagee may go into possession before the ink is dry on
the mortgage unless there is something in the contract, express or by implication,
whereby he has contracted himself out of that right. The right of possession is
exercisable whether or not the mortgage unless there is something in the contract,
express or by implication whereby he has contracted himself out of that right. The
legal chargeholder gets the legal title to the charged property and the right to
possession is exercisable whether or not the mortgagor has defaulted. A mortgage in
possession must account to the mortgagor for rents and profits which, but for the
mortgagees default or neglect he might have received. Therefore, a mortgagee is
under very heavy liability when in possession of the mortgage property.
Debenture-holders claim
A debentureholder can claim that:
(1) the debentures are a charge on the assets;
(2) that a receiver and manager be appointed;
(3) that the debentures be enforced by sale or foreclosure.
The assets realised by a debentureholders action are applied in the following
order in case of a deficiency.
(a) Costs incurred in realisation;
(b) Remuneration of the receiver;
(c) Trustees remuneration;
(d) Plaintiffs costs incurred in taking action;


(e) Preferential creditors, if the debentures are secured by a floating charge;
and the debentureholders.
Distinction Between Debentures and Shares
(a) Shares are part of the capital of a company whereas debentures constitute a
loan.
(b) The shareholders are members/owners of the company whereas debenture
holders are creditors.
(c) Fixed amount of interest on debentures gets priority over dividend on
shares.
(d) Debentures generally have a charge on the assets of the company, shares
do not carry any such charge.
(e) Unlike in the case of shares, no restrictions are imposed by the Act for
issuing debentures at a discount.
(f) The rate of interest is fixed in the case of debentures, whereas on equity
shares the dividend varies from year to year depending upon the profit of the
company and the Board of directors decision to declare dividends or not.
(g) Shareholders enjoy voting right whereas debentureholders do not have any
voting right.
(h) Interest on debenture is payable even if there are no profits i.e. even out of
capital. Dividend can be paid to shareholders only out of the profits of the
company and not otherwise.
(i) Interest paid on debenture is a business expenditure and allowable
deduction from profits but dividend is not allowable deduction as business
expenditure.
(j) Return of allotment in e-Form No. 2 is to be filed for allotment of shares but
not for allotment of debentures.
Redemption of Debentures
The debentures which are redeemable are to be repaid by the company in
accordance with the terms and conditions of issue. Debentures may be redeemed
either out of the proceeds of a fresh issue of debentures or shares or by creating
Debenture Redemption Reserve by setting aside certain sums out of annual profits of
the company as provided under Section 117C of the Act. The debentures may be
redeemed at the end of the period for which they are issued or they may be
redeemed periodically by means of drawings by lots.
Re-issue of Redeemed Debentures
Under Section 121 of the Act, the company has powers to keep alive the
redeemable debentures either by re-issuing the same debentures or by issuing fresh
debentures in their place unless:
(a) there is any provision to the contrary, whether express or implied contained
in the articles/memorandum or in the conditions of issue or in any contract
entered into by the company; or
(b) the company has manifested its intention to cancel the debentures by a


resolution to that effect or by some other act.
8. PUBLIC SECTOR BONDS
Pursuant to the announcement made by the Finance Minister in the Budget
Session of Parliament in 1985, the Government evolved a scheme for flotation of
bonds by telecommunication and power sector. Under the Scheme such of the
Government corporate bodies as may be specified in area of telecommunication and
power and any other section, as might be notified by the Government, were permitted
to issue bonds for
(a) setting up of new projects; and/or
(b) expansion or diversification of existing project; or
(c) meeting normal capital expenditure for modernisation; or
(d) for augmenting the long term resources of the company for working capital
requirements.
In July 1986 the scheme was extended to other public sector enterprises. In
pursuance of the announcement made by the Finance Minister in the Budget Session
of Parliament in 1986, the Government introduced the scheme for issue of tax free
bonds in addition to the earlier series of power and telecom bonds. In the new series
the maximum rate of interest was 10% and the period of redemption upto 10 years
which could be increased in suitable cases, as may be approved by the Government.
The interest income from these bonds is completely free from income-tax. The bonds
were also exempt from Wealth Tax without any limit. These bonds were also
transferable by endorsement and delivery. The scheme provided for facility of buy
back also. These bonds were required to be listed on Stock Exchanges.
The guidelines for issue of bonds as issued by Office of Controller of Capital
Issues under the Ministry of Finance have now become obsolete in view of the repeal
of Capital Issues Control Act. However, the SEBI guidelines for debentures equally
apply to bonds as well. Besides, PSEs have to comply with the other administrative
instructions issued by the Ministry of Finance from time to time.
As the bonds are transferable by endorsement and delivery, the provisions of
Sub-section (1) of Section 108 of the Companies Act, 1956 in so far as the section
requires a proper instrument of transfer to be duly stamped and executed by or on
behalf of the transferor and by, on behalf of transferee do not apply to bonds issued
by a Government company provided an intimation by the transferee specifying his
name, address and occupation, if any, has been delivered to the company alongwith
the certificate relating to the Bond, and if no such certificate is in existence alongwith
letter of allotment of Bond [Deptt. of Company Affairs, Notification No. GSR 1294(E)
dated 19.12.1986].
9. FOREIGN BONDS
Companies have now started floating issues in the Euro-bond market on borrowing
instead of obtaining funds solely by issue of bonds in specific capital market.
Indian business enterprises can tap this source of raising foreign currency funds
by issue of foreign bonds. In 1986, a new development in Indias participation in


global market was the floating of the India's Fund in the United Kingdom by the Unit
Trust of India in collaboration with Merril Lynch International Capital Managers. The
Indias fund was established to enable non-resident Indians and other persons or
firms resident outside India to invest in the securities market in India through
subscription to the shares of the fund.
Indian company can, with the approval of the Ministry of Finance, issue American
Depository Receipts/Global Depository Receipts/Foreign Currency Convertible Bonds.
10. BROKERAGE
Brokerage is the amount paid to a middle man (called broker) who brings about a
bargain between the seller and a purchaser of shares of debentures in the case of a
company. Brokerage is different from the underwriting commission because the
underwriter undertake to subscribe for shares in case public do not subscribe but the
broker does not incur any such liability. If he brings a bargain between the company
and the allottee, he gets the brokerage, and otherwise not.
Brokerage means reasonable brokerage and it is paid to professional person
carrying on the business of broker and not to a private person or to a person who has
casually induced others to subscribe where a company agrees to pay commission for
sale of shares to an allottee who was not in broking business, such a commission is
not brokerage. Section 76(3) provides that nothing in this section (i.e. Section 76)
shall affect the power of any company to pay such brokerage as it has heretobefore
been lawful for a company to pay.
11. DEVELOPMENTS IN CORPORATE DEBT FINANCING
The instruments used by the corporate sector to raise funds are selected on the
basis of
(i) investors preference for a given instrument;
(ii) the regulatory framework, whereunder the company has to issue the
security.
Convertible debenture is the most popular instrument in the current scenario to
raise funds from the markets. The tax liability of the company, the purpose for which
the funds are required, debt servicing ability and willingness to broadbase the
shareholding of the company, all influence the choice of the instrument.
The salient features of new financial instrument which have emerged in the
financial markets in recent years are given below:
(1) Convertible capital issue:- means the issue made in the form of partly or
wholly convertible issue, with varying conversion terms and premium on par
value of equity.
(2) Zero coupon bonds:- refer to those bonds which are sold at a discount from
its eventual maturity value and have zero interest rate.
(3) Shares with differential rights:- signifies a share with differential right to vote
dividend etc. The investor is compensated for renouncing the voting right
through a higher rate of dividend than that on the conventional voting share.
(4) Secured Premium Notes with Detachable Warrants:- SPN, which is issued


along with detachable warrant, is redeemable after a notified period, say 4 to
7 years. The warrants attached to it ensure the holder the right to apply to
get alloted equity shares, provided SPN is fully paid.
(5) Non-convertible Debentures with Detachable Equity Warrants:- The holder
of NCDs with detachable equity warrants is given an option to buy a specific
number of shares from the company at a predetermined price within a
definite time frame.
(6) Zero Interest fully Convertible Debentures:- The investors in zero interest
fully convertible debentures will not be paid any interest.
(7) Equity Shares with Detachable Warrants:- In this category, along with fully
paid equity shares, detachable warrants are issued which will entitle the
warrant holder to apply for a specified number of shares at a predetermined
price.
(8) Fully Convertible Cumulative Preference Shares (Equipref):- Equipref is a
recent introduction in the market. It has two parts: A and B. Part A, is
convertible into equity shares automatically and compulsorily on the
date of allotment without any further act or application by the allottee and
Part B will be redeemed at part-converted into equity shares after a lock-in-
period at the option of the investors.
(9) Preference shares with warrants attached:- Under this instrument, each
preference share should carry certain number of warrants entitling the holder
to apply for equity shares for cash at 'premium' at any time in one or more
stages between the third and fifth year from the date of allotment. If the
warrant holder fails to exercise his option, the unsubscribed portion will lapse.
(10) Secured zero interest Partly Convertible Debentures with Detachable and
separately tradeable warrants:- The instrument has two parts - Part A is
convertible into equity shares at a fixed amount on the date of allotment and
Part B - non-convertible to be redeemed at par at the end of a specific period
from the date of allotment. Part B will carry a detachable and separately
tradeable warrant which will provide an option to the warrant holder to receive
equity share for every warrant held at a price as worked out by the company.
(11) Fully convertible Debentures with interest (optional):- This instrument will not
yield any interest for a short period, say 6 months. After this period, option is
given to the holders of FCDs to apply for equities at 'premium' for which no
additional amount needs to be payable. This option needs to be indicated in
the application form itself. However, interest on FCDs payable at a
determined rate from the date of first conversion to second/final conversion
and in lieu of it equity shares will be issued.
(12) Deep discount bond:- It refers to those bonds which are sold at discount
value by the company and on maturity face value is paid to the investors.
(13) Disaster Bonds:- These are the bonds which are issued by issuer to share
the risk and expand the capital with the objective to link investors return to
the size of insurer losses.
(14) Option bonds:- It covers those cumulative and non-cumulative bonds where
interest is payable on maturity periodically and redemption premium is
offered to attract investors.


(15) Global depository receipts:- It is a form of depository receipt on certificate
created by the Overseas Depository Bank outside India denominated in
dollar and issued to non-resident investor against the issue of ordinary
shares on foreign currency convertible bonds of issuing company.
(16) It is a quasi debt instrument which is issued by any corporate entity,
international agency or sovereign state to the investors all over the world.
(17) External Commercial borrowings:- are defined to include commercial bank
loans, buyers credit, suppliers credit, securitised instruments such as
Floating Rate Notes and Fixed Rate Bonds etc. credit from official export
credit agencies and commercial borrowings from the private sector window
of Multilateral Financial Institutions such as International Finance
Corporation (Washington, ADB, AFIC, CDC etc). It is permitted by the
Government as a source of finance for Indian corporates for expansion of
existing capacities and fresh investments.
(18) Derivatives: Derivatives are contracts which derive their values from the
value of one or more other assets known as underlying assets. Some of the
most commonly traded derivatives are futures, options and swaps.
(a)Futures: Futures is a contract to buy or sell an underlying financial instrument
at a specified future date at a price when the contract is entered.
(b)Options: An option contract conveys the right to buy or sell a specific security
or commodity at specified price within a specified period of time. The
right to buy is referred to as a call option whereas the right to sell is
known as 'put option'.
New Instruments in Money Market
(1) Certificate of deposit is a document of title to a time deposit. Being a bearer
document, CDs are readily negotiable and are attractive, both to the banker
and to the investors in that, the banker is not required to encash the
deposits prematurely, while the investor can sell the same in the secondary
market. This ensures ready liquidity. Minimum size of issue of a CD is Rs. 1
lakh.
(2) Commercial paper: CP refers to unsecured promissory notes issued by
credit worthy companies to borrow funds on a short term basis. It can be
issued in denominations of Rs. 5 lakh or multiples thereof.

LESSON ROUND-UP
All companies are given power to borrow by their articles which fix the maximum
limit of borrowings. A public company cannot borrow money until it is entitled to
commence business. But in case of a private company, it is not so. The power to
borrow money and to issue debentures can only be exercised by the Directors at
a duly convened meeting.
Where the company borrows without the authority conferred on it by the Articles
or beyond the amount set out in the Articles, it is an ultra vires borrowing and
hence void. Ultra vires borrowings cannot even be ratified by a resolution passed
by the company in general meeting. In case of ultra vires borrowings the lender
has the following remedies: (a) Injunction and Recovery, (b) Subrogation, (c) Suit


against Directors.
Where the directors exceed their authority, the excess part may not be ultra vires
and may be only irregular depending upon the facts and circumstances. The
company will be bound if the excess is within the directors ostensible authority
and the lender acted in good faith or of the transaction was ratified by the
company.
The power to borrow includes the power to give security, which may take the
form of a mortgage, a charge, hypothecation, lien, guarantee, pledge, etc. A
company may charge its uncalled capital if its articles or memorandum authorize
it to charge it. A company may also create a mortgage or a charge, including a
floating charge, on any of its book-debts.
In order to make a company liable on any promissory note or bills of exchange it
must appear clearly on the face of the instrument that it was intended to be
drawn, accepted, made or endorsed on behalf of the company.
Working capital may be defined as the excess of current and liquid assets over
current liabilities of a business, having regard to reasonable provision for
contingencies so as to enable it to conduct its operations normally and free from
financial embarrassment and to avoid losses consequent upon incurring
commitments beyond its capacity in the ordinary course of events.
A debenture is a document given by a company under its seal as an evidence of
a debt to the holder usually arising out of a loan and most commonly secured by
a charge. Section 2(12) of the Act defines debenture to include debenture stock,
bonds and other securities of a company, whether constituting a charge on the
assets of the company or not.
Debentures may be of different kinds, viz. redeemable debentures, perpetual or
irredeemable debentures, registered and bearer debentures, secured and
unsecured or naked debentures, convertible debentures.
A debenture stock is a borrowed capital consolidated into one mass for the sake
of convenience.
A loan creates a right in the creditor to demand repayment, and the substance of
a debt is a liability upon the debtor to repay the money.
A debenture trust deed is one of the several instruments required to be executed
to secure redemption of debentures and payment of interest on due dates.
Section 117C of the Act required every company to create a debenture
redemption reserve to which adequate amount shall be credited out of its profits
every year until such debentures are redeemed and shall utilize the same
exclusively for redemption of a particular set or series of debentures only.
SEBI has issued guidelines pertaining to Issue of Debentures.
Brokerage is the amount paid to a middle man (called broker) who brings about a
bargain between the seller and a purchaser of shares or debentures in the case
of a company.
Certificate of deposit is a document of title to a time deposit.
Commercial paper refers to unsecured promissory notes issued by credit worthy
companies to borrow funds on a short term basis.




SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answer to these questions are not to
be submitted for evaluation).
1. What are the restrictions imposed on the borrowing powers of the Board of
directors? If a company borrows beyond its powers, examine the remedies
open to such creditor:
(i)When the money has not been spent;
(ii)When the money has been spent to pay the debts of the company.
2. What is the difference between debenture and a loan? Is fixed deposit a
Debenture or Loan?
3. What is debenture? What are the kinds of debentures?
4. What is a convertible debenture? What are the provisions of the Companies
Act, 1956 regarding convertible debentures or loans?
5. What is underwriting?
6. Summarise the SEBI guidelines pertaining to the issue of Debentures.
7. Is it compulsory to maintain a Debenture Redemption Reserve? If yes, how?
8. Write short notes on the following:
(i)Ultra vires borrowings
(ii)Intra vires borrowings
(iii)Security for borrowings
(iv)Types of borrowings
(v)Raising loans from financial institutions.
9. Who is a debenture trustee? Why is it compulsory to appoint a trustee in
connection with the issuance of debentures? What are the duties of a
trustee?


Suggested Readings:
(1) Guide to Companies Act A. Ramaiya.
(2) Company Law & Practice A.K. Majumdar and G.K. Kapoor.
(3) Company Law Ready Reckoner R. Suryanarayanan.











STUDY X
FINANCIAL STRUCTURE AND MEMBERSHIP-V
CREATION AND REGISTRATION OF CHARGES

LEARNING OBJECTIVES
A charge is a right created by any person including a company referred to as the
borrower on its assets and properties, present and future, in favour of a financial
institution or a bank, referred to as the lender, which has agreed to extend financial
assistance. The chapter covers the following topics:
Definition and kinds of a charge
Crystallization of floating charge
Registration of charge
Effect of Registration
Satisfaction of charges
Modification of charges
Definition and nature of mortgage
Mortgage vs. charge

1. DEFINITION OF A CHARGE
A charge is a security given for securing loans or debentures by way of a
mortgage on the assets of the company. As mentioned earlier, the power of the
company to borrow includes the power to give security also. A company, like a
natural person, can give security. Normally, the debentures and other borrowings of
the company are secured by a charge on the assets of the company. Where property,
both existing and future, is agreed to be made available as a security for the
repayment of debt and creditors have a present right to have it made available, there
is a charge. The present legal right of the creditor can only be enforced at some
future date. The creditor gets no legal right to property either absolute or special. He
only gets the right to have the security made available by an order of the Court.
According to Section 124 of the Act, charge includes a mortgage. Charge also
includes a lien and an equitable charge whether created by an instrument in writing or
by the deposit of title deed (Dublin City Distillery Co. v. Deherty, 1914 AC 823).
Kinds of Charges
A charge on the property of the company as security for debentures may be of
the following kinds, namely :
(i) fixed or specific charge;
(ii) floating charge.
Fixed or Specific Charge
A charge is fixed or specific when it is made specifically to cover assets which are
ascertained and definite or are capable of being ascertained and defined, at the time of
358


creating charge e.g., land, building, or heavy machinery. A fixed charge, therefore, is
against security of certain specific property, and the company looses its right to dispose
off that property as unencumbered. In other words, the company can deal with such
property, subject to the charge so that the charge holder gets priority over all
subsequent transferees except a bona fide transferee for consideration without notice
of the earlier charge. In the winding-up of the company, a debenture holder secured by
a specific charge will be placed in the highest ranking class of creditors. A specific
charge is one that without more fastens on ascertained and definite property or
property capable of being ascertained and defined [Lord Macnaghten in Illingworth &
Another v. Houldsworth & Another, (1904) 73 L.J.CH. 739].
The plant and machinery of a company embedded in the earth or permanently
fastened to things attached to the earth became a part of the companys immovable
property and therefore apart from the registration under the Companies Act,
registration under the Indian Registration Act would also be necessary to make the
charge valid and effective. [Official Liquidator v. Sri Krishna Deo, (1959) 29 Com
Cases 476 : AIR 1959 All 247 and Roy & Bros. v. Ramnath Das, (1945) 15 Com
Cases 69, 75 (Cal)].
A construction companys washing machine which was in use at the site was
declared under the terms of the contract to be the employers property during the
period of construction. This was held to have created a fixed charge and not a
floating charge on the machine because the machine was only one fixed item and
was not likely to change [Cosslett (Contractors) Ltd., Re, (1996) 1 BCLC 407 (Ch D)].
Floating Charge
A floating charge, as a type of security, is peculiar to companies as borrowers. A
floating charge is not attached to any definite property but covers property of a
fluctuating type e.g., stock-in-trade and is thus necessarily equitable. A floating
charge is a charge on a class of assets present and future which in the ordinary
course of business is changing from time to time and leaves the company free to deal
with the property as it sees fit until the holders of charge take steps to enforce their
security.
A floating security, observed Lord Macnaghten in Government Stock
Investment Company Ltd. v. Manila Rly. Company Ltd., (1897) A.C. 81, is an
equitable charge on the assets for the time being of a going concern. It attaches to
the subject charged in the varying condition in which it happens to be from time to
time. It is the essence of such a charge that it remains dormant until the undertaking
charged ceases to be a going concern, or until the person in whose favour the charge
is created intervenes. The same learned judge observed in Illingworth & Another v.
Holdsworth & Another, (ibid) . A floating charge is ambulatory and shifting in its
nature hovering over and so to speak floating with the property which it is intended to
affect until some event occurs or act is done which causes it to settle and fasten on
the subject of the charge within its reach and grasp.
It is clear from the above observation that a floating charge is an equitable
charge which does not fasten on any specific property, but covers the whole of the
companys property, whether it is or is not subject to a fixed charge. Upon the
happening of any of the events set out in the deed of the floating charge, it


crystallizes or becomes fixed and thereafter the assets comprised in the charge are
subject to the same restrictions and affected in the same manner as under a specific
charge. [Union of India v. Coorg Estates Ltd. (1963) 2 Comp. LJ 164 (Ker-DB)].
When the floating charge crystallises it becomes fixed and the assets comprised
therein are subject to the same restrictions as the fixed charge. It was said in Maturi
U. Rao v. Pendyala A.I.R. 1970 A.P. 225, the essence of a floating charge is that the
security remains dormant until it is fixed or crystallised. But a floating security is not a
future security. It is a present security, which presently affects all the assets of the
company expressed to be included in it. On the other hand, it is not a specific
security; the holder of such charge cannot affirm that the assets are specifically
mortgaged to him. The assets are mortgaged in such a way that the mortgagor i.e.
the company can deal with them without the concurrence of the mortgagees.
The advantage of a floating charge is that the company may continue to deal in
any way with the property which has been charged. The company may sell, mortgage
or lease such property in ordinary course of its business if it is authorised by its
memorandum of association. In Re. Borax Co., (1901) 1 CH 325, it was held that a
company may sell the whole of its undertaking if that is one of the objects specified in
its memorandum. Unless specifically precluded, the company can create fixed charge
subsequent to floating charges over the same property [Wheatly v. Silkstone & High
Moor Coal Co. Ltd., (1885) 54 L.J. Ch 78].
In Smith v. Bridgend County Borougn Council (2002) 1 BCLC 77 (HC), the
agreement was held to constitute a floating charge, in so far as it allowed the
employer, in various situations of default by the contractor, to sell the contractors
plant and equipment and apply the proceeds in discharge of its obligations. A right to
sell an asset belonging to a debtor and appropriate the proceeds to payment of the
debt could not be anything other than a charge. It was a floating charge because the
property in question was a fluctuating body of assets which could be consumed or
removed from the site in the ordinary course of the contractors business.
2. CRYSTALLISATION OF FLOATING CHARGE
A floating charge attaches to the companys property generally and remains
dormant till it crystallises or becomes fixed. The company has a right to carry on its
business with the help of assets having a floating charge till the happening of some
event which determines this right. A floating charge crystallises and the security
becomes fixed in the following cases:
(a) when the company goes into liquidation;
(b) when the company ceases to carry on the business;
(c) when the creditors or the debenture holders take steps to enforce their
security e.g. by appointing receiver to take possession of the property
charged;
(d) on the happening of the event specified in the deed.
In the aforesaid circumstances, the floating charge is said to become fixed or to
have crystallised. Until the charge crystallises or attaches or becomes fixed the
company can deal with the property so charged in any manner it likes. The company
may even sell its whole undertaking if that is otherwise permissible as per the objects


specified in the memorandum.
Although a floating charge is a present security, yet it leaves the company free to
create a specific mortgage on its property having priority over the floating charge. In
Government Stock Investment Co. Ltd. v. Manila Railway Co. Ltd., (1897) A.C. 81,
the debentures created a floating charge. Three months interest became due but the
debenture holders took no steps and so the charge did not crystallize but remained
floating. The company then made a mortgage of a specific part of its property. Held,
the mortgagee had priority. The security for the debentures remained merely a
floating security as the debenture holders had taken no steps to enforce their
security.
Effect of Crystallisation of a Floating Charge
On crystallisation, the floating charge converts itself into a fixed charge on the
property of the company. It has priority over any subsequent equitable charge and
other unsecured creditors. But preferential creditors who have priority for payment
over secured creditors in the winding-up get priority over the claims of the debenture
holders having floating charge. Where a receiver is appointed on behalf of the
holders of any debentures or possession is taken by or on behalf of those debenture
holders of any property subject to charge then payment made in respect of such debt
shall, be recouped, as far as may be, out of the assets available for payment of
unsecured creditors. (Section 123).
3. POSTPONEMENT OF A FLOATING CHARGE
The creation of a floating charge leaves the company free to create a legal and
equitable mortgage on the same property until the floating charge crystallises. Where
such a mortgage is created it has priority over the floating charge which gets
postponed. The floating charge is postponed in favour of the following persons if they
act before the crystallisation of the security:
(a) a landlord who distrains for rent;
(b) a creditor who obtains a garnishee absolute;
(c) a judgement creditor who attaches goods of the company and gets them
sold (But if the goods are not sold and the debenture holders take action in
the meantime, the floating charge has priority);
(d) the employees of the company, as well as other preferential creditors in the
event of winding-up of the company;
(e) the supplier of goods to the company under a hire-purchase agreement on
terms that goods are to remain the property of the seller until they are paid
for in full, has priority over the floating charge, whether such hire-purchase
agreement is made before or after the issue of the debentures with a floating
charge.
Debenture-holders with a floating charge do not, therefore, enjoy the same rights
as the secured creditors, for claims against the company. The deed creating the
floating charge may, however, contain a clause restricting the power of the company
to create charges in priority to or pari passu with it. But even in such a case a person
who takes mortgage without notice of floating charge gets priority. But such a


contingency can be safeguarded by registering the charge. In terms of Section 126 of
the Act, where a mortgage or charge required to be registered under Section 125 of
the Act has been so registered, any person acquiring such property or any part
thereof or any interest of share therein shall be deemed to have notice of the charge
as from the date of such registration.
Restraint on the Power to Create Charges with Priority to a Floating Charge
As the floating charge allows wide powers to the company to deal with its
property subject to floating charge, it is common to insert a clause restricting the
powers of the company to create charge with priority to or pari passu with it. Thus if
the company creates a mortgage in favour of any person who has notice of the
floating charge and restriction, such person ranks after the floating charge. But a
person who obtains a valid mortgage, and can show either (i) that he was not aware
of the existence of the floating charge; (ii) that though he was aware of the charge, he
was not aware of the restriction, is entitled to priority by virtue of the legal estate.
Furthermore, where a specific charge is created expressly subject to a floating
charge, the specific charge is postponed as from the date when the floating charge
crystallises by the appointment of a receiver.
Invalidity of Floating Charge
A floating charge remains afloat until a winding up commences, unless it has
already crystallised through the intervention of the debenture holders or the creditors.
Also, a floating charge is valid only against the unsecured creditors, whether in a
winding- up or otherwise. But the Act prevents an unsecured creditor to get priority
over the other creditors by obtaining a floating charge when he learns that the
companys liquidation is imminent.
Accordingly, Section 534 of the Act provides that a floating charge which is
created within 12 months immediately preceding the commencement of the winding
up proceedings of a company shall be invalid, unless it is proved that the company
was solvent immediately after the creation of the charge. But the charge will be valid
to the extent of the amount of any cash paid to the company at the time of or after the
creation of, and in consideration for the charge, together with interest on that amount
at 5 per cent per annum or such other rate as may be fixed by the Central
Government.
4. REGISTRATION OF CHARGES
Section 125 of the Act requires a company to file, within 30 days after the date of
the creation of a charge, with the Registrar, complete particulars together with the
instrument, if any, creating, evidencing or modifying the charge, or a copy thereof
verified in the prescribed manner for registration; otherwise the charge shall be void
against the liquidator and creditors and on the charge becoming void, the money
thereby shall immediately become payable.
However, the Registrar may allow the particulars and instrument or copy as
aforesaid to be filed within thirty days next following the expiry of the said period of
thirty days on payment of such additional fee not exceeding ten times the amount of
fee specified in Schedule X as the Registrar may determine, if the company satisfies


the Registrar that it had sufficient cause for not filing the particulars and instrument or
copy within that period.
The charges which must be registered, are :
(a) a charge for the purpose of securing any issue of debentures;
(b) a charge on uncalled share capital of the company;
(c) a charge on any immovable property, wherever situate or any interest
therein;
(d) a charge on any book debts of the company;
(e) a charge, not being a pledge, on any movable property of the company;
(f) a floating charge on the undertaking or any property of the company
including stock-in-trade;
(g) a charge on calls made but not paid;
(h) a charge on a ship or any share in a ship; and
(i) a charge on goodwill or a patent or a licence under a patent, or on a trade
mark, or on a copyright or a licence under a copyright.
The holding of debentures entitling the holder to a charge on immovable property
shall not, be deemed to be an interest in immovable property. [Section 125(8)]. Also,
where a negotiable instrument has been given to secure the payment of any book
debts of a company the deposit of the instrument for the purpose of securing an
advance to the company, shall not be treated as a charge on those book debts.
[Section 125(7)]
According to Section 125(6), where a charge is created in India, but comprises
property outside India, the instrument creating or purporting to create the charge or a
copy thereof verified in the prescribed manner, may be filed for registration,
notwithstanding that further proceeding may be necessary to make the charge valid
or effectual according to the law of the country in which the property is situated.
Companies are required to file particulars of charges for registration of charge
created or modified with the concerned Registrar of Companies. Before the
introduction of Companies (Amendment) Act, 2006, all transactions including filing of
documents under the Act were conducted in physical form using the prescribed
forms. The Ministry of Corporate Affairs has implemented an e-governance initiative
through a project named as MCA-21. The e-forms have been notified for electronic
use.
Section 610B as inserted by Companies (Amendment) Act, 2006 and rules made
thereunder specifies that particulars of charges shall be filed through e-form 8 in
computer readable electronic form, in portable document format and authenticated by
a managing director, director or secretary or person specified in the Act for such
purpose by the use of a valid digital signature.
Under the system of e-filing, for registration or creation of charge, only one
e-form 8 is required to be filed in place of old form 8 and 13.
The e-form 8 should be filed by the company or any person interested therein
within 30 days from the date of creation or modification of charge. A further period of


30 days is allowed on payment of requisite fees as required by Schedule X to the
Companies Act, 1956. Separate e-form 8 is to be filed for each charge. In case of
acquisition of a property which is already subject to charge, then instrument
evidencing creation or modification of charge is a mandatory attachment. In case of
joint charge and consortium finance, particulars of other chargeholders should be
attached. If more than one chargeholder is involved, then details of extent of charge,
particulars of property charged, amount secured is required to be provided as
attachment. Any other information can be provided as an optional attachment.
E-form 8 should be digitally signed by the chargeholder and in case of an Indian
company by the Managing Director or director or manager or secretary of the
company authorised by the board of directors and in case of a foreign company, by
an authorised representative. In case of charge created or modified outside India on
the property situated outside India, the date of receipt of the document in India is
required to be mentioned. Further, in case the amount secured by the charge is in
foreign currency, rupee equivalent amount is required to be stated in the e-form.
If the charge is modified in favour of the asset reconstruction company (ARC) or
assignee then, the e-form should also be digitally signed by such ARC or assignee. In
such case, the digital signature of the company representative is optional.
Charge identification number is allotted at the time of registration of the charge.
A copy of every instrument or deed creating or evidencing any charge requiring
registration is to be verified in the following manner as provided in Rule 6 of the
Companies (Central Governments) General Rules and Forms, 1956:
(i) Where the instrument or deed relates solely to property situate outside India,
the copy shall be verified by a certificate either under the seal of the
company, or under the hand of some person interested in the mortgage or
charge on behalf of any person other than the company, stating that it is a
true copy;
(ii) Where the instrument or deed relates, whether wholly or partly, to property
situate in India, the copy shall be verified by a certificate of a responsible
officer of the company stating that it is a true copy or by a certificate of public
officer given under and in accordance with the provisions of Section 76 of
the Indian Evidence Act, 1872 (1 of 1872).
A charge created orally would also require registration. The registration of a
charge with the Registrar itself would show that the charge is created even if no
instrument is created. A Board resolution can also be taken to be the fact of creation
of a charge.
As per the Madras High Court decision in T.R. Thyagarajan v. Official Liquidator
(1960) 30 Comp. Cas 481, if a company acquires a property, subject to a charge and
fails to deliver particulars of the charge to the Registrar, the validity of the charge is
not affected. A charge by way of hypothecation of book debts requires registration. A
charge on future debts will be void if it is not registered. [Independent Automatic
Sales Ltd. v. Knowles & Foster (1962) 32 Comp Cas 1090 (C.D.)].
Particulars to be filed with the Registrar in case of series of Debentures


Under Section 128 of the Companies Act, 1956, where a series of debentures
containing or giving by reference to any instrument any charge to the benefit of which
debenture holders of the series are entitled pari passu is created by a company, it is
sufficient, to file with the Registrar within 30 days after the execution of the deed
containing the charge or, if there is no such deed, after execution of any debentures
of the series, the following particulars:
(i) the total amount secured by the whole series;
(ii) the dates of resolutions authorising the issue of the series and the date of
covering deed, if any, by which the security is created or defined;
(iii) a general description of the property charged;
(iv) the names of trustees, if any for the debenture holders.
The deed containing the charge, or a copy of the deed verified in the prescribed
manner, or if there is no such deed, one of the debentures of the series must also be
filed. If any commission, allowance or discount has been paid or made by the
company to any person directly or indirectly for subscribing, agreeing to take, or
procuring any or agreeing to procure, subscription for any debentures, the amount or
rate per cent of the commission, discount or allowance so paid or made must also be
indicated as required under Section 129 of the Companies Act, 1956. The particulars
under Sections 128 and 129 are to be filed in e-form 10, as prescribed under the
Companies (Central Governments) General Rules & Forms (Amendment) Rules,
2006. The omission to give these particulars does not, however, affect the validity of
the debentures. The deposit of any debentures as security for any debt of the
company does not amount to issue of debentures at a discount.
E-form 10 is required to be filed within a period of thirty days from the date of
creation or modification of charge for debentures. A further period of thirty days is
allowed on payment of requisite fees as required by Schedule X to the Companies
Act, 1956.
The number and details of trustees for debentureholders are required to be
entered. If there are more than one trustee, details of one trustee is to be given in the
e-form and the rest can be given as an attachment.
Copy of the resolution authorizing the issue of the debenture series and
instrument detailing creation or modification of charge have to be filed with e-form 10
as attachments.
The e-form is required to be digitally signed by the trustee(s) of debentureholder
as well as by Managing Director or director or manager or secretary of a company, in
case of an Indian company and by an authorised representative, in case of a foreign
company. Further, the e-form is required to be pre-certified by Chartered Accountant
or Cost Accountant or Company Secretary (in whole time practice).
5. EFFECT OF REGISTRATION
A registration of charge under Section 125 constitutes a notice to whosoever
acquires a future interest in the charged assets. Section 126 provides that where any
charge on any property of a company required to be registered under Section 125
has been so registered, any person acquiring such property or part thereof or any


share or interest therein shall be deemed to have notice of the charge as from the
date of such registration.
The registration of charge is intended to give notice to people who may not
otherwise be aware of it, particularly to persons who may advance money to the
company, and it may also serve the purpose of preventing a fraudulent and belated
claim of a charge in the event of liquidation [Sree Meenakshi Mills Ltd. v. Registrar of
Companies, AIR 1966, Madras 24 : (1966) 36 Comp Cas 961].
The object of public notice is achieved in two ways. First, by requiring the
companies to maintain record of charges and make it available for inspection to the
members of the public. Secondly, by requiring the Registrar of Companies under
Section 130 of Companies Act, 1956 to maintain record of the charges filed by
companies and make it available for public inspection.
The inspection of public documents was earlier carried out by inspection of
physical files containing company documents available in the concerned ROC offices.
In e-governance era, the documents, in so far as these are available in digital form,
shall be available for public inspection through electronic means using internet.
In accordance with the Rule 5 of Companies (Electronic Filing and Authentication
of Documents) Rules, 2006, the Central Government shall set up and maintain a
secure electronic registry in which all the documents filed electronically shall be
stored. The electronic registry so set up shall enable public access and inspection of
such documents as are required to be in public domain under the Act on payment of
the fees as prescribed under the Act or the rules made thereunder.
The particulars similar to these required for a charge created by the company are
to be filed, when any property is acquired by the company which is subject to a
charge, within 30 days of the acquisition of the property.
Non-registration of mortgage or charges, does not however, render the
transaction void or the debt not recoverable. The only consequence is that the
security created by the charge or mortgage is void against the liquidator and other
creditors. As against the company, the mortgage or charge is good and may be
enforced so long as the company does not go into liquidation. The failure to register
does not prejudice any contract or obligation for repayment of money secured by the
charge. The company itself cannot have a cause of action arising out of non-
registration of a charge.
Conclusive Nature of the Certificate of Registration
Dealing with the conclusive nature of the certificate of registration issued by the
Registrar, Scrutton L.J. observed in National Provincial and Union Bank of England v.
Charnley [(1924) 1 K.B. 431, 447 (CA)]
*
as follows :
The object of the certificate in that case is to prevent the debenture holders
security from being upset if it turns out that the company or the Registrar has
made a mistake as to what has been put, on the register, I am bound to say that
the language of the statute is rather puzzling: Every mortgage or charge created
by company ....... shall be void unless the prescribed particulars of the mortgage
or charge ....... are delivered ....... to the registrar ....... within twenty-one days*.

*
The judgement was rendered under the English Act.


That makes the avoidance depend on the neglect to send in the particulars. The
neglect to register the charge will not make it void. Then when the registrar has
got the particulars and the instrument creating the charge, he is to enter in the
register, not the particulars delivered by the company, but the date of the
instrument and its description, the amount secured, short particulars of the
property mortgaged or charged, and the names of the mortgagees or persons
entitled to the charge, So that there is a possibility, first, of the company making
an error in delivering the particulars, and, secondly, of the Registrar making an
error either in omitting to enter something specified in the particulars, or in
misunderstanding the instrument of charge delivered to him with the particulars;
and for that reason one can well understand a clause being put in favour of the
guarantees of the charge, who are not the persons whose duty it is to deliver the
particulars, that if the Registrar gives a certificate that all is in order that certificate
shall be conclusive evidence that the requirements as to registration have been
complied with. The result of the legislation as it appears to me is that if the
document sent in for registration does contain a charge on particular property,
even if the company sending it in has misstated that charge, or the Registrar
considering it judicially has misunderstood it, when once the certificate has been
given the guarantees are safe. Though one can see that this may cause great
hardship to a person who gives credit to the company in reliance on a defective
register, one can also see that equal hardship would be caused to secured
creditors if their security was to be upset for reasons connected with the action of
persons over whom they had no control. For these reasons I take the view which
was taken in Cunard Steamship Co. v. Hopwood (1908) 2 Ch. 564 (Ch. D) that
the giving of the certificate by the Registrar is conclusive that the document
creating the charge was properly registered, even if in fact it was not property
registered. [See also Bank of Maharashtra Ltd. v. Official Liquidator, (1973) 43
Comp. Cas. 505, wherein the aforesaid observation is quoted).
Consequences of non-registration
If a charge which requires registration under Section 125 is not registered as per
Sub-section (1) of Section 125, the consequences are as follows:
(a) The charge will be void as against the liquidator (if the company goes into
liquidation) and against creditors, but against them only.
(b) The charge is good against the company and the amount becomes payable
immediately.
(c) Until liquidation, the person seeking to enforce such a charge, has available
to him all remedies of a mortgage against the company, though not against
other creditors.
(d) The company may give a subsequent valid mortgage to secure the same
debt. But if a subsequent creditor, even with notice of the first charge, takes
a registered charge before the first said charge is registered, he obtains
priority.
(e) During liquidation the charge-holder (creditor) assumes the status of an
unsecured creditor, as the charge is void against liquidator and creditors.


(f) The holder of an equitable charge whose charge is void on the ground of
non-registration, has no lien on the title deeds or documents deposited with
him as the deposit is only ancillary to the void charge.
(g) Although a security becomes void by non-registration, it does not affect the
contract or obligation of the company to repay the money thereby secured.
In fact, Section 125 provides that where a charge becomes void by non-
registration, the money becomes immediately payable and the company
cannot repudiate it on the ground of non-registration.
(h) Omission to register particulars of charges as required is punishable with fine.
The company and every officer of the company or other person who is in
default shall be punishable with fine which may extend to five thousand
rupees for everyday during which the default continues. A further fine of
Rs. 10,000 may be imposed on the company and every officer of the company
for other defaults relating to the registration of charges (Section 142).
6. COMPANYS REGISTER OF CHARGES
Every company is required to keep at its registered office a register of all charges
(including mortgages) specifically affecting the property of the company and enter
therein all charges specifically affecting property of the company and all floating
charges on the undertaking or on any property of the company giving in each case a
short description of the property charged, the amount of the charge, and the names
of the persons entitled to it (Section 143). Further, every company must keep at its
registered office, a copy of every instrument creating any charge (Section 136).
Inspection of the Register of Charges and of the instrument creating charges can be
allowed only during the business hours to any creditor or member of the company
without fee and to any other person on payment of a fee of rupees ten (Section 144).
Registrars Register of Charges
As per Section 130 of the Act, the Registrar shall, with respect to each company,
cause to be kept a register containing all the charges requiring registration and shall
on payment of the prescribed fee, cause to enter in the Register with respect to every
such charge the following particulars :
1. the date of its creation.
2. the amount secured by the charge;
3. short particulars of the property charged; and
4. the persons entitled to the charge
In the case of a charge to the benefit of which the holders of a series of
debentures are entitled, the particulars to be entered in the Register are:
1. the total amount secured by the whole series.
2. the dates of the resolutions authorising the issue of the series and the date
of the covering deed, if any, by which the security is created or defined;
3. a general description of the property charged;
4. the names of the trustees, if any, for the debenture holders; and


5. the amount or rate per cent of the commission or discount if any, paid to any
person subscribing or procuring subscriptions for any debentures of the
company [Sections 128 and 129].
After the implementation of e-governance program, the Central Government shall
maintain all the records filed electronically in a secure electronic registry. The
documents shall be available for public inspection through electronic means using
Internet.
The users will have the option of viewing index of documents available in
electronic form. The documents including the forms of charges can be accessed
electronically upon payment of statutory fees of Rs. 50/- per company for a limited
direction of three hours from the time of accessing the first document of the given
company.
One can find charge ID by entering the CIN or foreign company registration
number of the company in the View index of charges service available after logging
in MyMCA portal. System displays all active charges with date of charge creation and
amount secured. (Students may note that the Form 13 required to be filed earlier is
done away with and the details of Form 13 are captured through other charge related
forms).
The Registrar must also keep a Chronological Index of Charges so registered for
ready reference, in Form No. 12 of the Companies (Central Governments) General
Rules and Forms.
Index to register of charges [Section 131] The Registrar shall keep a
chronological index, in the prescribed form and with the prescribed particulars, of the
charges registered with him in pursuance of the requirement of Section 125 of the
Act.
Extension of Time and Rectification of Register of Charges
As mentioned earlier, Section 125 of the Act requires filing of charges which
require registration within 30 days after the date of its creation. However, the
Registrar may allow further thirty days immediately following the expiry of the 30 days
on payment of such additional fee not exceeding ten times the amount of fee
specified in Schedule X as the Registrar may determine, for filing the charge, if the
company satisfies the Registrar that it had sufficient cause for not filing the particulars
and instrument or copy within the allowed period of 30 days.
When a company omits to file with the Registrar the particulars of any charge
created by it or of any charge subject to which any property has been acquired by it
or of any modification of any such charge or of any issue of debentures of a series, or
of the payment or satisfaction of a charge, within the time required, it has to make
petition before the Company Law Board (Central Government)
*
for extension of time
as provided under Section 141 of the Act.
The petition should be made as per the procedure laid down under the Company
Law Board Regulations, 1991. According to these Regulations, the petition shall be

*
amended vide Companies (Second Amendment) Act, 2002 w.e.f. a date yet to be notified.


prepared in Form No. 1 given in Annexure II to these Regulations and shall be
presented to the concerned Company Law Board Bench, where the registered office
of the company is situated either by the petitioner in person or through his authorised
representative or may be sent by registered post with acknowledgement due to the
Secretary or Bench Officer of the Bench concerned. The petition should set forth the
name of the company with its status, date of incorporation, address of its registered
office, authorised capital, main objects in brief for which the company was formed,
present business activities of the company etc. The petition shall also state clearly,
under distinct heads, the grounds for such petition and the nature of reliefs prayed
for.
The petition should be accompanied by:
(a) Copy of the agreement creating or modifying the charge as the case may
be.
(b) Copy of the resolution envisaged by Section 292(1)(b) or (c) and
Section 293(1)(a), as may be applicable.
(c) Affidavit verifying the petition.
(d) Bank draft evidencing payment of prescribed application fee.
(e) Memorandum of Appearance with a copy of Board Resolution or the
executed Vakalatnama, as the case may be.
If the Company Law Board is satisfied that the omission to file with the Registrar
the particulars of any charge or any modification thereof or the intimation of
satisfaction of charge was accidental or due to inadvertence or due to some other
sufficient cause or is not in a nature to prejudice the position of creditors or
shareholders of the company, or if the Company Law Board is satisfied that on other
grounds it is just and equitable to grant relief, it may direct that time for filing of
charge or intimation for satisfaction of charge shall be extended.
The effect of extension of time for registration and actual registration within the
extended time is that the charge becomes a valid charge from the date of its
execution.
A copy of the final order passed by the Bench extending the time shall be filed by
the company with the Registrar as an attachment to e-form 21, prescribed under the
Companies (Central Governments) General Rules and Forms (Amendment) Rules,
2006. The original certified copy of CLB is also required to be submitted at concerned
ROC simultaneously, failing which filing will not be considered valid.
Condonation of delay by the Central Government under Section 637B
When relief of extension of time is not granted by the Company Law Board a
further application under Section 637B, may be made to the Central Government who
for reasons to be recorded in writing may condone the delay. On condonation of the
delay the charge or other document which would otherwise be void gets revived.
7. SATISFACTION OF CHARGES
Section 138 of the Act requires that the company shall give intimation to the


Registrar of the payment or satisfaction in full, of any charge relating to the company
within 30 days from the date of such payment or satisfaction. The company shall
intimate satisfaction of the charge in e-form 17 prescribed under the Companies
(Central Governments) General Rules and Forms (Amendment) Rules, 2006
accompanied by appropriate fees, prescribed in Schedule X of the Act (which
depends on the nominal capital of the company). In this case no extension of time
can be allowed by the Registrar of Companies. The power to extend the time for filing
the satisfaction of charges was lied with the Company Law Board, under Section 141
for which a petition has to be filed before it as indicated earlier in this Study in case of
filing of charges. Now such power lies with Central Government (date of its coming
into effect is yet to be notified), vide the Companies (Second Amendment) Act, 2002.
Under the system of e-filing, for satisfaction of charge only one e-form 17 is
required to be filed instead of form 17 and form 13 which were required to be filed in
physical mode.
E-form 17 is required to be filed within 30 days from the date of satisfaction or
payment of full and final amount to the chargeholder.
While filling the e-form 17, the charge creation identification number obtained
after filing e-form 8 or 10 or the charge satisfied should be entered and the relevant
particulars of charge holders will get automatically displayed.
Letter of chargeholder stating that the amount has been satisfied is required to be
attached with this e-form. E-form is required to be digitally signed by chargeholder or
trustee of the debentureholder and in case of an Indian company, by the managing
director or director or manager or secretary of the company authorised by the board
of directors, while in case of foreign company, by an authorised representative.
Further, the e-form is required to be pre-certified by the Chartered Accountant or Cost
Accountant or Company Secretary (whole-time practice).
If e-Form No. 17 is signed by both the parties and is filed with Registrar, the
satisfaction of charge can be registered on the spot without issuing any notice to the
creditor.
Under Section 139 of the Companies Act, 1956, Registrars have been
empowered to record memorandum of satisfaction of a charge in the Register of
Charges, on evidence being given to him to his satisfaction with respect to a
registered charge that the debt for which charge was created has been paid or
satisfied.
When the Registrar makes an entry of satisfaction of a charge, he will furnish the
company with a copy of the memorandum of satisfaction (Section 140).
8. MODIFICATION OF CHARGES
As per Section 135 of the Act whenever the terms or conditions, or the extent or
operation, of any charge registered are or is modified, it shall be the duty of the company
to send to the Registrar the particulars of such modification within 30 days. For
registration of modification of charges also e-form 8 (details of which were given earlier)
has to be filed with the Registrar. Under Section 134 of the Companies Act, 1956, a
charge can be filed by the company or by any person interested in the charge. However,


under Section 135 modification of a charge can only be filed by the company.
While filing e-form 8 for modification of charge, charge identification number
allotted at the time of registration of the charge is to be entered.
In this case, fields 4, 5, 6, 10, 11, 13 and fields 15 to 17 of e-form 8 are
applicable and required to be filled.
In case the consortium finance is involved, then all the information like charge
creation or modification, asset category, name and address of chargeholders, nature
of instrument creating charge, are to be provided as an attachment.
In case of acquisition of property, already subjected to charge, instrument
evidencing creation or modification of charge is a mandatory attachment.
In case of modification of charge, if there is any modification in the charge
amount, then the total amount secured by charge after such modification is required
to be entered.
9. PURCHASE OR ACQUISITION OF A PROPERTY SUBJECT TO CHARGE
It has already been stated that when any person buys or acquires any property
which is already under charge and the charge was duly registered with the Registrar,
it will be deemed that the buyer or acquirer had notice of the charge. Therefore, when
a company acquires a property which is subject to a charge requiring registration with
the Registrar the acquiring company shall cause the prescribed particulars of the
charge with a duly certified copy of the instrument creating or evidencing the charge
to be delivered to the Registrar for registration, within thirty days of completion of the
process of acquisition.
But, where a registrable charge is not registered, it was held in the State Bank of
India v. Vishwaniryat (P) Ltd. (1987) 3 Comp. LJ 171 (Ker. DB) that the purchaser
shall be deemed to have purchased the property subject to charge. It is because, a
charge under Section 125 becomes void only against the liquidator and the creditor of
a company and not against any other person including the purchaser thereof.
10. PROPERTIES SITUATED ABROAD AND SUBJECT TO CHARGE
There may be situations in respect of creation of charge on properties located
abroad.
These may be as under:
(1) Property situated out of India and charge created also out of India This
requires registration with the Registrar in terms of Section 125 with only
difference in the time allowed for registration. The period of thirty days will
start from the day by which the instrument creating or evidencing the charge
would have reasonably reached India through post.
(2) Property situated abroad but charge is created in India In this case the
instrument creating or purporting to create the charge or a duly verified copy
thereof may be filed for registration within the normal time of thirty days
allowed under Section 125(1), notwithstanding compliance with further


procedure being necessary to make the charge valid or effective according
to the law of the country where the property is situated.
(3) Purchase of a property situated abroad but already subject to charge This
case is similar to the one under (1) above. The period of thirty days for filing
the copy of the instrument with the Registrar shall be counted from a day
within which the copy in the normal course would have reached India
through post.
11. DEFINITION AND NATURE OF MORTGAGE
According to Section 58 of the Transfer of Property Act, 1882, a mortgage is the
transfer of an interest in specific immoveable property for the purpose of securing the
payment of money advanced or to be advanced by way of loan, an existing or future
debt or the performance of an agreement which may give rise to pecuniary liability.
The transferor is called a mortgagor, the transferee a mortgagee; the principal
money and interest the payment of which is secured for the time being are called the
mortgage money and the instrument by which the transfer is effected is called the
mortgage deed.
Essentials of a Mortgage
1. Transfer of Interest: The first thing to note is that a mortgage is a
transfer of interest in the specific immovable property. The mortgagor as
an owner of the property possesses all the interests in it, and when he
mortgages the property to secure a loan, he only parts with a part of the
interest in that property in favour of the mortgagee. After mortgage, the
interest of the mortgagor is reduced by the interest which has been
transferred to the mortgagee. His ownership has become less for the time
being by the interest which he has parted with in favour of the mortgagee. If
the mortgagor transfers this property, the transferee gets it subject to the
right of the mortgagee to recover from it what is due to him i.e., the principal
plus interest.
2. Specific Immovable Property: The second point is that the property must be
specifically mentioned in the mortgage deed. Where, for instance, the
mortgagor stated all of my property in the mortgage deed, it was held by
the Court that this was not a mortgage. The reason why the immovable
property must be distinctly and specifically mentioned in the mortgage deed
is that, in case the mortgagor fails to repay the loan the Court is in a position
to grant a decree for the sale of any particular property on a suit by the
mortgagee.
3. To Secure the Payment of a Loan: Another characteristic of a mortgage is
that the transaction is for the purpose of securing the payment of a loan or
the performance of an obligation which may give rise to pecuniary liability. It
may be for the purpose of obtaining a loan, or if a loan has already been
granted to secure the repayment of such loan. There is thus a debt and the
relationship between the mortgagor and the mortgagee is that of debtor and
creditor. When A borrows 100 bags of paddy from B on a mortgage and
agrees to return an equal quantity of paddy and a further quantity by way of


interest, it is a mortgage transaction for the performance of an obligation.
Where, however, a person borrows money and agrees with the creditor that till
the debt is repaid he will not alienate his property, the transaction does not amount to
a mortgage. Here the person merely says that he will not transfer his property till he
has repaid the debt; he does not transfer any interest in the property to the creditor.
In a sale, as distinguished from a mortgage, all the interests or rights or ownership
are transferred to the purchaser. In a mortgage, as stated earlier, only part of the
interest is transferred to the mortgagee, some of them remains vested in the
mortgagor.
To sum up, it may be stated that there are three outstanding characteristics of a
mortgage:
(a) The mortgagees interest in the property mortgaged terminates upon the
performance of the obligation secured by the mortgage.
(b) The mortgagee has a right of foreclosure upon the mortgagors failure to
perform.
(c) The mortgagor has a right to redeem or regain the property on repayment of
the debt or performance of the obligation.
Kinds of Mortgages
There are in all six kinds of mortgages in immovable property, namely:
(a) Simple mortgage.
(b) Mortgage by conditional sale.
(c) Usufructuary mortgage.
(d) English mortgage.
(e) Mortgage by deposit of title-deeds or equitable mortgage.
(f) Anomalous mortgage.
Difference between Mortgage and Charge
1. A mortgage is created by the act of the parties whereas a charge may be
created either through the act of parties or by operation of law.
2. A charge created by operation of law does not require the registration as
prescribed for mortgage under the Transfer of Property Act. But a charge
created by act of parties requires registration.
3. A mortgage is for a fixed term whereas the charge may be in perpetuity.
4. A simple mortgage carries personal liability unless excluded by express
contract. But in case of charge, no personal liability is created. But where a
charge is the result of a contract, there may be a personal remedy.
5. A charge only gives a right to receive payment out of a particular property, a
mortgage is a transfer of an interest in specific immovable property.
6. A mortgage is a transfer of an interest in a specific immovable property, but
there is no such transfer of interest in the case of a charge. Charge does not
operate as transfer of an interest in the property and a transferee of the


property gets the property free from the charge provided he purchases it for
value without notice of the charge.
7. A mortgage is good against subsequent transferees, but a charge is good
against subsequent transferees with notice.

LESSON ROUND-UP
The power of the company to borrow includes the power to give security also. A
charge is a security given for securing loans or debentures by way of a mortgage
on assets of the company.
There are two kinds of charges, fixed or specific charge and floating charge.
A charge is fixed when it is made to cover assets which are ascertained and
definite or capable of being ascertained and defined at the time of creating
charge. Whereas floating charge is not attached to any definite property but
covers property of a fluctuating type.
When floating charge crystallizes, it becomes fixed.
The floating charge allows wide powers to the company to deal with its property
until such charge crystallizes.
A company is required to file e-form 8 through MCA portal giving complete
particulars together with the instrument creating charge within 30 days of creation
of charges under Section 125 of the Companies Act, 1956.
A charge identification number is allotted at the time of registration of the charge.
A registration of charge constitutes a notice to whosoever acquires a future
interest in the charged assets.
In e-governance era, there is a facility for public inspection of charges by
electronic means using internet.
Non-registration does not render the transaction void or the debt non
recoverable, but that the security created by the charge is void against the
liquidator and other creditors.
Every company is required to keep at its registered office a register of all charges
as well as a copy of instrument creating any charge.
Company may make petition to CLB (Central Government)
*
for extension of time
for filing particulars of charges to ROC for registration.
For intimating satisfaction of charge to ROC, e-form 17 is required to be filed.
For intimating modification of charge, e-form 8 is required to be filed within 30
days of modification.
Mortgage is created by the act of parties whereas a charge may be created either
through the act of parties or by operation of law.





*
amended vide Companies (Second Amendment) Act, 2002 w.e.f. a date yet to be notified.


SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation).
1. Define mortgage. State the various types of mortgages.
2. What are the essentials of a mortgage?
3. What is a charge? Enumerate the statutory provisions for their registration.
State the circumstances under which certain charges may be void against
the liquidator or the creditors of company.
4. What information must be entered in the register of charges maintained by
the company? What is the effect of a failure to register a charge?
5. Can a floating charge become a fixed charge? If so, under what
circumstances?
6. Distinguish between :
(a)Fixed and Floating Charge
(b)Mortgage and Charge
7. Under what circumstances a Floating Charge is crystallised?
8. Discuss various types of registerable charges.
9. What are consequences of non-registration of charges?
10. Write short notes on:
(a)Satisfaction of Charges
(b)Modification of Charges.


Suggested Readings :
1. Guide to Companies Act A. Ramaiya.
2. Company Law P.P.S. Gogna.

















STUDY XI
FINANCIAL STRUCTURE AND MEMBERSHIP-VI
ALLOTMENT AND CERTIFICATES OF SECURITIES

LEARNING OBJECTIVES
An allotment is the acceptance of an offer to take shares by an applicant in response
to the shares or debentures offered to public for subscription. Allotment of shares is
an important aspect of company. After going through the chapter, you will be able to
understand what does allotment mean, what are the various statutory provisions
regarding Allotment, what is minimum subscription, effects of irregular allotment, what
is allotment procedure etc.
The topics covered under the chapter are:
Allotment of shares
General principles regarding allotment
Statutory provisions regarding allotment
Effect of irregular allotment
Revocation by applicant
Ultra vires allotment
Allotment procedure
Share certificate
Share warrant
Personation of shareholder
Calls and forfeiture

1. ALLOTMENT OF SHARES
Allotment of shares means the act of appropriation by the Board of directors of
the company out of the previously un-appropriated capital of a company of a certain
number of shares to persons who have made applications for shares (In Re Calcutta
Stock Exchange Association, AIR 1957 Cal. 438). It is on allotment that shares come
into existence.
The re-issue of forfeited shares does not constitute appropriation out of
unappropriated capital, and therefore is not an allotment within the meaning of
Section 75(1) of the Companies Act, 1956 and a company need not file return in
e-Form No. 2 in respect of the re-issue of forfeited shares.
What is termed allotment is generally neither more or less than the acceptance
by the company of the offer to take shares [Re. Florence Land & Public Works Ltd.
(1885) 29 Ch. 421].



Notice of Allotment
An allotment is the acceptance of an offer to take shares by an applicant, and like
any other acceptance it must be communicated. Thus, a binding contract between
the company and the applicant could emerge only when the allotment is made by a
resolution of the Board of directors and notice of such allotment has been given to the
allottee. If the notice (i.e. the Allotment Advice/Letter of Allotment) is posted to the
proper address of the allottee, the contract will result even if the allotment letter does
not reach him or is delayed in post. It should be noted that the allotment and its
communication result in a contract between the company and the allottee. The
allottee does not automatically become a member of the company, until his name is
placed on the register of members.
2. GENERAL PRINCIPLES REGARDING ALLOTMENT
With regard to the allotment of shares, the following general principles should be
observed in addition to the statutory provisions, discussed hereafter:
(1) The allotment should be made by proper authority, i.e. the Board Directors
of the company, or a committee authorised to allot shares on behalf of the
Board. Allotment made without proper authority will be invalid. Allotment of
shares made by an irregularly constituted Board of directors shall be invalid
[Changa Mal v. Provisional Bank (1914) ILR 36 All 412].
It is necessary that the Board should be duly constituted and should pass a
valid resolution of allotment at a valid meeting [Homes District Consolidated
Gold Mines Re (1888) 39 Ch D 546 (CA)]. But Section 290 and the Rule in
Royal British Bank v. Turquand (1856) 6 E & B 327 : (1843-60) All ER Rep
435 may make an allotment valid even if some defect was there in the
appointment of directors but which was subsequently discovered. An
allotment by a Board irregularly constituted may be subsequently ratified by
a regular Board [Portugese Consolidated Copper Mines, (1889) 42 Ch. D
160 (CA)]. A director who has joined in an allotment to himself will be
estopped from alleging the invalidity of the allotment [Yark Tramways Co. v.
Willows, (1882) 8 QBD 685 (CA)].
(2) Allotment of shares must be made within a reasonable time (As per Section
6 of the Indian Contract Act, 1872, an offer must be accepted within a
reasonable time). What is a reasonable time is a question of fact in each
case. An applicant may refuse to take shares if the allotment is made after a
long time.
The interval of about 6 months between application and allotment was held
unreasonable [Ramsgate Victoria Hotel Company v. Montefione (1866) LR 1
EX 109].
(3) The allotment should be absolute and unconditional. Shares must be alloted
on same terms on which they were applied for and as they are stated in the
application for shares. Allotment of shares subject to certain conditions is
also not valid. For example where an applicant applied for shares on the
condition that he will be appointed as branch manager of company but later
on the condition was breached, it was held that he is not bound by the
377


allotment of shares [Ramanbhai v. Ghasi Ram (1918) BOM. LR 595].
Similarly, if the number of shares alloted are less than those applied for, it
cannot be termed as absolute allotment.
(4) The allotment must be communicated. As mentioned earlier posting of letter
of allotment or allotment advice will be taken as a valid communication even
if the letter is lost in transit. In Household Fire And Carriage Accident
Insurance Co. Ltd. Grant (1879) 4 E.D. 216, Grant applied for certain shares
in a company, the company despatched letter of allotment to him which
never reached him. It was held that he was liable for the balance amount
due on the shares. The mere entry of a shareholders name in the
companys register is insufficient to establish that an allotment was in fact
made [Official Liquidator, Bellary Electric Supply Co. v. Kanni Ram
Ramwoothmal (1933) 3 Com Cases 45; AIR 1933 Med 320]. There can be
no proper allotment of shares unless the applicant has been informed of the
allotment [British and American Steam Navigation Co. Re. (1870) LR 10 Eq
659]. A formal allotment is not necessary. It is enough if the applicant is
made aware of the allotment. [Universal Banking Corpn. Re. Gunns Case
(1867) 3 Ch App 40].
(5) Allotment against application only No valid allotment can be made on an
oral request. Section 41 requires that a person should agree in writing to
become a member.
(6) Allotment should not be in contravention of any other law If shares are
allotted on an application of a minor, the allotment will be void.
3. STATUTORY PROVISIONS REGARDING ALLOTMENT
The Companies Act lays down the following conditions to be fulfilled before a
Company can proceed to allot shares:
(a) The Company intending to offer shares or debentures to the public for
subscription by the issue of a prospectus shall, before such issue, make an
application to one or more recognised stock exchange(s) for permission for
the shares or debentures to be dealt with in the regional stock exchange or
each of such stock exchanges [Section 73(1)]. If permission is not granted
by any one of the stock exchanges named in the prospectus, the
consequence by virtue of Section 73(1A) would render the entire allotment
void. [Rishyashringa Jewellery Ltd. v. Stock Exchange 1995 6 SCL 227].
(b) The company shall file with the Registrar, a prospectus or a statement in lieu
of prospectus in e-form 19 or e-form 20, as the case may be, before making
an allotment signed by every person who is named therein as a director.
(c) The company shall receive in cash the amount payable on application which
shall not be less than 5 percent of the nominal value of the shares and must
keep in deposit the amount so received in a scheduled bank in a separate
account till the allotment is made and until the certificate to commence
business has been obtained under Section 149 of the Companies Act, 1956.
[Section 69]
(d) Where such certificate has already been obtained, until the entire amount


payable on application for shares in respect of the minimum subscription, as
provided in the prospectus, has been received by the company.
Share application money collected should be kept deposited in a separate
account with bankers to the issue only [Rich Paints Ltd. v. Vadodara Stock
Exchange Ltd. (1998) 15 SCC 128/92-Comp Cas 8 (Guj.)].
If the above conditions are not fulfilled within 120 days of the first issue of
prospectus, all moneys shall be refunded forthwith. If not refunded within
130 days, the directors are jointly and severally liable to repay the amount
together with interest @ 6% p.a. from the expiry of the one hundred and
thirtieth day.
(e) No allotment shall be made where a prospectus is issued generally until the
beginning of the fifth day after the date on which the prospectus is so issued
or such later date as may be specified in the prospectus. This date is known
as the date of opening of the subscription list (Section 72).
(f) Closing of the Subscription List SEBI (Disclosure and Investor Protection)
Guidelines 2000 provide that the subscription list must be kept open for
atleast 3 working days and not more than 10 working days and in the case
of infrastructure company, the maximum period is 21 working days. In case
of Rights issue, the SEBI guidelines provide that the issue shall remain open
for atleast 30 days and not more than 60 days.
(g) If the company having a share capital does not issue a prospectus, it cannot
proceed with the allotment unless it files with the Registrar of Companies
atleast 3 days before the first allotment, a Statement in lieu of prospectus in
e-form 20 in Schedule III and must contain the particulars and reports set
out therein.
Allotment of Shares/Debentures to be listed on Stock Exchange
Section 73(1) provides that every company intending to offer shares or
debentures to the public for subscription by issue of prospectus shall, before such
issue, make an application to one or more recognised stock exchanges for
permission for enlistment of its shares or debentures.
Sub-section 73(1) was inserted by the Companies (Amendment) Act, 1988
making the listing of all public issues compulsory with atleast one recognised stock
exchange.
Section 73(1A) provides that where a prospectus states that application under
Sub-section (1) has been made for permission for the shares or debentures offered
thereby to be dealt in one or more recognised stock exchanges, then the allotment
shall be void if the permission has not been granted by the stock exchange or each
such stock exchange as the case may be, before the expiry of ten weeks from the
date of the closing of the subscription lists.
However, where a stock exchange refuses to grant an application or fails to
dispose it off within 10 weeks, the company may, under Section 22 of the Securities
Contracts (Regulation) Act, 1956 appeal to the Securities Appellate Tribunal against
the refusal:


(1) within 15 days from the date of the refusal, or
(2) within 15 days from the date of the expiry of 10 weeks. It can be seen that
the obtaining of permission to deal is a condition precedent to allotment
once the prospectus has stated that it has been or will be applied for.
Section 73(2) states that where the allotment is void under Section 73(1)
because either the application has not been made for listing or the permission has
not been granted, the company must repay the application money at once to the
applicants, and if it is not repaid within 8 days after the company becomes liable to
repay, the company and every director of company who is an officer in default shall
on and from the expiry of the eighth day, be jointly and severally liable to repay that
money with interest @ 15% p.a.
Section 73(2A) provides that where permission has been granted by the
recognised stock exchange or exchanges, and the moneys received from applicants for
shares or debentures are in excess of the aggregate of the application moneys relating
to the shares or debentures allotted, the company must repay the excess amount
forthwith without interest. If such money is not repaid within 8 days, then the company
and every director of the company who is an officer in default shall, on and from the
expiry of the eighth day, (from the day the company becomes liable to pay) be, jointly
and severally, liable to repay the money with interest at such rate, not less than four
percent and not more than fifteen percent as may be prescribed, having regard to
length of the period of delay in making the repayment of such money [vide Rule 4D of
the Companies (Central Government's) General Rules & Forms, 1956, 15 percent
interest has been prescribed]. If default is made in complying with this provision then
the company and every officer in default shall be liable to be fined upto Rs. 50,000 and
where the repayemnt is not made within 6 months from the expirty of the 8th day, also
with imprisonment upto one year [Section 73(2A) and (2B)].
Section 73(3) states that all moneys received from applicants for shares must be
kept in a separate account maintained with a scheduled bank and they shall not be
utilised for any purpose other than adjustment against allotment of shares or for
repayment to the applicants.
As per Section 73(5), it shall be deemed that the permission has not been
granted if the application for permission, for listing of companies shares, has not been
disposed of within 10 weeks from the date of the closing of the subscription list.
In CIT v. Henkel Spic India Ltd. Comp. Cases 189 (2004) the Madras High Court
held that any interest earned on application money deposited with the bankers,
pending receipt of permission of listing on a stock exchange cannot be treated as
money available to the company. The interest is an amount which accrues on a fund
which is itself held in trust, until the allotment is completed and monies are returned
to those to whom shares are not allotted. Therefore, only at a point, when the trust
terminates, it can be stated that amount has accrued to the company as its income.
Basis of Allotment
Clause 44 of listing agreement requires that the allotment of securities offered to
public shall be made within 30 days of closure of public Issue. In case the allotment is
not made or refund order not despatched to investors within 30 days from the date of


closure of issue, then the Company shall pay interest @ 15% p.a. as per the listing
agreement.
Over Subscription
SEBI (Disclosure and Investor Protection) Guidelines, 2000 disallow retention of
over-subscription under any circumstances except to the extent necessary because
of proportional allotment, but not exceeding 10% of the net offers for the purpose of
rounding off to the nearer multiple of 100. Accordingly, all monies in excess of the
application money on shares allotted must be repaid forthwith without interest. If such
money is not repaid within 8 days from the day the company becomes liable to pay
every officer who is in default shall be jointly and severally liable to repay the same
with interest @ 15% p.a. [Section 73(2A)]. The High Court in P.C. Wadhwa (1995)
Comp L.J. 529 held that the remedy under Section 73(2A) was available to a
shareholder. Where a person not being a shareholder was aggrieved, the remedy
was to file a complaint with the Registrar of Companies.
Minimum Subscription
Section 69(1) states that no shares shall be offered to the public until the
minimum subscription stated in the prospectus has been subscribed and the amount
payable on application has been received in cash by the company. In this context,
SEBI has prescribed that any company making public or right issue must receive a
minimum of 90 percent of the issue including devolvement on underwriters
subscription against the entire issue before making allotment.
The amount of minimum subscription must be stated in the prospectus. Any
amount other than in cash should not be included in the minimum subscription.
If the minimum subscription is not raised within 120 days after the issue of the
prospectus the money paid by the subscribers must be returned forthwith. If it is not
so returned, the directors become liable to repay the money with 6% interest from the
end of the 130th day. All money received from the applicants should be kept
deposited in a separate account with a scheduled bank until the company obtains the
certificate to commence business. In case the company has already obtained the
said certificate the amount so received should be kept in a scheduled bank until the
entire amount payable on application for shares in respect of minimum subscription
has been received by the company.
Letter of Allotment
The company is required to issue letter of allotment to persons who are alloted
shares. Such letter is called Letter of Allotment. Such persons are required to
surrender this letter of allotment to company for issue of share certificate.
Letter of Renunciation
Under Section 81, when the Public Company, at any time after 2 years from the
formation of company or at any time after the expiry of the one year from the
allotment of shares in that company made for the first time after its formation
whichever is earlier, proposes to increase the subscribed capital of company by
allotment of further shares, then the Board of directors are required to offer the
shares first to existing shareholders.


Such shareholders are also given an option to renounce the shares in favour of
any other person. The letter, through which such shareholders renounce shares in
favour of other person is called "Letter of renunciation".
If the person to whom offer is made or the person in whose favour offer is
renounced does not accept the shares, the Board may dispose of them in such
manner as they think fit for the benefit of the company.
4. EFFECT OF IRREGULAR ALLOTMENT
An allotment is irregular if it is made without complying with the conditions
precedent to a regular allotment as discussed above, viz, the provisions of
Section 69 and 70 of the Act.
Consequences of irregular allotment depend upon the nature of irregularity
involved. These may be noted as follows:
1. Failure to deliver a copy of the prospectus to the Registrar before its issue
In case an allotment has been made without delivering to the Registrar of
Companies, a copy of the prospectus along with other specified documents
either before or on the date of its issue, the company and every person who
is knowingly a party to the issue of the prospectus shall be punishable with
fine which may extend to Rs. 50,000 [Section 60(5)]. The allotment,
however, shall remain valid.
2. Non-compliance with provisions of Section 69 and Section 70 In the event
of non-compliance with the provisions of Section 69 and Section 70 (viz
allotment without raising minimum subscription or without either collecting
application money or collecting less than 5 percent as application money or
failure to deliver a copy of statement in lieu of prospectus at least three days
before allotment), the following consequences shall follow:
(a)The allotment is rendered voidable at the option of the applicant. The option
must however be exercised
(i) within 2 months after the holding of the statutory meeting of the
company and not later; or
(ii) where the company is not required to hold a statutory meeting, or
where the allotment is made after the holding of the statutory
meeting, within 2 months after the date of allotment and not later.
The irregular allotment is voidable even if the company is in the
course of being wound up.
(b)Any director who has knowledge of the fact of the irregular allotment of shares
shall be liable to compensate the company and the allottee respectively
for any loss, damages or costs which the company or the allottee may
have sustained or incurred thereby. Proceedings to recover any such
loss, damages or costs cannot be commenced after the expiration of 2
years from the date of allotment.
Rectification by company of irregular allotment
An irregular allotment of shares made by the directors in excess of their powers


may be subsequently ratified by the shareholders at a general meeting [Bamford v.
Bamford, (1969) 39 Com Cases 369].
Lapse of application on undue delay in allotment
An application to take shares lapses if allotment is delayed unreasonably
[Ramsgate Victoria Hotel v. Montefiore (1866) LR 1 Ex 109 (C Ex)].
Cases where applicant cannot avoid allotment
We had noted earlier, that an allottee can avoid the allotment within the time
frame mentioned in Section 71(1) of the Companies Act, 1956. However, the
applicant cannot avoid the allotment if he unequivocally affirms the allotment by
endeavouring to sell the shares, [Ex. P. Briggs 1866 LR 1 Eq 483]; (2) by executing a
transfer of the shares [Crawleys case (1969) LR 4 Ch App 322]; (3) by paying calls
or receiving dividends, [Scholey v. Central Railway of Venezuela (1868) LR 9 Eq
266]; (4) by attending and voting at a general meeting in person or by proxy,
[Sharpley v. Louth Co. (1876) 2 Ch. 663 (CA)].
3. Non-compliance of Section 72 In case allotment is made in contravention
of the provisions of Section 72 (viz, before the beginning of the fifth day from
the date of issue of the prospectus), the company and every officer of the
company shall be punishable with fine which may extend to Rs. 50,000
[Section 72(3)]. However, allotment in such a case shall be valid.
4. Condition as to listing of shares on a stock exchange is not observed
Where the prospectus of a company states that an application has been
made for permission for the shares offered thereby to be dealt in one or
more recognised stock exchanges, the allotment shall be void, if either the
permission has not been applied for or refused or not granted before the
expiry of 10 weeks from the date of the closing of the subscription list
[Section 73(1) and (2)].
In a particular case, a company proposed public issue at a premium and it stated
in the prospectus that it had applied for listing of the shares in four recognised stock
exchanges. Three of the stock exchanges granted permission for listing after the
Central Government had issued orders in this regard. The petitioner contended that
the allotment made is void under Section 73 of the Companies Act. The court held
that the question of public issue being declared void does not arise as three
exchanges had granted listing permission [Smt. Urmila Barutha v. Conventry Spring
& Engineering Co. Ltd. and Other (1997) 2 CLJ 48 (Cal)].
However, where an appeal against the decision of any recognised stock
exchange refusing permission has been preferred with Securities Appellate Tribunal,
under Section 22 of the Securities Contracts (Regulation) Act, 1956 such allotment
shall not be void until the dismissal of the appeal [Section 73(1)].
In case of allotment becoming void, the money becomes due to be refunded
forthwith and must therefore be repaid.
5. REVOCATION BY APPLICANT/ALLOTTEE
Ordinarily the provisions of Law of Contract apply to applications and allotment of
shares. An application is an offer by the applicant and allotment is an acceptance of


the offer by the company. An offer can be revoked at any time before there is an
acceptance to allot shares by the company subject to the provisions and restrictions
of the Companies Act.
6. ULTRA VIRES ALLOTMENT
Where the directors have no authority under the companys memorandum to
make an allotment, the allotment would be irregular and may be ratified by the
company. But it would be void where the company itself has no power to make an
allotment. At common law any subscription money was returnable to the allottee.
[Waverly Hydropathic Co. v. Barrowman, 1895 23 R. 136].
Allotment of shares to a charitable Institution by way of donation
If there is no payment in monies worth for the shares; the allotment would be
ultra vires. In case of allotment for consideration, other than cash, there is a
requirement for companies to disclose in the return of allotment the number of shares
allotted by it for consideration otherwise than in cash. Allotment of shares by the
company as fully paid up shares to charitable trust by way of donation shall not be
valid.
7. ALLOTMENT PROCEDURE
Where the company has received from bankers all the share applications, the
directors shall proceed with the allotment of shares. If the issue is fully subscribed,
then there is no difficulty in allotment of shares. If, however, the issue is over-
subscribed, then shares are allotted on the basis of scheme of allotment worked out
in consultation with the Stock Exchange(s) where shares are to be listed, by a
Board/Committee resolution. The Board also authorises the Secretary, by a
resolution, to issue letter of allotment or Allotment Advice-cum-Allotment Money
Notice and letters of regret, as the case may be, to all the applicants. The resolution
should also provide for the refund of the application money.
When the companys issue is over-subscribed, the directors allot less shares to
all or some applicants than applied for, it is called partial allotment. Allotment of
lesser than the number of shares applied for is not binding on the applicant. He may
accept or refuse the shares allotted to him, as the allotment of fewer shares is a
counter-offer by the company to the applicants. Hence, in order to guard against any
such problem, the application forms provide for such clauses accepting the partial
allotment by the applicants.
As per the SEBI guidelines, a company cannot retain any amount of over-
subscription. After the allotment, the over-subscribed amount must be returned to the
applicants.
Return of Allotment
Section 75 of the Companies Act provides that after allotment of shares by any
company, a return of allotment in the prescribed e-form 2 even if it is of a single
share, must be filed with the Registrar of Companies within thirty days of the
allotment of shares. The return must state:
(a) Where shares are allotted for cash:
(i)The number and nominal amount of the shares allotted.


(ii)The amount paid or payable on each share.
(iii)The class of shares-equity or preference.
(iv)The amount of premium paid/discount.
The company shall in no case show in such return any shares as having
been allotted for cash if cash has not actually been received in respect of
such allotment [Proviso to Section 75(1)(a)].
Any payment which is presently enforceable against the company such as
consideration payable for property purchased, will constitute payment in
cash [Harmony and Montage Tin and Copper Mining Company; Spargos
case (1873) 8 Ch. App. 407].
The aforesaid view has been endorsed by the Department of Company
Affairs. The Department is of the view that the allotment of shares by a
company to a person in lieu of a genuine debt due to him is in perfect
compliance with the provisions of Section 75(1). In this connection, it has
been clarified that the act of handing over cash to the allottee of shares by a
company in payment of its debt and the allottee in turn returning the same
cash as payment for the shares allotted to him is not necessary for treating
the shares as having been allotted for cash. What is required is to ensure
that the genuine debt presently payable by a company is liquidated to the
extent of the value of shares [Circular 8/32 (75) 77-CL/V dated 13th March
1978].
Allotment of shares against promissory notes shall not be valid
[Chokkalingam v. Official Liquidator AIR 1944 Mad. 87].
(b) Where shares (other than bonus shares) are allotted fully or partly paid-up
otherwise than in cash (e.g. where consideration for allotment of shares is
paid by way of property, goods or services), the following are required:
(i)A copy of contract, if any, for allotment of such shares is required to be
attached with the e-form.
(ii)The contract of sale or for services or other consideration for which the
allotment was made; and
(iii)A return stating the number and nominal amount of the shares so allotted, to
the extent to which they are paid-up, and the consideration for which
they are allotted.
Where shares are issued as fully or partly paid up in consideration of a
property thereafter to be sold to the company or services to be rendered to
the company or in consideration of the release of a claim or by way of
compromise, the issue is for consideration other than cash.
In case of inadequacy of consideration, the shares will be treated as not fully
paid and the shareholder will be liable to pay for them in full, Alote Estate v.
R.B. Seth Hiralal Kalyanmal Kasliwal [1970] 40 Comp. 1116 (SC), unless the
contract is fraudulent.
(c) Where bonus shares have been issued, a return must be filed with the


Registrar stating:
(i)The number and nominal amount of such shares comprised in the allotment;
(ii)The names, addresses and occupation of the allottees; and
(iii)A copy of the resolution authorising the issue of such shares is required to be
attached with the e-form 2.
(d) Where the shares have been issued at a discount, a copy of the resolution
passed by the company authorising such issue and a copy of the order of
the Central Government sanctioning the issue must be filed with the
Registrar. If rate of discount exceeds 10% the relevant order of the Central
Government must also be filed with the Registrar as an attachment with e-
form 2.
It should be ensured that filing of e-form 23 precedes filing of e-form 2, in case
e-form 23 is required to be filed in relation to the resolution passed for issue of shares
under Section 81(1A) of the Act.
The following items are also required to be attached with e-form 2 along with the
earlier stated attachments:
List of allottees.
Copy of board or members resolution approving the allotment of shares.
In case of allotment of shares for consideration otherwise than in cash,
attach copy of contract.
In case of issue of bonus shares, attach copy of said resolution.
In case of issue of shares at discount, attach copy of resolution with copy of
order of Central Government (Company Law Board).
E-form 2 is required to be digitally signed by managing director or director or
manager or company secretary of the company. Further the e-form is required to be
precertified by certifying professionals (Chartered Accountant or Cost Accountant or
Company Secretary in whole time practice).
Other requirements:
(i) Penalty: If default is made in complying with the provisions of Section 75, as
stated above, every officer of the company who is in default shall be
punishable with fine which may extend to Rs. 5000 for every day during
which the default continues. However, where the default relates to
contravention of proviso to clause (a) Sub-section (1), viz showing in the
return that shares have been allotted for cash, when such is not the case,
every promoter and every officer of the company who is guilty of the
contravention shall be punishable with fine which may extend to Rs. 50,000
[Section 75(4)].
(ii) Re-issue of forfeited shares: No return of allotment is required to be filed
with regard to the re-issue of forfeited shares [Section 75(5)]. Re-issue of
such shares does not amount to allotment within the meaning of
Section 75(1). It is only the re-issue of existing shares.


In Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. 1963-
(033)-Comp Cas-0862-SC, the Supreme Court held that the exchange was not liable
to file any return of the forfeited shares under Section 75(1) of the Companies Act,
1956, when the same were re-issued.
The Court observed that when a share is forfeited and re-issued, there is no
allotment, in the sense of appropriation of shares out of the authorised and
unappropriated capital and approved the observations of Harries C.J. in S.M. Nandys
case that: On such forfeiture all that happened was that the right of the particular
shareholder disappeared but the shares considered as a unit of issued capital
continued to exist and was kept in suspense until another shareholder was found for
it.
In the following cases, return of allotment is not required to be filed:
(a) issue of debentures
(b) re-issue of forfeited shares
(c) shares subscribed by subscribers to memorandum of association
(d) on conversion of debentures or loan into equity by an order of Central
Government u/s 81(4).
8. SHARE CERTIFICATE
A share certificate is a certificate issued to the members by the company under
its common seal specifying the number of shares held by him and the amount paid on
each share. According to Section 83 of the Companies Act, 1956 each share of the
share capital of the company shall be distinguished with a distinct number for its
individual identification. However, such distinction shall not be required, as per
proviso to Section 83, if the shares in a company are held in depository form. It is a
declaration by the company to all the world that the person in whose name the
certificate is made out and to whom it is given, is a bona fide shareholder of the
company and it is given by the company with the intention that it shall be so used by
the person to whom it is given, and acted upon in sale and transfer of shares. [In Re.
Bahia San Francisco Railway Company (1865) LR QB 584].
In terms of Section 84(1) of the Act, a certificate under the common seal of the
company is prima facie evidence of the title of the member to the shares specified
therein. The certificate is the only documentary evidence of title in the possession of
the shareholder. But it is not a warranty of title by the company issuing it. This gives
rise to two estoppels against the company, (discussed later) namely estoppel as to
title, which means that the company cannot deny as against an innocent purchaser of
shares that the share certificate was issued by mistake; estoppel as to payment,
which means that the company cannot say as against an innocent purchaser of
shares that the amount of payment shown on the certificate was entered by mistake,
[Cf. Balkis Consolidated Co. Ltd. v. Tomkinson, 1893 AC 396 (HL)].
Time of issue of Share Certificate
As per Rule 8 of the Companies (Issue of Share Certificate) Rules, 1960, all
blank forms to be used for issue of share certificates shall be printed and the printing
shall be done only on the authority of a resolution of the Board of directors.


Under Section 113(1) of the Act where shares have been allotted to an applicant
or where a valid transfer of shares by a shareholder to another person has been
lodged with the company, the company (unless prohibited by any provision of law or
any order of any Court, Tribunal or other authority) must deliver within three months
after the allotment and within two months after the receipt of the applications for
registration of transfers, a certificate or certificates evidencing the title of the allottee
or transferee to the shares allotted or transferred. In case of listed companies the
period prescribed is two months allotment and one month for transfer. However, such
period may be extended upto a further period of nine months by the Company Law
Board

for issuing debenture certificates [See proviso to Section 113(1)].
Where the Securities are dealt in a depository system, the company shall
intimate the details of allotment of securities to a depository immediately on allotment
of such securities under Section 113(4) inserted by the Depositories Act, 1996.
If default is made in complying with these provisions, the company and every
officer of the company who is in default, shall be liable to fine upto Rs. 5000 for every
day during which the default continues. A person entitled to the certificate may give
notice to the company to make good the default and if the company fails to do so, he
may apply to the Company Law Board (CLB)
1
. The CLB will then ask the company to
make good the default within a specified period of time and pay costs of and
incidental to, the application.
Significance of Share Certificate
A certificate of shares, is an evidence to the effect that the allottee is holding a
certain number of shares of the company showing their nominal and paid-up value
and distinctive numbers. This certificate is a prime facie evidence of title to the shares
in the possession of shareholders. [Society Generale De Paris v. Walker, (1885) 11A
AC 20, 29].
Moreover, when the company issues a certificate, it holds out to the world that
the facts contained therein are true. Any person acting on the faith of the share
certificate of the company, can compel the company to pay compensation for any
damage caused by reason of any misstatement in the share certificate as the
company is bound by any statements made in the certificate.
Share certificate is the only documentary evidence of title and that the share
certificate is a declaration by the company that the person in whose name the
certificate is issued is a shareholder in the company. [Ghanshyam Chhaturbhuj v.
Industrial Ceramics (Pvt.) Ltd. (1995) 4 Com LJ 51].
Also the company cannot dispute the amount mentioned on the certificate as
already paid. [Bloomenthal v. Ford (1897) AC 156 (HL)].
Damages against Company and Directors for wrong certificates
As already mentioned, a person acting on the share certificate issued by the
company may recover compensation for the damages suffered by him. The measure

1
. Company Law Board has been substituted by Central Government by the Companies (Second
Amendment) Act, 2002, which is yet to be notified.


of damage is the value of the shares at the time of the refusal by the company to
recognise him as a shareholder together with interest from that date. [Bahla and San
Francisco Rly. Co., (1868) LR 3 QB 584].
Where directors issue a certificate of title of shares which the company has no
power to issue, they may be held personally liable to damages on an implied
warranty of authority to any person who acts on such certificate. In Hoirche v. Sims,
(1894) AC 654, the company had issued shares at a discount, but the certificates
issued by the directors mentioned that the shares were fully paid-up. Though the
company was estopped from disputing this, the directors were liable to compensate
the company.
Where the share certificates are issued under the authority of the directors, it
binds the company even if the directors authority is obtained by fraud and by
connivance on the part of the secretary. Dixon v. Kennaway & Co. (1900) 1 Ch. 833.
As per Section 113(3) compensation is paid for actual losses/costs incurred by
an applicant but not for any hypothetical losses suffered by the applicant.
Split Certificate
A split certificate means a separate certificate claimed by a shareholder for a
portion of his holding. The advantages of a split certificate are that the shareholder
may benefit in case of a transfer by way of sale or mortgage in small lots and the right
to multiply the certificates into as many shares held by the shareholder.
Purpose and Form of Share Certificate
With the help of a share certificate a member of a company may deal with his
shares in the market whether it is one of sale, mortgage or pledge by showing a good
prima facie marketable title to the shares. A share certificate is a documentary
evidence of title to shares in the possession of the shareholder. It is a prima facie
evidence of his title to the shares.
The Act does not provide for any specific form of a share certificate. Rule 5 of
the Companies (Issue of Share Certificates) Rules, 1960 provides that every share
certificate shall specify the name(s) of the person(s) in whose favour the certificate
is issued, the shares to which it relates and the amount paid-up thereon. Every
share certificate should also state the name of company, address of its registered
office and date of issue. In case of listed companies, the size, form and contents of
the share certificate are required to be approved by the concerned Stock Exchange
before its issue to the public.
Specifying authorised capital on share certificate
It is not obligatory to publish the authorised capital of the Company on its share
certificates. However, where the Company does so, it would be mandatory in terms of
Section 148, to publish the subscribed and the paid-up capital also. Paid-up capital
for the purpose would mean the capital paid-up at the time of the issue of the share
certificate [DCA Circular No. 8/35 (147)/66-CL-V, dated 13th January, 1967].
Issue of Share Certificates
The Companies (Issue of Share Certificate) Rules, 1960 provides that when a


company issues any capital, no share certificate shall be issued except:
(i) in pursuance of a Board resolution and;
(ii) on surrender to the company of its letter of allotment or its fractional
coupons of requisite value, save in cases of issues against letters of
acceptance or of renunciation, or in cases of issue of bonus shares.
Provided that if the letter of allotment is lost or destroyed the Board may impose
such reasonable conditions as to evidence and indemnity and the payment of out-of-
pocket expenses incurred by the company in investigating evidence as the Board
thinks fit.
Issue of Duplicate Share Certificate
Section 84(4) confers the right to obtain the duplicate share certificate when the
original certificate is lost or destroyed or has become mutilated and issue of such
certificate is governed by rules of the Companies (Issue of Share Certificate) Rule,
1960.
Section 84(2) provides that a certificate may be renewed or duplicate of a
certificate may be issued if such certificate is proved to have been lost or destroyed,
or having been defaced or mutilated or torn is surrendered to the company.
No share certificate shall be issued either in exchange for those which are sub-
divided or consolidated or in replacement of those which are defaced, torn, mutilated
or worn out, or where the cages in the reverse of the certificate for recording transfers
have been fully utilised, unless:
(1) the consent of the Board is given (in case of loss or destruction of
certificate);
(2) the certificate in lieu of which it is being issued is surrendered to the
company and is cancelled;
(3) payment of fees for issue of duplicate certificate is made by the shareholder
(not exceeding Rs. 2 per share certificate);
(4) proper evidence and indemnity to the satisfaction of the company is
furnished;
(5) out-of-pocket expenses estimated to be incurred by the company in
investigating the evidence, as the Board may think fit, are deposited with the
company, in case of lost or stolen share certificates the cost of public notice
shall also be borne by the member;
(6) the words Duplicate issued in lieu of Share Certificate No. .../Sub-divided/
Replaced/Lost/Consolidation of share (as the case may be) are rubber
stamped on its face and also on the counterfoil. The word Duplicate may
either be rubber stamped or punched;
(7) Mutilated, defaced or torn certificates surrendered shall be defaced by a
cancellation mark and destroyed after three years with the authority of
Board.
Once a duplicate certificate is issued, the original certificate becomes extinct. In


order to safeguard the original shareholder from any jeopardy, it is necessary under
Sub-section (2)(a) of Section 84 that there is proof of the fact that the original has been
lost or destroyed. It has been held by the Company Law Board that the original cannot
be said to have been lost or destroyed as long as the existence of the original is known.
Hence, as a matter of precaution public notice of the loss must be given whenever
duplicate certificate is sought. This will be particularly more necessary where a
substantial number of share certificates are involved. No company should take this
precaution lightly. An issue of duplicate certificates was held to be not in accordance
with Section 84(2) where the precautions prescribed by the sub-section for ascertaining
genuineness of loss were not observed. The purpose of the sub-section is to safeguard
the share market from fraudulent dealings in duplicates. [Tracstar Investments Ltd. v.
Gordon Woodroffe Ltd., (1996) 87 Com. Cases. 941 (CLB-Mad)]. A Division Bench of
the Madras High Court affirmed this decision in Shoe Specialities Ltd. v. Tracstar
Investment Ltd., (1997) 88 Com. Cases. 471 (Mad-DB) and added that where matters
are so extremely complicated that the directors themselves are not able to find out the
reality as to the loss of documents and the genuineness of the claims for duplicates, the
company should refer the matter to a decision in a regular civil suit where truth of the
matter can be ascertained to a greater certainty.
If the company refuses to issue a duplicate share certificate, the remedy of the
aggrieved person is to file an application in terms of Rule 9 and Rule 11(b) of the
Companies (Court) Rules, 1959. The application has to be filed in the High Court and
there must be a specific prayer for a direction to the concerned company to issue a
duplicate share certificate.
If a certificate is renewed or a duplicate is issued with fraudulent notice, a fine
upto Rs. 10,000/- shall be imposed on the company and every officer who is in
default shall be punishable with imprisonment for a term which may extend to six
months or with fine which may extend to Rs. 10,000/- or with both (Section 84). if any
person impersonates or obtains a certificate fraudulently he may be liable for
imprisonment up to three years and also with fine (Section 116).
In case of loss of share certificates a newspaper advertisement can be issued by
a company only upon receipt of an application by the registered shareholder or in
case of his death by the legal representatives of the deceased stating loss of original
share certificates and asking for issue of duplicate share certificates.
In Chambal Fertilizers & Chemicals Ltd. v. Bukka Ramulu, the company issued
duplicate share certificate on receipt of a complaint for loss of two share certificates
for 200 shares and an affidavit and indemnity bond duly executed. Subsequently, the
company received these share certificates lodged for transfer alongwith the relevant
transfer documents. Held, the purchasers should be indemnified by the company
towards the purchase consideration. Further, the company having already issued
duplicate shares, the original share certificates were directed to be cancelled.
Where company issuing duplicate certificates was aware of the whereabouts of
original share certificates, same could not be deemed to have been lost and,
therefore, issue of duplicate certificates was irregular being not in conformity with
Section 84(2).
As long as the whereabouts of the certificates are known, the same cannot be


deemed to have been lost within the meaning of this sub-section [Tracstar
Investments Ltd. v. Gordon Woodroffe Ltd. [1996] 7 SCL 211 (CLB-Mad)].
Action of company issuing duplicate share certificates without making enquiry
about original certificates would be in violation of Section 84(2). [Shoe Specialities
Ltd. v. Tracstar Investments Ltd. [1996] 10 SCL 121 (Mad.)].
Company Law Board has no jurisdiction to issue direction to Company to issue
duplicate share certificates. The provision for issue of duplicate share certificate has
been prescribed under Rule 4(3) of the Companies (Issue of Share Certificate) Rules,
1960. Therefore, the relief of issue of duplicate share certificates falls out side the
ambit of Section 113 of the Companies Act, 1956. Ajit Jayantilal Sheth v. Shriram
Transport Finance Co. Ltd. [(2006) 72 SCL 359 (CLB)], [Decided on 30.5.2006].
Sealing and Signing of Certificate
Accordance to Rule 6 of the Companies (Issue of Share Certificate) Rules, 1960,
every share certificate shall be issued under the common seal of the company, which
shall be affixed in the presence of (i) two directors or persons acting on behalf of the
directors under a duly registered power of attorney; and (ii) the secretary or some
other person appointed by the Board for the purpose. The two directors or their
attorney/attornies and the secretary or other person shall sign the share certificates.
Provided that, if the composition of the Board permits, at least one of the aforesaid
two directors shall be a person other than the managing or whole-time director.
Explanation: For the purpose of this Rule, a director may sign a share certificate
by affixing his signatures thereon by means of any machine, equipment or other
mechanical means such as engraving in metal or lithography, but not by means of a
rubber stamp, provided that the director shall be responsible for the safe custody of
such machine, equipment or other material used for the purpose.
Records of Certificates
(1) Particulars of every share certificate issued in accordance with Rule 4, sub-
rule (1) shall be entered in the Register of Members in a form as near
thereto as circumstances admit against the name(s) of person(s) to whom it
has been issued, including the date of issue.
(2) Particulars of every share certificate issued in accordance with Rule 4, sub-
rules (2) and (3) shall be entered in a Register of Renewed and Duplicate
Certificates indicating against the name(s) of the person(s) to whom the
certificate is issued the number and the date of issue of the share certificate
in lieu of which the new certificate is issued, and the necessary changes
indicated in the Register of Members by suitable cross-reference in the
Remarks column.
(3) All entries made in the Register of Members or the Register of Renewed and
Duplicate Certificates shall be authenticated by the secretary or such other
person as may be appointed by the Board for the purpose of sealing and
signing the share certificate under the provisions of Rule 6.


Whether Share Certificate an Official Publication
The question whether a share certificate is an official publication within the
meaning of Section 147(1)(c) was considered by the Department of Company Affairs
(Now, Ministry of Corporate Affairs) and the Department has clarified vide Circular
No. 3/73[8/10(47)]/72-CL-V dated 3.2.1973 as follows:
It will be seen that in terms of Section 82, the shares in a company are movable
property transferable in the manner provided in the articles of the company.
Section 84 provides that a certificate under the common seal of the company
specifying any share held by any member shall be prima facie evidence of the title of
the member to such share.
Thus, shares are movable property transferable in the manner provided in the
articles of the company and that the share certificates are certificates of title and are
movable property but are not publications in the nature of prospectus, balance sheet,
profit and loss account, notice or advertisement.
The conclusion reached, therefore, is that the share certificate is not an official
publication within the meaning of Section 147 (1)(c).
Legal Effect of Share Certificate
We have already stated that a share certificate is prima facie evidence to the title
of the person whose name is entered on it. It means that the share certificate is a
statement by the company that the moment when it was issued, the person named in
it was the legal owner of the shares specified in it, and those shares were paid-up to
the extent stated. It does not constitute title but it is merely evidence of title. It is,
however a statement of considerable importance, for it is made with the knowledge
that other persons may act upon it in the belief that it is true and this fact brings into
operation the doctrine of estoppel. As a result, a share certificate once issued by the
company binds it in two ways, namely:
(a) by estoppel as to title, and
(b) by estoppel as to payment.
Estoppel as to Title: As observed by Cockburn C.J., a share certificate is a
declaration by the company to all the world that the person in whose name it is made
out and to whom it is given, is a shareholder in the company. In other words, the
company holds him out as the holder of the shares mentioned therein and is,
therefore, estopped from denying his title to those shares.
(i) In Re. Bahia and Skin Francisco Rail Co. (1868) L.R. 3 Q.B. 584, T a
registered shareholder, left her shares with her broker. A forged deed of
transfer of these shares to S together with the certificate was lodged with
the company for registration. In the usual way the Secretary wrote to T
informing her of the proposed transfer and in the absence of a reply
registered S, issuing him a certificate and removing Ts name from the
register. S sold the shares to B who relied on the certificate and Bs name
was placed on the register. Later the forgery was discovered and the
company was ordered to restore Ts name as holder of the shares. In an


action for damage by B. it was held that B was entitled to recover
damages from the company for the loss of the shares as B had relied on
the companys statement as to title made in the certificate. The measure of
damages would be the value of the shares at the time the company refused
to recognise B as holder plus interest from that time.
(ii) In Re. Ottos Kopje Diamond Mines (1993) 1 Ch. 618 A bought from B
4,000 shares in a company on the faith of certificate issued by the company.
A tendered to the company a transfer deed from B to himself duly executed
together with the share certificate. The company discovered that the
certificate in the name of B had been fraudulently obtained and refused to
register the transfer. It was held that though the certificate was not a
warranty of title upon which A could maintain against the company, it
estopped the company from disputing As right to be registered. A could
maintain against the company, it estopped the company from disputing As
right to be registered. A could claim damages from the company to the
extent of the value of the shares at the time, it refused to register.
In another case, an individual applied for shares in a company. An officer of the
company fraudulently transferred 800 shares in favour of the individual inspite of the
fact that he owned no shares, the company registered the transfer and issued a new
certificate to the applicant of shares. The company was liable for damages to him.
It should be noted that in case of a controversy as to whether a person is a
member on the basis of the certificate as issued to him though his name may not be
placed in the Register of Members, it has been held that the Register of members
could be subject to manipulation and membership evidenced through the share
certificate would get precedence.
Estoppel as to Payment: If the certificate states that on each of the shares full
amount has been paid, the company is estopped as against a bona fide purchaser of
the shares, from alleging that they are not fully paid.
In Bloomenthal v. Ford, (1897) A.C.: 156 B, lent Rs. 1,000 to a company on the
security of 1,000 shares which were issued to him as fully paid. In fact nothing had
been paid on them. In the winding up of the company it was held that neither the
company nor the liquidator could deny that the shares were fully paid and therefore
B could not be called upon to pay anything on those shares. When a company
issues a share certificate, that certificate creates an estoppel so that the company
cannot afterwards deny, as against a person who has acted on the faith of the truth of
the matter stated in it.
Despite everything, a certificate must be issued by someone who has the
authority. Where in one case, the secretary forged the signature of two directors in a
company, the company had refused to register the holder of shares as a member.
Further a certificate is not an evidence as to the equitable interest in shares. Also,
where an individual is aware of the false statements in a certificate, he will not be
entitled to claim an estoppel.
9. SHARE WARRANT


A share warrant is a bearer document of title to the specified shares. As per
Sections 114 and 115 of the Companies Act, a public company, if authorised by its
articles, may, in respect of fully paid shares, issue under its common seal, and with
the previous approval of the Central Government, a share warrant stating that the
bearer thereof is entitled to the shares specified therein. The payment of future
dividends are made by coupons or otherwise. Shares specified in the warrant are
transferable like negotiable instruments by mere delivery of the warrant. A private
company cannot issue share warrants.
Position of the Holder of a Share Warrant
When a share warrant is issued in respect of any shares, the company must
strike out from the register of members the names of the members who held the
shares, now comprised in the share warrant and should enter into the register:
(a) the fact of the issue of share warrant;
(b) a statement of the shares included in the warrant, distinguishing each share
by its number; and
(c) the date of the issue of the warrant.
Since the name of the shareholder has been removed from the register of
members, the company is no more in a position to know who the shareholder is and
who is entitled to the dividends. For this reason, dividend coupons are attached to
each share warrant showing the dates on which dividends, if declared, will become
payable during several years following the issue of the share warrant, and the
dividend will be paid on such date to the person who produces the appropriate
coupon.
The holder of a share warrant is not strictly a member of the company, but the
articles usually provide that the holder of a share warrant could be treated as member
of the company and can attend the company meetings, have the powers of voting
etc., as if he was on the register of members provided he surrenders or deposits the
share warrants against a receipt within the stipulated time (at least two days before
the meeting). But the holder of a share warrant cannot qualify himself as a director of
the company (in cases where qualification shares are required for directorship).
Section 115(2) of the Act entitles the bearer of a share warrant to surrender it for
cancellation and, on payment of a fee prescribed by the Board of directors and
subject to the articles of the company, to have his name entered as a member in the
register in respect of the shares which were included in the warrant and to have a
share certificate issued in his name.
Section 115(6) provides that if default is made in complying with the provision of
Section 115, the company and every officer in default shall be punishable with fine
which may extend to Rs. five hundred for every day during which the default
continues.
Share Certificate and Share Warrant Distinguished
(a) The holder of a share certificate is a registered member of the company,


while the bearer of a share warrant is not.
(b) While holder of a share certificate is essentially a member of the company,
the bearer of a share warrant can be a member only if the articles so provide
and only for the purposes as defined in the articles.
(c) The issue of a share certificate does not require the approval of the Central
Government. While share warrant can be issued only if the articles authorise
its issue and the Central Government has accorded its previous approval.
(d) Both public and private companies must issue share certificates, but share
warrants can be issued only by public companies.
(e) A share certificate is issued in respect of partly or fully paid shares, whereas
a share warrant can be issued only in respect of fully paid shares.
(f) The shares specified in a share certificate can be transferred by the
execution of a transfer deed and its delivery along with the share certificate
to the transferee to enable him to get himself registered as a member, but in
the case of a share warrant the shares are transferable by mere delivery of
the warrant.
(g) A share warrant is a negotiable instrument, but a share certificate is not a
negotiable instrument.
(h) The holder of a share warrant is not qualified as a director of the company
(where qualification shares are prescribed) but the holder of share certificate
is so qualified.
(i) The holder of a share certificate can present a petition for winding up, but
the holder of a share warrant cannot do so.
(j) Stamp duty is payable on transfer of shares specified in a share certificate,
but no stamp duty is payable on transfer of a share warrant, although heavy
stamp duty is payable at the time of issue of share warrant itself, whereas in
the case of share certificate a nominal stamp duty is payable.
(k) Since a share warrant is a negotiable instrument, previous permission of the
Reserve Bank of India is also required for issuing share warrants.
10. PERSONATION OF SHAREHOLDER
Section 116 of the Companies Act provides that if any person deceitfully
personates an owner of any share or interest in a company, or of any share warrant
or coupon issued in pursuance of the Companies Act, and thereby obtains or
attempts to obtain any such share or interest or any share warrant or coupon, or
receives or attempts to receive any money due to any such owner, he shall be
punishable with imprisonment for a term extending to three years and shall also be
liable to fine.
THE COMPANIES (ISSUE OF SHARE CERTIFICATE) RULES, 1960
1. Short Title
These rules may be called the Companies (Issue of Share Certificate) Rules,
1960.
2. Effect of Rules


These rules shall have effect notwithstanding anything to the contrary contained
in the Articles of Association of a company.
3. Definitions
In these rules, unless the context otherwise requires:
(a) Act means the Companies Act, 1956 (1 to 1956);
(b) Board means the board of directors of a company or a committee thereof
consisting of not less than three directors where the total number of directors
exceeds six, and not less than two directors where the total number does
not exceed six;
Provided that, to the extent that the composition of the Board of directors
permits of it, at least half of a number of members of the Committee shall
consist of directors other than (i) a managing or whole time directors;
(c) Seal means the common seal of a company.
4. Issue of Share Certificate
1. When a company issues any capital, no certificate of any share or shares in
the company shall be issued except:
(i)In pursuance of a resolution passed by the Board; and
(ii)On surrender to the company of its letter of allotment or its fractional coupons
of requisite value, save in cases of issues against letters of acceptance
or of renunciation, or in cases of bonus shares;
Provided that if the letter of allotment is lost or destroyed the Board may
impose such reasonable terms, if any, as to evidence and indemnity and the
payment of out of pocket expenses incurred by the company in investigating
evidence, as the Board thinks fit.
2. No certificate of any share or shares shall be issued either in exchange for
those which are sub-divided or consolidated or in replacement of those
which are defaced, torn or old, decrepit, worn out, or where the cases in the
reverse for recording transfers have been duly utilised, unless the certificate
in lieu of which it is issued is surrendered to the company;
Provided that the company may charge such fee, if any, not exceeding Rs. 2
per certificate issued on splitting or consolidation of share certificate or in
replacement of share certificate that are defaced or torn, as the Board thinks fit.
3. No duplicate share certificate shall be issued in lieu of those that are lost or
destroyed without the prior consent of the Board or without payment of such
fees, if any, not exceeding Rs. 2, and on such reasonable terms, if any as to
evidence and indemnity and the payment of out of pocket expenses incurred
by the company in investigating evidence, as the Board thinks fit.
4. The companies listed with OTC Exchange of India, a company registered
under Section 25 of the Companies Act, 1956 may issue a jumbo share


certificate in favour of the Custodian and issue counter receipts to every
allottee with respect to their holding.
Provided that no counter receipts shall be issued after the 28th February,
1999.
Explanation: For purpose of Sub-rule (4), Custodian means an entity
carrying on post trade activities such as, settlement of purchases and sales,
information reporting, safe keeping of securities and/or participating in any
clearing system for and on behalf of the client to effect deliveries of the
securities.
5. Forms of Certificates
(1) Every certificate shall specify the name(s) of the person(s) in whose favour
the certificate is issued, the shares to which it relates and the amount paid-
up thereon.
(2) When any certificate is issued in any of the circumstances specified in rule
4, sub-rule (2) it shall state on the face of it and against the stub or
counterfoil to the effect that it is Issued in lieu of share certificate no./sub-
divided/ replaced/on consolidation of shares.
(3) When a certificate is issued in any of the circumstances specified in rule 4
sub-rule (3), it shall state on the face of it and against the stub or counterfoil
to the effect that it is a duplicate issued in lieu of share certificate
No.......................... Further, the word duplicate shall be stamped or
punched in bold letters across the face of the share certificate.
6. Sealing and Signing of Certificate
Every share certificate shall be issued under the seal of the company, which shall
be affixed in the presence of (i) two directors or persons acting on behalf of the
directors under a duly registered power of attorney; and (ii) the secretary or some
other person appointed by the Board for the purpose. The two directors or their
attorneys and the secretary or other person shall sign the share certificate.
Provided that, if the composition of the Board permits of it, at least one of the
aforesaid two directors shall be a person other than a managing or whole-time director.
Explanation: For the purpose of this rule, a director may sign a share certificate
by affixing his signature thereon by means of any machine, equipment or other
material used for the purpose.
7. Record of Certificates Issued
(1) Particulars of every share certificate issued in accordance with rule 4, sub-
rule (1) shall be entered in the Register of Members maintained in the form
set out in the appendix annexed hereto or in a form as near thereto as
circumstances admit against the name(s) of person(s) to whom it has been
issued, indicating the date of issue.
(2) Particulars of every share certificate issued in accordance with rule 4, sub-
rules (2) and (3) shall be entered in a Register of Renewed and Duplicate


Certificates indicating against the name(s) of the person(s) to whom the
certificate is issued, the number and date of issue of the share certificate in
lieu of which the new certificate is issued, and the necessary changes
indicated in the Register of Members by suitable cross-references in the
Remarks column.
(3) All entries made in the Register of Members or the Register of Renewed and
Duplicate Certificates shall be authenticated by the secretary or such other
person as may be appointed by the Board for purposes of sealing and
signing the share certificate under the provisions of rule 6.
8. Printing of Forms
All blank forms to be used for issue of share certificates shall be printed and the
printing shall be done only on the authority of a resolution of the Board. The blank
form shall be consecutively machine-numbered and the forms and the blocks,
engravings, facsimiles and hues relating to the printing of such forms shall be kept in
the custody of the secretary or such other person as the Board may appoint for the
purpose; and the secretary or other person aforesaid shall be responsible for
rendering an account of these forms to the Board.
9. Custody of Books and Documents
(1) The following persons shall be responsible for the maintenance,
preservation and safe-custody of all books and documents relating to the
issue of share certificates except the blank forms of share certificates
referred to in Rule 8, namely:
(a)[omitted]
(b)[omitted]
(c)[omitted]
(d)where the company has a managing director, the managing director; and
(e)where the company has no managing director, every director of the company.
(2) All books referred to in sub-rule (1) shall be preserved in good order
permanently, and all certificates surrendered to a company shall
immediately be defaced by the word cancelled being stamped or punched
in bold letters and may be destroyed after the expiry of three years from the
date on which they are surrendered, under the authority of a resolution of
the Board and in the presence of a person duly appointed by the Board in
this behalf.
Provided that nothing in this sub-rule shall apply to cancellation of the certificate
of security under Sub-section (2) of Section 6 of the Depositories Act, 1996 when
such certificate are cancelled in accordance with Sub-regulation (5) or Regulation 54
of SEBI (Depositories and Participants) Regulations, 1996.
11. CALLS AND FORFEITURE
Calls
A company issuing shares to its members may call the money due on shares at


intervals depending upon the requirements for funds for implementing the project and
the shareholders also prefer to pay the nominal value on their shares in installments
as and when demanded by the company.
A call is a demand, by the company in pursuance of a Board resolution and in
accordance with the articles of the company, upon its shareholders to pay the whole
or part of the balance still due on each class of shares allotted or held by them made
at any time during the life of the company. A call may also be made by the liquidator
in the course of winding up of the company. The amount payable in application on
each share shall not be less than five per cent of the nominal amount of the share.
The balance may be payable as and when called for in one or more calls. The
prospectus and the articles of a company generally specify the amount payable at
different times, as call(s).
Under Section 36(2) of the Act all moneys payable by any member to the
company on the shares held by him under the memorandum or articles is a debt due
from him to the company. In the event of default in payment of a valid call, the
company can enforce payment of such moneys by legal process and forfeit the
shares in case the call is not paid. The liability of members is enforceable only after a
proper notice which is called call letter or call notice as 1st, 2nd and final or so on, is
given to him in accordance with the articles.
Requisites of a valid call
1. Board of Directors to make call(s) on shares
The power to make calls is exercised by the Board in its meeting by means of a
resolution [Section 292(1)(a)]. The Board, in making a call, must observe the
provisions of the articles, otherwise the call will be invalid, and the shareholder is not
bound to pay. A proper notice must be given, and the notice must specify the amount
called up and manner i.e. the date for payment and place and to whom it is to be
paid. It may be emphasised that the time and place at which the call is to be paid are
essential ingredients of a valid call.
Apart from this rule, in making call, care must be taken that the directors making
it are duly appointed and qualified; the meeting of the directors has been duly
convened; proper quorum was present, and that the resolution making the call was
duly passed and specifies the amount of the call, the time and place of payment-for
these are the essence and to whom the call is to be paid (Palmers Company Law).
A proper resolution must be passed at a meeting of the Board, and proper entry be
made in the Minutes books of the company.
The Board resolution must state the amount, time and place of payment. Otherwise,
the resolution will be defective and the call will be invalid. In E & W Insurance Co. Ltd. v.
Mrs. Kamala Mehta, A.I.R. 1956 Bom. 537, the directors of the company decided to
make call and passed two resolutions therefor. None of the resolutions specified the date
and time of payment. The blanks were filled subsequently by the secretary who sent the
notice. The call notice was held to be invalid.
However, every small irregularity may not render a call invalid. As in the case of
Shiromani Sugar Mills Ltd. v. Debi Prasad AIR 1950 All 508, where the articles


provide that the acts of directors would be valid notwithstanding the fact that it was
afterwards discovered that their appointment was defective it was held that a call
made by such directors was a valid one.
2. Call(s) to be made bonafide in the interest of the company
The power to make call is in the nature of trust and must be exercised only for
the benefit of the company, and not for the private ends of the directors. If the call is
made for the personal benefit of directors, the call will be invalid. In Alexander v.
Automatic Telephone Co., (1900) 2 Ch. 56, the directors of the company paid nothing
on their shares but did not disclose this fact to the shareholders and called on them to
pay certain amount partly as allotment money and partly as call money. The directors
were held guilty of breach of trust and the call was held invalid. In a certain case, the
directors realising that the company was in financial difficulties made a call only to
enable them to draw their own remuneration, the call was held to be an invalid one
and the directors were bound to refund the remuneration drawn by them.
3. Call(s) must be made on uniform basis
According to Section 91 of the Act, calls on same class of shares must be made
on a uniform basis. Hence a call cannot be made only on some of the members
unless they constitute a separate class. In other words, there cannot be any
discrimination between shareholders of the same class as regards amount and time
of payment of call.
4. Notice of call(s)
The notice of call must specify the exact amount and time of payment. In
Shackleyford & Co. Dangerfield (1868) (R3 CP 407) the notice had specified the time
and amount to be paid as a call, it will be a valid call inspite of the fact that the form of
notice was an inaccurate one.
A call must be made by serving upon member formal notice in accordance with
the provisions of Section 53.
5. Time within which shares to be made fully paid-up
In case of an issue size below Rs. 500 crores, the company must ensure that the
shares are made fully paid-up within 12 months of the allotment, when the size of the
issue exceed Rs. 500 crores, the size on each call should not exceed 25% of the total
quantum of issue.
Usually Articles of association of companies provide for the manner in which calls
should be made. They follow the pattern set out in Regulations 13 to 18 of Table-A of
Schedule-I appended to the Companies Act, 1956.
(a) For each call at least 14 days notice must be given to members.
(b) An interval of thirty days is required between two successive calls and not
more than fifty per cent of the nominal value of shares can be called at one
time. However, companies may have their own articles and raise the limit.
(c) The Board of directors has the power to revoke or postpone a call after it is


made.
(d) Joint shareholders are jointly and severally liable for payment of calls.
(e) If a member fails to pay call money he is liable to pay interest not exceeding
the rate specified in the articles or terms of issue. The directors are free to
waive the payment of interest.
(f) If any member desires to pay the call money in advance, the directors may
at their discretion accept and pay interest not exceeding the rate specified in
the articles.
(g) A defaulting member will not have any voting right till call money is paid by
him.
The liability of the joint shareholders shall be joint and several (Section 43 of the
Indian Contract Act and Regulation 15 of Table A of the Companies Act, 1956).
Payment of calls otherwise than in cash Shares may be paid for in cash or in
kind or in any manner that has the effect of actual cash being received by the
company. A payment is an effective payment in moneys worth, if the consideration
given by way of payment is something which is bona fide recorded by the parties as
fairly representing the sum due to be discharged. However, in White Star Line Ltd., In
Re (1939) 9 Com. Cas 85 (CA), It was held that, the consideration given for all on
shares must not be colourable or illusory, but must amount to full payment of money's
worth. Thus, where in satisfaction of the debt of calls, the shareholder issued
deferred creditors certificates, which admittedly were worth less than their nominal
value, it was held that the calls had not been satisfied. But, in the absence of a fraud
in violation, the court may not interfere only on the ground of inadequacy of
consideration. In Alote Estate v. R.B. Seth Hiralal Kalyanmal [1970] 1 SCC 425,
shares were allotted in return for sugar cane growing land transferred to the
company. In the winding up of the company, it was alleged that the value of the land
was ten times less than the values of the shares allotted. The Supreme Court refused
to interfere. The learned judge said that there was no allegation of fraud. The facts
stated were related more to inadequacy of price or consideration and not to it (i.e.,
consideration) being illusory.
A debt due and owing by a banking company to a shareholder can be set-off
against outstanding calls so long as banking company is going concern - [Hind Iran
Bank Ltd. v. Raizada Jagan Nath Bali [1959] 29 Comp. Cas. 418 (Punj)].
Interest on calls due but not paid A member is generally made liable to pay
interest on the calls made but not paid. The rate of interest to be charged is as
specified in the Articles. Regulation 16 of Table A, in this regard provides:
"16 (1)If a sum called in respect of a share is not paid before or on the day
appointed for payment thereof, the person from whom the sum is due
shall pay interest thereon from the day appointed for payment thereof to
the time of actual payment at 5% per annum or at such lower rate, if
any, as the Board may determine.
(2)The Board shall be at liberty to waive payment of any such interest wholly or


in part."
Payment in advance of Calls
Section 92 of the Act provides that the directors may, if authorised by the articles,
allow shareholders to pay up the amount in whole or in part if due on their shares
before any call has been made and may pay interest on the amount so paid in
advance of calls. Where the interest is agreed to be paid, it may be paid out of the
capital, if profits are not available. The amount so paid is not refundable except in
winding up and such shareholders rank after creditors in respect of the advance, but
in priority to the other shareholders.
The effect of the payment in advance of calls is that the shareholders liability in
respect of the calls or call is extinguished. But they will not be entitled to any voting rights
in respect of the moneys paid in advance of the calls. When, however, the calls are made
and these moneys become presently payable, they will acquire the voting right.
Quantum and Interval between two calls Proviso to Regulation 13(1) to the
Table A of the Companies Act provides that no call shall exceed 25% of the nominal
value of the share or be payable at less than one month from the date fixed for the
payment of the last proceeding call. However, SEBI guidelines require the entire
amount to be called along with application in case of an offer for sale. If the
subscription money is proposed to be received in calls, the calls shall be structured in
such a manner that the entire subscription money is called within 12 months from the
date of allotment. If the investor fails to pay call money within 12 months, the
subscription money already paid may be forfeited. This condition is not applicable
where the issue size is above Rs. 500 crores as already stated.
Forfeiture of Shares
If a member fails to pay a valid call within the stipulated time, the company may
sue him for recovery of the amount of the call after waiting for a reasonable period.
But articles often provide for forfeiture of shares for non-payment of any call or
instalment of a call.
The power of forfeiture must be exercised bona fide and in the interest of the
company. It should not be collusive or fraudulent. In Re Esparto Trading Co. (1879)
12 Ch. D. 791, the forfeiture of shares was set aside, because it was found to have
been carried out at the request of a shareholder to relieve him of liability. Such a
forfeiture amounts to an abuse of power to forfeit and a fraud on other shareholders.
Forfeited shares become the property of the company. To this extent, forfeiture
involves a reduction in the paid-up capital till the shares are re-issued. Normally,
therefore, companies re-issue them. A company can re-issue forfeited shares at any
price provided that the total of the sum paid by the original owner of the shares
together with the re-issue price is not less than the par value. If the articles so
provide, the original shareholder shall remain liable for payment of unpaid calls for a
period of three years from the date of forfeiture. However, a company cannot recover
from him more than the difference between the amount payable and the amount
received on forfeited shares.
Meanwhile, the original holder may be discharged from all liability on the share,


except that he will be put on the Beneficiaries list in the event of the company going
into liquidation within one year of the cessation of his membership. Articles, usually
provide that where a share has been forfeited, the member shall be liable for payment
of the call, and this created a new obligation; he can be sued as an ordinary debtor.
In case, the defaulting shareholder approaches the Board to cancel the forfeiture,
the Board is empowered to cancel such forfeiture and claim the due amount with
interest.
When a forfeiture takes place, shareholder ceases to be a member
[Regulation 33(1) of Table A]. Regulation 33(2) further provides that the liability of a
person whose shares have been forfeited ceases if and when the company receives
payment in full of all such money in respect of the shares forfeited. If liquidation takes
place, the original holder shall remain liable as a past member to pay calls within one
year of forfeiture. Once a forfeiture takes place, the forfeited shares become the
property of the company.
The following rules may be noted in connection with forfeiture of shares:
1. Articles to Authorise - Shares can be forfeited for non-payment of any call, if
the articles authorize such forfeiture. As per Regulation 29 of Table A,
shares can be forfeited only against non-payment of any call, or instalments
of a call. The Articles of a company may, however, lawfully incorporate any
other grounds of forfeiture [Shah J. in Naresh Chandra Sanyal v. Calcutta
Stock Exchange Assn. Ltd. AIR 1971 SC 422]. Also, in the recent case of
Linkmen Services (P.) Ltd. v. Tapas Sinha [(2008) 83 SCL 143 (CAL)], a
company amended its articles of association to the effect of (i) forfeiting the
shares of any defaulting member and (ii) expelling member who desert the
company by not doing business with it. The respondents challenged the
above amendments on the grounds of oppression. The CLB held that the
articles of company could not empower to forfeit the shares on account of
dues other than unpaid calls. The appellant company appealed to the High
Court. Allowing the appeal the Court held that forfeiture on grounds as
mentioned in the articles of company is not alien to corporate jurisprudence
as the CLB found in the impugned judgment. It is a power that the articles
can confer. But, where the articles authorise the directors to forfeit the
shares of a shareholder, who commences an action against the company or
the directors, by making a payment of the full market value of his shares, it
was held that such a clause was invalid as it was against the rights of a
shareholder. [Hope v. International Finance Society (1876) 4 Ch. D 598].
Where two directors were allotted qualification shares, without any payment,
and these shares were forfeited by a Board resolution passed at the request
of those two directors, the forfeiture was held to be invalid and the directors
were held liable to pay the nominal value of the shares. [Re Exparto Trading
Co. [1879] 12 Ch. D 191]. Where power is given in the articles, it must be
exercised in accordance with the regulation regarding notice, procedure and
manner stated therein, otherwise the forfeiture will be void.
2. Resolution for Forfeiture - Article 31 of the Table A provides that if the defaulting
shareholder does not pay the amount within the specified time as required by
the notice, the directors may pass a resolution forfeiting the shares.


3. Proper Notice - Before the shares of a member are forfeited, a proper notice
to that effect must have been served. Regulation 30 of Table A provides that a
notice shall name a further day (not less than 14 days from the date of service
of the notice) on or before which the payment is to be made. The notice must
also mention that in the event of non payment, the shares will be liable to be
forfeited. A proper notice is a condition precedent to the forfeiture, and even
the slightest defect in the notice will invalidate the forfeiture. [Public Passenger
Services Ltd. v. M.A. Khader [1966] 1 Comp. LJ1].
The notice should mention that the payment of interest should be made from
the date of the call. [Johnson v. Lyttles Iron Agency [1877) Ch D 687].
Accidental non receipt of notice of forfeiture by the defaulter is not a ground
for relief against forfeiture regularly effected. [Sparks v. Liverpool Water
Works Co., [1807] 13 Ves 428].
4. Power of forfeiture must be exercised bona fide and for the benefit of the
company - The power to forfeit be exercised bona fide and for the benefit of
the company. The power must be used in order to coerce reluctant
shareholders into paying their calls. The power of forfeiture cannot be
exercised to relieve unwilling shareholders from the liability of making the
payment. Such a shareholder continues to be responsible for the unpaid
part of the shares. In an interesting case, a shareholder was induced to
subscribe for shares by misrepresentation. The directors decided to forfeit
his shares. The court held that the decision was incorrect. The directors
should choose to strike off the members name from the Registrar of
Members as was done in the case of Rease River Silver Mining Co. v. Smith
(1869) LE 4 HL 64.
If Articles authorise, the forfeiture shall include forfeiture of all dividends declared
in respect of the forfeited shares and such dividend is not actually paid before the
forfeiture of the shares.
Even a slight irregularity in effecting a forfeiture would be fatal and render the
forfeiture null and void. The aggrieved shareholder may bring an action for setting
aside the forfeiture as well as for damages. Mere waiver or acquiescence would not
deprive him of his rights against an invalid forfeiture of his shares. [Sha Mulchand &
Co. v. Jawahar Mills Ltd. [1953] 23 Comp. Cas 1 (SC)].
After shares have been forfeited, no further notice intimating forfeiture is required.
[Sha Mulchand & Co. v. Jawahar Mills (supra)].
Forfeiture of fully paid shares - The clauses of Table A on forfeiture do not make
specific provision for forfeiture of fully paid up shares. On the other hand in Shyam
Chand v. Calcutta Stock Exchange Assn. [1945] 2 I.L.R. Cal 313 fully paid up shares
could be forfeited in cases like expulsion of members where the articles authorise.
In any case, right of recovery of call money expires three years after the date of
allotment.
Allotment Money/Premium Payable on Shares - Application of Provision relating to
Calls/Forfeiture


Generally, articles of association of companies will, on the lines of Regulations -
17 and 35 of Table-A appended to the Companies Act, 1956 provide that the
provisions relating to calls and forfeiture of shares for non-payment thereof will apply
to all moneys which by the terms of issue of the shares become payable on allotment
or at any fixed date, whether on account of the nominal value of the share or by way
of premium.
Re-issue of Forfeited Shares
Shares forfeited by a company may either be cancelled or re-issued to another
person at the discretion of the Board. Generally, such shares are re-issued at a
discount which cannot exceed the amount already paid on such shares. This is done
by a Board resolution.
After the money due is received from the new member(s), the company executes
a transfer deed and issues a share certificate, and if the original holder has already
surrendered the share certificate, it is duly transferred, otherwise after a public notice
in a newspaper, a new share certificate is issued.
If the shares are re-issued at a price more than the face value, the excess of the
proceeds of sale is not payable to the former owner, if the articles provide otherwise
(Calcutta Stock Exchange Assn. Ltd Re AIR 1957 Cal 438). The excess of the
proceeds so retained shall constitute a premium and must therefore be transferred to
the securities premium account. However, in the case of Naresh Chandra Sanyal v.
Calcutta Stock Exchange Ass. Ltd., AIR 1971 SC 422, Supreme Court held that,
where the articles are silent with regard to such surplus, the right of a company upon
the forfeiture and sale of forfeited shares is to use the proceeds for discharging the
liability for which the forfeiture was effected and if there is any balance, it belongs to
the defaulter and cannot be appropriated by the company.
Where shares are sold for non payment of calls, the purchaser is liable to a fresh
call in respect of the total amount of the prior calls. But, if any amount is recovered
from the ex-holder in respect of the calls, the purchaser will be entitled to the benefit
of any amount so recovered. Likewise, any payments by the purchaser will reduce
the liability of the ex-holder.
Where the forfeited shares are re-issued while credit will be given for money
already received in respect of them, the new shareholders will not only be liable for
the balance amount remaining on the shares but he will also not be entitled to voting
rights so long as calls payable by the original shareholder remain unpaid, if the
companys articles so provide, as stated in Section 181.
A listed company for reissuing forfeited shares should comply with the relevant
clause the listing agreement and due approval of the regional stock exchange and
others as well.
No return of allotment in respect of re-issue of Forfeited Shares - No return of
allotment of the shares re-issued need to be filed with the Registrar [Section 75(5)].
Such re-issue, in fact, cannot be called allotment.





LESSON ROUND-UP
Allotment means the act of appropriation by the Board of directors of the
company of a certain number of shares to persons who have made applications
for shares.
The allotment should be made by proper authority, within a reasonable time,
should be absolute and unconditional, must be communicated, should be against
application only and should not be in contravention of any other law.
The Companies Act lays down certain conditions under various sections to be
fulfilled before a company can proceed to allot shares such as making an
application for getting the securities listed u/s 73, filing prospectus or statement in
lieu of prospectus before allotment, minimum subscription, no allotment until date
of opening of subscription list.
If the allotment is made without complying with the conditions as discussed
above, allotment is said to be irregular and it will result to the consequences
depending upon the nature of irregularity.
After allotment of shares, a return of allotment in the prescribed e-form 2 is
required to be filed with Registrar of Companies within 30 days of allotment of
shares.
A certificate under the common seal of the company is prime facie evidence of
the title of the member to the shares specified therein. Companies (issue of
shares certificate) Rules, 1960 deals with the rules relating to issue of share
certificate by the company.
Every share certificate shall be issued under the common seal of the company
affixed in presence of two directors and the secretary. Two directors or their
attornies and the secretary shall sign the share certificates, if the composition of
the board permits it and at least one of the aforesaid two directors shall be a
person other than a managing or whole-time director.
Share certificate is not an official publication within the meaning of
Section 147(1)(c).
A share warrant is a bearer document of title to the specified shares.
With previous approval of Central Government and if authorized by the articles, a
public company may issue share warrants.
A call is a demand by the company upon its shareholders to pay the whole or part
of the balance still due on each class of shares allotted, made at any time during
the life of the company.
If a member fails to pay a valid call within the stipulated time, the company may
exercise the power to forfeit the shares.
Shares forfeited by a company may either be cancelled or re-issued to another
person at the discretion of the Board.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these are not to be
submitted for evaluation).
1. What is the significance of a Share Certificate?
2. What do you mean by a Split Certificate?


3. A share certificate is lost. What are the provision under the Companies Act,
1956 and the Companies (Issue of Share Certificate) Rules, 1960 for the
issue of a duplicate share certificate?
4. Explain the legal effects of a share certificate citing case laws.
5. Is the share certificate an official publication? Give reasons for your answer.
6. What is allotment? State the statutory provision regarding allotment? Can
allotment be made on an oral application?
7. Write short notes on:
(a)Return of Allotment
(b)Irregular Allotment
(c)Minimum Subscription
(d)Irregular allotment
(e)Share certificate
(f)Share warrant.
8. Write the difference between the following:
(i)Notice of allotment
(a) under allotment of Physical shares,
(b) under allocation in Demat mode.
(ii)Process of holding of shares in Physical and Demat mode.
(iii)Maximum time limit of allotment of shares under Physical and Demat issue of
shares.
9. What is forfeiture of shares and the rules to be followed for the same? Can
the forfeited shares be re-issued?


Suggested Readings:
1. A Guide to Companies Act A. Ramaiya
2. SEBI (Disclosure and Investor Protection) Guidelines, 2000
3. Company Law & Practice A.K. Majumdar & Dr. G.K. Kapoor










STUDY XII
FINANCIAL STRUCTURE AND MEMBERSHIP - VII
MEMBERSHIP IN A COMPANY

LEARNING OBJECTIVES
Members of a Company play very important role in the corporate world. After going
through this chapter, students will be able to understand who are members, how one
can acquire membership, how can one cease to be a member. Also, what are the
rights and liabilities of a member will be clear to the students.
This chapter covers the following topics:
Who are members
Modes of acquiring membership
Cessation of membership
Register of members
Rights and liabilities of members
1. WHO ARE MEMBERS?
A company is composed of members, though it has its own entity distinct from
members. The members of a company are the persons who, for the time being,
constitute the company, as a corporate entity.
In the case of a company limited by shares, the shareholders are the members.
The terms members and shareholders are usually used interchangeably, being
synonymous, as there can be no membership except through the medium of
shareholding. Thus, generally speaking every shareholder is a member and every
member is a shareholder. However, there may be exceptions to this statement, e.g.,
a person may be a holder of share(s) by transfer but will not become its member until
the transfer is registered in the books of the company in his favour and his name is
entered in the register of members. Similarly, a member who has transferred his
shares, though he does not hold any shares yet he continues to be member of the
company until the transfer is registered and his name is removed from the register of
members maintained by the company under Section 150 of the Companies Act,
1956.
In Herdilia Unimers Ltd. v. Renu Jain [1995] 4 Comp. LJ. 45 (Raj.), 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 whether the allottee received the shares or not.
In a company limited by guarantee, the persons who are liable under the
guarantee clause in its Memorandum of Association, are members of the company.
In an unlimited company, the members are the persons who are liable to the
company, each in proportion to the extent of their interests in the company, to
contribute the sums necessary to discharge in full, the debts and liabilities of the
company, in the event of its being wound-up.


Definition of Member
According to Section 41 of the Companies Act, 1956:
(1) The subscribers of the memorandum of a company shall be deemed to have
agreed to become members of the company, and on registration, shall be
entered as members in its register of members;
(2) Every other person who agrees in writing to become a member of a
company and whose name is entered in its register of members shall, be a
member of the company;
(3) Every person holding equity share capital of a company and whose name is
entered as beneficial owner in the records of a depository shall be deemed
to be a member of the concerned company.
Accordingly, there are two important elements which must be present before a
person can acquire membership of a company viz., (i) agreement to become a
member; and (ii) entry of the name of the person so agreeing, in the register of
members of the company. Both these conditions are cumulative. [Balkrishan Gupta v.
Swadeshi Polytex Ltd. (1985) 58 Com Cases 563].
The person desirous of becoming a member of a company must have the legal
capacity of entering into an agreement in accordance with the provisions of the Indian
Contract Act, 1972. Section 11 of the Indian Contract Act lays down:
Every person is competent to contract, who is of the age of majority according to
the law to which he is subject, and who is of sound mind, and is not disqualified from
contracting by any law to which he is subject.
2. MODES OF ACQUIRING MEMBERSHIP
As per Section 41 of the Companies Act, a person may acquire the membership
of a company:
(a) by subscribing to the Memorandum of Association (deemed agreement); or
(b) by agreeing in writing to become a member:
(i)by making an application to the company for allotment of shares; or
(ii)by executing an instrument of transfer of shares as transferee; or
(iii)by consenting to the transfer of share of a deceased member in his name; or
(iv)by acquiescence or estoppel.
(c) by holding equity share capital of a company and whose name is entered as
beneficial owner in the records of a depository (Under the Depositories Act,
1996),
and on his name being entered in the register of members of company. Also every
such person holding equity share capital of the company and whose name is entered
as beneficial owner in the records of the depository shall be deemed to be the
member of the concerned company.
(a) Subscribers to the Memorandum
In the case of a subscriber, no application or allotment is necessary to become a
member. By virtue of his subscribing to the memorandum, he is deemed to have
agreed to become a member and he becomes ipso facto member on the


incorporation of the company and is liable for the shares he has subscribed. A
subscriber to the memorandum cannot rescind the contract for the purchase of
shares even on the ground of fraud by the promoters. In Re. Metal Constituents Co.,
(1902) 1. Ch. 707, it was held that a subscriber, by signing the memorandum, is
bound to other members in the company. The facts of the case are that a subscriber
agreed to take 350 shares. Thereafter, he wanted to rescind the contract on the
ground that he was induced to sign the memorandum by misrepresentation on the
part of the promoters. It was held that by his own act he brought the company into
existence and he cannot rescind the contract. A subscriber to be liable must sign by
his own hand or through an authorised agent. [Imperial Flour Mills Co. v. Lamb
(1988) 1 LR 12 Bom 647].
In Kumaran Potty v. Venad Pharmaceuticals & Chemicals Ltd., [1996] 2
Comp. LJ. 288 (Ker.), a question arose as to whether the purported promise to
convert loan into shares can also constitute a ground for rectification of
register of members. The vice-chairman of the company collected huge sums
of money from employees as if they were loans. After repayment of the
substantial part of the loans, the Managing director reportedly agreed to
convert the remaining amounts into shares. However, the same was not done
and it was prayed that the register of members be rectified to make the
petitioner employee a shareholder for the unpaid amount. It was held that the
amount was nothing but a loan and it will always remain a loan. To become a
shareholder there must be an agreement in writing under Section 41(2) of the
Companies Act between the petitioner and the company.
In accordance with the provisions of Section 36(2) of the Companies Act, 1956,
all money payable by any member to the company under the memorandum or
articles shall be debt due from him to the company. Further, a subscriber to the
memorandum must pay for his shares in cash even if the promoters have promised
him the shares for services rendered in connection with the promotion of the
company. Again, he must take the shares directly from the company, and not through
transfer from other member(s). When a person signs a memorandum for any number
of shares he becomes absolutely bound to take those shares and no delay will relieve
him from that liability unless he fulfills the obligation. His liability remains right up to
the time when the company goes into liquidation and he is bound to bring the money
for which he is liable to pay to the creditors of the company. By virtue of Section
266(2) of the Companies Act, a person who, being named in the articles as director,
signs and files an undertaking to take and pay for his qualification shares, he shall, as
regards those shares, be in the same position as if he has signed the memorandum
for shares of the number and value.
Every person who agrees in writing to become a member and whose name is
entered in the register of members of a company, shall be a member of the company.
Two conditions have to be satisfied to constitute a person as a member, viz., an
agreement in writing to become a member and entry of his name in the register of
members. Therefore, it is only a person who is on the register of members of the
company who is a member/shareholder of the company. No claims by one whose
name is not on the register of a company can be made against the company. [BSN
(UK) Ltd. v. Janardan Mohandas Rajan Pillai, (1996) 86 Comp. Cas. 371 (Bom)].
The requirement of agreement in writing is a statutory requirement based on the


principle of public policy and, therefore, cannot be waived by the parties. Ram Kishan
v. Kanwar Papers P. Ltd. (1990) 69 Com Cas 209 (HP).
(b) Agreement in Writing
(i) By an application and allotment
A person who applies for shares becomes a member when shares are allotted to
him, a notice of allotment is issued to him and his name is entered on the register of
members. The general law of contract applies to this transaction. There is an offer to
take shares and acceptance of this offer when the shares are allotted. An application
for shares may be absolute or conditional. If it is absolute, an allotment and its notice
to the applicant will be sufficient acceptance. On the other hand, if the offer is
conditional, the allotment must be made according to be condition as contained in the
application. If there is conditional application and unconditional allotment, there is no
contract.
(ii) By transfer of shares
Shares in a company are movable property as provided in Section 82 of the
Companies Act and are transferable in the manner as provided in the articles of the
company and as provided in Section 108 of the Companies Act, 1956. A person can
become a member by acquiring shares from an existing member and by having the
transfer of shares registered in the books of the company, i.e. by getting his name
entered in the register of members of the company.
(iii) By transmission of shares
A person may become a member of a company by operation of law i.e. if he
succeeds to the estate of a deceased member. Membership by this method is a legal
consequence. On the death of a member, his executor or the person who is entitled
under the law to succeed to his estate, gets the right to have the shares transmitted
and registered in his name in the companys register of members. No instrument of
transfer is necessary in this case. If the legal representative of deceased member
desires to be registered as a member in place of the deceased member, the
company shall do so or in the alternative he may request the company to transfer the
shares in the name of another person of his choice. The Official Assignee or Official
Receiver is likewise entitled to be a member in place of the shareholder, who has
been adjudged insolvent.
(iv) By acquiescence or estoppel
A person is deemed to be a member of a company if he allows his name, without
sufficient cause, to be on the register of members of the company or otherwise holds
himself out or allows himself to be held out as a member. In such a case, he is
estopped from denying his membership. He can, however, escape his liability by
taking prompt action for having his name removed from the register of members on
permissible grounds.
(c) Holding Shares as Beneficial Owner in the Records of Depository.
A new Sub-section (3) has been inserted in Section 41 by Depositories Act to
provide that a person holding equity share capital of a company whose name is
entered in the records of the depository shall be deemed to be a member of the


concerned company.
3. WHO MAY BECOME A MEMBER
Subject to the Memorandum and Articles, any sui juris (a person who is
competent to contract) except the company itself, can become a member of a
company. However, it is important to note the following points in relation to certain
organisations and persons:
(a) Company as a member of another company : A company is a legal person
and so is competent to contract. Therefore, it can become a member of any other
company. However, it must be authorised by its Memorandum of Association to
invest in the shares of that company or any other company. A subsidiary company
cannot become a member of its holding company. Also a company cannot become a
member of itself.
(b) Partnership firm as a member : A partnership firm is not a legal person and
as such it cannot, in its own name, become a member of a company. However, its
partners may become joint shareholders of a company and their names be entered in
the register of members. However, it can become a member of a Section 25
Company, but on dissolution of the firm its membership of such a company ceases.
(c) Section 25 company : A non-profit making company licensed under Section
25 of the Companies Act can become a member of another company if it is
authorised by its Memorandum of Association to invest into shares of the other
company.
(d) Foreigners as members : A foreigner may take shares in an Indian company
and become a member subject to the provisions of the Foreign Exchange
Management Act, 1999, but in the event of war with his country, he becomes an alien
enemy and his power of voting and his right to receive notices are suspended.
(e) Minor as member : A member who is not a sui juris e.g., a minor, is wholly
incompetent to enter into a contract and as such cannot become a member of a
company. Consequently, an agreement by a minor to take shares is void ab-initio.
In Palaniappa v. Official Liquidator, Pasupati Bank Ltd., A.I.R. 1942 Mad. 470, 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 transaction was void on
the face of it and the father of the minor who had signed the application could not be
deemed to have contracted for the shares and could not be placed on the list of
contributories.
If the directors, not aware of the fact of minority, allot shares to a minor in
response to his application, and enter his name in the register of members, the
company can repudiate the allotment and remove his name from the register on
coming to know of the minority of the person. The minor may also repudiate during
his minority. In either case, the company must pay back all moneys received from the
minor in respect of the shares allotted to him. If neither party repudiates the allotment
and the minors name remains on the companys register of members, he does
not incur any liability during his minority, as was held in Fazalhboy Jaffer v. The
Credit Bank of India A.I.R. 1914 Bom. 128, a minor can be a member so as to enjoy


the benefits of membership without being liable as a contributory.
After attaining majority, the minor, if he does not want to be a member, must
repudiate his liability on the shares on ground of minority, and if he does so, the
company can not plead estoppel on the ground of his having received dividends
during his minority or that he had fraudulently misrepresented his age in his
application for shares [Sadiq Ali v. Jai Kishori, (1928) 30 Bom. L.R. 1346].
It has been held by the Company Law Board that an agreement in writing for a
minor to become a member may be signed on behalf of the minor by his lawful
guardian and the registration of transfer of shares in the name of the minor, acting
through his or her guardian, especially where the shares are fully paid cannot be
refused on the ground of the transferee being a minor [Miss Nandita Jain v. Benett
Coleman and Co. Ltd., Appeal No. 27 of 1972 dated 17.2.78].
If shares are transferred to a minor, the transferor will remain liable for all future
calls on such shares so long as they are held by the minor even if the transferor was
ignorant of his minority. If the company knows of his minority it may refuse to register
the transfer, unless the transfer was made through the guardian.
(f) Insolvent as member : As insolvent may be a member of a company as long
as he is on the register of members, he is entitled to vote, but he loses all beneficial
interest in the shares and company will pay dividend on his shares to the Official
Assignee or Receiver [Morgan v. Gray, (1953) All E.R. 213].
(g) Pawnee : A pawnee has no right of foreclosure since he never had the
absolute ownership at law and his equitable title cannot exceed what is specifically
granted by law. In this sense, a pledge differs from a mortgage. In view of the
foregoing, a pawnee cannot be treated as the holder of the shares pledged in his
favour, and the pawner continues to be a member and can exercise the rights of a
member [Balakrishna Gupta v. Swadeshi Polytex Ltd., (1985) 58 Comp. Cas. 563
(S.C.)].
(h) Receiver : A receiver whose name is not entered in the register of members
cannot exercise any of the membership rights attached to a share unless in a
proceeding to which company is a party and an order is made therein. Mere
appointment of a receiver in respect of certain shares of a company without more
rights cannot, deprive the holder of the shares whose name is entered in the register
of members of the company, the right to vote at the meeting of the company
[Balakrishna Gupta v. Swadeshi Polytex Ltd., (1985) 58 Comp. Cas. 563 (S.C.)].
(i) Bankrupt : A bankrupt may be a member of a company, as long as he is on
the register of members. He is entitled to vote [Morgan v. Gray, (1953) Ch. 83].
(j) Persons taking shares in fictitious names : A person who takes shares in the
name of a fictitious person, becomes liable as a member besides incurring criminal
liability under Section 68A of the Act, wherein punishment provided is imprisonment
up to five years.
(k) Trade Union as member : A trade union registered under the Trade Union
Act, can be registered as a member and can hold shares in a company in its own


corporate name [All India Bank Officers Confederation v. Dhanlakshmi Bank Ltd.,
(1997) 90 Com Cases 225].
Joint Members
If more than one person apply for shares in a company and shares are allotted to
them, each one of such applicant becomes a member (Narandas v. India Mfg. Co.,
A.I.R. 1953 Bom. 433]. Unless the Articles of the company otherwise provide, joint
members can insist on having their names registered in any order they may require.
They may also have their holding split into several joint holdings with their names in
different orders so that all of them may have a right to vote as first named holding in
one or the other joint holdings. Burns v. Siemens Brothers Dynamo Works Ltd. (1919)
1 Ch. 225.
Joint holders of shares in a public company are not a single member. Each of the
joint holder of shares is a member of the company [Narandas v. India Mfg. Co.
Supra), but joint holders are counted as one member for the purpose of determining
the maximum number of members i.e. fifty in a private company and for determining
the members required for making applications under Sections 397 and 398 of the
Companies Act, 1956. Notices and other documents required to be served by the
company will be deemed to be properly served if the service is effected on the first
named joint-holder. Unless instructions in writing have been received to the contrary,
the company, can pay dividend to the first named shareholder. Unless the Articles
otherwise provide, any joint shareholder is entitled to be present in any general
meeting and take part in the proceedings and vote on resolutions on show of hands.
However, in the event of poll, voting right can be exercised only by one of the joint
shareholders acting in consultation with and on behalf of all. Joint members are liable
jointly and severally to pay calls on the shares held by them. Proxy form to be valid
must be signed by all joint shareholders.
Registration of Shares in the name of Public Office
The Companies Act, 1956 contains no provisions with regard to the
registration of shares in the name of a public office. Shares cannot, therefore, be
registered in the names of public offices like the Collector of Central Excise or the
Commissioner of Income-tax etc. Similar observations apply to the holder of any
other public office which is not a corporation sole constituted by statute, e.g., the
Administrators General Act, 1963) (Clarification issued by the Department of
Company Affairs).
Section 41(2) provides the mechanism by which a person (other than a
subscriber of the memorandum) can become a member. The term person has been
held to include, among others, a corporate sole.
A corporation sole is a corporation constituted in a single person who in the
right of some office or function and has corporate status. The object of corporation
sole is to make it possible to distinguish the holder of an office or function in his
official and in his private capacity. By this fiction of law, it is possible to attach rights
and duties to the holder, for the time being, of the office or functions to convey real or
personal property to him in his official name and style. In short, a corporation sole has
the same characteristics of perpetual succession and separation of rights


and duties of the corporate body from those of the corporate as all corporations
possess.
Under Article 299 of the Constitution of India, all contracts for and on behalf of
the Government of India are required to be in the name of the President of India and
all contracts for and on behalf of any State Government are required to be in the
name of the Governor of the State. The President of India or the Governor of a State
can hold shares in a company in his name and become member of a company.
Where he is a member he may appoint such person as he thinks fit to act as his
representative at any general meeting of the company. Such representative shall
have all the rights and powers as the President or Governor could exercise as the
member of the company (Section 187A of the Companies Act, 1956).
Under Article 300 of the Constitution of India, all suits by or against the Union of
India or a State Government are required to be filed in the name of the President of
India or the Governor of the concerned State, as the case may be. A Collector of a
District, who is a civil servant, has no power under the Constitution to enter into a
contract or to sue or to be sued in his capacity as Collector. Therefore, the Collector
cannot be said to be a corporation sole. He is not competent to hold shares in a
company incorporated under the Companies Act, 1956.
4. MINIMUM NUMBER OF MEMBERS
Section 12 of the Companies Act, 1956 provides that any seven or more persons,
or where the company to be formed will be a private company, any two or more
persons, associated for any lawful purpose may, by subscribing their names to a
memorandum of association and otherwise complying with the requirements of the
Act in respect of registration, form an incorporated company, with or without limited
liability.
Maintenance of Minimum Number
Section 45 of the Act provides that the liability of the members of a company shall
be unlimited, if the number of its members falls below the statutory
minimum and the company carries on business beyond the period of six months
after the number has so fallen and members are cognizant of the fact that it is
carrying on business with less than seven or two members, as the case may be. In
accordance with the provisions of Section 433(d) of the Act, a company, the
number of whose members falls below the statutory minimum, may be wound-up by
the Court. The purpose is to withdraw the benefits of incorporation in the event of
default of the condition of incorporation with regard to the minimum number of
members.
Restriction on Membership
By virtue of Section 3(1)(iii)(b) of the Companies Act, 1956, the maximum
number of members of a private company is limited to fifty excluding the present and
past employees of the company who continue to be members of the company. There
is no restriction with regard to the maximum number of members of a public
company.
5. CESSATION OF MEMBERSHIP


A person ceases to be a member of a company when his name is removed from
its register of members, which may occur in any of the following situations:
(a) he transfers his shares to another person, the transfer is registered by the
company and his name is removed from the register of members;
(b) his shares are forfeited;
(c) his shares are sold by the company to enforce a lien;
(d) he dies; (his estate, however, remains liable for calls);
(e) he is adjudged insolvent and the Official Assignee disclaims his shares;
(f) his redeemable preference shares are redeemed;
(g) he rescinds the contract of membership on the ground of fraud or
misrepresentation or a genuine mistake;
(h) his shares are purchased either by another member or by the company itself
under an order of the Court under Section 402 of the Companies Act;
(i) the member is a company which is being wound-up in India, and the
liquidator disclaims the shares;
(j) the company is wound up; or
(k) share warrants have been issued in exchange of fully paid shares.
Though one ceases to be a member, he remains liable as a contributory and is
also entitled to share in the surplus, if any.
Expulsion of a Member
A controversy had arisen as to whether a public limited company had powers to
insert an article in its Articles of Association relating to expulsion of a member by the
Board of Directors of the company where the directors were of the view that the
activities or conduct of such a member was detrimental to the interests of the company.
The Department of Company Affairs clarified that an article for expulsion of a
member is opposed to the fundamental principles of the Company Jurisprudence and
is ultra vires the company, the reason being that such a provision militates against
the provisions of the Companies Act relating to the rights of a member in a company,
the powers of the Central Government as an appellate authority under Section 111 of
the Act and the powers of the Court under Sections 107, 395 and 397 of the
Companies Act.
According to Section 9 of the Companies Act, the Act overrides the Memorandum
and Articles of Association and any provision contained in these documents
repugnant to the provisions of the Companies Act, is void.
The Department of Company Affairs has, therefore, clarified that any assumption
of the powers by the Board of Directors to expel a member by alteration of Articles of
Association shall be illegal and void.
6. PERSONATION AND PENALTY THEREFOR
Section 116 of the Companies Act, 1956 provides for penalty for personation of a
shareholder. The section reads:
If any person deceitfully personates an owner of any share or interest in a


company, or of any share warrant or coupon issued in pursuance of the Act, and
thereby obtains or attempts to obtain any such share or interest or any such
share warrant or coupon, or receives or attempts to receive any money due to
any such owner, he shall be punishable with imprisonment for a term which may
extend to three years and shall also be liable to fine.
The punishment provided by Section 116 is for obtaining or attempting to obtain
or receiving or attempting to receive a share, share warrant, coupon due to the
rightful owner. According to the criminal law, personation is one of the means of
cheating. Section 416 of the Indian Penal Code, 1860 lays down: A person is said to
cheat by personation if he cheats by pretending to be some other person, or by
knowingly substituting one person for another, or representing that he or any other
person is a person other than he or such person really is.
Explanation : The offence is committed whether the individual personated is a
real or imaginary person.
According to Section 419 of the Indian Penal Code, punishment for cheating by
personation is imprisonment of either description for a term which may extend to
three years or with fine or with both.
7. REGISTER OF MEMBERS
Section 150 of the Companies Act, 1956 lays down:
(1) Every company shall keep in one or more books, a register of its members,
and enter therein the following particulars:
(a)the name and address, and the occupation, if any, of each member;
(b)in the case of a company having a share capital, the shares held by each
member, distinguishing each share by its number except where such
shares are held with a depository, and the amount paid or agreed to be
considered as paid on those shares;
(c)the date at which each person was entered in the register as a member; and
(d)the date at which any person ceased to be a member.
Provided that where the company has converted any of its shares into stock
and given notice of the conversion to the Registrar, the register shall show
the amount of stock held by each of the members concerned instead of the
shares so converted which were previously held by him.
(2) If default is made in complying with Sub-section (1), the company, and every
officer of the company who is in default, shall be punishable with fine which
may extend to five hundred rupees for every day during which the default
continues.
The register of members is a prima facie evidence of its contents, including that
of membership. It provides evidence whenever the question arises whether a person
is or is not a member. The register of members should be in the Form given in the
Appendix to the Companies (Issue of Share Certificates) Rules, 1960 or in a Form as
near thereto as circumstances admit. The specimen of register of members is given


hereunder:
Name (See rule 7) Folio No.
Address REGISTER OF MEMBERS
Occupation
Date at which entered as a Member Date at which ceased to be a Member
Shares acquired Cash
Payable
on
shares
Cash paid on
shares
Shares transferred
Dist-
inctive
number
of shares
(inclusive)
Dist-
inctive
number
of shares
(inclusive)

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1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23












NOTE: All entries in the Register should be authenticated by the Secretary or the person appointed by
the Board to sign the share certificates.
Particulars of each jointholder have to be recorded. The names of minor
members are entered along with the names of their guardians. If declaration under


Section 187C had been received from any member, it has to be recorded.
A person who claims to have purchased the shares of a member will be entitled
to have his name entered in the register by satisfying the requirement of either
Section 108 or 109. [Lalithamba Bai v. Harrisons Malayalam Ltd., (1988) 2 Comp LJ
41 (Ker)].
No company should enter in the register a statement that it has a lien on the
shares of a member, [W. Key & Son Ltd., (1902) 1 Ch 467]. A company cannot insist
upon putting in the register anything except that which is required by the section to be
inserted in it. [T.H. Saunders & Co. Ltd. Re, (1908) 1 Ch 415].
In a voluntary winding up, the liquidator may accept share transfers and alter the
register accordingly. [Taylor, Phillips and Richards Case, (1897) 1 Ch 298].
A firm in its own name cannot be registered as a member, as a firm is not a legal
person like a company incorporated under the Act. Only the partners can be
recognised and registered as joint holders. [See Re Vagliano & Anthracite Callieries
Ltd., (1910) 79 LJ Ch 769].
Index of Members
Section 151 of the Companies Act, 1956 requires:
(1) Every company having more than fifty members shall, unless the register of
members is in such a form as in itself to constitute an index, keep an index,
which may be in the form of a card index, of the names of the members of
the company and shall, within fourteen days after the date on which any
alteration is made in the register of members, make the necessary alteration
in the index.
(2) The index shall, in respect of each member, contain a sufficient indication to
enable the entries relating to that member in the register to be readily found.
(3) The index shall, at all times, be kept at the same place as the register of
members.
(4) If default is made in complying with Sub-sections (1), (2) or (3), the
company, and every officer of the company who is in default, shall be
punishable with fine which may extend to five hundred rupees.
Inspection must be allowed of the Index in the same manner as applicable to the
register of members.
Place of keeping and inspection of the Registers
Section 163 of the Companies Act, 1956 fixes the place for maintaining a
companys register including its register and index of Members, returns etc. and for
allowing their inspection.
The Section lays down:
(1) The register of members commencing from the date of registration of the
company, the index of members, the register and index of debenture holders, and
copies of all annual returns prepared under Section 159 and 160, together with the
copies of certificates and documents required to be annexed thereto, shall be kept at
the registered office of the company :


Provided that such registers, indexes, returns and copies of certificates and
documents or any or more of them may, instead of being kept at the registered office
of the company, be kept at any other place within the city, town or village in which
registered office is situate, if
(i) such other place has been approved for this purpose by a special resolution
passed by the company in general meeting; and
(ii) the Registrar has been given in advance a copy of the proposed special
resolution. (A copy of the special resolution when passed has also to be filed
with the Registrar within 30 days of passing the resolution as per
requirement of Section 192 of the Companies Act, 1956).
(2) The registers, indexes, returns and copies of certificates and other documents
referred to in Sub-section (1) shall, except when the register of members or
debenture holders is closed under the provisions of this Act, be open during business
hours, subject to reasonable restrictions, as the company may impose, so that not
less than two hours in each day are allowed for inspection:
(a)of any member or debentureholders, without fee; and
(b)of any other person, on payment of a fee of Rs. 10 for each inspection.
(3) Any such member, debenture holder or other person may :
(a)make extract from any register, index or copy referred to in Sub-section
(1) without fee or additional fee, as the case may be;
(b)require a copy of such register, index or copy of any part thereof, on payment
of a fee of Re. 1 for every one hundred words or fractional part thereof
required to be copied.
Remedy if inspection is refused
According to Section 163(5) : If any inspection, or the making of any extract
required under this section, is refused, or if any copy required under this section is
not sent within the period specified in Sub-section (4), the company, and every officer
of the company who is in default shall be punishable, in respect of each offence, with
fine which may extend to five hundred rupees for every day during which the refusal
or default continues.
Register prima facie evidence
A register of members is prima facie evidence of the truth of its contents.
Accordingly, if a persons name, to his knowledge, is there in the register of members
of a company, he shall be deemed to be a member and onus lies on him to prove that
he is not a member. He must promptly apply to the Court for rectification of the
register under Section 111 of the Act to take his name off the register, failing which
the doctrine of holding out will apply.
In Re. M.F.R.D. Cruz, A.I.R. 1939 Madras 803, the plaintiff applied for 4,000
shares in a company but no allotment was made to him. Subsequently 4,000
shares were transferred to him without his request and his name was entered
in the register of members. The plaintiff knew it but took no steps for
rectification of the register of members. The company went into liquidation and
he was held liable as a contributory. The Court held when a person knows that
his name is included in the register of shareholders and he stands by and


allows his name to remain, he is holding out to the public that he is a
shareholder and thereby he loses his right to have his name removed.
Rectification of a Register of Members
The register of members of a company contains names, addresses, occupations,
if any etc. only of members of the company. Any person, whose name is entered in
the register of members of a company, considered to be its member, although he
may not own the shares which are shown in his name in the register of members. On
the contrary, a person, whose name is not entered in the register of members is not
considered as member of the company even though he may have done everything to
entitle him to be put on the register of members. Injustice may, therefore, result from
such omission or commission.
Section 111(4) of the Companies Act, 1956 confers powers on the Company Law
Board to order rectification or register of members of a company if an application is
made by or on behalf of the aggrieved person on any of the following grounds:
(a) where the name of a person is without sufficient cause, entered in the
register of members of a company;
(b) where his name, having been entered, is removed without sufficient cause;
or
(c) where default is made or unnecessary delay takes place in entering in the
register of members the fact of any person having become, or ceased to be,
a member of company.
This may happen where a person has transferred his shares according to law
and the company either refuses or delays registration of transfer in the transferees
name.
The application to the Company Law Board* should be made in Form No. 1
specified in Annexure II of the Company Law Board Regulations, 1991. The
application should be accompanied by (i) a copy of the memorandum and articles of
association of the company; (ii) latest audited balance sheet and profit and loss
account; (iii) auditors report and directors report; (iv) authenticated copy of the extract
or register of members; and (v) an affidavit verifying the petition.
The application should be accompanied by a bank draft evidencing payment of
application fee of Rs. 500.
The Company Law Board, while dealing with the application for rectification of
register may after hearing the parties either reject the application or direct for
rectification of the register including a direction to the company to pay damages if
any, sustained by the person aggrieved.
In Subash Ghosh v. Happy Valley Tea Co. Pvt Ltd. (CLB) C.P. NO. 164 (111)/
ERB/2004 [Decided on 12.6.2006] The petitioner was a selling agent of the
respondent company and he had applied for certain shares in the company at
the behest of the directors and made payment therefore. Article 4 of the
Articles of association of the company read: The shares shall be at the
disposal of the directors and they may allot or other wise dispose of them to
such persons at such times and generally on such terms and conditions as
they think proper. From this Article, it is evident that the Board has the


power to decide to allot shares on such terms and conditions as they think
proper. From this article, it is evident that the Board has the power to decide to
allot shares on such terms and conditions as they think proper. Board of
directors allotted 16,000 equity shares to him. The company also filed Form 2
indicating that 16,000 equity shares had been allotted, subject to the approval
of the shareholders, to the petitioner. The petitioner found that his name was
not appearing in the members register of the company. He petitioned the CLB
for rectification of members register by including his name.
CLB viewed that need to approach the CLB for rectification under Section
111(4) would arise only if a members name is either omitted from or entered in
the register of members without sufficient cause. In the present case, since the
name of the petitioner has been omitted from the register of members of
sufficient cause (even assuming his name was earlier entered in the register
after allotment), i.e. Members have not approved allotment of shares to the
petitioner, which was a pre-requisite, there is no scope to allow the petition.
However, since no share has been allotted to the petitioner, the amount of
money invested by him for the shares should be refunded to him within a
period of one month of the date of this order. It was directed that the company
would do so within the said time.
It is pertinent to note that though the time limit for filing an application for
rectification of register of members has not been specified in the Act, the provisions
of Article 137 of the Limitation Act would apply and in consequence, the application
for rectification must be made within three years from the date on which the right
occurs [Ref. Anil Gupta v. Delhi Cloth & General Mills Co. Ltd., (1983) 54 Comp.
Cases 301 (Delhi)].
The Company Law Board may on any application under Section 111(4) decide
not only the title of any person but also any question which is necessary or expedient
to be decided in connection with the application. The provisions stated above
regarding rectification of register of members shall apply in relation to rectification of
register of debentureholders as well.
In Ramesh B. Desai and Ors. v. Bipin Vadilal Mehta and Ors., 2006 (7)
SCALE 62, [2006] 132 Comp Cas 479 (SC), decided on July 11, 2006, the
appellants, Ramesh B. Desai and Ors. had filed the Company Petition for
rectification of the register of the company as provided by Section 155 of the
Companies Act in the manner that the names of Bipinbhai Vadilal Mehta, Smt.
Nirmaiben Bipinbhai Mehta and Priyambhai Bipinbhai Mehta may be deleted
from the register of the Company. The allegation made in the petition was that
the funds of the company were utilized for acquiring shares. The manner of
acquiring the shares was violative of Section 77(2) of the Companies Act.
Further, the company had no knowledge of the devise adopted by Bipinbhai
nor the company had authorized these transactions by passing any resolution
of the Board and the Company never rectified the action of Bipinbhai. It was
also averred in the petition that Article 20 of the Articles of Association of the
Company stipulates that none of the funds of the company shall be employed
in the purchase of shares of the company. The transaction devised by
Bipinbhai in order to purchase the shares and get control of the company is


also contrary to Article 20 of the Articles of Association of the Company and,
therefore, it is void.
The respondents, Bipin Vadilal Mehta and Priyam Bipinbhai Mehta moved
Company Application before the learned Company Judge to dismiss the said
Company Petition, without going into the merits of the petition, on the ground
that the same is barred by limitation.
This application was allowed by the learned Company Judge by the
judgment and order dated 12.3.1996 and the said order was affirmed in appeal
by a Division Bench of the High Court by the judgment and order dated
10.3.2000. This judgment was challenged in the Supreme Court.
According to learned Supreme Court Judge, in view of the facts pleaded in
the Company Petition, the case is covered by Section 17(1)(a) of the
Limitation Act and not by Section 17(1)(b) as the petitioners are not claiming
any right or title over the shares of the Company, which according to them
were purchased out of the funds of the Company. Section 17(1)(b) will apply
when the plaintiff or applicant is claiming any kind of right or title to any
moveable or immoveable property etc. In view of the pleadings as aforesaid, it
is Section 17(1)(a) of the Limitation Act which would govern the situation and
not Section 17(1)(b) of the Limitation Act.
Further, the continuance of the name of Bipinbhai in the register of the
Company was a continuing wrong and, therefore, the period of limitation would
begin to run at every moment of time during which the wrong name of
Bipinbhai continues to remain in the register. Learned counsel has submitted
that in such a situation the principles enshrined in Section 22 of the Limitation
Act will apply and the Company Petition cannot be held to be barred by
limitation and the view to the contrary taken by the High Court is erroneous in
law.
The appeal accordingly succeeded and allowed. The judgment and order
passed by the learned Company Judge and that of the Division Bench were set
aside. The High Court would decide the Company Petition afresh in accordance
with law.
If the default is made in giving effect to the orders of Company Law Board, the
company and every officer of the company who is in default shall 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 day after which the default continues.
The provisions of Section 111 are applicable to a private company and shall
include a private company which had become a public company by virtue of
Section 43A of the Act. [Sub-section (14)].
Closing of Register of Members
Section 154 of the Companies Act, 1956 contains guidelines for closing the
register of members. It lays down:
(1) A company may, after giving not less than seven days previous notice by


advertisement in some newspaper circulating in the district in which the
registered office of the company is situate, close the register of members or
the register of debenture holders for any period or periods not exceeding in
the aggregate forty-five days in each year, but not exceeding thirty days at
any one time.
(2) If the register of members or of debenture holders is closed without giving
the notice provided in Sub-section (1), or after giving shorter notice than that
so provided, or for a continuous or an aggregate period in excess of the
limits specified in that sub-section, the company and every officer of the
company who is in default, shall be punishable with fine which may extend
to five thousand rupees for every day during which the register is so closed.
The provisions contained in Section 154 is permissive and not mandatory. The
section has application only when a company desires to close its register of members
and in such a situation, the requirements of the section are to be complied with.
A company is not bound to close its register even for a day. But if it does choose
to close, the provisions of the section will have to be complied with. The Madras High
Court is of the view that the section is mandatory at least to this extent that if the
company chooses to close its register of members it would have to comply with the
requirements of this section. [Talyar Tea Co. v. Union of India, (1991) 71 Com Cases
95].
The power in this section is intended for the convenience of the company in order
to enable the register of members to be brought up to date for the purpose of
calculating dividend and bonus, etc. However, even if the register of members is
closed, the company is obliged to make certain entries during the period of closure,
such as entries relating to registration and probates and letters of administration,
notices of change of name and address and court orders, such as changing orders, etc.
[Killick Nixon Ltd. v. Dhanraj Mill Pvt. Ltd., (1983) 54 Com Cases 432 (DB) (Bom)].
The closure of the register is cloaked with the right to refuse the transfer of
shares/debentures. Record date is an alternate for closing the registers. The purpose
of closing the registers is to get the registers updated and to fix a cut-off date for the
purpose of payment of dividend or issue of rights and bonus shares. This purpose
can also be achieved by fixing a record date for a day.
The companies, whose shares are listed on one or more stock exchange(s) are
required under the Listing Agreement to fix dates for closure of the register in
consultation with the concerned stock exchange(s). Companies are required to give
to the concerned stock exchange(s) advance notice as required by the Listing
Agreement.
Foreign Register
Section 157 of the Companies Act, empower companies to keep foreign registers
of members or debentureholders, states:
(1) A company which has a share capital or which has issued debentures may if
so authorised by its articles, keep in any State or country outside India, a
branch register of members or debentureholders resident in that State or
Country, (In this Act called a foreign register).


(2) The company shall, within thirty days from the date of the opening of any
foreign register, file with the Registrar notice of the situation of the office
where such register is kept; and in the event of any change in the situation
of such office or of its discontinuance, shall, within thirty days from the date
of such change or discontinuance, as the case may be, file notice with the
Registrar of such change or discontinuance.
(3) If default is made in complying with the requirements of Sub-section (2), the
company and every officer of the company who is in default, shall be
punishable with fine which may extend to five hundred rupees for every day
during which the default continues.
A foreign register is deemed to be a part of the companys principal register and it
should be kept in the same manner as the principal register and be likewise open to
inspection.
A duplicate of such register should be maintained at the registered office in India
and all entries made in the foreign register should be made in the duplicate register at
the registered office as soon as possible.
A company may discontinue a foreign register at any time but all the entries
made in it must be transferred to the principal register.
The decision of a competent Court in the State or Country in which a foreign
register is kept, with regard to its rectification, shall be as effective as if it were a
decision of a competent Court in India, if the Central Government, by notification in
the Official Gazette, so directs.
Preservation of Registers, etc.
The Companies (Preservation and Disposal of Records) Rules, 1966 regulate the
preservation and disposal of registers which the companies registered under the
Companies Act, 1956 are required to maintain.
Rule 2 of the said Rules lays down that :
(1) Register of members commencing from the date of the registration of the
company is permanent and is not to be destroyed at any point of time;
(2) Index of members is also a permanent record and is not to be destroyed at
any point of time;
(3) Register and Index of debentureholders should be preserved for fifteen
years till after the redemption of the debentures.
(4) Copies of all annual returns prepared under Section 159 and Section 160
and copies of all documents required to be annexed thereto under Sections
160 and 161 are to be preserved for eight years from the date of filing with
the Registrar of Companies.
According to Rule 3 of the Rules, the Registrar of Companies may, by order in
writing, direct any company to preserve any of the above registers and documents
beyond the period specified above for retention.
Rule 4 makes it obligatory on the part of companies to maintain a register in the


form prescribed in the Rules where they shall enter brief particulars of the documents
destroyed and all entries made therein shall be authenticated by the secretary or
such other persons as may be authorised by the Board for the purpose.
No Notice of Trust
Sometimes shares are held in trust. For example, shares of which A is the real
owner may be registered by him in the name of B. A, in this case is the beneficial
owner and B is the trustee. B holds the shares in trust for A. Bs name will be entered
in the companys register of members and he alone is the member entitled to the
rights of membership and is also liable as member and as contributory in the event of
the company going into liquidation, for the amount unpaid on the shares. According to
Section 153 of the Companies Act; No notice of any trust, express, implied or
constructive, shall be entered on the register of members or of debenture holders.
In Murshidabad Loan Office Ltd. v. Satish Chandra Chakravarti, A.I.R. 1943
Cal. 440, S, a lady was registered as holder of certain shares in a company. The
company, on learning that the shares actually belonged to her husband, sued
her husband for the unpaid calls on the shares. Held, he was not liable as he
was not the member of the company. It is only the registered member, who is
liable on the shares, though he or she may not be the real owner of the shares.
The Court observed: Assuming that the registered shareholder is not the real
owner but if he is the member in the books of the company, it is he alone who
would be entitled to the rights of a shareholder and he alone is liable for call on
shares and to be put on the list of contributories.
In a decision of the Madras High Court it has been held that the section does not
prevent the managing director of a company from contending that the shares held by
his wife were only held by her as benamidar for him. [Parameshwari S.V. Kamadhenu
Metal Rolling Mills, (1970) 2 Comp LJ 120 : AIR 1971 Mad 293].
Though as per terms of this section no notice of any trust is to be entered in the
register of members, the section does not prevent the company taking notice of a
trust which is brought to its notice from other evidence [See Parameswari S.V.
Kamdhenu Metal Rolling Mills Ltd. (Supra)].
Power of the Central Government to Investigate into the Ownership of Shares
Sometimes, the registered holder of shares in a company may be a nominee for
some other person, who really owns the shares. This enables persons, who in fact
control a company, to conceal their real status from the shareholders and from the
public and practice fraud with regard to the management of the company. To check
such a practice, Sections 247 and 248 empower the Central Government to appoint
an inspector to investigate into and report on the ownership of a company.
Declaration by Persons not holding Beneficial Interest in any Share
The main purpose of Sections 247 and 248 which empower the Central
Government to investigate the ownership of the shares of the companies is to know
the benami shareholding. However, these sections proved ineffective in this regard.
Therefore, Section 187C was inserted by the Companies (Amendment) Act, 1974 in
the Companies Act, 1956, which made it obligatory on the part of a person, whose


name was entered at the commencement of the Amendment Act, i.e. 1st February,
1975, in the register of members of a company as the holder of a share in that
company but who did not hold beneficial interest in such share to make a declaration
to the company specifying the name and other particulars of the person who held the
beneficial interest in such share [Sub-section (1)].
Sub-section (2) of the Section made it obligatory for any person who, after 1st
February, 1975, held beneficial interest in a share or class of shares in a company or
where there was a change in the beneficial interest in a share in a company, the
beneficial interest holder shall make a declaration within thirty days, to the company
in the prescribed Form and Sub-section (4) makes it obligatory on the part of the
company to make a note of such a declaration in its register of members and to file
within thirty days with the Registrar of Companies a return in the prescribed form with
regard to such a declaration.
Sub-section (5) prescribes penalty for non-compliance of the foregoing provisions
of Section 187C which may extend to one thousand rupees for every day during
which the failure continues.
The Companies (Declaration of Beneficial Interest in Shares) Rule, 1975 has
prescribed three forms. Form I is required to be filed by the holder of shares. Form II
is to be filed by the beneficial owner of the shares and Form III is the return to be filed
by the company with the Registrar of Companies.
It would, thus, be seen that Sections 153B and 187C which require the
companies to take notice of the trusts and indicate the names of the benami
shareholders in the register of members when a declaration is made to the company
virtually negates the provision of Section 153 which requires the companies not to
take the notice of any trust. Further Section 187C(8) of the Act directs that the
provisions of Section 187C shall not apply to the trustee referred to in Section 187B
on or after 13.12.2000.
8. RIGHTS OF MEMBERS
When once a person becomes a member he is entitled to exercise all the rights
of a member until he ceases to be a member in accordance with the provisions of the
Act. The appointment of a receiver, the attachment of the shares, the pledge of the
shares or taking over of the management of a company which is holding shares in
another company under Section 18A of the Industries (Development & Regulation)
Act, 1951 will not alter the position. So long a persons name stands registered in the
books as a member, even if he has sold the share and has given the share
certificates and the blank transfer deed duly signed, he alone is entitled to exercise
the rights of membership [Balakrishna Gupta & Others v. Swadeshi Polytex Ltd. and
Others (1985) 58 Comp. Cas. 563 (S.C.); and Life Insurance Corporation of India v.
Escorts Ltd. & Others (1986) 59 Comp. Cas. 548 (S.C.)]. These rights are derived by
virtue of the membership contract between the company and the member and the
general law. Some of these rights can be exercised by him individually and others
alongwith other members unless member himself holds shares equivalent to the
minimum holding prescribed under the various provisions of the Companies Act,
1956.
Individual Rights


Members of a company enjoy certain rights in their individual capacity, which
they can enforce individually. These rights are contractual rights and cannot be taken
away except with the written consent of the member concerned. These rights can be
categorised as under:
(1) Right to receive copies of the following documents from the company:
(i)Abridged balance-sheet and profit and loss account in the case of a listed
company and balance-sheet and profit and loss account otherwise
(Section 219).
(ii)Report of the Cost Auditor, if so directed by the Government.
(iii)Contract for the appointment of the managing director/manager (Section 302).
(iv)Notices of the general meetings of the company (Sections 171-173).
(2) Right to inspect statutory registers/returns and get copies thereof on
payment of prescribed fee.
The members have been given right to inspect the following registers etc.:
(i)Debenture trust deed (Section 118);
(ii)Register of Charges (Section 141);
(iii)Register of Members, and Debenture holders and Index Registers, Annual
Returns (Section 163);
(iv)Shareholders Minutes Book (Section 196);
(v)Register of Contracts (Section 301);
(vi)Register of Directors (Section 304);
(vii)Register of Directors Shareholdings (Section 307); and
(viii)Copy of agreement of appointment of the managing director/manager
(Section 302).
The members can also get the copies of the aforesaid registers/returns on
payment of prescribed fee except those of Register of Directors and
Register of Directors Shareholdings. Members can also get copies of
memorandum and articles of association on payment of a fee of Re. One
(Section 39).
(3) Right to attend meetings of the shareholders and exercise voting rights at
these meetings either personally or through proxy (Sections 165, 166, 169,
176 and 177).
(4) Other rights.
Over and above the rights enumerated at Item Nos. 1 to 3 above, the
members have the following rights:
(i)To receive share certificates as title of their holdings [Section 84 read with the
Companies (Issue of Share Certificates) Rules, 1960].
(ii)To transfer shares (Sections 82 and 108 and Articles).
(iii)To resist and safeguard against increase in his liability without his written
consent.


(iv)To receive dividend when declared.
(v)To have rights shares (Section 81).
(vi)To appoint directors (Section 255).
(vii)To share the surplus assets on winding up (Section 511).
(viii)Right of dissentient shareholders to apply to court (Section 107).
(ix)Right to be exercised collectively in respect of making application to the
Central Government for investigation of the affairs of the company
(Section 235), and for appointment of Government directors
(Section 408).
(x)Right to make application collectively to the Company Law Board
1
/ Tribunal
2

for oppression and mismanagement (Sections 397 and 398).
(xi)Right of Nomination.
Corporate Membership Rights
Members of a company have certain rights which can be exercised by members
collectively by means of democratic process, i.e. by majority of members usually
unless otherwise prescribed. Corporate rights are the rights, which, each member
has agreed, to be exercised by majority at general body meetings. This involves the
principle of submission by all members to the will of the majority, provided that the will
is exercised in accordance with the law and the Memorandum and Articles of
Association of the company. Thus, the shareholders in majority determine the policy
of the company and exercise control over the management of the company.
However, if and when the majority becomes oppressive or is accused of
mismanagement of the affairs of the company, Section 399 confers right, to not less
than one hundred members of a company or not less than one-tenth of the total
number of its members whichever is less or any member or members holding not
less than one-tenth of the issued share capital of the company (but they must have
paid all calls and others sums due on their shares) and in the case of a company not
having a share capital, not less than one-fifth of the total number of its members, to
apply to Board
1
/Tribunal
2
under Section 397 or Section 398 for relief in cases of
oppression or for relief in cases of mismanagement respectively.
Section 169 of the Companies Act confers on members, holding not less than
one-tenth of the paid-up share capital of a company, right to requisition an
extraordinary general meeting of the company. The section also confers on members
having not less than one-tenth of the total voting power in a company not having a
share capital, to requisition an extraordinary general meeting of the company. If the
Board of directors of the company does not, within twenty-one days from the date of
the deposit of a valid requisition in regard to any matters, proceed to call a meeting
for the consideration of those matters on a day not later than forty-five days from the
date of deposit of the requisition, the meeting may be called by the requisitionists
themselves.

1.
Existing.
2.
Proposed.


It may be noted that mere appointment of a receiver in respect of certain shares
of a company without anything further cannot deprive the holder of the shares, whose
name is entered in the register of members of a company, the right to vote at the
meetings of the company or right to issue notice under Section 169 of the Companies
Act. Such rights are not affected by the attachment of the shares also. In the event of
a pledge of shares, the pawnee cannot be treated as the holder of the shares,
pledged in his favour and, therefore, the pledger continues to be a member and can
exercise his voting right and the rights under Section 169 [Balkrishan Gupta v.
Swadeshi Polytex Ltd., (1985) 58 Comp. Cas. 563 (S.C.)].
Voting Rights of Members
The right of attending shareholders meetings and voting thereat is the most
important right of a member of a company, as shareholders meetings play a very
important role in the companys life. Directors are appointed by the shareholders, who
direct the affairs of the company, formulate short-term plans and long-term policies of
the company, appoint management personnel to constitute organisation to implement
their plans and policies in order to achieve the objects of the company.
In view of the importance of the general meetings of a company, the Companies
Act has not left the members to the will of the directors to call general meetings.
If the members feel that the affairs of the company are not being properly managed
by the directors and the directors are avoiding to call a general meeting of the
company, Section 169 of the Companies Act confers right on members specified
therein to deposit a requisition setting out the matters for the consideration of which
the meeting is to be called and if the Board of directors does not proceed within
twenty-one days of the requisition to call a meeting within forty-five days of the
requisition, the requisitionists may themselves call the meeting.
Section 87 of the Act provides that every member of a public company limited by
shares, holding equity shares, shall have votes in proportion to his share of the paid-
up equity share capital of the company.
The Companies (Amendment) Act, 2000 has amended Section 86 of the
Companies Act, 1956 which provides that a company limited by shares shall be
entitled to issue (i) equity share capital with voting rights or with differential rights as
to dividend, voting or otherwise in accordance with such rules and subject to such
conditions prescribed by the Government. The Central Government framed the
Companies (Issue of Share Capital with Differential Voting Rights) Rules, 2001 which
have come into force with effect from 9th March, 2001. As such, equity share capital
with differential rights as to dividend, voting or otherwise can be issued.
Preference shareholders ordinarily vote only on matters directly relating to rights
attached to preference share capital. A resolution for winding up of the company or
for the reduction of the share capital, will be deemed to affect directly the rights
attached to preference share and so they can vote on such resolutions.
In case of a public company where preference shares are cumulative as to
dividend and the dividend thereon has remained unpaid for an aggregate period of
two years before the date of any meeting of the company, the preference
shareholders shall have right to vote on every resolution before the meeting. In the
case of non-cumulative preference shares, preference shareholders have the right to


vote on every resolution if the dividend due on their capital remains unpaid either in
respect of a period of not less than two years ending with the expiry of the financial
year immediately preceding the commencement of the meeting or in respect of the
aggregate period of not less than three years comprised in the six years ending with
the expiry of the financial year aforesaid (Section 87).
Section 92 of the Act lays down that a company may, if authorised by its articles,
accept from any member the whole or a part of the amount remaining unpaid on any
shares held by him although no part of the amount has been called up. Such advance
payment, however, shall not confer on the member concerned any voting rights.
Shareholders Pre-emptive Rights
To preserve the shareholders proportionate dividend, liquidation and voting
rights, pre-emptive rights are often recognised, but their existence and scope can be
effected by provisions in the articles. However, Section 81 of the Companies Act,
1956 secures shareholders pre-emptive rights with regard to the further issue of
share capital by the company. The Section lays down:
(1) Where at any time after the expiry of two years from the formation of a
company or at any time after the expiry of one year from the allotment of shares in
that company made for the first time after its formation, whichever is earlier, it is
proposed to increase the subscribed capital of the company by allotment of further
shares, then such further shares shall be offered to the persons who, at the date of
the offer, are holders of the equity shares of the company, in proportion, as nearly as
circumstances admit, to the capital paid-up on those shares at that date [Sub clause
(a)] and unless the articles of the company otherwise provide, the offer aforesaid
shall be deemed to include a right exercisable by the person concerned to renounce
the shares offered to him or any of them in favour of any other person; and the notice
of offer shall contain a statement to this right [Sub clause (c)].
Variation of Members Rights
Members right are determined by the Companies Act, Memorandum of
association, Articles of association of the company and the terms of issue of shares.
Rights attached to a class of shares are known as class rights.
Members rights relate to dividend, voting at members meetings and return of
capital. Preference shareholders may have rights to a fixed amount or a fixed rate of
dividend or to cumulative dividend. Where the ordinary shareholders are conferred
the right to participate in the surplus assets on winding up of a company, it is not
deemed to be a class right as it is implied even in the absence of any express
provision in the articles.
Section 106 of the Companies Act, 1956 lays down that the rights attached to the
shares of any class can be varied with the consent in writing of the holders of not less
than three-fourths of the issued shares of that class or with the sanction of a special
resolution passed at a separate meeting of the holders of the issued shares of the
class. Further, the variation of rights of shareholders can be effected only:
(i) if provision with respect to such variation is contained in the Memorandum or
Articles of association of the company; or


(ii) in the absence of any such provision in a Memorandum or Articles of
association of the company, if such a variation is not prohibited by the terms
of issue of the shares of that class.
Rights of Dissentient Members
Section 107 of the Companies Act confers certain rights upon the dissentient
shareholders. According to this section, where the rights of any class of shares are
varied, the holders of not less than ten per cent of the shares of that class, being
persons who did not consent to or vote in favour of the resolution for the variation,
can apply to the Court
1
/Tribunal
2
to have the variation cancelled. Where any such
application is made to the Court
1
/Tribunal
2
, the variation will not be effective unless
and until it is confirmed by the Court.
9. LIABILITY OF MEMBERS
A member is liable to pay the full nominal values of the shares he holds in a
company as and when called up by the company. A member is also liable both under
civil law and under criminal law for any misrepresentation, fraud etc. which may, at
any stage during his membership, be detected by the company, of which he may be
proved guilty in securing the shares in the company and/or having the acquisition,
transfer or transmission thereof registered in his name in the books of the company.
The liability of the members becomes unlimited if the number of members falls
below the statutory limits i.e., seven in a public company and two in a private
company (Section 45).
The liability of a member to pay the entire nominal value of the shares he holds in
a company is not discharged until the whole amount is actually paid as and when
called. If before the full nominal value of the shares is paid, the company goes into
liquidation, the member becomes liable as contributory to pay the balance when
called upon to pay, by the liquidator of the company.
If a member ceased to be member of a company within one year prior to the
commencement of the winding up of the company he is liable to pay on the shares
which he held to the extent of the amount unpaid thereon, if:
(i) on the winding up, debts exist which were incurred while he was a member,
and
(ii) the present members are not able to satisfy the contribution required from
them in respect of their shares.
A person is liable as member in spite of a valid transfer of shares by him, if the
name of the transferee is not placed on the register of members, in place of the
transferors name. If a person applies for shares in the name of a fictitious person or
a person not in existence or uses another persons name for himself, or uses an
alias, and shares are allotted in that name or alias, he will be liable as a member.

1.
Existing.
2.
Proposed.


LESSON ROUND-UP
A Company is composed of members, though it has its own entity distinct from
members.
Every shareholder is a member and every member is a shareholder, however,
there may be exceptions to this statement.
Section 41 of the Companies Act provides the modes by which a person may
acquire membership of a Company.
by subscribing to the Memorandum,
by agreeing in writing to become a member,
by holding equity share capital of a Company as beneficial owner in the
records of a depository.
Company, non-profit making Company licensed under Section 25 of the
Companies Act can become member of any other company.
Foreigners, trade unions can hold shares in a company, and consequently
become its members.
Insolvent and bankrupt may be members of a company as long as they are on
the register of members.
Partnership firm, minor cannot become a member of a company.
Pawnee and Receiver cannot be treated as members.
Persons taking shares in fictitious names become liable as a member besides
incurring criminal liability u/s 68A of the Act.
Section 45 of the Act provides that the liability of the members of a company shall
be unlimited if the number of members falls below the statutory minimum limit.
Person ceases to be a member when his name is removed from register of
members of a company.
In accordance with Section 150, every Company shall keep register of its
members. This register shall be kept at the registered office of the Company
subject to the provisions of Section 163 of the Companies Act, 1956.
Section 154 contains guidelines for closing the register of members.
The Companies (Preservation and Disposal of Records) Rules, 1966 regulate the
preservation and disposal of register and index thereof which the Companies
registered under the Companies Act, 1956 are required to maintain.
On becoming a member, the person enjoys certain rights and is bestowed with
the liabilities as per the provisions of Companies Act.
SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation.)
1. Every shareholder of a company is known as a member while every member
may not be known as a shareholder. Comment.
2. Define a member. Distinguish him from a shareholder. In what ways may a
member become and cease to be a member of the company?


3. Who can become a member of the company? Can the following persons or
institutions become member of a company:
(a) Minor; (b) Company; (c) Partnership firm; (d) Foreigner; (e) Insolvent.
4. Describe the circumstances under which a register of members may be
rectified? Illustrate your answer in the light of the relevant provisions of the
Companies Act, 1956.
5. What are the particulars to be recorded in a register of members of a
company? Where is the register to be maintained and who has to maintain
it? Can a member have access to the register?
6. The name of X is found entered in the register of a company. But X
contends that he is not a member of the company. The company maintains
that X had orally agreed to become a member and hence his name was
entered in the register and so he is a member. Is the contention of the
company valid?
7. What are the individual and group rights of a member?
8. When does the liability of a member of a limited company become
unlimited?
9. Write short notes on:
(a)Cessation of membership of a company;
(b)Index of members;
(c)Membership by holding out;
(d)Variation of members rights;
(e)Registration of shares in the name of public office.


Suggested Readings :
(1) Guide to the Companies Act A. Ramaiya.
(2) Company Law and Practice P.K. Ghosh & V. Balachandran.















STUDY XIII
FINANCIAL STRUCTURE AND MEMBERSHIP - VIII
TRANSFER AND TRANSMISSION OF SECURITIES

LEARNING OBJECTIVES
Transferability of shares is one of the important characteristics of a company. This
chapter will make the students understand the concept of transfer of shares in a
company, various provisions of company law regulating transfer of shares, powers of
Board to refuse registration, transfer during winding up, transmission of shares,
transfers under depository system, etc.
Topics covered under the chapter are:-
Introduction
Provision regulating transfer of Securities
Stamp duty payable and Affixation/Cancellation of shares
Transfer of Debentures
Power of Board of Directors to refuse registration
Extension of time limit for presentation to prescribed authority under
Section 108(1D)
Transfer of securities of a public Co. under Section 111A.
Transfer of shares during winding up
Rights of transferor
Transmission of shares
Legal framework for Depository Systems.

1. INTRODUCTION
One of the most important characteristics of a company is that its shares are
transferable. Section 82 of the Companies Act, 1956 states that the shares or
debentures or other interest of any member in a company shall be movable property,
transferable in the manner provided by the articles of the company. Shares of a
public company are freely transferable. However, in terms of Section 3(1)(iii), a
private company is required to restrict the right to transfer its shares by its articles.
In view of the importance of transfer of such securities, provisions for the
regulation of their transfer have been enacted in Sections 108 to 111 of the
Companies Act, 1956 and the Securities Contracts (Regulation) Act, 1956 and a
Share Transfer Form No. 7B is prescribed under the Companies (Central
Governments) General Rules and Forms, 1956. For companies registered under
Section 25 of the Companies Act, form 7BB has been prescribed by the Ministry of
Corporate Affairs. The restrictions on acquisition and transfer of shares are also laid
down by the Foreign Exchange Management Act, 1999 and the Securities Contracts
(Regulation) Act, 1956.
437


2. PROVISIONS UNDER COMPANIES ACT REGULATING TRANSFER OF
SECURITIES
As per Section 108(1) of the Companies Act, 1956, a company, whether public or
private, shall not register transfer of shares in, or debentures of, the company, unless
a proper instrument of transfer duly stamped and executed by or on behalf of the
transferor, and transferee has been delivered to the company along with the
certificate relating to the shares or debentures, or if no such certificate is in existence,
along with the related letter of allotment. However, where on an application in writing
made to the company by the transferee and bearing the stamp required for an
instrument of transfer, it is proved to the satisfaction of the Board of directors that the
instrument of transfer signed by or on behalf of the transferor and transferee has
been lost, the company may register the transfer on such terms as to indemnity as
the Board may think fit. This sub-section is mandatory and unless all the pre-
requisites mentioned in the Sub-section are complied with, the transfer shall be void.
(Appeal No. 29 decided by the Company Law Board on 25.4.1980).
The instrument of transfer of shares must be in the prescribed Form No. 7B
The aforesaid Form No. 7B provides for writing the name, address and occupation of
the transferee, and signature by the transferor and the transferee, name of the
company to which the shares relate, the distinctive numbers of shares sought to be
transferred, certificate number, amount of considerations and the name of the stock
exchange on which dealt with, if any.
Section 108(1A) of the Companies Act, 1956 provides that every such form shall,
before it is signed by or on behalf of the transferor, and before any entry is made
therein, be presented to the prescribed authority, being a person in service of the
Government, who shall stamp or otherwise endorse thereon the date on which it is so
presented. Usually, Registrars of Companies are authorised to sign or stamp and put
date on such transfer instruments. The transfer deeds duly executed and completed
in all respects are required to be delivered to the company for registration within the
time prescribed in Section 108(1A) of the Act, viz.,
(i) in the case of shares dealt in or quoted on a recognised stock exchange, at
any time before the date on which the Register of Members is closed, in
accordance with the law, for the first time after the date of presentation of
the form to the aforesaid prescribed authority or within twelve months from
the date of such presentation, whichever is later;
(ii) in any other case, within two months from the date of such presentation.
The aforesaid provisions contained in Sub-section (1A) shall not apply, as per
Section 108(1C), to:
(A) any share:
(i) which is held by a company in any other body corporate in the name of a
director or nominee in pursuance of Sub-section (2) or (3) of Section 49 of
the Companies Act, 1956, or
(ii) which is held by a corporation, owned or controlled by the Central
Government or a State Government in any other body corporate in the name
of a director or nominee,


(iii) in respect of which a declaration has been made to the public trustee under
Section 153B if:
(1)the company or corporation as the case may be, stamps or otherwise
endorses, on the form of transfer in respect of such share, the date on
which it decides that such share shall not be held in the name of the
said director or nominee, or as the case may be in the case of any share
in respect of which any such declaration has been made to the public
trustees, the public trustee stamps or otherwise endorses, on the form of
transfer in respect of such share under his seal, the date on which the
form is presented to him, and
(2)the instrument of transfer in such form, duly completed in all respects, is
delivered to the
(a) body corporate, in whose share such company or corporation has
made investment in the name of its director or nominee, or
(b) company in which such share is held in trust.
within two months of the date so stamped or otherwise endorsed, or
(B) any share deposited by any person with:
(i) the State Bank of India, or
(ii) any Scheduled Bank, or
(iii) any other banking company, or financial institution approved by the Central
Government by notification in the Official Gazette, or
(iv) the Central/State Government or any corporation owned or controlled by any
such Government,
by way of security for the repayment of any loan or advance to or for the
performance of any obligation undertaken by such person, if:
(1) the bank, institution, Government or corporation stamps or otherwise
endorses on the transfer form of such share:
(a)the date on which such share is returned by it to the depositor, or
(b)in the case of the failure on the part of the depositor to repay the loan or
advance or to perform the obligation, the date on which such share is
released for sale by such bank, institution, Government or corporation,
or
(c)where the aforesaid bank, institution, Government or corporation intends to
get such share registered in its own name, the date on which the
instrument of transfer relating to such share, is executed by it; and
(2) the instrument of transfer in the prescribed Form No. 7B duly completed in
all respects, is delivered to the company within two months of date of
stamping or endorsement by the aforesaid prescribed authority, or
(C) any share which is held in any company by the Central Government or a State
Government in the name of its nominee except that every instrument of transfer
executed on or after 1.10.1966 in respect of any such share shall be in the
prescribed form.


Central Government is vested with powers under Section 108(1D) of the Act to
extend the aforesaid periods for delivery of the share transfer deed to the company
on an application made, where, in the opinion of the Government, it is necessary to
avoid hardship.
The Central Government has vide notification GSR No. 481(E) dated 22.4.1988,
empowered the Registrar of Companies, of the State in which the registered office of the
Company is situated or by the Registrar of Companies of the State in which the
transferee ordinarily resides to exercise the powers and functions under Section 108(1D).
Except Section 108(1), other Sections 108(1A) and (1C) are directory and not
mandatory in nature.
In Dove Investments P. Ltd. v. Gujarat Industrial Investment Corpn. Ltd.
[(2005) 60 SCL 604 (MAD)], the respondent company lodged with the appellant
company shares pledged with it for effecting transfer of the same in its name.
The appellant registered some of the shares and refused to register the balance
on the ground that the respondent had failed to comply with the provisions of
Section 108(1A) and 108(1C). The respondent was successful before the CLB
which held that provisions of Section 108(1C) are directory and directed the
appellant to register the shares. The appellant challenged the order of the CLB
before the High Court.
The Appeal was dismissed.
According to the High Court, insofar as Sub-section (1C) is concerned, if the
transfer of shares falls within any one of the exempted cases mentioned in that
Sub-section, the requirements as to presentation of the instrument of transfer in
favour of the prescribed authority and delivery thereof to the company within the
prescribed time limit, as contemplated in Sub-section (1A) are not applicable,
provided the conditions stipulated in Sub-section (1C) are satisfied. In view of
the same, if any bank or financial institution or the Central Government or a State
Government or any corporation owned or controlled by the Central Government
or a State Government, or a corporation granting a loan against the security of
shares, intends to get such shares registered in its own name, in the event of
failure on the part of the borrower to repay the amount of loan, it shall complete
the instrument of transfer and lodge it with the company for registration of the
transfer in its own name. In such a circumstance, they will have to stamp or
otherwise endorse on the instrument of transfer the date on which the bank or
financial institution decides to get such share registered in its own name and the
instrument so stamped or endorsed will have to be delivered to be company,
together with the share certificate, for registration of the transfer within two
months from the date so stamped or endorsed. It was not in dispute that the
instruments of transfer were neither stamped nor endorsed by the petitioner, as
required under Sub-section (1C) however, stamped by the prescribed authority
contemplated under Sub-section (1A)
As rightly observed by the Single Judge of the Karnataka High Court in
Mukundlal Manchanda v. Prakash Raodlines Ltd. (1971) Comp Cas 575, the
requirement of Sub-section 1A(b)(ii) has to be read reasonably, so as to enable
its smooth functioning; a delivery of instrument of transfer within a reasonable


time should be held as a proper delivery. Further, where the company opines
that the instrument of transfer has become stale and that it is improper to act
upon it, the instrument of transfer has to be held as liable to be ignored.
Further, even the belated delivery can be acted upon under certain
circumstances while moving the Central Government under Sub-section (1) of
Section 108(1A). In the light of the said provision, even though the discretion
lies in the company either to recognize the transfer or not to recognize it
depending upon the staleness of the instrument, the affected person can very
well move the Central Government under Sub-section (1D) by explaining the
circumstances under which the delay occurred and the hardship that resulted
by the non-recognition of the transfer. It was rightly concluded that in the light
of the scheme of Section 108, particularly after the insertion of Sub-section
(1A), (1B), (1C) and (1D), the court have to bear in mind that the trivialities
would not render an act futile and technical formalities required to be complied
with for a valid transaction cannot outweigh the importance to be given to the
substance of the transaction. Though the matter was taken up by way of appeal
before the Divisional Bench of the Karnataka High Court, the Division Bench
had not gone into the said aspect, namely, whether mandatory or directory,
however, confirmed the judgment of the Single Judge in Mukundlal
Manchandas case was to be upheld and accordingly it was held that except
Section 108(1) other provisions namely Sub-sections (1A) and (1C) are
directory and not mandatory in nature.
The number of extensions granted by the Central Government under this section
and the period of each such extension shall be shown in the annual report laid before
the House of Parliament under Section 638 of the Act.
The requirements of companys articles must also be satisfied. Where the article
requires the payment of transfer fee in the office of the company, depositing the same
in the Court was held to be not a sufficient compliance.
A transfer deed executed by the transferor alone does not pass the title in the
shares to the transferee. Where the transferors address and the distinctive numbers
of the shares were not mentioned in the transfer form, the same was held to be not
void because those particulars were verifiable from the accompanying share
certificate [Letheby & Christopher Ltd., Re (1904) 1 Ch 815].
A transfer is complete as between the transferor and transferee when all the
formalities such as execution of the transfer deed and handing over the share
certificates are completed [CIT v. Ramaswamy (1985) 57 Com Cases 7, 10 (Mad)].
In Life Insurance Corporation of India v. Escorts Ltd., (1986) 59 Com Cases 548
at 618: AIR 1986 SC 1370, the Supreme Court held that a transfer effective between
transferor and the transferee is not effective as against the company and any person
without notice of the transfer being registered in the companys register.
Transfer of shares by HUF
Section 108 enables the execution of a transfer deed by or on behalf of the
transferor or the transferee. In the case of a joint family, the transfer form would be
executed by the holding member or, in his absence, by the manager (Karta) of the


family who represents the family. [Vickers System International Ltd. v. Mahesh P.
Keshwani (1992) 73 Com Cases 317: (1991) 2 Comp LJ 444 (CLB)]. The same
would be true when the family is transferee. The CLB directed the company to
register shares in the name of the Hindu undivided family showing Mahesh P.
Keshwani as its Karta.
Section 108 not to apply to Auction Sales/Sale of Forfeited Shares
A transfer by a registered holder of shares cannot have any application to a Court
auction sale or sale of forfeited shares for non payment of calls etc. [Mohideen Pichai
Taraganar v. Tinnevilly Mills Co. Ltd., AIR 1928 Mad 571].
Where special permission is necessary
Where the transfer in question could be effected only with the permission of
Special Court, (Trial of Offences Relating to Transactions in Securities Ordinance,
1992), it was held that the refusal by the company to accept the transfer without such
permission was justified. Castrol India Ltd. v. S.S. Transfer of Mehta (1993) 78 Com
Cases 146 (1993) 2 Comp LJ 8 (CLB).
Transfer of Shares to Partnership Firm
The Companies Act does not contemplate the registration of the name of a firm
as the holder of shares of a company. A firm is not a person and as such is not
entitled to apply for membership. The Department of Company Affairs (Now, Ministry
of Corporate Affairs) has in its Circular No. 4/72 dated 9.2.1972 stated that a firm not
being a person cannot be registered as a member of a company except where the
company is licensed under Section 25.
Transfer of shares to a Body Corporate
An incorporated body being a legal person can acquire shares in its own name.
Where a company is a transferee, the following documents are required to be
submitted to the company :
(a) A certified true copy of the Board resolution and/or power of attorney
authorizing the signatory of the instrument of transfer to execute the
instruments;
(b) A certified true copy of a Board resolution passed under Section 292(1)(d) of
the Companies Act; and
(c) A certified true copy of Memorandum and Articles of Association of a
company.
Transferor Holds Bonus Shares Only as a Trustee for the Transferee
In Charanjiv Lal v. ITC Ltd. and Another [(2005) 5 COMP LJ 138 (CLB), the
petitioner-transferee purchased 100 equity shares of ITC limited of bearing and
lodged the same through post, which were received by the company on 10
th

December, 1991. However, the company did not take any action to register the
shares in the name of the petitioner and informed him that it had not received
the share certificates and the transfer instrument. To prevent any unauthorized


transfer of the shares, he obtained a status quo order from Senior Civil Judge,
Delhi. In the meanwhile, the company declared 60 bonus shares on two
occasions against the impugned 100 shares of which the certificate relating to
first 60 bonus shares had been sent to the transferor. The suit filed by the
transferee-petitioner was dismissed for want of jurisdiction and hence this the
petitioner-transferee approached the Company Law Board.
The Petition was allowed. The view expressed by the Judge was that the
bonus shares always go with the original shares and the transferor holds
bonus shares only as a trustee for the transferee. Considering that the original
shares have been sold before the record date, in the absence of denial by the
transferor nearly a month before the record date, it is the petitioner transferee
who is entitled to the bonus shares and not the transferor.
Provisions of Section 108 not to apply to Transfer of Shares Registered with the
Depository.
As stated earlier, in terms of Section 108 of the Act, the transfer of shares and
debenture of, a company, cannot be registered unless a proper instrument of transfer
duly stamped and executed by or on behalf of the transferor and by or on behalf of
transferee along with the certificate relating to the share or debentures has been
delivered to the company. These requirements are not applicable in respect of
transfer of securities where both the transferor and transferee are entered as
beneficial owners in the records of a depository. A new Sub-section (3) has been
inserted in Section 108 of the Act by Depositories Act, 1996 to this effect. Besides, no
stamp duty is payable for registration of transfer of shares in depository form.
However, transaction charges are payable to depository participants.
3. STAMP DUTY PAYABLE AND AFFIXATION/CANCELLATION OF STAMPS
Before the transfer is lodged with the company, it should be duly stamped. The
transfer of shares attracts stamp duty under the Indian Stamp Act, 1899 (Act 2 of
1899). Only the Central Government can levy stamp duty on share transfers. Stamps
at the rate of twenty five paise for consideration of Rs. 100 or part thereof is payable.
The duty chargeable shall, wherever necessary, be rounded off to the next five paise.
[S.O. 130(E) dated 28.1.2004 issued by Department of Revenue].
The stamp duty payable on transfer of debentures is, however, governed by
Article 62(b) of Schedule I to the Indian Stamp Act, 1899, and also varies from State
to State. In this case, the duty would be :
(i) the duty applicable where the deed is executed, or
(ii) the duty applicable where the registered office of the company is situated,
whichever is higher.
The amount of consideration is required to be mentioned in the share transfer
deed as otherwise the companies cannot verify whether share transfer stamp duty
has been correctly charged thereby attracting the penal provisions of the Stamp Act
in case of a default. Thus, in case where question of consideration does not arise like
in the case of a gift of shares, stamp duty will be paid on the basis of the market
value of shares and in case of unquoted shares or where quotations are not available


at the face value of the shares.
In the case of transfer of shares by the holder thereof in the name of a banking
company, as a security for facilities granted by the bank to the holder and to none
else and subsequent re-transfer of shares on release of the security, the Central
Government have reduced the stamp duty. Irrespective of the number of shares
covered by the transfer deed, the maximum stamp duty payable on such instruments
is only Rs. 7.50.
Under Section 108(1), a company cannot register the transfer of shares unless a
proper instrument of transfer duly stamped and executed by or on behalf of the
transferor and the transferee has been delivered to the company alongwith the share
certificate in question. The expression duly stamped has not been defined in the
Companies Act. Under Section 2(11) of the Indian Stamp Act, 1899 duly stamped as
applied to an instrument, means that the instrument bears an adhesive or impressed
stamp of not less than the proper amount and that such stamp has been affixed or
used in accordance with the law for the time being in force in India. Under Section 12(1)
of the Stamp Act, whoever affixes an adhesive stamp to an instrument which has been
executed by any person shall, when affixing such stamp, cancel the same so that it
cannot be used again. Sub-section (2) thereof makes it clear that any instrument
bearing an adhesive stamp which has not been cancelled so that it cannot be used
again, shall, so far as such stamp is concerned, be deemed to be unstamped. Sub-
section (3) thereof provides the manner in which the adhesive stamp can be cancelled
and provides that the stamp be cancelled by writing on or across the stamp his name or
initials or the name or initials of his firm. Section 17 of the Indian Stamp Act, 1899
makes it clear that all instruments chargeable with duty and executed shall be stamped
before, or at the time of execution. Therefore, the legal requirement is that the stamp
must be cancelled either before or at the time of execution [Babulal Choukhani v.
Western Indian Theatres Ltd. (1958) 28 Comp. Cas. 565; Canara Bank v. Ballarpur
Paper and Strawboard Mills Ltd., CLB decision, p.137].
It is not necessary that he should put the date on it (Kirpa Ram v. Barumal, 3 All
L.J. 326). A stamp may be effectively cancelled by merely drawing a line across it
(Mahadeo Koeri v. Sheoraj Ram Telki, A.I.R. 1919). But if it is possible to use the
stamp a second time in spite of a line being drawn across it, there is no effectual
cancellation (Hafix Allah Buksh v. Dost Mahammed, A.I.R. 1935 Lah. 716). If the
stamp is not cancelled, then the effect is the same as if the instrument is not stamped
(Re. Coronation Tea Co. Ltd., A.I.R. 1961 Cal. 528). The adhesive stamp affixed to
the transfer deed should be cancelled by the executant of the deed in accordance
with the provisions of Section 12 of the Indian Stamp Act, 1899. Legally the share
transfer deed is not duly stamped and for purposes of Section 108(1) of the
Companies Act, 1956, it is for the executant of transfer deed to cancel the stamp; the
plea that if the stamps had to be cancelled, the company could have easily done so,
was rejected by the Court [(1962) 32 Comp. Cas. 568].
Under Section 29 of the Indian Stamp Act, 1899, in the absence of an agreement
to the contrary, the expenses of providing the proper stamp shall be borne by the
person drawing, making or executing such instrument. In Jainarain Ram Lundia v.
Surajmull Sagarmull, A.I.R. 1949 F.C. 211, the Federal Court held that ordinarily and
as a matter of law, in the case of a contract of transfer of shares in a company, it was


the vendor who was liable for stamp duty. The matter arose out of a contract to sell
shares and the question for the consideration of the learned judges of the Federal
Court was whether the contract was complete or not. The party challenging the
contract contended that no agreement had been arrived at regarding the payment of
the stamp duty on the transfer deed and, therefore, the transfer could not be said to
be complete. It was contended, on the other hand, that the question of payment of
stamp duty was not one of the terms of the contract as ordinarily stamped duty was
paid by the transferor. This contention was accepted by the learned judges of the
Federal Court, and holding that in law it is the transferor who pays the stamp duty,
the absence of any agreement on this point could not invalidate the contract. The
Punjab High Court held in G.R. Parry and Another v. Union of India and Others,
(1962) 22 Comp. Cas. 145, that the transferee is not liable for paying stamp duty
simply because an instrument of transfer of shares is required to be executed both by
the transferor and transferee. There is no provision in the Companies Act or in the
Stamp Act which would make the company liable for payment of the proper stamp
duty and that the liability to pay stamp duty in the case of instrument of transfer of
shares is upon the executant and that liability cannot be considered to have been
duly discharged by the mere fact that the amount required for purchasing the stamps
had been paid to the company by the appellant [V. Kabaleswaran and Others v.
Varalakashmi Fund (Vellore) Ltd., C.L.B. decisions p. 53].
4. LOST TRANSFER DEEDS
It is sometimes found that the transfer documents sent to companies are lost, say,
in transit. In such a case, the company may receive a request from the transferee by
way of an application carrying adequate stamp duty. In terms of the first proviso to
Section 108(1) of the Act, the procedure is: (1) an application, in writing should be
made to the company by the transferee, which should bear stamp duty required for an
instrument of transfer. (2) the Board of directors of the company should be satisfied that
the instrument of transfer signed by or on behalf of the transferor and by or on behalf of
the transferee has been lost. The proof may be in the form of an affidavit from the
transferor or the transferee and supported by the purchase or sale note of the broker
and the registration receipt issued by the postal authorities. (3) In addition, the
company can take an indemnity to safeguard its position.
5. DELEGATION OF POWERS FOR TRANSFER
The Companies Act, 1956 does not mention that the registration of share
transfers should be approved by the Board of directors in a meeting or a committee
thereof. It is the articles of the company which authorise the Board of directors to
accept or refuse transfer of shares, at their discretion. The Board further have the
power to delegate all or any of their powers to any of the directors of the company or
any person even not in the employment of the company. Therefore, the articles of
association should authorise the Board of directors to delegate the powers suitably.
Only in the case of refusal to register a transfer, the directors are required to exercise
their discretion.
6. TRANSFER OF DEBENTURES
In the case of debentures, the transfer instrument is not required to be dated by
the prescribed authority nor the transfer is subject to any statutory period within which


the registration has to be effected. However, stamp duty is payable for transfer of
debentures and the duty varies from State to State, as explained above.
After registering the transfer, the particulars thereof have to be recorded in the
Debenture Transfer Register and should be initialled by the appropriate authority.
After making appropriate endorsements, the debenture certificate may be sent to the
party concerned.
7. POWER OF THE BOARD OF DIRECTORS TO REFUSE REGISTRATION
Where the articles give power to the Board of directors to refuse to register a
transfer of shares, such power must be exercised actively by the directors, and
unless they do so, the transfer must be registered. This means that there must be a
refusal to register a transfer by a resolution of the Board of directors passed either
unanimously or by majority. If one of the two directors refuses to attend a Board
meeting so that quorum cannot be reached and consequently the consent of the
Board for registration of share transfer cannot be obtained, the Court will order that
the transferee should be entered on the register of members [Gopal Varnish Co. Ltd.
(1917) 2 Ch. 349].
Where the articles give the directors absolute and uncontrolled power to
refuse registration of a transfer, they can do so without giving any reason and
such refusal can be attacked only if the directors have not exercised their discretion
honestly in the interest of the company.
If their refusal is exercised mala fide, i.e. if they act oppressively, capriciously, or
corruptly, the Company Law Board will interfere and order registration of the transfer
of shares (B. Choukhani v. Western India Theatres Ltd., A.I.R. 1957 Cal. 709). The
onus of proving bad faith on the part of directors, rests on the plaintiff. However, the
directors cannot refuse to register transfer of shares effected by a Court sale, in spite
of powers given by the articles [In Re. Wahib Bus and Mails Transport Co., (1947) 17
Comp. Cas. 182].
The provisions with regard to power of the Board to refuse registration and appeal
against refusal are contained in Section 111 of the Companies Act, 1956. It may be
noted that though the inherent power of the Board to refuse registration of transfer of
shares, if so, authorised by the articles and intimation thereof to the transferor and the
transferee has been retained, this right has been sheltered with sufficient safeguards by
the Amendment Act of 1988 by requiring companies to categorically state the reasons
therefor. According to Sub-section (1) of Section 111, if a company refuses, whether in
pursuance of any power of the company under its articles or otherwise, to register the
transfer of or the transmission by operation of law of the right to any shares or interest
of a member in, or debentures of the company, it shall within two months from the date
on which the instrument of transfer, or the intimation of such transmission, as the case
may be, was delivered to the company, send notice of the refusal to the transferee and
the transferor or to the person giving intimation of such transmission, as the case may
be giving reasons for such refusal.
The power to refuse registration of shares which is conferred on the directors by
the articles, is a discretionary power and must be exercised reasonably, and in good
faith for the benefit of the company. Unless the contrary is proved, the power is


deemed to have been exercised properly (Berry & Stewart v. Tottenham Hostpur
Football and Athletic Co. Ltd., 1936, 3 A11 E.R. 554).
Refusal to register share transfer on suspicion that the employee if admitted as a
member will attend general meetings of the company and may create nuisance by
raising irrelevant issues and also obtain access to the records to the company as a
shareholder is not a valid reason. (Appeal to the CLB No. 27, of 1975 dated 17th
August, 1976, Shri Nirmal Kumar v. Jaipur Metal and Electrical Limited).
The mere attempts of a person to wind up a company more than once cannot be
a ground for refusing to register transfer by the directors [Rangpur Tea Association
Ltd. v. Makkan Lal Samaddar (1979), 43 Comp. Cas. 58].
Where the articles of association of a company confer a discretion on the
directors with regard to acceptance of transfers, this discretion like all the directors
powers is a fiduciary one to be exercised bona fide in what the Board considers to be
in the interest of the company. If on a true construction of the articles, the directors
are only given the powers to reject on certain prescribed grounds and it is proved that
on these grounds the request for transfer was rejected, the Court cannot substitute
the opinion of the Board. If the articles of association give an unfettered discretion,
the court would interfere with it only on proof of bad faith. [M.J. Amrithalingam v.
Gudiyatham Textiles Pvt. Ltd., (1972) 42 Comp. Cas. 350].
The Supreme Court, in Bajaj Auto Limited v. N.K. Firodia, AIR 1971, S.C.
321, has laid down the principles of law relating to refusal of transfer of shares.
While discussing the nature of directors discretion to refuse registration of
shares, the Supreme Court observed : discretion implies just and proper
consideration of the proposal under the facts and circumstances of the case. In
the exercise of that discretion, the directors will act in the paramount interest
of the company and in the general interest of the shareholders because the
directors are in a fiduciary position both towards the company and towards
every shareholder. The directors are, therefore, required to act bona fide and
not arbitrarily and not for any collateral motive. It was observed further that
where the articles permitted the directors to decline to register transfer of
shares without stating reasons, the Court would not draw unfavourable
inferences against the directors because they did not give reasons. The Court
would assume that the directors acted reasonably and bona fide and those who
allege to the contrary would have to prove and establish the same by evidence.
However, if the directors gave reasons, the Court would consider whether they
were legitimate and whether the directors proceeded on right or wrong
principle. The Court has also laid down three tests to determine the proper
exercise of power by the Board of directors. The tests are:
1. Whether the directors acted in the interest of the company;
2. Whether they acted on a wrong principle; and
3. Whether they acted on oblique motive or for a collateral purpose.
If the directors have uncontrolled and absolute discretion in regard to
declining registration of transfer of shares, the Court would consider whether
the reasons were legitimate or the directors acted on a wrong principle, or from


corrupt motive. If the reasons for refusal given by the directors were legitimate,
the Court would not over-rule that decision merely on the ground that the court
would not have come to the same conclusion. The discretion of the directors
was to be tested as the opinion of any fair and sensible man in the interest of
the company.
Where the appellant transferee and respondent company were in the same line
of business and were rivals, the refusal on the ground of rivalry will be justified in
terms of the decision rendered by the Supreme Court in the Bajaj Auto Case (ibid).
Under these circumstances, the investment cannot be considered to have been made
bona fide with the intention of making profits. The respondent company is entitled to
refuse the registration even in the absence of an enabling provision in articles in view
of the provisions of Section 111(2) [Modi Carpets Ltd. v. Trans-Asia Carpets Ltd.,
Appeal No. 2 of 1980 decided on 26.12.1981 (CLB)].
A company cannot register transfer of shares unless the instrument of transfer is
duly stamped and is delivered to the company. The expression duly stamped has to
be construed with reference to the provisions of Section 2(11) of the Indian Stamp
Act, 1899 and the document in question would be an invalid one if the stamp affixed
thereon has not been cancelled. Under Section 108(1) of the Companies Act, 1956, it
is mandatory that the company shall not register the transfer of shares unless a
properly executed instrument of transfer duly stamped has been delivered to the
company [Shri Parveen Sharda v. Chopsani Ice Aerated Water and Oils Mills Ltd.,
Appeal No. 1 of 1982 decided on 10.1.1983 (CLB)].
In Vardhaman Publishers Ltd. v. Mathrubhumi Printing & Publishing Co. Ltd.
(1990), the Kerala High Court held that affixing stamps on a separate sheet of paper
and attaching it to the transfer application or cancellation of stamps by drawing a line
across the stamp was not improper and would not invalidate the said application. On
the question of whether a newly added Article empowering the Board to reject
transfer of shares would affect transactions of sale of shares entered into before the
insertion of the Article, the Court held that the property in the shares passes on the
date of transfer and the right to have the shares registered in the transferees name
becomes crystallised on that day itself. Any alteration of articles will not affect
concluded transactions and in respect of such transactions, the then existing articles
would prevail. So, if the original (unaltered) Articles as on the date of transfer permit
free transfer of shares, the Board cannot refuse registration of the transfer.
In Shri T.N. Kuriakos v. Premier Tyres Ltd., decided on 13.6.1983 (CLB), the
appeal against the refusal by the respondent company to register transfer of shares
was allowed by the Company Law Board on the ground that the refusal of the
respondent to register transfer of shares in favour of the appellant was based on the
decision of the Transfer Committee, a sub-committee of the Board of directors and
not that of the Board of directors as such, and, therefore, the said decision was not a
valid and legal decision.
Rejected Documents
Documents which are not duly stamped or where stamps are not cancelled
should be returned to the persons lodging them pointing out the errors so as to


enable them to rectify the error. In Federal Bank Ltd. v. Smt. Sarla Devi Rathi (1997)
CLA 183 (Raj.), the company had not registered 100 shares that Smt. Sarla Devi
Rathi, the respondent, had purchased. They neither returned the share certificates to
her. The company urged that since the respondent had not become a shareholder of
the company, no cognizance of the complaint could be taken. The High Court held
that there was a prima-facie case against the company.
The CLB has pointed out that the company on not registering the transfer should
have returned the documents to the party who lodged them (the transferee in this
case) and not the transferor as the transferor loses his right in the shares as soon as
he executes the transfer in blank.
Time for pointing out insufficiency of stamps
Where a company by mistake or otherwise registers a transfer which should have
been refused because of insufficient or uncancelled stamps, or because of the
instrument being unstamped, it should point out the error to the transferee within such
time (within one year from the date of execution) that the transferee can have the
matters rectified through the orders of the Collector. Afterwards it would be too late.
[Kothari Industrial Corpn. Ltd. v. Lazor Detergents P. Ltd., (1994) 1 Comp LJ 178
(CLB Mad)].
Impounding of Documents Relating to Share Transfer
The Board of directors are not persons to impound or regularise an instrument of
transfer which is not duly stamped, Mathrubhumi Co. Ltd. v. Vardhaman Publishers
Ltd., (1992) 73 Com Cases. 80 93 (Ker) as they have no authority under Sections 33
and 42 of the Stamp Act.
Extention of Time Limit for Presentation to prescribed Authority under Section
108(1D)
Where an instrument is not complete or is erroneous, it will be a case of bad
delivery and the company would be entitled to refuse registration. The transferor is
bound to rectify the errors and lodge the transfer within the prescribed time-limit from
the date of presentation to the prescribed authority, failing which the investor will
have to make the application to the Central Government (Registrar of Companies)
under the provisions of Section 108(1D) for extension of the prescribed period for
delivery of the transfer deed.
Compliance with Section 108 a mandatory provision
The Allahabad High Court had held that the provisions of Sub-section (1)
are not mandatory but only directory and, therefore, the registration of a transfer
of shares without an instrument of transfer is not void. Maheshwari Khetan Sugar
Mills v. Ishwari Khetan Sugar Mills, (1963) 2 Comp LJ 74 : (1963) 33 Com Cases
1142 (DB) (All). But Section 108 mentions the words shall not register which have
the effect of forbidding the act of transfer except on the fulfilment of certain conditions
precedent.


The above decision of the Allahabad High Court has since been reversed by the
Supreme Court in Mannalal Khetan v. Kedar Nath Khetan (1977) 47 Com Cases 185:
AIR 1977 SC 536 where the mandatory nature of the provisions of Sub-section (1) of
Section 108 has been elaborately discussed and emphasised. The result is that
without production of the share certificate along with the application for transfer, the
transfer cannot be registered and if registered, the registration will be void.
8. TRANSFER OF SHARES TO A MINOR
In India, a minor is not competent to enter into any contract, as under Section 11
of the Indian Contract Act, 1872, a person who has attained the age of majority is
only competent to contract. In Mohari Bibi v. Dharamdas Ghosh (1903) 30 Cal. 539
(P.C.), the privy council held that a contract by a minor is void ab initio. Since a minor
cannot enter into a contract or agreement except through a guardian, and since as
per Section 153, no notice can be taken of the fact that the guardian holds a share in
trust for a minor, it follows that his name cannot be entered in the Register of
Members and therefore, he cannot become a member of a company. There is,
however, no objection in law to the guardian of a minor entering into a contract on
behalf of a minor, by virtue of the statutory right conferred on the guardian of a minor
under Section 8 read with Section 4 to 6 of the Hindu Minority and Guardianship Act,
1956. Since Section 108 of the Companies Act enables execution of transfer deed by
or on behalf of the transferor or the transferee, the transfer deed can be executed by
a minor through his natural guardian as transferee, and the contract so entered into
by a minor through his natural guardian is a binding and valid contract under Section
8 of the Hindu Minority and Guardianship Act, 1956.
In Diwan Singh v. Minerva Films Ltd., (1958) Comp. Cas 191, it was held that
there is nothing in law to prevent minors acquiring or holding shares in a joint stock
company if they are properly represented and act by lawful guardians. The minor is
not subject to any obligation by holding paid-up shares. (See also P.V.C. Raju v.
General Papers Ltd., CLB decision p. 114). In R. Balaraman v. Buckinghum &
Carnatic Co. Ltd., (1969), Comp LJ 81, the Company Law Board held that an
agreement in writing for a minor to become a member may be signed on behalf of the
minor by his lawful guardian and the registration or shares in the name of a minor,
acting through his/her guardian, cannot be refused on the ground that the transferee
is a minor, specially when the shares, are fully paid-up. On such refusal to register
fully paid-up shares the Board of directors have not acted in the interest of the
company, and such action affect adversely the free transferability of shares in a
public limited company [Nandita Jain v. Bennet Colemen & Co. Ltd., CLB decision p.
37 (which followed the decision in R. Balaraman v. Buckinghum & Carnatic Co. Ltd.;
Saroj v. Britannia Industries Ltd., CLB Appeal No. 5 of 1980 decided on 14.12.1981].
The articles of association of a company cannot impose a blanket ban prohibiting
transfer of shares in favour of a minor, as such a restriction is unreasonable and not
sustainable. Section 82 of the Companies Act, 1956 provides that shares in a
company are movable property and are transferable. The expression in the manner
provided by the articles of association of the company can only be interpreted to
mean the procedure to be adopted for transfer and impose restrictions, which are
meaningful and reasonable. In case, the restriction imposed on transfer to a minor is


accepted, it would mean that the shares of a deceased member can never be
inherited by the legal heir who might be a minor. This would lead to a highly unjust
situation and cannot be accepted as tenable. Accordingly, if the shares can be
transmitted in favour of a minor, there is no reason why the shares which are fully
paid-up and in respect of which no financial liability devolves on the minor are to be
held as not transferable merely because of the ban imposed in the articles of
association [Saroj v. Britannia Industries Ltd., Appeal No. 5/80 decided on 14.12.81
by CLB].
9. STATUTORY REMEDY AGAINST REFUSAL UNDER SECTION 111
One of the fundamental features of joint stock companies is that their shares are
capable of being transferred. The right of the shareholder to transfer his shares in a
company is absolute as it is inherent in the ownership of the shares subject only to
provisions of the Act and restrictions, if any, laid down in the articles.
According to Section 111(2) of the Companies Act, 1956, the transferor or the
transferee, or the person who gave intimation of the transmission by operation of law,
as the case may be, may appeal to the Company Law Board against any refusal of
the company to register the transfer or transmission, or against any failure on its part,
within the period referred to in Sub-section (1) either to register the transfer or
transmission or to send notice of its refusal to register the same.
An appeal under Sub-section (2) shall be made within two months of the receipt
of the notice of such refusal or, where no notice has been sent by the company,
within four months from the date on which the instrument of transfer, or the intimation
of transmission, as the case may be, was delivered to the company. [Section 111(3)].
In Vasant Investment Corporation Ltd. v. Company Law Board (1999) 19 SLL
502 (Bom), it was held that it is for the party making an appeal to the CLB to prove
that the decision of the Board of directors is initiated by an ulterior motive in case of a
refusal by the Board to register a transfer.
The amended Section 111 assimilates in its fold the provisions for rectification of
register of members empowering the CLB to order rectification of register of
members, instead of the High Court. Sub-section (4) of Section 111 provides that if
(a) the name of any person is without sufficient cause entered in the register of
members, or after having been entered in the register is without sufficient cause
omitted therefrom, (b) default is made or unnecessary delay takes place in entering in
the register, the fact of any person having become or ceased to be a member
including a refusal under Sub-section (1), the person aggrieved or any member of the
company, or the company may apply to the CLB for rectification of the register.
The CLB while dealing with the cases of appeal preferred to it under the
circumstances stated in Sub-section (2) above or on an application for rectification
of the register under Sub-section (4) may after hearing the parties either dismiss
the appeal or reject the application or by order direct that the transfer or
transmission be registered by the company and the company shall be required to
comply with such orders within 10 days of its receipt or direct for rectification of the
register, and also direct the company to pay damages, if any, sustained by the


person aggrieved [Sub-section (5)].
In Ratnesh H. Bagga v. Central Circuit Cine Association [(2005) 128 Comp
Cas 370 (CLB)], decided on 10.9.2004, respondent is a Section 25 company.
The petitioner applied for membership of the respondent and his application
was rejected. The petitioner filed a petition under Section 111 of the Companies
Act, 1956 seeking rectification of the register of members by putting his name
in the register of members of the respondent company.
The petition was dismissed.
The reason stated was that Sub-sections (1), (2) and (3) of Section 111
apply only to transfer or transmission of shares and has no application in the
present case. Sub-section (4) would apply only in a case of rectification of
something in the register which should not be there or something omitted from
the register which should rightly be there. The complaint of the petitioner is
that the association had rejected his application for membership and thereby
refused to put his name in the register of members. The two conditions
prescribed in Section 41 of the Act are cumulative in nature in the sense that
there should not only be an agreement in writing but the name also should be
entered in the register of members to become a member of a company. Merely
agreeing to become a member of a company and on that basis to claim that the
refusal of the company to enter his name in the register would entitle a
petitioner to file a petition under Section 111 is not sustainable. Whether the
refusal by the association was malafide or whether the articles giving power to
the association to reject an application of membership are valid etc are beyond
the scope of Section 111.
It is, however, pertinent to note that though time limits for filing of an appeal in
circumstances stated in Sub-section (2) have been specified, however no limit has
been laid down for preferring an application for rectification of the register of
members in Sub-section (4). But in regard to rectification to register of members
provisions of Article 137 of the Limitation Act would apply and in consequence the
application for rectification of register of members must be preferred within three
years from the date on which the right occurs. [Anil Gupta v. Delhi Cloth & General
Mills Co. Ltd. (1983) 54 Comp. Cas 301 (Delhi)]. Every appeal or application to the
CLB whether under Sub-section (2) or (4) shall be made by a petition in writing and
shall be accompanied by a fee of Rs. 500 as has been specified in the Company Law
Board (Fees on Applications and Petitions) Rules 1991.
The section empowers the CLB at its discretion to make such interim orders
including orders as to injunction or stay, as it may deem fit and just, such orders as to
costs as it thinks fit and incidental or consequential orders regarding payment of
dividend or the allotment of bonus or right shares [Sub-section (6)]. The CLB may on
any application under this section decide not only the question of title of any person
but also any question which is necessary or expedient to be decided in connection
with the application for rectification. The provisions stated above regarding
rectification of the register of members shall apply in relation to the rectification of the
register of debentureholder as they apply in relation to the rectification of the register
of members.


If default is made in giving effect to the orders of the CLB under this section, the
company and every officer of the company who is in default shall 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 day if such default continues. In addition, where the
default is made in complying with any provisions of Section 111, the company and
every officer of the company who is in default shall be punishable with fine which may
extend to Rs. 500 for every day during which the default continues.
In the matter of a private company, it may be stated that though by its very
definition under Section 3(1)(iii) a private company restricts transfer of its shares,
under Section 111 the power of a private company to refuse transfer of shares has
been reiterated under Sub-section (13). However, the right conferred is only to the
extent to enforcing restrictions contained in the articles of association and not on any
other grounds. Also, Sub-section (11) of Section 111 provides that petition will lie for
non-transmission of shares in or debentures of a private company which is not a
subsidiary of a public company, if such transmission is by way of sale thereof held by
a court or other public authority.
10. APPLICABILITY OF SECTION 111 TO PRIVATE COMPANIES AND NOT TO
PUBLIC COMPANIES
Sub-section (14) inserted in Section 111 by the Depositories Act, 1996 makes
Section 111 applicable only to private companies which includes the private
companies which are public limited companies by virtue of Section 43A. As a
consequence of this addition, Section 111 is not applicable to public companies.
11. TRANSFER OF SECURITIES OF A PUBLIC COMPANY (SECTION 111A)
The newly inserted Section 111A provides that the securities of a company other than
a private company are freely transferable. The Board of directors of a Company or the
concerned depository has no discretion to refuse or withhold transfer of any security. The
transfer has to be effected by the company/depository automatically and immediately.
Where, however, the transfer of shares or debentures is effected in contravention of
the provisions of Securities and Exchange Board of India Act, 1992 or regulations made
thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985*,
*
or any
other law for the time being in force an application can be made to the Company Law
Board by depository, company, participant or investor or the Securities and
Exchange Board of India within two months from the date of transfer of the shares or
debentures held by the depository or from the date on which the instrument of
transfer or the intimation of transmission was delivered to the company, as the case may
be, to rectify the register or records of the company or depository. If the Company
Law Board, after making such inquiry as it thinks fit, is satisfied that the contravention
has taken place, it may direct the company or the depository to rectify the register
or the records of ownership. In terms of Section 111A the CLBs scope of power for
rectification of register of members is restricted only in cases of refusal by the company to
make transfer of shares. This section applies to public companies.
The Company Law Board may pending completion of the inquiry, at its discretion

*
To be repealed.


suspend the voting rights in respect of the securities, which are subject matter of
inquiry. During the pendency of the application before the Company Law Board, the
transferee can transfer the security and such further transfer would entitle the
transferee to voting rights also, unless the voting rights in case of transferee have
also been suspended by Company Law Board.
Restrictions on the acquisition and transfer of shares of, or by, certain bodies
corporate
Sections 108A to 108G were introduced in the Companies Act by the Companies
(Amendment) Act, 1974, to regulate the acquisition and transfer of shares of certain
bodies corporate. By the MRTP (Amendment) Act, 1984 w.e.f. 1.8.1984 these
sections were transferred to MRTP Act, 1991 as Sections 30A to 30G in Chapter IIIA
of the MRTP Act, 1969 but again have been transferred to the Companies Act, w.e.f.
28.12.1991.
The restrictive provisions of this chapter applied to the acquisition or transfer of
shares or share capital by or to an individual, firm, group, constituent of a group, body
corporate or bodies corporate under the same management, who or which (a) was
the owner in relation to an undertaking to which Part A of Chapter III applied; or (b)
would have become as a result of such acquisition or transfer of shares or share
capital the owner of an undertaking to which Part A of Chapter III applied or would
have applied. With the restructuring of the MRTP Act, 1991 and removal of Sections
26 to 30 of Part A of Chapter III, these sections were retransferred to the Companies
Act as Sections 108A to 108G w.e.f. 28.12.1991.
Section 108A prohibits any individual, firm, body corporate, group, constituents
of a group or bodies corporate under common management to acquire more
than 25 percent of the paid up equity share capital of a public company without the
prior approval of the Central Government. Where any individual, firm, group etc. is
prohibited as above from acquiring without the approval of the Central Government
any share of a public limited company or a private company which is a subsidiary
of a public company then no company in which not less than fifty one percent of
the share capital is held by the Central Government or a corporation (not being a
company) established by or under any Central Act or a financial institution
shall transfer or agree to transfer any share to such individual, firm etc. unless it
has obtained the permission of the Central Government. Every application for
approval of the Central Government under Section 108A shall be in Form 7D of the
Companies (Central Governments) General Rules and Forms 1956.
Under Section 108B it is obligatory for every body corporate or bodies corporate
under the same management holding whether singly or in the aggregate 10 percent
or more of the subscribed equity share capital of any company, to intimate the
Central Government about its proposal for transfer of such shares [Section 108(1)].
Such an intimation should include a statement as to shares proposed to be
transferred, the name and address of the person to whom the share is proposed to
be transferred, the shareholding, if any, of the proposed transferee in the concerned
company and other prescribed particulars. Where on such an intimation or otherwise
the Central Government is of the opinion that as a result of such transfer a change in
the composition of the Board of directors is likely to take place and that change would


be prejudicial to the interest of the company or to public interest, it may by order
direct that no such share shall be transferred. However, no such order shall preclude
the body corporate or bodies corporate from intimating in accordance with the
provisions of Sub-section (1) to the Central Government its or their proposal to
transfer the shares to any other person.
Where such share is held in a company engaged in any industry specified in
the Schedule XV (see Annexure) to the Act it may by order direct the transfer of
such shares to the Central Government or to such corporation owned or controlled
by the Government as may be specified. Where a direction herein is made by the
Central Government, the shares referred to in such direction shall stand transferred
to the Central Government or to the corporation specified therein, and the Central
Government or the specified corporation, as the case may be, shall pay, in cash to
the body corporate or bodies corporate, from which shares stand transferred, an
amount equal to the market value of such shares, within the time specified in Sub-
section (4).
Market value means, in the case of a share which is quoted on any recognised
stock exchange, the value quoted at such stock exchange on the date immediately
preceding the date on which the direction is made, and, in any other case, such value
as may be mutually agreed upon between the holder of the share and the Central
Government or the specified corporation, as the case may be, or in the absence of
such agreement, as may be determined by the Court [Explanation to Sub-section (3)].
Sub-section (4) of Section 108B provides that the market value herein shall be given
forthwith where there is no dispute as to such value or where such value has been
mutually agreed upon but where there is a dispute as to market value, such value as
is estimated by the Central Government or the corporation, as the case may be, shall
be given forthwith and the balance, if any, shall be given within thirty days from the
date when the market value is determined, by the Court. If no such direction
prohibiting transfer or ordering transfer to Government or specified corporation is
received by the applicant company within a period of sixty days of the receipt of the
intimation by the Government, the applicant would be free to transfer the shares as
proposed.
Section 108C places restrictions on the transfer of shares of foreign companies.
Accordingly, no body corporate or bodies corporate under the same management
which holds or hold in aggregate ten percent or more of the nominal value of the
equity share capital of a foreign company, having an established place of business in
India, shall transfer any share in such foreign company to any citizen of India or any
body corporate incorporated in India except with the previous approval of the Central
Government and such previous approval shall not be refused unless the Central
Government is of the opinion that such transfer would be prejudicial to public interest.
Every intimation referred to in Section 108B as well as every application for approval
under Section 108C shall be given in Form 7E of the Companies (Central
Governments) General Rules and Forms, 1956.
Section 108D(1) empowers the Central Government to direct a company not to
give effect to any transfer of shares if it was satisfied that such transfer was likely to
bring about a change in the controlling interest of the company which would be
prejudicial to the interest of the company or to public interest. Where a share transfer


has been registered, the Government can by order prohibit the transferee or his
nominee or proxy of the transferee to exercise any voting rights or other rights
attached in such shares.
Where, however, the transfer of such share or block of shares has not been
registered the Government may prohibit not to permit any nominee or proxy of the
transferor to exercise any voting or other rights attaching to such share or block of
shares.
Sub-section (2) of Section 108D provides that where any direction is given by the
Central Government under Sub-section (1), the share or block of shares referred to
therein shall stand retransferred to the person from whom it was acquired, and
thereupon the amount paid by the transferee shall be refunded to him by the person
to whom such share or block of share stands retransferred. If the refund referred to is
not made within the period of thirty days from the date of the direction referred to in
Sub-section(1) the Central Government shall, on the application of the person entitled
to get the refund, direct, by order, the refund of such amount and such order may be
enforced as if it were a decree made by Civil Court [Sub-section (3)].
The person to whom any shares or block of shares stands or stand retransferred
under Sub-section (2) shall, on making refund under Sub-section (2) or Sub-section
(3), be eligible to exercise voting or other rights attached to such share or block of
shares.
Section 108F stipulates that the restrictions contained in Section 108A (except
Sub-section (2) thereof shall not apply to the transfer of shares to and nothing in
Section 108B or Section 108C or Section 108D shall apply to the transfer of any
shares by (a) any company in which not less than fifty one percent of share capital is
held by the Central Government; (b) any corporation (not being a company)
established by or under any Central Act; and (c) and financial institution.
Every request made to the Central Government for according its approval to the
proposal for the acquisition of any share referred to in Section 108A or the transfer of
any share referred to in Section 108C shall be presumed to have been granted
unless, within a period of 60 days from the date of receipt of such request, the
Central Government communicates to the person by whom the request was made,
that the approval prayed for cannot be granted (Section 108E).
Applicability of Sections 108A to 108F
Section 108G deals with the applicability of the provisions of Section 108A to
108F, it provides that the provisions of Section 108A to 108F (both inclusive) shall
apply to the acquisition or transfer of shares or share capital by, or to, an individual,
firm, group, constituent of a group, body corporate or bodies corporate under the
same management, who or which (a) is, in case of acquisition of shares or share
capital, the owner in relation to a dominant undertaking and there would be, as a
result of such acquisition, an increase (i) in the production, supply, distribution or
control of any goods that are produced, supplied, distributed or controlled in India or
any substantial part thereof by that dominant undertaking, or (ii) in the provision or
control of any services that are rendered in India or any substantial part thereof by
that dominant undertaking, or (b) would be, as a result of such acquisition or transfer
of shares of share capital, the owner of a dominant undertaking or (c) is in case of


transfer of shares or share capital the owner in relation to a dominant undertaking.
The expressions group, same management, financial institution, dominant
undertaking and owner used in Sections 108A to 108G (both inclusive), shall have
the meanings respectively assigned to them in the Monopolies and Restrictive Trade
Practices Act, 1969 [Section 108(H)].
Section 108-I provides penalty for acquisition or transfer of shares in
contravention of Section 108A to 108D. According to it:
Any person who acquires any share in contravention of the provisions of
Section 108A shall be punishable with imprisonment for a term which may
extend to three years or with fine which may extend to fifty thousand rupees,
or with both.
Every body corporate which makes any transfer of shares without giving any
intimation as required by Section 108B shall be punishable with fine which
may extend to fifty thousand rupees.
Where any contravention of the provisions of Section 108B has been made
by a company, every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to three years, or
with fine which may extend to fifty thousand rupees, or with both.
Every body corporate which makes any transfer of shares in contravention
of the provisions of Section 108C shall be punishable with fine which may
extend to fifty thousand rupees.
Where any contravention of the provisions of Section 108C has been made
by a company, every officer of the company who is in default shall be
punishable with imprisonment for a term which may extend to three years, or
with fine which may extend to fifty thousand rupees or with both.
Every person who transfers any share in contravention of any order made by
the Central Government under Section 108B or given effect to any transfer
of shares made in contravention of any direction made by the Central
Government under Section 108D or who exercise any voting right in respect
of any share in contravention of any direction made by the Central
Government under Section 108D shall be punishable with imprisonment for
a term which may extend to five years and shall also be liable to fine.
If any company gives effect to any voting or other right exercised in relation
to any share acquired in contravention of the provisions of Section 108B, or
which gives effect to any voting right in contravention of any direction made
by the Central Government under Section 108D, the company shall be
punishable with fine which may extend to fifty thousand rupees and every
officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to three years, or with fine which
may extend to fifty thousand rupees, or with both.
Some decided cases on Transfer of Shares
1. In Vallur Mohammad Saheb v. Golden Agro-Tech Industries Ltd. [(2008) 83
SCL 391(CLB-CHENNAI)], the transferee purchased 2700 shares of the
company and lodged the transfer deed along with the original share
certificates to the Registrar and Share Transfer Agent (RSTA) of the


company. The company did not register the shares in the name of the
transferee inspite of the transferor taking up the matter with the company. The
transferee, therefore, filed petition under section 111/111A to direct the
company as well as its RSTA to pay damages with future interest from the
date of filing the petition till the date of realization, or to issue duplicate share
certificates to the petitioner. Allowing the petition, it was held that the bar
embodied in section 22 of the SICA does not extend to any direction which
may be issued by the CLB under section 111/111A for rectification of the
register of members of the company. In view of this legal position, the
resistance of the company for not registering the transfer of shares
constituting miniscule 2700 shares only in favour of the transferee was not
tenable.
2. In Hindustan Mercantile Bank Ltd. v. D.N.Choudhury Cotton Mills Ltd. [(2008)
83 SCL 399 (CLBKOL.)], the legal opinion on which the transferor company
had relied upon was on the basis that the transferee company along with a
few other companies was acting in concert to acquire shares in violation of the
SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997.
To come to the conclusion that the transferee along with others was acting in
concert, reliance had been placed on commonality of directors both in the
transferee-company and other companies. Since the company was not a
listed company, the SEBI (Substantial Acquisition of Shares and Takeovers)
Regulations, 1997, were not applicable. Further, it was found that neither the
transferee company nor other companies had acquired shares of the
transferor company. Accordingly, the company was to be directed to register
the transfer of shares in favour of the transferee.
3. If, by virtue of Section 111A(3) of the Companies Act, 1956, the petition
should have been filed within 2 months of the registration of the securities
submitted for transfer, and where on the basis of facts and circumstances of
the case, the transfer was effected in a fraudulent manner, the period of
limitation (2 months) shall not apply. [Sham Sunder Kukreja v. Hindustan
Lever Ltd. (2001) 44 CLA 38 (CLB)].
4. In the case, where the shares of a company are held in joint names and one
of these joint holders requests the company to split the shares equally
between the joint holders by issuing fresh certificates, the company shall not
be legally bound to do so unless the share transfer deeds executed by both
the joint holders duly completed and stamped are lodged with the company
together with the relevant share certificates, in terms of the provisions of
Section 108 of the Companies Act, 1956. [Dr. Rajiv Das v. The United Press
Ltd. (2001) (CLB)].
5. There shall be no justification, if a company/bank asks for information on
Income Tax Returns (including that of the nominees of the transferee), the
sources of the consideration paid for the purchase of shares, the details of
the group to which the transferee is attached, for the purposes of registration
of transfer of shares, if the number of the shares which are subject matter of
transfer, is insignificant, and after the registration of which the controlling of
interest in the company/bank is not changing. [T.S. Premkumar v. Tamil
Nadu Mercantile Bank Ltd. 2001 (CLB)].


Transfer of Share Warrants
A share warrant is transferable by mere delivery of the warrants without
execution of any written instrument of transfer being registered by the company. The
bearer of a share warrant is not a member of the company unless otherwise so
provided in the articles of the company in terms of Section 115(5) of the Act and,
therefore, such a bearer of share warrants does not impliedly covenant to observe
the provision of the companys memorandum and articles.
Certification of Transfer
The procedure outlined above is slightly different when a shareholder sells only a
part of the shares (and not all of them) mentioned in the share certificate. In such
circumstances, the transfer instrument, after being signed by the transferor, is not
sent to the transferee, nor is the transferors share certificate handed over to the
transferee. Both these documents are lodged by the transferor at the companys
registered office. The company retains the share certificate but issues to the
transferor a balance ticket in respect of the shares which he is retaining, and an
officer of the company, usually the secretary, certifies the transfer by endorsing on
the transfer instrument a signed statement certificate lodged or words to that effect
and mentions the number of shares which it is lodged. This is called Certification of
transfer and, taken by the buyer of the shares as tantamount for delivery to himself
of the share certificate; and he can make a good title to the share in the certified
transfer. When this certified transfer instrument is handed over to the transferee of
shares, he signs it and forwards it to the companys registered office with a request
for registration. When the transfer has been registered, the company cancels the old
share certificate and issues two new certificates; one to the transferee in respect of
the shares transferred and the other to the transferor, in exchange for the balance
ticket in respect of the shares retained by him. Certification is also necessary when a
shareholder disposes of the whole of his holding to two or more transferees. In such
a case, each transfer instrument is certified but no balance ticket is issued because
the transferor has not retained any shares for himself.
The Certification used to be in effect a representation by the company to any
person acting on the faith of certification that the company has received such
documents so as to show a prima facie title of the transferor but not that transferor
has any title to the shares.
Thus in Bishop v. Balkis Consolidation Co., (1890) 25 Q.B.D. 512 (C.A.), B
transferred his shares to two persons and lodged the certificate with the
company. The company certified the transfers, but instead of destroying the
original certificate, returned it to the transferor who borrowed money on it. The
company was held not liable to the lender. Even if he had deceived a person to
accept the transfer of those shares, the company would not have been liable to
the transferee. The reason was that the share certificate is neither a negotiable
instrument nor a warranty of title on the part of the company issuing it.
However, Section 112 of the Companies Act, 1956 has altered this position to a great
extent. The said section provides inter alia that if the company issues a false
Certification negligently or deliberately, it would be liable to any person who is deceived
by having acted on the faith of the certification. A certification is deemed to have been
made by the company when it has been signed by a person authorised to do so.


Blank Transfer
When a shareholder signs the transfer form without filling in the name of the
transferee and the date of execution and hands it over with the share certificate to the
transferee thereby enabling the transferee to deal with the shares, he is said to have
made a transfer in blank or a blank transfer. Shares are usually transferred in blank
when a shareholder borrows money on its security, e.g., by pledging the shares;
should the pledgor make default in payment of the amount due at the time appointed
for repayment, the pledgee or the holder of the share certificate and the blank
transfer instrument has implied power to fill up the blanks in the instrument by
inserting the date and his own name as transferee and to get himself registered as a
member of the company. The pledgor is under an implied obligation not to prevent or
delay such registration. This right to get himself registered as a member is available
to the transferee even after the death of the transferor [In Re. Bengal Silk Mills Co.
Ltd., (1942) Comp. Cas 206].
A blank transfer accompanied by the delivery of the share certificates vests in the
transferee both equitable as well as legal rights in the shares. But until the
registration of his name in the register of members, the transferee does not acquire a
title and thus he cannot exercise any right as shareholder in respect of those shares.
In all cases only a bona fide holder will have the right to fill in his name or the
name of a person for whom he is acting under an authority and apply for registration
of the transfer. [Colonial Bank v. Hepworth, (1887) 36 ChD 26]. Where share scrips
accompanied by duly executed transfer forms came into the hands of a bona fide
purchaser, it was held that the original owner who signed in blank was estopped from
questioning the validity of the title of the bona fide purchaser. [Sumitra Debi Jalan v.
Satya Narayan Prahladka, AIR 1965 Cal 355].
In Howrah Trading Co. Ltd. v. C.I.T. (1959) 29 Com Cases 282 : AIR 1959
SC 775, the Supreme Court recognised the validity of blank transfers viz.,
where the name of transferor is entered and the transferor signs the transfer with
the share scrip annexed, and hands it over to the transferee who, if he chooses, may
complete the transfer by entering his name and then apply to the company to register
his name in the place of that of the transferor.
Transfer of Shares during winding up
Any transfer made during winding up of a company is void, unless it is made with the
sanction of the Court
1
in compulsory winding up (i.e. winding up by the order of the Court
1
or under the supervision of the Court) and with the sanction of the liquidator in voluntary
winding up (Section 536). Where an agreement for the sale of the shares was made in
ignorance that a petition for winding up has been presented, the Court
1
will not sanction
the transfer. The Court
1
will put the buyer on the register of members only when the
transfer was incomplete by reason of want of registration at the commencement of the
winding up. Like the Court in compulsory winding up, a liquidator has power to register a
transfer after winding up and transfer so registered, has full effect.
In W. Gunther Gmbh & Others v. Switching Technologies Gunther Ltd &
Others, (2004) 4 Comp LJ 507 (CLB), the petitioner company was the major
shareholder in the Respondent JV Company with 61.22% shares. It had filed an

1.
Tribunal as proposed by the Companies (Second) Amendment Act, 2002 which is yet to be notified.


insolvency petition before the German insolvency court, which declared it to be
insolvent company, and an administrator was appointed. The insolvency court
prohibited the petitioner from transferring any of its assets including its
shareholdings in the Indian company. The administrator transferred the
shareholding of the petitioner to another company. Just before declared as
insolvent, the petitioner company had entered into a share purchase agreement
with an American company for the transfer of its shareholding in the respondent
company. The respondent company had transferred the shares in the name of
the American company during the period when insolvency proceedings were
going on. The petitioner and the administrator appointed by the German
insolvency court challenged the above said share transfer before the Company
Law Board on the ground that the transfer was against law as the transfer was
prohibited by the German court. On the other hand the respondent company and
the American company contended that the shares were transferred on the basis
of blank share transfer forms handed over to it by the petitioner which took
place before the commencement of the insolvency proceedings.
The Petition was allowed.
According to learned Company Law Board Judge, a careful perusal of
terms and conditions of the agreement between the petitioning German
company and the purchaser shows that the agreement dated 28.01.2004 is a
conditional contract. Where the transfer of the property in the goods is subject
to some conditions to be fulfilled, the property in the goods stands transferred
on fulfillment of such conditions. In the instant case, one of the stipulations in
the agreement is that the sale and transfer of shares is subject to the approval
of the creditors of the German company. There is no document on record to
show that this condition has been fulfilled, in which case, the interest or title
over the impugned shares remains vested with the petitioners, empowering
them to file the instant company petition, despite the stipulation that transfer
was to take immediate and real effect. Moreover, the transfer in favour of the
purchaser is not yet registered according to Indian law. At this juncture, it shall
be borne in mind that the parties have excluded the applicability of the Indian
law for legal enforceability of the agreement, dated 28.01.2004. There is,
therefore, no merit in the plea of the respondents that in the light of the
provisions of the Sale of Goods Act, the sale of shares in favour of the
purchaser was completed with the execution of the agreement entered into
between the petitioners and the purchaser Amazeum Shop and Merchandising
GmbH (Amaseum). Accordingly, the petitioning German company has locus
standi to maintain this petition seeking restoration of its name on the register
of members of the Indian company. It is not under dispute that the share
transfer form was signed by the third respondent both on behalf of the
transferor company (German company) and the transferee company (American
company). There is no document by way of any legal authority empowering the
third respondent to sign the share transfer form on behalf of the German
company. The manner in which the registration of transfer had been approved
in favour of the American company by the Share Transfer Committee of the
Indian company raises doubts about bona fides of the entire transaction. When
the Insolvency Administrator had cautioned the Indian company not to effect
the registration of transfer, the Committee should have, before effecting the


transfer, ascertained full particulars, as a measure of abundant caution, which
in the present case, it had failed to do giving rise to possible conclusion that
the registration was sought to be made before the Insolvency Court seized of
the matter. It is clear that there is no adequate material to show that the
German company had transferred the impugned shares in favour of the
American company prior to the commencement of the insolvency proceedings
and further that the Indian company had acted in contravention of the
provisions of Section 108(1). Therefore, the petitioners are entitled to seek
rectification of the register of members of the Indian company.
Forged Transfer
It may happen that a forged instrument of transfer is presented to the company
for registration. In order to avoid the consequences which will follow a forged transfer,
companies normally write to the transferor about the lodgement of the transfer
instrument so that he can object if he wishes. The company informs him that if no
objection is made by him before a day specified in the notice, it would register the
transfer. The consequences of a forged transfer are detailed hereunder:
(a) A forged transfer is a nullity and, therefore, the original owner of the shares
continues to be the shareholder and the company is bound to restore his
name on the register of members [Peoples Ins. Co. v. Wood and Co., 1961
(31) Comp. Cas. 61]. A forged document never has any legal effect. It can
never move ownership from one person to another, however, genuine it may
appear. Thus, a forged instrument of transfer leaves the ownership of the
shares exactly where it always was in the so-called transferor. It follows that
if a company registers a forged transfer, the true owner can apply so as to
be replaced on the register and his name will be restored. But the company
does not incur any liability in damages by putting the name on the register.
(b) However, if the company issues a share certificate to the transferee and he
sells the shares to an innocent purchaser, the company is liable to
compensate such a purchaser, if it refuses to register him as a member, or if
his name has to be removed on the application of the true owner.
(c) If the company is put to loss by reason of the forged transfer, as it may have
paid damages to an innocent purchaser, it may recover the same
independently from the person who lodged the forged transfer.
Let us take an example to illustrate the consequences of forged transfer. Suppose,
A is registered shareholder and his name is entered on the register of members
in respect of certain number of shares. By fraud or theft, B obtains possessions of As
share certificate and having forged a document purporting to be a transfer of shares to
himself from A, succeeds in getting himself registered as a member and obtains from
the company a new shares certificate made out in his name. In spite of this, A does not
cease to be the owner of the shares and a member of the company, as a forged
document, being a nullity, does not move ownership from him to B or any other person.
Producing the new certificate as evidence of his title, B purports to sell the shares to C,
an innocent purchaser, who in reliance upon Bs certificate, buys the shares in good
faith and without notice of Bs fraud. The company then registers C as a member and
issues the share certificate to him in respect of the shares purchased by him. When A
discovers the fraud, he being entitled for the rectification of register, has Cs name
struck off the register of members and has his own name restored as the registered


holder of the shares. A never ceased to be the owner of the shares, although the
company issued successive certificates to B and C. The company will be liable in
damages to C and for other incidental loss. But it would be entitled to indemnity as
against B, and if the forged transfer were lodged by a broker acting for B, against the
broker also, even though the broker was innocent to the fraud for a person who brings
a transfer to the registering authority and requests him to register it, impliedly warrants
that it is a genuine document.
A forged transfer can pass no title and is a nullity. In Simm v. Anglo-American
Telegraph Co., (1879) 5 QBD 188, CA; France v. Clark, (1884) 26 ChD 257 CA;
when shares transferred under a forged signature and the transferee received a
share certificate, the title does not pass to him.
The fact that the transferee was a bona fide purchaser for value did not make any
difference and the transferee was bound to return the scrips to the person to whom
the same rightfully belong. [Kaushalya Devi v. National Insulated Cable Company of
India 1977 Tax LR 1928 (Del)]
A person acting in good faith, sends in and procures registration of the transfer
and the issue of a fresh certificate on the basis of a forged deed is bound to
indemnify the company against the untoward consequences. [See Welch v. Bank of
England, (1955) Ch 508 : (1955) 1 All ER 811]. This happens when a stock broker,
trusting his clients innocently forwards forged document to the company. [Yeung v.
Hongkong and Shanghai Banking Corpn., (1980) 2 All ER 599].
In case of joint shareholders, a transfer to be effective must be executed by all and
if the signature of any one is forged, the transfer will be void. [Nicols case (1885)].
Transposition of Name
In the case of joint-shareholders, one or more of them may require the company
to alter or rearrange the serial order of their names in the register of members of the
company. In this process, there will be need for effecting consequential changes in
the share certificates issued to them. If the company provides in its articles that the
senior-most among the joint-holders will be recognised for all purposes like service of
notice, a copy of balance sheet, profit and loss account, voting at a meeting etc., the
request of transposition may be duly considered and approved by the Board or other
authorised officer of the company. Since no transfer of any interest in the shares
takes place on such transposition, the question of insisting on filling transfer deed
with the company, may not arise. Transposition does not also require stamp duty.
The Stock Exchange Division of the Department of Economic Affairs has clarified
that there is no need of execution of transfer deed for transposition of names if the
request for change in the order of names was made in writing, by all the joint-holders.
If transposition is required in respect of a part of the holding, execution of transfer
deed will be required.
Death of transferor or transferee before registration of transfer
Where the transferor dies and the company has no notice of his death the
company would obviously register the transfer. But if the company has notice of his
death, the proper course is not to register until the legal representative of the
transferor has been referred to.
Where the transferee dies and company has notice of his death, a transfer of


shares cannot be registered in the name of the deceased. With the consent of the
transferor and the legal representatives of the transferee, the transfer may be
registered in the names of the latter. But if there is a dispute, an order of Court will
have to be insisted upon.
In Killick Nixon Ltd. v. Dhanraj Mills Ltd. (Supra)., it was held that the company is
not bound to enquire into the capability of the transferee to enter into a contract. The
company has to act on the basis of what is presented in the transfer deed.
Proof in a transfer by representative
Where a transfer is executed by a person in a representative capacity such as an
officer of a body corporate or by an attorney, proof of the authority, must be
produced, before the transfer can be registered.
Relationship between Transferor and Transferee
Pending registration, the transferee has only an equitable right to the shares
transferred to him. He does not become the legal owner until his name is entered
on the Register of Members in respect of the shares. But as between the transferor
and the transferee, immediately after the transfer is made, the contract of transfer will
subsist and the transferee becomes the beneficial owner of the shares so transferred
to him. A relation of trustee (transferor) and beneficiary (transferee) is thereby
established between them. The transferor is under obligation to comply with all
reasonable directions of the transferee. The transferee should, however, take prompt
steps to get himself registered as a member.
Section 206A inserted by the Companies (Amendment) Act, 1988 w.e.f. 15.6.88
provides that where the transferor gives a mandate to pay the dividend to the
transferee pending registration of transfer, the same should be paid to the transferee,
otherwise the dividend in relation to such shares should be transferred to the special
account mentioned in Section 205A. It is further provided that in the case of offer of
right shares or fully paid bonus shares, the same should be kept in abeyance till the
title to the shares is decided.
12. RIGHTS OF TRANSFEROR
In JRRT (Investments) Ltd. v. Haycraft, (1993) BCLC 401 (Ch.D) it was held that, the
transferor is not deprived off his valuable rights, the right to dividend and the right to vote
even where the purchaser has failed to make payment. An unpaid vendor has the right to
exercise voting rights in respect of shares registered in his name. He is not obliged to
comply with the directions of the purchaser in respect of the shares taken by him.
But on the other hand, the company refuses to register the transfer for no fault or
default of the transferee, the transferor, by reason of the shares continuing to stand in
his name, will, in cases where he has received consideration for the transfer, be
treated as trustee for the transferee and bound to act in accordance with his
directions and for his benefit in respect of the shares, unless the transferee rescinds
the contract and seeks to recover his money on a consideration which has failed.
However, after the transfer form has been executed the transferor cannot be
compelled to undertake any additional financial burden in respect of the shares at the
instance of the transferee where, after the transfer of shares, but before the company
had registered the transfer, the company offered rights shares to its members, the
Supreme Court held that the transferor could not be compelled by the transferee to


take up on his behalf the rights shares offered to the transferor. [Mathalone (R) v.
Bombay Life Assurance Co. Ltd. AIR 1953 SC 385 : (1954) 24 Com Cases 1 See
also Life Insurance Corporation of India v. Escorts Ltd. (1986) 59 Com Cases 548 :
AIR 1986 SC 1370]. But where, due to the transferees own default, the transfer of
shares is not registered the transferor cannot be held to be a trustee for the defaulting
transferee simply because the share continues to remain in the transferors name in
the books of the company.
The sellers duty is complete when he hands over to the transferee a duly
executed transfer form. [Skinner v. City of London Marine Insurance Corpn., (1885)
14 QBD 882].
Where a transferor transfers his share for consideration and delivers along with
the share certificate the transfer form duly signed by him, but the transferee, instead
of completing the transfer by signing his own name as transferee and presenting it for
registration to the company, chooses to keep the transfer in blank and passes it on to
others along with the share certificate, it cannot be said that the transferor, simply
because the share continues to stand in his name, should be treated as a trustee for
and be at the back and call of one or the other of a series of unknown holders of the
blank transfer.
When he sold his share to the original transferee he could not be deemed to
have represented to the transferee anything more than that the share was
transferable nor to have agreed to the transferee keeping or passing on the transfer
in blank from hand to hand for an indefinite duration, without its being presented to
the company for registration.
Where a shareholder executes a blank transfer to enable another to deal with the
shares, he is bound not to do anything to obstruct registration of the transfer and if he
improperly intervenes he is liable in damages, Hooper v. Herts, (1906) 1 Ch 549:
(1904-7) ALL ER Rep 849 (CA).
Transferors right to indemnity for calls - Where a transferor has paid for calls
to the company after the shares are transferred, there arises an implied promise by
the transferee to indemnify the transferor. Such a promise to idemnify can be implied
even in the case of blank transfers [Ashworth Partington & Co., (1925) 1 K].
Transferees right to Dividends, Bonus and Rights Shares - Where the
transferor, by reason of the shares standing in his name, has received after the
transfer, any dividend on shares, bonus or other benefit accruing in respect thereof,
the transferee being the person lawfully entitled thereto, can recover the same from
the transferor, provided that he has not allowed his claim to become time barred
under the provisions of the Limitation Act. [Chunnilal Khushaldas Patel v. H.K.
Adhyaru, (1956) 26 Com Cases 168 : AIR 1956 SC 655].
Dividend to transferee after transfer - In one case the transfer was registered
and dividends paid to the transferee. Later, the register was rectified by removing the
transferees name from the register on the ground of a technical nature, like
inadequacy of stamps, it was held that the transferee was not bound to handover the
dividend amount to the transferor. [Kothari Industrial Corpn. Ltd. v. Lazor Detergents
P. Ltd., (1994) 1 Comp LJ 178 (CLB-Mad)]. However the Madras High Court held in
this case that the company should not be allowed to rectify the register on a technical
ground after transferring the shares.


Position under the Securities Contracts (Regulation) Act, 1956 - As regards
the position of a transferor after transfer, Section 27 of the Securities Contracts
(Regulation) Act (XLII of 1956) may also be noted. It provides as follows:
Title to dividends - (1) It shall be lawful for the holder of any security whose name
appears on the books of the company issuing the said security to receive and retain
any dividend declared by the company in respect thereof for any year,
notwithstanding that the said security has already been transferred by him for
consideration, unless the transferee, who claims the dividend from the transferor has
lodged the security and all other documents relating to the transfer which may be
required by the company for being registered in his name within fifteen days of the
date on which the dividend became due.
Explanation: The period specified in this section shall be extended -
(i) in case of death of the transferee, by the actual period taken by his legal
representative to establish his claim to the dividend;
(ii) in case of loss of transfer deed by theft or any other cause beyond the
control of the transferee, by the actual period taken for the replacement
thereof; and
(iii) in case of delay in the lodging of any security and other documents relating
to the transfer due to causes connected with the post, by the actual period of
the delay.
(2) Nothing contained in Sub-section (1) shall affect -
(a)the right of a company to pay any dividend which has become due to any
person whose name is for the time being registered in the books of the
company as the holder of the security in respect of which the dividend
has become due; or
(b)the right of the transferee of any security to enforce against the transferor or
any other person his rights, if any, in relation to the transfer in any case
where the company has refused to register the transfer of the security to
the name of the transferee.
13. EFFECTS OF TRANSFER
Once a transfer form has been executed, the transfer is complete as between the
transferor and the transferee and the transferee acquires the right to have his name
entered in the register of members. No further application is necessary for having the
name of the transferee entered in the register of members and the transferee perfects
his title to the share after the entry in the Register of Members. Once the transferee
becomes a member of the company, a contractual relationship arises with the
company, [Killick Nixon Ltd. v. Dhanraj Mills Pvt. Ltd., (1983) 54 Com Cases 432
(DB) (Bom)].
A transfer to a firm in the firm name, if accepted by the company and registered,
will make the partners individually liable as members [Weikersheims case, (1873) 6
Ch App 831].
A company cannot refuse to register a transfer on the ground that the
transfer was without consideration or that there was a collusion and connivance
between the transferor and transferee. Any objection about inadequate
consideration can be raised only by the transferor himself and not by the company


particularly where the shares are fully paid. Where the transfer is in a spot delivery
contract, Section 108 is not applicable. [Sanatan Investment Co. Pvt. Ltd. v. Prem
Chand Jute Mills Ltd. (1983) 54 Com Cases 186 (Cal)].
Priority among Transferees
It was held in Society General De Paris v. Jonet Walker and other (1886) 11 Ac
20 that where a shareholder has fraudulently sold his shares to two different
transferees, the first purchaser will, on the ground of time alone, be entitled to the
shares in priority to the second. Thus, a person assigned his property, including some
shares, for the benefit of his creditor. The assignee failed to get the share certificates
registered in his name, but gave notice of assignment to the company. The assignor
sold the shares to another who applied for registration. It was held that the assignees
claim was prior in time and therefore, entitled to registration. [Pe C v. Clayton, (1906)
1 Ch. 659].
Pledging of Shares
Shares of a company can be a subject matter of a valid pledge. Section 2(7) of
Indian Contract Act defines the term goods as meaning every kind of moveable
property other than actionable claim and money and includes stocks and shares.
Shares are goods under the Indian Contract Act and can be a subject matter of pledge.
In Kanhaiyalal Jhanwar v. Pandit Shinah & Co., the Calcutta High Court held that the
deposit of share certificates themselves is sufficient to create a pledge thereon.
Transfer by Way of Gift
A gratuitous transfer of shares may sometimes also be effective to transfer an
equitable title to the shares. [See Re Rose, (1949) Ch 78 : (1948) Ch 78]. It has been
held that where a donor of shares has done everything in his power to divest himself
in favour of the donee e.g. he has delivered to the donee, or to the company, an
executed transfer deed and the relevant share certificate; the gift is complete in
equity despite the fact that the directors have a discretion to refuse registration of the
transfer. The Supreme Court in Ramchandra Shelat v. Pranlal Jayanand Thakar,
(1975) 45 Com Cases 43 : AIR 1974 SC 1728 has held that even where transfer
forms signed by the transferor are otherwise in blank and are handed over to the
transferee along with the share scrips by way of gift the transferees title will be
complete even before registration.
Transfer on price to be determined it has been held that it is permissible to the
parties to agree to transfer of shares at a price to be determined later. It will not
render the transfer void. [M.S. Madhusoodhan v. Kerala Kaumudi P. Ltd. (2003) 117
Com. Cases 19 (SC): (2003) 55 CLA 372: (2003) 46 SCL 695]. It was noted in this
case by the Supreme Court that the transfer deeds were placed before the directors
for approval creating thereby, a presumption that the transfer deeds were properly
executed and mandatory requirements satisfied.
In Shree Shanti Textile Mills (P) Ltd. v. Siddharth N Shah, [2005] 65 CLA 349
(BOM), the appellant company was a family company and the shareholders
were close family members. Though the company had issued and allotted
shares to its shareholders it did not issue share certificates to them. One of the
lady shareholder, holding shares jointly, gifted her shares and the donee sent
the transfer deed to the company to record the transfer in his name. Shortly


after the gift the donor died. The company refused to register the transfer on
the ground that share certificates were not sent along with the shares transfer
form and that the stamp affixed on the share transfer deed was not properly
cancelled and that the gift of shares was not registered. The donor moved the
Company Law Board which directed the company to register the share transfer.
The company appealed to the High Court. Appeal was dismissed.
If the shares certificate of the company had never been issued to the
shareholders and the company was not maintaining its own records and
complying with the requirements of Sections 75 and 113, it cannot refuse to
register the transfer of the impugned shares on the ground that the relevant
share certificates have not been sent with her application for transfer of shares.
It is true that the stamp affixed to a transfer deed should be cancelled and
in the absence of such cancellation the transfer deed will not be valid. This
contention may not, however, be available to a company which has not itself
complied with the provisions of the Act. Further, if the company has failed to
point out the defect in the share transfer deed to the respondent within a
reasonable time, it is not open to it to raise it at a belated stage, after the death
of the original owner of the shares.
The Registration Act does not require registration of a movable gift. Where
the thing to be gifted is a share certificate and the company is already in
possession of the certificates in question, a mere letter from the transferor
addressed to the company expressing the transferors intention to gift the
shares to the transferee, should constitute a valid gift document. In terms of
Vasudev Ramachandra Shelat v. Pranlal J ayanand Thaker, AIR 1974 SC 1728, a
gift does not become invalid for non-compliance with the formalities prescribed
in the Act.
14. TRANSMISSION OF SHARES
Transmission by operation of law is not a transfer. It refers to those cases where
a person acquires an interest in property by operation of any provision of law, such as
by right of inheritance or succession or by reason of the insolvency or lunacy of the
shareholder or by purchase in a Court-sale, while a transfer is effected by act of
parties [Maheshwari Khetan Sugar Mills v. Ishwari Khetan Sugar Mills, (1963) 2
Comp Cases 1142 (All)].
This is known as transmission or transfer by operation of law, or involuntary
assignment. Thus, transmission of shares takes place when the registered
shareholder dies or is adjudicated as an insolvent, or if the shareholder is a company,
it goes into liquidation. Because a deceased person cannot own anything, the
ownership of all his property passes, after his death, to those who legally represent
him. Similarly, when a person is declared insolvent, all his property vests in the
Official Assignee or Official Receiver. Upon the death of a sole registered
shareholder, so far as the company is concerned, the legal representatives of the
deceased shareholder are the only persons having title to the shares unless
shareholder had appointed a nominee, in which case he would be entitled to the
exclusion of all others.


In Re. Greene, (1949) Ch. 333, the articles of the company provided that upon
the death of any...director, if such director leaves a wife surviving him, the shares of
such director shall be deemed to have passed on the death of such director to such
deceased directors wife and such wife shall be the only person recognised by the
company as having any title to the shares and shall forthwith be registered as the
holder. On the death of a director, the question arose as to whether his widow was
entitled to the shares or his legal representatives. The Court held that the legal
representatives of the deceased were entitled to the shares, and the articles were
contrary to the requirements of the Companies Act concerning instrument of transfer
and were illegal and void.
This case states the rule laid down in Section 108(1) of the Companies Act, 1956
that the transfer of shares must be effected by a proper instrument of transfer and
that a provision in the articles of an automatic transfer of shares of a deceased
shareholder is illegal and void. Such transfer does not amount to transmission which
takes place by operation of law. The second proviso to Section 108(1) of the Act
provides that nothing in the sub-section shall prejudice the powers of the company to
register as shareholder any person to whom the right to any shares has been
transmitted by operation of law. It follows that, for such transmission, instrument of
transfer is not required, and, merely an application addressed to the company by the
legal representative is sufficient.
There need be neither an instrument of transfer nor any payment of stamp duty.
But the right of a company to insist upon the proof to transmission and the power to
regulate by articles the procedure relating to transmission are not affected. See also
Life Insurance Corporation of India v. Bokaro & Ramgur Ltd., (1966) 36 Com Cases
490 (Tribunal) (Delhi).
Where the articles of a company enabled members to transfer share to their
relatives or other members without sanction of the Board of directors and restricted
only the right of transfer to outsiders, it was held that the restrictions as to transfer of
shares could not be used to defeat a transmission. [Hemendra Prasad Barooah v.
Bahadur Tea Co. Ltd., (1991) 70 Com Cases 792, 795 (Gau)].
Articles of companies generally provide for formalities to be observed for
transmission of shares. In the absence of such provision in the articles of the
company, Regulations 25 to 28 of Table A of Schedule I to the Act will govern the
procedure for transmission. According to these regulations, the legal representatives
are entitled to the shares held by deceased member and the company must accept
the evidence of succession e.g., a succession certificate or letter of administrations or
probate or any other evidence properly required by the Board of directors. He is,
however, not a member of the company by reason only of being the legal owner of
the shares. But he may apply to be registered as a member. On the contrary, instead
of being registered himself as a member, he may make such transfer of the shares as
the deceased could have made. The Board of directors also have the same right to
decline registration as they would have had in the case of transfer of shares before
death. But if the company unduly refuses to accept a transmission, the same
remedies are available to the legal representative as in the case of a transfer or
namely, an appeal to the Company Law Board under Section 111.


A deceased shareholders Will was filed with the company by his five sons. The
daughter of the deceased sent a telegram to the company which raised a doubt about
the succession of the shares. The company would have registered the shares in the
name of five sons to whom the shares were transmitted by operation of law. But it
insisted on a succession certificate/probable/letter of administration [Narender Kumar
Sehgal v. Leader Values Ltd. (1993) 77 Com. Cases 393 at 398 (1993) 2 Comp. LJ
(16) CLB].
In Subir Roy v. P.R. Productions (P.) Ltd [(2006) 70 SCL (CLB)] [Decided on
22.8.2005], consequent upon demise of the petitioners father, who held some
shares in the respondent company, he obtained succession certificate and
applied to the company for transferring those shares in his name. However, the
company informed him that his father had incurred certain debts to the
company beyond the value of the shares and as such, it had sought for legal
advice. Subsequently, though he was informed that the directors had approved
the said transmission and it would take sometime to make necessary
endorsement where after he could collect the same. The company failed to
deliver the certificates duly transmitted in his name. The petitioner, therefore,
filed petition under Section 111 seeking for direction to the company to
transmit shares in his name. The company contended that without clearing the
dues of his father, the petitioner could not seek for transmission of the shares
and, therefore the petition should be dismissed.
In view of CLB, for rejection of the transmission, there should be a
provision in the Articles that any debt incurred by a shareholder, should be
cleared by the legal heir before registration of transmission. Neither of the
parties had filed a copy of the Article of Association. Even in terms of Table A,
a company can have lien on shares only in respect of unpaid calls and not on
fully paid shares. Further, the alleged debt by the deceased should have, by
then, become time barred. Thus, taking into consideration the peculiar
circumstances of the instant case, the company was directed to register the
transmission of the impugned shares in favour of the petitioner.
Apart from the regulations in the Articles, Section 109 of the Act expressly
enables a legal representative to effect a transfer of shares inherited by him even if
he is not a member and the transferee will acquire the valid title to the shares and
can get himself registered as a member. The legal representative must, however,
decide within a reasonable time whether or not he wishes to be registered as
member. When the legal representative elects not to be registered, there will be no
one to vote in respect of the deceased members shares. The provision to Article 28
in Table A of Schedule I to the Act, therefore, authorises directors to require the legal
representative either to become registered as a member or to transfer the shares
within 90 days of the notice by the directors. If he does not comply within this period,
then the directors may withhold all dividends and other moneys payable in respect of
the shares until he complies with the notice.
As the legal representative is entitled to receive dividends and also notice of
company meeting, he is also a contributory, and if he makes default in paying any
money which he is ordered to pay, the company may take proceedings for
administering the estate of the deceased member and compel payment from the
estate of the money due. If the legal representative becomes a member, his liability to


pay calls is personal, but in that case, he is entitled to be indemnified out of the estate
of the deceased shareholder. [Appa Chettan v. Indian Overseas Branch Ltd. (1943)
13 Com Cases 202 (Mad)].
Where the shares were registered in the name of the deceased and a surviving
member, the title in the shares will pass to the survivor, the legal representative of the
deceased will not get any title to the shares. But the estate of the deceased member
is liable in respect of the calls which have remained unpaid.
When a member of a company becomes insolvent the legal position is very
similar to that arising on death. The insolvents name will be on the register of
member, but he will no longer own the shares for when he was adjudicated insolvent,
the ownership passed by operation of law on the Official Assignee or the Official
Receiver. The Official Assignee or Receiver, though not on the register of members,
becomes entitled as owner of the shares to deal with them, to exercise the insolvents
vote and to be registered as a member, if he so wishes. If the shares are partly paid,
the company may prove in the insolvency both for calls in arrears and liability for
future calls but the Official Assignee may disclaim the shares if they are onerous. The
effect of the disclaimer is that all rights, interest and liabilities of the insolvent member
are determined.
In Shri Nathulal v. United India Periodicals Pvt. Ltd. and others (Appeal No.
33 of 1978 decided on 31st May, 1979), the Company Law Board held that there
are two modes by which change in ownership of shares in a company on its
register of members can take place, viz., transfer of shares or transmission of
shares by operation of law. Transfer of shares can result from a voluntary sale
or an involuntary sale when it is not effected willingly by the owner, but
otherwise, e.g. as a court-sale or under the provisions of the Income Tax Act,
1961 by the Tax Recovery Officer. In this case, the Company Law Board did not
accept the contention that every involuntary sale of shares results in
transmission of shares by operation of law. In this context, the Company Law
Board's observations are : the expression operation of law assumes
significance in that, it must be in pursuance of any provision in a statue whereby
devolution of the shares take place automatically in favour of some specified
person(s) on the happening of a contingency. Transmission of shares by
operation of law, thus, can take place on the death of the holder of the shares or
on the holder becoming insolvent under the laws relating to inheritance or
insolvency as the case may be. Such transmission of shares by operation of law
can also take place in certain other circumstances e.g., as a result of
constitutional changes following the Indian Independence Act, 1947, as held by
the Supreme Court in the case of Indian Chemical Products v. State of Orissa,
(1966) CSR 380. In all such cases of transmission of shares by operation of law,
the title to the shares is automatically acquired by some person(s) or body
specified by virtue of some provisions in a statue. In contrast thereto, in the case
of involuntary sale, e.g., a sale arising out of public auction by the Tax Recovery
Officer, a public authority, there is an overt act of the said authority that is to say,
public auction of the shares which no doubt is done in pursuance of the powers
vested in the said authority under the Income Tax Act, 1961. The devolution of
the shares in favour of the auction purchaser, however, is the outcome of such
public auction, the devolution of shares does not automatically flow from any


provision of the said statute. Further, the ownership of the shares auctioned is
acquired not by any specified person(s), but any person(s) who might be the
successful bidder at the auction. It is, therefore, difficult to hold that the public
auction of the shares under the provisions of the Income Tax Act for recovery of
tax dues from a tax defaulter results in transmission of shares by operation of
law. Such a sale no doubt takes place without the express consent or willingness
of the owner of shares and hence an involuntary sale, nonetheless it would result
in transfer simpliciter. It is involuntary transfer of shares. The use of words
transmitted and Transmission of the right in Sub-section (8) of Section 111
and in the proviso thereto cannot be construed to mean that the devolution of
shares of a private company consequent upon a sale by public authority results
in transmission of shares by operation of law, in contradistinction to transfer of
shares.
In Balwant Transport Company Ltd. v. Y.H. Deshpande, AIR 1956 Nagpur 20, it
was held that a purchaser of a share in a company at a court sale does not
automatically become a member of the company in view of the provisions of Order 21,
Rules 79 and 80 of the Civil Procedure Code. A purchaser can become a member of
the company on compliance with the requirements of the provisions of the Articles of
Association of the company and the purchaser of a share of a court sale could only
become a member of the company by way of transfer of shares in pursuance of the
provisions dealing with transfer of shares in the articles of association of the company
and his case could not be kept on the discretionary power of the Board of directors to
decline the same which was vested in the Board by the articles.
Distinction between Transfer and Transmission
The distinction between transfer and transmission is as under:
1. Transfer takes place by a voluntary act of the transferor while transmission
is the result of the operation of law.
2. An instrument of transfer is required in case of transfer but no instrument of
transfer is required in case of transmission.
3. Transfer is a normal course of transferring property whereas transmission
takes place on death or insolvency of a shareholder.
Transmission in case of sole owner
On the death of a sole owner of shares, the rights and liabilities goes in favour of
the legal heirs. They are entitled to be registered as the holder of the shares. But the
company can register them as members with only their consent. Re Cheshire
Banking Co., Duffs Executors case (1886) 32 Ch D 301 and when they apply for it.
Transmission of shares to widow
If a widow applies for transmission of the shares standing in the name of her
deceased husband without producing a succession certificate and if the articles of
association of the company so authorises, the directors may dispense with the
production of succession certificate, probate or letter of administration upon such
terms as to indemnity as the directors may consider necessary, and transmit the
shares to the widow of the deceased by obtaining an indemnity bond.


Transmission of joint holdings
In case some shares are registered in joint names and the articles of the
company provide that the survivor shall be the only person to be recognised by the
company as having any title to the shares, the company is justified in refusing to
register the transmission of title by operation of law in favour of the son of the
deceased holder even though he may obtain succession certificate from the Court.
Succession Certificate
It is granted by the Court having an appropriate jurisdiction and will have
application only in respect of the properties mentioned in the certificate. It will not
apply in respect of matters not specified in the succession certificate. In the case of
shares, the succession certificate granted by the Court should specify the powers to
receive dividends and to negotiate or transfer the shares. Section 109 of the Act
provides in this respect that a transfer of the shares or other interest in a company of
a deceased member thereof made by his legal representative shall, although the
legal representative is not himself a member, be as valid as if he had been a member
at the time of the execution of the instrument of transfer. In the absence of the power
to receive dividend and the power to negotiate or transfer shares, it will not be
possible for the legal representative in whose name the succession certificate has
been granted, to subsequently transfer the shares.
There will be no such difficulty in regard to grant of letter of administration or
probate or a Will, once it is granted in favour of a person, it will apply in respect of all
the properties, effects, rights, etc., left behind by the deceased. The grantee will be
the absolute owner. The obtaining of succession certificate or letter of administration
or probate of a Will is time consuming and costly. Therefore, in the case of small
holdings, companies usually take an affidavit and indemnity bond and, if necessary,
deed of relinquishment, and transmit the shares in the names of the legal
representative or one or more of them. For this purpose, the Secretary should have a
working knowledge of the Hindu Succession Act, 1956, and the Indian Succession
Act, 1925, etc.
15. COMPANYS LIEN ON SHARES
Articles 9 to 12 of Table A carry the rules as to lien. These articles are not
compulsory. A company may adopt its own articles regarding the subject matter of
lien as also regarding any money due to it from the shareholder either originally or
subsequently by a special resolution. The fact to be noted is that unless the articles
provide for a lien, a company has no inherent or prima facie right of lien on the shares
of members. [Canara Bank Ltd. v. Tribhuvandas Jetha Bhai, AIR 1957 Trav. C. 183 :
(1957) 27 Com Cases 647]. But in the case of public company, one of the listing
requirements is that the articles of the company shall provide that the fully paid
shares will be free from all lien, while in the case of partly paid shares the companys
lien will be restricted to monies called or payable at a fixed time in respect of such
shares [Rule 19(2)(ii) of the Securities Contracts (Regulation) Rules, 1957]. In a lien
the company shall have first and paramount lien on the shares of each member for
his debts and liabilities to the company. Such a provision is fully effective for private
as well as public companies. [Allen v. Gold Reefs of West Africa Ltd., (1900) 1 Ch


656: (1900-3) All ER 746 (CA)]
Where lien is acquired by a subsequent amendment of the articles, it will not
allow the company to upset any rights which might have been acquired. But
otherwise the right of a lien subsequently brought in, shall be binding on all the
members even if they became shareholders before the alteration [Allen v. Gold Reefs
of West Africa Ltd., (1900) 1 Ch 656 : (1900-3) All ER 746 (CA)].
Extent and waiver of lien
The right of lien extends to any monies receivable by the shareholder in respect
of the shares even in the winding up of the company. A lien on the proceeds of sale
of shares is a lien on the shares.
Where the articles of association of a private limited company gave the company
a first and paramount lien over the shares of any shareholder indebted to it, and the
shareholder created an equitable charge on the shares in favour of a third party, the
companys lien was held to have priority over the equitable charge. [Champagne
Perrier-Janet S.A. v. H.H. Finch Ltd., (1982) 3 All ER 713].
The company can waive the lien either expressly or by doing anything which has
the effect of waiving the right. See Northern Assam Tea Co. (1870) 10 Eq 458; Bank
of Africa v. Salisbury Gold Mining Co., 1892 AC 281, where the articles give a lien
against the holder of any shares and the holder is a trustee, the company cannot
claim a lien for debts for the cestui que trust, Re Perkins, (1890) 24 QBD 613.
Where a company registers a transfer of shares over which it has a lien, the
registration will operate as a waiver of the lien. [See Turner Morrison & Co. Ltd. v.
Hungerford Investment Trust Ltd., (1972) 42 Com Cases 512 : AIR 1972 SC 1311].
Where a company has notice of a trust and a lien in its favour was in respect of a
subsequent transaction, it was held that the lien could not prevail [Wigan Coal & Iron
Co., (1916) 2 Ch 293].
Enforcement and postponement of lien
The usual method of enforcing a lien is a refusal by the company to register a
transfer of shares until the dues of the company in respect of those shares are first
paid.
Where the articles of a company contain a provision that the company may
decline to register a transfer of shares by a member who is indebted to the company,
such a provision, may amount to a passive lien on the shares to the extent to the
indebtedness; but it will not prevail over an equitable charge created by the
shareholder. [See Unity Company Private Ltd. v. Diamond Sugar Mills, (1970) 2
Comp LJ 64].
An article merely giving a right of lien is not enough to confer a right to bring the
property to sale in exercise of such right. [See Bank of India Ltd. v. Rustom Fakirji,
AIR 1955 Bom 419].
In the absence of a provision in the articles giving power to the company to


enforce a lien by sale, the lien cannot be enforced except through Court. [New
London & Brazilian Bank v. Brockle Bank, (1882) 21 Ch D 302].
A lien cannot be enforced by forfeiture, even if the articles provide that it may
be so enforced. For, a lien is in the nature of an equitable mortgage and a clause for
forfeiture in a mortgage is invalid as a clog on the equity of redemption.
In a case, certain shares which were subject to a first and paramount lien
were given to bank as security for an overdraft and the bank gave notice to the
company, the Court held that the banks claim was prior to that of the company
which arose subsequently. Notice to the company means notice to any director or
officer who is authorised in the matter. [United India Sugar Mills Ltd., Re AIR
1933 ALL 607].
Surrender of shares
A company cannot accept a surrender of its shares as every surrender of
shares, whether fully paid-up or not involves a reduction of capital which is
unlawful...forfeiture is a statutory exception and is the only exception. [Bellerby v.
Rowland and Marwoods S.S. Co. Ltd., (1902) 2 Ch 14]. But a surrender may be dealt
with in the manner indicated in Re Castiglione's Willtrusts, Hunter v. Mackenzie,
(1958) 1 All ER 480 viz., directing that the shares be held in the name of a nominee
as trustee for the company. However, a surrender can be accepted in circumstances
absolutely parallel to the requirements of a forfeiture, the only difference being that
instead of going to the length of the formalities of a forfeiture, the company accepts in
good faith in its own interest the shares which the shareholder is voluntarily
surrendering. The other advantage to the company is that the shareholder becomes
estopped from questioning the validity. [Collector of Moradabad v. Equity Insurance
Co. Ltd., AIR 1948 Oudh 197].
16. NOMINATION OF SHARES/DEBENTURES
The Companies (Amendment) Act, 1999 has provided the facility to
shareholders/debentureholders to make nomination of shares. According to Section
109A of the Companies Act, 1956 every shareholder or debentureholder of a
company has right to nominate at any time in the prescribed manner, a person to
whom his shares/debenture shall vest in the event of his death. The nomination is to
be made in Form No. 2B of Companies (Central Governments) General Rules and
Forms, 1956. In case shares/debentures are held jointly, then the joint holders may
together nominate a person to whom their shares/debentures shall vest in the event
of death of all the joint holders.
The nominee will on the death of shareholder or debentureholder become
entitled to all rights in the shares/debentures to the exclusion of all other persons
irrespective of anything contained in any other law for the time being in force or in any
disposition, whether testamentary or otherwise in respect of such shares or
debentures, unless the nomination is varied or cancelled.
Where the nominee is a minor, it shall be lawful for the holder of shares or
debentures, to make the nomination to appoint, in the prescribed manner, any person
to become entitled to shares in, or debentures of, the company, in the event of his


death, during the minority.
The nomination can be made by individuals only applying/holding shares or
debentures on their own behalf singly or jointly. Non-individuals including society,
trust, body corporate, partnership firms, Karta of Hindu Undivided Family, holder of
power of attorney cannot nominate.
Where a nomination has been made by a shareholder/debentureholder of his
shares/debentures in a company, the nominee will be entitled to all the rights in
respect of shares in the event of death of the shareholder as against the legal
representative/legal heirs of the deceased member.
Transmission of shares in favour of nominee(s)
According to Section 109B, any person who becomes a nominee by virtue of the
provisions of Section 109A, upon the production of such evidence as may be required
by the Board and subject as hereinafter provided, elect, either:
(a) to be registered himself as holder of the share or debenture, as the case
may be; or
(b) to make such transfer of the share or debenture, as the case may be, as the
deceased shareholder or debentureholder, as the case may be, could have
made.
If the nominee elects to be registered as shareholder or debentureholder, he
shall have to deliver or send a notice in writing signed by him stating his intention
alongwith death certificate of the deceased shareholder or debentureholder, as the
case may be. All the limitations, restrictions and provisions of the Companies Act,
1956 relating to the right to transfer and the registration of transfer of
shares/debentures shall be applicable to any such notice or transfer in the same
manner as if the member has not died.
Such a nominee, on the death of the shareholder, shall be entitled to same
dividends and other advantages as a member except that he shall not, before being
registered as a member be entitled to exercise rights of members in relation to
meetings of the company. In other words he will not be entitled to attend and vote at
general meetings unless he has become a registered member of the company.
However, the Board of directors may give a notice requiring any such person to
elect either to be registered himself or to transfer the shares or debentures. On non-
compliance of the notice of the Board of directors within ninety days, the Board may
thereafter withhold the payment of all dividends, bonuses or other money payable in
respect of shares or debenture, until the requirements of the notice have been
complied with.
17. TRANSFER AND TRANSMISSION OF DEBENTURES
For transfer of debentures there is no necessity to present the instrument of
transfer before the prescribed authority. There is no time limit prescribed for
lodgement for transfer deed with the company.
The rate of stamp duty payable on transfer of debentures is not prescribed by the


Union of India, unlike in the case of transfer of shares. Therefore, the question would
arise whether the stamp duty would be the one payable in the State where the
transfer deed is executed or the one applicable in the State in which the registered
office of the company is situate. Many State Governments have introduced a new
Section 19A to the Stamp Act whereunder it is provided that the differential duty (i.e.
duty in the State in which the Registered Office of the Company is situate minus the
duty in the State in which the transfer was effected) has to be paid for. Such duty has
to be paid for by the person executing the instrument. In effect, the duty payable on
transfer of debentures would be higher of the following duty on the value of
debentures.
(a) Stamp duty applicable in the State in which the transfer deed is executed;
(b) Stamp duty applicable in the State where the Registered Office of the
Company is situate;
Provided the Stamp Act of the concerned State contains a provision to this effect.
Otherwise, the stamp duty prevailing in the State where the registered office of the
company is situate would be applicable.
18. TRANSFER OF SHARES IN DEPOSITORY MODE
Depository system maintains the ownership records of securities in the book
entry form while in physical mode every share transfer is required to be accomplished
by physical movement of share certificates to, and registration with the company
concerned. The process of physical movement of share certificates often involves
long delays and a significant portion of transactions end up as bad deliveries due to
the faulty completion of paperwork, or signature differences with the specimens on
record with the companies, or for other procedural lapses. Investors also face
problems on account of loss of share certificates, forgery and mutilation. The
significant time involved in effecting ownership changes also impounds a substantial
volume of shares at any given time leading to lower trading volumes.
As part of capital market reform, the Government promulgated on September 20,
1995, the Depositories Ordinance, 1995 to provide for legal framework for setting up
of depositories to record the ownership details in book entry form. Later, on
November 28, 1995, the Government introduced in Parliament the Depositories Bill,
1995 to replace the said Ordinance. The Bill was enacted as the Depositories Act,
1996.
Legal Framework for Depository Systems
The legal framework for depository system in the Depositories Act provides for
the establishment of single or multiple depositories. Any body to be eligible for
providing depository services must be formed and registered as a company under the
Companies Act, 1956 and seek registration with SEBI and obtain a Certificate of
Commencement of Business from SEBI on fulfilment of the prescribed conditions.
The investors opting to join depository mode are required to enter into an agreement
with depository through a participant who acts as an agent of depository. The
agencies such as custodians, banks, financial institutions, large corporate brokerage
firms, non-banking financial companies etc. act as participants of depositories. The


companies issuing securities are also required to enter into an agreement with the
Depository.
In the depository system, share certificates belonging to the investors are
dematerialised and their names are entered in the records of depository as beneficial
owners. Consequent to these changes, the investors names in the companies
register are replaced by the name of depository as the registered owner of the
securities. The depository however, does not have any voting rights or other
economic rights in respect of the shares as a registered owner. The beneficial owner
continues to enjoy all the rights and benefits and be subject to all the liabilities in
respect of the securities held by a depository. Shares in the depository mode are
fungible and do not have distinctive numbers. The ownership changes in, the
depository are done automatically on the basis of delivery v. payment.
The companies which enter into an agreement with the depository will give an
option to the holders of eligible securities to avail the services of the depository through
participants. The investors desiring to join the depository are required to surrender the
certificates of securities to the issuer company in the specified manner and on receipt
of information about dematerialisation of securities by the issuer company, the
depository enters in its records the names of the investors as beneficial owners.
Similarly, the beneficial owner has right to opt out of a depository in respect of any
security and claim the share certificates and get his name substituted in the register of
members as the registered owner in place of the depository.
There has to be regular, mandatory flow of information about the details of
ownership in the depository record to the company concerned. In case of any
reservation about the share acquisition on the ground that the transfer of shares
debentures is in contravention of any of the provisions of SEBI Act or Rules made
thereunder or the Sick Industrial Companies (Special Provisions) Repeal Act, 2003 or
any other law for the time being in force, the depository, company participants or
investors or SEBI shall have a right to make an application to the CLB

/Tribunal

for
rectification of register or records. Pending decision of CLB
1
/Tribunal
2
the transferee
concerned shall be entitled to all the rights and benefits of the shares including the
right to transfer the securities except that the Company Law Board
1
/Tribunal
2
may at
its discretion make an interim order suspending the voting rights.
The Act provides for detailed regulations to be framed by SEBI and detailed
bye-laws to be framed by depositories with the approval of SEBI. The bye-laws
have to provide for rights and obligations of participants, beneficial owners and
procedure for ensuring adequate safeguards to protect the interests of investors. The
Act requires the depository to indemnify for loss caused to beneficial owner due to
negligence of depository or its participants.
The Companies (Amendment) Act, 2000 has inserted the definition of Depository
as under :
Depository has the same meaning as in the Depositories Act, 1996 (22 of
1996).

1.
Existing.
2.
Proposed.


THE DEPOSITORIES ACT, 1996: AN ANALYSIS
Objectives
Depositories Act, 1996, aims at providing for:
(a) a legal basis for establishment of depositories to conduct the task of
maintenance of ownership records of securities and effect changes in
ownership records throughout by book entry.
(b) dematerialisation of securities in the depositories mode as well as give
option to an investor to choose between holding securities as at present or
hold securities in a dematerialised form in a depository.
(c) making the securities fungible.
(d) making the shares, debentures and any interest thereon of a public limited
company freely transferable; and
(e) exempting all transfers of shares within a depository from stamp duty.
Benefits of depository system
The benefits from the depository system are following:
(a) It reduces the cost of issue and transfer of securities by eliminating stamp
duty.
(b) It reduces the scope for theft, forgery damage to security certificates.
(c) It eliminates bad deliveries.
(d) It entitles the transferee to all the rights associated with the securities
immediately on settlement of purchase transaction.
(e) It enhances the velocity of the securities in circulation and hence liquidity in
the market. The investors can trade in securities immediately on allotment
without waiting for receipt of security certificates.
(f) It makes faster disbursement of non cash corporate benefits like rights,
bonus, etc. possible.
(g) It reduces brokerage by many brokers for trading in dematerialized
securities.
(h) It eliminates problems relating to change of address of investor,
transmission etc.
(i) It eliminates problems relating to selling securities on behalf of a minor.
Services to be rendered by a Depository
The Depository Service for securities usually refers to making a computerised
book entry record of securities to effect transfer of ownership. In the context of the
Depositories Act, (a) allotment of securities, (b) transfer of ownership of securities are
reflected through book entry system only and do not require existence of security
certificates etc.


Who can render Depository services?
Any body to be eligible to provide depository services must
(a) be formed and registered as a company under the Companies Act, 1956,
(b) be registered with SEBI as a depository under the SEBI Act, 1992,
(c) have framed bye-laws with the previous approval of SEBI,
(d) have obtained a certificate of commencement of business from SEBI,
(e) have one or more participants to render depository services on its behalf,
and
(f) have adequate systems and safeguards to prevent manipulation of records
and transactions to the satisfaction of SEBI.
(g) have been established by one or more of the following (i) public financial
institution (ii) a bank (iii) a foreign bank (iv) recognised stock exchange (v) a
body corporate engaged in providing financial services (vi) a body corporate
constituted or recognised in foreign country for providing custodial, clearing
or settlement services in securities market and approved by the Central
Government (vii) an institution engaged in providing financial services
established outside India and approved by the Central Government (viii) fit
and proper person.
Securities eligible for depository services
The Depositories services are available in respect of securities as may be
specified by SEBI. The eligibility criteria for admission of securities into depository
has been determined by SEBI Regulations. This provides flexibility to SEBI, for
example, to admit certain instruments like units of mutual funds in the depository
mode. An instrument to be under the depository mode need not be a security as
defined in the Securities Contracts (Regulation) Act, 1956.
Are all eligible securities required to be in the depository mode?
It is not necessary that all eligible securities must be in the depository mode. In
the scheme of the Depositories legislation, the investor has been given supremacy. If
he wishes to avail of the depository services in respect of any eligible security,
whether existing or to be issued, the issuer who has entered into an agreement with
one or more depositories has to give him the facility. The investor has the choice of
holding physical securities or opting for a depository based ownership record. At the
time of fresh issue, the issuer who has entered into an agreement with the depository
is under obligation to give the option to the investors either to receive the security
certificates under the paper based system (non-depository mode) or opt to hold
securities with a depository (depository mode). The decision on whether or not to
hold securities within the depository mode and if in depository mode with which
depository or participant, would be entirely with the investor. Such freedom can be
exercised either at the time of the initial offer of the security by indicating his choice in
the application form or at any subsequent time. He will also have the freedom to
switch from depository mode to non-depository mode and vice versa. Section 68B
has been introduced by the Companies (Amendment) Act, 2000 according to which


public companies making public offer of any security for a sum of rupees ten crore or
more, shall issue the same only in dematerialised form by complying with the
provisions of the Depositories Act, 1996 and regulations made thereunder.
Who is a participant?
Participant is an agent of depository and is registered as such under the SEBI
Act, 1992 to render depository services. The participants shall have such rights and
obligations as may be specified by the regulations viz. SEBI (Depositories and
Participants) Regulations, 1996. The eligibility criteria for admission of any person as
a participant has been determined by SEBI by Regulations. Banks, custodians, public
financial institutions, foreign bank, state financial Corporation, an institution engaged
in providing financial services, clearing corporation, stock broker, non-banking
finance companies and Registrar to an issue or share transfer agent are eligible for
registration as participant.
Responsibilities of a depository vis-a-vis participant
The depository does not render services directly but only through an agent who is
registered as a participant with SEBI. The relationship between a depository and the
participant is that of a principal and agent and is governed by the bye-laws of the
depository and the agreement between them. The depository shall maintain
ownership records in the name of each participant and each such participant shall act
as the agent of the depository, further maintain ownership records in respect of
individual investors. The depository shall, however, idemnify the investor for any loss
caused to him due to negligence of depository and/or participant. The depository in
turn shall raise consequential claims on the concerned participant.
Status of the depository in the records of the issuer
By fiction of law, the depository is deemed to be a registered owner of the
securities. In respect of the securities held in a depository, the name of the depository
shall appear in the records of the issuer as registered owner of the securities and
such registered owner shall have the right to effect the transfer of securities on behalf
of the beneficial owner but shall not have voting and other rights associated with the
securities.
Status of an investor who avails of depository services
If an investor avails of depository services, his name is replaced by the name of
the depository in the records of the issuer, as the depository becomes the registered
owner of the securities held by the investor. The status of the investor changes from
that of a registered owner, again by fiction of law, to beneficial owner. The name of
the investor appears on the records of the depository as beneficial owner in respect
of the securities held by him. The beneficial owner shall continue to have all the rights
and benefits and be subject to all the liabilities associated with the securities held by
the depository on his behalf.
Dematerialisation of securities
The Depositories Act envisages dematerialisation in the depository mode. In
such a case the securities held in a depository shall be dematerialised and the


ownership of the securities shall be reflected through book entry only. The securities
outside the depository shall be represented by physical scrips.
Fungibility
The Depositories Act, 1996 specifies that all securities held in a depository are
fungible. That is all certificates of the same security are inter-changeable in the sense
that investors lose the right to obtain the exact certificate they surrender at the time of
entry into depository. It is like withdrawing money from the bank without bothering
about the distinctive number of the currencies (Section 9). Nothing contained in
Section 153, 153A, 153B, 187B, 187C, 372 (Now Section 372A) of the Companies
Act, 1956 shall apply to depository in respect of securities held by it on behalf of the
beneficial owners.
*

How does an investor avail services of a depository?
(a) In the case of existing securities:
An investor before availing the services of a depository, shall enter into an
agreement with the depository through a participant and then shall surrender security
certificates to the issuer. The issuer on receipt of security certificate shall cancel them
and substitute in its records the name of the depository as the registered owner in
respect of that security and inform the depository accordingly. The depository shall
thereafter enter the name of the investor in its records as beneficial owner.
(b) In the case of fresh issue:
At the time of initial offer the investor would indicate his choice in the application
form. If the investor opts to hold a security in the depository mode, the issuer shall
intimate the concerned depository about the details of allotment of a security made in
the favour of investors and records the depository as registered owner of the
securities. On receipt of such information, the depository shall enter in its records the
names of allottees as the beneficial owners. In such case a prior agreement by the
investor with the depository as well as an agreement between the issuer company
and depository may be necessary.
(c) In the case of exit from the depository:
If a beneficial owner or a transferee of a security desires to take away a security
from depository, he shall inform the depository of his intention. The depository in turn
shall make appropriate entries in its records and inform the issuer. The issuer shall
make arrangements for the issue of certificate of securities to the investor within 30
days of the receipt of intimation from the depository.
(d) In the case of transfer within the depository:
The depository shall record all transfers of securities made among the beneficial
owners on receipt of suitable intimation to the effect that a genuine purchase
transaction has been settled.
(e) In the case of pledge:

*
Substituted by Depositories Related Laws (Amendment) Act, 1997.


Before creation of any pledge or hypothecation in respect of a security, the
beneficial owner is required to obtain prior approval of the depository and on creation
of pledge or hypothecation, the beneficial owner shall give intimation of such pledge
or hypothecation to the depository. The depository shall make appropriate entries in
its records which will be admissible as evidence.
What is free transferability of securities?
It refers to a situation where on receipt of intimation regarding settlement of purchase
transaction, the transfer of a security is effected immediately and the transferee enjoys all
the rights and obligations associated with the securities. Once a genuine purchase
transaction is settled, nobody including the issuer, depository, participant, any
intermediary or regulatory authority can withhold the transfer of security.
Types of securities freely transferable
Only the shares, debentures and any interest therein of a public limited company
(listed as well as unlisted companies) have been made freely transferable. The Board
of directors of such a company or the concerned depository shall not have any
discretion to refuse or withhold a transfer of such security. Any other security, for
example, shares or debentures of a private company or any unit of a mutual fund, or
any security issued by any issuer other than a public limited company are not freely
transferable and would be subject to the restrictions contained in the articles of
association or the bye-laws of the concerned issuer and terms of issue.
Refusal of a transfer which contravenes the provisions of the SEBI Act or SICA
*

or any other law
In case of a public limited company, the transfer of shares or debentures or any
interest therein cannot be refused without sufficient cause. It has to be given effect
immediately by the company or depository. However, if the transfer has contravened
any of the provisions of the SEBI Act, 1992 or the regulations made thereunder or
Sick Industrial Companies (Special Provisions) Act, 1985 or any other law for the time
being in force, the concerned company, depository, participant, investor or SEBI can
move an application to the Company Law Board

/Tribunal

to determine if the alleged

contravention has really taken place. After inquiry if the Company Law
Board
1
/Tribunal
2
is satisfied of the contravention, it can direct the company or the
depository to rectify the ownership records of securities. However, before completion
of inquiry, the Company Law Board
1
/Tribunal
2
can suspend voting rights in respect of
securities so transferred. The economic rights (bonus, dividend, rights etc.) cannot be
suspended under any circumstances.
In case of any other security, the transfer can be refused under the bye-laws of
the issuer and existing provisions of the relevant statutes.
The powers of the Company Law Board
1
/Tribunal
2

As mentioned above the CLB
1
/Tribunal
2
has been empowered to

*
Ibid.
1.
Existing.
2.
Proposed.


(a) determine if a transfer of a security of a public limited company is in
contravention of any of the provisions of SEBI Act, 1992 or regulations made
thereunder or the SICA, 1985 or any other law for the time being in force.
(b) suspend voting rights in respect of securities before completion of enquiry.
(c) direct the company/depository to rectify ownership records if the transfer has
contravened SEBI Act, 1992 or SICA, 1985 or any other law for the time
being in force.
Is it required to have a transfer deed for transfer of securities within the
depository mode?
The transfer deed and all other associated paraphernalia stipulated in Section
108 of the Companies Act, 1956 shall not apply to the transfers effected within the
depository mode. However, this formality need to be complied with for transfer of
securities outside the depository mode. In case of the securities in the depository
mode, the depository would effect the transfer on the basis of intimation (contract
note or some other suitable evidence to the effect that a purchase transaction has
been settled) received through participants.
Areas on which Rules may be framed by the Central Government
The Central Government may frame Rules to provide, inter alia, for:
(a) The manner of inquiry and the time within which an appeal may be preferred
from the orders of SEBI. Section 23(1) provides that any person aggrieved
by an order of SEBI made under the Act or the regulations made thereunder
may prefer an appeal to the Central Government within the prescribed time.
(b) the form in which an appeal may be preferred and the fees payable in
respect of such appeal.
(c) the procedure for disposing of an appeal.
(d) the form in which an appeal may be filed before the Securities Appellate
Tribunal and Fees payable for it.
Powers of SEBI under the Depositories Act, 1996
(a) to register the depositories and the participants under the SEBI Act, 1992.
(b) to issue certificate of commencement of business to the depositories on
being satisfied that the depository has adequate systems and safeguards to
ensure against manipulation of records and transactions.
(c) to frame regulations under the SEBI Act as well as under the Depositories
Act to carry out the purposes of the Depositories Act.
(d) to suspend or cancel the certificate of registration after giving a reasonable
opportunity of being heard.
(e) to regulate depositories, participants, issuers and their relationship with the
investors.
(f) to monitor, inspect, call for information, summon and enforce attendance of


witnesses and production of documents, conduct inquires and audit of
depositories, participants, investors and issuers of securities.
(g) to specify the securities and the eligibility criteria of the securities for
admission into a depository.
(h) to give directions to any depository, participant or issuer in the interest of
investors or the securities market.
(i) to approve the bye-laws of a depository and amend or a revoke any bye-
laws of the depository.
Stamps duty on security certificates
At the time of fresh issue of securities (shares or otherwise) either issued in the
form of physical certificate directly to investors or through records of a depository, the
issuer shall pay the stamp duty on the total amount of the security issued by it, even
though there may be no physical securities (instrument) which can be stamped
(executed).
Payment of stamp duty at the time of entry into the depository
Entry by an investor into a depository by surrendering the security certificates
involve change of registered ownership as the investor becomes the beneficial owner
and the depository becomes the registered owner in respect of the security. Such
change of registered ownership of shares from an investor to a depository has been
exempted from stamp duty.
Stamp duty in the case of transfer of securities within the depositories
All transfer of securities involve change in registered ownership and/or beneficial
ownership. If such change is in respect of shares within the depository mode, no
stamp duty shall be payable.
Stamp duty payable while opting out of depository
If an investor opts to exit from a depository, the registered ownership changes
from the depository to the investor. Such change of ownership in respect of shares
shall not attract stamp duty. However, when the investor seeks the issue of physical
certificate of securities from the issuer, the issue of such certificates shall attract
stamp duty as is payable on the issue of duplicate certificates.
Stamp duty in respect of transactions outside the depository mode
All transactions outside the depository mode attract stamp duty as at present.
Distinctive numbers of shares
The mandatory requirement of distinguishing each security by an appropriate
number is not required. However, it does not prohibit a company from having distinct
number for its securities which are outside the depository mode.
Exercise of membership rights in respect of securities held by a Depository
The Depository as a registered owner have not any voting rights or any other rights


in respect of securities held by it on behalf of the beneficial owners. The beneficial
owner shall be entitled to all the rights and benefits (including the right to vote) and be
subjected to all the liabilities in respect of securities held by a depository.
The evidential value of the records of the depository
The depository has been treated as a bank for the purposes of the Bankers Book
Evidence Act, 1891. The ownership records of securities maintained by depositories,
whether maintained in the form of books or machine readable forms, shall be
accepted as prima facie evidence in all legal proceedings.
Cognizance of offences by courts
No court shall take cognizance of any offence, save on a complaint made by the
Central or State Government or SEBI or by any person. No court inferior to that of a
court of session shall try any offence punishable under this Act.
Penalty for offences under the Depositories Act
A maximum penalty of imprisonment for a term which may extend to ten years or
fine or both can be imposed.
ANNEXURES
ANNEXURE - I
CIRCULARS AND CLARIFICATIONS
(1) Fixing a record date without closing register of members
The action of the company in fixing record date without seeming to close the
register of members has no legal validity. If by naming a record date the company
intends that any proposals for transfer of shares received by the company between
the record date and the date of the (annual general) meeting at which dividends are
declared would not be considered or would be held in abeyance, then, this would
amount to closing the register of members on and from the record date. The effect
of the provisions of Section 108(1A) in such a case will have to be considered in the
above light (Circular No. 8/4(108)/67-CL-V, dated 4-8-1967).
(2) Share transfer - Registration of - Transfer deeds in name of minor must be
signed by natural guardian
This has refer to letter No. UT/2000/OPR-127/95-96 dated June 4, 1996 on
Transfer Deeds being signed by the guardian on behalf of a minor under listed
Schemes.
In slight modification thereof, keeping in mind with the revised SEBI guidelines on
good and bad delivery, we confirm that in case of transfer, the transferee can be a
minor represented by the natural guardian. In other words, the Transfer Deeds in the
name of a minor must be signed by the Natural Guardian. In case of a Court
Guardian, a Court order will be required.


(Press Release: UT/69/OPR-127/97-98, dated 29-7-1997, issued by the Unit
Trust of India).
(3) Registration not to be effected if instrument is received after period
stipulated in Sub-section (1B)
It would not be in order for a company to effect registration of a transfer of shares
if the instrument of transfer has been received by it after the specified period even
though the delay may have been caused by postal irregularity. As such, if the
documents are so despatched that in the ordinary course of transit these would be
received by the company whatsoever or if the documents are received in time but are
deficient and compliance is not made within the prescribed time, the transferee will
have to get the time extended by the Central Government (Registrar of Companies)
as required under Section 108(1D) of the Companies Act before transfer can be
effected (Source: Clarification issued by Department of Company Affairs).
(4) Bulk lodgement of instrument of transfer of shares/debentures
As per the existing procedure, prescribed under Section 108 of the Companies
Act, 1956, the shares/debentures can be transferred only by execution of a transfer
deed. In case of bulk handling of transfer deeds, in respect of transactions entered
into by the Foreign Institutional Investors (FIIs) registered with SEBI, Public Financial
Institutions as defined under Section 4A of the Companies Act, 1956 and Mutual
Funds (domestic and off-shore), since, there is a considerable amount of difficulty in
complying with the existing procedure of signing each individual instrument is the
same. With a view to overcoming these difficulties and simplifying the procedure, the
companies are advised to accept transfer deeds executed in such cases in the
manner specified below:-
(i) In respect of bulk transfers where there is a single transferee, the transferee,
instead of signing each transfer deed, may fill up and sign a covering
transfer deed in the existing prescribed format complete in all respects,
enclosing therewith all the related transfer deeds in the prescribed format
duly executed by transferors.
(ii) The covering transfer deed shall contain, by way of an Annexure, details of
distinctive numbers and corresponding certificate numbers of shares/
debentures involved in transfer.
(iii) The part relating to transferees particulars in the individual transfer deed
(enclosed with the covering transfer deed) need not be signed by the
transferee and may be merely stamped with the name and address of the
transferee.
(iv) Requisite amount of stamps may be affixed on the covering transfer deed or
paid in a manner as otherwise prescribed by the Government (Circular
No. 15 of 1993, dated 28-12-1993).
(5) Whether execution of transfer deeds is necessary for effecting change in
order of names of joint shareholders


Where some of the companies were insisting on execution of transfer deeds in
cases in which the shareholders apply for transposition of their names in respect of
their joint shareholdings. The necessity for execution of transfer deeds in such cases
has been examined and it is now clarified that there is no need for insisting on
execution of transfer deeds for transposition of names, that is, change in the order of
names of joint shareholders provided such request is made in writing, by all
shareholders jointly to the company. However, where change in the order of names is
required in respect of a part of the holding, execution of a transfer deed will be
required. (Letter No. F. 1/24/SE/80, issued by Stock Exchange Division, Department
of Economic Affairs, dated 5-9-1980).
(6) Transfer of Shares when transfer deed is lost
Section 108 being mandatory, can a company give effect to a transfer where both
the certificate or allotment letter and the instrument of transfer were lost, if the loss is
proved to the satisfaction of the Board and indemnity as the Board may require is
furnished by the transferee along with and application signed with the stamps
required for the instrument of transfer affixed thereon, and also issue a duplicate
certificate to the transferee?
Answer: In the opinion of the Department, Section 108 only envisages the case
where the instrument of transfer is lost. If, therefore, the share certificate or the
allotment letter is also lost, then a duplicate thereof will have to be obtained first.
Reference is also invited in this connection to the provisions of Rule 4(3) of the
Companies (Issue of Share Certificates) Rules, 1960.
The company will seek the no-objection of the transferor for issue of duplicate
share certificate and then register the transfer in the name of the transferee (Source:
Company News & Notes, July 1963 issue).
(7) Refusal to transfer shares on frivolous grounds such as non-tally of
attested signature
Departments Circular I. It has been brought to the notice of this Department
that certain companies are returning instruments of transfer without effecting transfer
of shares in the names of transferees on frivolous grounds, inter alia, that the
specimen signatures of transferors do not tally with that on record, inspite of the fact
that the transfer forms bear attestation of the magistrates, etc. In this connection, it
may be stated that as per instructions below the prescribed share transfer form (No.
7-B) attestation, where required, of thumb impression, marks, signatures, etc.,
should be done by a magistrate, notary public or special executive magistrate or a
similar authority holding a public office or a member of a recognised stock exchange
through whom the shares are introduced or a member of the transferors bank.
Further, the guidelines for good or bad delivery issued by the Ministry of Finance,
Department of Economic Affairs, vide their Circular No. 1/10/SE/83, dated 21-7-83 also
provide a similar requirement. You are, therefore, requested to advise your constituent
member companies to follow the aforesaid instructions scrupulously and to effect
transfer of shares within the period prescribed under Section 113 of the Companies
Act, 1956, and the listing guidelines. (Circular No. 3 of 1993 dated 22-3-1993).
Departments Circular II. In reference to this Departments Circular No. 3/93,


dated 22-3-1993, on the above subject, in which companies were advised not to
return transfer deeds on the ground, inter alia, that the signatures of the transferor do
not tally, where the same are attested by Notary Public, Stock Broker, Magistrate
etc., and to say that it has represented to this Department that in some cases,
although the signatures are attested by Notary Public, the same do not tally or the
signatures have not been properly attested, which may give rise to disputes. In view
of these representations, the companies concerned are advised to satisfy themselves
where there is doubt/apprehension about the genuineness of signatures by making a
reference to the transferor. Such cases will, however, be more by way of exception
rather than as a general rule. (Circular No. 10/93; File No. 3/4/92-CL.V dated 13-8-
1993).
ANNEXURE - II
Schedule XV
[See Section 108B(2)(b)]
1. Arms and ammunition and allied items of defence equipment, defence
aircrafts and warships.
2. Atomic energy.
3. Minerals specified in the Schedule to the Atomic Energy (Control of
Production and Use) Order, 1953.
4. Railway transport.

LESSON ROUND-UP
As per Section 108(1) of the Companies Act, 1956, a company, whether public or
private shall not register transfer of shares in or debentures of the company
unless a proper instrument of transfer duly stamped and executed by or on behalf
of the transferor and transferee has been delivered to the company along with
the certificate relating to the shares or debentures or if no such certificate is in
existence, along with the related letter of allotment.
The transfer deeds only executed and completed in all respects are required to
be delivered to the company for registration within the time prescribed in
Section 108(1A) of the Act.
Section 108 (1A) does not apply to items specified under Section 108(1C).
Provisions of Section 108 not to apply to transfer of shares registered with the
Depository.
The transfer of shares attracts stamp duty under the Indian Stamp Act, 1899.
The power of refusal to register a transfer of shares must be exercised judicially
and not arbitrarily.
The right of the shareholder to transfer his shares in a company is absolute and
he may appeal to the Company Law Board if there is any refusal to register
transfer or transmission.
Central Government has powers under Section 108D to direct companies not to
give effect the transfer of shares.
When a shareholder sells only a part of the shares and not all of them, the
procedure is different.


In compulsory winding up, the transfer made during winding up of a company is
void unless it is made with the sanction of Court (Tribunal, on enforcement of
Companies Second Amendment Act, 2002).
Unless the articles provide for a lien, a company has no inherent or prima facie
right of lien on shares of members.
Every shareholder or debentureholder of a company has right to nominate at any
time in the prescribed manner a person to whom his shares/debentures shall vest
in the event of his death.
Depository system reduces the cost of issue and transfer of securities by
eliminating stamp duty, it entitles the transferee to all the rights associated with
the securities immediately on settlement of purchase transaction.

SELF-TEST QUESTIONS
(These are meant for re-capitulation only. Answers to these questions are not to
be submitted for evaluation)
1. (a)Distinguish between transfer and transmission of shares.
(b)The directors have uncontrolled and unfettered powers to refuse registration
of transfer of shares Comment.
2. What are the remedies available against refusal to register transfer of
shares?
3. Explain the procedure for transfer of shares and debentures.
4. What are the consequences of a forged transfer?
5. Under what circumstances shares can be transferred during the winding up
of a company?
6. A buys 200 shares in a company from B on the faith of a share certificate
issued by the company. A tenders to company a transfer to himself from B
duly executed together with Bs share certificate. The company discovers
that the certificate in the name of B has been fraudulently obtained and
refuses to register the transfer. Is A entitled to get the registration of the
transfer?
7. X and Y each held half the issued capital of the company. The Articles
provided the directors may, at any time, in their absolute and uncontrolled
discretion refuse to register any transfer of shares.
X died and his executor applied to have his shares registered in his name.
Y, who is director, refuse under the above mentioned provision of Articles.
Can the Court come to the rescue of Xs executor?
8. An agreement for transfer of certain shares was entered into and the
transferee was registered as a member without transfer deed being
executed. Is the registration of the transfer valid?


9. State the powers of the Board of directors to refuse registration?
10. What are the benefits of depository system?
11. How does an investor avail services of a depository?
12. Are all eligible securities required to be in the depository mode?
13. How are the shares alloted/allocated and transferred under the Depository
System?
14. Who is a depository participant? How is he appointed by the Issuer
company? Also narrate his liabilities, duties and rights.



Suggested Readings:
(1) A Guide to the Companies Act A. Ramaiya
(2) Depository Participants Laws & Practice Vijay K. Gaba
(3) Depositories Law Practice & Procedures Pawan Kumar Vijay & Sanjiv
Aggarwal


























STUDY XIV
MANAGEMENT AND CONTROL OF COMPANIES-I
INSTITUTION OF DIRECTORS

LEARNING OBJECTIVES
Company is a legal person but it is not a living person. To attain the objectives
prescribed in Memorandum of Association of the company, company depends on
Board of Directors (collectively) and directors (individually). Directors of a Company
are its eyes, ears, brain, hands and other essential limbs. This chapter deals with the
concept of director, their qualifications, appointment, removal, remuneration, etc. After
going through this study, one will be able to understand the following:
Concept of Director
Definition of Director
Types of Directors
Legal position of Directors
Qualifications of Directors
Companies (Disqualification of Directors under Section 274(1)(g) of Companies
Act, 1956) Rules, 2003
Qualification of Shares
Number of Directors
Appointment of Directors
Removal of Directors
Penalty for Wrongful Withholding of Companys Property
Remuneration of Directors
Office or place of profit

1. CONCEPT OF DIRECTOR
When a company is registered under the Companies Act, 1956 (the Act), it
becomes a legal entity. It lives like a human being and its death lies in its winding up
or on its amalgamation with other company or on its being declared defunct by
Registrar of Companies in the office of the Registrar when he has a reasonable
cause to believe that the company is not carrying on business or is not in operation or
it has not enhanced the paid-up capital as required under Section 3 of the Act.
On incorporation, a company becomes a person in the eyes of law, it has a perpetual
succession, its members may come and may go but the company lives till its death as
aforementioned. It has a common seal, which is affixed on all the legal documents
executed on behalf of the company in the presence of and signed by authorised signatory
or signatories. It is empowered to hold all properties in its own name and in its own right.
It can sue others and can be sued by others in its own name.
With all the strapping of a legal person, a company is unlike a living human
being. It has no physical existence. It has no eyes to see, no ears to hear, no hands
to sign and execute documents, no brain to think and no nerves to communicate
492


among its various limbs. In order to enable a company to live and to achieve its
objects as enshrined in the objects clause of its Memorandum of Association, it has
necessarily to depend upon some agency, known as Board of directors. The Board of
directors of a company is a nucleus, selected according to the procedure prescribed
in the Act and the Articles of Association, out of the entire mass of its shareholders
and even non-shareholders. Members of the Board of directors are known as
directors, who unless especially authorised by the Board of directors of the Company,
do not possess any power of management of the affairs of the company. Acting
collectively as a Board of directors, they can exercise all the powers of the company
except those, which are prescribed by the Act to be specifically exercised by the
company in general meeting.
The directors of a company are its eyes, ears, brain, hands, nerves and other
essential limbs, upon whose efficient functioning depends the success of the
company. The directors formulate policies and establish organisational set up for
implementing those policies and to achieve the objectives as contained in the
Memorandum, muster resources for achieving the company objectives and control,
guide, direct and manage the affairs of the company.
Prior to the Second World War, the average size of business and trade agency
was very small. Virtually every business and trade agency was a one-man show. The
owner of the one-man show represented the entire management put together. He
used to see, hear, think and act for his business. He was his Purchase Manager,
Sales Manager, Stores Manager, Finance Manager and what not. There had been
quite hectic economic activities during the war. Price of almost every commodity rose
sky high because of scarcity due to increased demands. Therefore additional jobs
were created both in civilian departments and in the defence departments catering to
the defence requirements. Quite a few small-scale industrial units and a very large
number of industries sprung up. With this development, the normal size of business,
trade and industry unit grew and the proprietors engaged outside hands to help them
in running their business more efficiently. This was coupled with industrial revolution.
After independence of the country, quite a few British business houses transferred
their business organizations to the Indians and Indian nationals were also given all
possible help and assistance by the Government to set up medium-scale and large-
scale industrial units and establish large business houses and import and export trading
houses. For the efficient running of these organizations, the proprietors, who were the
sole directors of their respective businesses expanded their management bodies, by
associating with them loyal servants, friends and business associates and by hiring the
services of certain professionals and experts in various corporate disciplines. With the
passage of time, these management bodies came to be known as the Boards of
directors on the pattern of English joint stock companies.
Directors, as a body, frame the general policy of the company, direct its affairs,
appoints the company officers, ensure that they carry out their duties and recommend
to the shareholders regarding distribution of dividend.
There are mainly two types of company directors. They are (i) Executive
Directors or whole-time directors with their designations as managing directors,
executive directors and technical directors; and (ii) Non-executive or part-time
directors who are professionals and for their livelihood do not depend upon one
company but serve on the Boards of directors of a number of companies.


As per clause 49 of the Listing Agreement which deals with good Corporate
Governance Practices, every company, to which this clause applicables shall have an
optimum combination of executive and non-executive directors with not less than fifty
percent of the Board of directors comprise of non-executive directors. The number of
independent directors would depend whether the Chairman is executive or non-
executive. In case of a non-executive Chairman, at least one-third of Board should
comprise of independent directors and in case of an executive Chairman, at least half
of Board should comprise of independent directors. Further where the non-executive
Chairman is or promoter of the company or is related to any promoter or person
occupying management positions and the Board level or at one level below the
Board, at least one-half of the Board of the company shall consist of independent
director. Further where the non-executive chairman is a promoter of the company or
is related to any promoter or person occupying management positions at the Board
level or at one level below the Board, at least one-half of the Board or the company
shall consist of independent directors.
For this purpose the expression Independent directors means directors who apart
from receiving directors remuneration, do not have any other material pecuniary
relationship or transactions with the company, its promoters, its management or its
subsidiaries, which in judgement of the Board may affect independence of judgment of
the director. Except in the case of Government companies, institutional directors on the
boards of companies should be considered as independent directors whether the
institution is an investing institution or a lending institution.
Further, all pecuniary relationship or transactions of the non-executive directors
viz-a-viz the company should be disclosed in the Annual Report.
The executive directors are the directors who have employment stakes in the
companies managed by them as their companies provide them all their bread and
butter. More often than not they wield substantial powers, enjoy to the maximum
possible extent remunerations, perquisites, fees, commissions and allowances as
allowed under the Act. The part-time directors get only sitting fee for the Board
meetings attended by them, and wield very little or no power.
2. DEFINITION OF DIRECTOR
The supreme executive authority in the control of a company and its affairs
resides in persons known as Board of directors. Section 253 of the Act provides that
only an individual, and not a body corporate, association or firm, shall be appointed
as director.
Section 2(13) defines a director as including any person occupying the position
of director by whatever name called.
This is a definition based purely on function; a person is a director if he does
whatever a director does normally. The Act offers no further guidance on the
functions and duties of directors. One may, therefore, attempt a functional definition
of directors as the individuals who direct, control, manage or superintend the affairs
of a company in the form of the Board of directors. As a body, they frame the general
policy of the company, direct its affairs, appoint the companys officers, ensure that
they carry out their duties and recommend to the shareholders regarding distribution


of dividend as per its Articles of Association. The collective body in whom the
authority is vested and through whom the company acts is called the Board of
directors or the Board. The Supreme Court has in Ram Autar Jalan v. Coal
Products (P) Ltd. (1970) 40 Comp. Cas. 714 held that when a question arises as to
whether a person is in law a director of a company, the minutes books and returns
sent to Registrar of Companies are important evidence, rather than fact that the
person was de facto functioning as director.
3. TYPES OF DIRECTORS
(a) Inside Directors
Inside directors are those directors who are in the whole-time employment of a
company. This category includes a Managing Director, Whole-time Director,
Technical Director, Executive Director, etc.
(b) Outside Directors
Outside directors are those directors, who are not in the whole-time employment
of a company and as such are not associated with its day-to-day working. They
include professional directors, nominated directors and statutory directors. They are
also sometimes described as non-management or non-executive directors as
distinguished from inside directors who are also known as management directors or
executive directors.
(c) Professional Directors
Professional directors are specialists in different fields of management with
extensive experience and capability of assisting in improving a given organisation.
They are in a good position to offer constructive suggestions in formulating the
companys policies. Their income is derived principally from sitting fees that they
receive from the companies on whose boards they serve.
(d) Nominee Directors
Nominee directors are appointed by financial institutions or banks, which extend
term loans and/or working capital assistance or any other type of financial assistance
to companies. Nominee directors are a powerful tool of project supervision,
monitoring and control, particularly following the issue of Government guidelines
enjoining financial institutions to nominate directors on the boards of companies
enjoying substantial assistance.
(e) Special Directors or Executive Directors
A special director or an executive director is a full-time employee of a company
and is given this designation in appreciation of his merit and his usefulness to the
company. Such directors may not be the members of the Board and as such they
cannot be called directors within the meaning of the provisions of the Companies Act,
1956. However, the Department of Company Affairs has, vide Circular No. 2/82,
advised companies to desist from giving designations as Special Director, Director
Administration, etc., to their executives, who are not members of the Board, as such
designations give an impression to the public at large and those dealing with the
companies and the executives that they are full-fledged directors entitled to act as


such on behalf of the company.
(f) Independent Directors
In Clause 49 of the listing agreement, the term Independent Directors has been
defined as under:-
Independent director shall mean non-executive director of the company who
(a) apart from receiving directors remuneration, does not have any material
pecuniary relationships or transactions with the company, its promoters, its
senior management or its holding company, its subsidiaries and associated
companies;
(b) is not related to promoters or management at the board level or at one level
below the board;
(c) has not been an executive of the company in the immediately preceding
three financial years;
(d) is not a partner or an executive of the statutory audit firm or the internal audit
firm that is associated with the company, and has not been a partner or an
executive of any such firm for the last three years. This will also apply to
legal firm(s) and consulting firm(s) that have a material association with the
entity.
(e) is not a supplier, service provider or customer of the company. This should
include lessor-lessee type relationships also; and
(f) is not a substantial shareholder of the company, i.e. owning two percent or
more of the block of voting shares.
Explanation (ii): Institutional directors on the boards of companies shall be
considered as independent directors whether the institution is an investing institution
or a lending institution.
(g) Interested Directors
Interested Director means any director whose presence cannot, by reason of
Section 300, count for the purpose of forming a quorum at a meeting of the Board, at
the time of the discussion or vote on any matter.
(h) Government Directors
The Central Government has the power to appoint directors under Section 408 of
the Act. The detailed provisions in this regard have been discussed later in this study
lesson.
(i) Whole-time Director
According to Explanation to Section 269(1), a Whole-time Director includes a
director in the whole-time employment of the company. Thus, a whole-time director
means a director who devotes all his time and attention to the management of the
company. Where a director is appointed to act as Technical Director, Legal Director,


Works Director and Sales Director on full time basis he is a whole-time director of the
company. A whole-time director is also a managerial person [See Section 268(1)].
(j) Managing Director
A Managing Director, as defined in Section 2(26) of the Act, means a director
who, by virtue of an agreement with the company, or of a resolution passed by the
company in a general meeting or by its Board of directors or by virtue of its
memorandum or articles of association, is entrusted with substantial powers of
management which would not otherwise be exercisable by him, and includes a
director occupying the position of a Managing Director, by whatever name called.
The definition makes it clear that the managing directors powers must be
substantial so as to give him a discretion and power to decide matters such as buying
and selling, appointment of employees, and the managing director must exercise his
powers subject to the superintendence, control and directions of the companys
Board of directors. But the power to perform acts of routine administrative character
alone, such as affixing the common seal of the company to any document or drawing
and endorsing cheques on companys account in any bank or drawing and endorsing
other negotiable instruments or signing of share certificates or directing the
registration of transfer of shares will not make a director a managing director.
4. LEGAL POSITION OF DIRECTORS
It is very difficult to define the position of directors. Section 2(13) of the
Companies Act, 1956 defines a director as director includes any person occupying
the position of director, by whatever name called. Section 252 of the Act makes it
obligatory on every public company to have at least three directors and on every
other company to have at least two directors.
Although the Companies Act makes it obligatory for all the companies to have
directors, yet the definition given by the Act does not throw any light nor does it guide
and advise the shareholders as to whom they should appoint as directors. The Act
does not lay down any qualification for a person to become a director. However, it
lays down disqualifications.
The true position of company directors is that of agent and apart from the
provisions of the various corporate laws, which bind them, confer certain rights upon,
impose certain obligations on them and make them liable for defaults for violations
thereof. Their real relationship with the company is governed by the arrangement of
agency as governed by the Contract Act.
This position was established long back in Ferguson v. Wilson (1966) L.R. 2 Ch.,
wherein it was held that the company itself cannot act in its own person for it has no
person; it can only act through directors and the case is as regards those directors
merely the ordinary case of principal and agent. Wherever an agent is liable those
directors would be liable; where the liability would attach to the principal and principal
only, the liability is the liability of the company.
In the aforesaid case, F applied for, and by resolution of the Board was allotted
certain shares in a railway company. At the time of allotment all the shares in the
company had been allotted with the result that the company was unable to place F on


the register of members as the holder of shares in the company. F sued W, as
director of the company, claiming inter alia that W should transfer some of his own
shares to F and pay damages. Held Fs claim failed on the ground that the directors
of a company acting in the normal course of their duties are agents for their company
and incur no personal liability.
In Re. Desiraju Venkata Krishna Sharma, AIR 1955 A.P. 26, it was held that
directors being agents of the company, there could be no personal liability or
obligation on them to pay the taxes payable by the company.
Section 179 of the Income Tax Act, 1961, imposes personal liability for tax
arrears upon every director of a private company who cannot prove that the default
was not due to his neglect, misfeasance or breach of duty. Personal liability of the
directors might arise where they contract in their own name or fail to exclude personal
liability, they will also be personally liable if they contract on behaff of the company
without using the word Limited or the words Private Limited as part of the name. It
is in the interest of the directors to make clear, while signing on behalf of the
company that they are signing as agents.
It is important to remember that it is the Board of directors as a collective body
that is the agent of the company and so if the Board acts as agent that binds the
company, a single director will have no authority to bind the company, unless such
powers are, specifically delegated to him by the Board of directors. If the directors
exceed their powers, that is to say, if the contract made by them is ultra vires their
powers, themselves, then such contract, if made with a member of the company is
only voidable; and if made with an outsider who had no notice of the want of
authority, binds the company but the company may claim damages for breach of
implied warranty or authority [Elkington and Co. v. Hunder (1892) 2 Ch. 452]. The
company may, however, ratify an act, ultra vires the directors, by a resolution at a
general meeting.
To some extent, directors are also trustees for the properties of the company and
of the rights which are conferred on them by law and conventions. A trustee is a
person who is the owner of the property, deals with it as principal, as owner and a
master, subject only to an equitable obligation to account to some person to whom he
stands in relation of trustee [Smith v. Anderson (1880) 15 Ch. D. 247]. Directors
stand in fiduciary position towards the company in regard to the powers conferred on
them by the Companies Act and by the articles of the company and also with regard
to the funds of the company, which are under their control.
In Re. Land Allotment Co (1894) 1Ch. 616 Lord Lindley observed: Although
directors are not properly speaking trustees, yet they have always been considered
and treated as trustees of money which comes to their hands or which is actually
under their control; and ever since joint stock companies were invented directors
have been held liable to make good, moneys which they have misapplied upon the
same footing as if they were trustees.
Barring directors in the whole-time employment of the company, like the
managing director, executive director, technical director, etc., directors are not in the
employment of the company and they are not entitled to any remuneration beyond
what is allowed to them by the Act, i.e. fee for attending meetings of the Board and its


committees. They are also not required to hold any shares in the companies on
whose Board they are appointed in so far as articles of most of the companies do not
provide for any share qualifications for their directors.
Section 314 of the Companies Act permits a director to hold an employment in
the company, or what is called an office or place of profit in the company, in addition
to his usual directorship. In such an event the director shall enjoy all the rights,
privileges and benefits which are available to other employees of the company. But
his rights as a director being separate from those of an employee, he will not be
entitled to claim priority for his fees as a director under Section 530 of the Act in the
event of winding up of the company.
As regards the position of directors as trustees, the directors are persons
selected to manage the affairs of the company for the benefit of the shareholders. It is
an office of trust which if they undertake, it is their duty to perform fully and entirely. A
resolution by the shareholders that shares or any other property of the company shall
be at the disposal of the director, binds them and they must deal with it within the
scope of the functions delegated to them and in the manner that suited to benefit the
shareholders.
The trusteeship of directors extends not merely to the property of the company,
but also to the moneys of the company, trade secrets and other items of intellectual
property, the existence or particulars of which may be within the personal knowledge
of the directors [Baket v. Citibbons, (1972) WCR 693].
It, must, however, be noted that directors are not trustees for the company in
the strict legal sense as they manage the property of the company which is not
vested in them. Whereas the property of a trust is vested in its trustees and they
manage the same.
To sum up, directors are trustees of the moneys of the company, but not of the
debts due to the company. They are trustees also in respect of powers of the
company that are conferred upon them, e.g. powers of: (a) issuing and allotting
shares, (b) approving transfers of shares; (c) making calls on shares; and (d)
forfeiting shares for non-payment of calls. They must exercise these powers solely
for the benefit of the company. Since, however, they are not trustees for the
company in the legal sense as aforesaid, the rules of law which apply in case of
such trustees do not in all respects apply to them. They may, accordingly, avail
themselves of the provisions of the Limitation Act or the Companies Act, as the
case may be, for escaping any liability that may be sought to be enforced against
them.
However, it must be remembered that directors are trustees for the company and
not for the individual shareholders.
Director Identification Number (DIN)
Sections 266A to 266G of Companies Act contain the provisions for DIN. As
such, all the existing directors and individuals intending to become directors have to
obtain DIN within the prescribed time frame and in the manner as prescribed. Central
Govt. has prescribed Director Identification Number Rules, 2006, governing Director


Identification Number.
5. QUALIFICATIONS OF DIRECTORS
The Companies Act, 1956 does not lay down any qualifications for a person to be
appointed as a director of a company. However, it mentions disqualifications of
directors, which are contained in Section 274 of the Act.
Section 274 lays down: (1) A person shall not be capable of being appointed
director of a company, if
(a) he has been found to be of unsound mind by a Court of competent
jurisdiction and the finding is in force;
(b) he is an un-discharged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is
pending;
(d) he has been convicted by a Court of any offence involving moral turpitude
and sentenced in respect thereof to imprisonment for not less than six
months, and a period of five years has not elapsed from the date of expiry of
the sentence;
(e) he has not paid any call in respect of the shares of the company held by
him, whether alone or jointly with others, and six months have elapsed from
the last day fixed for the payment of the call;
(f) an order disqualifying him for appointment as director has been passed by
Court in pursuance of Section 203 and is in force unless the leave of the
Court has been obtained for his appointment in pursuance of that section; or
(g) such person is already a director of a public company which, -
(a)has not filed the annual accounts and annual returns for any continuous three
financial years commencing on and after first day of April 1999; or
(b)has failed to repay its deposit or interest thereon on due date or redeem its
debentures on due date or pay dividend and such failure continues for
one year or more:
Provided that such person shall not be eligible to be appointed as a director of
any other public company for a period of five years from the date on
which such public company, in which he is a director, failed to file annual
accounts and annual returns under sub-clause (a) or has failed to repay
its deposit or interest or redeem its debentures on due date or pay
dividend referred to in clause.
(2) the Central Government may, by notification in the Official Gazette, remove
(a)the disqualification incurred by any person in virtue of clause (d) of Sub-
section (1), either generally or in relation to any company or companies
specified in the notification; or
(b)the disqualification incurred by any person in virtue of clause (e) of Sub-
section (1)
(3) A private company which is not a subsidiary of a public company may, by its
articles, provide that a person shall be disqualified for appointment as a director on


any grounds in addition to those specified in Sub-section (1)
The expression moral turpitude is not defined any where but it means anything
done contrary to justice, honesty, modesty or good morals. [Durga Singh v. State AIR
1955 Punj. 97].
It would be seen from Sub-section (3) above, that the power to add to the
disqualifications enumerated in Sub-section (1) of Section 274 is confined only to
private companies which are not subsidiaries of public companies. Sub-section (3) by
necessary implication, does not permit public companies from adopting by their
articles any additional disqualifications for the appointment of directors [Cricket Club
of India v. Madhav. L. Apte (1975) 45 Comp. 574].
In addition to the disqualifications specified above, Section 253 of the Act lays
down that only an individual can be a director. The reason why only an individual
should be a director, as pointed out by the Supreme Court in Oriental Metal Pressing
Works Pvt. Ltd. v. Bhaskar Kashinath Thakore (A.I.R. 1961 S.C. 573) is that as the
office of a director is to some extent an office of trust and there should be somebody
available on whom responsibility could be fixed. Fixing such responsibility might be
difficult if the director is a corporation or an association or firm.
In Essar Oil Ltd., In Re [(2005) 126 SCL (GUJ .) KA Puj, J . (Decided on
18.7.2005), the applicant company proposed scheme of compromise and
arrangement with respect to 2000 debenture holders. As non redemption of
debentures on due date is a disqualification for the directors, pending disposal
of company petition and consideration of the scheme, the company moved an
application praying for an order that directors of the applicant company not to
be treated as disqualified under Section 274(1)(g). By order, the court granted
the protection till one month after the scheme was sanctioned or otherwise
disposed of by the Court. The scheme of compromise and arrangement had
failed in the meeting convened on 25.6.2005. In order to overcome this difficulty
and to extend the protection cover, the applicant company proposed another
scheme whereby a new class of scheme lenders was created and debenture
holders were put in the said class and there after permission was sought for
convening the meeting of the scheme lenders. Pending consideration of the
new scheme, the applicant company again sought declaration from the court
that the directors of the applicant company would not be treated as disqualified
under Section 274(10)(g) contending that if the scheme proposed by the
company would be sanctioned, date of redemption would be deferred and in
that case there would not be any violation of
Section 274(1)(g).
The Application was dismissed.
It was viewed that Section 274(1)(g) is very clear and unambiguous. It is
mandatory in nature. The provision of Section 274(2) carves out the exception
only in case of Section 274(1)(d) and Section 274(1)(e). However, no exception
is carved out so far as sub clause (g) is concerned. Thus, the said sub section
must be given its natural meaning and once the default is committed the
disqualification starts, which cannot be postponed or deferred in assumptions
that if the scheme would be sanctioned, the date of redemption would be


deferred and in that case there may not be any violation of Section 274(1)(g).
As on the date when the court was considering the application, admittedly the
default had been committed. The debentures were not redeemed. The
debenture holders were neither paid any principal amount nor interest accrued
thereon. Even if it was accepted that the protection granted by the court was in
operation up to 24.7.2005, the disqualification would start from 25.7.2005 and it
could not be further delayed merely on account of scheme having been
proposed by the applicant company and meeting for considering of the said
proposal was scheduled to be held on 28.7.2005. Therefore, the substantive
petition may be filed before the court which may or may not be sanctioned by
the court. On the basis of all the ifs and buts, invocation of provision of Section
274(1)(g) could not be stopped, as it would amount to grant of stay against
operation of law.
6. COMPANIES [DISQUALIFICATION OF DIRECTORS UNDER SECTION
274(1)(G) OF THE COMPANIES ACT, 1956] RULES, 2003
The Ministry of Finance, Department of Company Affairs has issued the
following Notification with regard to Companies [Disqualification of Directors under
Section 274(1)(g) of the Companies Act, 1956] Rules, 2003:
NOTIFICATION
New Delhi, the 21st October, 2003
G.S.R. 830(E). In exercise of the powers conferred by clause (b) of Sub-section
(1) of Section 642 of the Companies Act, 1956 (1 of 1956), the Central Government
hereby makes the following rules to carry out the purpose of Clause (g) of Sub-
section (1) of Section 274 of the said Act, namely:
Short title, commencement and extent.
1. (1) These rules may be called the Companies (Disqualification of Directors under
Section 274(1)(g) of the Companies Act, 1956) Rules, 2003.
(2) These rules shall come into force from the date of their notification in the
Official Gazette.
(3) These rules shall apply to all public limited companies registered under the
Companies Act, 1956.
Definitions.
2. In these rules, unless the context otherwise requires:
(a) disqualifying company is the company in which the default has occurred on
account of which a director stands disqualified;
(b) appointing company is the company in which an individual is seeking
appointment as a director, including re-appointment as director.
Disqualifications under clause (g) of Sub-section (1) of Section 274 of the
Companies Act, 1956.
3. (a) Whenever a company fails to file the annual accounts and annual returns, as


described in Sub-clause (A) of clause (g) of Sub-section (1) of Section 274, persons
who are directors on the last due date for filing the annual accounts and the annual
returns for any continuous three financial years commencing on and after the first day
of April, 1999, shall be disqualified.
(b) If a company has failed to repay any deposit, irrespective of the enactment,
rules or regulations under which the deposits have been accepted by the companies,
or interest thereon, or redeem its debentures, or pay any dividend declared on the
respective due dates, and if such failure continues for one year, as described in sub-
clause (B) of Clause (g) of Sub-section (1) of Section 274, then the directors of that
company shall stand disqualified immediately on expiry of that one year from the
respective due dates:
Provided that all the directors who have been directors in the relevant year, from
the due date to the expiry of one year after the due date, will be disqualified:
Provided further that disqualification on account of the reasons cited under this
Rule shall also apply to the reappointment as a director.
Explanation: For the purpose of this rule, it is clarified that non-payment of
dividend referred to in sub-clause (B) of clause (g) of Sub-section (1) of Section 274
due to the reason of dividend not being claimed or kept in separate bank account as
required under Section 205A of Companies Act, 1956 or paid into Investors
Education and Protection Fund as required under Section 205C of that Act shall not
be deemed to be a failure to make payment of dividend.
Duty of Statutory Auditor to report on disqualification.
4. (a) It shall be the duty of statutory auditor of the appointing company as well as
disqualifying company, as required under Section 227(3)(f) to report to the members of
the company whether any director is disqualified from being appointed as director
under clause (g) of Sub-section (1) of Section 274 and to furnish a certificate each year
as to whether on the basis of his examination of the books and records of the company,
any director of the company is disqualified for appointment as a director not.
(b) It shall be the duty of the statutory auditors of the disqualifying company as
required in Section 227(3)(f) to report to the members of the company whether any
director in the company has been disqualified during the year from being re-
appointed as director, or being appointed as director in another company under
clause (g) of Sub-section (1) of Sub-section (1) of Section 274.
Duty of company to intimate disqualification.
5. Whenever a company fails to file the annual accounts and returns, or fails to
repay any deposit, interest, dividend, or fails to redeem its debentures, as
described in clauses (A) and (B) of clause (g) of Sub-section (1) of Section 274, the
company shall immediately file a return in duplicate in Form DD-B, prescribed
under these rules for this purpose, to the Registrar of Companies, furnishing therein
the names and addresses of all the Directors of the company during the relevant
financial years:
Provided that names of such directors who have been exempted from application


of Section 274(1)(g) by the Central Government, from time to time, shall be excluded.
Provided further that no unusual abbreviations or short forms shall be used in
filling up the Form DD-B, which shall give such details as may be necessary to
distinguish and identify each director without any ambiguity.
5A. The Form DD-B prescribed in these rules may be filed through electronic media
or through any other computer readable media as referred under Section 610A of the
Companies Act, 1956.
Failure to intimate disqualification shall render director as officer in default.
6. When a company fails to file the Form DD-B as above within 30 days of the
failure that would attract disqualification under Section 274(1)(g), officers of the
company listed in Section 5 of the Companies Act, 1956 shall be officers in default.
7. (a) Upon receipt of the Form DD-B in duplicate under Rule 5, the Registrar of
Companies shall immediately register the document and place one copy of it in the
document file for public inspection.
(b) The Registrar of Companies shall forward the other copy to the Central
Government.
8. Names of the disqualified directors on the web-site etc.
(a) The Central Government shall place on the web-site of the Department of
Company Affairs the names and addresses and such other details including names
and details of the companies concerned, as may be necessary, in respect of all the
disqualified directors.
(b) The Central Government may also publicize the names of disqualified
directors in such manner as it may consider appropriate.
(c) The Central Government shall take such steps as may be required to update
its web-site to ensure that name of the person, in whose respect disqualification
period has expired after 5 years, is deleted from the web-site.
9. Duty of every director.
Every director in a public company registered under the Companies Act, 1956
shall file Form DD-A, prescribed under these Rules, before he is appointed or re-
appointed.
10. If any question arises as to whether these rules are or are not applicable to a
particular company, such question shall be decided by the Central Government.
11. Punishment for contravention of the rules.
If a company or any other person contravenes any provision of these rules for
which no punishment is provided in the Companies Act, 1956, the company and every
officer of the company who is in default or such other person shall be punishable with
fine which may extend to five thousand rupees and where the contravention is a
continuing one, with a further fine which may extend to five hundred rupees for every
day after the first, during which the contravention continues.


12. On the commencement of these rules, all rules, orders or directions in force in
relation to any matter for which provision is made in these Rules shall stand repealed,
except as respects things done or omitted to be done before such repeal.
13. The electronic form shall be authenticated by the authorised signatories using
digital signatures, as defined under the Information Technology Act, 2000.
14. The Forms prescribed in these rules, when filed in physical form, may be
authenticated by authorised signatory by affirming his signature manually.
[F.No. 1/8/2002-CL.V]
Rajiv Mehrishi, Joint Secretary
In terms of Companies (Disqualification of Directors under Section 274(1)(g) of
the Companies Act, 1956) Rules, 2003, a responsibility has been imposed on the
disqualified directors and the companies of such directors to file returns in Form DD-
A and DD-B respectively to the Registrar of Companies. The format of these forms
has been prescribed as Annexure I.
Disqualification Provisions Significance thereof
The purpose of these provisions is firstly to set some standards of corporate
managership, a degree of competence and responsibility and to save the owners,
the shareholders and at large the community from the consequences of
mismanagement.
Under Section 202 it is an offence for an undischarged insolvent to take part in or
be concerned in the management of a company. An undischarged insolvent and one
who has applied for adjudication as an insolvent are disqualified from being
appointed as a director. The prohibition on insolvents from managing companies are
not intended to punish them but is to protect the community.
7. QUALIFICATION SHARES
There is no statutory requirement that a director must hold qualification shares in
the company in which he is a director. Thus, a person may be a director in a
company without being its member unless the articles provide otherwise. However,
the articles usually provide for a share qualification. The modern view is that holding
a nominal share qualification does not make a director more responsible. If the
articles of a company provide for share qualification, Section 270 lays down that
(a) each director must obtain his qualification shares within two months after his
appointment as director.
(b) any provision in the articles shall be void in so far as it requires a person to
hold the qualification shares before his appointment as a director or to obtain
them within a shorter time than two months after his appointment as such.
(c) the nominal value of the qualification shares shall not exceed Rs. 5,000 or
the nominal value of the one share where it exceeds five thousand rupees;
(d) for the purpose of any provision in the articles requiring a director to hold a
specified share qualification, the bearer of a share warrant should not be
deemed to be the holder of the shares specified in the warrant [Spencer v.


Kennedy (1926) Ch. 125]
A director who accepts his qualification shares as a secret gift from promoters of
a company is guilty of a gross breach of trust and he is liable to give up the shares.
[Boston Deep Sea Fishing Co. v. Ansell, (1888) 39 Ch D 339].
A director can act for two months without possessing the qualification shares
required under the Articles. If he wants to continue after that period, he must have the
requisite qualification before the expiry of two months. Thus, two months locus
poenitentiae seems to have been given to a director to acquire the necessary
qualification [Zamir Ahmed Raz v. Dr. D.R. Banaji, (1957) 27 Com Cases 634]. The
date of appointment is the date when the result of a poll for the election was
announced to the company by the scrutineers and not the date when the poll was
taken. [Holmes v. Keyes (Lord), (1958) 28 Com Cases 419].
If a director fails to acquire his qualification shares within two months after his
appointment or at any time thereafter ceases to hold the share qualification his office
shall become vacant on the expiry of that period [Section 283(1)(a)].
Under Section 272 of the Companies Act, such director shall be punishable with
fine which may extend to five hundred rupees for every day if he acts as a director
after the expiry of the said period of two months without holding the qualification
shares.
The effect of this provision is that if the company goes into liquidation within two
months of his appointment as director, his name cannot be included in the list of
contributories, if he has not acquired the qualification shares, as his name could not be
entered in the Register of Members of the company until he had applied for shares and
those were allotted to him [Zamir Ahmed v. D.R. Banaji (Supra)]. His mere acting as a
director does not imply agreement to take shares in the company but if in such
circumstances he is put on the register of members by the officer of the company after
the time fixed for qualifying has expired and he continues to act as a director, he is
estopped by his conduct from repudiating shares, and will be liable to pay for them
[Browns Case (1873) L.R. Ch. at p. 102]. If a director resigns before the expiry of the
period of two months, he is not liable to the company in respect of the qualification
shares- although he might have been acting as a director in the meantime [Re., Pandora
Theatu Co., (1884) 24 Sol 30 238]. Also, where a director acts without acquiring his
qualification shares after the expiry of two months from the date of his appointment, the
company will be bound to third parties for acts of such a director until the defect in the
appointment or disqualification is disclosed, and acts done after disclosure will not bind
the company. [Re., Hercynia Copper Co., (1894) 2 Ch. 403 (CA)].
Validity of acts not affected
The acts of a director are regarded as valid if done before he becomes bound
by the articles to acquire his qualification shares or notwithstanding that,
having once becoming qualified, a defect may afterwards be discovered in his
qualification [International Cable Co. ex. p. Official Liquidator, (1892) 66 LT 253 and
Section 290].


Raising of share qualification
A director who has already purchased his qualification shares as originally
required by the articles, will not have to vacate his office if the articles are altered
later and a larger number of qualification shares is prescribed [Molineaux v. London
Birmingham and Manchester Insurance Co., (1902) 2 KB 589 (CA)].
Vacation of office and penalty
A failure to acquire or to keep the specified share qualification will result in the
vacation of the office of the director under Section 283(1)(a) Chander Bhan v. Emperor,
AIR 1914 Lah 222 and he can be restrained by an injunction from acting as director.
[Richard B.T.H. Chow v. James Chow 75 (CWN 173)]. Section 283 also prescribes a
penalty if a director, with knowledge that his office is vacated, continues to function as
such with fine upto Rs. 5,000/- on each day on which he functions as a director.
Directors who need not hold qualification shares
A director appointed by the Central Government on the Board of any company
under Section 408 of the Act need not hold qualification shares [Section 408(4)]. The
nominee directors representing those financial institution that are established by a
separate statute of Parliament are not required to acquire the qualifying shares by
virtue of enabling provisions contained in the concerned statute e.g. Section 30A of
the IDBI Act, Section 27 of the SFCS Act, Section 19A of he UTI Act.
Similarly, the directors who by the articles of association of the company are not
required to hold qualification shares, need not hold such shares.
8. NUMBER OF DIRECTORS
According to Section 252 of the Companies Act, 1956 every public company shall
have at least three directors. Every private company shall have at least two directors.
Articles of Association of companies usually provide for the minimum and maximum
number of directors for its Board.
Section 258 of the Act lays down that a company in general meeting may by
ordinary resolution, increase or reduce the number of its directors within the limits
fixed in that behalf by its articles. However, this is subject to the provisions of
Sections 252, 255 and 259 of the Act. Only the Board of directors have the power of
increasing or reducing the number of directors and make proposal for the same to the
general body. A shareholder can make a proposal of this kind through a requisition.
[Ravi Shankar Taneja v. Mother Son Triplex Tools P. Ltd. (2001) 4 Comp LJ 102].
According to Section 259 of the Act, increase in the number of directors under
certain circumstances requires Central Governments approval. In the case of a
public company or a private company which is a subsidiary of a public company, any
increase in the number of its directors, except:
(a) in the case of a company which was in existence on the 21
st
July, 1951, an
increase which was within the permissible maximum under its articles as in
force on that date; and


(b) in the case of a company which came or may come into existence after that
date, an increase which is within the permissible maximum under its article
as first registered,
shall not have any effect unless approved by the Central Government; and shall
become void if, and in so far as it is disapproved by that Government:
Provided that where such permissible maximum is twelve or less than twelve, no
approval of the Central Government shall be required if the increase in the number of
its directors does not make the total number of its directors more than twelve.
Where an increase in the number of directors will involve an alteration of the
articles, a special resolution would be necessary for the purpose [Ram Kissendas
Dhanuka v. Satya Charan Law, (1950) 20 Com Cases 133].
Restrictions on Number of Directorships
Section 275 of the Companies Act prohibits the appointment of a person holding office of a director at the same time in more

than fifteen companies. The Companies (Amendment) Act, 2000 ha
d
reduced the number of companies in which a person can be
a director from twenty to fifteen with effect from 13.12.2000.

Section 277 of the Act lays down that when a person holding office of a director
in fifteen companies is appointed as a director of any other company, the
appointment shall not take effect unless such person has, within fifteen days thereof,
effectively vacated his office as director in any of the companies in which he was
already a director and the new appointment shall become void immediately on the
expiry of the fifteen days if he has not before such expiry, effectively vacated his
office as director in any of the other companies.
Sub-section (2) provides that where a person already holding office of director in fourteen
companies or less is
appointed as a director, of some other companies, making the total number of his
directorships more than fifteen, he shall choose the number of directorships which he
wishes to continue to hold or to accept so however that the total number of the
directorships, old and new, held by him shall not exceed fifteen. None of the new
appointments of director shall take effect until such choice is made; and if choice is
not made within fifteen days of the day on which the last appointment was made, all
the new appointment shall become void.
Section 278 of the Act lays down that directorship in the following companies
shall be excluded for the purpose of calculation of the permissible maximum number
of directorships for the purposes of Sections 275, 276 and 277:
(a) a private company which is neither a subsidiary nor a holding company of a
public company;
(b) an unlimited company;
(c) an association not carrying on business for profit or which prohibits the
payment of dividend; and
(d) a company in which such person is only an alternate director.
9. APPOINTMENT OF DIRECTORS


Directors may be appointed in the following ways:
(i) By subscribers to the Memorandum (First Directors) Section 254.
(ii) By members in general meeting Sections 255, 256, 257, 265.
(iii) By Board of directors (Sections 260, 262 and 313)
(iv) By Central Government (Sections 408 and 409)
(v) By third-parties if the articles provide.
(vi) By small shareholders, if the articles so provide.
Restrictions on Appointment or Re-appointment of Directors
Section 266 of the Act lays down that a person shall not be capable of being
appointed director of a company by the articles, and shall not be named as a director
or proposed director of a company in prospectus issued by or on behalf of the
company, or as proposed director of an intended company in a prospectus issued in
relation to that intended company, or in a statement in lieu of prospectus filed with the
Registrar by or on behalf of a company, unless, before the registration of the articles,
the publication of the prospectus, or the filing of the statement in lieu of prospectus,
as the case may be, he has, by himself or by his agent authorised in writing
(a) signed and filed with the Registrar a consent in writing to act as such
director, and
(b) either
(i)signed the memorandum for shares not being less in number or value than
that of his qualification shares, if any; or
(ii)taken his qualification shares, if any, from the company and paid or agreed to
pay for them; or
(iii)signed and filed with the Registrar an undertaking in writing to take from the
company his qualification shares, if any and pay for them; or
(iv)made and filed with the Registrar an affidavit to the effect that shares, not
being less in number or value than that of his qualification shares, if any,
are registered in his name.
Sub-section (2) of the said section provides that where a person has signed and
filed as aforesaid an undertaking to take and pay for his qualification shares, he shall,
as regards those shares, be in the same position as if he had signed the
memorandum for shares of that number or value.
References in Section 266 to the share qualification of a director or proposed
director shall be construed as including only a share qualification required within a
period determined by reference to the time of appointment, and references therein to
qualification shares shall be construed accordingly.
This section, however, shall not apply to
(i) a company not having share capital;
(ii) a private company;


(iii) a public company which was originally formed as a private company;
(iv) a prospectus issued by or on behalf of a company after the expiry of one
year from the date on which the company was entitled to commence
business.
(i) Appointment of First Directors
First director means the director of the company who assumes office from the
date of incorporation of the company. The first directors of a company may be named
in its articles of association. In case no directors are so named in the articles, the
articles may authorise the subscribers to the memorandum to appoint the first
directors.
Section 254 of the Act, provides that in the absence of any such provision in the
articles of association, the subscribers of the memorandum who are individuals, shall
be deemed to be the first directors of the company until the directors are duly
appointed in accordance with Section 255. If the articles provide for any share
qualification, only such of the subscribers as possess the necessary share
qualification shall be deemed to be directors. This provision is applicable only to a
public company and not to a private company unless the articles make it applicable.
If all the subscribers to the memorandum are bodies corporate, none of the
subscribers can be deemed to be directors, and the company will have no directors
until the first directors are appointed under Section 255, in the absence of other
provisions in the articles. The articles at the time of registration may contain the
names of the first directors until directors are appointed at the first general meeting.
(ii) Appointment of directors by members in General Meeting
Section 255 of the Act, provides that unless the articles provide for the retirement
of all directors at every annual general meeting, not less than two-thirds of the total
number of directors of a public company, or of a private company which is subsidiary
of a public company, shall be persons whose period of office is liable to determination
by retirement of directors by rotation and except as otherwise expressly provided in
the Act, be appointed by the company in general meeting. Any fraction is to be
rounded off to next higher number.
Sub-section (2) of the said section provides that the remaining directors in the
case of any such company, and the directors generally in the case of a private
company which is not subsidiary of a public company shall, in default of and subject
to any regulations in the articles of the company, also be appointed by the company
in general meeting.
When there are no validly appointed directors functioning, the shareholders have
the right to appoint directors at the annual general meeting [Viswanathan (B.N.) v.
Tiffins Barytes Asbestos & Paints Ltd., (1953) 23 Com Cases 29].
Section 256 of the Act, provides that in the case of a public company or a private
company which is subsidiary of a public company, at the first annual general meeting
held after the holding of the general meeting at which the first directors are appointed
in accordance with Section 255 and at every subsequent annual general meeting,


one-third of such of the directors for the time being as are liable to retire by rotation,
shall retire at every annual general meeting or if their number is not three or multiples
of three then the number nearest to one-third, shall retire from office. Those directors
who have been longest in office since their appointment shall retire first. As between
person who became directors, on the same day, retirement among themselves, be
determined by lot. Directors nominated by Financial Institutions pursuant to their loan
agreements are not liable to retirement. Also, the directors appointed by the Central
Government in pursuance of Section 408 of the Act shall also not be liable to retire by
rotation. Articles of most companies contain an express provision excluding the
managing or whole-time director from the requirement of retirement by rotation and
provide that a person shall not be liable to retire by rotation as long as he continues
to hold the office of the managing or whole-time director.
Where the articles of a company provided that every year subsequent to the first
annual general meeting one-third of the directors or if their number is not a multiple of
three, then the number nearest to but not exceeding one-third, shall retire from office.
The strength of the Board became reduced to two and the question was whether
either of them ceased to be a director under this article. It was held that in this case
there are two directors and therefore one cannot find a number which is nearest to
but does not exceed one third [Mosely v. David Mosely & Sons Ltd. (1939) 9 Comp
Cas 204]. In another similar case, it was held that one of the two directors should
have retired at the annual general meeting [B M Viswanathan v. Tiffins Barytes
Asbestos Paints Ltd. (Supra)].
Sub-section (3) of Section 256 of the Act provides that where a director retires by
rotation at the annual general meeting, the company at the same meeting may
appoint (i) the retiring director, or (ii) some other person in the vacancy.
If at the said annual general meeting the vacancy is not so filled and the meeting
has not expressly resolved not to fill the vacancy, the meeting, though it has disposed
off all other matters on the agenda, shall stand adjourned till the same day in the next
week, at the same time and place, or if that day is a public holiday, till the next
succeeding day which is not a public holiday, at the same time and place.
Section 256(4) provides that if at the adjourned meeting also, the vacancy is not
filled up and that meeting also has not expressly resolved not to fill the vacancy, the
retiring directors shall be deemed to have been re-appointed at the adjourned
meeting except in the following cases:
(a) at that meeting or at a previous meeting a resolution for the re-appointment
of such a director has been put to the meeting and lost;
(b) the retiring director has, by a notice in writing addressed to the company or
its Board of directors, expressed his unwillingness to be so appointed;
(c) he is not qualified or is disqualified for appointment;
(d) a resolution, whether special or ordinary, is required for his appointment or
re-appointment by virtue of any provisions of the Act; or
(e) the proviso to Sub-section (2) of Section 263 is applicable to the case.
This sub-section deals with a meeting adjourned because no decision is taken on


filling up a vacancy caused by retirement of a director and not with a meeting
adjourned for lack of quorum as provided for by Section 174. The meeting
contemplated in this sub-section is a meeting capable of taking a decision.
Section 174 does not apply to a case coming within this sub-section. If a meeting is
adjourned for want of quorum and no decision is taken at the adjourned meeting on
re-appointment of a director, the director is not deemed to be re-appointed by virtue
of sub-clause (b) of this sub-section [Cardamon Marketing Co.Ltd. v. Krishna Iyer (N)
(1982) 52 Com Cases 299 (DB) (Ker)].
Where no annual general meeting is called or held, there is no scope for the
application of the deeming provision of clause (b) at all.
When a general meeting is adjourned for the purpose of taking a poll, the
provisions of Sub-section (4)(a) and (b) relating to automatic re-election of retiring
directors are not attracted for the time being [Srinavasan (M.K.) v. W.S. Subramanya
Ayyar, (1932) 2 Com Cases 147].
The re-appointment as above shall be effective from the day of the adjourned
meeting.
In case the vacancy is not filled at the annual general meeting and also the
retiring directors do not get automatically re-appointed, the vacancies may be filled by
the Board of directors.
The directors due to retire by rotation at an annual general meeting vacate office
at the latest on the last day on which the meeting was due or ought to have been
held. In case the meeting is not called by the directors, they cannot be allowed to
take advantage of their own default and cannot extend their directorship after the
date on which the meeting should have been called and held [Ananta Lakshmi Amal
v. Indian traders Invest Ltd. AIR 1953 Mad. 467, (1952) Comp. Cases 324].
Additional directors, hold office till the next annual general meeting and,
therefore, they would not be, included in the whole number of directors for the
purpose of computing the proportion of directors who should retire at the meeting.
[Eyre v. Milton Proprietary Ltd., (1935) All ER Rep 286].
Re-election of directors - filing of return
The provisions of Section 303 (2) requiring the filing of a return to the Registrar of
any change in the particulars of directors are not applicable to directors who are re-
elected after retirement and, therefore, no document in reference to them is
necessary. [Krishna Mills Ltd. v. The State, (1957) 27 Com Cases 388, 389].
Appointment of Person other than Retiring Director
Section 257 contains provision regarding the right of persons other than the
retiring directors to stand for directorship and provides for the machinery for the
election of such persons. It enables a person to stand for directorship at any general
meeting and not necessarily only at an annual general meeting [Re Motion Pictures
Association (1974) 44 Comp Cas 298 (Del)].
A person who is not retiring director is also eligible for appointment as director.


Section 257 of the Act provides that a person (even a non member) other than a
retiring director may give a notice in writing to a public company or a private company
which is subsidiary of a public company not less than fourteen days before a general
meeting about his candidature as a director or any member may give such notice
signifying his intention to propose him as a candidate for that office. Such notice
should be accompanied with a deposit of five hundred rupees, which shall be
refunded to such person or, as the case may be, to such member, if the person
succeeds in getting elected as a director. The Department of Company Affairs (Now,
Ministry of Company Affairs) has vide circular No. 5/89 dated 15.9.1989 clarified that
if in terms of Section 257, the person does not get elected, as a director then he or
the member proposing him, as the case may be will not be entitled to the refund of
Rs. 500 and the amount deposited shall stand forfeited to the company.
On receipt of such a notice the company must inform its members of the
candidature of a person or the intention of a member to propose such person as a
candidate either by serving individual notice on the members or by advertising not
less than seven days before the meeting in at least one English Language
newspaper and one regional language newspaper circulating in the place where the
registered office of the company is situated.
A notice given to members under Sub-section (1A) not less than seven days in
advance of the election is valid notwithstanding that it does not comply with the
requirement of twenty one days set out in Section 171. Appending an explanatory
note to the notice under Sub-section (1A) is valid compliance with Section 173(2)
[Pazhamalai (S.) v. Aruna Sugars Ltd., (1984) 55 Com Cases 500 (Mad)].
Section 257 is a specific provision giving a right to an individual member to give
notice thereunder. The specific right that has been given under Section 257 does not
provide that the implementation of such a right will have to be in accordance with the
procedure laid down in Section 188 of the Act. Sections 188 and 257 cover different
fields [Gopal Vyas v. Sinclair Hotels and Transportation Ltd. Comp Cas. 68 (1990)
516 (Cal.)].
The Department of Company Affairs, in this regard, has expressed the views
that if a person who is appointed as an additional director wants to be elected as a
director at the next annual general meeting, the provisions of section 257 will have to
be complied with since he cannot be considered to be a director retiring by rotation at
that meeting (Letter No. 8/3 (270)/63/PR dated 27-7-1963).
Applicability of the provisions of Section 257 to a private company
Section 257(1) does not apply to a private company which is not subsidiary of a
public company. Thus a private company, unless its articles so require, is not bound
to receive a notice of candidature of a person for directorship at a general meeting
and inform the same to its members in respect of convened general meeting. The
proposal to appoint a person as a director can begin straightaway at the meeting
itself. Affirmed in K. Meenakshi Amma v. Sree Rama Vilas Press and Publications
Ltd., (1992) 73 Com Cases 285 at 295 (Ker-DB). Appointment of director other than
the retiring one in general meeting will, in case of a private company not being a
subsidiary of a public company, be governed by its Articles of Association.


Appointment of Directors to be voted individually
The directors are usually elected by shareholders at a general meeting by an
ordinary resolution passed by simple majority of votes. Two or more directors should
not be elected en bloc or by a single resolution. Section 263(1) of the Act, provides
that in case of public company or a private company which is a subsidiary of a public
company, a motion shall not be made for the appointment of two or more persons as
directors of the company by a single resolution, unless a resolution that it shall be so
made has first been agreed to by the meeting without any vote being given against it.
Therefore, if two or more directors are to be appointed or elected by a single
resolution, it is necessary first to pass a resolution authorising their appointment or
election in that manner without even one dissentient vote being given against such
resolution.
Sub-section (2) provides that resolution moved in contravention of Sub-section
(1) shall be void whether or not objection was taken at the time of its being so moved.
So when a resolution re-electing the retiring directors becomes void for the reasons
above, the provisions for the automatic re-appointment of the directors retiring by
rotation in default of another appointment as provided in Section 256(4) shall not
apply.
The provision gives discretion to the meeting as regards the rejection of a
particular candidate in the list.
The object of the prohibition of a composite motion is that it will enable the
shareholders to appoint a particular individual standing for directorship, without being
compelled to vote for candidates in a batch.
Contravention of the provision of Section 263
The effects of the contravention of Section 263 would be as follows:
(1) The appointment of all the directors not voted on individually will be void
even if no body objected to it at that time. [Raghunath Swarup Mathur v.
Raghuraj Bahadur Mathur, (1967) 37 Com Cases 304 : 91966) 2 Comp LJ
100 (All)];
(2) The appointment would not invalidate the acts of directors where defect is
afterwards discovered (Section 290).
(3) The provision for the automatic re-appointment of retiring directors provided
in Section 256 will not have effect in such case; that is to say, where an
appointment is void by reason of the application of Sub-section (2), the
vacancy created thereby cannot be filled by the retiring director under the
provision for automatic re-appointment provided in Sub-section (4) of
Section 258 of the Act.
Principle of Proportional Representation
Normally, directors are appointed by simple majority on a direct vote of the
members of the company by an ordinary resolution. As a result of this method of
simple majority a substantial minority may not be able to succeed in placing even a


single director of its choice on the Board.
Section 265 of the Act affords an opportunity to the minority shareholders to have
their representatives on the Board of directors. In accordance with the said Section, a
public company or a private company, may provide in its articles for the appointment
of not less than two-thirds of the directors, according to the principal of proportional
representation, whether by single transferable vote or by a system of cumulative
voting or otherwise. The appointments are made once in three years and any casual
vacancies can be filled in by the Board of directors as in other cases.
The directors appointed according to this principle hold office for three years and
cannot be removed by the company in general meeting under Section 284.
(iii) Appointment of Directors by the Board
(a) Additional Directors : The Board of directors of a company may appoint
additional directors. Section 260 of the Act lays down that if the articles of association
of a company empower its directors to appoint additional directors, the Board may
exercise such power. Such additional director shall hold office only up to the date of
the next annual general meeting of the company. The Section further provides that
the number of additional directors together with the existing directors shall not exceed
the maximum number fixed for the Board by the articles.
The power of the Board of directors to appoint an additional director is not
affected by the provisions of Section 255 (Section 260). The restriction imposed by
Section 255 regarding the proportion of directors liable to retire by rotation and non-
rotational need not be complied with while appointing an additional director.
If the annual general meeting of a company is not held or cannot be held, the
person appointed as additional director vacates his office on the last day on which
annual general meeting should have been held in terms of Section 166 of the Act. He
cannot continue in office thereafter on the ground that the meeting was not or could
not be called within the time prescribed in the Section [Krishna Prasad Pilani v.
Colaba Land and Mills Co. 1959 Comp. Case 273].
The expression up to date of the annual general meeting means up to the date
when the next annual general meeting ought to be held at the latest [See also
Consolidated Nickel Mines Ltd. In Re, (1914) 1 Ch 883; 186 followed in
Anantalakshmi (A) Ammal v. The Indian Trades and Investments Ltd., (1952) 22 Com
Cases 324 (Mad)].
Section 260 applies to all companies, public as well as private Needle Industries
(India) Ltd. v. Needle Industries Newey (India) Holdings Ltd. AIR 1981 SC 1298.
Unlike in the case of the casual vacancies which can be filled only at a regular
meeting of the Board, the appointment of additional director may be made either at a
meeting of the Board or by passing a resolution by circulation as provided in
Section 289.
Section 303(2) requires a company to file with the Registrar any change among
its directors specifying the date of the change within thirty days thereof. Now, only
one copy of Form 32 is required to be filed with the Registrar instead of two copies.


Whether the appointment of an additional director appointed under Section 260 or a
director appointed in a casual vacancy under Section 262 as a director by the
company in its annual general meeting will constitute a change within the meaning of
Section 303(2) of the Act. The above question was examined by Ministry of
Corporate Affairs, earlier the Department of Company Affairs which has clarified that
where an additional director or a director appointed in a casual vacancy is appointed
as director of the company in the annual general meeting, the nature of his
appointment changes radically. It would, therefore, be in the interest of such directors
that such changes are notified to the Registrar under Section 303(2) of the
Companies Act, 1956.
In the opinion of Ministry of Corporate Affairs, earlier Department of Company
Affairs where all the directors of a company retire at the annual general meeting and
are re-appointed at the meeting to the same respective offices as before, such re-
appointments will not be deemed to constitute a change within the meaning of
section 303(2) and no return therefor need to be filed. This does not, however, extend
to additional directors (section 260) or directors appointed to the casual vacancies
(section 262) when they are appointed for a full term at the annual general meeting
[Company News and Notes dated July 1, 1963].
Power of general meeting to appoint additional directors
The power to appoint additional director by the Board is to be delegated by the
Articles of Association of the Companies and unless the articles do so, there is no
reason why the company in general meeting may not exercise the power [Blair Open
Hearth Furnace Ltd. v. Reigart, (1913) 108 LT 665]. Thus, the articles can be so
framed so as to delegate the power of appointing additional directors to the Board
and not to the general meeting and in such a case an appointment made by a
general meeting would not be effective. There are exceptions to this:
(1) The general meeting will have the power to appoint additional directors
where the directors have not filled the vacancies;
(2) When they are not able to do so either because there is a deadlock in the
Board; or because there is no validly appointed director in office. [Foster v.
Foster, (1916) 1 Ch 532].
Judicial non-interference in appointment of directors
Courts do not generally interfere in the matter of appointment of directors
because that would amount to interference in the functioning of corporate democracy.
A director appointed by shareholders participated in the meetings of the Board as
well as general meetings where certain other directors were appointed.
Subsequently, he applied for an injunction to restrain the functioning of the new
appointees. The court refused to oblige him. Even if the appointment was, as alleged,
the result of a conspiracy that could be sorted out in a regular suit. Manoj Kumar
Sonthalia v. Nariman Point Building Service and Trading P. Ltd., (1995) 84 Com
Cases 559 (Mad). The court followed its own earlier decision in Vivek Goenka v.
Manoj Santhalia, (1995) 83 Com Cases 897 (Mad) where also similar appointments
were made and no relief against them was allowed because of no irregularity.
(b) Filling up Casual Vacancies Section 262 empowers the Board to fill


casual vacancies in the case of a public company or a private company, which is a
subsidiary of a public company. Thus, if the office of any director appointed by the
company in general meeting is vacated before his term of office expires in the normal
course, the resulting casual vacancy may, subject to any regulations in the articles of
the company, be filled by the Board of directors at a meeting of the Board.
The Board of directors shall have the power at any time and from time to time
subject to the provisions of Section 260 of the Companies Act, 1956 to appoint any
person to be a director to fill a casual vacancy among directors of the company.
As per Sub-section (2) of Section 262, if the director fills up a casual vacancy, the
person appointed will hold office not until the next annual general meeting only but for
the entire period for which the person in whose place he has been appointed would
have held office. Thus, if A is a director and vacates his office later, B appointed in
his place would continue for the whole period for which A, if he had not vacated,
would have continued. But though B would continue for the whole of the unexpired
term for which A had been appointed; on the expiry of that term, B will not be
eligible for re-appointment as a director retiring by rotation.
Filling of casual vacancy by a private company - Section 262 does not apply to a
private company which is not a subsidiary of a public company. Such a company will
fill casual vacancies as provided by its own articles and/or under Section 255(2) i.e. in
a general meeting. It need not follow the provisions of Section 262.
Vacancy created by resignation, etc. of a director appointed to fill casual
vacancyThe following query was addressed to MCA:
X, a director of a company, was appointed at the annual general meeting. Due
to some reason, X resigned from the Board and casual vacancy thus created
was filled by the appointment of Y at a meeting of the Board of directors.
Necessary return concerning this change was filed with the Registrar. Later on,
Y resigned and the directors again invited X to fill the vacancy created by the
resignation of Y. The question is: Is the action of the Board in appointing X, in
the second instance, quite in accordance with the provisions of Section 262(1)
and particularly considering the fact that the appointment of X consequent
upon the resignation of Y, for the purpose of filling the casual vacancy at a
Board meeting does not, in effect, satisfy the statutory requirement which
states if the office of any director appointed by the company in general
meeting is vacated?
MCA gave the following reply :
The Departments view on the point raised is that the appointment of X, by the
Board, in the second instance, in the vacancy caused in the Board by the
resignation of Y cannot, strictly speaking, be deemed to be an appointment to
a casual vacancy in the office of director appointed by the company in general
meeting, within the meaning of Section 262(1) in as much as the appointment
of Y himself was not originally made by the company in general meeting.
However, in the interest of the smooth working of the company, if the casual
vacancy is in an office which was filled by election at a general meeting, the
Department would have no objection to the Board of directors of the company


filling that casual vacancy as many times as may be necessary. [Company
News and Notes dated July 1, 1963).
The words director appointed by the company in general meeting used in
Section 262(1) must be read with the following words i.e., is vacated before his term
of office will expire. In M.K. Srinivasan v. W.S. Subrahmanya Ayyar [1932] Comp.
Cas 147. The director did not assume office i.e. he dies after his appointment of the
general meeting but before assuming the office. In this case here is no question of
someone vacating any office if he never even assumed it.
Power to fill casual vacancies is exercisable by the Board even when the
membership of the Board has fallen below the statutory minimum. Even the holding
of a general meeting to appoint directors will not extinguish the directors power to fill
casual vacancies.
This power, like all other powers of directors, should be exercised in good faith in
the interest of the company as a whole. Ananthalakshmi Ammal (A) v. Indian Trades
& Investments Ltd., (1952) 22 Com Cases 324.
(c) Alternate director - The Board of directors of a company may, if so
authorised by its articles or by a resolution passed by the company in general
meeting, appoint an alternate director, in accordance with Section 313 of the
Companies Act, 1956, to act for a director during his absence for a period of not less
than three months from the State in which meetings of the Board are ordinarily held.
An alternate director occupies the position of director and even though he is
called an alternate director, he is a director and performs same duties and is subject
to the same liabilities as of any director. However, in calculating for the purposes of
Section 275, the number of companies of which he is a director, a company in which
he is an alternate director shall not be included [Section 278(1)(d)]. An alternate
director may be appointed as a managing or whole-time director. Therefore, no new
office of the director is created by his appointment. Provisions of the Act not
applicable to the alternate director are as follows:
(1) Appointment of an alternate director is not considered as an increase in the
strength of the Board of directors.
(2) Alternate directorship held by a person cannot be counted for maximum
number of directorships, which a person can hold.
(3) An alternate director is not required to hold any qualification shares.
It is the prerogative of the Board of directors to appoint an alternate director.
Neither the shareholders of the company nor any other person can exercise the
power to appoint alternate director.
Vacation of office of alternate director An alternate director shall not hold
office as such for a period longer than that permissible to the original director in
whose place he has been appointed and shall vacate office as and when the
original director returns to the State in which meetings of the Board are ordinarily
held.
MCA has clarified that the alternate director vacates his office whether or not the


original director attends the Board meeting on his return to the State [Letter No.
6/16(313)/68-PR, dated 5-2-1968].
The word permissible used above has to be understood not only in the sense
of his term of office by virtue of his appointment but also in the sense that there
can be a situation when it is no longer permissible for the original director to hold the
office despite the fact that the period of his appointment is yet to come to an end.
Thus, if the original director suddenly dies, the office is automatically vacated and the
alternate director, unless reappointed, in the casual vacancy caused by the death of
the original director, will also vacate his office. Again, if the original director vacates
his office by virtue of any of the provisions of Section 283, the alternate director also
automatically vacates the office. Suppose that the original director, as per his terms
of appointment, was entitled to hold the office of a director for a period of three years,
which may be maximum permissible period under the normal circumstances. But
then, it may happen that this maximum permissible period is curtailed by virtue of any
other provisions of the Act. In that event, the maximum permissible period is also
reduced for the alternate director. (A.M. Chakraborti, Taxmann, 1994 Edition,
page 979).
(iv) Appointment of Directors by Central Government
Section 408 of the Act, vests overriding powers in Central Government to
nominate directors. Sub-section (1) of this section provides that notwithstanding
anything contained in this Act, the Central Government may appoint such number of
persons as the Company Law Board
1
may, by order in writing, specify as being
necessary to effectively safeguard the interests of the company, or its shareholders
or the public interests to hold office as directors thereof for such period not exceeding
three years on any one occasion, as it may think fit, if the Company Law Board
1
, on a
reference made to it by the Central Government or on an application of not less than
one hundred members of the company or of the members of the company holding not
less than one-tenth of the total voting power therein, is satisfied after such inquiry as
it deems fit to make, that it is necessary to make the appointment or appointments in
order to prevent the affairs of the company being conducted either in a manner which
is oppressive to any member of the company or in a manner which is prejudicial to
the interest of the company or to public interest. The section opens with the words
not withstanding anything contained in this Act. This is a non obstante clause which
vests overriding powers in the Government to nominate directors to prevent
mismanagement or oppression. [Oriental Industrial and Investment Corpon. Ltd. v.
Union of India, (1981) 51 Com Cases 487, 493 (Del)].
The directors appointed under Section 408 may or may not be the members of
the company. The period of three years mentioned herein means full term of three
years excluding the period during which an injunction by court on instance of
company restraining director for acting operates [Union of India v. Shri Changdeo
Sugar Mills Ltd. (1984) 55 Comp. Cas. 42 (Bom.)]
Alternatively, and in lieu of appointing directors as aforesaid, the Company Law
Board
1
may, if the company has not availed itself of the option given to it under

1.
Substituted for Company Law Board by the Companies (Second Amendment) Act, 2002, w.e.f. date yet
to be notified.


Section 265, i.e. appointment of directors by proportional representation, direct the
company to alter its articles in the manner provided in that Section and make
fresh appointment of directors in pursuance of the articles so amended, within such
time as may be specified in that behalf by the Company Law Board [proviso to
Section 408(1)].
In case the Company Law Board
1
passes an order under the proviso above, it
may, if it thinks fit, direct that until new directors are appointed in pursuance of the
order aforesaid, such number of persons as the Company Law Board
1
may, by order
specify as being necessary to effectively safeguard the interests of the company, or
its shareholders or the public interest, shall hold office as additional directors of the
company and on such directions, the Central Government shall appoint such
additional directors [Section 408(2)].
The power of the Central Government, to appoint directors under Section 408 of
the Act is not absolute, but is circumscribed by the limitations mentioned in that
section. The exercise of its power is dependent on the establishment, in an objective
manner that it is necessary to make the appointment in order to prevent the affairs of
the company being conducted in a manner which is oppressive to any member of the
company or in a manner which is prejudicial to the interests of the company or the
public interest. Since the exercise of these powers has grave consequences and
seriously affects the reputation and credibility of the management of the company,
the power must be exercised only when the requisite conditions are fully compiled
with. The power cannot be exercised in a whimsical or arbitrary manner [South India
Viscose Ltd. v. Union of India (1982) 52 Comp. Case. 247, Delhi].
For the purpose of reckoning two-thirds or any other proportion of the total
number of directors of the company, any director or directors appointed by the
Central Government shall not be taken into account.
Any director appointed by the Central Government under Section 408 shall not
be required to hold any qualification shares and not be liable to determination by
retirement of directors by rotation. But they can be removed by the Central
Government at any time and other persons can be appointed by it in their place.
In addition to the aforesaid powers of the Central Government to appoint
directors, it has, as the shareholder of government companies, the right to appoint
directors of such companies.
Sub-Section (5) of Section 408 provides that no change in the Board of directors,
after a person is appointed or directed to hold office as a director or additional
director under this section shall, so long as such director or additional director holds
office, have effect unless confirmed by the Company Law Board
1
.
The Central Government may also issue such directions to companies, where
Government directors have been appointed, as it may consider necessary or
appropriate in regard to their affairs. Such directions may include directions to
remove an auditor already appointed and to appoint another auditor in his place, or to

1.
Substituted for Company Law Board by the Companies (Second Amendment) Act, 2002, w.e.f. date yet
to be notified.


alter the articles of the company, and upon such directions being given the
appointment, removal or alteration as the case may be, shall be deemed to have
come into effect as if the provisions of this Act in this behalf have been complied with
without requiring any further act or thing to be done. The Government directors may
be required to report to the Central Government from time to time with regard to the
affairs of the company.
The Company Law Board
1
have also powers under Section 409 of the
Companies Act to prevent change in the Board of directors of a company, which is
likely to affect the company prejudicially. It provides that where a complaint has been
made to the Company Law Board
1
by its managing director or any other director or
the manager of the company that as a result of a change which has taken place or is
likely to take place in the ownership of any shares held in the company, a change in
the Board of directors is likely to take place which if allowed, would effect prejudicially
the affairs of the company, the Company Law Board
1
may, if satisfied, after such
inquiry as it thinks fit to make that it is just and proper so to do, by order, direct that
no resolution passed or that may be passed or no action taken or that may be taken
to effect a change in the Board of directors after the date of complaint, shall have
effect unless confirmed by the Company Law Board
1
and any such order shall have
effect notwithstanding anything to the contrary contained in any other provision of this
Act or in the memorandum or articles of the company or in any agreement with, or
any resolution passed, in general meeting by or by the Board of directors of the
company.
The Company Law Board
1
shall have power when any such complaint is received
by it, to make an interim order to the effect set out aforesaid before making or
completing the inquiry aforesaid.
Nothing contained aforesaid shall apply to private company unless it is a
subsidiary of a public company.
Application to the Company Law Board
1
to Prevent Oppression and
Mismanagement.
An application under Section 408 and Section 409 of the Act is required to be
made to the principal Bench of the CLB
1
in Form No. 1 in Annexure II to the CLB
Regulations with a fee of Rs. 500. The application is to be accompanied with the
following documents.
1. Documentary and/or other evidence in support of the statements made in
the petition as are reasonably open to the petitioner(s).
2. Documentary evidence in proof of the eligibility and status of the petitioner(s)
with the voting power held by each of them.
3. Affidavit verifying the petition.
4. Bank draft evidencing payment of application fee.
5. Memorandum of appearance with copy of the Board
1
resolution or the
executed vakalatnama, as the case may be.

1.
Substituted for Company Law Board by the Companies (Second Amendment) Act, 2002, w.e.f. date yet
to be notified.


6. Three copies of petition.
(v) Appointment of Directors by Third Parties (Nominee Directors)
Sometimes financial institutions or banks or other lenders, etc., nominate a
director to represent their interest on the Board. The lending institutions assume a
pivotal role in financing the various projects of the companies. Such Financial
Institutions have to safeguard their interests. They have to ensure that the money
is only used for the purposes for which it was borrowed. The right and the terms of
nominating the directors on the Boards of companies is usually contained in the
agreement itself. Special legislations governing certain public financial institutions
and State financial corporations envisage the appointment of certain directors on the
Boards of borrowing companies and such a provision has an overriding applicability
to the Companies Act.
Nominee directors can be appointed only if a provision to that effect exists in the
Memorandum of Association or Articles of Association of the company unless where
a statute provides for such nomination. Therefore, it would be necessary for the
company to specifically provide in its Articles, or amend its Articles to provide, for
appointment of a non-rotational director by the assisting financial institution(s).
As per Section 255 of the Act, it should be ensured that the total number of non-
rotational directors does not exceed one-third of the total strength of the Board. The
companys articles may include provisions relating to the following:
(1) The nominee director may not be required to hold qualification shares and
shall not be liable to retire by rotation.
(2) Every such director shall be entitled to attend all general meetings, Board
meetings and Committee meetings.
(3) The nominee director shall be paid normal fees and expenses to which other
directors are entitled.
The fees, commission monies and remuneration in relation to such nominee
directors shall accrue to corporation(s) and the same shall accordingly be paid by the
company directly to the respective corporation(s) of which nominee directors are
employees. If they are not employees of nominating institutions, fees, commissions or
remuneration shall be paid to them.
Sometimes a company may not accept the appointment of a director nominated
by the third party. The third party might insist that the director nominated by it must be
accepted and may thus refuse to provide an alternative. In British Murac Syndicate
Ltd. v. Alperton Rubber Co. Ltd. [1915] 2 Ch. 186, it was held that the company shall
be compelled to accept the appointment unless the appointee is unfit to act as
director, e.g., where he has conflicting interests.
Liability of nominee directors Nominee directors are in the same position and
they owe same duties to the company as any other director.
However, by virtue of special provisions in the respective Acts governing different
financial institutions, the directors nominated by the financial institutions have been
given immunity from action for any liability as a director in the company and


administrative instructions have also been issued to the Department of Company
Affairs not to launch any prosecution against such directors.
Director nominated by a shareholder
It has been held that there is nothing wrong if a member holding large
shareholding nominates a director on the Board of a company to represent his
interests. However, such interests should be subservient to the interest of the
company and the director should be free to exercise his best judgement in the
interest of the company, which he serves. But if he agrees to subordinate the
interests of the company to the interests of his patron his conduct will be oppressive
to the other shareholders for which the patron, can be brought to book [Bowlting vs.
Association of Cinematograph, Television and Alined Technicians (1963) 1 AIL ER
716 (1963) I Comp LJ 344].
(vi) Appointment of a Director by Small Shareholders
The Companies (Amendment) Act, 2000 had inserted the following proviso to
Section 252(1) of the Act:-
Provided that a public company having
(a) a paid-up capital of five crores rupees or more;
(b) one thousand or more small shareholders,
may have a director elected by such small shareholders in the manner as may be
prescribed.
Explanation For the purposes of this Sub-section small shareholders means
a shareholder holding shares of nominal value of twenty thousand rupees or less in a
public company to which this section applies.
This amendment came into force with effect from December 13, 2000. The
Government prescribed the Companies (Appointment of the Small Shareholders
Director) Rules 2001 vide notification No. G.S.R. 168(E) dated 9th March, 2001 for
the manner of appointment of such director.
(For the text of these Rules see Annexure II).
Accordingly, a public company having paid-up share capital (Preference and/or
Equity Capital) of Rs. five crores or more may have a director from amongst small
shareholders elected suo-moto or upon notice of small shareholders who are not less
than one tenth of total small shareholders. Such notice duly signed by at least 100
small shareholders should be served upon the company at least 14 days before the
general meeting at which such appointment is intended.
The listed public company shall elect, small shareholders director through the
postal ballot whereas the unlisted public company on the recommendation by the
majority of the small shareholders for the proposed candidate subject to other
conditions and disqualifications prescribed under the said Rules.
Tenure of such director shall be for a maximum period of three years. On expiry of


his tenure, the same person, if so decided by small shareholders, may be elected for
another period of three years. Such director shall be treated as director for all purposes
but he/she cannot be appointed as managing or wholetime director. An individual can
not hold office of the small shareholders director at the same time in more than two
companies. Such director shall have to vacate the office as provided in the Rules and
he can also be removed in pursuance of Section 284 of the Act.
10. REMOVAL OF DIRECTORS
A director may be removed from office before the expiry of his term by
(a) Shareholders of the Company; (b) Central Government; or (c) Company Law
Board.
(a) Removal by shareholders
Pursuant to Section 284(1) of the Act, the shareholders of a company may, by
passing an ordinary resolution at a general meeting, remove a director before the
expiry of the period of his office. However, the following directors cannot be removed
by the company unless otherwise stipulated in the terms of their appointment:
(a) a director appointed by the Central Government under Section 408;
(b) a director of a private company holding office for life on the first day of April,
1952 whether or not he is subject to retirement under an age limit by virtue
of the articles or otherwise;
(c) where the company has availed itself of the option to appoint not less than
two-thirds of the total number of directors according to the principle of
proportional representation under Section 265;
(d) a director appointed by a Financial Institution/Bank under the terms of a loan
agreement.
The right given by Section 284 is a statutory right which cannot be taken away by
the memorandum, articles or by any contract or any other document and if it is sought
to be taken away, such a provision will be void [see Section 9].
In the case of Ravi Prakash Singh v. Venus Sugar Ltd. [(2008) 84 SCL 75 (Del)],
the judgment made it clear that where articles of association confer power on the
board of directors to remove a director, such power is not affected by the provisions
of section 284. The articles of association are in the nature of an agreement between
the shareholders who are the joint owners of the company. If some specific
methodology is devised by consent, nothing precludes the members/shareholders
from doing so.
In Tarlok Chand Khanna v. Raj Kumar Kapoor (1983) 54 Comp. Cas. 12 (Delhi),
it was held that apart from the directors appointed by the Central Government under
Section 408, life directors holding office on 1.4.1952 and nominee directors appointed
by the financial institutions, a company has full power under Section 284 to remove a
permanent director even if articles of association put restrictions on removal of
permanent directors.


The shareholders cannot be restrained from calling a general meeting to remove
existing directors and appoint new directors. [Life Insurance Corporation of India v.
Escorts Ltd. (1986) 59 Comp. Cas. 548 (SC)]. It has been held to be a good ground
for removing a director where it was found as a fact that the director had made
misleading complaints to various Government Authorities which resulted in raids on
the companys premises and the concerned authorities found nothing wrong and
gave a clean chit to the company. [Vinod Kumar Mittal v. Kaveri Lime Industries Ltd.
(2000) 100 Com. Cases 66].
The Civil Court has no jurisdiction to entertain the suit for removal of directors of
a limited company as it relates to the internal management of the company which is
governed by the Act. In Khetan Industries Private Ltd. v. Manju Ravindra Prasad
Khetan AIR 1995 Bom 43, one of the two issues before the High Court was whether
the Civil Court has jurisdiction to entertain a suit for removal of directors of a
Company. The Court held that the shareholders have a right to remove directors
under Section 284 of the Act, which provides a machinery for enforcement of the right
and Civil Court has no jurisdiction to entertain a suit for removal of directors.
To remove a director under Section 284 of the Act, certain essential requirements
are to be followed. A special notice shall be required of the intention to move any
resolution for the removal of a director or to appoint some other person in his place
[Section 284 (2)]. On receipt of the notice the company shall forthwith send a copy of
the same to the director concerned and the director concerned (whether or not he is a
member of the company), shall be entitled to be heard on the resolution at the
meeting [Section 284(3)]. Where no special notice of resolution to remove the
directors in question was given, the resolution passed in extraordinary general
meeting removing the directors was held to be invalid [Bhankerpur Beverages (P.)
Ltd. v. Sarabhjit Singh (1996) 86 Comp. Cas. 842 (P&H)]. Non-compliance of these
requirements would render the resolution passed in the general meeting invalid.
Where the directors attempted to avoid their removal by omitting to call a meeting
or by not attending with a view to creating a situation of no quorum, the court [in
India the Company Law Board
1
] will convene the necessary meeting under Section
186, [See Re, El Sombrero Ltd., (1958) 3 All ER 1].
In Major General Shanta Shamsher v. Kamani Brothers, AIR 1959 Bom 201:
(1959) 29 Com Cases 501, the appointment of a managing or other director was
revoked by the Board of directors and Section 284 would not be attracted in the case.
Hence, there is no scope in this case of applying Section 284 when the director was not
to be disturbed from his office as a director and the business proposed to be transacted
related only to the removal from his managerial position. He could not question the
meeting on that ground, nor any other person could do so on that cause.
The company must give intimation to the concerned director of the resolution of
his removal by sending a copy of special notice received by it forthwith on receipt
thereof. The director shall have the right to be heard on the resolution at the meeting
[Section 284(3)]. The director who is sought to be removed, can make a

1.
Substituted for Company Law Board by the Companies (Second Amendment) Act, 2002, w.e.f. date yet
to be notified.


representation in writing against his removal and request the company to notify it to
the companys members. The company is duty bound to do so, in the manner
stipulated in Section 284(4)(a) and (b), unless it is received by it too late. If a copy of
the representation is not sent to the members, as aforesaid because they were
received too late or because of the companys default, the director may require that
the representations shall be read out at the meeting.
The provisions of Section 173(2) as to the explanatory statement are not
applicable in respect of the resolution for the removal, because the company is
merely acting in pursuance of a special notice received by it to move the resolution, it
is not a resolution proposed by the company [Life Insurance Corporation of India v.
Escorts Ltd. (1986) 59 Comp Cas 548 (SL)].
However, a copy of the representation need not be sent to the members and
representations need not be read out at the meeting, if on the application either of the
company or of the aggrieved party, the CLB is satisfied that the rights conferred by the
sub-section are being abused to secure needless publicity for defamatory matter.
The company shall in its general meeting discuss the proposal and pass the
necessary resolution.
A vacancy caused by such removal may be filled at the same meeting provided
special notice of the proposed appointment has also been given. The director so
appointed shall hold office till the removed director could have held office had he not
been removed. If the vacancy is not filled in, at the meeting, it may be filled in by the
Board as a casual vacancy. However, the director, who has been removed shall not
be appointed.
Section 284, however, does not deprive a person removed thereunder of any
compensation or damage payable to him in respect of the termination of his
appointment as director or of any appointment terminating with that as director.
The Company Secretary shall also take steps to record the necessary particulars
obtained from the person concerned in the relevant registers and also advise the new
director to take qualification shares, if required. Section 284 is also not attracted
when en bloc replacement of all the directors is sought under Section 402 as a part of
the relief against oppression and mismanagement [Shoe Specialities Ltd. v. Standard
Distilleries and Breweries P. Ltd. (1997) 1 Comp. LJ 243: (1997) 90 Com Cases 1 at
36 (Mad-DB)].
Section 284 is attracted only where some charges against an individual director
are made and the company seeks removal of that director.
In Ravi Prakash Singh v. Venus Sugar Ltd. & Ors. [(2007) 140 Comp Cas 823
(Delhi)], a public limited company was incorporated for setting up a project for the
manufacture of white crystal sugar. The director was a part of the companys
management according to the prospectus of the company. Disputes having arisen
between the director and the management, a letter was issued to him informing that
his nomination as director by the co-promoter was withdrawn and he would cease to


be a director with effect from June 29, 1993. A resolution was passed thereafter on
June 29, 1993, whereby the director was removed from the board of directors. In a
suit for declaration and permanent injunction the director challenged his removal.
Dismissing the suit it was held that the articles of association of a company are in the
nature of an agreement between the shareholders who are the joint owners of the
company. If some specific methodology is devised by consent, nothing precludes the
members or shareholders from doing so. Admittedly, the director was liable to retire
by rotation. According to article 112(h) of the Articles of Association both the
company and the co-promoters had the right to remove or withdraw their nominees
from the board of directors and to provide substitutes. In furtherance of the power, the
co-promoters had exercised their rights and issued the letter dated June 11, 1993,
seeking to withdraw his nomination as director of the co-promoters of the company.
Such nomination was not in the realm of nomination by the Central Government
under section 408 of the Companies Act, 1956, and the exception to section 284 of
the Act would also be attracted where there was such provision in the articles of
association of the company. Therefore, the removal of the director from the board of
directors was proper.
(b) Removal of directors by the Central Government
Chapter IVA of the Act comprising Section 388B to 388E contains provisions
regarding power of the Central Government to remove managerial personnel of a
Company from office on the recommendation of the Company Law Board
1
. The
Central Government may state a case against the person and refer the same to the
Company Law Board
1
with the request that Company Law Board
1
may inquire into
the case and record the decision as to whether or not such person is a fit and proper
person to hold the office of director or other management office. The Central
Government may make such a reference to the Company Law Board
1
where it is of
the opinion that there are circumstances suggesting:
(a) that any person concerned in the conduct and management of the affairs of
company is or has been in connection therewith guilty of fraud, misfeasance
persistent negligence or default in carrying out his obligations and functions
under the law, or breach of trust; or
(b) that the business of a company is not or has not been conducted and
managed by such person in accordance with sound business principles or
prudent commercial practices; or
(c) that a company is or has been conducted and managed by such person in a
manner which is likely to cause, or has caused, serious injury or damage to
the interest of the trade, industry or business to which such company pertains;
or
(d) that the business of a company is or has been conducted and managed by
such person with intent to defraud its creditors, members or any other
person or otherwise for a fraudulent or unlawful purpose or in a manner

1.
Substituted for Company Law Board by the Companies (Second Amendment) Act, 2002, w.e.f. date yet
to be notified.


prejudicial to public interest.
Formation of the opinion by the Central Government as stated above is
subjective process and cannot be questioned ordinarily [Alok Prakash Jain v. Union
of India (1973) 43 Comp Case 68]. However, if the bona fides of the Government are
challenged and if the Government is called upon to explain, such materials must be
disclosed to the Company Law Board
1
.
The person against whom the case is presented under this section is joined as a
respondent to the application. The application shall contain a concise statement of
circumstances and materials as the Central Government may consider necessary for
the purpose of the inquiry. The application shall be signed and verified in the manner
as laid down in the Code of Civil Procedure, 1908 for signing and verification of the
plaint in a suit by the Central Government. The Company Law Board may at any
stage allow amendments to such application presented by the Central Government.
The Company Law Board may by interim order direct that the respondent shall not
discharge any duty of his office until the further order of the Company Law Board and
appoint suitable person in place of the respondent to discharge the duties of the
office held by the respondent, subject to such terms and conditions as the Board may
specify in the order. Every such person is treated as a public servant within the
meaning of Section 21 of the Indian Penal Code (Section 388C).
At the conclusion of the hearing of the case, the Company Law Board shall refer
its decision stating specifically whether or not the respondent director is a fit and
proper person to hold the office of director or any other office connected with the
conduct and management of any company. After such an order is made under
Section 388D, the Central Government shall, by an order, remove the respondent
from the office. The person against whom an order is made becomes disqualified
from holding the office of director or any other office connected with the conduct and
management of the affairs of the company for five years from the date of the order of
removal. Further, the Central Government may, with the previous concurrence of the
Company Law Board, permit such person to hold office before the expiry of such
period of five years.
The removed director shall not be entitled to or be paid any compensation for the
loss or termination of office. The company with the previous approval of the Central
Government appoint another person in place of the respondent who has been
removed.
In Maruti Udyog Ltd. v. R.C. Bhargava [1998] 17 SCL 269, the CLB, Principal
Bench New Delhi dismissed the petition under Section 388B as the reference was
made by the Central Government after 5 to 13 years of occurrences of matters. The
Bench held that no period of limitation exists for making a reference to CLB but gross
and inordinate delay in the absence of justifiable ground to making of the reference
renders it liable to be dismissed.
(c) Removal by Company Law Board
Where on an application to the Company Law Board for prevention of oppression


under Section 397 and mismanagement under Section 398 of the Act, the CLB finds
that the relief ought to be granted, it may by order, terminate or set aside any
agreement of the company with a director or managing director or other personnel on
such terms and conditions as it may think just and equitable. The Court may
constitute an advisory board for proper management of the company. It can appoint a
special officer or Administrator. [Richardson and Cruddas Ltd. v. Haridas Mundra AIR
1959 Cal. 695.]
Where the appointment of the director is so terminated or set aside, he cannot,
except with leave of the Company Law Board, serve any company in a management
capacity for a period of five years. He also cannot sue the company for damages or
compensation for loss of office.
It was held in Bennett Coleman & Co. Ltd. v. Union of India (1977) 47 Comp Cas
92 (Bom) that the Court dealing with an application under Section 397 or 398 has the
power to reconstitute the Board of the company concerned. In such an event the
directors of the company would cease to be the directors.
11. RETIREMENT OF DIRECTORS
A director ceases to hold office if he retires by rotation at an annual general
meeting unless he offers himself for re-election and get re-elected at the same
meeting. Special circumstances may justify continuation of directors who would
have retired by rotation if a meeting was held. Ambika Tea Co. Ltd. v. Manjushree
Shah (1988) Cal. LT 61 was cited in Incab Industries Ltd. Re. (1996) 4 Comp. LJ
482 at 484 (CLB) as an authority for the proposition that the directors to retire by
rotation can continue as directors as there cannot be a vacuum in the Board of
directors.
12. RESIGNATION OF DIRECTORS
The Companies Act does not make express provision for the resignation of a
director. A director may resign his office in the manner provided by the articles. If
the articles contain no provision regarding the resignation by a director, he may resign
his office at any time by giving reasonable notice to the company, no matter whether
the company accepts it or not [Abdul Hug v. Katpadi Industries Ltd. A.I.R. 1960 Mad.
482].
Thus, in the absence of any provision in the articles, resignation once made will
take effect immediately when the intention to resign is made clear. In such a case the
resignation tendered by a director unequivocally in writing will take effect from the
time when such resignation is tendered.
In Dushyant D. Anjaria v. Wall Street Finance Ltd. (2001) Comp. Cas. 655
(Bom.), the Bombay High Court had held that the resignation of a Director would be
effective from the date it was submitted because the letter brings out clearly his
intentions to resign. However, if there was delay on the part of the company in
intimating the ROC about the date of the resignation, the resigning Director could not
be seddled with responsibility and liability for such delay. Prior to this in Glossop v.


Glossop (1907) Ch. D. 370, it was held that the resignation of a director would
become effective on and from the date it was tendered and from the Articles of
Association of the Company, it would be clear that resignation of a Director would be
effective from the date it was tendered.
The Chairman and Managing Director of a company resigned on 6.5.1996 as
such but the company filed Form No. 32 to ROC stating the date of resignation as
15.3.97. The company, issued various cheques to its investors in repayment of their
deposits after 6.5.1996, which were bounced. The investor filed a complaint against
the former Managing Director. The High Court noted that the Articles of Association
of the company provided that the resignation would be effective from the date it was
tendered. The Court held that the Respondent had resigned on 6.5.1996 and shall
not be responsible for any liability in connection with the cheques issued by the
Company after the date of his resignation. [Pandurang Camotim Sancoalcar v.
Suresh Prabhakar Prabhu (2003) 53 CLA 265].
A question arose that whether a resigning director is also liable to file Form
No. 32 to ROC to inform him through notice that he has resigned as such. It was held
that the director is not liable and the company secretary of the company is liable to
file Form No. 32 and to give notice to ROC [Saumil Dilip Mehta v. State of
Maharashtra (2003) 113 Comp. Cas. 443 (Guj.)].
In V. Thangavel v. Associated Business Credits Ltd & Ors. [(2006) 71 CLA
250 (CLB)] [Decided on 12.9.2005], the applicant was one of the directors of the
respondent company and had resigned from the office. No Form 32 was filed.
Subsequently the company was ordered to be wound up and came under the
Official Liquidator. The petitioner filed a petition before the CLB seeking
directions that the company should be directed to file the required Form
No. 32. Petition was allowed by directing OL to file the form no. 32.
It was explained that a company has a statutory duty in terms of
Section 303(2) to file with the Registrar of Companies a return in Form No. 32
with respect to any change among its Directors. Where the company had been
ordered to be wound up, this statutory duty would fall upon the official
liquidator, who would fulfil it with the leave of the winding up court as, in such
cases, provisions of Section 446(1) were attracted. Accordingly petition was
disposed of.
In N. Balasubramanian v. M/S Vegab Communications Pvt. Ltd. & Ors.
[CLB] C.P. NO. 877/614(1)/SRB/2005 [Decided on 6.6.2006], the petitioner
was the first director of the respondent company. He resigned from the
board on 20.2.1995 and sent his resignation letter to the company. The
company failed to file Form 32 with the ROC intimating the change in
directorship of the company. Meanwhile, the ROC initiated prosecution
proceedings against the company and directors including the petitioner on
1.7.2005. The petitioner approached the CLB seeking directions to the company
to file the Form 32.
The Petition was dismissed. Bench viewed that the petitioner had


reportedly resigned from the office of director of the Company with effect from
20.2.1995, but approached the CLB invoking the provisions of Section 614 after
a delay of more than a decade. Though, the provisions of Section 614 did not
specify any time limit to make an application before the Company Law Board
so as to direct the company and any officer to make good the default in making
the return, yet the petitioner was duty bound to explain the long delay in
initiating the present proceedings. The belated action of the petitioner,
pursuant to the show cause notice dated 1.7.2005 issued by the ROC, was not
sufficient to exercise the powers vested in Section 614. in the absence of any
justifiable ground, the company petition was dismissed on account of latches
on the part of the petitioner, in due enforcement of his right under Section 614
and in the light of the reports of the ROC.
On the question whether the articles of a public company can validly contain a
provision to the effect that the office of a director shall be vacated if he resigns by
notice in writing, the Patna High Court has held that in view of the provisions
contained in Section 283 of the Act, a public company cannot include in its articles a
provision for resignation as an additional ground for vacation of office of a director.
Rejecting the contention that it is an inherent/absolute right of any person to tender
resignation and he cannot be compelled against his wishes to continue to function in
the office for a day longer than he desires, the learned judge has held that vacation of
office of a director by resignation cannot be a ground to be included in the articles of
a public company [The Registrar of Companies v. Bihar Investment Trust Ltd. (1978)
48 Comp Cas 579 (Pat)].
In the case of T. Murari v. State of Madras (1976) 46 Comp. Case 613, it has
been held that the resignation of a director is irrevocable. The director who has
tendered resignation cannot withdraw it. However, he may do so with the consent of
the general meeting. The resignation of a director may even be oral (Latchford
Premier Cinema Ltd. v. Ennion and Paterson 1931 2 Ch. 409). It was held that even
the resignation tendered orally at a general meeting and accepted at the meeting,
was effective.
A notice of resignation sent by a third party is not a valid letter of resignation
[Registrar of Companies, Orissa v. Orissa Paper Products Ltd., (1988) 63 Com
Cases 460.]
Where out of the two directors one died and the other wanted to resign, it was
held that a letter of resignation left at the office of the company under intimation to
ROC was enough to make the resignation effective and it was not necessary that the
surviving director should first co-opt a director in the exercise of power of co-option
under the articles [S.S. Lakshamana Pillai v. ROC, (1977) 47 Com Cases 652 (Mad)].
Resignation will not however, relieve him of any liability, which he may incur while in
office.
Where a director started a competing business and requested the company by
means of a letter stating his desire to be treated as a sleeping partner and the other
directors, accepted it and relieved him from directorship. It was held that they could
not be liable for misreading the letter, as they understood the letter to be a
resignation [Fateh Chand Kad v. Hindsons (Patiala) Ltd., (1957) 27 Com Cases].


A managing or whole-time director, however, cannot resign merely by giving a
notice. His resignation is governed by the terms and conditions of his appointment. In
this case, a formal acceptance of the resignation is essential so as to make it
effective for he has to be relieved of his duties and obligations [Achuta Pal v.
Registrar of Companies, (1966) 36 Comp. Cas 598].
13. PENALTY FOR WRONGFUL WITHHOLDING OF COMPANYS PROPERTY
No managing director, whole time director or any employee of the company can
refuse to vacate the companys accommodation after he has vacated the office.
Section 630 of the Companies Act, 1956 provides penalty for wrongful
withholding of the companys accommodation which is given to him for the personal
use only till such time he continues to be the director or in the employment of the
company.
Section 630(1) of the Companies Act provides that if any officer or employee of a
company:
(a) wrongfully obtains possession of any property of a company; or
(b) having any such property in his possession, wrongfully withholds it or
knowingly applies it to purposes other than those expressed or directed in
the articles and authorised by this Act;
he shall, on the complaint of the company or any creditor or contributory thereof, be
punishable with fine which may extend to ten thousand rupees.
The Court trying the offence may also order such officer or employee to deliver
up or refund, within a time to be fixed by the Court, any such property wrongfully
obtained or wrongfully withheld or knowingly misapplied, or in default, to suffer
imprisonment for a term which may extend upto two years [Section 630(2)].
In Krishna Avtar Bahadur v. Col. Irwin Extross and others (1986) 59 Comp. Cas.
417, the Court held that the flat which was occupied by the office during the terms of
his employment with the company belonged to the company and the officer was
entitled to occupy it only during the term of his employment with the company. After
the termination of his service he could not claim to continue to occupy the premises
on the ground that he was a tenant thereof.
In Govind T. Jagtiani v. Sirajuddin S. Kazi and another (1984) 56 Comp. Cas.
329, the Bombay High Court held that the provision of Section 630 of the Act, apply
not merely to the existing officers and employees but also to ex-employees and ex-
officers. The Court held that the entitlement of an officer to the property of the
company is contingent on the right and capacity of the officer by virtue of his
employment which is transformed into the actual possession of the property and the
duration of such right would be co-terminus with the terms of employment. If the
property is held back the retained possession would amount to wrongful withholding
of the property of the company.
The Calcutta High Court in the case of Amrit Lal Chum v. Devi Ranjan Jha (1987)
61 Comp. Cas. 211 deciding a similar issue has given an altogether different decision
and held that Section 630 applied only to serving officers and employees of a


company. Clause (b) of Sub-section (1) of Section 630 reads as having any such
property in his possession wrongfully withheld it or knowingly applies it to purpose
other than expressed or directed in the articles and authorised by this Act. The
articles and authorised by this Act are most likely to be known by the employees of
the company. It is necessary to confine the application of this clause of existing
officers and employees of the company. The reference in Sub-section (2) of Section
630 is also to such officers and employee of the company. The order of delivering
up or refund can be passed only on an officer or employee of the company. That is
possible when the accused is an officer of the company on the date of mandamus. If
the accused is not such an officer or employee such order or refund cannot be
passed on him. When it is not possible to secure compliance with the direction the
Court is expected to order for imprisonment in default of compliance. This suggests
that the provisions of the section are restricted in their operation against existing
officers and employees of the company over whom the company has some hold or
authority.
But the Supreme Court has in the case of Baldev Krishna Sahi v. Shipping
Corporation of India (1987) AIR 1987 SC 2245 while deciding the applicability of
Section 630 overruled the above decision and held that the term officer or
employee of a company applied not only to existing officers or employees of a
company but also to past officers or employees of the company. The court
held that the Section is in two parts. It creates two distinct and separate
offences. First of these is the one contemplated by clause (a), namely, where
an officer or employee of a company wrongfully obtains possession of any
property of the company during the course of his employment to which he is
not entitled. Normally, it is only the present officers and employee who can
secure possession of any property of a company. It is also possible for such
officer or employee after termination of his employment to wrongfully take
away possession of any such property. Although it primarily refers to the
existing officers and employees, it may also take in past officers and
employees.
In contrast clause (b) contemplates a case where an officer or employee
wrongfully withholds it or knowingly applies it to purposes other than those
expressed or directed in the articles and authorised by the Act. It may well be
that an officer or employee may have lawfully obtained possession of any such
property during the course of his employment but wrongfully withholds it after
the termination of his employment. That appears to be one of the functions of
clause (b). Clause (b) also make it an offence if any officer or employee of a
company having any property of the company in his possession knowingly
applies it to purpose other than those expressed or directed in the article and
authorised by the Act. That would primarily apply to the present officers and
employees and may also include past officers and employees. There is,
therefore, not warrant to give a restrictive meaning to the term officer or
employee appearing in Sub-section (1). It is evident that clauses (a) and (b) are
separated by the word or and, thereof, are clearly disjunctive.
In the case of Dr. S.K. Ghosh Alias Dr. S.N. Gupta v. Siemens India Ltd. (1990),
the Bombay High Court has held that the retirement benefits of an employee cannot
be withheld by a company on the employees failure to surrender possession of the


flat allotted to him. The Court observed that pension being the incidence of service
which an employee earns after a life long service rendered by the employee, this right
cannot be frittered as the very livelihood of the employee depends upon receiving his
retirement benefits.
In Arun Kumar Dass v. State (1990) 68 Com. Cas. 482, the Calcutta High Court
held that the offence of the wrongfully withholding the property of the company is a
continuing offence and it continues so long as the property is withheld. This view was
also taken by the Supreme Court in the case of State of Bihar v. Deokaran Nenshi,
wherein it held that a continuing offence was one on which was susceptible of
continuance and was distinguishable from one which was committed once and for all.
Section 630(1)(b) of the Act provides that if any officer or employee of the company
having any property of the company in his possession wrongfully withholds it, he shall
on the complaint of the company or any other person specified therein, be punishable
with fine extending up to Rs. 10,000. Clearly therefore, the offence consists of
wrongfully withholding property of the company and necessarily the offence must
continue so long as the property is so withheld.
Subsequently in Gokak Patil Volkart Ltd. v. Dundayya Gurushiddaiah Hiremath
(1991) 71 Com Cases 403 (SC), the Supreme Court held that the offence under this
section is a continuing one. The Court observed that it is not an instantaneous
offence and limitation beings with the cessation of the criminal act i.e. with the
delivering up or refund of the property.
However, recently, in the case of Chandrasingh Jaisingh Mahida v. State of
Gujarat & Anr. [(2008) 146 Comp Cas 69(Guj.)], it was held that though refusal to
vacate the companys quarters constitute a continuing offence, the fact that the
offence was a continuing one would come to the aid of the company for the purpose
of overcoming the bar of limitation under section 468(2)(a) of the Code of Criminal
Procedure, 1973, but could not come to the aid of the company while considering the
bar under section 300 of the Code in as much as when on the same set of facts and
for the same offence, the petitioner had already been acquitted after trial, he could
not be tried again for the same offence for a subsequent period.
The object of Section 630 of the Companies Act, 1956 has been set forth by the
Supreme Court in Smt. Abilash VInod Kumar Jain v. Cox & Kings (India) Ltd., (1995)
17 CLA 90, stating that the provisions of Section 630 were designed to protect the
property of a company and to prevent its officers or employees from wrongfully
obtaining or keeping such property. The provisions of the section were quasi criminal
in nature and had been enacted with the object of providing speedy relief to a
company when its property was wrongfully obtained or wrongfully withheld by an
employee or officer or any one claiming under them.
In Gopika Chandrabhushan Saran & Anr. v. XLO India Ltd. & Anr. [(2009) 148
Comp Cas 130 (SC)], the appellants are the legal heirs of the deceased managing
director of the company. The company allotted the house to its managing director and
he since died, demanded the house from the appellants. After contending before
various lower courts the issue ultimately came before the Supreme Court. Dismissing


the appeal of the legal heirs of MD, the Court held that, Section 630 of the Act will
cover within its ambit not only the employee or officer but also the past employee or
the past officer or the heirs of the deceased employee or anyone claiming under them
in possession of the property. The legal heirs or representatives in possession of the
property acquire the right of occupancy in the property of the company, by virtue of
being family members of the employee or officer during the employment of the
employee or the officer and not on any independent account. They, therefore, derive
their colours and content from the employee or the officer only and have no
independent or personal right to hold on to the property of the company.
14. VACATION OF OFFICE OF DIRECTORS
Section 283 of the Companies Act, provides that the office of a director shall
become vacant, if
(a) he fails to obtain within two months from the date of his appointment or
ceases to hold at any time thereafter, the share qualification, if any required
of him by the articles of the company;
(b) he is found to be unsound mind by a Court of competent jurisdiction;
(c) he applies to be adjudicated an insolvent;
(d) he is adjudged an insolvent
(e) he is convicted by a Court of any offence involving moral turpitude and
sentenced in respect thereof to imprisonment for not less than six months;
(f) he fails to pay any call in respect of shares of the company held by him,
whether along or jointly with other within six months, from the last date fixed
for the payment of the call unless the Central Government has, by
notification in the Official Gazette removed the disqualification incurred by
such failure;
(g) he absents himself from three consecutive meeting of the Board of directors,
or from all meetings of the Board for a continuous period of three months,
whichever is longer, without obtaining leave of absence from the Board.
Where there was no proof that notices of Board meetings were served on
directors, directors could not be removed on ground that they abstained from
attending meetings [Vijay Krishna Jaidka v. Jaidka Motor Co. Ltd. [1996] 10
SCL 244 (CLB-Delhi)].
(h) He (whether by himself or by any person for his benefit or on his account) or
any firm in which he is a partner or any private company of which he is a
director, accepts a loan, or any guarantee security for a loan from the
company in contravention of Section 295;
(i) He fails to disclose to the Board his interest in any contract or arrangement


entered into by the company as required by Section 299;
(j) He becomes disqualified by an order of the Court under Section 203 which
restrains fraudulent persons from managing companies.
(k) He is removed in pursuance of Section 284.
(l) He becomes director by virtue of an office or employment in the company,
on ceasing to hold that office or employment.
In the case of (d), (e) and (J) above, the disqualification referred to in these
clauses shall not take effect for thirty days from the date of adjudication, sentence or
order or if an appeal or petition is preferred within the thirty days aforesaid
against the adjudication, sentence or conviction result in the sentence or order
until the expiry of seven days from the date on which such appeal or petition is
disposed of. In case, within the seven days aforesaid, any further appeal or
petition preferred in respect of the adjudication, sentence, conviction, or order and the
appeal or petition if allowed, would, result in the removal of the disqualification, then
the person shall remain a director until such further appeal or petition is disposed of.
In Fateh Chand Kad v. Hindsons (Patiala) Ltd. (1986) 3 Comp L J 234 (MP) ; it
was held that when the law provides that a director shall vacate office on the
happening of some event the director automatically vacates his office on the
happening of that event, the Board has no power to waive that event.
A private company which is not a subsidiary of a public company may by its
articles provide additional grounds for vacation of office of director. A public company
cannot, however, add to the disqualifications mentioned in Section 283 of the Act.
[Cricket Club of India Ltd. v. Madhav L. Apte (1975) 45 Comp. Cas. 574].
In Clause (g) above the words absent himself imply voluntary or deliberate
absence and do not cover cases of involuntary absence such as caused by illness
etc. or due to causes beyond his control.
It should be noted that the disqualifications leading to the vacation of office of a
director as mentioned in Section 283 are the statutory disqualifications and no
director and no company is immune from them. The articles of any company cannot
detract from the provisions of this section [Somesh Chander Manilal Nanavati v.
Jivanlal C Chinai (1956) 26 Comp Cas 148]. This is true irrespective of whether the
company is a private company or a public company [Coal Products P.Ltd. v. Ram
Avtar Jatan (1969) 39 Comp Cas 223].
In K. Radha Krishan v. Thirumani Asphalts & Flats (P) Ltd., (1998) 28 CLA 396
(Mad), the petitioner, who was a director of the company was removed from his office
by the respondent company for the reason of absenting himself consecutively from
three Boards meetings. The question before the Court was whether company court
has power to give a declaration that he continued as director. It was held that
Section 283 only sets out the circumstances on the occurrence of which the office of


the director shall become vacant. The section does not contemplate any application
being made to the company Court either to declare that the office has been
vacated or continued. The company court cannot, therefore, entertain a petition to
declare that the petitioner continues to be a director and that he has not vacated the
office.
There is yet another section viz. Section 209A which provides for the vacation of
the office of the director. As per Sub-section (9) of the said section, if any director is
convicted of any offence under this section, he shall be deemed to have vacated his
office from the date of his conviction.
Where a person who is deemed to have vacated the office of director held by him
by virtue of Section 283 of the Act continues to function as a director, he is liable to
be punished with fine which may extend to Rs. 5000 for each day on which he
functions as a director.
15. REMUNERATION OF DIRECTORS
Directors are not the servants of the company and in the absence of a specific
agreement, are not entitled to remuneration for their services. Lindley L.J. in Re.
George Newman and Co. (1895) 1 Ch. 674, observed: Directors have no right to be
paid for their services, and cannot pay themselves or each other, or make presents to
themselves out of the companys assets, unless authorised so to do by the
instrument which regulates the company (i.e. the articles) or by the shareholders at a
properly convened meeting. In short, directors are not entitled to payment in the
absence of express provisions.
The remuneration paid to directors is subject to the provisions of Section 198,
309 and Schedule XIII of the Companies Act.
The term managerial remuneration has not been defined in the Act. A reference
to Sections 198, 309 to 311 and 387 suggests that directors of the company
and manager, if any, constitute managerial personnel and naturally includes a
managing director or a whole time director and they are entitled to receive managerial
remuneration. Even a person carrying administrative designation of manager like
general manager as an executive will not be included as a managerial personnel.
Meaning of Managerial Remuneration - To remunerate means to pay,
recompensate, or reward for work, etc. Managerial remuneration may take the form
of monthly payments, say, salary or a specified percentage of net profits or a
commission and/or by way of a fee for each meeting of the Board (called sitting fee)
Besides, as per Explanation of Section 198(4), the expression remuneration shall
also include:
(a) any expenditure incurred by the company in providing any rent free
accommodation, or any other benefit or amenity in respect of
accommodation free of charge, to any of its directors or manager;


(b) any expenditure incurred by the company in providing any other benefit or
amenity free of charge or at a concessional rate to any of the persons
aforesaid;
(c) any expenditure incurred by the company in respect of any obligation or
service, which, but for such expenditure by the company, would have been
incurred by any of the persons aforesaid; and
(d) any expenditure incurred by the company to effect any insurance on the life
of, or to provide any pension, annuity or gratuity for any of the persons
aforesaid or his spouse or child.
Again, payment received by a director for holding an office or place of profit
under the company is not managerial remuneration. This has been made clear by the
specific provision of Sub-section (1) of Section 309.
Section 198(1) lays down 11% of the net profits as the overall ceiling on the total
managerial remuneration payable by a public company or a private company, which
is a subsidiary of a public company, to its directors (which means all directors
including managing and whole-time directors) and manager. Section 309(1) provides
that the remuneration payable to the directors of a company, including any managing
or whole-time director shall be determined in accordance with and subject to the
provisions of Section 198 and this section either by the articles of the company or by
a resolution or, if the articles so require by a special resolution passed by the
company in general meeting and the remuneration payable to any such director
determined as aforesaid shall be inclusive of the remuneration payable to such
director for services rendered by him in any other capacity.
According to Sub-section (3) of Section 309, a director which is either in the
whole time employment of the company or a managing director may be paid
remuneration either by way of a monthly payment or at a specified percentage of the
net profits of the company or partly by one way and partly by other.
Remuneration to Non-Executive Directors
Sub-section (4) provides that a director who is neither in the whole-time
employment of the company nor a managing director may be paid remuneration
either :
(a) by way of a monthly, quarterly or annual payment with the approval of the
Central Government; or
(b) by way of commission, if the company by special resolution authorises such
payment.
Provided that in either case, the remuneration paid to such director, or where
there are more than one such directors, to all of them together shall not exceed:
(i) one per cent of the net profits of the company, if the company has managing


or whole-time director or manager;
(ii) three per cent of the net profits of the company in any other case.
The company in general meeting may, with the approval of the Central
Government, authorise the payment of commission at a rate higher than one per cent
or, three per cent of its net profits as the case may be. The special resolution by
which payment is sanctioned will remain in operation for not more than five years, but
may be renewed for five years term from time to time provided the renewal is made in
the last year of the previous term. However, the approval of Central Government will
be necessary for payment of any remuneration to non-executive directors in terms of
Section 310.
A director may receive remuneration by way of a fee for each meeting of the
Board, or a committee thereof attended by him [Section 309(2)]. This is known as
sitting fee. Sitting fee is not taken into account for computing the overall managerial
remuneration under Section 198.
Guarantee Commission whether remuneration - Guarantee commission
received by the director is for personal liability which the director undertakes. Therefore,
guarantee commission is not remuneration within the meaning of Section 309 Suessen
Textile Bearings Ltd v. Union of India [1984] 55 Comp. Cas 492 (Delhi).
Sitting fee and travelling expenses for attending Board meeting [Sub-section (2)]
Where the articles contain a provision identical with Article 65 of Table A in
Schedule I to the Act, the directors may be paid travelling, hotel or other expenses
incurred by them in attending meetings of the Board or any Committee thereof or
general meetings of the company or in connection with the business of the company.
Expenses on travelling are generally reimbursed and any excessive
unreasonable payment may make the directors liable for breach of fiduciary duty. In
the absence of such an article in the articles of association of a company, travelling
expenses cannot be paid [Young v. Naval Military and Civil Services Co-op Society of
South Africa (1905) 1 KB 687]. Expenses may even be authorised by the company in
general meeting.
As seen earlier, Section 309(2) of the Companies Act provides that a director
may receive remuneration by way of fee for each meeting of the Board of directors or
for a Committee thereof attended by him. The emphasis in this regard is on
attending the meeting and not on the actual holding of the meeting. If the meeting
of the Board could not be held for want of quorum or for any other reason not within
the control of the director concerned, that does not mean that the director did not
attend the meeting.
In view of the above, sitting fees, travelling allowances, etc., are payable to a
director who was present at the meeting of the Board with a view to participating in its
proceedings though no business could be transacted at that meeting for want of
quorum. (Circular No 1 of 1972 dated 2-2-1972).


On the question whether the condition restricting travelling and daily allowances
which may be paid to the directors of the company for performing journeys
on the business of the company, to the limits laid down in rule 6D of the Income Tax
Rules, should be imposed, the Department of Company Affairs has clarified that
having regard to the various practical difficulties faced by the companies in complying
with the aforesaid condition, no such condition need be imposed. It has, however,
been advised to ensure that the payment is on the basis of actual expenditure and it
should be kept to the minimum (Circular No. 5 of 1975 dated 1 February, 1975).
Meeting of two or more companies on same day and same premises
Whether a director attending the Board meetings of two or three companies on
the same day and in the same building was entitled to draw travelling allowance from
all the companies or from one of them only.
It was clarified that since the travelling allowance should not be a source of profit,
the director concerned should claim only as much as would cover his actual
expenses and, if he so chooses, he may reimburse himself from each of the
companies proportionately so that the total amount drawn by him from all the
companies put together does not exceed the expenses actually incurred by him. He
may, however, draw the sitting fee from each of the companies in full (Company
News & Notes, dated August 1, 1963).
Unauthorised Remuneration Sub-section (5A) of Section 309, which was
inserted by the Companies (Amendment) Act, 1960, provides that if any director draws
or receives directly or indirectly by way of remuneration any sums in excess of the limits
prescribed by that section or without prior sanction of the Central Government where it
is required he shall refund such sums to the company and until such sums is refunded,
hold it in trust for the company. This sub-section refers to remuneration received by a
director directly or indirectly. Indirect remuneration can include remuneration paid to a
director for any office held by him such as technical advisor.
Remuneration for non-managerial services of directors
Section 309, provides that subject to the general provisions of Section 198, the
remuneration be determined by the Articles, or by a resolution or, if the articles so
require, by a special resolution, passed by the company in general meeting. The
remuneration so payable shall be inclusive of the remuneration payable for services
rendered by a director in any other capacity except where :
(a) the services are of a professional nature, and
(b) in the opinion of the Central Government, the director possesses the
requisite qualification for the practice of the profession.
Remuneration to Director in a Professional Capacity While Sub-section (1)
of Section 309 brings within its purview the remuneration payable to any director for
services rendered by him in any capacity, its proviso excludes any remuneration for
professional services rendered by a director provided the Central Government has
expressed an opinion that the director possesses the requisite professional
qualification. Exception under this proviso will be made only in respect of those
directors who possess the requisite qualification for practising the profession in


respect of which they render special services [Tenth Annual Report of the
Department of Company Affairs for the year ended 31.3.66]. While a director is a
medical man or an engineer or a legal advisor or a company secretary having the
membership of the Institute of Company Secretaries of India or is a professionally
qualified accountant being a member either of the Institute of Chartered Accountants
or the Institute of Costs and Works Accountants, the remuneration received by him in
such professional capacity will not be hit by the provisions of section 309 provided the
Central Government is of the opinion as that the directors hold a position by virtue of
which he can render services in his professional capacity. There is nothing in Section
309 of the Act which empowers the Central Government to put any restriction on the
remuneration payable to him in respect of the professional services; the remuneration
being excluded from managerial remuneration [Strip Consultants Ltd., v. Union of
India [1987] 61 Comp. Cas 784 (Delhi) and Sree Gajanana Motor Transport Co. Ltd
v. Union of India [1992] 73 Comp. Cas 348 (Kar)].
Additional remuneration from subsidiary, when prohibited Sub-section (6)
of Section 309 specifies that no director of a company who is in receipt of any
commission from the company and who is either in the whole time employment of the
company or a managing director shall be entitled to receive any commission or other
remuneration from any subsidiary of such company.
The provisions of Sub-section (6), which prohibit a director from receiving any
commission or other remuneration from the subsidiary of the company of which he is
the director, are subject to a number of conditions to be fulfilled. First, the director
concerned must be in receipt of commission from the holding company. Secondly, he
should not be an ordinary director but should be either a managing or whole-time
director. There is, therefore, no bar against an ordinary director receiving
remuneration or commission both from the holding and subsidiary companies. The
prohibition would also not apply to a manager if he is not a director. Where, however,
the manager is a director and is in whole-time employment, then the prohibition may
be attracted. Again, there is no bar against receiving commission or other
remuneration from the subsidiary so long as remuneration other than by way of
commission is received from the holding company. A person who is an executive and
not a director in the holding company may receive both commission and other
remuneration from the subsidiary in the capacity of manager or whole time director of
the subsidiary. Similarly, an executive working in the subsidiary company may draw
remuneration from the subsidiary and also from the holding company by way of both
commission and other remuneration by working as a director in the holding company.
Further, a director of the holding company can draw perquisites and remuneration in
any form other than in the form of commission while at the same time drawing
commission and other remuneration from the subsidiary company.
Applicability of the Provisions of Sections 309 and 198 to Private Companies
The provisions relating to managerial remuneration, as aforesaid shall not apply
to a private company unless it is a subsidiary of a public company [Section 198(1)
and Section 309(9)].
The Companies (Amendment) Act, 1988 introduced Schedule XIII under Sections
269 to replace the administrative guidelines in respect of managerial remuneration


issued by the Central Government. Accordingly, it is now open to a public company
or a private company which is subsidiary of a public company, to appoint its
managerial personnel so long as the same is in accordance with the conditions laid
down in Schedule XIII without seeking the prior approval of the Central Government.
Amendment of Schedule XIII The Government by its notifications dated
13.7.1993, 1.2.1994 12.9.1996, 2.3.2000 and 16.01.2002 amended Schedule XIII
revising the managerial remuneration ceilings upwards. The salient features of
amended Schedule XIII regarding managerial remuneration are as follows:
Remuneration payable by companies having profits Subject to the
provisions of Sections 198 and 309, a company having earned profits in a financial
year may pay any remuneration by way of salary, dearness allowance, perquisites,
commission and other allowances, which shall not exceed 5 per cent of its net profits
for one such managerial person, and if there is more than one such managerial
persons 10 per cent for all of them together.
A person who is a managerial person in more than one company shall be able to
draw remuneration from one or both the companies provided that the total
remuneration drawn from the companies does not exceed the higher maximum limit
admissible from any one of the companies of which he is a managerial person.
Remuneration payable by companies having no profits or inadequate profits
Where in any financial year during the currency of tenure of the managerial person, a
company has no profits or its profits are inadequate, it may pay remuneration to a
managerial person, by way of salary, dearness allowance, perquisites and any other
allowance, not exceeding the ceiling limits specified in Section II of Part II of
Schedule XIII. The ceiling limits are calculated on the following scales:
Where the effective capital of a company is Monthly remuneration payable shall
not exceed
Option A
(Rs.)
Option B
(Rs.)
Option C
(Rs.)
Not exceeding Exceeding
(i) less than Rs. 1 crore 75,000 1,50,000 1,50,000
(ii) Rs. 1 crore or more but less than
Rs. 5 crores
1,00,000 2,00,000 2,00,000
(iii) Rs. 5 crores or more but less than
Rs 25 crores
1,25,000 2.50,000 2,50,000
(iv) Rs. 25 crores or more but less than
Rs 50 crores
1,50,000 3,00,000 3,00,000
(v) Rs. 50 crores or more but less than
Rs 100 crores
1,75,000 3,50,000 3,50,000
(vi) Rs. 100 crores or more 2,00,000 4,00,000 4,00,000
The amendments notified to Schedule XIII w.e.f. 16th January, 2002, provided
three options to the companies within which they could pay the remuneration to their


managerial personnel. All, but with some riders. Each of the options prescribed have
followed with few requirements to be complied with by the companies. Thus, if the
company proposes to pay remuneration to its managerial personnel as per
Option (A), they will have to comply with the requirements provided for Option A,
similarly if it proposes to pay higher remuneration as per Option (B), then it shall
comply all the requirements of Option (B).
However, if the company proposes to pay managerial remuneration to its
personnel, which can be any amount higher than the amounts stated in Option (B),
then it will have to comply with the requirements as stated and prescribed under
Option (C).
To provide a clear cut understanding, while differentiating amongst them, we are
providing herewith the requirements to be complied with under each of the three
options provided.
CATEGORY I General Companies

Requirements Option A Option B Option C
1. Approval of remuneration by a
Remuneration Committee
Yes Yes Yes
2. Before the appointment of the
managerial personnel, the company
has not defaulted for a continuous
period of 30 days in the preceding
financial year in the payment of its
debts, public deposits, debentures or
interest payable thereon.
No default No default No default
3. Period of appointment, not exceeding 3 years 3 years
4. Requirement of special resolution in
general meeting
Required Required
5. Notice to convene AGM to enclose a
statement containing the following:

(i) General Information of the Industry
and Company
Yes Yes
(ii) Information about the proposed
appointee
Yes Yes
(iii) Profitability details Yes Yes
(iv) Disclosures:
(a) Information to shareholders
about the remuneration
Yes Yes
(b) Disclosures about Corporate
Governance
Yes Yes
6. Applicability of specified conditions in
case of effective capital being negative
No No Yes
7. Prior approval of Central Government No No Yes


CATEGORY II Special Economic Zones
The companies in Special Economic Zones, as specified by the Deptt. of
Commerce from time to time, can pay a sum of Rs. 2,40,00,000 per annum or
Rs. 20,00,000 per month to its managerial person, to be appointed under Section 209
of the Act, provided:
(i) there is no public issue of shares or debentures by the company.
(ii) these companies should not have committed any default in India in
repayment of any of its debts, or public deposits, or debentures or interest
payable thereon, for a continuous period of 30 days in any financial year.
Besides the aforesaid remuneration, managerial personnel of a company having
no profits or having inadequate profits shall also be eligible to the following
perquisites.
(a) Contribution to provident fund, superannuation fund or annuity fund to the
extent these either singly or put together are not taxable under the Income-
tax Act, 1961.
(b) Gratuity payable at a rate not exceeding half a months salary for each
completed year of service, and
(c) Encashment of leave at the end of the tenure.
In addition to these perquisites, an expatriate managerial person (including a
non-resident Indian) shall also be eligible to the following perquisites:
(i) Childrens education allowance In case of children studying in or outside
India, an allowance limited to a maximum of Rs. 5,000 per month per child
or actual expenses incurred whichever is less. Such allowance is admissible
up to a maximum of two children.
(ii) Holiday passage for children studying outside India/family staying abroad
Return holiday passage once in a year by economy class or once in two
years by first class to children and to the member and to the members of the
family from the place of their study or stay abroad to India if they are not
residing in India with the managerial person.
(iii) Leave travel concession Return passage for self and family in accordance
with the rules specified by the company where it is proposed that the leave
be spent in home country instead of anywhere in India.
Part III of the Schedule XIII provides that
1. The remuneration payable to a managerial personnel, as aforesaid, shall be
subject to approval by a resolution of the shareholders in general meeting.
2. The auditor or the secretary of the company or when there is no secretary,
then a secretary in whole-time practice shall certify that the requirements of
Schedule XIII of the Act have been complied with and such certificate shall
be incorporated in the return to be filed with the Registrar of Companies
pursuant to Section 269(2).
Government companies exempted - The restrictions with regard to managerial


remuneration contemplated under section 198 and 309 (including Schedule XIII) do
not apply to Government Companies.
Meaning of effective capital The expression effective capital for the
purposes of Schedule XIII, means the aggregate of the paid up share capital
(excluding share application money or advances against shares); amount, if any, for
the time being standing to the credit of share premium account; reserves and surplus
(excluding revaluation reserve); long term loans and deposits repayable after one
year (excluding working capital loans, overdraft, interest due on loans unless funded,
bank guarantee etc., and other short term arrangements) as reduced by the
aggregate of any investments (except in the case of investments by an investment
company whose principal business is acquisition of shares, stock, debentures or
other securities); accumulated losses and preliminary expenses not written off.
However, when the appointment of the managerial person is made in the year in
which the company was incorporated, the effective capital shall be calculated as on
the date of appointment. In all other cases, it shall be calculated as on the last date of
the financial year preceding the financial year in which the appointment is made.
Remuneration Committee As is clear that w.e.f. 16th January 2002,
appointment of all managerial persons is required to be approved through a
resolution of the Remuneration Committee. Explanations IV and V have also been
added to the Schedule XIII to the Act, by way of Notification No. GSR 36(E) dated
16th January, 2002, as under:
Explanation IV: Remuneration Committee shall mean a committee which shall
consist of at least 3 non-executive independent directors including nominee
director(s), if any.
Explanation V: The Remuneration Committee, while approving the remuneration
shall:
(a) take into account the financial position of the company, the trend in the
industry, appointees qualifications, experience, past performance, past
remuneration, etc.
(b) be in a position to bring about objectivity in determining the remuneration
package while striking a balance between the interest of the company and
its shareholders.
Sitting fee The fee payable to a director for each meeting of the Board of
Directors or a Committee thereof is called sitting fee. According to Section 310, sitting
fee shall not exceed such amount as may be prescribed by the Central Government
(presently, twenty thousand rupees vide Rule 10B of General Rules & Forms).
Companies will have discretion to pay such amount by way of sitting fee as may be
considered appropriate within this revised ceiling of Rs. 20,000 as under:
Eligibility for Payment of Sitting Fees
(i) Companies having a paid up capital and
free reserves of Rs. 10 crores and above
Upto Rs. 20,000/- per meeting.
(ii) Companies having a turnover of Rs. 50 Upto Rs. 20,000/- per meeting.


crores and above.
(iii) Other companies. Upto Rs. 10,000/- per meeting.
[Notification No. GSR 580(E) dated 24.07.03].
Increase in remuneration Section 310 provides that any provision or an
amendment thereof, either in the companys Memorandum or Articles or in an
agreement entered into by the company or in any resolution of the shareholders or of
the Board, which purports to increase or has the effect of increasing, whether directly
or indirectly, the remuneration of any director, shall not have any effect (a) unless it is
otherwise approved by the Central Government.
Thus, approval of the Central Government shall not be required if the fixation or
the increase in remuneration is in accordance with the conditions specified in
Schedule XIII. It may be noted that Schedule XIII does not specify any conditions for
increase in remuneration. It simply specifies the limits within which salary,
commission and other perquisites can be paid without Government approval.
Schedule XIII does, however, specify the conditions which must be fulfilled for
making an appointment without Government approval. Clause (a) of Sub-section (1)
of Section 310, therefore, in fact, means that in case an appointment or
reappointment is made by fulfilling the conditions specified in Schedule XIII, read with
Part III of that Schedule, approval of the Central Government will not be required, in
so far as increase in remuneration is concerned.
As per clause 49 of the Listing Agreement, in case of every company, to which
this clause is applicable the remuneration of non-executive directors shall be decided
by the Board of directors. In terms of amended clause 49, the following information or
particulars shall be disclosed in the Annual Report.
(i) All pecuniary relationship or transactions of the non-executive directors
vis--vis the company.
(ii) Further the following disclosures on the remuneration of directors shall be
made in the section on the Corporate Governance of the annual report:
All elements of remuneration package of all the directors i.e. salary, benefits,
bonuses, stock options, pension etc.
Details of fixed component and performance linked incentives, along with the
performance criteria.
Service contracts, notice period, severance fees.
Stock option details, if any and whether issued at a discount as well as the
period over which accrued and over which exercisable.
16. OFFICE OR PLACE OF PROFIT
Section 314 of the Act, which contains regulatory provisions with regard to an
office or place of profit to be held under a company by director and others was
introduced by the Companies (Amendment) Act, 1960.
Sub-section (1) of Section 314 provides that except with the consent of the


company accorded by a special resolution (a) no director of a company shall hold any
office or place of profit, and (b) no partner or relative of such director, no firm in which
such director, or a relative of such director, is a partner, no private company of which
such director is a director or member, and no director or manager of such a private
company can hold any office or place of profit carrying a total monthly remuneration
of such sum as may be prescribed, except that of managing director, manager,
banker or trustee for the debenture holders of the company
(i) under the company; or
(ii) under any subsidiary of the company, unless the remuneration received
from such subsidiary in respect of such office or place of profit is paid over to
the company or its holding company.
The sum prescribed vide Sub-rule (1) of Rule 10C of Companies (Central
Governments) General Rules and Forms 1956 is presently Rs. 10,000.
The first proviso to Sub-section (1) of Section 314 states that it shall be sufficient
if the special resolution according the consent of the company is passed at the
general meeting of the company held for the first time after the holding of such office
or place profit.
It is further provided that in case a relative of a director or a firm in which such
relative is a partner, is appointed to an office or place of profit under the company or
subsidiary thereof without the knowledge of the director, the consent of the company
may be obtained either in the general meeting aforesaid or within three months from
the date of the appointment, whichever is later.
According to explanation to Sub-section (1) a special resolution shall be
necessary for every subsequent appointment to such office or place of profit on a
higher remuneration not covered by the special resolution, except where an
appointment on a time scale has already been approved by the special resolution.
The provisions of Section 314(1) do not apply where a relative of a director or a
firm in which such relative is a partner holds any office or place of profit under the
company or a subsidiary thereof having been appointed to such office or place before
such director becomes a director of the company.
The term relative has the meaning assigned to it under Section 6 of the Act. The
Madras High Court, in A.R. Sundaram v. The Madras Purasawalkam Hindu
Janhopakara Aswatha Nidhi Ltd. (1984) 1 Comp. L.J. 402 (Mad.) after analysing
clauses (a) and (b) of Sub-section (1) of Section 314 held that the first proviso of Sub-
section (1) deals with a case of a director holding any office or place or profit, while
the second proviso deals with relative of such director. Thus, the second proviso has
to be read in conjunction with Section 314(1)(b). If so read, it is amply clear that the
prohibition under Section 314(1)(b) is restricted to a relative of such director meaning
thereby the director holding any office or place of profit referred to under Section
314(1), but not any ordinary director. Therefore, according to this judgement, Section
314 is not attracted where an ordinary sitting directors (a director who does not hold
any office or place of profit under the company) relative holds any office or place of
profit as the relative is not a relative of such director who is holding office or place of
profit under the company.


With due respect to the Honble Court it may be stated that the above
interpretation appears to be very restrictive.
Section 314(1B) provides that notwithstanding anything contained in Sub-section
(1)
(a) no partner or relative of a director or manager;
(b) no firm in which such director or manager, relative of either, is a partner;
(c) no private company of which such a director or manager, or relative of
either, is a director or member;
shall hold any office or place of profit in the company which carries a total monthly
remuneration of such sum as may be prescribed except with the prior consent of the
company by a special resolution. The sum prescribed vide sub-rule (2) of Rule 10C of
Companies (Central Government) General Rules and Forms is presently Rs.
20,000. The prior approval of the Central Government shall be referred in case the
said total monthly remuneration exceeds Rs. 50,000 p.m.
The object of Sub-section (1B) is to see that the moneys of the company are not
siphoned into the pockets of the relatives of the directors without such persons being
otherwise competent to fill the office or without rendering real services to the company
[Dalmia Cement (Bharat) Ltd. v. Union of India (1980) 50 Comp Cas 18 (Del)].
In Ravinder Kumar Sangal v. Auto Lamps Ltd., (1984) 1 Comp. L.J. 59
(Delhi), the auditors of the Company raised an objection that since the
petitioner was the son-in-law of the Managing Director and had been receiving
total remuneration in excess of Rs. 36,000 per annum without the prior
sanction of the Central Government, he was liable for consequence under
Section 314(2B) or (2C) of the Companies Act, 1956. The petitioner contended
that his remuneration was not more than Rs. 3,000 per month and Section
314(1B) was attracted only when the monthly remuneration was more than Rs.
3,000 (Now Rs. 20,000). The Delhi High Court held that the wide definition of the
term remuneration though extended to a number of sections of the Companies
Act, 1956 has not been made applicable by the legislature to Section 314. It
held that Section 314 not only postulates remuneration, it also speaks of total
monthly remuneration. The word monthly connotes anything taking place
once a month having duration of one month, occurring, appearing or being
made, done or acted upon every month. Hence, reference in the case to the
total yearly earning exceeding Rs. 36,000 is misplaced. Thus emphasis should
be not on what a person gets for a whole year but on his/her monthly
remuneration.
Directors Relatives (Office or Place of Profit) Rules, 2003
In exercise of the powers conferred by Clause (b) of Sub-section (1) of Section 642,
read with Sub-section (1B) of Section 314 of the Companies Act, 1956, the Central
Government has promulgated the Directors Relatives (Office or Place of Profit) Rules,
2003 vide GSR 89(E) dated 5.2.2003.
These rules provides for the requirement of the approval of Central Government


in case of appointment of relatives etc. of the directors of the company.
The salient provisions of these rules are as under:
1. Applicability: These rules shall be applicable to all the companies which are
registered under the Companies Act, 1956.
2. Approval of the Central Government: No appointment for an office or place
of profit in a company shall take effect, unless approved by the Central
Government on an application (Form not specified i.e. on the letter head of
the company), in respect of the following persons:
(i)partner or relative of director or manager; or
(ii)firm in which such director or manager, or relative of either is a partner; or
(iii)private company of which such director or manager or relative of either is a
director or member.
3. Amount of Remuneration: These rules shall be applicable if the
remuneration proposed to be paid to the appointee is exceeding 50,000/-
per month.
4. Examination of Applications: The applications submitted by the companies
under these rules shall be examined by the Central Government in respect
of the following, which shall be in addition to all other requirements as
prescribed under various provisions of the Companies Act, 1956:
(i)Undertaking by the appointee that he/she shall be in the exclusive
employment of the company and will not hold a place of project in any
other company.
(ii)The monetary value of monthly/annual remuneration inclusive of all
allowances and perquisites, proposed to be paid to the appointee,
alongwith details of his services to be rendered by him to the company.
(iii)Shareholding pattern of the company showing separately the holdings of
Directors and their relatives, public holdings and each institutions
holdings individually.
(iv)Educational qualification/experience, pay scale, allowances and other benefits
of similarly placed executives.
(v)If a relative, is being appointed, then an undertaking from the director or the
company secretary of the company that the similarly placed employees
are getting the comparable salary.
(vi)List or particulars of the employees who are in receipt of remuneration of Rs.
50,000/- or more per month.
(vii)Total number of relatives of all directors appointed as managerial personnel or
in any other position in the company. The total remuneration paid to
each one of them and the total remuneration paid to them altogether as
a percentage of profits as calculated for the purpose of Section 198 of
the Act.
5. Selection Procedure: The selection for the appointment of a relative of a
director in a company shall be approved by adopting the same procedure as


is applicable to non-relatives.
However, in case of public companies, the selection of a relative of director
shall have to be approved by a Selection Committee.
6. Selection Committee: It shall mean a committee, the majority of which shall
consist of independent directors and an expert in the respective field from
outside the company.
Meaning of office or place of profit
Sub-section (3) of Section 314 defines the term office or place of profit. As per
this sub-section an office or place of profit shall be deemed to be an office or place of
profit in the company:
(a) in case the office or place is held by a director, if the director holding it
obtains from the company anything by way of remuneration over and above
the remuneration to which he is entitled as such director, whether as salary,
fees, commission, perquisites, the right to occupy free of rent any premises
as a place of residence, or otherwise;
(b) in case the office or place is held by an individual other than a director or by
any firm, private company or other body corporate, if the individual, firm,
private company or body corporate holding it obtains from the company
anything by way of remuneration whether as salary, fees, commission,
perquisites, the right to occupy free of rent any premises as place of
residence or otherwise.
Thus, an office or place held by a director is deemed to be an office or place of
profit, only if such director obtains from the company anything by way of
remuneration over and above the remuneration to which he is entitled as such
director. The Department of Company Affairs has clarified that the remuneration paid
to the Managing Director or Whole-time Director is a remuneration to which a person
becomes entitled as a director and, therefore unless the remuneration paid to a
director is over and above the remuneration to which he would be entitled as
Managing or Whole-time Director, his holding of office would not be deemed to be
an office or place of profit under the Act. In such cases, the provisions of
Section 314(1B) of the Act will not apply. The appointment of Managing Director of a
company as sole selling agent by the company could be regarded as holding an
office of a profit under the company within the meaning of Section 314 and
consequently a special resolution according the consent of the company to such
appointment is required to be passed [Circular No. 12(9) CL. VI 68 dated 19.11.68].
Nothing contained in Section 314 applies to a person who being the holder of any
office of profit in the company is appointed by the Central Government, under Section
408, as a director of the company.
It is seen from the provisions of Sub-section (3) of Section 314 that the basic
criteria/principle to determine whether an office or place of profit is an office or place
of profit is remuneration paid to the person holding the office.
It was held by the Calcutta High Court, in the context of Section 204 of the Act
that the phrase office or place of profit has to be given its ordinary meaning namely


that by virtue of the office any profit is derived [Shalagram Jhajharia v. National Co.
Ltd. (1976) 1 Comp LJ 29 (Cal)]. Merely because a person holds any position in or
under the company he cannot be said to be holding an office or place of profit. For
payment of interest on loans obtained from a director of a company, no special
resolution under Section 314 is necessary. This is not a case of office or place of
profit within the meaning of the section.
It was, however, held by the Bombay High Court that a private company which
was appointed as a sole-selling agent of a public company and persons were
directors in both the companies, the private company appointed to an office or place
of profit under the public company and therefore Section 314 was attracted [Firestone
Tyre & Rubber Co. Ltd. v. Synthetics & Chemicals Ltd. (1971) 41 Comp Cas 377
(Bom) : (1970) 2 Comp LJ 200] See also Shalagram Jhajharia v. National Co. Ltd.
(Supra).
Contravention of the provisions of Section 314
Where an office or place of profit is held in contravention of Section 314, the
director, partner, relatives etc. shall be deemed to have vacated his or its office as
such, on and from the date of the general meeting of the company or the date of
expiry of the period of three months as the case may be and shall also be liable to
refund to the company any remuneration received or the monetary equivalent of any
perquisite or advantages enjoyed by him or it, for the period immediately preceding
the date aforesaid in respect of such office or place of profit.
Renewal of appointment
The explanation to Sub-section (1) of Section 314 says that a special resolution
is necessary for every appointment in the first instance and that a special resolution
will be necessary on a subsequent appointment on a higher remuneration not
covered by the earlier resolution except where an appointment on a time scale has
already been approved by the special resolution. It has been held by the Bombay
High Court in Firestone & Rubber Co. v. Synthetic & Chemical Ltd., (1971) 41 Com
Cases 377 (Bom) that higher remuneration would include the situation of a possible
higher remuneration and that a reappointment which is not made immediately after
the expiry of first appointment and is renewed after a gap of time, would not be a
subsequent appointment and further that where in the original appointment there is
no term for renewal, a reappointment would operate as a new appointment, requiring
a special resolution.
The company cannot waive the recovery of any sum refundable to it unless
permitted by the Central Government.
Every individual, firm or private company or any other body corporate proposed to
be appointed to any office or place of profit to which Section 314 applies, is required to
declare in writing before or at the time of appointment, whether he or it is or is not
connected with any director of the company in any of the ways mentioned above.
17. IMPORTANT CLARIFICATIONS
(1) Partnership firm working for a place of profit and relative of director


becoming partner
A partnership firm is appointed by a company to an office of profit and at the time
of appointment none of the directors is related to any partner of the said firm. Hence,
Section 314, would not apply to such appointment. But if the firm is reconstituted by
appointment of a relative of a director as one of the partners of the firm without the
knowledge or consent of either of the director concerned or the company, would
Section 314 be applicable and will the following consequences follow?
(a) Will the director have to vacate his office?
(b) Will the firm cease to hold office from the date of its reconstitution?
(c) Will the company be considered to have made any default?
The Department of Company Affairs viewed that in a case like the one cited
above it is permissible, for the company to regularise the matter by complying with
the requirements of Section 314 within three months from the date of appointment.
In default thereof
(a) the director will have to vacate his office after three months of the
reconstitution of the firm.
(b) the firm will cease to hold office after three months from the date of its
reconstitution; and
(c) the company will not be considered to have defaulted. Attention in this
connection is invited to the provisions of proviso to Sub-section (1) and of
Sub-section (2) of Section 314 of the Act. [Extract from the queries raised
by the Company Law Association of India in memorandum submitted to
the Dept. of Co. Law Administration on 31-7-1962 and the Departments
views thereon (Company News & Notes dated July 1, 1963)].
(2) Director as technical advisor
On the question whether appointment of a director as technical adviser requires
special resolution under Section 314, the Department has expressed the following
view:
A large number of cases continued to come to the notice of the Department
where directors were appointed as Technical advisors sometimes on very nominal
remuneration. It was contended by the companies that since technical advice was
given in a capacity other than that of a director, a special resolution under Section
314 of the Act was not required for their appointment and the remuneration paid to
them was outside the limit laid down for the total managerial remuneration. All such
cases were closely examined against the background of the management pattern of
the company in the past, the technical qualification of the persons concerned, then
powers and duties and whether such persons were rendering any managerial
services to other concerns also. In most of the cases, it was found that in fact the
persons concerned were performing managerial services. The companies were
therefore advised by the Department to get their appointment and remuneration
regularised in the manner laid down in the Act. In almost all cases the suggestions of
the Department were accepted by the companies concerned. [7th Annual Report of


the Department for the year end 31st March, 1963].
(3) Employee becoming relative of director subsequently
The following query was raised to Department :
Query Section 314 does not make it clear if a special resolution is required to
be passed if an employee of a company becomes related to a Director of the
company, during the course of his employment
(a) in case he had been appointed before the Director became a director of the
company; and
(b) in case he had been appointed after the Director became a director-which
contingency is not provided for under the newly inserted Sub-section (1A).
The Department expressed following views :
Only the cases of employee-relatives, already of office, before the relative
becomes a Director, are covered by Sub-section (1A) of the amended Section 314 of
the Act. As such, where an employee is appointed to his office before the Director
becomes a Director but the employee becomes related to the Director afterwards, as
well as the cases failing under category (b) in the query, will require special
resolutions to be passed under Section 314(1) of the Act (Letter No 8/16(1)61-PR,
dated 23-1-1961).
(4) Sale or purchase of materials by director or his relative, associate, etc.
The provisions of Section 314(1) of the Companies Act do not apply to the sale or
purchase of material by a company to or from its director or his relative, a firm in
which such director or relative is a partners any other partner in such a firm, or a
private company of which the director is a member or director. If would be enough in
such cases if the consent of the Board of directors of the company is obtained as laid
down in Section 297(1) of the Act (Letter No 8/38(314)/61-PR, dated 10-5-1961).
(5) Payment of guarantee commission and interest on loans
Departments view Section 314 is not applicable to the payment of guarantee
commission payable to a director for guaranteeing the companys loans and to
receive interest on loans advanced by the directors to his company (Letter No 8/26,
dated 9-1-1978).
(6) Clarifications on Section 314
The Department of Company Affairs vide Circular No. 14/75 dated 5
th
June, 1975,
has issued the following clarifications regarding Section 314.
Some doubts have been raised regarding the scope of Sub-section (1B) of
Section 314 inserted in the Companies Act, 1956 by Clause 29 of the Companies
(Amendment) Act, 1974. These points have been examined and the Departments
views thereon are given below.
Section 314 of the Companies Act, 1956 applies to public as well as private
companies. Sub-section (1) of this section provides that no director of a company and


no partner or relative of such directorshall hold any office or place of profit, except
that of managing director or manager, banker or trustee for the holders of debentures
of the company, carrying a total monthly remuneration of such as may be prescribed
under the company unless a special resolution according the consent of the company
is passed at the general meeting of the company held for the first time after the
holding of such office or place of profit.
The new Sub-section (1B) says that notwithstanding anything contained in the
aforesaid Sub-section (1), no such office or place of profit carrying a monthly
remuneration of not less than Rs. 20,000* shall be held except with the prior consent
of the company by a special resolution and the approval of the Central Government.
A question has been raised whether a special resolution under Section 314(1B)
is necessary for the appointment of managerial person who may be relatives of
director and whose appointment are already regulated by Section 269 of the Act. This
query arises with reference to public companies to which the said Section 269 applies
and strictly, will have to be answered in the affirmative. But for administrative
convenience, it has been decided that the approval of the Central Government once
again under Section 314(1B) will not be necessary in the cases where the Central
Governments approval has already been secured under Sections 198, 269, 309, 310
and 311, as the case may be. Irrespective of the question of Central Governments
approval, the special resolution required under Section 314(1B) will have to be
passed whether by a pubic company or a private company.
Further, with reference to the special resolution in the main part of Sub-section
(1B) it is necessary to understand the reference in the proviso of the Sub-section to
the approval of the company in general meeting as meaning the approval by a
special resolution of such meeting. But in a case where the special resolution was
passed in terms of Sub-section (1), it will not be necessary to have another
resolution, ordinary or special, once again and only the approval of the Central
Government in terms of the proviso to Sub-section (1B) will be necessary.
Another question raised is whether approval of the general meeting and of the
Central Government is necessary for an employee drawing salary exceeding
Rs.20,000
*
per month who is a relative of an existing Director but the appointment of
such employee was made before his relative became a Director, i.e., whether the
exemption under Section 314(1A) ensures under Section 314(1B) as well. It is
considered that Sub-section (1) and Sub-section (1A) should be read together before
applying Sub-section (1B) and in as much as there is nothing in Sub-section (1B) to
affect the operation of the principle underlying Sub-section (1A). The exemption
under Sub-section (1A) continues to apply even with reference to a case concurrently
falling under Sub-section (1B).
In the case of a private company (not governed by Section 269 etc. of the
Companies Act, 1956), a question has arisen whether the appointment of a person as
a managing director who is related to a director of the company will attract the
provisions of Section 314(1B) where the remuneration payable to such managing
director is in excess of the limit envisaged in the Sub-section (1B). This question is
answered in the affirmative. The circumstances that for the purpose of

*
Present limit under Section 314(1B).


Sub-section (1), which deals with appointment to an office of profit carrying not less
than a total monthly remuneration of Rs. 10,000 an exception made in respect of an
appointment of managing director or manager is not considered relevant because
Sub-section (1B) expressly overrides Sub-section (1) and calls for the exercise of a
greater vigilance against the likelihood of the abuse of patronage in a case where the
remuneration proposed is of the order of Rs. 20,000 per month and more.
A question has also been raised whether provisions of Section 314(1B) are
applicable where a company proposes to appoint a firm of solicitors and advocates,
etc. to help the company in its work. It is considered that an advocate or solicitor
appears in a Court of Law as an Officer of the Court in pleading the cause of justice
and hence, such appearance and receiving fee on that account cannot lead to an
inference of an office or place of profit in or under the company under Section 314 of
the Act. However, if such a solicitor/advocate, etc. is appointed on a regular retainer
basis for rendering legal advice other than appearance in Court, the provisions of
Section 314 will be applicable.
Some doubts had been raised regarding the application of Sub-section (1B) of
Section 314 to an individual who is a partner or relative of a manager or director of a
private company appointed as managing or whole-time director of such company at a
monthly remuneration of not less than Rs. 20,000. The position has since been re-
examined and it has now been decided to clarify the ambit of Section 314(1B) as
follows:
Sub-section (3) of Section 314 refers to what is treated for the purposes of
Section 314 an office or place of profit. The said Sub-section (3) provides that if the
office or place is held by a director it will be treated as holding an office or place of
profit if the director obtains from the company anything by way of remuneration over
and above the remuneration to which he is entitled as such director.
Section 309 of the Act refers to remuneration of directors. Section 309 in turn
provides that the remuneration payable to a director of a company, including any
managing or whole-time director, shall be determined in accordance with and subject
to the provisions of Section 198 and that section, namely, Section 309. It therefore,
follows that the remuneration paid to the managing or whole-time director is
remuneration to which he becomes entitled as a director to which he would be
entitled to as a managing or whole-time director, his holding of office would not be
deemed to be an office or place of profit under the company. In such a case the
question of application of the provisions of Section 314(1B) does not arise [Vide
circular No. 4 of 1976 dated the 11
th
February, 1976 on Files No. 8/12 (314-1B/75-
CL.V)].
(7) Appointment at general meeting Directors appointed by articles
Whether the section is attracted when it is proposed to elect such directors at
annual general meeting.
Query: In terms of Section 257 read with Section 256 directors appointed by the
articles of a newly registered company not having been appointed by the company in
general meeting could not be deemed to be directors retiring by rotation. Will the
provisions of Section 257 apply to such directors?


Answer: In the opinion of the Department, Section 257 will be attracted when it is
proposed to elect such directors at the annual general meeting. (Company News &
Notes July 1, 1963 issue.)
(8) Appointment at general meeting Additional director and director
appointed to fill casual vacancy Whether required to comply with Sub-
section (1)
Query:
1. Whether an additional director who ceases to hold office under Section 260
and a director appointed to fill a casual vacancy who vacates office under
Section 262 are required to give notice under Section 257 when they seek
re-appointment at the annual general meeting, or a notice from a member
under Section 257 would be necessary?
2. Whether they should file a fresh consent to act as director with the company
under section 264 before the general meeting, as also file a consent with the
Registrar of Companies under that section when re-appointed?
Answer:
1. In the view of the Department, additional directors appointed under
Section 260 and directors appointed to fill casual vacancies under
Section 262 are not retiring directors within the meaning of the Explanation
below Sub-section (5) of Section 256. Accordingly in their case, the
provisions of Section 257(1) will be attracted and will have to be complied
with.
2. In view of the clarification given above, the aforesaid directors should
comply with the provisions of Section 264(1) and (2) also.
(Company News & Notes, July 1, 1963 issue)
(9) Directors Appointment at general meeting Whether requirement of
giving notice to shareholders regarding candidature for directorship of a
person other than retiring director applies to private companies also
Query: According to new Sub-section (1A) of Section 257, a notice should be
given to all the shareholders regarding the candidature for directorship of a person
other than the retiring director 7 days before the meeting of the company in which
they are proposed to be elected. Sub-section (2) exempts private companies from the
operation of Sub-section (1). It is not clear whether Sub-section (1A) will apply to
private companies or not.
Answer: Sub-section (1A) applies only where Sub-section (1) applies. As Sub-
section (2) specifies that Sub-section (1) shall not apply to a private company, unless
it is a subsidiary of a public company, Sub-section (1A) will also not apply in such a
case.
(10) Filing of consent of candidate for directorship with company Whether it
is obligatory for nominated director to file consent with company


In view of the fact that the Government would not nominate an unwilling person
to the office of a director, and no useful purpose would be served by such a person
filling his written consent with the company in addition to the consent that would be
filed by him with the Registrar Pursuant to Section 264(2), it is not obligatory for such
nominated directors to file written consent with the company under Sub-section (1).
(Letter : No. 8/21/(264)/61-PR, dated 22-2-1962)
(11) Filing of consent to act as director with registrar Whether provisions of
Sub-section (2) of Section 264 applies in a case where all directors at annual
general meeting are re-appointed
Query: There appears to be a divergence of interpretation of the scope of Section
264(2) which says that person, other than a director, re-appointed after retirement by
rotation, shall not act as a director of a company unless he has, within thirty days of
his appointment, signed and filed with the Registrar his consent in writing to act as
such director. In the case of a company where all directors retire simultaneously at an
annual general meeting and all of them are re-elected, the directors need not file their
consent under Section 264(2). But there appears to be a view that en bloc retirement
is not the same as retirement by rotation and whenever there is en bloc retirement,
the directors concerned should file their consent on re-election. The en bloc
retirement and retirement by rotation should, therefore, be treated alike.
Answer: The Department is of the opinion that under Section 264(2), only a
director who retires by rotation at an annual general meeting of a company and is re-
appointed thereat is not required to file with the Registrar his consent to act as a
director within the time-limit laid down therein. In a case where all the directors retire
at the general meeting and are re-appointed thereat, there is not retirement by
rotation within the meaning of the Explanation below Sub-section (5) of Section 256
or Sub-section (2) of Section 264. Accordingly, a director who retire en bloc at a
general meeting are required to comply with the requirement in Sub-section (2) of
Section 264. (Source : Company News & Notes, July 1, 1963 issue.)
(12) Filing of consent to act as director with registrar Effect of non-filing,
Whether penalty under Section 629A would be attracted if director continues to
act as such without filing his consent
The Department has now been advised that the prohibition contained under
Section 264(2) operates only in respect of a person acting as director without his
consent being filed within the specified period. This prohibition, however, does not
extend to his appointment as such as in the cases falling under Section 261, nor does
it serve as disqualification as in the cases falling under Sections 266 and 274, nor
does the office of director become automatically vacant as in cases falling under
section 283. The consequence of a director continuing to act as such without filing his
consent within the period specified in Section 264(2) would be that the penalty under
section 629A would be attracted in the matter. Such consent may, however, be filed
after the expiry of the said period on payment of additional fee contemplated by
Section 611(2). It is further, open to the Central Government under Section 637B to
condone the delay in filing the consent within the period specified in Section 264(2)
and thereby remove the prohibition contained in the latter-mentioned section of the
Act. [Letter : No. 5/6/68-CL-V, dated 21-10-1970 (in modification of earlier letter of


even number, dated 21-2-1970)].
(13) Filing of consent to act as director with registrar Whether additional
director, elected as director at general meeting in which he vacated his office of
additional director, is required to file fresh consent.
Query: Whether a person, who had been holding the office of an additional
director under Section 260, should file a fresh letter of consent under Section
264(2), and also a fresh declaration of share qualification under Section 271, with the
Registrar, if he were elected as a director of the company at the annual general
meeting of the company in which he vacated his office of additional director that he
was holding?
Answer: While such a person is not required to file, on his election, a fresh
declaration of share qualification with the Registrar under Section 271, he is to file a
fresh letter of consent with the Registrar under Section 264(2), since the exception that
had been made in the latter section was only in respect of a director who retired by
rotation. (Source: Clarification issue by Department of Company Law Administration).
ANNEXURE I
FORM DD-A
Companies (Disqualification of Directors under Section 274(1)(g)
of the Companies Act, 1956) Rules, 2003
INTIMATION BY DIRECTOR
[Pursuant to Section 274(1)(g)]
Registration No. of Company.
Nominal Capital Rs.
Paid-up Capital Rs.
Name of Company.
Address of its Registered Office.
To
The Board of Directors
of.
I. son/daughter/wife of. resident of.
director (managing director) manager in the company hereby give notice that I
am/was a director in the following companies during the last 3 years:
No. Name of the Company Date of Appointment Date of Cessation
1. .
2. .


I further confirm that I have not incurred disqualification under Section 274(1)(g) of
the Companies Act, 1956 in any of the above companies, in the previous financial
year, and that I, at present stand free from any disqualification from being a director.
or
I further confirm that I have incurred disqualifications under Section 274(1)(g) of the
Companies Act, 1956 in the following company(s) in the previous financial year, and
that I, at present stand disqualified from being a director.
No. Name of the Company Date of Appointment Date of Cessation
1. .
2. .

Signature
(Full Name)
Dated this.. day of..
FORM DD-B
Report by a public company
[Pursuant to Section 274(1)(g) and Rule 5 of the Companies (Disqualification of
Directors under Section 274(1)(g) of the Companies Act, 1956) Rules, 2003]
NOTE: All fields marked in *are to be mandatorily filled.
1. (a)*Corporate identity number (CIN) of company _____________
Pre-fill
(b)Global location number (GLN) of company________________
2. (a)Name of the company_________________________________
(b)Address of the registered Office of the company_____________
3.Paid-up capital (in Rs.) ___________________________________
*It is hereby reported under Section 274(1)(g) of the Companies Act, 1956, that
M/s.________________________________________________________________
have failed to
___file the annual accounts and annual return for the last three
financial years
ending as on ________________(DD/MM/YYYY)
and/or ___ others
___ Repay deposits or interest thereon on due date being _____(DD/MM/YYYY)
___ Redeem its debentures on due date being ______________(DD/MM/YYYY)
___ Pay dividend declared by the company since ____________(DD/MM/YYYY)
The period of one year has expired on ____________(DD/MM/YYYY)
The particulars of directors at the relevant period are as under :
1.* (a)Director identification number (DIN) ____________


(b) Name of the director_______________________
2.* (a) DIN
____________
(b) Name of the director_______________________
3.* (a) DIN
____________
(b) Name of the director_______________________
4. (a) DIN
____________
(b) Name of the director_______________________
5. (a) DIN
____________
(b) Name of the director_______________________
6. (a) DIN
____________
(b) Name of the director_______________________
7. (a) DIN
____________
(b) Name of the director_______________________
8. (a) DIN
____________
(b) Name of the director_______________________
9. (a) DIN
____________
(b) Name of the director_______________________
10. (a) DIN
____________
(b) Name of the director_______________________
11. (a) DIN
____________
(b) Name of the director_______________________
12. (a) DIN
____________
(b) Name of the director_______________________
Attachments
Optional attachment (s) if any Attach


List of
attachments



________________





________________



________________


Remove
attachment

Declaration
To the best of my knowledge and belief, the information given in this form and its
attachments is correct and complete. I have been authorised by the board of
directors resolution dated*________________(DD/MM/YYYY) to sign and submit
this form.
To be digitally signed by:
Managing director or director or manager or secretary of the company_____

Modify Check Form
Pre-scrutiny
Submit

For office use only
This e-Form is hereby registered
Digital signature of the authorising officer________
Submit to BO____

FORM DD-C
Form of application for removal of disqualification of directors
[Pursuant to Section 274 of the Companies Act, 1956 and Companies
(Disqualification of directors under Section 274(1)(g) of
the Companies Act, 1956) Rules, 2003]

NOTE: All fields marked in *are to be mandatorily filled.

1. (a)*Corporate identity number (CIN) of company_____________
Pre-fill
(b)Global location number (GLN) of company_______________
2. (a)Name of the company________________________________
(b) Address of the registered
Office of the company________________________________


3.*Grounds under which director(s) are disqualified ______________
4.*Date of disqualification_______________________________ (DD/MM/YYYY)
5.*Details of the application_____________________________

Attachments

1. *Board resolution
Attach
2.Optional attachment (s) if any Attach


List of
attachments



________________



________________



________________


Remove
attachment
Declaration
To the best of my knowledge and belief, the information given in this application and
its attachments is correct and complete. I have been authorised by the board of
directors resolution dated*_____(DD/MM/YYYY) to sign and submit this application.
To be digitally signed by:
Managing director or director or manager or secretary of the company_____

Modify
Check Form Prescrutiny
Submit

For office use only

Digital signature of the authorising officer

This e-Form is hereby approved________________


This e-Form is hereby rejected_________________ Submit to
BO___

ANNEXURE II
COMPANIES (APPOINTMENT OF SMALL SHAREHOLDERS
DIRECTOR) RULES, 2001
NOTIFICATION
[GSR 168(E) dated 9.3.2001]
In exercise of the powers conferred by Section 642 read with Section 252 of the
Companies Act, 1956 (1 of 1956), the Central Government hereby makes the
following rules, namely:
1. Short title and Commencement
(1) These rules may be called the Companies (Appointment of the Small
Shareholders Director) Rules, 2001.
(2) They shall come into force on the date of their publication in the Official
Gazette.
2. Definitions
(a) Act means the Companies Act, 1956 (1 of 1956);
(b) Small Shareholder means a shareholder holding shares of nominal value
of twenty thousand rupees or less in a public company to which Section 252
of the Act applies.
3. Applications
These rules shall apply to public companies having
(a) paid-up capital of five crore rupees or more;
(b) one thousand or more small shareholders.
4. Manner of election of small shareholders director
(1) A company may act suo-moto to elect a small shareholders director from
amongst small shareholders or upon the notice of small shareholders,
who are not less than 1/10th of total small shareholders and have proposed
name of a person who shall also be a small shareholder of the company.
(2) Small shareholders intending to propose a person shall leave a notice of
their intention with the company at least 14 days before the meeting under
the signature of at least 100 small shareholders specifying name, address,
shares held and folio number and particulars of share with differential rights
as to dividend and voting, if any, of the person whose name is being
proposed for the post of director and of other small shareholders proposing
such person as a candidate for the post of director of small shareholders.
(3) A person whose name has been proposed for the post of small


shareholders director shall sign, and file with the company, his consent in
writing to act as a director.
(4) The listed public company shall elect small shareholders nominee subject to
sub-rules (1), (2) and (3) above through the postal ballot.
(5) The unlisted company may appoint such small shareholders nominee
subject to above conditions if majority of small shareholders recommend his
candidature for the post of director in their meeting.
(6) Tenure of such small shareholders director shall be for a maximum period
of three years subject to meeting the requirement of provisions of
Companies Act except that he need not have to retire by rotation.
(7) On expiry of his tenure, the same person if so desired by small
shareholders, may be elected for an another period of 3 years.
(8) Such director shall be treated as director for all other purposes except for
appointment as whole time director or managing director.
5. Disqualification
A person shall not be capable of being appointed as small shareholders director
of company, if
(i) he has been found to be of unsound mind by a Court of competent
jurisdiction and the finding is in force;
(ii) he is an undischarged insolvent;
(iii) he has applied to be adjudicated as an insolvent and his application is
pending;
(iv) he has been convicted by a Court of any offence involving moral turpitude
and sentenced in respect thereof to imprisonment for not less than six
months, and a period of five years has not elapsed from the date of expiry of
the sentence;
(v) he has not paid any call in respect of shares of the company held by him,
whether alone or jointly with others, and six months have elapsed from the
last fixed for the payment of the call; or
(vi) an order disqualifying him for appointment as director has been passed by a
Court in pursuance of Section 203 and is in force, unless the leave of the
Court has been obtained for his appointment in pursuance of that section.
6. Vacation of office
A person appointed as small shareholders director shall have to vacate the office
if
(i) such person so elected, as director of small shareholders ceases to be a
small shareholders director on and from such date on which he ceased to
be a small shareholder;
(ii) he has been rendered disqualified by virtue of Sub-rule (1) of Rule (5).
(iii) he fails to pay any call in respect of shares of the company held by him,


whether alone or jointly with others, within six months from the last date
fixed for the payment of the call;
(iv) he absents himself from three consecutive meetings of the Board of
directors, or from all meetings of the Board for a continuous period of three
months, whichever is longer, without obtaining leave of absence from the
Board;
(v) he is partner of any private company of which he is a director, accepts a
loan, or any guarantee or security for a loan, from the company in
contravention of Section 295;
(vi) he acts in contravention of Section 299;
(vii) he becomes disqualified by an order of Court under Section 203;
(viii) he is removed in pursuance of Section 284.
7. Restriction on number of directorship
No person shall hold office at the same time as small shareholders director in
more than two companies.

LESSON ROUND-UP
Acting collectively as a Board of directors, directors can exercise all the powers of
the company except those, which are prescribed by the Act to be specially
exercised by the company in General Meeting.
Every public company shall have at least three directors and every other
company shall have at least two directors u/s 252 of the Act.
Directors are trustees for the company i.e. the directors are persons selected to
manage the affairs of the company for the benefit of the shareholders.
Section 274 lays down disqualifications of directors. Also individuals only can be
a director u/s 253 of the Act.
Disqualified directors and companies are required to file returns in form DD-A and
DD-B respectively to the Registrar of Companies through MCA portal.
Holding of qualification shares in a company in which one is director is not
statutorily required.
Central Governments approval is required for increasing the number of directors
in certain circumstances specified u/s 259 of the Act.
Directors may be appointed by becoming subscribers to the Memorandum
(S.254); by members in general meeting (S.255-257, 265); by Board of directors
(S.260, 262 & 313); by Central Government (S.408 and 409); by third parties and
small shareholders if the articles provide.
Two or more directors should not be elected en bloc or by a single resolution.
A director may be removed from the office before the expiry of his term by
shareholders of the company under Section 284 of the Act, Central Government
(Section 388 B to 388 E) and by CLB (u/s 397 and 398 of the Act).
A director may resign his office in the manner provided by the articles.
Any officer or employee of a company shall be punishable with fine on the
complaint of company or any creditor or contributory thereof, if he wrongfully
obtains possession or withholds any property of the company u/s 630 of the Act.


Disqualifications leading to the vacation of the office of a directors as mentioned
in Section 283 are the statutory disqualifications and no director and no company
is ammine from them.
Directors are not entitled to payment in the absence of express provisions. The
remuneration paid to directors is subject to the provisions of Section 198, 309
and Schedule XIII of the Companies Act.
Provisions related to managerial remuneration shall not apply to private company
unless it is a subsidiary of a public company.
Section 314 regarding office or place of profit applies to public as well as private
companies.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not be
submitted for evaluation).
1. Explain the concept and the evolution of the institution of directors.
2. What are the qualifications of a director? When is a person disqualified for
appointment as a director of the company? What are the rules as regards
disqualification of Directors?
3. Explain the law relating to number of directors.
4. Who may be appointed as director of a company?
5. How can the directors be removed from the office before the expiry of their
term?
6. Under what circumstances is a director deemed to have vacated the office of
directorship?
7. State the provisions of the Companies Act regarding the remuneration of
directors.
8. Discuss in detail the provisions relating to holding of office or place of profit
by a director, relative etc. in a company.
9. How can the small shareholders director be appointed?


Suggested Readings:
1. A Guide to Companies Act A. Ramaiya
2. Circulars & Clarifications on Company Law & SEBI Taxmann
3. Company Law & Practice A.K. Majumdar & G.K. Kapoor








STUDY XV
MANAGEMENT AND CONTROL OF COMPANIES-II
POWERS AND DUTIES OF DIRECTORS

LEARNING OBJECTIVES
Directors acting collectively i.e. Board of Directors are authorized to do what the
company is authorized to do unless barred by restrictions on their powers by the
provisions of the Companies Act, 1956, the Memorandum or Articles of the company.
To know what are the powers of directors, its extent, duties of directors, liabilities of
directors is very important aspect of a company. After going through this chapter,
students will learn the following:-
Distribution of powers of a Company
Exercise of Powers
Loans to Directors
Boards sanction for contracts in which Directors are interested.
Disclosure of Interest by Directors
Duties of Directors
Liabilities of Directors
Courts power to grant relief in certain cases
Compounding of certain offences S 621A
Monitoring and Management

1. DISTRIBUTION OF POWERS OF A COMPANY
Except where express provisions are made that the powers of a company in
respect of any matter are to be exercised by the company in general meeting, in all
other cases the Board is entitled to exercise all its powers. The directors acting
together are the authority in conducting the affairs of the company. They are
authorised to do what the company is authorised to do, unless barred by restrictions
on their powers by the provisions of the Companies Act, 1956 (the Act), the
memorandum or articles of the company (Section 291).
The directors shall exercise their powers bona fide and in interest of the
company. The directors while exercising their powers do not act as agents for the
majority or even all the members and so the members cannot by resolution passed
by a majority or even unanimously supercede the directors powers, or instruct them
how they shall exercise their powers. This sovereignty of the directors within the limits
of the powers conferred on them by the articles, and within limit laid down by the Act
was clearly expressed by Greer L.J. in John Shaw & Sons (Salford) Ltd. v. Shaw
(1935) 2 K.B. 113 in the following words:
A company is an entity distinct alike from its shareholders and its directors.
Some of its powers may, according to its articles, be exercised by directors, certain


other powers may be reserved for the shareholders in general meeting. The powers
of management are vested in the directors. They and they alone can exercise these
powers. The only way in which the general body of the shareholders can control the
exercise of the powers vested by the articles, in the directors, is by altering the
articles, or if opportunity arises under the articles, by refusing to re-elect the directors
whose action they disapprove. They cannot themselves usurp the powers which by
the articles are vested in the directors any more than the directors can usurp the
powers vested by the articles in the general body of shareholders.
In Milan Sen v. Guardian Plasticate Ltd. (1998) 2 Comp L J 320, the directors
passed a resolution for rights issue which was questioned by certain shareholders.
The Calcutta High Court held that the question whether the company needed
additional capital was a question which should primarily be decided by the directors
of the company and if they were of the view that further capital in the form of rights
issue was required the Court would be slow to disturb the same unless there were
extreme circumstances of malafides or breach of trust.
Thus, from the provisions of Section 291 and the exposition of the law stated
above, it is clear that subject to the restrictions contained in the Act, Memorandum
and articles, the powers of directors are co-extensive with those of the company
itself.
The relationship of the Board of directors with the shareholders is more of
federation that one of subordinates and superior. Some powers are specially
reserved for the Board e.g. appointing directors in casual vacancies, the power to
issue debentures, etc. On the other hand, some powers are exclusively reserved for
the members in general meeting e.g. borrowing in excess of the paid-up capital and
free reserves, selling or disposing off the whole or substantially the whole of the
undertaking etc.
However, in the following exceptional cases, the general body of shareholders is
competent to act even in matters delegated to the Board:
(a) Directors Acting Male Fide: The general body of shareholders can intervene
when it is proved that the directors have acted for improper motive or arbitrarily or
capriciously. In Satya Charan Lal v. Romeshwar Prasad Bajoria (1950) SCR 394, it
was stated that ordinarily the directors of a company are the only persons who can
conduct litigation in the name of company, but when they are themselves the wrong
doers, and have acted malafide and their personal interest is in conflict with their duty
in such a way that they cannot or will not take steps to seek redress for the wrong
done to the company, the majority of the shareholders may take steps for redressal of
the wrong.
In Marshals Valve Gear Co. Ltd. v. Manning Wardle & Co. Ltd. (1909) 1 Ch. 267,
A and three other persons were four directors of M. Co. and they held almost the
whole of the subscribed capital of the company. A was the majority shareholder, but
held less than three-fourth of the share capital. Another company, known as N. Co.
was committing infringement of M. Co.s trademark and other three directors were
interested in that company. The result was that at a meeting of the Board they
declined to sanction any proceeding against N. Co. A, at a general meeting of the
shareholders, resolved and commenced an action to restrain the alleged
infringement.


(b) Incompetent Board: The general body of shareholders may exercise the
powers vested in the Board when the Board is incompetent to act, for instance, where
all the directors are interested in the transaction or the Board is unwilling to act, or
when there are no validly appointed directors functioning.
In Vishwanathan v. Tiffins B.A. and P. Ltd., AIR 1953 Mad. 520, a clause in
the articles of the company authorised the directors to fill casual vacancies and
also to increase the number of directors within the maximum number fixed in
the articles. Some casual vacancies occurred, and they were promptly filled at
a general meeting of the shareholders. This was challenged on the ground that
once the power to appoint was delegated to the Board, it could not have been
exercised at a general meeting. The Court upheld the appointments by the
company in the general meeting, as it found that at the time of the general
meeting there was no director in office and, therefore, the members had the
right to elect. Venkatarma Iyer, J. observed: A company has inherent power to
take all steps to ensure its proper working and that, of course, included the
power to appoint directors. It can delegate these powers to the Board and such
delegation will be binding upon it, but if there is no legally constituted Board
which could function or if there is a Board that is unable or unwilling to
function then the authority delegated to the Board lapses and the members can
exercise the right inherent in them of appointing directors.
(c) Deadlock in the Board: If the directors are unable or unwilling to act, on
account of deadlock, the shareholders have the inherent power to act. For instance,
in the Barron v. Potter (1914) 1 Ch. 895, there were only two directors on the Board
of the Company and one refused to act with the other. There was no provision in the
articles enabling the general meeting of the shareholders to increase or reduce the
number of directors. Held, that as there was a deadlock in the administration resulting
from the fact that the power to take necessary steps to ensure the working of the
company and to appoint additional director for the purpose.
From the above, it is clear that the residuary powers can be pressed into service
by the shareholders in general meeting.
2. EXERCISE OF POWERS
The powers of the Board may be grouped under the following heads:
(1) Powers exercisable only at Board meetings;
(2) Powers exercisable only with the consent of the company in general
meeting; and
(3) All other powers which, subject to the provisions of the Act, the company is
authorised to exercise.
2.1 Powers to be exercised only at Board Meetings
Section 292(1) of the Act, provides that the Board of directors of a company shall
exercise the following powers on behalf of the company, and it shall do so only by
means of resolution passed at a meeting of the Board:
(a) powers to make calls on shareholders in respect of money unpaid on their
shares;


(b) power to authorise the buy-back as per the provisions of Section 77A;
(c) power to issue debentures;
(d) power to borrow moneys otherwise than on debentures;
(e) power to invest the funds of the company; and
(f) power to make loans.
The Board, may, however, by a resolution passed at a meeting, delegate to any
committee of directors, the managing director, the manager or any other principal
officer of the company or in the case of a branch office of the company, a principal
officer of the branch office, the powers specified in clauses (c), (d) and (e), to the
extent specified below on such conditions as the Board may prescribe.
The directors can also exercise the power to print share certificates as per the
provisions of the Companies (Issue of Share Certificate) Rules 1960, in their Board
meetings.
It is further provided that the acceptance by a banking company in the ordinary
course of its business of deposits of money from the public payable on demand or
otherwise, or the placing of money on deposit by a banking company with another
banking company on such conditions as the Board may prescribe, shall not be
deemed to be a borrowing of money or, as the case may be, a making of loans by a
banking company within the meaning of this section.
Every resolution of the Board delegating the powers must specify:
(a) the total amount outstanding any one time up to which the money may be
borrowed by the delegate under clause (c); [Section 292(2)].
(b) the total amount up to which the funds of the company may be invested and
the nature of the investment which may be made by the delegate under
clause (d); [Section 292(3)].
(c) the total amount up to which loans may be made by the delegate, the
purpose for which the loans may be made, and the maximum amount of
loans which may be made for each such purpose in individual cases under
clause (e) [Section 292(4)].
Inspite of the fact that the directors can delegate upto certain extent they cannot
delegate the whole of their responsibilities, and must continue to exercise control
over the Committee which consists of one or more members of the Board. [Fire Proof
Doors, Re, (1916) 2 Ch 142 : (1916-17) All ER Rep 931]. Where the committee has
more than one member, every member must be present to enable the committee to
function unless the Board resolution fixes a quorum for committee meetings.
The Board of Directors is competent by resolution to enhance the rates of interest
in exercise of the powers under Sub-sections (1)(b) and (1)(c) of
Section 292. The exercise of that power is not controlled by Section 293.
Power to borrow money [Sub-section (1)(c)]
A trading company has an implied power to borrow, even though the
memorandum of association does not contain an authority to borrow. In the case of
non-trading company, however, there must be express power to borrow. [Badger
Mansell v. Viscount Cobham, Re, (1905) 1 Ch 568, 574].


The companys power of borrowing may also be exercised by delegating to
agents other than directors unless prohibited by the Articles of Association of the
company. The expression borrowing money is not confined to the taking of money
on the promise to return it, with or without interest; it will also include the entering into
any arrangement for deferred payment of the price of machinery, raw materials, etc.
Strangers dealing with a company are entitled to assume that a director or
manager was authorised to borrow, even if in fact not so authorised. Shri Krishna
Rathi v. Mondal Bros & Co. (P) Ltd., (1967) 1 Comp LJ 10: (1967) 37 Com Cases
256. He has a right to assume, as against the company, that all requirements of
internal management have been duly complied with.
In T.R. Pratt v. E.D. Sasoon & Co., AIR 1936 Bom 62 : (1936) 6 Com Cases 90,
money was borrowed and used for the benefit of the principal in paying debts of the
company, the company could not escape repayment of the debt on the ground that
the agents had no authority from the company to borrow.
Power to give security
The power to borrow implies a power to secure the borrowings by mortgage or a
charge on the companys assets. [Australian Auxiliary Steam Clipper Co. Ltd. v.
Mounsey, (1858) 4 K & J 733]. Unpaid calls can be charged under the general
powers to borrow but a company cannot give by way of security books and registers
which it is bound to keep under the Companies Act.
Borrowing for ultra vires purposes
Borrowing beyond the powers of the company, or the directors, is an ultra vires
borrowing and does not have the effect, legal or equitable. Any instrument executed
or security given therefor is void and no action lies to recover the money.
[Deonarayan Prasad Bhadani v. Bank of Baroda Ltd., (1957) 27 Com Cases 223
(Bom)].
In one case, Board of directors passed a resolution for borrowing of money for an
ultra vires purpose. The same being beyond the powers of the directors and the
company, it did not bind the company. [National Provincial Bank v. Introduction Ltd.,
(1969) 1 All ER 887 : (1969) LJ 28, affirming (1968) 2 All ER 1221 (CA)]. Where the
borrowing is ultra vires the memorandum or contrary to the law, even the
shareholders cannot ratify the act.
But, where the directors have borrowed beyond their own powers, the lender may
take advantage of the rule in Royal British Bank v. Turquand, (1856) 6 E & B 327 viz.,
that all matters relating to internal management of the company have been done
regularly and the directors have acted within their powers.
Section 58A - restrictions on borrowing powers
The Board of directors and others who exercise borrowing powers for or on
behalf of any non-banking company have to take particular care to see that the
directions of Reserve Bank as well as the provisions of Section 58A are complied
with. Whenever any company receives any money in the form of deposit it must be
noted that the Reserve Bank directions under Section 45-L of the Reserve Bank of


India Act have effect notwithstanding anything otherwise provided in the Companies
Act or any other law, as it is so expressly provided by Section 45-Q of that Act.
Other Powers to be exercised at Board Meetings
Besides the above powers, there are certain other powers which the Board of
directors can exercise only at its meeting. These powers are
(a) the power to form opinion about solvency of the Company in respect of buy-
back of shares (Section 77A).
(b) the power to fill up casual vacancies in the office of directors (Section 262);
(c) the power to constitute Audit Committee and specify terms of reference
thereof (Section 292A).
(d) the power to make donation to political parties [proviso to Sub-section (2) of
Section 293A];
(e) the power to accord sanction for specified contracts in which one or more
directors are interested [Section 297(4)];
(f) disclosure of interest by a director [Section 299(1)];
(g) the power to receive notice of disclosure of directors interest [Section
299(3)(c)];
(h) the power to receive notice of disclosure of directors shareholding
[Section 308(2)];
(i) the power to appoint or employ a person as managing director if he is the
managing director or manager of one and not more than one other company
[Section 316(2)];
(j) the power to invest in shares or debentures of any other body corporate
under Section 372A;
(k) the power to appoint or employ a person as its manager if he is the manager
or managing director of other company [Section 386(2)];
(l) the power to make a declaration of solvency where it is proposed to wind up
the company voluntarily [Section 488(1)];
(m) approval of text of advertisement for inviting public deposits [Section 58A
read with rule 4(4) of the Companies (Acceptance of Deposits) Rules, 1975].
In Maharashtra State Mining Corpn. v. Sunil [(2006) 70 SCL 351 (SC)],
decided on 24.04.2006, the appellant corporations managing director
terminated respondents services on 25-11-1991 for various misconducts. The
respondent filed a writ petition challenging the said dismissal order on the
ground that the Managing Director had no authority to do so since the same
was vested in the appellants board of directors. While the said petition was
pending, the Board of Directors passed a resolution ratifying the managing
directors impugned action. The High Court, however, while setting aside the
impugned termination order, allowed respondents writ petition. Appellant
appealed to the Supreme Court.
Appeal was allowed. According to the Learned Judge of the Supreme
Court, the High Court was right when it held that an act by a legally
incompetent authority was invalid. But it was entirely wrong in holding that


such an invalid act cannot be subsequently rectified by ratification of the
competent authority. Ratification, by definition, means making valid an act
already done. The principle was derived from the Latin maxim rati habitio
mandato aequiparature, namely, a subsequent ratification of an act was
equivalent to a prior authority to perform such act. Therefore, ratification
assumed an invalid act, which was retrospectively validated.
In the instant case, the managing directors order dismissing the
respondent from the service was admittedly ratified by the board of directors
on 20.2.1991 and the board of directors unquestionably had the power to
terminate the services of the respondent. Since the order of the managing
director had been ratified by the board of directors, such ratification related
back to the date of the order and validated it. Therefore, the instant appeal was
allowed, the impugned judgment and order of the High Court was quashed, and
the dismissal order dated 25.1.1991 was upheld.
Powers which must be exercised by unanimous vote
The following powers of the Board must be exercised by resolutions passed at
meeting with the consent of all the directors present at the meeting
(a) the power to appoint or employ a person as its managing director under
Section 316 or manager under Section 386 if he is managing director or
manager of one and not more than one other company.
(b) the power to invest in shares or debentures of any other body corporate
under Section 372A.
2.2 Powers of the Board exercisable with the approval of the company in
general meeting
Section 293(1) provides that the Board of directors of a public company, or of a
private company which is subsidiary of a public company shall not, except with the
consent of such public company as the case may be, in general meeting
(a) sell, lease or otherwise dispose of the whole, or substantially the whole, of
the undertaking of the company, or where the company owns more than one
undertaking, of the whole, or substantially the whole, of any such
undertaking;
(b) remit, or give time for the repayment of, any debt due by a director except in
the case of renewal or continuance of an advance made by a banking
company to its director in the ordinary course of business;
(c) invest, otherwise than in trust securities, the amount of compensation
received by the company in respect of the compulsory acquisition, after the
commencement of this Act, of any such undertaking as is referred to in
clause (a), or of any premises or properties used for any such undertaking
and without which it cannot be carried on or can be carried on only with
difficulty or only after a considerable time;
(d) borrow money, where the moneys to be borrowed, together with the moneys
already borrowed by the company (apart from temporary loans obtained
from the companys bankers in the ordinary course of business), will exceed


the aggregate of the paid-up capital of the company and its free reserves,
that is to say, reserves not set apart for any specific propose; or
(e) contribute to charitable and other funds not directly relating to the business
of the company or the welfare of its employees any amounts the aggregate
of which will, in any financial year, exceed fifty thousand rupees, or five
percent of its average net profits as determined in accordance with the
provisions of Sections 349 and 350 during the three financial years
immediately preceding, whichever is greater.
The resolution of the general meeting in relation to the exercise of the power
referred to in clause (d) or in clause (e) above should specify the total amount up to
which moneys may be borrowed by the directors or the total amount which may be
contributed to charitable or other funds in any financial year, as the case may be
[Explanation I].
The expression temporary loans occurring in clause (d) means loans repayable
on demand or within six months from the date of the loan such as short-term, cash
credit arrangements, the discounting of bills and the issue of other short terms loans
of a seasonal character, but does not include loans raised for the purpose of
financing expenditure of a capital nature.
Sub-section (2) of Section 293 provides that nothing contained in clause (a) of
Sub-section (1) shall effect
(i) the title of a buyer or other person who buys or takes a lease of any such
undertaking as is referred to in that clause, in good faith, and after exercising
due care and caution; or
(ii) the selling or leasing of any property of the company where the ordinary
business of the company consists of or comprises, such selling or leasing.
Any resolution for any transaction such as is referred to Section 293 (1) (a) may
attach such conditions as may be specified in the resolution including conditions
regarding the use, disposal or investment of the sale proceeds. However, this shall
not be deemed to authorize the company to effect any reduction in its capital except
in accordance with the provisions contained in that behalf in the Companies Act,
1956.
Sub-section (5) of Section 293 provides that no debt incurred by the company in
excess of the limit imposed by clause (d) of Sub-section (1) shall be valid or effectual,
unless the lender proves that he advanced the loan in good faith and without
knowledge that the limit imposed by that clause had been exceeded.
The acceptance by a banking company in the ordinary course of its business, or
deposits of money from the public, repayable on demand or otherwise, withdrawable
by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of money
by the banking company within the meaning of clause (d) of Sub-section (1).
In, Yellamma Cotton Woollen and Silk Mills Co. Ltd., (1970) 40 Com Cases 466 :
AIR 1969 Mys 280, movable assets were hypothecated with the condition that on
default the lender would take possession of the assets. This will not amount to sale of
assets. Transfer of all equity shares in a wholly owned subsidiary company by the
holding company may not attract the provision of this section.


The object of the section is to restrict the Board to dispose off the companys
assets whatever they may like. It is the shareholders who are the owners of the
company and they have the right to dispose off the companys assets according to
their wishes and if the directors do not collaborate with them they can either replace
directors or get a Court order in the matter [Kriparam v. Shreyanprasad, AIR 1951
Punj 79]. In another case, the directors disposed off the assets for the payment of the
debts of the company. This was held to be beyond the directors powers.
A decision was taken by the Board of directors to sell the immovable property of
the company. They also obtained sanction of the general body of shareholders. An
individual shareholder was not allowed to question the wisdom of the decision. The
Court cannot at the instance of a single shareholder upset the decision taken by the
Board of directors and sanctioned by the general body. The Court cannot substitute
its decision for the commercial wisdom of the Board of directors. [Cochin Malabar
Estates & Industries Ltd. v. P.V. Abdul Khader (2003) 114 Com. Cases 777 (Ker.)].
A closed unit of a company is not an undertaking within the meaning of this sub-
section and the provisions of section 293(1) do not apply to a proposed sale of the
unit. [Pramod Kumar Mittal v. Andhra Steel Corporation Ltd., (1982) 2 Comp LJ 629 :
(1985) 58 Com Cases 772 (Cal)].
Exemption of equitable mortgage/pledging
The Execution of an equitable mortgage and pledging by a company is not a
disposition of the whole or substantially the whole of the undertaking of the company
under Sub-section (1)(a) of Section 293 of the Act. [Sheth Mohanlal Ganpatram v.
Sayaji Jubilee Cotton & Jute Mills Co., (1964) 34 Com Cases 777 (Guj)].
Execution of an usufructuary mortgage
Departments view - If a company mortgages the whole or substantially the whole
of its undertaking for obtaining loans or other financial assistance, it need not comply
with the provisions of Section 293(1)(a) of the Act, but if it is an usufructuary
mortgage the said section would be attracted. (Letter No. 8/19(293)/64-PR, dated
21.7.1964).
Leasing of the right to use the facilities of a company, was held to be not a lease
or disposal of the Companys undertaking, because undertaking means substantial
part of the assets. An agreement of sale etc. means a complete and exclusive
transfer whereby the transferee gets the right to hold, possess and control the
undertaking in question [Allana Cold Storage Ltd. v. Goa Meat Complex Ltd., (1997)
90 Com. Cases 50 at 64].
Where a companys business was neither to invest in shares, nor even to engage
in the business of investing in shares, but even so the company carried on some
investment in shares, the sale of such shares by the company was held to be not the
sale of the undertaking or even a substantial part of the undertaking. The Company
Law Board, while examining the validity of such a transfer of shares, propounded this
test as to whether the sale of undertaking was involved or not, that whether the
business of the company would be carried on effectively even after the disposal of
the assets in question or whether a mere husk of the undertaking would remain after


the disposal of the assets. [Tracstar Investments Ltd. v. Gordon Woodroffe Ltd.
(1996) 87 Com. Cases 941 (Mad.-CLB)]. Affirmed in Shoe Specialities Ltd. v.
Tracstar investments Ltd., (1997) 99 Com. Cases 471 (Mad-DB).
Borrowings
The provisions of Sub-section (5) of Section 293 clearly lays down that the debts
incurred in excess of the limit specified shall not be valid unless the lender proves
that he lent his money in good faith and without knowledge of the limit imposed by
Sub-section (1) being exceeded. He cannot assume that the consent of the company
in general meeting has been given. Neither the rule in Royal British Bank v.
Turquand, (1856) 6 E & B 327 nor the series of decisions relating to ratification by
shareholders will apply. If the condition in Sub-section (5) is not satisfied, the debt in
excess of the limit is not valid or effectual.
In case of an ultra vires borrowing, the directors may, because of an implied
warranty given by the lender be personally liable to damages to the lender [Firbanks
Executors v. Humphreys, (1886) 18 QBD 54; Garrad v. James, 1925 Ch 616]. The
money may come in the hands of the company, and if paid to the companys
creditors, the lender may be subrogated to the rights of the creditors [Blackburn
Building Society v. Cunliffe Brooks & Co. (1882) 22 ChD 61 : (1881-5) All ER Rep
Ext. 1280]. If it is proved that money had gone into the companys coffers, the
company will be liable to repay, even if the borrowing is unauthorised.
In case of a borrowing in excess of the limits, the excess borrowing would be
ultra vires and not the whole transaction. But if all the shareholders ratify the excess
loans by directors, such a ratification will validate such excess debts.
The consent of the company in general meeting may be in the form of a formal
ordinary resolution [Bamford v. Bamford (1970) Ch. 212: (1969) 1 All ER 969 (CA)] or
it may be at an informal meeting of all the shareholders [Re, Express Engineering
Works Ltd., (1920) 1 Ch 466: (1920) All ER Rep Ext 850 (CA)] or by the
acquiescence of all the shareholders without a meeting [Parker Ltd v. Reading,
(1926) Ch. 975 : (1926) All ER Rep 323].
Hire purchase and leasing transactions: Hire purchase and leasing transactions
are not covered by clause (d) of Section 293(1), as they do not amount to
borrowing.
Contingent liabilities: Contingent liabilities like amounts outstanding on deferred
payment agreement or under guarantee issued by the bankers for such deferred
payment instalments or in respect of letters of credit established by the companys
bankers cannot be termed borrowings by the company and are not covered by the
provisions of sections 293. This view has also been clarified by the Company Law
Board, stating that in the view of the Department, the term borrowing under section
293(1)(d) does not include debts on account of purchase of machinery and deferred
payments [Letter No. 8/16(1)61-PR dated 9-5-1961].
Prohibitions and Restrictions Regarding Political Contributions
Section 293A(2) permits Non-Government Companies which are in existence for
not less than three financial years, to make contributions, directly or indirectly, in any


financial year, to any political party or for any political purpose to any person,
amounts not exceeding five percent of their average net profits determined in
accordance with provisions of Sections 349 and 350 during the three immediately
preceding financial years.
Government Companies and Companies which have been in existence for less
than three financial years cannot make any contribution to political party or for any
political purpose to any person.
It is further provided that no such contribution shall be made by a company
unless a resolution authorising the making of such contribution is passed at a
meeting of the Board of directors and such resolution shall, subject to other
provisions of this section, be deemed to be justification in law for the making and the
acceptance of the contribution authorised by it.
A donation or subscription or payment caused to be given by a company on its
behalf or on its account to a person who, to its knowledge, is carrying on any activity
which, at the time at which such donation or subscription or payment was given or
made can reasonably be regarded as likely to effect public support for a political party
shall also be deemed to be contribution of the amount of such donation, subscription
or payment to such person for a political purpose [Section 293A (3) (a)].
The amount of expenditure incurred, directly or indirectly, by a company on
advertisement in any publication (being a publication in the nature of a souvenir,
brochure, tract, pamphlet or the like) by or on behalf of a political party or for the
advantage shall also be deemed
(i) where such publication is by or on behalf of a political party, to be
contribution of such amount to such political party, and
(ii) where such publication is not by or on behalf of but for the advantage of a
political party, to be a contribution for political purpose to the person
publishing it [Section 293A (3) (b)].
Such contributions are required to be disclosed by every company in its profit and
loss account, giving particulars of the total amount contributed and the name of the
party or the person to which or to whom such amount has been contributed [Section
293A (4)].
A company which contravenes the provisions of Section 293A is punishable with
fine which may extend to three times the amount so contributed. Further, every officer
of the company, who is in default is also punishable with imprisonment which may
extend to three years and is also liable to fine [Section 293A (5)].
Power of Board and other persons to make contributions to the National
Defence Fund, etc.
By virtue of Section 293B, the Board of directors of any company or any person
or authority exercising the powers of the Board of directors of a company or of the
company in general meeting, may, notwithstanding anything contained in Section 293
and 293A or any other provisions of this Act or in the memorandum, articles or any
other instrument relating to the company, contribute such amount as it thinks fit to the
National Defence Fund or any other Fund approved by the Central Government for


the purpose of national defence. The amount of contributions made for this purpose
are required to be disclosed by the company in its profit and loss account of the
financial year during which such contributions are made.
3. LOANS TO DIRECTORS
According to Section 295 (1) of the Companies Act, 1956, no company,
(hereinafter known as the lending company), shall without obtaining the previous
approval of the Central Government in that behalf, directly or indirectly, make any
loan to or give any guarantee or provide any security in connection with the loan
made by any person to or to any other person by:
(a) any director of the lending company or of a company which is its holding
company or any partner or relative of any such director;
(b) any firm in which any such director or relative is a partner;
(c) any private company of which any such director is a director or member;
(d) any body corporate at a general meeting of which not less than twenty five
per cent of the total voting power may be exercised or controlled by any
such director, or by two or more directors together; or
(e) any body corporate, the Board of directors, managing director, or manager
whereof is accustomed to act in accordance with the directions or
instructions of the Board, or of any director or directors, of the lending
company.
The provisions of Sub-section (2) do not apply to:
(a) any loan made, guarantee given or security provided:- (i) by a private
company unless it is subsidiary of a public company, or (ii) by a banking
company;
(b) any loan made by a holding company to its subsidiary company;
(c) any guarantee given or security provided by a holding company in respect of
any loan made to its subsidiary company.
Any contravention of the provisions of Section 295 shall be punishable either with
fine, which may extend to Rs. 50,000/- or with simple imprisonment for a term which
may extend to six months. However, where any such loan or any loan in connection
with which any other guarantee or security has been given or provided by the lending
company has been repaid in full, no punishment by way of imprisonment shall be
imposed under this sub-section and where the loan has been repaid in part, the
maximum punishment by way of imprisonment shall be proportionately reduced.
All persons who are knowingly parties to any contravention of Sub-section (1) of
Section 295 shall be liable jointly and severally to the lending company for the
repayment of the loan or for making good the sum which the lending company may
have been called upon to pay in virtue of the guarantee given or the security provided
by such company.
This does not apply to a private company which is not subsidiary to a public
company.


Section 283 lays down that the office of the director shall become vacant for
contravention of Section 295.
In the case of M.R. Electronics Components Limited and Others v.
Assistant Registrar of Companies (1986) 3 Comp. L.J. 28 (Mad.), the directors
of a company had given an advance of Rs. 5,000 to the Managing Directors
wife who was employed by the Company on monthly salary. On the ground that
the provisions of Section 295 of the Companies Act, 1956 were violated,
prosecution was launched against the company and its directors and the trial
court held that the advance paid to the employee amounted to a loan and
consequently convicted the accused for an offence punishable under Section
295(4). In the revision which was filed in the Madras High Court against the said
conviction it was held that as far as the ingredients are concerned, salary
advance and loan are in all respects similar. Therefore, for the transaction to be
characterized as a loan or salary advance it is the capacity of the person
receiving the amount that counts. Merely because the beneficiary of a salary
advance is the wife of the Managing Director of a company, it cannot be said
merely on the sole reason that as she is the wife of one of the directors, an
offence has been committed. The court had to find out in each case whether
the salary advance was a genuine salary or a loan disguised as salary advance.
For that purpose, it would be necessary to consider whether beneficiary is a
bona-fide employee, whether advance falls within the general scheme of
advances given by the company to other employees, whether the amount given
is disproportionate to the salary of the employees, whether conditions of
repayment or other conditions of the loan like the rate of interest are
exorbitant, whether there was laxity in the recovery of the advance, etc. It is in
taking into consideration the circumstances that surround the operation that
the court can reach the correct conclusion.
The Bombay High Court in Fridie Ardeshir Mehta (Dr.) v. Union of India (1991)
70 Comp. Cas. 210 (1991) 1 Comp. LJ 437 (Bom.) came to the conclusion that the
company selling one of its flats to one of its directors on receiving half the price in
cash and agreeing to accept the balance in instalments does not amount to giving of
loan to the director.
House Building Loan
Ministry of the Corporate Affairs had allowed companies to make house building
loans to their Managing Directors and Whole-time Directors without obtaining prior
approval of the Central Government under Section 295 of the Companies Act, 1956
on such terms and conditions as are applicable to its officers/employees. The
approval of the Government will however, be necessary in the case of companies
having no such scheme or where the house building loan proposed to be made is not
covered by the terms and conditions as are applicable to its officers/employees.
Sub-Section (1) of Section 295 is not applicable to a Government company
provided such a company has obtained the approval of the Administrative Ministry,
Department of the concerned State Government. [Notification No. GSR 581(E) dated
16.7.1985].


Application for Approval Information to be Stated Therein
Application for giving loan, providing security or guarantee in connection with a
loan shall be made to the Central Government in e-Form 24AB.
Every applicant is required to furnish the under mentioned information and
documents to the Ministry of Company Affairs while filing the e-form:
(i) Working results of the company for the last three financial years.
(ii) Amount of loan or security or guarantee.
(iii) Details and justification of the proposal mentioned in the application.
(iv) Details of the borrowing Company.
(v) Controlling and common interest in shareholding pattern of the borrowing
Company.
(vi) Details of loan given or corporate guarantee or security provided to any
Company or person or firm etc. so far under Section 295 along with details
thereof and proof of compliance of Section 372A wherever applicable.
The following attachments are required to be filed along with the e-form:
(i) Copy of the board of directors resolution in this regard.
(ii) Copy of members resolution containing specific approval of required
members along with explanatory statement.
(iii) A declaration that Company has defaulted in making repayments to the
investors as and when they become due to them.
(iv) List of directors of board of both the Companies and disclosing inter se
interest, if any.
(v) Copy of draft loan agreement.
(vi) Declaration to the effect that funds proposed to be loaned are not required
for its working capital requirements at least for a year.
(vii) Copy of loan scheme for the employees of the Company, if any.
(viii) A no objection certificate or prior approval of public financial institutions or
banks in case any term loan is subsisting.
(ix) A declaration from the statutory auditor or a Company Secretary in whole
time practice that:
(a)The Company has not defaulted in:
(i) The repayment of any fixed deposits or part thereof or interest
thereon.
(ii) Payment of dividend.
(iii) Redemption or repayment of debenture and timely payment of
interest thereon.
(iv) Redemption of Preference Shares, and
(b)The Company is regular in filing all forms or returns as required to be filed
under the Companies Act, 1956.


(c)The proposal is in conformity within the provisions of the Section 372A of the
Companies Act, 1956.
(d)That the Company is not in any default on account of undisputed dues of the
Central Government e.g. income-tax, central excise etc.
(x) Copy of letter from bank or financial institutions wherein the Company has
been asked to furnish Corporate Guarantee or security for the loan
sanctioned to the borrower Company.
(x) Shareholding pattern of applicant and borrowing Company.
4. BOARDS SANCTION FOR CONTRACTS IN WHICH DIRECTORS ARE
INTERESTED
Section 297 of the Companies Act, 1956 provides that the consent of the Board
of directors is required for certain contracts in which particular directors are
interested. It provides that a director of the company or his relative, a firm in which
such a director or relative is a partner, any other partner in such a firm, or a private
company of which the director is a member or director, shall not enter into any
contract with the company except with the consent of the Board of directors:
(i) for the sale, purchase or supply of any goods, materials or services; or
(ii) for underwriting the subscription of any shares in or debentures of the
company.
In the case of company having a paid-up share capital of not less than rupees
one crore, previous approval of the Central Government would be required [proviso to
Section 297(1)]. For the previous approval of the Central Government, application
shall be made in e-form 24A [form for filing application to Central Government
(Regional Director)] of General Rules and Forms.
The power has been delegated to Regional Director.
Sub-section (2) of Section 297 provides that nothing contained in (i) above shall
apply to:
(a) the purchase of goods and materials from the company or the sale of goods
and materials to the company, by any director, relative, firm, partner or
private company as aforesaid for cash at prevailing market prices; or
(b) any contract or contracts between the company on one side and any such
director, relative, firm, partner or private company on the other for sale,
purchase or supply of any goods, materials and services in which either the
company or the director, relative, firm, partner or private company, as the
case may be regularly trades or does business. However, the value of
contract or contracts should not relate to goods and materials the value of
which, or services the cost of which, exceeds five thousand rupees in the
aggregate in any year comprised in the period of the contract or contracts; or
(c) in the case of a banking or insurance company any transaction in the
ordinary course of business of such company with any director, relative, firm,
partner or private company as aforesaid.
In circumstances of urgent necessity, the director, relative, firm, partner or private
company as aforesaid may enter, without obtaining the consent of the Board, into any


contracts with the company for the sale, purchase or supply of any goods, materials,
or services even if the value of such goods or cost of such services exceeds five
thousand rupees in the aggregate in any year comprised in the period of contract, but
then the consent of the Board must be obtained at a meeting within three months of
the date on which the contract was entered into.
The consent of the directors must be accorded by a resolution passed at a
meeting of the Board. It is not enough to obtain the consent by means of a resolution
passed by circulation.
The consent contemplated here cannot be a general consent but consent to each
specific contract. If consent of the Board is not accorded to any contract under this
section, anything done in pursuance of the contract shall be voidable at the option of
the Board.
This section does not apply to contracts between two public companies and also
is not attracted to a transaction of loan made by a director to the company because it
is not a sale or purchase of goods or a contract to render services. It has been
observed by the Calcutta High Court that the section does not seem to recognise any
public policy prohibiting a contract between a private and a public company with
some common shareholders or directors [Albert Judah v. Ramapada Gupta, (1960)
30 Com Cases 582: AIR 1959 Cal 715].
If X is a director of A Ltd. and also a director/member of B Private Ltd., then
Section 297(1) will apply to contracts between these two companies, subject to the
exceptions provided therein. However, if only the relatives of X are directors/
members of B Private Ltd. (and not X himself) the section will not apply. The same
rule will also apply to Section 295.
Section 297 not applicable to lease of immovable property
Lease of immovable property is outside the scope of Section 297 as the
reference to goods in the section means every kind of movable property under the
Sale of Goods Act.
The provisions of this section are not violated if, without obtaining the sanction of
the Board, a director owning premises enters into a contract of tenancy with the
company or gives on hire to the company any plant or machinery owned by him.
Departments Clarification. Sona Steering Systems Ltd., a joint venture of Maruti
Udyog Ltd., made an application to the Department of Company Affairs for approval
under Section 297(1) of the Companies Act, 1956, for taking on rent office premises
for the company from a firm in which directors of the company were interested. It was
clarified that the proposal of the company, being a transaction in immovable
properties, is not covered by the provisions of Section 297. (The letter No. 9/4/90
CL X dated 27-3-1990).
Service contracts
It may be noted that all contracts including service contracts whatever their value,
with the directors and other persons mentioned in the section require the previous
approval of the Central Government. If so, appointment of such persons coming


under Section 314 will also be covered. It is to be noted that even a director can enter
into a contract to serve the company and prior approval of the Central Government
would have to be sought.
Oral contracts
Under the Indian Contract Act, a contract need not be in writing, and an oral
contract is also valid in law. The provisions of Section 297 will accordingly also apply
in respect of an oral contract.
Contracts for supply of services
Contracts for supply of services are also covered under Section 297. Services
like banking, finance, insurance, transport, advertising, warehousing, purveying of
news or information, etc. are also included but not for personal services, such as a
contract of employment as the same is covered under Section 314. Further, the
reference to the market value of the services in clause (a) of Sub-section (2) also
seems to exclude personal service contracts.
A cheque may be treated as equivalent of a cash payment for the purpose of this
provision [Letter No. 8/2 (Misc.)/75-CL.V, dated 6-6-1975].
Delegation of powers to Regional Directors under Section 297(1) (Proviso)
Central Government has delegated to the Regional Directors the powers and
functions under the proviso to sub-section (1) vide Notification No. GSR 563 (E),
dated 19-8-1993.
Non-applicability of the provisions of Section 297 to certain transactions :
(1) Professional services of solicitors/advocates. Services of the nature of a
legal practitioner are not obtained on the basis of say, lowest tender but on
account of their professional expertise irrespective of the cost involved. Such
services cannot be bracketed with a contract for supply of goods or
materials. The Departments view is that these services fall outside the
scope of Section 297 of the Act and the scope of the section does not
extend to supply of professional services of the nature given by firms of
solicitors and advocates, etc. (Circular No. 13/75, dated 5-6-1975).
(2) Appointment of additional director. The appointment as an additional director
of a person who is related to a director has been held not to violate the
requirement of Section 300 (1) because such appointment does not
constitute any contract or arrangement of the company with the sitting
director [Shailesh Harilal Shah v. Matushree Textiles Ltd., (1994) 2 Comp LJ
291 at 301 : AIR 1994 Bom 20]. The director in question was not accordingly
disentitled from participation and voting at a meeting of the Board.
(3) Appointment as managing or whole-time director. A question has also been
raised whether proviso to Section 297(1) applies to a contract of
employment of a director as managing or whole-time director. In this
connection, it is pointed out that it is a basic principle of Company Law that
directors are agents or trustees and they stand in fiduciary position not only
to the company but also members and creditors. This position is not


changed merely by entrusting them with additional responsibilities for
managing the affairs or rendering of services of a professional nature though
they are remunerated for those services in accordance with the Articles of
Association of the Company subject to the provisions of the Companies Act.
Supply of Service is not the same as rendering of personal service as a
director or managing or whole-time director. Furthermore, there are specific
provisions in the Companies Act, for regulating such appointments.
Therefore, the Departments view is that proviso to Section 297(1) does not
apply to the contract of employment of a director as a managing or whole-
time director (Circular No. 13/75, dated 5-6-1975).
Consequences of non-compliance with section
Section 297 does not provide any penalty for non-compliance. The penalty,
therefore, will be as per the provisions of Section 629A. Default or non-compliance
with the section in cases where approval of the Central Government is necessary
would render the transaction void but it would be only voidable where the consent of
the Board of directors was necessary and was not accorded.
Where the accounts and affairs of the company were inspected and a violation of
the section was detected, it was held that the period of limitation began from the date
on which the directors submitted their explanation and not from the date of the report.
The Court however agreed that the prima facie limitation begins on the date on which
a document is filed with ROC. The court said that the limitation is a mixed question of
law and fact. [First Leasing Company of India Ltd. v. Addl. ROC (1997) 89 Com.
Cases 635 (Mad)].
As the proviso forbids the entry into contracts with a director, or his relative, or
firm or partner or private company specified in the Sub-section (1), except with the
previous approval of the Central Government, failure to obtain such previous
approval will make the contract illegal and void, the provisions of Sub-section (5)
making such contract voidable being confined only to cases where the consent of the
Board of directors has not been accorded to the contract [Globe Motors Ltd. v. Mehta
Teja Singh & Co., (1984) 55 Com. Cases 445 (Del) (DB)].
5. DISCLOSURE OF INTEREST BY DIRECTORS
Section 299 of the Companies Act provides, that every director of a company
who is in any way, whether directly or indirectly concerned or interested in a contract
or arrangement, or proposed contract or arrangement, entered into or to be entered
into by or on behalf of the company shall disclose the nature of his concern or his
interest at a meeting of the Board of directors [Section 299(1)].
A director occupies a fiduciary position in relation to a company and he must act
bonafide in the interests of the company. If a director makes a contract with the company
and does not disclose his interest, he will be committing breach of trust [Yashovardhan
Saboo v. Groz-Beckert Saboo Ltd., (1995) 83 Com Cases 371 at p.413 (CLB)].
Section 299 is wider in scope and deals with contracts between companies in
which a director is interested directly or indirectly. Here there is a conflict of duties as
contrasted to the conflict of personal interest contemplated under Section 297.


In case of a proposed contract or arrangement such disclosure shall be made at
the meeting of the Board, where it is first taken into consideration. At the date of that
meeting if the director was not concerned or interested in the proposed contract or
arrangement, he should disclose his interest or concern at the first meeting of the
Board held after he becomes so concerned or interested.
In the case of any other contract or arrangement, the required disclosure shall be
made at the first meeting of the Board held after the director becomes concerned or
interested in it [Section 299(8)].
Such disclosure may be made by a general notice given to the Board by a
director stating that he is a director or member of a specified body corporate or
partner of a specified firm and is to be regarded as concerned or interested in any
contract or arrangement which may be entered into after date of the notice, shall be
deemed to be a sufficient disclosure of concern or interest in relation to any contract
or arrangement so made. Such notice shall expire at the end of the financial year for
which it is given. However, it may be renewed for further periods of one financial year
at a time, by a fresh notice given in the last month of the financial year in which it
would otherwise expire. The general notice given to the Board is not effective unless
it is given and it is brought up and read at the first meeting of the Board after it is
given. The notice required to be given under Section 299 of the Act should be in
Form No. 24AA which is prescribed by the Companies (Central Governments)
General Rules and Forms, 1956.
Every director who fails to comply with the provisions of Sub-section (1) and (2)
shall be punishable with fine which may extend to fifty thousand rupees. The
provisions of Section 299 do not apply to any contract or arrangement entered into or
to be entered into between two companies where any of the directors of the one
company or two or more of them together holds or hold not more than two per cent of
the paid-up share capital in the other company.
The Department of Company Affairs vide letter No. 8/9/(299)63 - PR dated
20.9.1963, clarified that the provisions of Section 299 are applicable to directors
nominated by the Government on the Board of directors of any company.
Position of Interested Director
Section 300 prohibits an interested director from participating in the discussion of
or voting on, any contract or arrangement entered into, or to be entered into, by or on
behalf of the company in which his presence shall not be counted for the purpose of
forming a quorum at the time of any such discussion or vote and if he does vote, his
vote shall be void. Interest here means personal interest and not official or any other
interest. It may be financial interest and includes interest arising out of fiduciary duties
or closeness or relationship such as that of husband and wife, father and son
[Firestone Tyre & Rubber Co. v. Synthetics & Chemicals Ltd., (1970) Comp. L.J.
200].
However, the above provisions do not apply to:
(i) a private company which is neither a subsidiary nor a holding company of a
public company;


(ii) a private company which is a subsidiary of a public company in respect of
any contract entered into, or to be entered into, by the private company with
the holding company thereof;
(iii) any contract of indemnity against any loss which the directors, or any one or
more of them, may suffer by reason of becoming or being sureties or a surity
for the company;
(iv) any contract with another company in which the director is a nominee
director of the first company and holding not more than the qualification
shares or is a member of the other company holding not more than two per
cent of the paid-up share capital;
(v) a public company or a private company which is a subsidiary of a public
company, which has been exempted by the Central Government by
notification.
Any director who knowingly contravened the above provisions is punishable with
fine which may extend to fifty thousand rupees.
6. DUTIES OF DIRECTORS
The duties of directors are multifarious and they vary from company to company
depending upon the type and size of its activities.
The duties of directors may be divided under two heads:
1. Statutory duties and
2. Fiduciary and general duties
Statutory duties Statutory duties are the duties and obligations imposed by the
Companies Act. Important amongst them are :
(A) Duty to attend Board meetings Section 283(1)(g) imposes a statutory duty
on the directors to attend Board Meeting. Although a director may not be
able to attend all the meetings but if he fails to attend three consecutive
meetings or all meetings for a period of three months whichever is longer,
without obtaining leave of absence from the Board, his office shall
automatically fall vacant.
(B) Duty not to contract without Boards consent The directors should not
enter into contracts with company in violation of the provisions of Section
297 of the Act.
(C) Duty to disclose interest (Sections 299-300) Section 299 imposes an
obligation on a director to disclose the nature of his concern or interest
whether (direct or indirect) if any, at a meeting of the Board of directors. A
director is in a fiduciary position. A person in fiduciary position is not
permitted to obtain profit from his position except with the consent of his
beneficiaries or other persons to whom he owes the duty. In terms of
Section 300 an interested director shall not participate or vote in Boards
proceedings.
(D) Duty of Director etc. to make disclosure Section 305 imposes an
obligation on every director managing director, manager or secretary of a


company who is appointed to or relinquishes the office or director, managing
director, manager or secretary or any other body corporate (including foreign
company) shall within twenty days of such change, disclose to the company.
If he fails to do so, he shall be punishable with fine with may extend to five
thousand rupees.
(E) Duty of Directors to make disclosure of Shareholding Section 308
imposes an obligation that every director and every person deemed to be a
director by virtue of Sub-section (10) of Section 307 shall give notice, in
writing, of the matters relating to himself/herself as required under Section
307 of the Act. The Directors and deemed director(s) giving the notice shall
take all reasonable steps to secure that it is brought up and read at the
meeting of the Board next after it is given. Any person who fails to comply
with the provisions, shall be punishable with imprisonment for a term which
may extend to two years or with fine which may extend to fifty thousand
rupees or with both.
(F) Duty in connection with the general meeting the directors have to
convene statutory meeting, annual general meetings (AGMs) and also
extraordinary general meetings [Sections 165, 166 & 169]. The Companies
Act confers the duty of the preparation and placing at the annual general
meeting along with the balance sheet and profit and loss account, a report
on the companys affairs. The Boards report must also include a Directors
Responsibility Statement as provided under sub-section (2AA) of Section
217. Closely related thereto is the duty of authenticating and approving
annual financial statement under Section 215 of the Companies Act.
(G) To disclose receipt from transfer of property Section 319 of the
Companies Act provides that any money received by the directors from the
transferee in connection with the transfer of the companys property or
undertaking must be disclosed to the members of the company or the
amount shall be held by the directors in trust for the company. This money
may be in the nature of compensation for loss of office but in essence may
be on account of transfer of control of the company. But, if it is bona fide
payment of damages of the breach of contract, then it is protected by
Section 321(3). Even no director other than the managing director or whole
time director can receive any such payment from the company itself.
(H) To disclose receipt of compensation from transferee of shares Section
320 provides that if the loss of office results from the transfer (under certain
conditions) of all or any of the shares of the company, its directors would not
receive any compensation from the transferee unless the same has been
approved by the company in general meeting before the transfer takes
place. If the approval is not sought or the proposal is not approved, any
money received by the directors shall be held in trust for the shareholders
who have sold their shares.
Section 320 also provides that in pursuance of any agreement relating to
any of the above transfers, if the director receives any payment from the
transferee within one year before or within two years after the transfer, it
shall be accounted for to the company unless the director proves that it is
not by way of compensation for loss of office.


Section 321 further provides that if the price paid to a retiring director for his
shares in the company is in excess of the price paid to other shareholders or
any other valuable consideration has been given to him, it shall also be
regarded as compensation and should be disclosed to the shareholders. No
director can receive any such payment from the company itself.
(I) Duty to file declaration of Solvency Section 77A imposes an obligation on
the directors of the company in connection with passing special resolution
for buy-back of its own shares/securities to enquire into the affairs of the
company and form opinion about solvency of the company and to file
declaration of solvency in the prescribed form with affidavit.
(J) To make a declaration of solvency in the case of a Members voluntary
winding up (Section 488)
(1)Maintenance of books of account, audit, auditors report, directors report.
(2)Restriction on loans to directors and their associates.
(3)Certain powers to be exercised only at Board Meetings and certain powers to
be exercised with shareholders consent.
(4)Inspection and investigation into the affairs of the company.
(K) To file return of allotments Section 75 of the Companies Act, 1956 requires
a company to file with the Registrar, within a period of 30 days, a return of
the allotments stating the specified particulars. Failure to file such return
shall make the directors liable as officer in default. A fine up to Rs. 500 per
day till the default continues may be levied.
Besides the above, the Companies Act contains several provisions that are
aimed at directing the conduct and behaviour of the directors in relation to the
companies towards ethical standards, transparency and accountability. These are-
(1) Disclosure of shareholding dealings in the companys shares.
(2) Restrictions on remuneration and other benefits from the company.
(3) Restriction on holding of office or place of profit in the company by
themselves or their relatives and disclosure of information in connection
therewith.
Fiduciary and General duties:
The directors have several duties to discharge under the common law some of
which have been evolved by courts from time to time, having regard to the position of
directors in the company. Some of these duties are:
(1) Duty not to be negligent and not to commit or let others to commit tortuous
acts.
(2) Duty not to exceed powers.
(3) Duty to have regard to and act in the best interests of the company and its
stakeholders.
(4) Duty to creditors if business is conducted with intend to defraud them.


(5) Duty of confidentiality.
(6) Duty not to exercise powers for a collateral purpose.
(7) Duty not to misapply company assets.
(8) Duty not to compete with the company.
Some of the duties are discussed below at length.
1. Duty of good faith The directors must act in the best interest of the
company. Interest of the company implies the interest of present and future
members of the company on the footing that the company would be
continued as a going concern.
2. Duty not to make secret profits A director should not make any secret
profits even while selling his own property to the company as it would
amount to a breach of faith. He should also not exploit to his own use the
corporate opportunity. In Cook v. Deeks [1916] AC 554, it was observed that
men who assume complete control of a companys business must
remember that they are not at liberty to sacrifice the interest which they are
bound to protect and while ostensibly acting for the company direct in their
own favour business which should properly belong to the company they
represent.
If a property is acquired by the director in such capacity and he makes a
profit on re-sale of the same. Such profit would belong to the company and
he should account for such profit.
3. Duty to take care Justice Romer in Re City Equitable Fire Insurance
Companys case observed:
His (directors) duties will depend upon the nature of the companys
business, the manner in which the work of the company is distributed
between the directors and other officials of the company. In discharging
these duties a director must exercise some degree of skill and diligence. But
he does not owe to his company the duty to take all possible care to act with
best care. Indeed, he need not exhibit in the performance of his duties a
greater degree of skill than may reasonably be expected from a person of
his knowledge and experience. It is, therefore, perhaps another way of
stating the same proposition that directors are not liable for mere errors of
judgement.
Similar view was expressed in Lagunas Nitrate Co. v. Lagunas Nitrate Syndicate
[1899] 2 Ch. 392, in the following words:
If directors act within their powers, if they act with such care is to be reasonably
expected of them having regard to their knowledge and experience and if they
act honestly for the benefit of the company they discharge both their equitable as
well as legal duty to the company.
Reference can be made hereto Sections 201 and 633 of the Companies Act
which provides that any provision in the companys Articles or in any agreement that
excludes the liability of the directors for negligence, default, misfeasance, breach of


duty or breach of trust, is void. Where a director may be liable in respect of the
negligence, default, breach of duty, misfeasance or breach of trust but if he has acted
honestly and reasonably and having regard to all the circumstances of the case, he
ought fairly to be excused, the court may relieve him wholly or partly from his liability
on such terms as it may think fit.
4. Duty not to delegate - Director is an agent of the company and therefore is
bound by the maxim delegatus non potest delegate which means a
delegatee cannot further delegate. Of course, there are exceptions and a
director may, however, delegate in the following cases:
(a)Where permitted by the Companies Act (that is to say Section 297 permits
such delegation depending on the circumstances).
(b)Certain functions may be delegated to other officials of the company.
(c)Where authorised by the Articles of Association of the company.
(d)Where a director is authorized to delegate specific powers by a Board
resolution or a resolution passed in general meeting or by a Power of
Attorney executed under the common seal of the company.
7. LIABILITIES OF DIRECTORS
Under the Companies Act, 1956, the liabilities of company directors are
numerous. The directors have always to be on guard lest they should incur any
liability for any default or violation of any provision. Their civil and criminal liabilities
may be grouped under certain heads for convenience of consideration and
discussion. They are:
1. Liability to outsiders;
2. Liability to the company;
3. Liability to the shareholders;
4. Liability for statutory defaults and violations.
1. Liability to outsiders
Directors of a company may personally become liable to outside parties in the
following cases:
(a) When they enter into contracts on behalf of the company;
(i)if the contracts are ultra vires the company;
(ii)if they act outside the scope of their own authority;
(iii)if they act in their own name and not for and on behalf of the company;
Directors will be personally liable firstly if they contract in their own names
without disclosing that they are acting on behalf of the company. Where
a contract was being entered into by the company and not by the
director himself, the director should clearly state so that he is doing so
only as an agent or else the contract would be personal one and the
directors would be personally liable. But where all the contracts for
services were made in the name of the companies trading under their


trade names and the director sought to be made liable merely appended
his name to authenticate the contracts on behalf of the companies, he
could not be held personally liable. Further to make signatory director
liable there should have been a clear intention on the part of the parties
that the director should be a party to the contracts. In a particular case
there was no such indication. The company which he represented was
insolvent and, therefore, he was personally liable for breach of contract
[Cottrell v. Badgerhill Properties Ltd., (1991) BCL 805 (CA)].
Secondly, if the directors act beyond their powers, they will be personally
liable for damages, say, if he negotiates a loan which exceeds the limits
of the borrowing powers as laid down by the Memorandum of
Association or misrepresent to the bank that a resolution was passed
authorising him to sign cheques where in fact, he was not so authorised.
(b) When they issue a prospectus:
(i)in violation of the provisions of the Companies Act, 1956 and the SEBI
(Disclosure and Investor Protection) Guidelines;
(ii)which contains mis-statements(s);
(c) When they are found guilty of fraud;
(d) When they allot shares in an irregular manner;
(e) When their liability has been made unlimited under Sections 322 and 323 of
the Act. Section 322 provides that the memorandum of a company may
make the liability of any or all directors, or manager unlimited. In such cases,
the directors, manager and the member who propose person for
appointment to the office of director or manager, shall add to that proposal a
statement that the liability of the person holding that office will be unlimited,
and before the person accepts the office or acts therein, notice in writing that
his liability will be unlimited, shall be given to him by the following or one of
the following persons, namely, the promoters of the company, its directors,
manager, if any, and its officers.
A limited company may, if so authorised by its articles, by special resolution,
alter its memorandum so as to render unlimited the liability of its directors or
of any director. However, if the concerned director(s) is already holding
office on the date of alteration, the alteration making his liability unlimited
shall not have any effect till his term expires unless he accords his consent
thereto (Section 323).
(f) When the Court orders that the directors are personally liable for all or any of
the debts or liabilities of the company for fraudulent trading on the part of the
company.
2. Liability to the Company
The directors are liable to the company in the following cases:
(a) When they are negligent in the performance of their duty as directors and
the company suffers loss, etc. There are no set standards of skills and care
but only general principles which may be applied to determine whether a


director has been negligent depending on the facts of each case. It is not
possible or practical to take every possible care. [Lagunas Nitrate Co. v.
Lagunas Syndicate, (1899) 2 Ch 392: (1895-9) All ER Rep Ext 1349 (CA)]. It
is not negligence for a director to fail to attend the Board meetings and
thereafter not to ascertain the proceeding thereof [City Equitable Fire
Insurance Co. Ltd. Re, (Supra)]. Where in one case the directors delegated
their power to manage the company to a properly appointed managing
director who was able to dispose of the companys investments for his own
requirements, it did not amount to negligence [Re, City Equitable Fire
Insurance Co. Ltd., (1925) Ch 407 : (1924) All ER Rep 485 (CA)].
(b) When they commit an act which is ultra vires their powers or ultra vires the
company. [Re. Sharpe 1892 1 Ch. 154].
(c) When any illegal act or breach of trust is committed by them.
Liability under guarantee for companys debts
Where a director guaranteed his companys debts and his company became
liable as a guarantor of its subsidiary companys debts, it was held that the directors
guarantee would cover that debt also. The terms of the guarantee also covered the
contingent liability of the holding company for the debts of its subsidiary as these
liabilities cystralised [Bank of Scotland v. Wright, (1991) BCLC 244 (QBD)].
Where certain directors who had guaranteed the companys debts retired and
new directors were appointed in their place who also signed the guarantee bond and
there was no agreement to show that the earlier guarantee had ceased to be
operative it was held that all the directors including retired directors were liable jointly
and severally under guarantee. [Bank of Baroda v. Official Liquidator, (1992) 73 Com
Cases 688 (MP)].
A bank granted a temporary overdraft accommodation to a company for the
purpose of meeting its working capital requirements. The advance was granted on
the strength of a specific undertaking or promise made by the respondents, who were
the managing director and a director to liquidate within one month, the entire
outstanding in the account including costs and expenses. A decree passed against
the director and the managing director personally was held to be justified. They could
not get an order that recovery should not be out of personal assets. [Indian Overseas
Bank v. A.B. Senan (1999) 96 Com Cases 839 (Ker.)].
Liability in respect of companys debts
There is no provision in the Companies Act making the managing director of a
company personally liable for the companys debts. For ascertaining such liability, the
principles of agency shall apply to the transaction in question [Kundan Singh v. Moga
Transport Co. P. Ltd., (1987) 62 Com Cases 600 (P&H)].
Where directors deliberately dispose off their companys assets so as to make
them unavailable to pay the companys debts, the creditors affected cannot recover
damages from them (i.e. the value of the assets made unavailable) by suing them for
the tort of conspiracy, because the directors purpose is to benefit the company by
preserving the assets for its benefit, [Allied Arab Bank Ltd. v. Hajjar (No.2), (1988) QB
944].


The managing director of a company who executed the documents for obtaining
cash credit facility from a bank on behalf of the company would not incur any
personal liability for the loan obtained by the company. He is also not a necessary
party to suit by the bank against the company [Bank of Maharashtra v. Racmann
Auto Pvt.Ltd., (1992) 74 Com Cases 752, 755 (Del)].
Directors are liable for any misapplication of money to any ultra vires purpose
[Kathiawar Trading Co. Ltd. v. Virchand Dipchand, (1893) ILR 18 Bom 119]. A
shareholder can maintain an action against the directors to compel them to restore
funds of the company employed in ultra vires transactions, without making the
company a party to it [Jahangir Rustamji Modi v. Shamji Ladha, (1867) 4 Bom OC
185].
Where certain directors who had guaranteed the companys debts retired and
new directors were appointed in their place who also signed the guarantee bond and
there was no agreement to show that the earlier guarantee had ceased to be
operative, it was held that all directors including retired directors were liable jointly
and severally under the guarantee. [Bank of Baroda v. Official Liquidator (1992) 73
Com Cases 688 (MD)].
Directors are personally liable if they act beyond the powers delegated to them
even though the acts are not ultra vires the company [Re Oxford Benefit Building &
Investment Society, (1886) 35 Ch D 502].
In case of service contracts, directors are liable for damages if they breach the
express or implied terms of these contracts. The company can then recover the entire
amount of compensation for the loss suffered.
Liability for Personal Profits
The directors are liable to the company for all personal profits or gain made by them
taking advantage of their position as directors. A director is also liable in the following
circumstances:
(a) Diversion of the companys clientele to a business carried on by the director
himself, [Cook v. Deeks, (1916) 1 AC 554, 564: (1916-17) All ER Rep 285:
AIR 1916 PC 161].
(b) A director was held liable when a director patented and exploited in his own
name an invention made during the course of his employment with the
company [Cranleigh Precision Engineering Ltd. v. Bryan, (1964) All ER 289].
(c) A director is personally liable even after he ceases to be a director. If a
director makes an attempt to commit a breach of fiduciary duty while he is a
director and commits breach after resigning as a director, he remains liable
to the company for any profit he obtains from the transaction as a whole.
(d) Where a director receives commission from a supplier of goods to the
company, he is bound to repay the same to the company.
3. Liability to the Shareholders
The position of the directors in respect of the companys properties and the rights
conferred upon them to be exercised as directors is that of a trustee. If they commit


any breach of trust or indulge in wrongful uses of their rights and the company suffers
loss, they have to make good the loss. Similarly, if shareholders suffer loss due to the
negligence of the directors they are personally liable for the loss.
Right of shareholders to take action
When directors have acted mala fide or beyond their powers, the majority of the
shareholders must in such a case be held entitled to take steps to redress the wrong.
[Dr. Satya Charan Law v. Rameshwar Prosad Bajoria, (1950) 20 Com Cases 39, 48 :
AIR 1950 FC 133]. Even a single shareholder can proceed in such a case.
Rectification by Shareholders of ultra vires acts of the directors
If an act is ultra virus a company, i.e., beyond the powers laid down in the
memorandum, such act cannot be ratified by the general meeting. But where the act
is beyond the powers of the directors, but within the powers of the company, the
same can be ratified by the shareholders [Towers v. African Tug Co., (1904) 1 Ch
558]. However, ratification of a particular act by directors does not confer excess
powers on the directors for the future.
The directors are liable to compensate the company for loss suffered due to
transactions entered into beyond the powers of the company and in particular to
restore the value of the assets which have been disposed of in connection with the
ultra vires transactions [Land Credit Co. of Ireland v. Lord Fermoy, (1869) LR 8 Eq 7].
No individual shareholders can institute litigation in the companys name without
the consent/sanction of the general meeting. However, shareholders can pass an
ordinary resolution and stop proceedings against the company by directors who have
acted mala fide. It is a breach of their duties if directors wrongfully use information
say by speculating on shares, stating speculation loss/profit in Profit & Loss A/c.
Directors are liable for the profits they make on buying or selling the companys
shares by making use of the confidential information available with them as directors.
[Brophy v. City Service Co., (1974) 31 Del Ch 241 (USA)].
4. Liability for Statutory Defaults and Violations
Under the Companies Act, 1956, the directors are required to ensure compliance
with the several provisions of the Act and penalties have been prescribed for defaults
and/or non-compliance. The directors are liable for consequences in the following
situations:
(a) If, they issue a prospectus in contravention of Section 57 or 58 of the
Companies Act, 1956, they are liable to be punished with fine, which may
extend to fifty thousand rupees (Section 59).
(b) Pursuant to the provisions of Section 69 (5) of the Act, directors of a
company shall be jointly and severally liable to repay share application
money with interest at the rate of six per cent per annum from the expiry of
one hundred and thirtieth day after the first issue of the prospectus, if the
minimum subscription as stated in the prospectus has not been received by
the company.


(c) The directors of a company, according to Section 71 (3) of the Act, who
knowingly contravene, or willfully authorise or permit the contravention of
any of the provisions of Section 69 or 70 of the Act with respect to the
allotment of shares or debentures, shall be liable to compensate the
company and the allottee respectively for any loss, damage or costs which
the company or the allottee may have sustained or incurred thereby.
(d) Section 73 (2) and (2A) of the Act lays down that the directors of a company
shall be jointly and severally liable to repay the share application money with
interest at the rate of 15% presently prescribed, from the expiry of the eighth
day from the day the company becomes liable to repay it.
(e) The directors are liable under Section 207 of the Act to be punished with
simple imprisonment for a term which may extend to three years and shall
be liable to a fine of one thousand rupees for every day, if they fail to
distribute dividend within thirty days of its declaration by the shareholders.
(f) Directors knowingly contravening the provisions of Section 300 of the Act by
participating and/or voting in Board proceedings relating to any contract or
arrangement in which they are interested or concerned, shall be liable for
punishment which may extend to fifty thousand rupees as per Sub-section
(4) of the said Section.
(g) Sub-section (4) of Section 299 declares that every director who fails to
comply with the provisions of Sub-section (1) or (2) of Section 299 with
regard to disclosure of their interest at Board meetings, shall be liable to
punishment which may extend to fifty thousand rupees and also he vacates
the office of director automatically under Section 283(1)(l).
(h) The directors of a company, who are knowingly party to any contravention of
the provisions of Sub-section (1) or (3) of Section 295 of the Act, which deal
with loan to directors without the previous approval of the Central
Government, shall be liable to punishment either with fine which may extend
to fifty thousand rupees or with simple imprisonment for a term which may
extend to six months.
There are numerous other provisions in the Companies Act, for default or
violation whereof the directors are liable to varying degrees of punishments and fines
or both.
Liability under other Corporate Laws
Apart from the directors liability for violations of the Companies Act, they are also
liable for violation of the provisions of other corporate laws, important among them
being: Income-tax Act and the Rules, Sales-Tax Act and Rules, Central Excise and Salt
Act and the Rules, Customs Act and the Rules, Foreign Exchange Management Act.
Negotiable Instrument Act, 1881 and the Rules, Provident Fund Laws, Employees
State Insurance Laws and various industrial and labour laws. The managing director
and the members of the Board of directors can be prosecuted under environmental
laws like the Water (Prevention and Control of Pollution) Act, 1974.
A managing director is a principal officer and is liable under the Income-tax Act
for false verification of an income tax return [M.R. Pratap v. V.M. Muthukrishnan,


I.T.O. Central Circle III, Madras, (1992) 74 Com Cases 400, 406]. Where there was a
false statement in verification under the Income-tax Act, it was held that the complaint
against a nominee directors was justified [J. Sethuraman v. IAC of IT, (1992) 74 Com
Cases 815 (Mad)].
Section 18 of the Central Sales Tax Act provides that the directors of a private
company which is being wound up are liable for the sales tax dues of the company if
the same cannot be recovered from the company itself. [P. Chockalingam v. Deputy
Commercial Tax Officer, (1990) 68 Com Cases 707, 710 (Mad)].
Directors Liability for Acts of Co-directors
A director is an agent of the company and not of other members of the Board.
Anything done by the Board cannot make a director liable who did not know that
action and did not participate in it, even if he attends the subsequent meeting at
which the minutes recording the wrongful action of the earlier meeting are confirmed.
A director could not be liable for the misconduct of another director unless he has
joined with him in the perpetration of the wrong or has omitted to thwart the wrong
due to his negligence [Life Insurance Corporation v. Haridas Mundra (1966) 26 Com.
Cases 371 (D.B.) (AII)]. In the absence of reasonable grounds for suspicion, a
director cannot be held liable for the fraudulent acts of co-director on the ground that
he ought to have discovered the fraud [Dovey v. Cory (1901) A.C. 477]. Thus, a
director was not held liable for payment of dividends on false accounts declared at a
meeting where the director to be made liable was absent. [Negendra Prabhu v. the
Popular Bank ZLR (1961) 1 Ker. 340].
However, the position of managing director or the chairman of the Board is
different. He cannot say that he signed the accounts without understanding the
implications of its entries [Official Liquidator v. Shri Krishna Prasad Singh (1969)
Comp. L.J. 327].
The Managing Director of the company has no authority to use the funds of
the company for illegal purposes like giving bribes. Even if the company has
benefited from the contract, he has no right to change the company for his illegal
activities. The company can recover the money [Hannibal (E) & Co. v. Frost 1988 4
BCC 3 (CA)].
Criminal Liability
Finally, directors may incur criminal liability either at common law, or under any
statute, notably the Companies Act or the Indian Penal Code. Under the Companies
Act, criminal proceedings against directors may be instituted in pursuance of the
following sections, among others, resulting in imprisonment :
(a) Section 44(4) Filing of prospectus containing untrue statements two
years imprisonment and/or fine upto Rs. 50,000.
(b) Section 58A(6)(b) Inviting deposits in contravention of the Rules, or
manner or conditions five years imprisonment and fine.


(c) Section 58A(10) Failure to repay deposits as ordered by the
CLB/Tribunal
*
Three years imprisonment and fine.
(d) Section 63 Criminal liability for mis-statement in prospectus
imprisonment upto two years or fine upto Rs. 50,000 or both.
(e) Section 68 Fraudulently inducing persons to invest money
imprisonment upto five years, or fine Rs. 1,00,000.
(f) Section 73 Failure to repay excess application money imprisonment
upto one year and fine upto Rs. 50,000.
(g) Section 105 Concealing name of creditor imprisonment upto one year
or fine or both.
(h) Section 202(1) Undischarged insolvent acting as director imprisonment
upto two years or fine upto Rs. 50,000 or both.
(i) Section 207 Default in distributing dividends imprisonment upto 3
years and fine upto Rs. 1,000 for every day.
(j) Section 209A Failure to assist Registrar or any officer so authorised by
the Central Government in inspection of books of account, etc.
imprisonment upto one year and fine not less than Rs. 50,000.
(k) Section 210(5) Failure to lay balance sheet etc. at annual general
meeting imprisonment upto six months or fine upto Rs. 10,000 or both.
(l) Section 211(8) Failure to comply Section 211 regarding form of balance
sheet and matters to be stated imprisonment upto six months or fine upto
10,000.
(m) Section 217(5) Failure to attach to balance sheet a report of the Board
imprisonment upto six months for each offence or fine upto Rs. 20,000 or
both.
(n) Section 221(4) Failure to supply information to auditor imprisonment
upto six months, or fine upto Rs. 50,000 or both.
(o) Section 250(9) Improper issue of shares imprisonment upto six months
or fine upto Rs. 50,000 or both.
(p) Section 293A(5) Contribution to political parties in contravention of
Section 293A three years imprisonment and fine.
(q) Section 295 (4) Grant of loan to directors Simple imprisonment upto
six months or fine upto Rs. 50,000.
(r) Section 308(3) Failure to disclose shareholdings imprisonment upto
two years or fine upto Rs. 50,000 or both.
(s) Section 372A Giving loans to other bodies corporate in excess of the
limits prescribed under Section 372A imprisonment upto two years or fine
upto Rs. 50,000.
(t) Section 407(2) Acting as director after removal by Court imprisonment

*
Substituted for Company Law Board by the Companies (Second Amendment) Act, 2002, w.e.f. a date
yet to be notified.


upto one year, or fine upto Rs. 50,000 or both.
(u) Section 488(3) False declaration of companys solvency imprisonment
upto six months or fine upto Rs. 50,000 or both.
Offences under the Indian Penal Code generally relate to frauds, prejury,
misappropriation or embezzlement of funds, conspiracy to defraud, etc. Most of these
offences are now covered by the Companies Act.
It may be noted that any provision in the articles, agreement or any other
instrument indemnifying a director against any liability is void except as provided in
proviso to Section 201.
In some of the sections stated above, for example Section 58A(6)(b), 73 etc. a
director may become liable only if he is an officer in default.
Liability as an Officer in Default
The Companies Act, 1956, in a number of sections uses the term officer in
default when affixing a person with liability for offences, i.e., if default is made in
complying with a section, the company and every officer of the company who is in
default shall be guilty of an offence under that section. This is followed by the
specified penalty consisting of fine or fine and imprisonment in certain cases. It is in
the context of prosecution that determination of officer who is in default becomes very
important and essential. Under Section 5 of Companies Act which provides the
definition of an officer in default, apart from a managing director, whole time director,
an ordinary director will also many a times come within the net of an officer in default.
The section provides that:
For the purpose of any provisions in the Companies Act which enacts that an
officer of the company who is in default shall be liable to any punishment or penalty,
whether by way of imprisonment, fine or otherwise, the expression officer who is in
default means the following officers of the company namely:
(a) the managing director or managing directors;
(b) the whole-time director or whole-time directors;
(c) the manager;
(d) the secretary;
(e) any persons in accordance with whose directions or instructions the Board
of directors of the company is accustomed to act;
(f) any person who is charged by the board with the responsibility of complying
with that provision.
Provided that the person so charged has given his consent in this behalf to
the Board(Consent to be filed in Form 1AB);
(g) Where any company does not have any of the officers specified in clauses
(a) to (c), any director or directors who may be specified by the Board in this
behalf or where no director is specified all the directors.
Provided that where the Board exercises any powers under clause (f) or


clause (g), it shall, within thirty days of the exercise of such powers, file with the
Registrar a return in the prescribed form (form prescribed is e-Form 1AA).
It may be noted that managing director(s) whole-time director(s) and manager
have been specified as officers in default in clauses (a), (b) and (c) respectively. In
case of companies which do not have any of the officers specified in clauses (a) to
(c), any director or director specified by the Board will be held as officer in default.
Further, if there is no officers as mentioned in clauses (a) to (c) and also no
director(s) is/are specified by the Board, then all the directors (the word all is not
qualified it may include employee director, part time director, etc.) will be officers in
default.
The effect of this provision is that professional managers like Managing Directors,
Managers, Whole-time directors or Secretary will be regarded as officers in default
without any further inquiry [Ravindra Narain v. Registrar of Companies (1994) 81
Comp Cas 925 Rajasthan]. This category will also include those in accordance with
whose directions or instructions the Board of directors is accustomed to act. For the
rest it would have to be shown that they were under responsibility. Further, persons
who have been designated can be prosecuted only by showing their connection with
management and default on their part [R. Banerjee v. H.D. Dubey, (1992) 75 Comp
Cas 722 SC]. It must be alleged in the complaint that the director proceeded against
was a director at the material time and had knowledge of the default [Registrar of
Companies v. Bipin Behari Nayale, (1995) 83 Comp Cas 95 Orissa].
Section 5 stated above makes it clear that all the seven specified categories of
officers of the company would be deemed to be officers who are in default
irrespective of whether they were a party to the default or not. In other words, it is
enough to show that a statutory provision has not been complied with in order to
bring them under the mischief of the section.
It is however pertinent to note that Section 5 applies only to those provisions of
the Companies Act which use the expression Office who is in default or the like. In
cases where a different expression is used Section 5 shall have no applicability and
the element of mens rea unless specifically prohibited would have to be adhered to.
An analysis of the provisions of Section 5 reveals the following:
1. Under the section, liability as officer in default is fastened on all the officers
specified in clause (a) to (g) collectively.
2. Element of mens rea i.e. the guilty mind has been dispensed with by
deleting the expressions knowingly guilty and who knowingly or wilfully
authorises or permits such default; which had been a strong ground of
defence in cases of prosecutions under the Act.
3. If any of the officers specified in clauses (a) to (c) are appointed, the
directors will not be held as officers in default. Thus, in the case of a public
company or a private company which is a subsidiary of a public company
having a paid up share capital of rupees five crore or more, ordinary
directors may actually never be liable under Section 5 for as per the
amended Section 269 read with relevant notification such companies are
statutorily required to appoint a managing director or whole-time director or


manager.
4. Though Managing director(s)/Whole-time director(s) and Manager have
been specified as officers in default in clause (a), (b) and (c) respectively, it
may be highlighted that according to Section 197A of the Companies Act a
company cannot at the same time appoint or employ a managing director as
well as a manager.
5. The new definition has increased the responsibility of a Secretary [clause
(d)] by bracketing him alongwith the managerial personnel. Thus a secretary
has to be more vigilant in the matter of compliance of various provisions
under the Companies Act where his personal involvement can be presumed
or specifically prescribed.
6. In case of companies which do have any of the officers specified in clause
(a) to (c), any director or directors specified by the Board will be held as
officers in default.
7. Further, if there is no officer as mentioned in clause (a) to (c) and also the
director(s) as mentioned in previous para is/are not specified by the Board,
then all the directors (the word all is not qualified it may include, employee
director, part-time director, nominee director, etc.) will be officers in
default.
8. Clause (e) refers to any person in accordance with whose directions or
instructions the Board of the company is accustomed to act. Such a person
is included in the definition of officer given in Section 2(30) though
professional advisers are excluded by Section 7 from this category of
persons. Perhaps the situation envisaged in this clause may arise inter alia
when the directors on the Board of a company are infact dummy
persons and any of the persons who remain behind the scenes may
control the acts of directors. Such a person may perhaps include a
company or firm, in which case the directors of the other company or
partners of that firm would be treated as persons in accordance with whose
directions or instructions the Board of directors of the other company are
accustomed to act. Practically, however, it may be difficult to decide who
such persons are.
9. The expression any person charged by the Board under clause (f) refers to
only officers of the company and not to the subordinate staff for according to
the opening sentence of Section 5 the expression officer in default means
all the officers of the company as stated in the various clauses.
Further for a person to be brought within the purview of clause (f) the
fulfilment of the following two conditions is essential : (a) the Board should
charge a person with the responsibility of complying with any specific
provision(s) by passing a resolution and (b) the person so charged is
required to give the consent in Form 1AB as prescribed under Rule 4BB of
the Companies (Central Governments) General Rules and Forms 1956.
Thus where a company has not obtained the consent of the person as
prescribed, he cannot be charged by the Board with the intended
responsibilities.
10. The proviso to clause (g) provides for filing of return to the Registrar by the


Board if it has exercised its authority under clause (f) and (g) within 30 days
of the exercise of such power.
11. Where the board specifies any person to be responsible for observance of
particular provision, the consent of such a person should be taken and
should be filed with the Registrar within 30 days in Form No.1AA.
8. COURTS POWER TO GRANT RELIEF IN CERTAIN CASES
Section 633 of the Act gives the Court the power to relieve a director of any
liability which he may incur under the law. The object of the section is to provide
protection against undue hardship in deserving cases. For getting the relief, the
section provides that the Court must be satisfied that the defaulting director acted
honestly and reasonably and that having regard to all the circumstances of the case
he ought fairly to be excused. This satisfaction however, must be reached after a
serious and careful consideration of the whole question that the director did act
honestly and reasonably [Coal Marketing Co. of India (P) Ltd., in Re. (1967) Comp.
L.J. 237].
In the case of Hemal A. Kanuga & Ors. v. Registrar of Companies [(2008) 143
Comp Cas 8 (Guj)], while granting officers relief to the directors of the company, the
court was of the view that all due care and caution in complying with the provisions of
the Act has been taken and even if there may be minor lapses, those were required
to be condoned. For minor lapses and defaults of technical nature, to prosecute the
company and its highest ranking officers was not just and proper.
Section 633 (1) of the Companies Act, 1956, provides that if in any proceedings
for negligence, default, breach of duty, misfeasance or breach of trust against a
director of a company it appears to the Court hearing the case that he is or may be
liable in respect of the negligence, default, breach of duty, misfeasance etc. but that
he has acted honestly and reasonably the Court may relieve him, wholly or partly
from liability, he ought fairly to be excused having regard to all the circumstances of
the case including those connected with his appointment. [Tri-sure India Ltd. in Re.
(1983) 54 Comp. Cas. 197 (Bom.)].
In case of criminal proceedings the Court, has, however, no powers to grant relief
from any liability which may attach to the directors in respect of the negligence,
default, breach of duty, misfeasance or breach of trust.
The section also provides for seeking anticipatory relief from the High Court
where the director has reason to apprehend that any proceedings will or might be
brought against him in respect of negligence, default, breach of duty, misfeasance or
breach of trust. The High Court on such application shall have the same power to
relieve him as it would have had if it had been a Court before which proceedings
against the director for negligence, default, breach of duty, misfeasance, breach of
trust had been brought under Sub-section (1) above.
The section, thus, operates in two states. The High Court can grant anticipatory
relief and if a case is actually initiated, only court before which the compliant or trial is
going on can grant relief [Sri Krishna Prashad v. Registrar of Companies (1978) 48
Comp. Cas. 397 (Delhi)].
The granting of relief under Section 633 is discretionary. It may be partial or


complete, or on certain terms or unconditional [Ramkrishan Dalmia v. Registrar of
Joint Stock Companies, Delhi (1962) 32 Comp. Cas. 341].
Before granting relief the Court is required to serve notice on the Registrar and
on such other person, it may think necessary, to show cause why such relief should
not be granted. In Beejay Engineers (P) Ltd. in Re. (1983) 53 Comp. Cas. 918 the
Delhi High Court held that the Section 633 does not limits, restricts or confines its
operation to a liability arising out of negligence, default, breach of duty, misfeasance
or breach of trust under this Act alone. Protection under this section will be equally
available to an officer of a company against liability to be proceeded against for
negligence, etc. even under other Acts so long as it is with regard to the affairs and
functioning of the company.
It is worth noting, however, that the same High Court has in a later judgment of
Savannah Prasar Jhalani v. Regional Provident Fund Commissioner (1987) 62
Comp. Cas. 571, disagreed with the view taken in Beejay Engineers (P) Ltd. and held
that:
After examining the various provisions of the Act and some other Acts, it
appears to me that perhaps this decision i.e. Beejay Engineers (P) Ltd. needs
reconsideration. Section 633 cannot be panacea for all the ills, i.e. defaults/offences
committed in respect of various other enactments, those already in force and those
which will came on the statute book at a subsequent date. An act may not have been
an offence when the act was enforced and it is, therefore, difficult to see how the Act
could become applicable in that case and when particularly the other Act defining the
offence itself provides punishment for offences/defaults committed by the company.
To illustrate, Section 276C was introduced in Chapter XXII relating to offences and
prosecutions in the Income-tax Act, 1961 w.e.f. 1
st
October, 1975.
This question came up for consideration before the Supreme Court in the
case of Rabindra Chamaria v. Registrar of Companies C.A. No. 3012 of 1990
decided on 19.11.1991 wherein the Supreme Court discussed the appeal and
held that relief under Section 633 cannot be extended in respect of any liability
under any Act other than the Companies Act, 1956. The Court further held that
the expression and proceeding occurring in Section 633 cannot be read out of
context and be treated in isolation of the penal provisions of the Companies
Act. If that were so, penal clause under the various other Acts would be
rendered ineffective by application of Section 633. If the Parliament intended
Section 633 to have a coverage wider than that of the Act, it would have
specifically provided for it as it is a sound rule of construction to confine the
provisions of a statute to itself. While referring to any proceeding under Sub-
section (2) Parliament intended to restrict it only to proceedings arising out of
negligence, default, breach of trust, misfeasance or breach of duty in respect of
duties prescribed under the provisions of the Companies Act. Section 633(2)
cannot apply to proceedings against an officer of the company to enforce
liability arising out of violation of other statutes. The fact that notice is required
to be given to the Registrar of Companies under Sub-section (3) is an
indication that the powers under Sub-section (2) must be restricted in respect
of proceedings arising out of violation of the Companies Act, 1956.


In the case of Farouk Irani v. Registrar of Companies [(2009) 1 Comp LJ 112
(Mad.)], it was held that the powers vested upon the court under Section 633 of the
Companies Act, 1956, to grant the relief is, firstly, discretionary. Secondly, the
petitioners have to satisfy to satisfy the following conditions stipulated under
Section 633(1) of the said Act:
(1) the lapse or offence alleged must be one of the kinds mentioned in
Section 633(1);
(2) the applicant must be shown to have acted honestly and reasonably; and
(3) the court is in a position to conclude or render the finding with regard to all
the circumstances of the case that the officer ought to be excused fairly.
9. COMPOUNDING OF CERTAIN OFFENCESSECTION 621A
In the context of liabilities of directors, the provision regarding compounding of
offences is also of special reference. Section 621A of the Companies Act seeks to
compound offences punishable under the Act whether committed by the company or
any officer thereof, not being an offence punishable with imprisonment only or with
imprisonment and also with fine. In other words, three kinds of offences are permitted
to be compounded under this section. The first one relates to an offence which says
that an offence is punishable with fine only; the second one relates to offence which
states that an offence is punishable with imprisonment or fine; and the third one
relates to an offence which is punishable with imprisonment or fine or with both.
Imprisonment is not compulsory. An offence punishable with imprisonment only or
with imprisonment and fine is not compoundable under this section. The section
empowers the CLB to compound offences without any limit or where a maximum
amount of fine which may be imposed by an offence does not exceed Rs. 50,000 it
may be compounded by the Regional Director. (The powers of the Regional Directors
have been proposed to be withdrawn).
The offences committed by a company or its officer within a period of three years
from the date on which the similar offence was committed by it or him was
compounded under this section, are not compoundable.
An application for compounding of an offence is required to be made to the
Registrar who shall forward the same together with his comments thereon to the CLB
or the Regional Director, as the case may be. Where an offence is compounded no
prosecution lies. Clause (c) of Sub-section (4) [proposed to be renumbered as (3)]
permits the compounding of any offence before the institution of any prosecution.
However, for offences punishable with imprisonment or fine or both, there is no
getting away from launching prosecution before the magistrate. According to
clause (a) of Sub-section (7) [proposed to be renumbered as (6)] of Section 621A any
offence which is punishable with imprisonment or with fine, or with both can be
compounded with the permission of the Court.
In the case of Amadhi Investments Ltd., In re. [(2009) 149 Comp Cas 617 (CLB)],
during inspection of the records of the petitioner company by the officers of the


Ministry of Corporate Affairs under Section 209A of the Companies Act, 1956, some
contraventions of the Act were identified. By three applications before the Registrar of
Companies, the Company and its officers sought compounding of offences for
violation of the Act and the applications were listed before the Company Law Board.
The applications were opposed by the Registrar of Companies alleging involvement
of the company in a demat scam. It was held that the show cause notices issued by
the Registrar of Companies contained a sentence to the effect that the offences were
compoundable under Section 621A of the Act and the party could compound the
offence if it so desired. The Registrar could not change his stand at the time of
compounding of the offence by the Board as such power was not given to the
Registrar by Parliament. So, the offences of the company were compounded and the
Registrar was advised to invite applications from the officers in default for
compounding of offences.
10. MONITORING AND MANAGEMENT
The persons concerned with the working of a company may be divided into two
groups - (1) the managerial persons who formulate and guide the policies of the
company and monitor the administration of its business and (2) the administrative
staff which attends to the day to day work of the office and the functions of the
companys business in accordance with the decisions of the managerial person(s).
(1) The managerial persons include the following :-
(a)Directors
(b)Managing director(s) or/and whole time director(s)
(c)Manager
They work under the control and supervision of the Board of Directors. They
are assisted by company secretary, statutory auditors, (financial and
costing), internal auditors, legal advisors and other consultants
(technical or otherwise) etc. Under Section 197A of the Act,
simultaneous appointment or employment of Managing Director and
Manager is prohibited. Under Section 292A of the Act an Audit
Committee is required to be constituted by every public company having
paid up share capital of rupees 5 crore or more for monitoring financial
function thereof. A listed company has to constitute, in addition to Audit
Committee, Remuneration Committee, Shareholders Investors
Grievance Committee and Management Committee.
The appointment of directors, managing/whole time director(s) or manager is
to be made in accordance with the provisions of the Act and the
companys memorandum and articles. The Board of directors may
distribute the executive functions of the company to the qualified and
experienced persons as heads of production, purchase, sale,
administration legal etc, for monitoring the overall working of the
company various committees like Project committee, Capital
Expenditure Committee, Works Committee, Finance Committee,
Administration Committee may be constituted.
(2) The Administrative staff works under the heads of departments like


production, marketing, purchase, accounts, legal, personnel, taxation,
secretarial, research and development, advertisements, establishment,
labour, etc. in accordance with the decisions of the Board of directors and
authority delegated to managing/whole-time director(s) or manager or any
other chief executive officer of the company.
In accordance with the inclusive definitions provided by Section 2(30) of the
Act, officer includes any director, manager or secretary or any person in
accordance with whose directions or instructions the Board of Directors or
any one or more of the directors is or are accustomed to act. However, the
Board of directors of the company is collectively responsible for its working.
All directors are singly and jointly liable for all acts of commissions and
omissions done in managing the affairs of the company, unless any
individual director or officer is made responsible for a particular function by
delegation of authority. As such, the managing/whole-time director(s) or
manager shall be accountable for the functions delegated to them by the
Board of directors and for default, contravention or non-compliance, they are
personally liable until they prove their bona fide.

LESSON ROUND-UP
Subject to the restrictions contained in the Act, Memorandum and Articles, the
powers of directors are co-extensive with those of the company itself.
In some exceptional cases, the general body of shareholders is competent to act
even in matters delegated to the Board.
Certain powers are exercisable only at Board Meetings and certain powers are
exercisable with the approval of company in general meeting.
Without obtaining the previous approval of the Central Government, a company
cannot make any loan to or give any guarantee or provide any security in
connection with the loan made by or to any person specified u/s 295(1).
Under Section 297 of the Act, consent of Board of directors is required for certain
contracts in which particular directors are interested. However, it is not applicable
to certain transactions as specified under the provisions of the Act.
Every director of a company who is in any way interested in a contract or
arrangement shall disclose the nature of his concern at a meeting of the Board of
directors u/s 299 of the Act.
An interested director is prohibited from participating in the discussion of or voting
or, any contract or arrangement entered into or to be entered into by or on behalf
of the company in which his presence shall not be counted for the purpose of
forming of quorum at the time of such discussion u/s 300 of the Act.
The Companies Act, 1956 has imposed certain duties and obligations on the
directors. In addition to those, directors are bound by some fiduciary and general
duties under the common law.
The liabilities of directors are numerous under the Companies Act, 1956.
Under Section 621A, Central Government is empowered to compound offences.



SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to be
submitted for evaluation).
1. State the matters that may be transacted only at Board Meetings?
2. What powers can be exercised by the Board with the consent of members in
general meeting?
3. Discuss the liabilities of directors to the company and to outsiders for their
acts.
4. Directors are not only agents but are also in some sense trustee of the
company. Discuss.
5. State the provisions of the Companies Act relating to housing loans and
other loans to directors.
6. Discuss the duty of a director to disclose his interest in contracts to be
entered into by the company. What are the consequences of non-
disclosure?
7. Write short note on :
(i)Ultra-vires borrowings.
(ii)Political contribution.
(iii)Compounding of offences.


Suggested Readings:
(1) Company DirectorC.R. Datta
(2) Guide to the Companies ActA. Ramaiya


















STUDY XVI
MANAGEMENT AND CONTROL OF COMPANIES-III
MANAGING DIRECTOR, WHOLE-TIME DIRECTOR AND MANAGER

LEARNING OBJECTIVES
This study deals with the definitions, appointment, removal, powers etc. of Managing
Director, Whole-time Director and Manager in a company.
The study covers the following topics:-
Managing director
His appointment, removal, qualifications, powers and duties
Executive Directors/Whole-time Director
His appointment, powers, duties and liabilities
Manager
Their appointment, disqualification, etc.
Remuneration, powers, duties and liabilities of Managing Director
Chairman, his appointment, removal, duties and responsibilities.

1. MANAGING DIRECTOR
Definition
Section 2(26) of the Companies Act, 1956, defines 'managing director'. It stipulates
that a Managing director means a director who, by virtue of an agreement with the
company or of a resolution passed by the company in general meeting or by its Board
of directors or by virtue of its memorandum or articles of association, is entrusted with
substantial powers of management which would not otherwise be exercisable by him,
and includes a director occupying the position of a managing director, by whatever
name called. The sub-section further states that a managing director shall exercise his
powers subject to the superintendence, control and directions of the Board of directors.
The sub-section excludes from the sphere of substantial powers to be exercised by the
managing director the administrative acts of a routine nature when so authorised by the
Board such as the power to affix the common seal of the company to any document or
to draw and endorse any cheque on the account of the company in any bank or to draw
and endorse any negotiable instrument or to sign any certificate of share or to direct
registration of transfer of any share.
The managing director of a company filed a suit on behalf of the company
against the tenants and the trial court granted decree directing the tenants to
vacate and deliver possession of the tenanted premises. The court also
directed payment of damages and, in default, to pay interest. The tenants filed
an application and contended that in the instant case, the managing director,
who had filed suit, had no proper authorization from the board of directors. The
Court dismissed the application of the tenants and held that the words
substantial powers of management specifically excludes certain acts from its
purview. Therefore, except the excluded acts, the managing director has power
606


and privilege of conducting the business of the company in accordance with
the memorandum and articles of association of the company. The institution of
the suit on behalf of the company by the managing director is deemed to be
within the meaning of substantial powers of management, since such a power
is necessary and incidental to manage the day-to day affairs and business of
the company. Therefore, by virtue of provisions of section 2(26), the suit
instituted by the managing director is deemed to be within his power and
authority. The suit was obviously filed for the benefit of the company. In that
view of the matter, the contention that the managing director had no authority
to file a suit is untenable and the same is rejected. [Wasava Tyres v. Printers
(Mysore) Ltd. (2008) 86 SCL 171 (Kar)].
In G. Subba Rao v. Rasmi Die-Casting Ltd. [1998] 93 Comp. Cas. 797, the
Andhra Pradesh High Court held that from the definition of managing director as per
Section 2(26), it is clear that the managing director has to act under the
superintendence, control and direction of the Board of directors. Moreover, powers of
routine administrative nature like the power to affix the common seal to draw and
endorse any negotiable instrument do not fall within the substantial powers conferred
upon the managing director. What is to be seen is whether the managing director
making any representation for and on behalf of a company had in fact, actual
authority either in terms of the provisions of the constitution of that company or by
virtue of the delegation by the Board of directors.
A managing director must hold and continue to hold the office of director. A
managing director is first a director and then a managing director with certain
additional powers [Shanta Shamsher Jung Bahadur v. Kamani Brothers P. Ltd.
(1959) 29 Comp Cas 501 (Bom)]. A managing director is an ordinary director
entrusted with special powers. If a company wants to appoint a person as managing
director, who is not a director of the company, he has first to be appointed as an
additional director in accordance with the provisions of Section 260 of the Act. He
shall also be bound in accordance with provisions of Section 270 of the Act to obtain
his qualification shares if any, prescribed by the articles of association of the
company, within two months of his appointment as director, the nominal value
whereof shall not exceed five thousand rupees or the nominal value of one share, if it
exceeds rupees five thousand.
A managing director of a limited company may have a dual capacity. He may
both be a director as well as an employee. Where he is so employed, the relationship
between him as the managing director and the company may be similar to a person
who is employed as a servant or an agent, for the term employees is not large
enough to cover any of these relationships. The nature of his employment may be
determined by the articles of association of the company and/or the agreement.
A director entrusted with managerial functions will be a managing director even
though he may be called as technical director or technical advisor (Fourth Annual
Report - year ended 31st March, 1960).
Appointment
A managing director is generally appointed by the companys Board of directors,
which is, generally authorised by the articles. In Nelson v. James Nelson & Sons,
(1914) 2 KB 770: (1914-15) All ER Rep 433 CA, Swinfen Eady, LJ. Said: Unless


there is a power given to the directors by the articles to appoint a managing director,
it is not competent for them to make such an appointment. The articles may give a
power to the directors to appoint one of their members to be managing director.
Where the power to appoint a managing director is vested in the Board, the members
cannot exercise it. [Thomas Logan Ltd. v. Davis, (1911) 104 LT 914, affirmed (1911)
105 LJ 419 (CA)]. It was held in an old English case that where the articles do not
contain any provision enabling the Board of directors to appoint any managing
director, it is quite beyond the powers of the directors to appoint a third person, even
if qualified to be a director of the company at a specified salary as managing director
[Boschoek Proprietary Co. v. Fuke, (1906) 1 Ch 148]. However, Section 2(26)
expressly authorises the Board of directors without requiring to have a provision in
the Articles. If the articles vest the power in the shareholders the appointment must
be made by the shareholders.
The Department of Company Affairs (now Ministry of Corporate Affairs) has
clarified that a managing director may be appointed in any one of the five ways,
namely,
1. By virtue of an agreement with the company.
2. By virtue of a resolution passed by the company.
3. By virtue of a resolution passed by the Board of directors.
4. By virtue of the memorandum of association.
5. By virtue of the Articles of Association.
With effect from 18.9.1990, it is obligatory for a public company or a private
company which is a subsidiary of a public company having a paid-up share capital
of rupees five crores or more, to appoint a managing director or whole-time director
or manager [Section 269(1) read with Rule 10A of the Companies (Central
Governments) General Rules and Forms, 1956].
Sub-Section (2) of Section 269 provides that no appointment of a person as a
managing director (or whole-time director or manager) in a public company or a
private company which is a subsidiary of a public company shall be made except with
the approval of the Central Government. However, approval of the Government is not
necessary if the appointment is made in accordance with the conditions specified in
Parts I and II of Schedule XIII (the said parts being subject to the provisions of Part III
of the said schedule) and a return in the prescribed form viz.
e-Form 25C is filed with Registrar within 90 days from the date of such appointment.
A joint venture agreement creating a company under arrangement of fifty-fifty
shareholding and for appointment of managing director turn by turn under consent,
concurrence and opinion of both parties, the High Court of Delhi refused to interfere
on the allegation of one venturer that the other had usurped his turn in appointing the
managing director without mutual consent and concurrence. The Court said that a
stay order could have been granted only if the appointment in question would have
caused irrepairable damage to the interest of the complaining joint venturer who had
also referred the matter to arbitration for determining the respective rights of the
parties under their joint venture agreement. The Court also refused to stay a general
meeting of shareholders for approval of the appointment. [Suzuki Motor Corpn. v.
U.O.I. (1997) 4 Comp. L.J. 173; 27 CLA 166 (Del)].


Appointment with the Approval of Central Government
In case the provisions of Schedule XIII (Refer Annexure I to III) cannot be fulfilled
by company, an application seeking approval to the appointment of a managing
director (Whole-time director or manager) shall be made to the Central Government,
in revised Form, e-Form No. 25-A.
While according its approval, the Central Government should be satisfied that:
(i) the managing (or whole-time director or manager) is in its opinion a fit and
proper person to be appointed, or such appointment is in the public interest;
or
(ii) the term and conditions of the appointment of managing director (or whole-
time director or manager) are fair and reasonable [Section 269 (4)].
The powers under Sections 269, 198, 637AA is a quasi-judicial function and not
an administrative one [Cibatul Ltd. v. Union of India, (1980) 50 Com Cases 437]. The
Central Government while performing the duty, has to take into account the objective
and facts and to determine those facts in a quasi-judicial manner. Granting or
withholding of approval is the function of the Central Government and it is for the
government to come to a conclusion keeping in view the statutory provisions. If such
a conclusion has been arrived at by taking into consideration, matters which are
relevant, it will be not for the court to upset that conclusion.
The Central Government may also while according its approval, approve
appointment of a person for a period lesser than the period for which the appointment
is proposed to be made. If the appointment of a person as managing director or
whole-time director or manager as the case may be, is not approved by the Central
Government, the person appointed shall vacate his office on the date on which the
decision of the Central Government is communicated to the company, and if he omits
or fails to do so, he will be punishable with a fine which may extend to five thousand
rupees for every day during which he omits or fails to vacate such office [Sub-section
(6) of Section 269].
Where a person acts as managing director without approval of the Central
Government and in contravention of the requirements of Schedule XIII, provisions of
Sub-section (7) to Sub-section (11) of Section 269 become attracted.
All acts done by a managing or whole-time director or a manager, as the case
may be, purporting to act in such capacity and whose appointment has been found to
be in contravention of Schedule XIII, shall, if the acts so done are valid otherwise, be
valid notwithstanding any order made by the CLB
1
under Section 269(9) of the Act.
[Section 269(12)]
Where the Central Government suo moto or on any information received by it is,
prima facie, of the opinion that any appointment made without the approval of the
Central Government has been made in contravention of the requirements of
Schedule XIII, it shall be competent for the Central Government to refer the matter to
the CLB
1
for decision. The CLB
1
shall on receipt of a reference hereunder, issue a
notice to the company, the managing director or whole-time director or manager, as

1
. Tribunal in place of CLB by the Companies (Second Amendment) Act, 2002, w.e.f. a date yet to be
notified.


the case may be and the director or other officer responsible for complying with the
requirements of Schedule XIII, to show cause as to why such appointment shall not
be terminated and the penalties provided in Sub-section (10) should not be imposed.
The CLB
1
shall, if, after giving a reasonable opportunity to the company, the
managing director or whole-time director or the manager, the officer who is in default,
as the case may be, comes to the conclusion that the appointment has been made in
contravention of the requirement of the Schedule XIII, make an order declaring that a
contravention of the requirements of Schedule XIII has taken place [Sub-section (9)
of Section 269].
On the making of an order by the CLB
1

(a) the company shall be liable to a fine which may extend to fifty thousand
rupees;
(b) every officer of the company who is in default shall be liable to a fine of one
lakh rupees; and
(c) The appointment of the managing or whole-time director, as the case may
be, shall be deemed to have come to an end and the person so appointed
shall in addition to being liable to pay a fine of one lakh rupees, refund to the
company the entire amount of salaries, commissions and perquisites
received/enjoyed by him between the date of his appointment and passing
of such order.
For contravention of this provision or any direction given by the Company Law
Board
1
, every officer of the company who is in default and the managing or whole-
time director or the manager, as the case may be, shall be punishable with
imprisonment for a term which may extend to three years and shall also be liable to
fine which may extend to five hundred rupees for every day of default.
All acts done by a managing director or whole-time director or manager, as the
case may be purporting to act in such capacity and whose appointment has been
found to be in contravention of Schedule XIII shall, if the acts so done, are valid
otherwise, be valid notwithstanding any order made by the Company Law Board
1
/
Tribunal
2
under Sub-section (9) of the section.
Section 637A, makes it clear that where the Central Government is required or
authorised by any provisions of the Act to accord approval in relation to any matter,
then, in the absence of anything to the contrary contained in such or any other
provisions of the Act, the Central Government may accord such approval, subject to
such conditions, limitations or restrictions as it may think fit to impose. In view of the
provisions of Sections 269 and 637A, the Central Government may impose a
condition restraining remuneration of the appointee. There is no infirmity in the
condition so imposed [Company Law Board v. Upper Doab Sugar Mills Ltd. (1977) 47
Comp Cas 173 (SC)].
As per provisions of Section 302 of the Act, where a company enters into a
contract for the appointment, inter alia, of a managing director or varies such contract
already in existence, the company shall within twenty-one days from the date of such

1
. Tribunal in place of CLB by the Companies (Second Amendment) Act, 2002, w.e.f. a date yet to be
notified.


contract or variance as the case may be send an extract of every such contract to the
members of the company. The same will apply in the case of appointment of whole-
time director or manager.
No company can appoint a managing director for a term exceeding five years at
a time. He may, however, be re-appointed for another term of five years. The time
limit is provided in Section 317 of the Act. Section 316 of the Companies Act lays
down that no public company and no private company which is a subsidiary of a
public company shall appoint any person as managing director, if he is already either
the managing director or manager of any other company except as provided in the
section. The section provides that such company may appoint or employ a person as
its managing director, if he is the managing director or manager of one and of not
more than one other company including a private company which is not a subsidiary
of a public company. The section further says that such an appointment shall be
made by a resolution passed at a meeting of the Board of directors of the company
with the consent of all the directors present at the meeting and of which meeting and
of the resolution to be moved thereat specific notice has been given to all the
directors then in India. Sub-section (4) of Section 316 provides that notwithstanding
anything contained in the section the Central Government may, by order, permit any
person to be appointed as managing director of more than two companies. If the
Central Government is satisfied that it is necessary that the company should, for their
proper working function as a single unit and have a common managing director.
Section 203 of the Companies Act, 1956 lays down that without the leave of the
CLB
1
, a person convicted of any offence in connection with the promotion, formation
or management of a company or in course of winding up of a company it appears that
a person has been guilty of any offence for which he is punishable under Section 542
of the Act or has otherwise been guilty, while an officer of the company, of any fraud
or misfeasance in relation to the company or of any breach of his duty to the
company, shall not be appointed a director of company and consequently cannot be
appointed as managing director of the company.
Reappointment of Managing Director
In terms of explanation to Section 269 of the Companies Act, 1956, appointment
includes reappointment. Reappointment of a managing director of a company must
be taken for consideration before the expiry of his term of office. If the reappointment
of the managing director is approved and if it is not in accordance with the conditions
specified in Parts I and II of Schedule XIII then the approval of the Central
Government must be obtained for such reappointment. Rest of the provisions for
reappointment of a managing director are same as in the case of appointment of a
managing director.
Retirement by Rotation of Managing Director
Section 255 of the Act states that unless the articles of association of a company
provide for the retirement of all directors at every annual general meeting not less
than two-thirds of the total number of directors of a public company or of a private
company which is a subsidiary of a public company, shall be liable to retirement by
rotation. Articles of most of the public companies provide that a person shall not be

1
. Tribunal in place of CLB by the Companies (Second Amendment) Act, 2002, w.e.f. a date yet to be
notified.


liable to retire by rotation so long as he continues to hold the office of the managing
or whole-time director.
In terms of Section 268 of the Act, any amendment of any provision in the
memorandum or articles of a public company or of a private company which is
subsidiary of a public company or any agreement or resolution relating to
appointment or re-appointment of a managing or whole-time director or other director
not liable to retire by rotation in such a company requires approval of the Central
Government. But the approval of the Central Government is not required for making a
new provision in this regard, such approval is required only when an existing
provision in the Articles of Association etc. is amended. Clarification of Department of
Company Affairs vide its letter No. 1(120) CL-I/65, dated 04/11/65.
No approval of the Central Government under Section 268 is required for
appointment or re-appointment of managerial personnel, if made in terms of
Section 269 of the Act. (DCAs Circular No. 3 of 1989 dtd. 13.04.89). Provisions of
Section 268 of the Act are not applicable to a Government company. (Notification
GSR 235 dtd. 31.01.78).
In case the managing director is liable to retire as director by rotation but he is
appointed as a managing director for a fixed term, say five years and eventually a
situation may arise that, at an annual general meeting he would retire by rotation but
would be reappointed at the same meeting. In such a case during the intervening
period between his retirement and reappointment he might deem as not occupying
the office of director and in consequence it would result in a break in his appointment
as a Managing Director. The views of the Department of Company Affairs (Now,
Ministry of Corporate Affairs) on this point are as under:
A managing directors office as managing director does not suffer any break if he
retires as a director under Section 255 and is re-elected as a director in the same
meeting. Hence, in such a case, the approval of the Government would not be
necessary for five years where the terms of appointment of a managing director have
already been approved by the Government for that period. [Letter: No. 8/16(1)/61-PR,
dated 9-5-1961].
Whether a person initially appointed as additional/alternate director could continue a
managing/whole-time director
A clarification has been sought as to whether a person initially appointed as
additional/alternate director could continue as managing/whole-time director. The
terms director and managing director are defined in the Act. On the face of it, a
managing director has first to be a director. So long as he is a director and is also
appointed as managing director, he continues as managing director, subject to the
approval of the Central Government.
An additional director can be appointed by the Board of directors of a company
under Section 260. Such a person continues to be the additional director till the
commencement of the next annual general meeting. As soon as the annual general
meeting opens, he ceases to be the additional director of the company. If such a
person while he was the additional director of a company had been appointed as
managing director ceases to be a director, he also ceases to be the managing
director, the latter appointment also ceases simultaneously with his ceaser of


directorship at the commencement of the annual general meeting. However, if such a
person is re-elected as a full-fledged director at the annual general meeting and
thereby he continues as a director of the company, he shall continue as a managing
director also for the period for which he is so elected by the annual general meeting
and for the period for which his appointment has been approved by the Central
Government under Section 269.
An alternate director has no locus standi, the moment the principal director
returns to the state in which the board meeting of the company is ordinarily held, he
ceases to be the director immediately. If such an alternate director has been
appointed as a managing director also and the approval of the Central Government
had been obtained to such appointment, even then the moment he ceases to be a
director of the company, he ceases to be the managing director also.
As to the enquiry whether a person who ceases to be a managing director
because he has not been re-elected by the annual general meeting as a director, can
be continued as an employee of the company and whether such an approval if made
in the articles of the company shall be approved by the Central Government, it may
be stated that the appointment of a person in the capacity of an employee is a
management function for which no approval of the Central Government is
necessary. However, any provision in the articles of the company of the nature of
continuing a person, appointed as a managing director, to remain as an employee
after his appointment as a managing director ceases, will attract Section 268 and
approval of the Central Government will be necessary. Each case has to be
examined on its merits. [Letter: No. 8/21/(260)/76-CL-V, dated 17-3-77].
If an advocate is validly appointed as managing director in accordance with the
provisions of the Companies Act, there will be no bar simply because he is a
practising lawyer, although his appointment as such may be in violation of the Bar
Council Act and it appears to be a matter for the Bar Council to take up with the
person concerned. [Letter: No. 8/55(269)/63-PR, dated 31-8-1963].
The appointment of whole-time company secretary as part-time director on the
Board of directors of the company does not require approval of the Central
Government under Section 269(1) so long as substantial powers of management of
the affairs of the company are not vested in the incumbent [Letter: No. 16/39-CL-
III/85, dated 26-6-1987].
Resignation by Managing Director
It is a general view that a managing director combines two capacities, namely,
manager and director. The capacity as managing director cannot be terminated by
merely sending two resignations. It becomes effective only when the company
accepts the resignation and relieves him from his duties [Achutha Pai v. Registrar of
Companies, (1966) 36 Com Cases 598: (1966) 1 Comp LJ 104 (Ker)]. On the other
hand, it is viewed that a managing director does not hold two offices namely that of
manager and of a director. The concept of a manager as defined by the Act is
different from that of a managing director. A managing director as defined by the Act
is a director who is entrusted with substantial powers of management. It is, however,
true that a managing director may resign his office and continue to be an ordinary
director. His resignation as managing director becomes effective only when accepted
by the Board.


Removal of a Managing Director
No approval of the Central Government is required to remove a person from
managing directorship. The articles of association of most companies empower the
Board of directors to remove or dismiss a managing director from his office as such.
The removal of a managing director in accordance with the provisions in the articles
or in pursuance of the terms of the contract; if any, between the company and the
managing director would not amount to an amendment within the meaning of
Section 268 requiring the approval of the Central Government under that section.
A managing director can be removed as a director pursuant to Section 284 of the
Act, which would result in the termination of the office of the managing director.
However, this section presumes the right to claim compensation or damages if such
removal results in a breach of contract. [Section 284(7)].
Qualifications
Apart from the disqualifications enumerated under Section 274, Section 267 of
the Act makes a specific prohibitory provision with regard to the appointment of
certain persons as managing directors. The section lays down that no company shall
appoint or employ or continue the appointment or employment of any person as its
managing director who
(a) is an undischarged insolvent or has at anytime been adjudged as insolvent;
(b) suspends or has at any time suspended payment to his creditors, or makes,
or has at any time made, a composition with them; or
(c) is or has at any time been, convicted by a Court of an offence involving
moral turpitude.
Apart from this, Part I of Schedule XIII contains five conditions which must be
satisfied by a person to be eligible for appointment as managing director without the
approval of the Central Government. These conditions are as below:
(a) he had not been sentenced to imprisonment for any period, or to a fine
exceeding one thousand rupees, for the conviction of an offence under any
of the following Acts, namely:-
(i) the Indian Stamp Act, 1899 (2 of 1899),
(ii) the Central Excise Act, 1944 (1 of 1944),
(iii) the Industries (Development and Regulation) Act, 1951 (65 of 1951),
(iv) the Prevention of Food Adulteration Act, 1954 (37 of 1954),
(v) the Essential Commodities Act, 1955 (10 of 1955),
(vi) the Companies Act, 1956 (1 of 1956),
(vii) the Securities Contracts (Regulation) Act, 1956 (42 of 1956),
(viii) the Wealth-tax Act, 1957 (27 of 1957),
(ix) the Income-tax Act, 1961 (43 of 1961),
(x) the Customs Act, 1962 (52 of 1962),
(xi) the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969),
(xii) the Foreign Exchange Regulation Act, 1973 (46 of 1973), [This Act has
been repealed and FEMA, 1999 has been enacted].


(xiii) the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of
1986),
(xiv) the Securities and Exchange Board of India Act, 1992 (15 of 1992),
(xv) the Foreign Trade (Development and Regulation) Act, 1992 (22 of
1992);
(b) he had not been detained for any period under the Conservation of Foreign
Exchange and Prevention of Smuggling Activities Act, 1974 (52 of 1974);
Provided that where the Central Government has given its approval to the
appointment of a person convicted or detained under sub-paragraph (a) or
sub-paragraph (b), as the case may be, no further approval of the Central
Government shall be necessary for the subsequent appointment of that
person if he had not been so convicted or detained subsequent to such
approval;
(c) he has completed the age of 25 years and has not attained the age of 70
years:
Provided that where
(i) he has not completed the age of 25 years, but has attained the age of
majority; or
(ii) he has attained the age of 70 years; and
where his appointment is approved by a special resolution passed by the
company in general meeting, no further approval of the Central Government
shall be necessary for such appointment;
(d) where he is a managerial person in more than one company he draws
remuneration from one or more companies subject to the ceiling provided in
Section III of Part II;
(e) he is resident in India.
Explanation: For the purpose of this Schedule, resident in India includes a
person who has been staying in India for a continuous period of not less
than twelve months immediately preceding the date of his appointment as a
managerial person and who has come to stay in India:
(i) for taking up employment in India, or
(ii) for carrying on a business or vocation in India.
But this condition shall not be applicable to the companies in Special Economic
Zones, as may be notified by Department of Commerce from time to time.
However, a person, being a non-resident in India, shall enter India only after
obtaining a proper Employment Visa from the concerned Indian mission abroad. For
this purpose, such person shall be required to furnish, alongwith the visa application
form, profile of the company, the principal employer and the terms and conditions of
such persons appointment.
Powers of Managing Director
A managing director acts subject to the superintendence, direction and control of
the Board of directors of the company and also subject to the provisions of the Act.
He derives powers from the company or its Board. Sub-section (26) of Section 2 of
the Companies Act, 1956 gives sufficient indication as to the sources of power of a


managing director. Generally, the Articles of the company contain provisions
regarding the powers of managing director. The managing director shall have general
conduct and management of the whole of the business and affairs of the company
except in matters which may be specifically required to be done by the Board of
directors either by the Act or by the Articles. The agreement or Board resolution
appointing the managing director may also confer various powers to the managing
director like, buying fixed assets, selling assets, borrowings, investing, entering into
contracts, appointment of senior personnels etc.
Representative capacity of managing director
Notwithstanding the fact that the Managing Director does not hold a power of
attorney the Court may allow representation by him [Puri Construction Pvt. Ltd. v.
N.L. Mehta, (1982) 2 Comp LJ 765 (Del)]. But it is established that a managing
director is vested with representative capacity and persons dealing with him in the
ordinary course of business are entitled to assume that he has the necessary
authority [South African Industrial Friendly Co-op Soc v. Webber, (1992) TPD 49].
Where a company has borrowing powers, he has the authority to authenticate
promissory notes on behalf of the company [Kumar Krishna Rohatagi v. State Bank
of India, (1980) 50 Com Cases 722 (Pat-DB)].
A managing director, being in charge of the management of the companys
affairs, enjoys the power to vary the duties of employees within permissible limits. [V.
Ramaswami v. Madras TImes Printing & Publishing Co., AIR 1917 Mad 485].
The Civil Court will not interfere where a managing director carrying out the
duties of managing director is removed from his office [Joginder Singh Palta v. Time
Travels (Pvt.) Ltd., 1983 Tax LR 2487: (1984) 56 Com Cases 103 (Cal)]. Any
subsequent act of a managing director who cease to be so will not be valid, as firstly
he has not the authority to act so and further it would amount to an irregular exercise
of power.
Relationship with the Board of Directors
The managing director of a company is appointed by its Board of directors and
exercises his powers of management subject to the superintendence, control and
direction of the Board of directors. He is a link between the directors and executives
of the company. By virtue of his position as co-ordinator of activities of the various
divisions and departments of the company, he is expected to be thoroughly
conversant with the day-to-day working of the company, the problems faced by the
various departments of the company and by having a frequent interaction with the
companys executives, staff and workers, he is in a better position as compared to
other directors of the company to suggest solutions to the problems. He reviews the
working of the company at Board meetings and briefs the directors on the business
before them and guide the directors and he can render all assistance to them to
enable them to contribute their best to the deliberations of the Board so that the
decisions of the Board are based on the expert advice of the managing director and
knowledge, experience and expertise of the directors.
Position of managing director etc., on private company becoming public
On a private company becoming a public company, the provisions of the
Companies Act, which are applicable to public companies, become applicable to the


company, including the provisions of all the sections, governing appointment and
remuneration of managing director/whole-time director or manager, namely
Sections 269, 198, 309, 310, Schedule XIII etc. and therefore such a company must
comply with these provisions.
However, a question arises, whether the appointment and remuneration
approved and effectuated prior to the company becoming a public company would
remain unaffected and need not therefore be altered for the remainder of the term for
which the managing director was appointed. The Department of Company Affairs
(Now, Ministry of Corporate Affairs) has clarified that the provisions of Section 269
will not apply who has been holding the office of a managing director or whole-time
director in a private company immediately before its conversion into a public
company, as no fresh appointment is involved. It may, however, be added that this
view cannot be extended to Sections 198, 255, 309, 310, 311, etc., the restrictions
contained in these sections will automatically apply to the company from the date of
its conversion into a public company [Letter: No. 8/11/43A/61-PR-dated 25.1.1961].
The Department of Company Affairs (Now, Ministry of Corporate Affairs) has
further clarified that the existing appointment of managing director or whole-time
director would not require the approval of the Central Government now but it will be
necessary at the time of the next appointment. In case the existing appointment is for
an indefinite period i.e. until further orders. Then unless the appointment is
terminated earlier, the period of appointment will be taken as five years from the date
of the company becoming a public company [Letter: No. 32/13/75-Cl - III dated 25-6-
75].
From the above, it appears that the appointment of managing and whole-time
director made prior to the private company becoming a public company, voluntarily
shall remain unaffected for a period for which the appointment was made or five
years from the date of the company becoming a public company, whichever is less.
When the office of a director is terminated, his appointment as a managing
director would also terminate with it but when he is removed from managing
directorship only, his appointment as a director would remain effective and when this
happens on the conversion of a private company into a public company he would
remain a director till he is rotated out at the next annual general meeting of the
company [Swapan Das Gupta v. Navin Chand Suchanti, (1988) 64 Com Cases 562,
582: (1988) 3 Comp LJ 76 (Cal) (DB)].
Duties of a Managing Director
The duties and responsibilities of a managing director are set out in detail in the
document by which he is appointed, i.e. either in the articles of association of the
company or in the Board resolution or company resolution through which he is
appointed or by the agreement which he enters into with the company.
The Companies Act lays down that the managing director of a company is
entrusted with substantial powers of management. However, he exercises his powers
subject to the superintendence, control and directions of the Board of directors of the
company. He is fully answerable to, and functions under the overall supervision,
guidance and control of the Board of directors. The Board cannot divest itself of the
powers it has to exercise under the Act and under the memorandum and articles of


association of the company by delegating all its powers to the managing director.
Liabilities
The managing director is liable for breach, whether willful or unintentional, of any
of the duties and powers entrusted to him under the terms and conditions of his
appointment, or under any provisions of the Companies Act, or by virtue of any
provisions of the memorandum and articles of association of the company or under
the provisions of any other law which he is bound as managing director to honour and
to comply with. He is liable for fraudulent conduct of business of the company, for
improper use of the companys funds and properties. He is also liable both in a
prospectus issued by the company during his tenure as managing director and which
he has signed as managing director before its release. His named is included as an
'officer in default' under Section 5 of the Act and can be made liable accordingly.
2. EXECUTIVE DIRECTOR/WHOLE-TIME DIRECTOR
The terms executive director and the whole-time director have not been defined
in the Companies Act except saying that he is in the whole-time employment of the
company. An executive director may also be called whole-time director. In many
companies, however, the executive directors are not members of the Board of
directors of the Company. The Company Law Board has however issued directive to
the effect to desist such company practices as to naming their employees as
executive directors but not making them Board members. Hence, for the purpose of
our study, we will presume executive directors to be members of the Board of
directors of the conerned company. They are essentially directors but unlike ordinary
directors, they devote their entire time and attention to the business and affairs of the
company. They cannot accept the office of executive director or whole-time director in
any other company. They may, however, accept the office of a non-executive director
in other companies subject to overall number of companies as prescribed in Section
275 of the Companies Act, 1956 i.e. fifteen public companies.
The office of the whole-time director has, for certain prohibitive sections of the
Companies Act for appointment to such an office, been equated with that of the
managing director. Section 267 of the Act prohibits the appointment or employment of
certain persons as managing or whole-time director in any company. They are: (i) an
undischarged insolvent or who has at any time been adjudged insolvent; (ii) a person
who suspends or has at any time suspended, payment to his creditors or makes or has
made at any time a composition with them; and (iii) a person who is or has at any time
been convicted by a Court of an offence involving moral turpitude.
Since a whole-time director and an executive director are also directors and
additional responsibility is entrusted to them, their appointment shall be subject to the
provisions of Section 274 of the Act, which lays down certain disqualifications of
directors.
Further, where the appointment of the whole-time director is as per Schedule XIII
the eligibility conditions as contained in Part I of the said Schedule must be satisfied
as explained earlier.
Appointment
The substantive provisions with regard to appointment and reappointment of


whole-time director are similar to that of managing director which have been
discussed earlier.
Period of Appointment
It is a point worth noting here that while in the case of a managing director,
Section 317 restricts the period for which he may be appointed at a time upto five
years, there is no such restriction on the appointment of a whole-time director, so that
he may be appointed for a longer period without the necessity for renewal every five
years, provided, however, that his office of director is not one, which is subject to
retirement of directors by rotation.
Whole-time director is virtually managing director
A whole-time director for the purpose of Section 269 or 309 is a director
rendering his services whole time to the management of the company and, therefore,
he is virtually a managing director though not so designated. A director-in-charge
also stands in the same position as a managing director, even if he does not give his
whole-time to management of the company (Annual Report of DCA year ended
March 31, 1957).
Whether a whole-time employee is a whole time director
A, whole-time employee of a company also appointed as a director of the
Company is in the position of a whole time director. The view is equally applicable in
the case of an alternate director. Accordingly the appointment of an employee as an
alternate director will be governed by the provisions of Sections 314, 269, 309 and
198 of the Companies Act, 1956 (DCA Letter No. 2/19/63 P.R. dated 29-6-1964).
Branch manager if appointed director would be whole-time director
The Department is of the view that when a branch manager who is apparently a
whole-time employee, is appointed, as director, he will be in the position of a whole-
time director and the appointment would require the approval of the Central
Government under Section 269 if it is not in accordance with Schedule XIII.
(Company News & Notes, dated July 1, 1963).
Role and Powers of Executive/Whole-time Director
The executive director of a company is duty bound to execute the policies laid
down and decision taken by the Board of directors at their various meetings. He has
to co-ordinate activities of various divisions and departments of the company and
ensures that the short-term and long-term policies and plans of the company are
executed and implemented as per the time schedule fixed by the Board. In the event
of any delay in the implementation of the policies and plans chalked out by the
Board of directors, he is duty bound to bring the fact to the notice of the Board so that
causes of the delay may be analysed and remedial action can be taken, if any, and
future plans and policies be modified in the light of the experience gained.
The whole-time director is normally entrusted with the responsibility of one
particular department or division of the company. If he is appointed for looking after
the work of procurement of raw materials, stores, spares, plants and machines, jigs,
tools, fixtures, oils lubricants etc, it is his duty to establish proper coordination with the


production and marketing departments to ensure procurement of all the inventory in
such a way that unwanted inventory is not built up, non-moving items are disposed of
and productions not hampered on account of non-availability of necessary inputs. If
he is in charge of production, he has to coordinate the activities of his department
with the marketing and procurement divisions so that right quality goods are
produced in right quantity and in right time to execute the various sale orders in time.
He should ensure that no sale orders are allowed to remain in the pipeline for a long
time and at the same time unnecessary stock of semi-finished and finished goods are
not build up. If he is incharge of marketing the product of the company, he has to
keep the marketing team in absolute readiness since the market is very competitive
and aggressive salesmanship is required. The sales team must make all possible
efforts to keep the order book always full. The whole-time director incharge of
marketing has to coordinate the marketing activities with the production and with the
Transport incharge/Transport Companies so that the orders booked by the sales
team are dispatched in time and the quality and quantity of the goods dispatched
remain perfect to avoid all chances of complaints on their account and also sales
accounts department for timely realisation of sales proceeds in time. Similarly, if the
whole-time director is incharge of finance, he has to make sure that sufficient funds
are available to the company to keep all the divisions to their optimum use. Funds
should be managed in such a way that they are turned over in the quickest possible
time thereby reducing interest burden to the minimum and at the same time the funds
should never be in short supply lest the production programme is held up for want of
funds or unnecessarily huge funds are laying in the current accounts of the company
without earning any interest, whereas in certain other accounts the company has to
pay heavy amounts in the form of interest and service charge because of huge debit
balance in cash credit accounts, overdraft and other interest bearing accounts. He
should also ensure timely sales realisation as to avoid long debtors position. It is
possible by coordination with the marketing head. Such a situation should be avoided
by judiciously planning funds management.
Duties of a whole time director
The duties and responsibilities of an executive director or whole-time director are
governed by the terms and conditions of their appointment and also by powers and
authorities given to them and responsibilities entrusted to them by the Board of
directors from time to time or by the shareholders at their general meetings. Unlike
the managing director of a company, an executive director or a whole-time director is
not entrusted by the company with substantial powers of management of the
business and affairs of the company. They are bound to act in strict compliance with
duties and powers entrusted to them under the overall direction of the managing
director, if any.
Liabilities
An executive director and a whole-time director are not personally liable on the
contracts made by them for the company with the third parties. Even where a contract
is ultra-vires their powers, meaning thereby that where they have no authority to
contract, they are not personally liable on the contracts. They may, however, be liable
for damages for acting without authority or in excess of authority if they can be
deemed to have given out to outsiders that they had authority to act on behalf of the


company. However, if they contract in their own names without disclosing that they
are acting for the company, they may be personally liable to third parties. They are
personally liable to the injured party for any fraudulent act on their part as no contract
or agency or other service can impose upon the agent any obligation to commit or
procure any fraud or any other wrong. Therefore, where a wrongful act such as libel
or trespass, infringement of a patent or trade mark etc. is committed by an executive
director or a whole-time director, they are liable along with the company.
3. MANAGER
Definition
As per Sub-section (24) of Section 2 of the Companies Act, manager means an
individual who, subject to the superintendence, control and direction of the Board of
directors, has the management of the whole or substantially the whole, of the affairs
of a company, and includes a director or any other person occupying the position of a
manager, by whatever name called, and whether under a contract of service or not.
Thus, only an individual can be appointed as a manager in a company. There is
difference in the mode of appointment of manager and managing director. Besides, in
a case where a manager is also appointed a director, if for any reason his office as
director is vacated, the office of manager held by him is not affected, whereas in the
case of managing director, if he ceases to be director for any reason whatsoever, his
office as managing director also will cease along with it, as managing director
means a director who, by virtue of an agreement with the company or of a resolution
passed by the company in general meeting or by its Board of directors or by virtue of
its memorandum or articles of association, is entrusted with substantial powers of
management which would not otherwise be exercisable by him and includes a
director occupying the position of a managing director, by whatever name called.
Only a director can be appointed as managing director as compared to the manager
who may be any individual not necessarily a director.
Number of Managers in a Company
Section 197A of the Companies Act, 1956 provides that notwithstanding anything
contained in this Act or any other law or any agreement or instrument no company
shall appoint or employ at the same time a managing director and a manager. Thus
in terms of Section 197A, a company can at the same time, have two or more
managing directors or two or more managers but cannot have both manager and
managing director.
Director as Manager
A manager may or may not be director of the company. Where one director of the
company is appointed as a Manager, he would, ipso facto, become a Managing
Director as the Act envisage a distinction between the two. The Department of
Company Affairs holds the view that A person who is a manager within the meaning
of Section 2(24) and is also a director of the company would be a managing director
and would be subject to all restrictions applicable to a managing director under the
Act. In this connection, manager means an individual who has the management of
the whole or substantially the whole of the affairs of a company and a director of the


company may also be its manager.
Appointment
A manager may be appointed or reappointed by the Board unless the articles of a
company vest that power in the company to be exercised at a general meeting.
According to Section 388 of the Act, the provision of Sections 269, 301, 311, 312 and
317 of the Act shall apply in relation to the manager of a company as they apply in
relation to managing director thereof, and those of Section 312 shall apply in relation
to the manager of a company, as they apply to a director thereof.
Disqualifications
No company shall appoint or employ any firm, body corporate or association as
its manager under Section 384. A manager must be an individual. He must not be
disqualified under Section 385. If he is a director he must not be disqualified under
Section 274 as far as his office of director is concerned.
Term of office
Section 317 permits a company to appoint or re-appoint a manager for a period
not exceeding five years at a time. He may, however, be re-appointed for similar
terms of five years. The Central Government may also, if it is of the opinion that in the
interest of the company it is necessary so to do, accord its approval to the proposed
appointment or re-appointment for a period shorter than the period for which the
person is proposed to be appointed by the company.
Restriction on the number of companies of which a person may be appointed
manager
According to Section 386 no company shall appoint or employ any person as
manager, if he is already either the manager or managing director of any other
company. However, a company may appoint or employ any person as a manager if
he is manager or managing director one and not more than one other company. Such
an appointment or employment has to be made or approved by resolution passed at
the meeting of the Board with the consent of all the directors present in the meeting,
and of which meeting and of the resolution to be moved thereat, specific notice has
been given to all the directors then in India. However, the Central Government may,
by order, permit any person to be appointed as manager of more than two
companies, if the Central Government is satisfied that it is necessary that the
companies should, for their proper working function as a single unit and have a
common manager.
Restriction on Appointment of Manager
Section 202 prohibits the appointment as managerial personnel of an individual
who is an undischarged insolvent. Section 385 also lays down that no individual shall
be appointed manager of a company:
(a) who is an undischarged insolvent, or has at any time, within the preceding
five years been adjudged an insolvent; or
(b) who suspends, or has at any time within preceding five years suspended


payment to his creditors, or makes or has at any time within the preceding
five years made a composition with them; or
(c) who is, or has at anytime within the preceding five years been convicted by
a Court in India of an offence involving moral turpitude.
Distinction between Manager and Managing Director
The thin line of distinction between a manager and a managing director is not
significant as a manager who may also be a director and who is not different from a
managing director with regard to his functions. Being a whole-time employee of the
company, he is obliged to devote his entire time and attention to the management of
the affairs of the company and not to engage himself in any other business. A
manager can, however, be director in the other companies within the overall limit
prescribed by Section 275 of the Act. Another feature of both the offices is that while
a manager by virtue of his office has the management of the whole or substantially
the whole of the affairs of a company, a managing director is entrusted with
substantial powers of management which would not otherwise be exercisable by him.
Tests to be fulfilled
As held by the Supreme Court, three tests are required to be satisfied:
1. The manager must be an individual, which means that a firm or a body
corporate or an association can not be a manager. This fact is made clear in
Section 384.
2. He should have the management of the whole or substantially the whole of
the affairs of the company.
3. He should be subject to the superintendence, control and directions of the
Board of directors in the matter of managing the affairs of the company. A
manager has to work or exercise his powers under the control and directions
of the Board of directors.
Section 384 in express terms prohibits after the commencement of the Act, the
appointment of a firm or a body corporate or an association of persons as a manager
as also the continuation of such employment after expiry of six months from such
commencement i.e. till 30th September 1956.
Remuneration
Section 387 of the Companies Act deals with the remuneration of a manager. It
provides that the manager of a company may, subject to the provisions of Section
198, receive remuneration either by way of a monthly payment, or by way of a
specified percentage of the net profits of the company calculated in the manner laid
down in Sections 349 and 350, or partly by one way and partly by the other. It further
provides that except with the approval of the Central Government such remuneration
shall not exceed in aggregate 5% of the net profits.
Section 388 further provides that Sections 269, 301, 311, 312 and 317 as
applicable to managing director/whole time director shall also apply to manager.
Therefore, the remuneration of a manager has to be fixed by the company within the


overall limits as prescribed in Section 198 of the Companies Act and according to the
provisions of Section 269 read with Schedule XIII, and Sections 309, 310 and 311 of
the Act.
The appointment or re-appointment of the manager, and the fixation of his
remuneration is done in the same manner as for managing or whole-time directors of
a company.
Powers
The manager of a company may be a director or may only be an employee of the
company. If he is a director-manager then he has general conduct and management
of the whole of the business and affairs of the company. In such a case he has all the
powers of a managing director. However, the manager may exercise these powers
subject to the superintendence, control and directions of the Board of directors.
Further, in case the manager is only an employee of the company then the terms of
agreement appointing him as manager of the company may confer the powers which
may be exercised by him. The Board of directors or the Articles of Association of the
company may also confer certain powers to a manager.
Duties
The duties and responsibilities of a manager are set out in his contract of
service, if any, or in the company/Board resolution or in the articles, by virtue of which
he is appointed. The Board of directors of the company is the final authority, subject
to whose superintendence, control and direction he has the management of the
whole or substantially the whole of the affairs of the company. The Board may
increase or contract his duties depending upon the exigencies of work.
Liabilities
A manager is liable for violation, default or breach, whether willful or
unintentional, of any of the managerial duties and responsibilities as per his terms of
appointment or as enjoined upon him by the Companies Act and any other corporate
law or by any provision of the memorandum and articles of association of the
company. He is liable for fraudulent conduct of business of the company, for misuse
of companys funds and properties. He is also liable both in civil and to criminal
prosecution for any wrong statement or misrepresentation in a prospectus issued by
the company to which he is a signatory.
Relationship with the Board of Directors
A manager is an important link between the Board of directors on the one hand
and the executives of the company, shareholders, suppliers, buyers, various
Government agencies and the public at large on the other hand. He co-ordinates the
activities of the various divisions and departments of the company and by virtue of his
status and position he is expected to be thoroughly conversant with the day-to-day
working of the company, the problems and difficulties faced by the various
departmental heads. He briefs the directors at periodical Board meetings and at the
committees of the directors and reviews the working of the company thereat. He
explains to the directors the internal detailed working of various divisions, offers


various alternate solutions to the problems facing the company from time to time and
thus helps the Board in thoroughly deliberating upon every item of business before it
and in taking decisions on short-term plans and long-term policies. He also supplies
information to the directors with regard to the implementation of the various Board
decisions and policies with comparative figures of targets fixed for various
departments, suggests remedial and preventive measures if and when needed and
thus helps the directors in their work of directing the business and affairs of the
company.
Remuneration of Whole-time/Managing Director/Manager
Section 309 of the Companies Act contains provisions regarding remuneration of
directors including any managing or whole-time directors. Sub-section (1) of Section
309 inter alia, provides that the remuneration payable to the directors of a company,
including any managing director or whole-time director, shall be determined, in
accordance with and subject to the provisions of Section 198 and this section, either
by the articles of the company, or by a resolution or if the articles so require, by a
special resolution passed by the company in general meeting, and the remuneration
payable to any such director determined as aforesaid shall be inclusive of the
remuneration payable to such director for services rendered by him in any other
capacity.
The remuneration payable in pursuance of Section 309, including the remuneration
payable to the managing or whole-time director, may be determined either by the
articles; or by an ordinary resolution of the company. But, if the articles of a company
so require, the remuneration shall be determined by a special resolution. It should be
noted that where a case falls within the purview of Schedule XIII, the appointment and
remuneration payable to the managing or whole-time director referred to in Part I and
Part II respectively of the Schedule shall be subject to the approval by an ordinary
resolution passed at a general meeting although the appointment and remuneration
may have been determined by the Board of directors. This is, however, subject to the
provisions of the articles, if any, so far as remuneration is concerned, requiring a
special resolution. Every change in the remuneration will require a resolution, ordinary
or special, as the case may be as stated above. There is no requirement of prior
approval by the shareholders. It can be a post facto approval. In the cases falling under
Schedule XIII, an ordinary resolution required thereunder can be passed even after the
expiry of 90 days from the date of the Boards resolution. [Circular No. 3/89/3/19/88-CL-
V dtd. 13th April, 1989].
Section 309(3) of the Companies Act provides that a managing director or a
whole-time director may be paid remuneration either by way of monthly payment or at
a specified percentage of the net profits of the company or partly by one way and
partly by the other. Except with the approval of Central Government such
remuneration should not exceed five per cent of the net profits for one such director
and if there is more than one such director, not more than ten per cent for all of them
together. The net profits referred to in Sub-section (3) shall be calculated in the
manner referred to in Section 198.
Schedule XIII provides guidelines for remuneration of managerial personnel.
These guidelines constitute statutory guidelines to the appointment of a person as
managing director without the approval of the Central Government. Prior to the


enactment of Schedule XIII administrative guidelines on managerial remuneration
were issued by the Government from time to time. However, the administrative
guidelines issued by the Government are replaced by statutory guidelines contained
in the Schedule XIII.
The provisions of Sections 309, 310 and 311 do not apply to a private company
unless it is a subsidiary of a public company.
Section 310 provides that any provision relating to the remuneration of any
director including a managing or whole-time director, or any amendment thereof,
which purports to increase or has the effect of increasing, whether directly or
indirectly, the amount thereof, whether the provision be contained in the companys
memorandum or articles, or in an agreement entered into by it, or in any resolution
passed by the company in general meeting or by its Board of directors, shall not have
any effect:
(i) in case where Schedule XIII is applicable, unless such increase is in
accordance with the conditions specified in that Schedule, and
(ii) in any other case, unless approved by the Central Government, on an
application submitted by the company in revised form, e-Form No. 25A.
and that amendment shall be void, if and in so far as it is disapproved by that
Government.
However, the approval of the Central Government is not required where any such
provision or any amendment thereof, purports to increase, or has the effect of
increasing, the amount of such remuneration only by way of a fee for each meeting of
the Board, or a committee thereof attended by any such director and the amount of
such fee after such increase does not exceed the sum of twenty thousand rupees
*

[Rule 10B of the Companies (Central Governments) General Rules and Forms as
amended dated 24.7.2003].
Section 311 of the Companies Act, 1956 provides that if the terms of any re-
appointment of managing or whole-time director made after the commencement of
the Act, purport to increase or have the effect of increasing, whether directly or
indirectly, the remuneration which the managing or whole-time director or the
previous managing or whole-time director, as the case may be was receiving
immediately before such re-appointment or appointment, the re-appointment or
appointment shall not have any effect:
(a) In cases where Schedule XIII is applicable, unless such increase is in
accordance with the conditions specified in that Schedule; and
(b) In any other case, unless approved by the Central Government.
and shall be void, if and in so far as it is disapproved by the Government.
As per the Sub-section (3) of Section 309 approval of the Central Government is
required in case the remuneration payable to managing or whole time director(s)
exceeds 5% of net profits for one such director or 10% of net profits for all of them

*
in case of Companies with paid up share capital and free reserves of Rs. 10 crores and above or turnover
of Rs. 50 crore and above and in case of other Companies, sitting fee not exceeding
Rs. 10,000.


together. As per Schedule XIII (effective from 1-2-1994); there is no restriction on the
quantum of remuneration as long as the remuneration paid during any financial year
is within 5% or 10% of net profits, as the case may be (Section I of Part II of Schedule
XIII). In the event of loss or inadequacy of profits, a company would have freedom to
work out remuneration package for its managerial personnel within the limits
specified in paragraph 1 of Section II of Part II of Schedule XIII, without the need of
approval of the Central Government under Section 198(4) and 309(3). [See
Departments Circular No. 2/94, Dated 10-2-1994 and Notification No. GSR 215(E)
dated 2-3-2000].
Any payment by way of remuneration in excess of the limit prescribed by the
section or without approval of the Central Government where approval is required,
has to be held by the recipient in trust for the company and he shall refund it to the
company. The recovery of such sum cannot be waived by the company unless
permitted by the Central Government. [Re Oxford etc. Society, (1886) 35 Ch D 502;
Leeds Estate etc. Co. v. Shepherd, (1887) 36 Ch D 787, 809].
Thus, remuneration can be paid either in terms of the companys articles or in
accordance with a resolution of the general meeting. A director can sue for
remuneration which has been agreed to be paid to him. [Nell v. Allanta etc., Mines
(1895) 11 TLR 407 (CA)]. But there is no right of action till such resolution passed. He
can prove him claim in the winding up like an ordinary creditor. [Beckwith Exp. (1998)
1 Ch 324; (1895-9) ALL ER Rep Ext. 1655].
A remuneration approved by all the shareholders entitled to attend and vote at a
general meeting, has the same effect as a resolution duly passed [Cane v. Jones
(1981) 1 All ER 533: (1980) 1 WLR 1451], Where the remuneration is shown in the
accounts which have been approved by the shareholders, this may operate as an
authority for payment of remuneration as specified in the accounts [Felix Hadley &
Co. Ltd. v. Hadley, (1897) 77 LT 131].
Remuneration for Professional Services
The previous sanction of the Central Government under Section 310 is not
necessary for paying remuneration to a director for services of a professional nature,
since such remuneration is excluded from total remuneration under
Section 309(1)(a). In a certain case, it was held that payment can be made for
professional services rendered by a director who is a solicitor. The company need not
obtain any further approval before making any such payment. [Ruby Mills Ltd v.
Union of India (1985) 57 Com Cases 193 (Bom)]. Journalist, Editor, Author, Engineer,
Solicitor, Operator, Auctioneer etc. have been taken to be exercising a profession.
Commission upto 1% only when director renders some specific services
Raising of remuneration of a director by way of commission constitutes an
increase which would require Central Government approval under Section 310
entitling the Central Government to impose restrictions and conditions in the exercise
of its powers under Section 637A and Section 637AA. [National Engineering
Industries Ltd v. Secretary, Ministry of Law Justice and Company Affairs, (1990-91)
95 CWN 1112 (Cal)].


Departments Clarification - Government has generally never objected to such
payments where there are no managing directors but where such managerial officers
function and receive remuneration for services rendered by them, commission to the
directors to the extent of 1% permitted by the Act is being allowed only where the
directors render some specific services for which some remuneration would appear
justified. This is a fair and equitable principle based on the wholesome rule of
correlation of remuneration to services rendered. It is of course open to the company
to satisfy the Board in specific cases that such directors rendered services beyond
merely attending Board meetings, and where the board is satisfied about such
services, necessary sanction would not be withheld. (Letter No. 2/8/64-PR dated
23.3.1964).
Reimbursement of Medical Expenses
It may also be noted that the Government has vide Circular No. 2/31/CL.VII/95,
dated 7.11.1996 clarified that any reimbursement of medical expenses in excess of
limits mentioned in total managerial remuneration package requires approval of the
Central Government under Section 310 of the Companies Act. An application for this
purpose is to be preferred to the Central Government in the prescribed form after
complying with the requirement formalities. The circular adds that such proposals are
normally considered by the Central Government within the framework of policy as
stated below:
(a) Having regard to the improved medical facilities available in India, the
managerial personnel should obtain specified treatment abroad only in
exceptional and deserving cases. All proposals for reimbursement on
specialised medical treatment abroad must invariably be accompanied by an
essentiality it certificate issued and signed by the Director General of Health
Services of the concerned State/Union Government.
(b) The ceiling on reimbursement of medical expenses on specialised medical
treatment abroad (inclusive of air fare, boarding/lodging for the patient and
the attendant, where the Director General of Health Services considers it
necessary that the attendant should accompany the patient) is Rs. 9 lakhs
only.
(c) The proposals for increase in the remuneration by way of reimbursement of
medical expenses on specialized treatment abroad is considered in respect
of the managerial personnel himself/herself and not his/her family members
or dependents.
(d) It should be noted that any claim for an amount in excess of Rs. 9 lakhs
would not be entertained by the Central Government.
(e) The application under Section 310 of the Companies Act, 1956, in this
regard, should be preferred within the currency of the tenure of the
managerial personnel concerned.
Expenses on Use of Companys Car and Telephone
Department of Company Affairs has clarified that the expenditure on use of
companys car and telephone at residence, which may be borne by the company, are
not considered perquisites. The expenditure on personal long distance calls on


telephone and use of car for private purpose shall, however, be billed by the
company to the appointee; the term billed used in this regard in the para on this
subject should be taken to mean to recover.
Payment of Sitting Fee to Managerial Personnel
As regards that payment of sitting fee to managing or whole-time director the
Department of Company Affairs has vide letter No. 3/1/90-Cl.V dated 18.8.1990
clarified that payment of sitting fee to managerial personnel is part of managerial
remuneration and in case of Schedule XIII appointments, no sitting fee is payable in
the absence of any proviso made therein.
Expenses incurred on travelling and transportation of personal effects of
Managing or Whole-time Director or Manager
Some companies have sought a clarification from the Department of Company
Affairs whether it would be in order for them to meet the expenses on travel of the
managing or whole time director or manager and his family members and on
transportation of his personal effects from the place of his duty to his home town or to
a place where he intends to settle on expiry of his tenure. In this connection, it is
clarified that these expenses are not in the nature of perquisites and are not
therefore, covered in Schedule XIII (though Schedule XIII does contain a provision in
regard to reimbursement of expenses incurred on joining duty and return to the home
country in respect of expatriate managerial personnel). The companies, may
therefore, incur expenses on travel of the managing or whole-time director or
manager and his family members and on transportation of his personal effects from
his place of duty to his home town or to a place where he intends to settle, on expiry
of his tenure, provided the relevant travelling rules of the company provide for
incurring such expenditure. No approval of Central Government would be required in
such cases. [Circular No. 9/93; F. No 1/4/92-CL. V dated 28-7-1993].
Appointment of managing director without remuneration
Approval of the Central Government is necessary even if the managing
director/whole-time director is not paid any remuneration, if the case falls outside
Schedule XIII.
Change of designation of managerial personnel
For change of designation of managing or whole time director, fresh approval of
the Government is not necessary. It would, however, be advisable to intimate the
change to the Government.
Whole-time director and director in the whole-time employment
These expressions occurring in Sub-sections (1) and (3) respectively mean the
same thing. As the Sub-section (1) provides that the remuneration of such a director
payable for services in any capacity whether as director or for other services, the
provisions of that sub-section will have to be compiled with, whether the remuneration
is for managerial services or other services. When once an employee becomes a
director, he will come within the scope of Sections 269, 309 and 310 of the Act.


Compensation for Loss of Office
Sections 318, 319, 320 and 321 of the Act deal with the question of payment of
compensation to a director for loss of his office. Section 318 states that no
compensation for loss of office or as consideration for retirement from office, or in
connection with such loss or retirement shall be paid by a company to any director
other than the managing director or a director holding the office of manager, or in the
whole-time employment of the company.
Even in the case of a managing director or a whole-time director or a manager no
such payment shall be made in the following cases:
(i) where the director resigns his office on reconstruction or amalgamation of
the company and is appointed as the managing director, manager or other
officer of the reconstructed company or the body corporate resulting from
the amalgamation;
(ii) where the director resigns his office otherwise than on reconstruction of the
company or its amalgamation thereof;
(iii) where the office is vacated under Section 203 or 283;
(iv) where the winding up of the company takes place due to his negligence or
mismanagement;
(v) where the director has been guilty of fraud or breach of trust or gross
negligence or mismanagement of the conduct of the affairs of the company,
or any subsidiary or holding company thereof;
(vi) where the director has instigated or has taken part in bringing about the
termination of his office.
However, the compensation, if payable, must not exceed the remuneration which
the director would have earned for the unexpired residue of his term or for three
years, whichever is shorter. The amount should be calculated on the basis of the
average remuneration actually earned by him during a period of three years before
the termination, or where he holds office for lesser period, during such period. But, no
such payment shall be made to the director in the event of the commencement of the
winding up of the company, whether before, or at any time within twelve months after,
the date on which he ceased to hold office, if the assets of the company on the
winding up, after deducting the expenses thereof, are not sufficient to repay to the
shareholders the share capital (including the premium, if any) contributed by them.
Sub-section (3) specifies the circumstances in which a managerial personnel
entitled to compensation under this section would lose his right to compensation. One
of them is when he is guilty of fraud, or a breach of trust, etc. In Bell v. Lever Bros
(1932) AC 161: (1931) 1 All ER Rep 1 (HL), Lever Bros. removed their managing
director of a South African subsidiary by compensating him. It was realised that
during his tenure of office he had been guilty of breach of duty and corrupt practice
and that he need not have been paid compensation. Proceedings were taken to
recover back the compensation money. It was held that Bell was not bound to refund
the compensation money.
In another case where the compensation money paid over to a managing director
for removing him was not allowed to be recovered back because at the time of


payment he had not diverted the business opportunity of the company to his use. It
was only subsequently to his removal that it became clear as to what his intention in
reference to that opportunity was.
4. CHAIRMAN
The Chairman is a necessary element of company meeting and is usually
appointed by the articles. Section 175 of the Companies Act, 1956 (the Act) provides
that unless the articles of company otherwise provide, the members personally
present at the meeting shall elect one of themselves to be the chairman thereof on a
show of hands.
Election of Chairman
In the absence of any provision in the articles of a company as regards the
election of a chairman of its general meetings, the common law rule is that the
candidate for the office of chairman should not preside over the election; and where
an outgoing chairman seeks re-election, he should vacate the chair pending the
election, unless on a show of hands he is re-elected without any controversy. The
meeting may appoint a temporary or provisional chairman to run the meeting until the
chairman is elected.
Any objection to the appointment of a chairman should be made immediately
because otherwise any irregularity in the nomination may become cured by
acquiescence. [Cornwall v. Woods, (1846) 4 Notes of Cases 555].
Appointment
A. Board Meetings
Most of the companies name in their articles of association the chairman of the
meetings of the Board of directors. Certain other companies incorporate in their
articles a provision corresponding to the provision of Regulation 76 of Table A in
Schedule I to the Companies Act, 1956, which provides; (1) The Board may elect a
chairman of its meetings and determine the period for which he is to hold office. (2) If
no such chairman is elected or if at any meeting the chairman is not present within
five minutes after the time appointed for holding the meeting, the director present
may choose one of their number to be chairman of the meeting.
B. Committee Meetings
With regard to the chairman of the meetings of the various committees of the
Board, Regulation 78 of Table A provides: (1) A committee may elect a chairman of
its meetings, (2) if no such chairman is elected or if at any meeting the chairman is
not present within five minutes after the time appointed for holding the meeting, the
members present may choose one of their number to be chairman of the meeting.
As a matter of convention, the chairman of the meetings of the Board of directors
is a member on all the Board committees and he presides over all the committee
meetings. In exceptional cases, however, the above provision of Regulation 78 or any
corresponding provision in the articles of any company shall govern the appointment
of committee chairman.


Pursuant to Section 292A of the Act, an Audit Committee is required to be
constituted. Its chairman may be a managing or whole-time director or any other
director, whereas in pursuance of the clause 49 of the listing agreement, the
Chairman of the Audit Committee shall be an independent director. The chairman of
the Audit Committee must have to attend the annual general meeting to provide any
clarification on matters relating to audit (Section 292 and Clause 49).
C. General Meetings
Usually the chairman of the meetings of the Board of directors, if named in the
articles of association or if appointed by the Board of directors of a company for a
specific period, presides over all the general meetings of the company. The articles of
association of some companies contain provisions corresponding to the ones in
Regulations 50, 51 and 52 of Table A about the appointment of chairman of the
companys general meetings. Otherwise, if regulations of Table A are not excluded,
the said regulations apply. These Regulations are:
Regulation 50: The chairman, if any, of the Board shall preside as chairman at
every general meeting of the company.
Regulation 51: If there is no such chairman, or if he is not present within fifteen
minutes after the time appointed for holding the meeting or is unwilling to act as
chairman of the meeting, the directors present shall elect one of their number to be
chairman of the meeting.
Regulation 52: If at any meeting no director is willing to act as chairman or if no
director is present within fifteen minutes after the time appointed for holding the
meeting, the members present shall choose one of their number to be chairman of
the meeting.
Removal of Chairman
In order to remove a chairman, the usual procedure would be for a member to
propose a vote of no confidence in the chair and this move should be seconded by
another member. The chairman would have the right to make a representation
against the removal. The matter should then be put to vote. If he loses the vote, he
should relinquish the chair. Thus, a chairman who has been elected by the meeting
can be removed by the meeting [Booth v. Arnold, (1895) 1QB 571]. But where the
companys articles appoint the chairman, the meeting cannot remove him unless it is
due to bad faith, impartiality or abuse of authority.
The articles of a company may govern the point and may provide for challenge to
be made to a ruling of the chairman. The chairman should vacate the chair while the
challenge to his ruling is debated.
Role
The chairman has prima facie authority to decide all questions which arise at a
meeting, and which require decision at the time, but a member by submitting to his
ruling and voting upon a resolution which the chairman allows to be put is not
precluded from maintaining by litigation that he was wrong [In Henderson v. Bank of
Australasia, (1890) 45 Ch D 330(A): (1886-90) All ER Rep Ext1190] it was held that


the entry in the minute book of the chairmans decision is, however, prima facie
evidence of the correctness of the decision, and the onus of displacing that evidence
is on those who impeach it, and there is delay in commencing proceedings, very strict
proof will be required that the entry in the minute book is wrong. [Indian Zoedone Co.,
(1884) 26 Ch D 70 (CA); Ayre v. Skelsey Adaman Cement Co., (1905) 21 TLR 464
(CA)].
Before proceeding with the business of meeting, the chairman must ascertain
that a quorum to constitute the meeting as prescribed under the Act or the Articles of
Association of the Company is present. If there is no quorum, he has to adjourn the
meeting. Where a meeting has commenced with proper quorum, lack of quorum
during the continuance of the meeting will not invalidate the proceedings.
Regulation 53 of Table A gives authority to the chairman to adjourn a meeting
where quorum is present. It lays down: (1) The chairman may, with the consent of
any meeting at which a quorum is present, and shall, if so directed by the meeting,
adjourn the meeting from time to time and from place to place. (2) No business shall
be transacted at any adjourned meeting other than the business left unfinished at the
meeting from which the adjournment took place. (3) When a meeting is adjourned for
thirty days or more, notice of the adjourned meeting shall be given as in the case of
an original meeting. (4) Save as aforesaid, it shall not be necessary to give any notice
of an adjournment or of the business to be transacted at an adjourned meeting. The
Chairman of the meeting has to keep the above provisions in view while conducting
proceedings at such meetings.
The chairman may adjourn meeting at his discretion when he feels that peaceful
conduct of the meeting is not possible. While conducting meetings of Board of
directors, the chairman has to give a sense of direction to the deliberations ensuring
at the same time that he does not curb the freedom of expression of the directors to
enable them to put forth their views on the business before the Board. The chairman
should not dictate or even try to dictate the directors or check them beyond
reasonable limits. He should give opportunity to all the directors present to contribute
their best to the deliberations of the Board. The directors must be allowed to feel that
they are free to put forward their views before the Board takes decisions. The
chairman should allow sufficient time for discussion on all items on the agenda of a
meeting. Rushing with the agenda and claiming that the entire business was
conducted in a very short time does not give any credit to a chairman. He should give
all the directors a sense of participation and should inspire them to do their home
work and come prepared for the meeting and contribute their best to the deliberations
of the Board. The assent of the directors should not be taken for granted. The
chairman must have an extra degree of patience and tact. He should be fair but firm.
The chairman must allow the directors to have a fair and full discussion on each
business before the meeting but at the same time he must make sure that the
discussion must be strictly relevant, brief and to the point. This will ensure
effectiveness of the Board as a decision-making agency of the company.
Whole-time and Part-time Chairman
In India, we have Boards, which are chaired by managing directors, who are
known as chairman-cum-managing director (CMD). We have also Boards, which are


chaired by directors, who are not whole-time directors. A chairman-cum-managing
director (CMD) is sometimes called a whole-time chairman whereas a director, who is
not a whole-time director of the company, is called a part-time chairman. Even if a
managing director is chairman-cum-managing director of the company, he acts as
chairman of the meetings of the Board of directors only when they are held. During
the intervals, he occupies the chair of the managing director. Strictly speaking
therefore, a chairman is never a whole-time chairman. He is always a part-time
chairman. The term whole-time chairman thus seems to be a misnomer.
Where the chief executive, designated either as managing director, executive
director or technical director happens to chair the meetings of the Board of directors
of a company, he convenes/conduct Board meetings essentially to get certain
decisions approved or disapproved as he plans, to feel the pulse of the Board before
issues are presented for decisions and to inform the Board on matters and
developments to the extent he feels prudent to do so. The effectiveness and success
of such a Board, therefore, depends to a great deal, on the clarity of the mind of such
chairman-cum-managing director, the home work done by him and the manner in
which the Board meetings are conducted and he is expected to take pains to go
through all the items on the agenda of a meeting in detail so as to help the
participating directors in appreciating the real nature of the problem, matters and
issues to be discussed, decisions to be taken and policies to be formulated.
Sometimes the Board meetings may not run strictly on the lines expected by the
chairman-cum-managing director and in such cases division of votes or differences of
opinion on certain matters may take place.
Duties and Responsibilities
The primary duty of the chairman of a Board or company meeting is to ensure the
presence of quorum before proceeding with the deliberations of the meeting and then
to conduct the meeting in a peaceful atmosphere so that the business on the agenda
before the meeting is transacted in an orderly fashion.
In National Dwellings Society v. Sykes, (1894) 3 Ch 159, Chitty J said,
Unquestionably it is the duty of the chairman, and his function, to preserve order, and
to take care that the preceedings are conducted in a proper manner, and that the
sense of the meeting is properly ascertained with regard to any question which is
properly put before the meeting. But he has no power to stop or adjourn a meeting at
his will, [Second Consolidated Trust Ltd. v. Ceylon Amalgamated Tea and Rubber
Estates, (1943) 2 All ER 567; Narayan Chettiar S.R.M.S.T. v. Kaleeswarar Mills Ltd.,
(1951) 21 Com Cases 351: AIR 1952 515].
In order to fulfil his duty properly, he must observe strict impartiality, even though
he may be personally and strongly opposed to any matter. He must give a
reasonable chance to the members present to discuss any proposed resolutions, as
long as discussion is kept within reasonable limits. After it has been reasonably
debated he should stop discussion after seeing that the minority is not stifled in any
way. He must bow to the majority vote in respect of all matters where he has to take
a decision. [Wall v. London and Northern Assets Corporation, (1898) 2 Ch 469 (CA)].
But where there is serious disorder, the chairman has an inherent power to
adjourn [John v. Rees (1969) 2 All ER 274 (Ch D)].


It is his duty to ensure that all the participating directors get an opportunity to
express their views on the business before the meeting so that the deliberations and
decisions have the benefit of the experience, knowledge and expertise of all the
participating directors. He must ensure that the discussions are absolutely relevant
and material to the proceedings, not defamatory of any person and not detrimental to
the interests of the company. He must take consensus of the meeting on the
business before the meeting and voting in Board meetings will be by show of hands.
Certain companies provide in their articles that in the event of equality of votes in a
meeting on a subject under discussion, the chairman shall have a second or deciding
vote, which is also known as casting vote. Regulation 54 of Table A contains this
provision. The chairman should take up the routine matters on the agenda first and
dispose off them leaving controversial matters to be taken up later on. Although it is
advisable that the business on the agenda should be considerd in the same order,
yet the chairman may, either with the consent of the meeting or at his own discretion
take up any item and dispose it of for the sake of convenience and expediency.
At a meeting of Board of directors, the chairman may allow any additional
business to be transacted either with the consent of the meeting or at his own
discretion but at a general meeting no motion, of which due notice has not been
given, can be taken up by the chairman even with the consent of the members
present. At the conclusion of a meeting, the chairman should declare the meeting
closed.
Where there is some discussion, he should not use the closure to prevent
discussion, but if the minority shareholders have had sufficient opportunity of stating
their case, he may, with the consent of the meeting, apply the closure and put the
question to vote [Wall v. London and Northern Assets Corporation, (1898) 2 Ch 469].
The chairman may be called upon to decide tricky questions, and must decide them
to on a fair basis. His decisions are to be taken as prima facie correct [Indian
Zoedone Co., (1884) 25 Ch D 70].
The chairman must ensure that minutes of proceedings of all the general
meetings and meetings of Board of directors containing a fair and correct summary of
the proceedings and so far as the meetings of Board are concerned including details
of appointments of all officers made at any of the meetings, names of the directors
present, names of directors interested in particular contract or arrangement approved
by the Board, names of the directors dissenting from or not concurring in a resolution,
if any, are kept by making, within thirty days of the conclusion of every such meeting,
entries there of in books kept for that purpose with their pages consecutively
numbered according to the provisions of Section 193 of the Act. The chairman should
also make sure that each page of the minutes books is initialed and the last page of
each minutes signed with the date of signature in accordance with the provisions of
Sub-section (1A) of Section 193 of the Act. According to explanation to Sub-section
(5) of Section 193 of the Act, the chairman shall exercise an absolute discretion in
regard to the inclusion or non-inclusion of any matter in the minutes on the grounds
specified in the said sub-section.
Chairmans Power under Common Law
The chairman has powers under the common law; such as (1) the power to bring


the discussion on any question to a close (2) the power to adjourn a meeting, if it is
necessary, in his opinion, under any circumstances. The chairman cannot arbitrarily
dissolve or adjourn a meeting, and if he prematurely closes a meeting or adjourns it,
his act will be considered irregular and it will be open to the meeting to select another
chairman and proceed with the business. Like any other member he has an ordinary
vote. But as regards the use of a second or casting vote, he cannot exercise such a
right, unless the articles of the company specially confer it to him as per
Regulation 74(2) of Table A of Schedule I. [Nell v. Longbottom (1894) 1 QB 767].
The decision of chairman of any subject or as to the validity of vote at a meeting
are final and binding on the chairman or his successors at later stage. [Narayanan
Chettiar (S.RM. S.T.) v. Kaleswarar Mills Ltd., (1951) 21 Com Cases 351].
Amendments to Resolution
Any amendment to a resolution which is specified and within the scope of the
notice may be proposed, seconded and passed at the meeting. Such an amendment
cannot be refused by the chairman before the meeting. See Henderson v. Bank of
Australia. (1890) 45 Ch D 330: (1886-90) All ER Rep 1190 (CA), where the chairman
refused to put the amendment, the resolution was set aside.
Adjournment of Meetings
1. The chairman does not have the right to cancel or adjourn a meeting
properly convened, except as provided by the articles and in accordance
therewith.
2. But the chairman has the right to adjourn a meeting when it is impossible to
continue the meeting, by reason of disorder or other like cause [John v.
Rees, (1969) 2 All ER 274 at 290-291].
3. If the chairman attempts to adjourn improperly, the meeting may elect
another chairman and proceed with the business [National Dwelling Society
Ltd. v. Sykes, (1894) 3 Ch 159].
4. Where the articles provide that the chairman may, with the consent of
meeting, adjourn the meeting, he may, in his discretion refuse to adjourn,
even though meeting may resolve to do so. (Salisbury Gold Mining Co. v.
Hathorn, (1897) App Cas 268); but if the articles provide that he shall
adjourn, he has no discretion but must adjourn, if so resolved by the
meeting.
5. Of course, Section 174 provides for adjournment or dissolution as the case
may require, in case of want of quorum.
6. When in an orderly meeting a poll is demanded on a motion to adjourn and
such poll cannot be taken forthwith, the chairman has power to suspend the
meeting with a view to its continuance at a later date after the result of the
poll is known [Jackson v. Hamlyn, (1953) 1 All ER 887: 1953 Ch 577].
7. An adjourned meeting is a continuation of the original meeting, and no new
notice need be given except in cases provided by the articles; cited with
approval by Delhi High Court in S.P. Arora v. Roshanara Club, (1992) 8


Corpt LA 31 at 34 (Del). At an adjourned meeting, only such business as is
left incomplete at the original meeting, can be dealt with unless new notice is
properly given as required by Sections 171, 172 and 173. Resolutions
passed at adjourned meeting are, for all purposes, to be treated as passed
on the date on which they were in fact passed.
Chairmans Declaration as to Result to Voting
As mentioned earlier, when voting takes place by show of hands, the
Chairmans declaration as to the result of voting is a conclusive evidence of the
resolution being passed or not [E.D. Sasoon United Mills, Re, AIR 1929 Bom 38;
Gold Co. (1970) 11 Ch D 701, 719: (1874-80) All ER Rep 957 (CA)]. But there are
two exceptions: (a) when a poll is demanded, [Harben v. Philips, (1883) 23 Ch D 14,
23] and (b) when the declaration is without taking into account of the numbers or
proportion of the votes recorded in favour or against the resolution [Dhakeshwari
Cotton Mills v. Nil Kamal Chakravarthy, (1937) 7 Com. Cases 117: AIR 1937 Cal.
645]. Further the formalities such as the showing of hands must be complied with
even when the motion is unopposed.
Liabilities
The Companies Act fixes no liabilities on the chairman of company and Board
meetings. However, the chairman of the meetings of the Board of directors of a
company, in whom the administration of the company is vested in accordance with
the provisions of its articles of association, company resolution, Board resolution or
an agreement, may be liable for ignoring the duties enjoined upon him. He is,
however, not liable for monies received and spent by him for and on behalf of the
company, if any.
ANNEXURES
ANNEXURE I
SCHEDULE XIII
PART I
APPOINTMENTS
No person shall be eligible for appointment as a managing or whole-time director
or a manager (hereinafter referred to as managerial person) of a company unless he
satisfies the following conditions, namely:
(a) he had not been sentenced to imprisonment for any period, or to a fine
exceeding one thousand rupees, for the conviction of an offence under any
of the following conditions, namely:
(i) the Indian Stamp Act, 1899 (2 of 1899),
(ii) the Central Excises and Salt Act, 1944 (1 of 1944),
(iii) the Industrial (Development and Regulation) Act, 1951 (65 of 1951),
(iv) the Prevention of food Adulteration Act, 1954 (37 of 1954),
(v) the Essential Commodities Act, 1955 (10 of 1955),
(vi) the Companies Act, 1956 (1 of 1956),


(vii) the Securities Contracts (Regulation) Act, 1956 (42 of 1956),
(viii) the Wealth-tax Act, 1957 (27 of 1957),
(ix) the Income-tax Act, 1961 (43 of 1961),
(x) the Customs Act, 1962 (52 of 1962),
(xi) the Monopolies and Restrictive Trade Practices Act, 1969 (54 of 1969),
(xii) the Foreign Exchange Regulation Act, 1973 (46 of 1973),
(xiii) the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of
1986),
(xiv) the Securities and Exchange Board of India Act, 1992 (15 of 1992),
(xv) the Foreign Trade (Development and Regulation) Act, 1992 (52 of
1992),
(b) he had not been detained for any period under the Conservation of foreign
exchange and Prevention of Smuggling Activities Act, 1974 (52 of 1974):
Provided that where the Central Government has given its approval to the
appointment of a person convicted or detained under sub-paragraph (a) or
sub-paragraph (b), as the case may be, no further approval of the Central
Government shall be necessary for the subsequent appointment of that
person if he had not been so convicted or detained subsequent to such
approval;
(c) he has completed the age of twenty-five years and has not attained the
aged of seventy years.
Provided that where:
(i) he has not completed the age of 25 years, but has attained the age of
majority; or
(ii) he has attained the age of 70 years; and
Where his appointment is approved by a special resolution passed by the
company in general meeting, no further approval of the central Government
shall be necessary for such appointment;
(d) where he is a managerial person in more than one company he draws
remuneration from one or more companies subject to the ceiling provided in
Section III of Part II;
(e) he is resident of India.
Explanation I: For the purpose of this Schedule, resident of India includes a
person who has been staying in India for a continuous period of not less than twelve
months immediately preceding the date of his appointment as a managerial person
and who has come to stay in India
(i) for taking up employment in India, or
(ii) for carrying on a business or vocation in India.
Explanation II: This condition shall not apply to the companies in Special
Economic Zones as notified by Department of Commerce from time to time.
Provided that a person, being a non-resident in India shall enter India only after


obtaining a proper Employment Visa from the concerned Indian mission abroad. For
this purpose, such person shall be required to furnish, alongwith the visa application
form, profile of the company, the principal employer and terms and conditions of such
persons appointment.
PART II
REMUNERATION
Section I Remuneration payable by companies having profits
Subject to the provision of Section 198 and 309, a company having profits in a
financial year may pay any remuneration, by way of salary, dearness allowance,
perquisites, commission and other allowances, which shall not exceed five per cent of
its net profits for one such managerial person, and if there is more than one such
managerial person, ten per cent for all of them together.
Section II Remuneration payable by companies having no profits or
inadequate profits
1. Notwithstanding anything contained in this Part, where in any financial year
during the currency of tenure of the managerial person, a company has no profits or
its profits are inadequate, it may pay remuneration to a managerial person, by way of
salary, dearness allowance, perquisites and any other allowances,
(A) not exceeding ceiling limit of Rs. 24,00,000 per annum or Rs. 2,00,000 per
month calculated on the following scale:

Where the effective capital of
Monthly remuneration
the company is
payable shall
not exceed


(Rupees)


(i) less than rupees 1 crore
75,000
(ii)rupees 1 crore or more but less
1,00,000
than rupees 5 crores
(iii)rupees 5 crores or more but less
1,25,000
than rupees 25 crores
(iv)rupees 25 crores or more but less
1,50,000
than rupees 50 crores


(v)rupees 50 crores or more but less
1,75,000
than rupees 100 crores
(vi) rupees 100 crores or more
2,00,000


Provided that the ceiling limits specified under this sub-paragraph shall apply, if
(i) payment of remuneration is approved by a resolution passed by the
Remuneration Committee:
(ii) the company has not made any default in repayment of any of its debts
(including public deposits) or debentures or interest payable thereon for a
continuous period of thirty days in the preceding financial year before the
date of appointment of such managerial person.
(B) not exceeding ceiling limit of Rs. 48,00,000 per annum or Rs. 4,00,000 per
month calculated on the following scale:

Where the effective capital of
Monthly remuneration
the company is
payable shall
not exceed


(Rupees)


(i) less than rupees 1 crore
1,50,000
(ii)rupees 1 crore or more but less
2,00,000
than rupees 5 crores
(iii)rupees 5 crores or more but less
2,50,000
than rupees 25 crores
(iv)rupees 25 crores or more but less
3,00,000
than rupees 50 crores
(v)rupees 50 crores or more but less
3,50,000
than rupees 100 crores
(vi) rupees 100 crores or more
4,00,000




Provided that the ceiling limits specified under this sub-paragraph shall apply, if
(i) payment of remuneration is approved by a resolution passed by the
Remuneration Committee;
(ii) the company has not made any default in repayment of any of its debts
(including public deposits) or debentures or interest payable thereon for a
continuous period of thirty days in the preceding financial year before the
date of appointment of such managerial person;
(iii) a special resolution has been passed at the general meeting of the company
for payment of remuneration for a period not exceeding three years;
(iv) a statement along with a notice calling the general meeting referred to in
clause (iii) is given to the shareholders containing the following information,
namely
I. General information:
(1) Nature of industry
(2) Date or expected date of commencement of commercial
production
(3) In case of new companies, expected date of commencement
of activities as per project approved by financial institutions
appearing in the prospectus.
(4) Financial performance based on given indicators
(5) Export performance and net foreign exchange collaborations
(6) Foreign investments or collaborations, if any.
II. Information about the appointee:
(1) Background details
(2) Past remuneration
(3) Recognition or awards
(4) Job profile and his suitability
(5) Remuneration proposed
(6) Comparative remuneration profile with respect to industry,
size of the company, profile of the position and person (in case of
expatriates the relevant details would be w.r.t the country of his
origin).
(7) Pecuniary relationship directly or indirectly with the company,
or relationship with the managerial personnel, if any.
III. Other information:
(1) Reasons of loss or inadequate profits
(2) Steps taken or proposed to be taken for improvement
(3) Expected increase in productivity and profits in measurable
terms.
IV. Disclosures:
(1) The shareholders of the company shall be informed of the
remuneration package of the managerial person.


(2) The following disclosures shall be mentioned in the Board of
Directors Report under the heading Corporate Governance, if any,
attached to the annual report:
(i) All elements of remuneration package such as salary,
benefits, bonuses, stock options, pension, etc., of all the
directors;
(ii) Details of fixed components and performance linked
incentives along with the performance criteria;
(iii) Service contracts, notice period, severance fees;
(iv) Stock option details, if any, and whether the same has been
issued at a discount as well as the period over which accrued
and over which exercisable;
(C) exceeding the ceiling limit of Rs. 48,00,000 per annum or Rs. 4,00,000 per
month calculated on the following scale:

Where the effective capital of
Monthly remuneration
Company is

payable exceed


(Rupees)


(i) less than rupees 1 crore
1,50,000
(ii)rupees 1 crore or more but less
2,00,000
than rupees 5 crores
(iii)rupees 5 crores or more but less
2,50,000
than rupees 25 crores
(iv)rupees 25 crores or more but less
3,00,000
than rupees 50 crores
(v)rupees 50 crores or more but less
3,50,000
than rupees 100 crores
(vi) rupees 100 crores or more
4,00,000


Provided that the ceiling limits specified under this sub-paragraph shall apply, if
(i) payment of remuneration is approved by a resolution passed by the
Remuneration Committee;


(ii) the company has not made any default in repayment of any of its debts
(including public deposits) or debentures or interest payable thereon for a
continuous period of thirty days in the preceding financial year before the
date of appointment of such managerial person;
(iii) a special resolution has been passed at the general meeting of the company
for payment of remuneration for a period not exceeding three years;
(iv) a statement along with a notice calling the general meeting referred to in
clause (iii) is given to the shareholders containing the following information,
namely
I. General information:
(1) Nature of industry
(2) Date or expected date of commencement of commercial
production
(3) In case of new companies, expected date of commencement
of activities as per project approved by financial institutions
appearing in the prospectus.
(4) Financial performance based on given indicators
(5) Export performance and net foreign exchange collaborations
(6) Foreign investments or collaborators, if any.
II. Information about the appointee:
(1) Background details
(2) Past remuneration
(3) Recognition or awards
(4) Job profile and his suitability
(5) Remuneration proposed
(6) Comparative remuneration profile with respect to industry,
size of the company, profile of the position and person (in case of
expatriates the relevant details would be w.r.t the country of his
origin).
(7) Pecuniary relationship directly or indirectly with the company,
or relationship with the managerial personnel, if any.
III. Other information:
(1) Reasons of loss or inadequate profits
(2) Steps taken or proposed to be taken for improvement
(3) Expected increase in productivity and profits in measurable
terms.
IV. Disclosures:
(1) The shareholders of the company shall be informed of the
remuneration package of the managerial person.
(2) The following disclosures shall be mentioned in the Board of
Directors report under the heading Corporate Governance, if any,


attached to the annual report:
(i) All elements of remuneration package such as salary,
benefits, bonuses, stock options, pension, etc., of all the
directors;
(ii) Details of fixed components and performance linked
incentives along with the performance criteria;
(iii) Service contracts, notice period, severance fees;
(iv) Stock option details, if any, and whether the same has been
issued at a discount as well as the period over which accrued
and over which exercisable:
Provided further that the conditions specified in sub-paragraph (C) shall apply in
the case the effective capital of the company is negative:
Provided also that the prior approval of the Central Government is obtained for
payment of remuneration on the above scale.
(D) not exceeding Rs. 2,40,00,000 per annum or Rs. 20,00,000 per month in respect
of companies in Special Economic Zones as notified by Department of
Commerce from time to time:
Provided that these companies have not raised any money by public issue of
shares or debentures in India:
Provided further that such companies have not made any default in India in
repayment of any of its debts (including public deposits) or debentures or interest
payable thereon for a continuous period of thirty days in any financial year.
2. A managerial person shall also be eligible to the following perquisites which
shall not be included in the computation of the ceiling on remuneration specified in
paragraph 1 of this Section:
(a) contribution to provident fund, superannuation fund or annuity fund to the
extent these either singly or put together are not taxable under the Income-
tax Act, 1961.
(b) gratuity payable at a rate not exceeding half a months salary for each
completed year of service, and
(c) encashment of leave at the end of the tenure.
3. In addition to the perquisites specified in paragraph of this Section, an
expatriate managerial person (including a non-resident Indian), shall be eligible to the
following perquisites which shall not be included in the computation of the ceiling on
remuneration specified in paragraph 1 of this Section:
(a) Childrens education allowance: In case of children studying in or outside
India, an allowance limited to a maximum of Rs. 5,000 per month per child
or actual expenses incurred, whichever is less. Such allowances is
admissible upto a maximum of two children.
(b) Holiday passage for children studying outside India/family staying abroad:


Return holiday passage once in a year by economy class or once in two
years by first class to children and to the members of the family from the
place of their study or stay abroad to India if they are not residing in India
with the managerial person.
(c) Leave travel concession: Return passage for self and family in accordance
with the rules specified by the company where it is proposed that the leave
be spent in home country interest of anywhere in India.
Explanation I: For the purposes of Section II of this part, effective capital
means the aggregate of the paid-up share capital (excluding share application money
or advances against shares): amount, if any, for the time being standing to the credit
of share premium account; reserves and surplus (excluding revaluation reserve);
long-term loans and deposits repayable after one year (excluding working capital
loans, overdrafts, interest due on loans unless funded, bank guarantee, etc., and
other short-term arrangements) as reduced by the aggregate of any investments
(except in the case of investment by an investment company whose principal
business is acquisition of shares, stock debentures or other securities); accumulated
losses and preliminary expenses not written of.
Explanation II: (a) Where the appointment of the managerial person is made in
the year in which company has been incorporated, the effective capital shall be
calculated as on the date of such appointment;
(b) In any other cases, the effective capital shall be calculated as on the last date
of the financial year preceding the financial year in which the appointment of the
managerial person is made.
Explanation III: For the purposes of Section II of this Part, family means the
spouse, dependent children and dependent parents of the managerial person.
Explanation IV: For the purposes of this section, Remuneration Committee
means that a committee which consists of at least three non-executive independent
directors including nominee director or nominee directors, if any.
Explanation V: For the purposes of this clause, the Remuneration Committee
while approving the remuneration under this section shall,
(a) take into account, financial position of the company, trend in the industry,
appointees qualification, experience, past performance, past remuneration,
etc.
(b) be in a position to bring about objectivity in the determining the remuneration
package while striking a balance between the interest of the company and
the shareholders.
Explanation VI: For the purposes of Paragraph 1, negative effective capital
means the effective capital which is calculated:
(a) in accordance with the provisions contained in Explanation I of this Part;
(b) less than zero.
Section III Remuneration payable to a managerial person in two companies


Subject to the provisions of Section I and II, a managerial person shall draw
remuneration from one or both companies, provided that the total remuneration
drawn from the companies does not exceed the higher maximum limit admissible
from any one of the companies of which he is a managerial person.
PART III
PROVISIONS APPLICABLE TO PARTS I AND II OF THIS SCHEDULE
1. The appointment and remuneration referred to in Parts I and II of this
Schedule be subject to approval by a resolution of the shareholders in
general meeting.
2. The auditor or the secretary of the company or where the company has not
appointed a secretary, a secretary in whole-time practice shall certify that
the requirements of this Schedule have been complied with and such
certificate shall be incorporated in the return filed with the Registrar under
Sub-section (2) of Section 269.
CLARIFICATIONS ON SCHEDULE XIII
(A) [Issued by the Ministry of Law, J ustice and Company Affairs vide Circular
No. 3 of 1989 dated 13.04.89].
(i) Section 269
Approval of the Central Government is not required in the case of appointment of
managerial personnel made on or after 15.6.1988 (the date when the amended
provision were enforced), in accordance with the conditions specified in Schedule XIII
to the Act. A return in the prescribed form (form No. 25C) is to be filed with the
concerned Registrar within 90 days from the date of such appointment. While filing
the retun in Form No. 25C, a copy of the resolution passed by the Board of Directors
and/or shareholders in the general meeting is required to be enclosed with the return.
In terms of paragraph 1 of Part-I, II of Schedule XIII to the Act, the appointment and
remuneration of managerial personal shall be subject to approval by a resolution of
the shareholders in the general meeting. The said resolution in the general meeting
can be passed even after the expiry of ninety days period from the date of
appointment by the Board of Directors, and is not required to be filed with the
Registrar, so long as the resolution passed by the Board of Directors has already
been enclosed with the said return.
(ii) Section 268
No approval of the Central Government under Section 268 is required for
appointment or re-appointment of managerial personnel, if made in terms of
Section 269 of the Act.
(iii) Schedule XIII Part I
The conditions specified therein are required to be satisfied only at the time of
appointment. In case the appointee, after appointment, does not satisfy any of the
said conditions, it will not debar the person concerned from continuing in office for the
full tenure of his appointment. For example, as per clause (c), an appointee must not


have attained the age of 65 years at the time of his appointment. If, for example, the
appointment is made at the age of 65 years and thereafter, the appointee crosses the
age of 64 years during the tenure of his appointment, no approval of the Central
Government is required under Section 268 for the latter part of his appointment which
may fall outside the upper age limit.
(B) [Issued by the Ministry of Law, J ustice and Company Affairs, Circular
No. 295, dated 10.02.1994].
(i) With effect from 1.2.1994, remuneration payable by a company having
adequate net profit to its managerial personnel shall be governed by
Section I of Part II of Schedule XIII. In other words, there would be no
restriction on the nature of quantum of remuneration paid by a company to
its managerial personnel as long as the remuneration paid during any
financial years is within 5 per cent or 10 per cent of the net profits, as the
case may be, of that financial year.
(ii) Remuneration payable by a company to a managerial person in the event of
absence or inadequacy of net profits during any financial year shall be
governed by the provisions of Section II of Part II of Schedule XIII. A
company would have full freedom to work out a suitable remuneration
package for its managerial personnel within the limit on remuneration as
specified in Para 1 of Section II of Part II. However, certain perquisites as
specified in paragraphs 2 and 3 of Section II of Part II shall not be taken into
account for computing the ceiling on remuneration.
(iii) The remuneration specified in Section II of Part II of Schedule XIII is
minimum remuneration for the purpose of Section 198 of the Companies
Act which would be admissible in the event of absence or inadequacy of net
profit in any financial year, without the approval of the Central Government
in individual cases. In other words, no separate approval of the Central
Government would be required under Sections 198(4) and 309(3) of the
Companies Act provided the remuneration paid to a managerial person in
the event of absence or inadequacy of net profits in any financial year is in
accordance with the provisions of Section II of Part II of Schedule XIII.
(iv) Regardless of the fact that remuneration of a managerial person may have
initially been fixed in accordance with the provisions of Section I of Part II of
Schedule XIII in view of availability of adequate net profits at the relevant
time, the provisions of Section II of Part II shall become automatically
applicable to him in any financial year in which the company has no profit or
its profits are inadequate. As a consequence thereof, his remuneration
during such a financial year will have to refixed so as to conform the
provisions of Section II of Part II Schedule XIII unless, of course, it is already
within the specified ceiling. Excess remuneration, if already paid, will have
to be recovered from the managerial person in such cases of the approval of
the Central Government will have to be obtained for payment of
remuneration in excess of the provisions of Section II of Part II of
Schedule XIII notwithstanding anything in any agreement entered into with
the concerned managerial person or in any resolution of the company or its


Board.
(v) In a case where Section II of Part II of Schedule XIII is applicable, if the
effective capital of a company is reduced in any financial year subsequent to
the year of appointment (due to repayment of long-term loans, further
accumulation of losses or for any other reason) with the result that the
remuneration payable in that financial year no longer corresponds to the
effective capital, the remuneration will have to be scaled down appropriately
unless approval of the Central Government is obtained to payment of
remuneration in excess of the limits specified in Section II of Part II of
Schedule XIII.
(vi) Where a company intends to increase or otherwise vary remuneration of its
managerial person already in position on the date of notification, it may do
so, from a date not earlier than the date of the notification, subject, to the
provisions of the revised Schedule read with the provisions of Sections 198,
309, 310, 311, 387 and 388 of the Companies Act, without the approval of
the Central Government even where the earlier appointment/remuneration
had been approved by the Central Government except in those cases where
Central Government had accorded conditional approval to the appointment.
For example, in some cases the Central Government approves appointment
of a person subject to the conditions that the company would not increase or
vary his remuneration without obtaining approval of the Central Government
or that the remuneration of a managerial person shall not exceed a specified
ceiling if he has been permitted to work as managerial person in more than
one company and draw remuneration from both the companies. Where such
specific or special conditions have been imposed by the Central
Government while approving appointment/remuneration, these conditions
would still have to be complied with unless varied by the Central
Government.
(vii) The provision for 10 per cent reduction in salary of a managerial person had
been deleted from the revised Schedule XIII effective 14.7.1993. In fact the
remuneration specified in Part II of the Schedule as amended on 14.7.1993
and in Section II of Part II of the Schedule as further amended on 1.2.1994
is itself the minimum remuneration. Hence, where a managerial person
had been appointed (with or without Central Government approval) on a
specified salary with a provision for 10 per cent reduction in salary in the
event of loss or inadequacy of net profits in any financial year, the company
may, if it so wishes, delete the said condition without obtaining Central
Governments approval, in accordance with the provision of Section 310.
(viii) It has been observed that resolution have been adopted in shareholders
meeting of some companies authorising respective Board of Directors to
revise remuneration of managerial personnel in accordance with such
amendments as have made or may be made in Schedule XIII, and such
resolutions of shareholders are being treated as compliance of the
provisions of Part III of the Schedule XIII. It is emphasized that the provision
of Sub-section (i) of Section 309 and Part III of Schedule XIII do not
contemplate any blanket approval of the shareholders and the same must
be specific as to the terms and conditions of appointment and remuneration.
Incidentally Part III of the schedule does not envisage prior approval or


approval within 90 days. All that is required is an approval of the
shareholders in a general meeting. It would, therefore, be appropriate if such
approval is obtained in the first general meeting held immediately after
fixation of remuneration.
DCAs clarification on managerial pay
Companies that have appointed managerial personnel before January 16, 2002,
can continue to pay them the desired remunerations without worrying about
bureaucratic clearances. DCA, while upwardly revising the ceiling of remuneration
payable to managerial personnel to Rs. 4,00,000 per month from Rs. 2,00,000 per
month, in a notification dated January 16, 2002, had stated that the payment of
remuneration should be approved by a resolution of the Remuneration Committee.
The amendment has a prospective effect and that remuneration pertaining to the
period falling after date of notification would be covered by this amendment. It has
further stated that, if part of the period falls prior to the amendment and part of it after
the amendment, than the provisions of the amendment would apply if a major part of
the period falls after the amendment.
STATEMENT OF REMUNERATION PROPOSED
In Rupees/Rupees equivalent per month
A. SALARY
Basic Salary
Bonus
Gratuity (Non-taxable)
Contribution to Provident fund (Non taxable)
Contribution to Superannuation fund/Annuity fund (Non taxable)
B. ALLOWANCES
Entertainment allowance
Special allowance
C. PERQUISITES
Accommodation
Gas/Electricity/Water expenses
Children education
Transport and driver
Leave Travel concession (Non taxable)
Medical reimbursement (Non taxable)
Insurance (a) Personal effect
(b) Medical (Non
taxable)
Servant, mail, cook
Security
Telephone
Club fee


Total
Note 1 Any other item(s), which the company wants to indicate, may be added in the
appropriate group above.
Note 2 As per explanation given under Section 198 of the Companies Act, 1956, the
salary and perquisites included in the total remuneration should be valued as
per actual cost.
Note 3 Income tax liability be indicated on a separate sheet to be attached.

LESSON ROUND-UP
A managing director means a director who, by virtue of an agreement with the
company or of a resolution passed by the company in general meeting or by its
board of directors or by virtue of its memorandum or articles of association is
entrusted with substantial powers of management which would not otherwise be
exercisable by him and includes a director occupying the position of a managing
director, by whatever name called.
On appointment of a person as a managing director or whole-time director or
manager, a return in e-form 25C within 90 days from the date of such
appointment is required to be filed with ROC.
In case, the provisions of Schedule XIII cannot be fulfilled by a company, an
application seeking approval to the appointment of a managing director/
wholetime director/manager shall be made to Central Government in e-form 25A.
To remove a person from managing directorship, approval of the Central
Government is not required.
The substantive provisions with regard to appointment and reappointment of
whole time director are similar to that of managing director.
Unlike the managing director of a company, an executive director or a whole time
director is not entrusted by the company with substantial powers of management
of the business and affairs of the company.
Manager means an individual who subject to the superintendence, control and
direction of the Board of Directors has the management of the whole or
substantially the whole of the affairs of a company and includes a director or any
other person occupying the position of a manager by whatever name called and
whether under a contract of service or not.
A company can at the same time, have two or more managing directors or two or
more managers but cannot have both manager and managing director.
Section 309 of the Companies Act contains provisions regarding remuneration of
directors including any managing or whole time directors.
The chairman is a necessary element of company meeting and is usually
appointed by the articles.
Primary duty of the chairman of a Board or company meeting is to ensure the
presence of quorum before proceeding with the deliberations of the meeting and
then to conduct the meeting in a peaceful atmosphere so that all items of the
agenda are conducted in an orderly fashion.



SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation).
1. Discuss the role of Chairman-cum-Managing Director of an average sized
company in India.
2. Write a note on the appointment, role and responsibility of a whole-time
director.
3. Distinguish between Managing Director and Manager.
4. Define Director-Manager. State his duties and responsibilities.
5. Can a Managing Director be paid compensation for loss of office?
6. State the provisions of the Companies Act, 1956, relating to remuneration of
Managerial Personnel.
7. Define 'Managing Director'. State detailed provisions relating to appointment
of a managing director.
8. Can we provide for some perquisites payable to managerial personnel? If
yes, then which perquisites shall be included in the definition of
remuneration paid or payable to them and which perquisites paid or
payable shall not be included in the said term.


Suggested Readings:
1. A Guide to Companies Act A. Ramaiya.
2. Company Law and Practice A.K. Majumdar & G.K. Kapoor.
3. Circulars and Clarification on Company Law & SEBI Taxmann.
















STUDY XVII
MANAGEMENT AND CONTROL OF COMPANIES-IV
COMPANY SECRETARY

LEARNING OBJECTIVES
Every company having a paid up share capital of Rs. 5 crores (at present) shall have
a company secretary. Company secretary holds key position in a company. He is
entrusted with the responsibility for due compliance with all such legal formalities.
After going through this study, you will be able to learn the following:
Who is company secretary
Importance and position of a Secretary
Qualities and Qualifications of a Company Secretary
Appointment of a Secretary.
Dismissal of a Secretary
Powers of a Secretary
Duties, rights and liabilities of a Company Secretary
Role of Company Secretary
Company Secretary in practice
Areas of practice
Code of Conduct
Quality Review Board and Peer Review.

1. WHO IS A SECRETARY?
In order to understand the meaning, importance and also position of a secretary,
it would be desirable to examine the definition of the term secretary. The Chambers
20th Century Dictionary defines secretary as a person employed to write or transact
business for another or for a society, company, etc. The word secretary is derived
from the word secret implying that there is something confidential and secretive
about his job though there is another view that the word secretary has been derived
from the Latin word secretarius which means a notary or scribe.
Who is a Company Secretary?
According to Section 2(45) of the Companies Act, 1956, a secretary means a
company secretary within the meaning of Clause (c) of Sub-section (1) of Section 2 of
the Company Secretaries Act, 1980 and includes any other individual possessing the
prescribed qualifications and appointed to perform the duties which may be
performed by a secretary under this Act or any other ministerial or administrative
duties. This definition brought the earlier definition of the secretary in line with a
definition of company secretary contained in Company Secretaries Act, 1980. Clause
(c) of Sub-section (1) of Section 2 of the Company Secretaries Act, defines a
company secretary as a person who is a member of the Institute.
651


Thus, secretary, as per this definition, should either be a member of the Institute
of Company Secretaries of India (ICSI) or be an individual possessing qualifications
as may be prescribed by the Government.
Statutory Requirement
Section 383A of the Companies Act, 1956 as amended by the Companies
(Amendment) Act, 1988 introduced the statutory requirement for certain companies to
have a company secretary. Sub-section (1) of the section provides that every
company having a paid-up share capital of such sum as may be prescribed shall
have a whole-time secretary and where the Board of directors of any such company
comprises of only two directors, neither of them shall be the secretary of the
company. The Government has in exercise of its powers under this section and
Section 2(45), framed the Companies (Appointment and Qualifications of Secretary)
Rules, 1988 and provided that every company having a paid-up share capital of not
less than the prescribed amount (presently rupees 2 crores) must have a whole-time
secretary who should be a member of the Institute. Further, the rules provide that in
the case of a company with a lesser paid-up share capital, where the paid-up share
capital of such company is increased to rupees 2 crores or more, the company shall
within a period of one year from the date of such increase appoint a person as a
whole-time secretary who should be member of the Institute.
Section 383A has been further amended by the Companies (Amendment) Act,
2000 and a proviso to Sub-section has been inserted which provides that every
company, which is not required to employ a whole-time secretary under Sub-section
(1) and having a paid-up share capital of ten lakh rupees or more, shall file with the
Registrar a certificate from a secretary in whole-time practice in such form and within
such time and subject to such conditions, as may be prescribed as to whether the
company has complied with all the provisions of the Act and a copy of such certificate
shall be attached with Boards report referred to in Section 217 of the Act. The
Government has since prescribed the rules called the Companies (Compliance
Certificate) Rules, 2001 which have come into force vide GSR 52(E) dated
31.1.2001. The Compliance Certificate is required to be in the prescribed form or as
near thereto as circumstances admit in respect of each financial year. This certificate
is to be filed within thirty days from the date on which annual general meeting was
held or the latest day on which the annual general meeting should have been held in
accordance with the provisions of the Act.
Where a company fails to comply with the above provisions the company and
every officer of the company, who is in default, shall be punishable with fine which
may extend to five hundred rupees for every day during which the default continues.
However, in any proceedings against a person in respect of an offence thereunder it
shall be a defence to prove that (i) all reasonable efforts to comply with the provisions
of Sub-section (1) were taken (ii) that the financial position of the company was such
that it was beyond its capacity to engage a whole-time secretary. [Sub-section (1A)
Section 383A].
If a company, which is not required to appoint a whole-time company secretary
has voluntarily appointed a whole-time secretary, within the meaning of Section
2(1)(c) of the Company Secretaries Act, 1980, such a company is not required to


obtain compliance certificate from a Company Secretary in Practice (DCA-General
Circular No. 35/2003 dated 11.12.2003).
Secretary in Section 25 Companies
The provisions of Section 383A of the Act are applicable to Section 25
Companies also. Hence, these companies are required to appoint a full time
secretary in their employment. However, Notification No. SO 1578 (1.7.61), SO 2767
(5.8.64), GSR 73 (30.12.65) and SO 35(E) (9.1.76) have partly exempted the
Section 25 Companies from the applicability of Section 2(45) which defines a
Secretary. Thus, the secretary of a Section 25 Company need not be a person who is
a member of ICSI.
Secretaries for Companies situated in Small Towns
The companies whose registered offices and corporate offices and works are
situated in towns where the population is less than one lakh in accordance with the
Census of India of 2001 Report may appoint any individual as the secretary of their
company, if the person proposed to be appointed as the secretary of the company
possesses any one or more of the qualifications as specified in clauses (i) to (x) of
sub-rule (4) of the said Rules of 1988, provided the paid up capital of such companies
is rupees two crores or more but less than 5 crores. However, if these companies
shift either their registered or corporate office or works from such towns, then, these
companies shall appoint a person as a whole time secretary of the company with
qualifications as prescribed under sub-rule (1) of the Rules of 1988.
2. IMPORTANCE OF SECRETARY
In ancient times, the term secretary applied solely to the officer who conducted
correspondence for the king, but in modern times the duties and functions of a
secretary have become wide and varied and he no longer resembles his ancient
counterpart. Not only are there company secretaries, but secretaries are also
appointed by institutions like clubs, trade and professional associations, cooperative
societies, local bodies, etc. His duties range from conducting all correspondence,
keeping all records and accounts, writing of minutes to acting as public relations
officer of the employer.
In modern times, the secretary has become almost an indispensable person in
trade, industry and other social institutions. Any organisation from a sports club right
upto the State cannot think of managing its affairs without appointing a secretary.
However, the importance and nature of the functions of a secretary differ from
organisation to organisation.
The importance of a secretary is specially felt in the business world since the
business organisations have to abide by certain legal requirements. The secretary is
entrusted with the responsibility for due compliance with all such legal formalities.
The Secretary also acts as the companys spokesperson between the management
and the staff as well as the outsiders and the shareholders.


3. POSITION OF THE SECRETARY
In order to understand the position of a secretary in any company today, it would
be useful to make a short historical reassessment of the position of a secretary. The
office of a secretary is as old as the concept of the corporate sector which goes
beyond the trading companies of the 17th Century like the East India Company, etc.
The role of a secretary from the position of almost a clerk to that of an important
figure in the corporate set-up has been acknowledged by judicial decisions over a
period of time. The traditional view as propounded by Lord Esher in his judgement in
Newlands v. National Employer's Accident Association Ltd. and reiterated by a Court
of appeal in the cases of Barnett Hoares & Co. v. The South London Tramways
Company C.A. (1887) 18 Q.B.D. 815 and George White Church Ltd. v. Caranagh,
1902 AC 117 was:
A Secretary is a mere servant, his position is that he is to do what he is told and
no person can assume that he has any authority to represent anything at all nor can
any one assume that statements made by him are necessarily to be accepted as
trustworthy without further enquiry any more than in the case of a merchant it can be
assumed that one who is only a clerk has authority to make representation to induce
persons to enter into contracts.
Accordingly, in the past it has been held that a company is not liable for the act of
its secretary in fraudulently making representations to induce persons to take shares
in the company, or in issuing a forged share certificate. The secretary is, however,
the proper official to issue share certificates, and so the company is estopped or
barred from denying the truth of genuine share certificates issued by him without the
authority of the company.
It has also been held that:
(a) He cannot participate in the management of the companys affairs; Barnett
v. The South London Tramways Co. (ibid).
(b) He cannot negotiate contracts on behalf of the company [Barnett (ibid) v.
The South London Tramways Co., other than the contracts necessary for
carrying on the administration of the companys organisation such as,
contracts for the employment of staff, the acquisition of office equipment or
the hiring of transport for customers visiting companys factory, Panorama
Development (Guildford) Ltd. v. Fidelis Furnishing Fabrics Ltd. (1971) 3 All
ER 16 C.A.
(c) He cannot borrow money in the companys name; Cleadon Trust Ltd., Re.
(1938) 4 All ER 518.
(d) He cannot register transfers of shares without the Boards authority; Chida
Mines Ltd. v. Anderson (1905) 22 TLR 27.
(e) He cannot call meetings of members. An act done by the secretary after
mentioning the matter to some of the directors, but without any express
approval of the directors and without a board meeting being held to consider
the question will not be considered the act of directors. Haycraft Gold
Reduction & Mining Co., Re. (1900) 2 Ch 230; State of Wyoming Syndicate,
Re. (1901) 2 Ch. 431.


(f) He has no power to strike a name off the Register of Members, without
authority by the Board of directors, Wheatcrofts case, Re. Matlock Old Bath
Hydropathic Co. (1873) 29 L.T. 324.
(g) He has no independent authority to bind the company by contract; Houghton
(J.C.) & Co. v. Nothard, Lowe and Wills (1928) A.C. I.H.C.
A striking departure however was made in Panorama Development
(Guildford) Ltd. v. Fidelis Furnishing Fabrics Ltd. In the judgement delivered by
Lord Denning in the Court of Appeal on 26th May, 1971, he overruled the 19th
Century judgement and said:
But times have changed. A company secretary is a much more important
person now-a-days than he was in 1887. He is an Officer of the company with
extensive duties and responsibilities. This appears not only in the modern
Companies Act but also by the role which he plays in the day-to-day business
of the company. He is no longer a mere clerk. He regularly makes
representations on behalf of the company and enters into contracts on its
behalf which come within the day-to-day running of the companys business.
So much so that he may be regarded as having been held out as having
authority to do such things on behalf of the company. He is certainly entitled to
sign contracts connected with the administrative side of a companys affairs,
such as employing staff and ordering cars and so forth. All such matters now
come within the ostensible authority of a company secretary.
The changing role and importance of a company secretary has also been
incorporated in the statutes over the years. Whilst the Companies Act, 1956 provides
for the appointment of a company secretary in companies having a paid-up capital of
Rs. 2 crores or more, under the English Companies Act, it is obligatory for every
company to appoint a company secretary. The importance of the role of a secretary is
also recognised in other statutes like the Income Tax Act, 1961 the MRTP Act,
*
1969
etc., where the secretary is considered as the principal officer.
With growing industrialisation, the task of company administration has become
more and more complex. The enactment of various economic legislations like
Companies Act, 1956, Industries (Development and Regulation) Act, 1951, MRTP
Act, 1969 and Foreign Exchange Management Act, 1999 (earlier FERA) to name a
few has increased the importance and the role of a company secretary in a company.
The complexities of company administration require comprehensive understanding of
law, accountancy, management, labour law, industrial relations and a multitude of
other aspects affecting the day-to-day functions of company. The liberalised
economic scenario since 1991, the abolition of Capital Issues (Control) Act, 1947 and
the enactment of the Securities and Exchange Board of India Act, 1992 have vastly
changed the complexion of the office of secretary in India. A company secretary
today can act as a vital link between the management and the shareholders. He can
examine and report upon the governance structures and policies, give expert
guidance in strategic planning of mergers and corporate restructuring and act as the
conscience keeper of the company.

*
Not yet repealed.


4. QUALITIES AND QUALIFICATIONSCOMPANIES (APPOINTMENT AND
QUALIFICATIONS OF SECRETARY) RULES, 1988
The general qualities expected of a good company secretary are: sound
education, knowledge of business, law and procedures, finance, good personality,
integrity, time management, capacity to manage and leadership qualities, high sense
of justice, a balanced mind and a good grasp of things.
In the words, of Sir Edwin Stockton at the Secretaries Conference held at Buxton
in 1927:
The secretary must have sound education and be well informed. He should have
specialised knowledge of the profession or business in which he is engaged and be
piercing enough to master the technique of his business and its know-how. He should
be in a position to adapt himself to situations and changing conditions and keep
himself abreast of all legislations and judge made law that may affect or is to affect
the industry.
He must have the drive to make quick decisions and be in a position to secure
the willing co-operation of all who run the race of administration of the company along
with him.
Being a liaison officer, he should have the sense of justice, self control and
sympathy in his dealings with others with whom he might come into contact in the
course of his administrative activities.
He should at once be a quasi-lawyer, a quasi-economist and particularly he
should seek to master the intricacies of modern finance and its bearings upon the
activities of his company.
His personality should be, in the minds and eyes of his associates and others in
the higher hierarchy, such that he may slowly but steadily improve his image and
instil confidence in others who put him in office.
The Department of Company Affairs, has vide Notification F.No. 1/29/87-CL.V
dated 29.11.1988, framed the Companies (Appointment and Qualifications of
Secretary) Rules, 1988. The text of these rules is reproduced below:
In exercise of the powers conferred by clauses (a) and (b) of Section 642 read
with clause (45) of Section 2 and Section 383A of the Companies Act, 1956 (1 of
1956), and in supersession of the Companies (Secretarys Qualifications) Rules
1975, the Central Government hereby makes the following rules namely:
1. Short Title and Commencement
(1) These rules may be called the Companies (Appointment and Qualifications
of Secretary) Rules, 1988.
(2) It shall come into force on the First day of December 1988.


2. Appointment etc. of whole-time secretary
(1) Every company having a paid-up share capital of not less than rupees five
crores shall have a whole-time secretary.
(2) No person shall be appointed as whole-time secretary under Sub-rule (1)
unless he is a member of the Institute of Company Secretaries of India
constituted under the Company Secretaries Act, 1980 (56 of 1980).
(3) A company having a paid-up share capital of less than rupees two crores
may appoint any individual as its whole-time secretary to perform the duties
of a secretary under the Companies Act, 1956 and any other ministerial or
administrative duties:
Provided that no individual shall be eligible to be so appointed unless he
possesses one or more of the qualifications specified in Sub-rule (4).
(3A) A company having a paid up share capital or two crore rupees or more but
less than five crore rupees may appoint any individual who possesses the
qualification of membership of the Institute of Company Secretaries of India
constituted under the Company Secretaries Act, 1980 (56 of 1980), as a
whole-time secretary to perform the duties of a secretary under the
Companies Act, 1956:
Provided that where a company has appointed under sub-rule (3) or this
sub-rule, a whole-time company secretary, possessing the qualification of
membership of the Institute of Company Secretaries of India, such a
company is not required to obtain a certificate from a secretary in whole-time
practice under Rule 3 of the Companies (Compliance Certificate) Rules,
2001.
(4) No individual shall be appointed as secretary pursuant to Sub-rule (3)
unless he possesses any one or more of the following qualifications,
namely:
(i)membership of the Institute of Company Secretaries of India constituted under
the Company Secretaries Act, 1980 (56 of 1980);
(ii)pass in the intermediate examination conducted either by the Institute of
Company Secretaries of India constituted under the Company
Secretaries Act, 1980 (56 of 1980) or by the earlier Institute of Company
Secretaries of India incorporated on 4th October, 1968 under the
Companies Act, 1956 and licensed under Section 25 of that Act;
(iii)post graduate degree of commerce or corporate secretaryship granted by any
University in India;
(iv)degree in law granted by any University;
(v)membership of the Institute of Chartered Accountants of India constituted
under the Chartered Accountants Act, 1949 (38 of 1949);


(vi)membership of the Institute of Cost and Works Accountants of India
constituted under the Cost and Works Accountants Act, 1959 (23 of
1959);
(vii)post graduate degree or diploma in management sciences, granted by any
University, or the Institutes of Management, Ahmedabad, Calcutta,
Bangalore or Lucknow;
(viii)post graduate diploma in company secretaryship granted by the Institute of
Commercial Practice under Delhi Administration or Diploma in
Corporate Laws and Management granted by the Indian Law Institute,
New Delhi;
(ix)post graduate diploma in company law and secretarial practice granted by the
University of Udaipur; or
(x)membership of the Association of Secretaries and Managers, Calcutta,
registered under the West Bengal Registration of Societies Act, 1961
(XXVI of 1961).
Provided that where the paid-up share capital of such company is increased to
rupees five crores or more, the company shall, within a period of one year from the
date of such increase, comply with the provisions of Sub-rule (1) and (2) of Rule 2.
Explanation. In this Rule, University has the meaning assigned to it in the
University Grants Commission Act, 1956 (No. 3 of 1956) and includes any University
outside India which is recognised by the Union Public Service Commission for the
purposes of recruitment to public services and posts in connection with the service
affairs of the Union or of any State.
3. Provisions relating to existing secretaries
Notwithstanding anything contained in Sub-rules (1) and (2) of Rule 2, the
qualifications possessed by a person holding the office of whole-time secretary of a
company immediately before 30th October, 1980, in terms of the second proviso to
clause (a) of Rule 2 of the Companies (Secretaries Qualifications) Rules, 1975, shall
be deemed to be the qualifications which he shall be required to possess in order to
be eligible to continue as whole-time secretary in that company.
5. APPOINTMENT OF A SECRETARY
We have seen that in terms of Section 383A of the Companies Act, it is
necessary to appoint a secretary in a company having a paid-up capital of Rs. 2 crore
or more who is an individual possessing the prescribed qualifications, i.e., he should
be member of the Institute of Company Secretaries of India.
The secretary being a whole-time employee, his appointment, and remuneration
will be similar to that of other employees in his cadre in that organisation. Normally
the appointment of a company secretary is done by means of a resolution of the
Board as the position of a company secretary is slightly different from that of other
officers, as he is an officer recognised under the Companies Act, 1956. He is an
officer of the Board. In view of the statutory provisions relating to his appointment, it


would be desirable even though it is not incumbent, that such appointment is made
by means of a resolution passed at a meeting of the Board of directors.
Any contract of appointment of an individual as company secretary, of a company
prior to the incorporation of the company would not automatically empower the
person so appointed to work as secretary after the formation of the company. Such
an appointment cannot even be ratified by the company after its incorporation on the
principle laid down in Kelner v. Baxter (1866) L.R. 2 C.P. 174; which stipulates that a
contract cannot be ratified if the principal had no contractual capacity at the time of
contract and it was entered into on behalf of the principal company not in existence.
In such cases, it is necessary for the company secretary so appointed to enter into a
fresh contract with the company after it came into existence. Sometimes, even the
name of the person to be appointed as the company secretary, is indicated in Articles
of Association. But they do not also bind either the company or its members and,
therefore, appointing a person as secretary in such a manner does not confer on him
a right to sue since he is not a party to the contract [Eley v. Positive Government
Security Life Assurance Co. (1878) 1 Ex. D. 88 (C.A.)]. Therefore, a statement in the
articles of association that a certain person will be the secretary or other officer of the
company will not be treated as a contract and such person should ensure that the
appointment is made by a resolution or by a contract duly executed after the
incorporation of the company. The Articles authorise the Board to appoint a person
as the secretary of the company.
Appointment of a person who is a director as a secretary in the company would
fall within the ambit of Section 314 and would require approval of the company by
special resolution. Even for appointment of certain persons specified under Section
314 other than directors would require approval of the company by special resolution
or special resolution and approval of the Central Government, as per the requirement
of the Section.
A specimen board resolution is given below for such appointment though it will
vary from company to company:
Resolved that Mr...................... who possesses the requisite qualification under
the Companies (Appointment and Qualifications of Secretary) Rules, 1988 be and
is hereby appointed as a secretary on the terms and conditions contained in the draft
letter of appointment, a copy of which was initialled by the Chairman for the purposes
of identification and tabled and approved at the meeting.
In terms of Section 303 of the Companies Act, 1956, the appointment and
cessation of office of a person as secretary must be recorded in the Register of
Directors/Manager/Secretary, and e-Form 32 relating to such appointment and
cessation must be filed with the Registrar of Companies within 30 days from the date
of appointment/cessation as the case may be, alongwith the requisite filing fee.
Appointing more than one Secretary
Section 383A(1) of the Act makes it obligatory for every company having a
prescribed capital, to have a whole time secretary. This shall mean that the company
should have a minimum of one secretary. In practice, there is no bar on appointment
of two or more secretaries in a single company. Hence, if there are two or more


secretaries in a company, it shall not be in violation of the provisions of this section.
However, e-Form 32 shall be filed with ROC for every individual appointed as the
secretary of the company. Work allocation between different secretaries is the
prerogative of the company.
6. DISMISSAL OF A SECRETARY
The appointment of a company secretary is generally done by means of a
resolution of the Board and his dismissal, therefore, can be done by the Board of
directors or by the Managing Director, if he is so authorised by the Board.
In the case of Haryana Seeds Development Corporation Ltd. v. J.K. Aggarwal,
Company Secretary (1989) 65 Comp. Cas. 95, the Punjab and Haryana High Court
held that where the articles so provide, it will not be within the jurisdiction of the
managing director of the company to remove the secretary in exercise of the power
delegated to him by the Board of directors to suspend or remove secretaries, officers,
etc. The power to remove or appoint a secretary, being explicity vested in the Board
of directors by the articles, can also be delegated to the managing director.
The secretary must be given notice of termination of his employment in
accordance with the terms of his contract of appointment. In the absence of express
provision in the contract, the employee is entitled to a reasonable notice or
compensation in lieu of such notice.
But, dismissal of a secretary without notice cannot be looked upon as improper in
all cases. An employee may be dismissed summarily without notice:
(i) for wilful disobedience of any lawful order of the company [Spain v. Arnott,
(1817) 2 Stark 256].
(ii) for misconduct and for speculating on the stock exchange [Pearce v. Foster,
(1886) 17 Q.B.D. 536, 541].
(iii) for incompetence or permanent disability. [Harmer v. Cornelius (1858) 5
C.B. (N.S.) 236]. Even an act of forgetfulness by an employee has been held
as sufficient cause for dismissing him without notice if it has or is calculated
to have serious results [Addis v. Gramophone Co. (1909) A.C. 488].
Even where the engagement of a secretary is for a fixed term, the company may
determine the employment earlier after giving proper notice in this regard [African
Association and Allen, Re. (1910) 1 K.B. 396].
7. POWERS OF SECRETARY
The secretary of a company is empowered to perform the following:
(i) All functions which he is required to perform under various enactments like
the Companies Act, the MRTP Act, the Income Tax Act, FEMA, Excise
Customs Act, Customs Tariff Act etc.
(ii) All acts which the Board of directors specifically direct him to perform.
(iii) All acts which are essential to enable him to discharge his duties smoothly
as the administrative head in his department.


The powers of the secretary mentioned above are conferred on him either under
the Act or by the Board or out of his service agreement with the company. At times,
the general meetings also authorise him to perform an act. However, if the secretary
performs an act without being so authorised the company may not be bound by it.
8. DUTIES OF A SECRETARY
The role and position of a company secretary varies from company to company
and, therefore, it would be difficult to codify his duties. However, it can be said that
the company secretary acts in three-fold capacity, namely:
(a) as an agent of the Board of directors, i.e. as a liaison or link between the
Board on the one hand and the executive and staff, shareholders,
customers and general public on the other;
(b) as an officer-in-charge of secretarial work;
(c) as a chief business executive or chief administrative officer of the company,
if he is put incharge of office administration, including accounts, taxation and
legal sections.
Whilst all the above three functions will possibly be performed by a company
secretary for small or medium sized companies, in big companies there could be a
chief accountant, a personnel manager or legal officer who may be in charge of the
functions relating to accounts, personnel and law and they may report to the
secretary or could report directly to the chief executive of the organisation.
In fact the duties of a company secretary in any modern organisation have
greatly expanded and he is today considered as a generalist specialist. In fact his
change of position was taken into consideration when the name of the Institute of
Chartered Secretaries in U.K. was changed to Institute of Chartered Secretaries and
Administrators.
In U.K. the Department of Employment conducted a survey on the role of a
company secretary and a report entitled Training for Company Secretaryship by the
sub-committee on company secretaryship/office management of the Joint Industrial
Board Committee for commercial and administrative training was published. The
report whilst mentioning that the duties and responsibilities of company secretaries
vary widely depending on the size and type of activity carried on by the company and
on the form of organisation adopted, emphasises that in view of the importance of
the role that the company secretary plays in companies of all sizes, in respect of both
statutory requirements and administrative responsibilities, professional qualification is
highly desirable. The report, therefore, indicates various aspects of training, the
mode of training and how to make it more purposeful and effective.
The report enumerates the various desirable qualities of a company secretary for
carrying on substantial responsibilities and working successfully with other staff at
management level. It also indicates that one of the important tasks of a company
secretary is collection and analysis of information and its presentation in concise and
accurate form in memoranda or reports to the Board.


The problems of modern corporations are gigantic and with the business process
becoming more and more complex the problems are assuming enormous
proportions. Whilst the companies engage a number of specialists to attend to these
problems yet it remains for the company secretary with his all-round expertise to
coordinate the various processes and ensure the smooth functioning of the company.
Indeed the company secretary is the pivot around which the whole corporate
machinery revolves.
The Statutory and General duties are briefly illustrated below:
A. Statutory Duties
(I) Under the Companies Act:
(i) To sign any document or proceedings requiring authentication by the
company (Section 54).
(ii) To arrange to file statement in lieu of prospectus (Section 70).
(iii) To deliver for registration of return of allotment and contracts relating to
allotment of shares for consideration other than cash (Section 75).
(iv) To give notice of the increase in the share capital to the Registrar
(Section 97).
(v) To deliver the share or debenture certificate within 3 months of allotment or
within 2 months of registration of transfer (Section 113).
(vi) To make entries in the register of members on issue of share warrants
(Section 115).
(vii) To make available for inspection trust deed to every member or debenture
holder and to forward a copy of it to the members or debenture holders on
their request and within 7 days of request on payment of prescribed fee
(Section 118).
(viii) To deliver for registration particulars of mortgages and charges to the
Registrar (Sections 125-127).
(ix) To file Notice of situation of registered office or change thereof of the
company in the prescribed e-Form 18 (Section 146).
(x) To get painted or affixed the name plate of the company outside every office
or the place of its business, to get it printed on documents of the company
and to get it engraved on the seal of the company (Section 147).
(xi) To make a statutory declaration for obtaining the certificate of
commencement of business and file it with the Registrar (Section 149).
(xii) To sign the Annual Return (Section 161).
(xiii) To allow inspection of and to furnish copies of register of members and
register of debentureholders (Section 163).
(xiv) To send notices of general meetings to every member of the company
(Section 171).
(xv) To file resolutions and agreements requiring registration with the Registrar
(Section 192).


(xvi) To prepare minutes of every general meeting and of every meeting of Board
of directors or of every committee of the Board within 30 days of the
conclusion of every such meeting (Section 193).
(xvii) To make available for inspection the minute books of general meetings
(Section 196).
(xviii) To sign the Balance Sheet of the company (Section 215).
(xix) To send notices of the meetings of Directors (Section 286).
(xx) To make available Register of directors for inspection (Section 304).
(xxi) To assist in preparing the statement of affairs in a winding up for the
purpose of submitting it to the liquidator (Section 454).
(xxii) To inform auditor of his appointment (Section 224).
(xxiii) To file returns with Registrar, if applicable under Section 95, 103, 187C, 220,
394(3) and 395.
(xxiv) To maintain the following statutory books:
(1)Register of investments held by company in name of its nominee (Section 49).
(2)Register of charges (Section 143).
(3)Register and index of members (Section 150).
(4)Register and Index of Debentureholders (Section 152).
(5)Register of contracts in which directors are interested (Section 301).
(6)Register of directors, manager and secretary (Section 303).
(7)Register of directors shareholdings (Section 307).
(8)Register of Loans and Investments (Section 372A).
(9)Register of renewed and duplicate certificates (Issue of Share Certificate
Rules).
(II) Duties under other Acts:
1. Under the Income-tax Act: A company secretary is a Principal Officer of a
company under Section 2(35) of the Income-tax Act, 1961. The Act imposes certain
obligations upon him:
(1) To ensure that proper income-tax is deducted at source from the salaries
paid to the employees, or from interest paid/payable to debenture holders or
depositors respectively.
(2) To see that a certificate of income-tax deducted at source is furnished to
every debenture holder or depositor.
(3) To ensure that the tax so deducted has been deposited in the Government
treasury.
(4) To submit and verify miscellaneous statements, forms and returns.
(5) To ensure that the dividend tax has been deposited in the Government
Treasury.
2. Under the Indian Stamp Act: It is the duty of the secretary to see that
documents like letters of allotment, share certificates, share warrants, debenture


certificates and transfer forms, etc. are properly stamped as per the requirements of
the Indian Stamp Act.
3. Under Other Acts: In addition to the above, the secretary is also required to
perform the various duties specified in The Industrial Disputes Act, 1947, The
Employees State Insurance Act, 1948, The Minimum Wages Act, 1948, The Payment
of Wages Act, 1936, The Factories Act, 1948, The Provident Fund Act, 1952, Foreign
Exchange Management Act (FEMA), 1999, Monopolies and Restrictive Trade
Practices (MRTP) Act, 1969, the Securities and Exchange Board of India Act, 1992
(SEBI), the Securities Contracts (Regulation) Act, 1956 and the Depositories Act,
1986.
B. General Duties
Duties towards Directors, Managing Director, Manager, etc.
The duties of the company secretary in relation to the directors may be stated
briefly as follows:
1. To do all those acts which a director (where authorised) or any other
managerial personnel specifically directs him to do.
2. To assist the chairman to convene Board and general meetings and to make
necessary arrangements in this regard.
3. To advise directors and managing directors, regarding complying with their
statutory duties.
Duties towards shareholders and public
1. To perform all the necessary things relating to shares and debentures,
issuing a prospectus, inviting applications for the subscription of shares and
debentures, arranging for allotment and issuing share certificates and
debentures, handling transfer and transmission of shares and debentures,
arranging payment of dividend and interest on shares and debentures
respectively.
2. To handle all correspondence between the company and the shareholders,
creditors and public. But should abstain from disclosing any confidential or
secret information relating to the affairs of the company.
3. To allow the inspection of various books and registers desired by the
members and other persons as per the provisions of the Companies Act,
1956 unless such inspection is prohibited under the said Act.
4. To ensure transparency and accountability in the operations/functioning of
the company by vouching good corporate governance practices.
Duties towards office staff
The status of Company Secretary as the chief administrative head of the
organisation, wherever applicable, bestows upon him the duty of planning,
organising, directing and co-ordinating the office work effectively. The work inter-alia
involves recruiting new employees, informing the employees about the policies and
decisions concerning them.


9. LIABILITIES OF A SECRETARY
The liabilities of the company secretary can be discussed under two broad
heads, namely (a) statutory liabilities, and (b) contractual liabilities.
Statutory Liabilities
There are many sections under the Companies Act, 1956 which impose penalty
on an officer who is in default for non-compliance of certain provisions of the Act. As
the Company Secretary is primarily responsible for the company complying with the
requirements of the provisions it is, therefore, necessary that he should whilst
discharging his duties under the Companies Act, 1956 ensure that there is no default
in compliance with the statutory provisions in this regard. Some of the important
sections and the penalty levied for default or non-compliance which affect the day-to-
day functions of the secretary in a company are:
(i) default in filing a return of allotment-fine upto Rs. 5000 for every day during
which the default continues (Section 75),
(ii) default in maintaining a register of securities bought back by the company
(Section 77A),
(iii) default in keeping ready for delivery share certificates, debenture certificates
etc., within 3 months after allotment and within 2 months of the application
for registration of transfer-fine upto Rs. 5000 for every day during which the
default continues (Section 113),
(iv) default in filing particulars of charges on properties acquired subject to
charge-fine upto Rs. 5000 (Section 127),
(v) failure to comply with the requirements of Section 147 of the Act regarding
exhibiting the name of the company-fine may extend upto Rs. 5000,
(vi) default in filing annual return-fine upto Rs. 500 for every day during which
the default continues (Section 162) and failure to allow inspection of
documents-five of Rs. 500 per day (Section 163).
(vii) default in holding statutory meeting or filing the statutory report with the
Registrar-fine upto Rs. 5000 (Section 165),
(viii) default in holding the annual general meeting of the company-fine upto
Rs. 50,000 plus fine upto Rs. 2,500 for every day after the first during which
such default continues (Section 168),
(ix) default in the circulation of the members resolution-fine upto Rs. 50,000
(Section 188),
(x) default in registering certain resolutions and agreements requiring
registration-fine upto Rs. 200 per day of default and failure to comply with
Sub-sections (2) and (3) of Section 192 - Rs. 100 per occasion,
(xi) failure to record the minutes of the Board and General Meetings-fine upto
Rs. 500 (Section 193).
(xii) refusal in allowing inspection of minutes of general meeting or failure to
furnish a copy of such minutes on request by any member within 7 days of
such request-fine upto Rs. 5000 in respect of each offence (Section 196),


(xiii) default in laying down before the company at the annual general meeting
the profit and loss account and Balance Sheet fine up to Rs. 10,000 or
imprisonment up to 6 months or both (Section 210),
(xiv) failure to give the due notice of Board meeting-fine upto Rs. 1000
(Section 286),
(xv) failure to maintain the following statutory books:
(a)Register of members fine upto Rs. 500 per day of default (Section
150),
(b)Index of register of members fine upto Rs. 500 (Section 151),
(c)Register and index of debenture holders fine upto Rs. 500 (Section
152),
(d)Register of directors shareholdings fine upto Rs. 50,000 and further fine of
Rs. 200 per day (Section 307),
(e)Register of directors fine upto Rs. 500 per day of default (Section
303),
(f)Register of Loans and Investments fine upto Rs. 50,000 or imprisonment
upto two years (Section 372A).
Section 628 provides the liability in general of the secretary under the Companies
Act. The section provides that if in any return, report, certificate, balance sheet,
prospectus, statement or other document required by or for the purposes of any of
the provisions of the Act, any person (including an officer) makes a statement:
(a) which is false in any material particular, knowing it to be false; or
(b) which omits any material fact knowing it to be material;
he shall, save as otherwise expressly provided in the Act, be punishable with
imprisonment upto two years and shall also be liable to fine.
Section 629 provides for imprisonment upto seven years and fine for giving false
evidence, upon any examination, under oath or solemn affirmation authorised under
the Act, or in any affidavit, deposition or solemn affirmation in or about the winding up
of the company or any matter arising under the Act.
Section 629A prescribes penalty for any person contravening the provisions of
the Act for which no specific penalty is provided elsewhere in the Act. Under this
section, a company and every officer thereof in default shall be punishable with fine
up to Rs. 5000 and where the contravention is a continuing one, with a further fine up
to Rs. 500 for every day after the first during which the contravention continues.
But Section 633 of the Act provides for the court to grant relief to officers
(including a secretary) of the company in certain cases. It provides that where in any
proceeding for negligence, default, breach of duty, misfeasance or breach of trust
against an officer of a company, it appears to the court hearing the case that the
officer is or may be liable in respect to such action, but he has acted honestly and
reasonably and having regard to all the circumstances of the case, including those
connected with his appointment, that the officer ought to be excused, the court may
relieve him from his liability either wholly or in part and subject to such terms it deems
fit. [Sub-section (1) of Section 633].


However, the court shall have no power to grant relief from any civil liability which
may attach to an officer in respect of such negligence, default, breach of duty,
misfeasance or breach of trust in the case of any criminal proceedings under this
sub-section.
Where any such officer has reason to apprehend that any proceeding will or
might be brought against him, he may apply to the High Court for relief. [Sub-section
(2) of Section 633]
Contractual Liabilities:
In addition to the statutory liabilities, a number of liabilities arise out of the
Secretarys contract of service with the company and such liabilities are called his
contractual liabilities.
The secretary is in a fiduciary relationship (position of trust) to the company and,
therefore,
(1) he should not allow his personal interest to clash with the interest of the
company.
(2) he should not make secret profit by virtue of his office and would be certainly
accountable to the company for any secret profit or similar gain made from
the company.
(3) he is personally liable for loss to any third party if he acts beyond his
authority.
(4) he is liable for damages caused to the company by wilful misconduct and
negligence in the discharge of his duties.
(5) he should not indulge or engage in any other activity not relating to his
company unless he obtains authority in this regard from the board/managing
directors, and
(6) he cannot reveal trade secrets which he comes to know during his course of
employment.
10. RIGHTS OF SECRETARY
Rights are given to the secretary by the Companies Act, Board of directors and
the general body of shareholders. He also derives some rights out of his service
agreement with the company. A secretary has the following rights:
(i) He has the right to control and supervise the working of his department.
(ii) As a principal officer of the company, he has the right to sign a document or
proceeding requiring authentication by the company.
(iii) He has a right to be indemnified by the company for any loss suffered by
him while discharging his duties.
(iv) As an employee of the company, he has the right to receive remuneration. In
the event of winding-up of the company, he has a right to be treated as a
preferential creditor for his salary subject to a maximum of Rs. 1,000.


But a company secretary has no right to borrow money in the name of the
company [Cleadon Trust Ltd. Re. (1938) 4 ALL EF 518]. He cannot also make
allotment of shares [Shida Mines Ltd. v. Anderson (1905) 22 TLR 27] or register
transfer of shares without the express authority or consent of the Board of directors.
He has no authority to convene a meeting of the company unless directed by the
Board or to remove a name from the Register of members, or to take policy
decisions.
However, if the articles empower the directors to delegate any of their powers to
any of the agents they choose, they may delegate such powers to the secretary and
this is not uncommon, especially when the secretary is also a director.
11. ROLE OF COMPANY SECRETARY
Generally speaking, the role of a secretary is three-fold, viz., as a statutory
officer, as a co-ordinator and as an administrative officer if so authorised. Similarly,
the responsibility of company secretaries extends not only to a company, but also to
its shareholders, depositors, creditors, employees, consumers, society and
government.
The relevant judicial pronouncements give a picture of the scope and ambit of the
role of a company secretary. However, neither the definition nor the laws case can
give the real and true position of a company secretary in the hierarchy of any
company. We have already seen that his role varies in different companies.
The role of a company secretary may conveniently be studied from three different
angles:
(a) as a statutory officer,
(b) as a co-ordinator,
(c) as an administrative officer.
(a) Statutory Officer
The company secretary is an officer responsible for compliance with numerous
legal requirements under different Acts including the Companies Act, 1956 as
applicable to companies. Under the Companies Act, 1956 he is responsible for
performance of the duties of a secretary and such other ministerial and administrative
duties as may be assigned to him. However, the Companies Act, 1956 has not
defined the functions of a secretary but has specifically fixed the statutory
responsibilities on a secretary for compliance with legal requirements under the
provisions of the Act. The responsibility of secretary has also increased as he has
been particularly specified by the Companies (Amendment) Act, 1988 to be an officer
who is in default, bracketed alongwith the managerial personnel and is liable to
punishment by way of imprisonment, fine or otherwise for violation of the provisions
of the Companies Act which hold the officers in default liable (Section 5).
However, for a proper understanding of the role of a company secretary under
different Acts, it would be desirable to study the provisions of those Acts in this
regard.


We have already seen the statutory position of a company secretary under the
Companies Act, 1956. In 1975, Section 2(45) of the Act was amended by deleting the
world purely before the words ministerial and administrative duties which indicates
that a secretary could also be assigned managerial duties. However, he is not a
managerial personnel within the meaning of Section 197A of the Act as this covers
only the managing and whole-time directors and the managers within the meaning of
the Act. The various provisions and rules framed under the Companies Act make it
obligatory for the secretary to sign the annual return filed with the Registrar [Section
161(1)], make declarations regarding commencement of business (Section 149),
authenticate the Balance Sheet and Profit and Loss Account (Section 215) and to
make declaration under Section 33(2) of the Act before incorporation of a company
confirming that all the requirements of Act and the Rules thereunder have been
complied with in respect of registration of a company and the Registrar may accept
such a declaration as sufficient evidence of such compliance.
Under the Indian Stamp Act it is the duty of a secretary to see that the documents
such as letter of allotment, share certificate, debentures, mortgages are issued duly
stamped. He is the principal officer under Section 2(35) of the Income Tax Act, 1961.
Under the MRTP Act, 1969 and its rules, the term principal officer includes a
secretary who has been so authorised by a resolution of the Board.
The most important task of the company pertaining to statutory and legal
obligations comes upon the secretary. Under the Companies Act he has to either
comply with the various provisions of the Act or is liable to be fined or imprisoned for
non-compliance of his obligations.
Thus the responsibility of a secretary as a statutory officer has been greatly
expanded by enactment of various economic statutes, like MRTP Act, Industries
(Development and Regulation) Act, Foreign Exchange Management Act, SEBI Act,
SCRA and Depositories Act. Accordingly, the numerous provisions which a Company
is obliged to comply with, makes the secretarys job onerous and difficult. The duties
imposed upon a secretary by various statutes clearly indicate the important place he
occupies in the corporate administrative hierarchy.
(b) Co-ordinator
On dealing with the Board functions, Peter Drucker has this to say But there
are real functions which only a Board of directors can discharge. Somebody has to
give final approval to the objectives, the company has set for itself and the
measurements it has developed to judge its progress towards these objectives.
Somebody has to look critically at the profit planning of the company, its capital
investment policy and its managed expenditure budget. Somebody has to discharge
the final judicial function in respect of organisation problems.
This concept of Peter Drucker provides for the company secretary to co-
effectively play a ordinating role to achieve the tasks the Board has set itself to.
In India, most companies have an increasing dependence on the financial
institutions for assistance. Every big-sized project involves assistance from the
financial institutions. These institutions expect the Board of directors to oversee the
overall management and performance of the assisted companies and for this


purpose, would insist on all basic policy issues to be discussed at the Board meetings
and decisions reached. For this purpose, it would be necessary for the companys
management to place all the salient features and information before the Board in
order that they can arrive at a proper decision.
This is evidenced by the various conditions imposed in the loan agreements
entered into between the financial institutions and the assisted companies. Company
managements look to the company secretary for implementation of the conditions in
the loan agreements.
The financial institutions stipulate in the case of companies assisted by them
financially that certificate format duly certified by the company secretary should be
furnished periodically at the Board meetings.
Furnishing of the certificate requires a skill of coordination between the company
secretary and the functional heads and the factory manager.
The Company Secretary as a co-ordinator has an important role to play in
administration of the companys business and affairs. It is for the secretary to ensure
effective execution and implementation of the management policies laid out by the
Board. The position that the company secretary occupies in the administrative set-up
of the company makes his function as one of co-ordinator and link between the top
management and other levels. He is not only the communicating channel between
the Board and the executives but he also co-ordinates the actions of other executives
vis-a-vis the Board. The ambit of his role as a co-ordinator also extends beyond the
Company and he is the link between the Company and its shareholders, society and
the Government. Thus, the role of a company secretary as a co-ordinator has two
aspects, namely internal and external. The internal role of a co-ordinator extends to
the Board including the Chairman and Managing Director, various line and staff
personnel, the trade unions and the auditors of the company. His role as an external
co-ordinator extends to the relationship of the company with shareholders,
Government and Society.
Relationship with the Board, Chairman and Managing Director
Whilst the Directors discuss and decide policy matters as a body, the Secretary is
responsible for transmitting the policies and decisions of the Board, to all levels in the
company and outsiders. His duties in relation to the Board include amongst others:
(i) Arranging meetings, both Board and general, drafting out the minutes and
reports.
(ii) Keeping the Board informed as an advisor on matters regarding legal,
financial and other laws and problems as far as they relate to the company.
This will include advising the Board of the various obligations imposed on
the directors by various statutes.
(iii) He must ensure that all decisions taken by the Board are in consonance with
legal requirements, and the powers they exercise do not require approval of
the shareholders, Central Government or any other authority.
(iv) Since meetings of the Board are confidential in nature, he should ensure
secrecy regarding matters discussed at such meetings.


Whilst the Board decides on policy matters, the day-to-day administration of
companies is vested in the managing director, if there is one. In other cases, where
the company is a board-managed company, i.e. where none of the directors is a
managing director or a whole-time director, the Secretary has to seek guidance and
instructions from the Chairman on all important matters. He must, however, ensure
that a Chairman who is not a managing director does not exercise substantial powers
of management as he will be deemed to be a managing director within the meaning
of the Act and, therefore, his appointment and remuneration will require the approval
of the shareholders and the Central Government, if necessary. Where, however, the
company has a managing director, he must seek his guidance and instructions
regarding implementation of the policies laid down by the Board and also on matters
arising out of the implementation of the decisions. He is also required to keep the
chairman and managing director apprised of changes in policies of the Government,
obligations under various statutes and to give balanced advice on matters which have
legal ramifications.
Relationship with other Functionaries
We have seen that the Secretary is responsible for conveying the Boards
decisions on various aspects of the companys policies to the persons in-charge of
such functions. He is, in addition, responsible to ensure that the returns and reports
received from various operational executives are submitted in time, complete in all
respects, and do not conflict with the corporate objectives.
Even where different persons are in-charge of other functions, e.g., sales,
personnel, etc., it is usually the Secretary who normally communicates with outside
agencies, particularly with government and semi-government bodies to ensure that
the information given to various agencies do not conflict with each other and are in
accordance with the corporate objectives of the organisation.
Trade Union(s)
Where the Secretary is responsible either directly or through his assistants with
industrial relations, he must exercise extreme caution while dealing with trade union
officials whether they belong to recognised unions or not. He must ensure that proper
notes are kept of the discussions and negotiations and all decisions arrived at during
such negotiations. Whenever long-term settlement with recognised unions are
finalised he should see that the agreement embodying these settlements are in
accordance with the relevant statutes applicable.
It is the responsibility of the Secretary through the Human Relations/Industrial
Relations to ensure compliance with the provisions of various labour legislations such
as Industrial Disputes Act, 1947, Employees Provident Funds and Miscellaneous
Provisions Act, 1952, Payment of Bonus Act, 1965, Payment of Gratuity Act, 1972,
Payment of Wages Act, 1936, etc.
In many companies there is a system whereby a report is submitted to the Board
at every meeting confirming that there has been no delay in the compliance with the
statutory formalities like deposit of Provident Fund Money, E.S.I. Contribution etc.
Whilst he must ensure that the employees guilty of misconduct are charge-
sheeted and punished, he must simultaneously ensure that all formalities, e.g.,


holding of enquiries etc., must also be scrupulously followed. He should ensure that
industrial labour relations are always cordial and he should take steps to further
ensure that various creative activities of the employees are encouraged wherever
possible by grants and subsidies from the company.
Auditors
Apart from the statutory audit, service of the companys auditors are required for
certifications required under various statutes and, therefore, the Secretary must liaise
very closely with the auditors. It may be pointed out that copies of minutes of Board
meetings and general meetings should be made available for the inspection to the
auditors during the statutory annual audit. He is to ensure that before their
appointment proper certificate is obtained under Section 224(1B) of the Companies
Act, 1956. He should intimate them about their appointment/re-appointment as the
case may be, within seven days from the date of the annual general meeting so as to
enable them to file the necessary return with the Registrar of Companies in time.
Shareholders
The relationship with the shareholders is an important sphere of his co-ordinating
role and, therefore, the Secretary will have to maintain proper relationships with the
shareholders of the company.
He should ensure that there is no delay in the inspection of books and registers
required by a shareholder provided all formalities are complied with. He must ensure
that extracts of registers demanded by shareholders are furnished to them within the
prescribed time.
However, the most important thing for a Secretary is to ensure that all
correspondence from shareholders is dealt with promptly and their queries are
answered as far as possible keeping the statutory provisions in mind. As part of
public relations he should be able to give time without prior notice to shareholders
who personally come for information, to furnish documents or any other matter. He
must also ensure that requests for issues of duplicate certificates/dividend warrants
and intimation of address are dealt with properly and promptly. This is important as
the image of the company will, to a great extent, depend on the relationship of the
Secretary with the shareholders.
Government
All the information and correspondence with the government are normally co-
ordinated or routed through the Secretary to ensure uniform reporting. The Secretary
has a very important role vis-a-vis the government. He should endeavour to have
information on government policies and programmes in advance wherever possible
to ensure effective implementation. Good relationship with the Government can be
developed where the company sincerely tries to implement various statutes in law as
well as in spirit.
Community
In recent years the responsibility of a company towards society has become very
important since the company has to function within the parameters of the


environment of the country. With this in view, a number of companies have
undertaken rural development including adoption of villages and have built schools,
colleges and hospitals to cater to the needs of society. In respect of companies in
consumer goods industry, it is necessary to project that the products and their prices
are in consonance with the standards expected by the consumers. Arising out of such
social responsibility many companies have also allowed small sectors to manufacture
ancillaries and raw materials required by the organisation for promotion of
employment opportunities. The provisions of the Consumer Protection Act, 1986, the
Pollution Control Laws, Public Liability Act, 1991, etc., are important in the operations
of companies and the role of Company Secretaries in these areas is quite important.
(c) Administrative Officer
We have seen that the role of a Company Secretary has widened over the years,
especially as an administrator.
The principal duty of a secretary as an administrator is to ensure that the
activities of a company are in conformity with the companys policy. In his role as an
administrator, the secretary provides the very foundation on which the entire structure
of company administration is constructed.
The role of a company secretary as an administrator can be sub-divided into
organisational, financial, office and personnel administration.
Organisational Administration
Since the secretary has an opportunity of looking at the entire organisation he
has the scope to advise the top management including the Board of directors on the
need to develop a good structure. Since the secretary collects, interprets and
assimilates information relating to all aspects of business to aid and assist the Board
in carrying out its function, he, therefore, gets an opportunity to know the strengths
and the weaknesses of the functional executives.
In his role as administrator, wherever applicable he has to make a detailed
analysis of various activities, decision-making machinery, inter-relations of
departments and functions. He has, therefore, to ensure that the organisational
structure is always under constant study. The making of such examination and study
and the consequent advice and recommendation for making changes is a task which
the company secretary has to perform.
Financial Administration
Since various monthly and periodical operating reports and financial statements
are routed for consideration of the board through the secretary, he should analytically
study these statements. Thus, as a secretary to the board, the Company Secretary in
consultation with the Finance Manager has to devise suitable and proper systems of
accounting procedure, internal control and internal audit with a view to safeguard the
companys funds. The Company Secretary should have a good knowledge of
budgetary control and procedures, accounts and other related matters. He is also
expected to be proficient in dealing with matters connected with taxation.
The Company Secretary is generally assisted by the Chief Accountant in the


discharge of his functions relating to financial administration. In many companies, the
Secretary is also the Chief Accountant. He has to negotiate with banks and financial
institutions the terms of finance both for working capital requirements and capital
expenditure.
Office Administration
In all big companies, the office administration is carried on by an officer called the
Office Manager who generally reports to the Company Secretary. It is the duty of the
Secretary to ensure that different departments of the office are properly staffed,
organised, co-ordinated and supervised.
He has to review from time to time the various procedures and systems with a
view to making the administration effective. He is also responsible in most
organisations for office services including transport. The image of a company
depends on the design and office layout from the reception to the records. The
Secretary has not only to ensure that these services are maintained and increased
but to also ensure that the cost of such services are reviewed from time to time.
Personnel Administration
Personnel administration includes recruitment, training, remuneration, promotion
retirement, discharge and dismissal of staff. This is a very important yet difficult task
to administer. Whilst in large organisations there may be a separate personnel or
Human Resources Manager or Officer, in smaller companies the Secretary may be
called upon to advise and assist the directors on principles and legal points involved
in this area of administration.
The Company Secretary should ensure that implication of new rules, orders, in
this field of management are advised to all concerned for effective implementation.
Administration-Companys Properties
The secretary has an important role to play in safeguarding the companys
interest in property matters. He has to ensure that all properties are properly
maintained and insured and maintain a suitable register for each property containing
relevant information. He should have a good knowledge of relevant rules and bye-
laws applicable to property. He should also ensure that registration of trade marks,
patents, licences are done from time to time and take legal action in respect of
infringement of such industrial rights.
Corporate Records
The Secretary is required to maintain certain other records in addition to those
specified under the Companies Act. The volume, method and procedure will vary with
the size and nature of the company.
The secretary also has to ensure that the statutory time limits relating to directors
and shareholders meetings, payment of dividend and interest, filing of returns under
the Companies Act, 1956, Income-tax Act and Sales Tax Act, etc., renewals of
contracts and leases and the formalities under stock exchange and SEBI regulations
and the listing agreements are complied with.
Personnel and Property


The secretary has to ensure that adequate systems of safety and security of
personnel based on technical advice are available in the factory and office. He is also
responsible for devising and maintaining systems to safeguard the valuable company
records, or information against loss, theft, fire, etc. He is to review these from time to
time to ensure that the properties of the company are adequately insured. The
company secretary should have good knowledge of insurance law and practice.
Whilst the above discussion only gives a brief outline, the duties and
responsibilities of the company secretary are subject to continuous change and
therefore, has to be reviewed from time to time to ensure that he effectively
contributes in respect of the above matters. He should, therefore, keep himself
abreast with legal changes and practices.
Changing Requirements
With the professionalisation of the boardroom, the company secretarys duties
are gaining importance. In addition to the statutory duties, he is to assist the board of
directors in:
1. formulation of policies to achieve the objectives of the company;
2. establishing guiding principles for the functional and line executives of the
company;
3. conducting the affairs of the company in accordance with the provisions of
the memorandum and articles of association of the company; and
4. participating in the fulfilment of the companys obligations legal, commercial,
and social, arising out of its operations.
12. COMPANY SECRETARY IN PRACTICE
The Companies (Amendment) Act, 1988 has recognised the concept of a
Secretary in whole-time practice by inserting a new section, viz., Section 2(45A)
which reads as under:
Secretary in whole-time practice means a secretary who shall be deemed to
be in practice within the meaning of Sub-section (2) of the Company Secretaries
Act, 1980 and who is not in full-time employment. Thus, a member of the Institute
in practice and not in full-time employment becomes a Secretary in whole-time
practice. The Companies (Amendment) Act, 1988 has also defined certain areas of
practice for secretaries in whole time practice.
Section 7 of the Company Secretaries Act, 1980 provides that only the members
of the Institute of Company Secretaries of India come within the purview of the
concept of Company Secretaries. Section 7 provides that every member of the
Institute in practice shall, and any other member may, use the designation of a
company secretary and no member using such designation shall use any other
description, whether in addition thereto or in substitution therefor.
The use of designations "Practising Company Secretary" or "Company Secretary
in Practice" or "Company Secretary in Whole-time practice" was earlier held to be not
permitted for use by members in practice. The Council of the Institute on
reconsideration of its earlier view, has opined that the use of designation "Practising
Company Secretary", "Company Secretary in Practice" or "Company Secretary in


Whole-time Practice" by members in practice would not offend Section 7 of the
Company Secretaries Act, 1980.
It is further provided that this section does not prohibit any such member from
adding any other description or letter to his name, if entitled thereto, to indicate
membership of such other Institute whether in India or elsewhere as may be
recognised in this behalf by the Council, or any other qualification that he may
possess. It also does not prohibit a firm, all the partners of which are members of the
Institute and in practice, from being known by its firm name as Company Secretaries.
A member of the Institute may prefix CS to his name in order to distinguish
himself from other professionals and to create brand image of the CS profession.
Who can Practice?
According to Section 6 of the Company Secretaries Act, 1980 only a member of
the Institute whether in India or elsewhere shall be entitled to practice provided he
has obtained from the Council of the Institute, a Certificate of Practice.
A member who desires to be entitled to practice should make an application in
the prescribed form and pay such annual fee for his certificate as may be prescribed
by the Council of the Institute. Such fees shall not exceed rupees three thousand,
and such fees shall be payable on or before the 1st day of April in each year. Council
may determine the fees exceeding rupees three thousand but not rupees six
thousand, with prior approval of the Central Government. Further, the certificate of
practice may be cancelled by the Council under such circumstances as may be
prescribed.
Regulation 10(2) of Company Secretaries Regulations provides that the Council
shall on acceptance of the application for issue of a certificate, issue a certificate in
the appropriate form which shall be valid until it is cancelled. Further, in the case of
renewal of the certificate of practice, the Secretary of the Institute of Company
Secretaries of India shall issue a letter extending the validity period for that year in
the appropriate form [Regulation 10(3)].
Section 26 of the Company Secretaries Act, 1980 prohibits companies whether
incorporated in India or elsewhere from practising as Company Secretaries. Any
company contravening this provision shall be punishable on first conviction with fine
which may extend to one thousand rupees, and on any subsequent conviction with
fine which may extend to five thousand rupees.
Further, any person other than a member of this Institute is prohibited from
signing any document on behalf of a company secretary in practice or a firm of such
company secretaries in his or its professional capacities [Section 27(1)].
Any person contravening the provisions of Section 27(1) of the Company
Secretaries Act, 1980 shall be punishable on first conviction with a fine not less than
five thousand rupees but which may extend to one lakh rupees, and in the event of a
second or subsequent conviction with imprisonment for a term which may extend to
one year or with a fine not less than ten thousand rupees but which may extend to
two lakh rupees or with both.


The evolution of the profession
Company Secretaryship is essentially a British institution and it has struck roots in
the Commonwealth countries. The profession of secretaries is very old. Like the East
Indian Company, the Companies Act and the Congress movement for independence,
the company secretaries too as an independent profession that originally took birth in
U.K. It all started with the advent of the limited company. The then secretary carried out
the staff function of merely recording the decisions and maintaining the records of the
company. When his legal status was tested in 1887 in England, he was stated as a
mere servant. In this context, the Chartered Institute of Secretaries was formed in 1891
by Eighteen London Secretaries and was granted Royal Charter in 1902. The Indian
Civil Procedure Code of 1908 also recognised the Secretary. When the Companies Bill,
1953, was under consideration of Parliament, the Institute of Secretaries was founded
in Bombay consisting of secretaries and Indian Association of these two Bodies made a
clarion call to elevate the status of company secretaries by providing a clause in the Bill
similar to one in English Companies Act, 1948, making it obligatory for every company
to have a secretary. The Companies Act, 1956 for the first time defined Secretary and
Secretaries & Treasures. Thus the genesis of the profession of company secretaries
taking its roots from the U.K. took birth in India along with the enactment of the
Companies Act, 1956.
In Britain, the first professional association of accountants was formed in 1854.
The first association of company secretaries, the Chartered Institute of Secretaries,
was formed only in 1891. It was incorporated by a Royal Charter in 1902. The name
of this body was changed to the Corporation of Secretaries in 1951, and it has since
been merged with the Chartered Institute of Secretaries in 1971. It is presently known
as the Institute of Chartered Secretaries and Administrators.
In India, the pioneers of the profession were:
(a) The Indian Association of Chartered Institute of Secretaries of Joint Stock
Companies and other Public Bodies (London) in Calcutta;
(b) The Indian Society of Corporation of Secretaries Limited (London) in
Bombay; and
(c) The Institute of Secretaries, Bombay.
The first two were branches of the U.K. organisations. In addition, students who
qualified in India for the Government Diploma in Company Secretaryship formed the
Company Secretaries Students Association which was later converted into the
Company Secretaries Association of India to make a representation to the
Government for statutory recognition.
Areas of Practice
The Company Secretaries Act, 1980 recognises that a member individually or in
partnership with other members, can engage in practice of the profession of company
secretaries and has specified the areas of practice.
Section 2(2) of the Company Secretaries Act, 1980 has prescribed the following
areas of practice for a company secretary in practice:
(a) to engage himself in the practice of the profession of company secretaries


to, or in relation to, any company; or
(b) to offer to perform or perform services in relation to the promotion, formation,
incorporation, amalgamation, reconstruction, reorganisation or winding-up of
companies; or
(c) to offer to perform or perform such services as may be performed by:
(i)an authorised representative of a company with respect to filing, registering,
presenting, attesting or verifying any documents (including forms,
applications, and returns) by or on behalf of the company;
(ii)a share transfer agent;
(iii)an issue house;
(iv)a share and stock broker;
(v)a secretarial auditor or consultant;
(vi)an adviser to a company on management, including any legal or procedural
matter falling under the Capital Issues (Control) Act, 1947
*
, the
Industries (Development and Regulation) Act, 1951; the Companies Act,
1956; the Securities Contracts (Regulation) Act, 1956; any of the rules
or bye-laws made by a recognised stock exchange, the Monopolies and
Restrictive Trade Practices Act, 1969; the Foreign Exchange Regulation
Act, 1973
**
; or under any other law for the time being in force.
(vii)to issue certificates on behalf of, or for the purposes of a company; or
(d) to hold himself out to the public as a company secretary in practice; or
(e) to render professional services or assistance with respect to matters of
principle or detail relating to the practice of the profession of company
secretaries; or
(f) to render such other services as, in the opinion of the Council are or may be
rendered by a Company Secretary in practice;
In terms of Clause (f) of Section 2(2) of the Act, the Council of the Institute has
power to specify any other service that can be rendered by a member. Pursuant to
this, the Council hereby specifies the following categories of Management, Advisory
and other services, which may be rendered by practicing members to corporations,
bodies corporate, societies, trusts, associations, enterprises, undertakings, clubs, non
trading corporations, industrial co-operatives, co-operative societies, non-government
organizations, local self government bodies, estates, firms, small, medium and large
industrial undertakings, entrepreneurs, investors, and other persons in carrying out
their activities and operations:
(i) Providing all services in MCA-21 systems including those relating to Front
Office, Facilitation Centre, Filing Centre, Local Registration Authority of
Digital Signature Certificate Providers.
(ii) Conceptualisation, identification, crystallization of business enterprise,

*
Capital Issues (Control) Act, 1947 has been repealed and SEBI Act, 1992 has been enacted.
**
Foreign Exchange Regulation Act, 1973 has been repealed and Foreign Exchange Management Act,
1999 has been enacted.


industrial-project or business activity.
(iii) Carrying out feasibility studies, preparation of project reports, proposals for
business operations including setting up a new unit or enterprise, as well as
expansion, or diversification and also representations, follow-up with
financial institutions, Government and other authorities for procurement of
the requisite approval, clearance or permission in respect of such proposals.
(iv) Guidance and support in relation to collaborations, joint-ventures, business
agreements, arrangements, restructuring, contracts, tie-ups in India and
abroad.
(v) Business planning, policy and management in all fields including manpower,
recruitment, employment, industrial relations, human resource development,
management information systems, marketing, publicity and public relations.
(vi) Planning, supervision and carrying out of internal audit, systems audit,
labour audit, management audit, operational audit, quality audit, social audit,
environment audit and energy audit.
(vii) Risk management of properties, profits, resources, know-how and operations.
(viii) Management, planning, representation and protection of trade marks,
patents and intellectual property service.
(ix) Procurement and management of materials and inventories.
(x) Assessment, procurement and management of financial requirements and
resources including project finance, working capital finance, forex
management, loan syndication, portfolio management.
(xi) Evaluation and management of deployment of funds in investments, assets
and securities, loans, collaborations, tie-ups, joint-ventures.
(xii) Formulating and implementing all activities relating to capital structure
including creation, issue, offer, allotment, placement, procurement, listing of
shares, debentures, bonds, deposits, coupons, ADR, GDR, IDR and all
types of financial instruments.
(xiii) Recovery-consultant in banking and financial sector.
(xiv) Insurance advisor and other related activities.
(xv) Acting as an arbitrator, mediator or conciliator for settlement of disputes or
being on the panel of arbitrators or representing in arbitration, mediation or
conciliation matters.
(xvi) Acting as advisor to investors, depositors, mutual fund unit holders and
stakeholders.
(xvii) Acting as advisor in relation to intermediary in securities and commodities
markets.
(xviii) Due diligence and legal services.
(xix) Corporate governance services.
(xx) Competition law and practice.
(xxi) Business process outsourcing, knowledge process outsourcing and legal


outsourcing.
(xxii) Valuer, surveyor and loss assessor.
(xxiii) Investigator, private liquidator, insolvency practitioner; operating agency.
The words to be in practice, with their grammatical variations and cognate
expressions, shall be construed accordingly.
Further, the Council has passed a resolution, permitting the members in practice
to engage in the following other business or occupation under Regulation 168 of the
Company Secretaries Regulations, 1982:
Permission granted generally
(i) Private tutorship.
(ii) Authorship of books and articles.
(iii) Holding of Life Insurance Agency Licence for the limited purpose of getting
renewal commission.
(iv) Holding of public elective offices such as M.P., M.L.A., M.L.C.
(v) Honorary office-bearership of charitable, educational or other non-
commercial organisations.
(vi) Acting as Justice of Peace, Special Executive Magistrate and the like.
(vii) Teaching assignment under the Coaching Organisation of the Institute or
any other organisation, so long as the hours during which a member in
practice is so engaged in teaching do not exceed average four hours in a
day irrespective of the manner in which such assignment is described or the
remuneration is receivable (whether by way of fixed amount or on the basis
of any time scale of pay or in any other manner) by the member in practice
for such assignment.
(viii) Valuation of papers, acting as a paper-setter, head examiner or a
moderator, for any examination.
(ix) Editorship of professional journals.
(x) Acting as ISO lead auditor.
(xi) Providing Risk Management Services for non-life insurance policies except
marketing or procuring of policies.
(xii) Acting as Recovery Consultant in the Banking Sector.
(xiii) Becoming non-executive director/promoter/promoter director/subscriber to
the Memorandum and Articles of Association of a company the objects of
which include areas, which fall within the scope of the profession of
Company Secretaries irrespective of whether or not the practising member
holds substantial interest in that company.
(xiv) Becoming non-executive director/promoter/promoter director/subscriber to
the Memorandum and Articles of Association of a company which is
engaged in any other business or occupation provided that the practising


member does not hold substantial interest in the company.
Permission to be granted specifically
Members of the Institute in practice may engage in the following categories of
business or occupation, after obtaining the specific and prior approval of the
Executive Committee of the Council in each case:
(i) Interest or association in family business concerns provided that the
member does not hold substantial interest in such concerns.
(ii) Interest in agricultural and allied activities carried on with the help, if
required, of hired labour.
(iii) Editorship of journals other than professional journals.
For the purpose of the above:
(i) A non-executive director means an ordinary director who fulfils the following
conditions:
(a)he is required to attend the meetings of the Board or its committees only.
(b)he is not paid any remuneration except the sitting fees for attending the
Board/Committee meetings and any remuneration to which he is entitled
as ordinary director.
(c)he is devoting his time for the company only to attend meetings of the Board
or Committees thereof and not for any other purpose.
(ii) a member shall be deemed to have a substantial interest" in a concern :
(a)in a case where the concern is a company, if its shares (not being shares
entitled to a fixed rate of dividend whether with or without a further right
to participate in profits) carrying not less than twenty-five per cent of
voting power at any time during the previous year, are owned
beneficially by such member.
(b)in the case of any other concern, if such member is entitled at any time during
the previous year, to not less than 25% of the profits of such concern.
Further in cases of permission to be granted specifically the Council will,
however, be always entitled to refuse permission in individual cases.
Regulation 168(2) provides that without prejudice to the discretion vested in the
Council in this behalf, a company secretary in practice may act as a secretary,
trustee, executor, administrator, arbitrator, receiver, appraiser, valuer, internal
auditor, management auditor, management consultant or as a representative on
financial matters including taxation and may take up an appointment that may be
made by the Central or any State Government, Courts of Law, Labour Tribunals, or
any other statutory authority.
13. PROFESSIONAL DUTIES AND CODE OF CONDUCT
In every profession when it becomes organised, certain traditions and practices
are developed by its members which are looked upon and cherished by the members
of the profession as noble. Such traditions and practices are called Code of
Conduct. Violation of such noble practices by any member of the profession rouses


the indignation of the other members and in days of old they did not even hesitate to
excommunicate the erring member.
In order to evoke the necessary interest and awareness among the members and
create the necessary climate for laying down the right type of code which should
govern the profession, the Institute organised a Convention in February, 1976,
primarily to evolve the necessary frame of reference. Soon after the convention was
over, the Council of the Institute appointed a Committee, which was entrusted with
the task of formulating a model code of conduct. Pursuant to the recommendations of
the code of conduct committee, the Council of the Institute adopted a uniform code of
conduct for Company Secretaries. The Code of Conduct outlines the expected
conduct of members, first as a member as such, next as a member in employment or
practice and lastly, as a member holding a public office in his professional capacity.
The Code consists of a set of simple rules accompanied by explanatory notes and
action points both for the Institute and the member.
The Code, however, has now become historical record as the Company
Secretaries Act, 1980 has adopted the provisions of the Code in its sections and
schedules giving a legislative prospect to it.
14. RULES APPLICABLE TO A COMPANY SECRETARY IN PRACTICE
1. Professional Independence: A Practising Company Secretary should exercise
professional independence in relation to his work. He should scrupulously
observe the criterion of objectivity in his work and should not detract himself
from independent and objective approach. He should deny his services of Practising
Company Secretary to a company manifestly known for its unfair, unethical
practices.
2. Quality of Service: The quality of services rendered by a Practising Company
Secretary should be the highest attainable by him without reference to the monetary
compensation received or receivable by him for his professional services. Where a
particular assignment is that he cannot efficiently accomplish even with the utmost
exercise of his own skill and expertise, he should not hesitate to consult other
professionals, if found necessary. Whenever the Practising Company Secretary feels
that a complex problem warrants consultation with the ICSI, he should approach the
Institute for necessary guidance.
3. Position of Trust: Unless so required by any law for the time being in force or
unless the professional Code of Conduct prescribed by ICSI for Members in practice,
the Practising Company Secretary should not disclose any information received by
him in the course of his work from his client to an outsider. He should not use such
information received confidentially to his own personal advantage or allow such
information to be used, with his knowledge, by anyone in such a way that he may
become an indirect beneficiary. Further, a Practising Company Secretary should not
be a party to any unlawful, unfair, unethical activity of his client company to derive
any direct or indirect benefit.
4. Duty Towards the Profession: It shall be the duty of a Company Secretary in


Practice:
(a) to conduct himself in a manner consistent with the high ideals of the
profession of Company Secretaries and the dignity of the Institute of
Company Secretaries of India;
(b) to uphold the cause of the profession and the ICSI in corporate, national and
international affairs in which he may have the opportunity to participate;
(c) to help the younger members in the profession and inculcate in them a
sense of professional discipline; to co-ordinate the various functions with a
view to reaching a harmonious result, reconcile rather than create conflict of
views with different professions and in this direction behave himself with
utmost courtesy and consideration towards all with whom he may come in
contact with in the course of his work.
Professional Misconduct
Every member is required to be conscious so as to behave in such a manner that
his conduct is not attracted by any provisions of the First and Second Schedules to
the Act which give instances and which will be construed as misconduct defined in
Section 22 of the Act.
(i) Professional misconduct defined: Section 22 of the Act read with the
Schedules to the Act, contains an illustrative, though not a conclusive definition of
Professional Misconduct. These constitute the code of professional conduct
applicable to the Company Secretaries. Section 22 of the Company Secretaries Act
provides that professional misconduct shall be deemed to include any act or omission
specified in any of the schedules but nothing in this section shall be construed to limit
or abridge in any way the power conferred or duty cast on the Director (Discipline)
under Sub-section (1) of Section 21 to inquire into the conduct of any member of the
Institute under any other circumstances.
A Company Secretary in practice who is entitled to issue compliance certificate
pursuant to proviso to Section 383A(1) of the Companies Act, 1956 and/or to sign an
Annual Return pursuant to the proviso to Sub-section (1) of Section 161 of the
Companies Act, 1956 shall be deemed to be guilty of professional misconduct if he
issues compliance certificate and/or signs Annual Return for more than 80 companies
in aggregate in a calendar year. However, in case of a firm of Company Secretaries,
the ceiling of 80 companies, as above, shall apply to each partner therein who is so
entitled to sign the certificate, Annual Return. (ICSI Guideline No. 1 of November,
2007) issue.
(ii) Contents of the Schedules to the Act: The different types of behaviour on the
part of a member which would be deemed to be professional misconduct within the
meaning of the Company Secretaries Act are comprised in two Schedules, the First
Schedule being divided into three parts and the Second Schedule into two parts.
Part I of the First Schedule deals with the misconduct in relation to members of
the Institute in practice which would have the effect generally of compromising his
position as an independent person. Part II deals with professional misconduct in
relation to members of the Institute in service. Part III of the First Schedule deals with


misconduct of members generally. The offences covered by any of the clauses in the
three parts of the First Schedule are to be adjudicated upon by the Council except
where the Council decides to remove the members name from the register of
members for a period exceeding five years or permanently.
The Second Schedule deals with misconduct in relation to members of the
Institute in practice and members generally requiring action by a High Court. This
Schedule is in two parts.
A member in practice may advertise through a write up setting out the services
provided by him or his firm and particulars of his firm in the manner and subject to the
guidelines for advertisement by company secretary in practice as issued by the
Council of Institute of Company Secretaries of India, in exercise of powers conferred
by clause (1) of Part II of Second Schedule to the Company Secretaries Act, 1980.
15. QUALITY REVIEW BOARD
The Company Secretaries (Amendment) Act, 2006 has inserted a new Chapter
VIIA pertaining to Quality Review Board. The Central Government shall, by
notification, constitute a Quality Review Board consisting of a chairperson and four
other members, who shall be appointed from amongst the persons of eminence
having experience in the field of law, economics, business, finance or accountancy.
Two members shall be nominated by the Council and the other two by the Central
Government (Section 29A).
Section 29B provides the functions to be performed by the Board:
(i) to make recommendations to the Council with regard to the quality of
services provided by the members of the Institute.
(ii) to review the quality of services provided by the members of the Institute
including secretarial services.
(iii) to guide the members of the Institute to improve the quality of services and
adherence to the various statutory and other regulatory requirements.
The procedure of the Board and terms and conditions of service of Board shall be
as specified (Section 29C & 29D). However, the expenditure of the Board shall be
borne by the Council.
The Central Government has constituted a Quality Review Board vide
Notification NO. G.S.R 490(E) dated 13.7.07. The terms and conditions of Service
and allowances of the chairperson and the members of the Board shall be governed
by Company Secretaries procedures of Meetings of Quality Review Board and terms
and conditions of services and allowances of the chairperson and members of the
Board, Rules, 2006.
16. PEER REVIEW
In order to enhance the quality of professional services being rendered by
practicing Company Secretaries, the Council, as empowered under Section 15 is also
proposing to issue guidelines for peer review/quality review. The guidelines shall also
provide a frame work of the Peer Review/Quality Review Process and the
requirements of what is expected of a member during the conduct of a peer review.


Peer review in general shall refer to an examination and review of the systems
and procedures so as to determine whether they have been put in place by the
practice unit for ensuring the efficacy and quality of attestation services as
envisaged and mandated by the technical standards i.e. standards to be laid
down by the Council in this regard. Essentially, through a review of attestation
services, peer review shall enable identification of areas where a practising company
secretary may require guidance in improving the quality of his performance and
adherence to various technical standards.
For the purpose of maintaining quality of attestation/certification services
provided by company secretaries in practice, every practising company secretary/
firm of practicing company secretaries shall maintain a register regarding
attestation/certification services provided by him/her/it, which shall be open for
inspection by such person as may be authorized, in accordance with the guidelines
as prescribed by council in exercise of powers conferred by clause (1) of Part II of
Second Schedule of Company Secretaries Act, 1980.
A complete list of recognitions secured for the profession of Company
Secretaries is given on the website of the Institute (www.icsi.edu), under the path
Home//Practising CS//Recognitions Secured for PCS.

LESSON ROUND-UP
Under Section 2(45) of the Companies Act, 1956, a Secretary is defined as a
Company Secretary within the meaning of Clause (c) of Sub-section (1) of
Section 2 of the Company Secretaries Act, 1980, and includes any other
individual possessing the prescribed qualifications in the respective rules and
appointed to perform the duties which may be performed by a secretary under
the Act.
Every Company having a paid up share capital of Rs. 5 crore or more is
compulsorily required to have a Company Secretary u/s 383A.
Every company secretary is expected to adhere not only to the letter of the law
but also ensure that the spirit of the law is followed.
A Company Secretary exercises supervisory and checking role so as to prevent
any chance of negligence in implementing various laws applicable to a particular
company.
Ministry of Corporate Affairs has framed Companies (Appointment and
Qualifications of Secretary) Rules, 1988.
Appointment of Company Secretary is made by means of a resolution passed at
meeting of Board of Directors.
Dismissal of a company secretary can be done by the Board of Directors or by
the Managing Director (if authorized by the Board).
Companies Act, through its various sections cast upon company secretary
various duties and liabilities called statutory duties and statutory liabilities.
Role of company secretary is three-fold, namely, as a statutory officer, as a
coordinator, and as an administrative officer.
Practising company secretaries provide plethora of corporate services to the


corporate world beginning from the incorporation of a new company to filing of
various documents with the authorities concerned, representing the company in
front of various government authorities etc. One of the most important roles of
practising company secretaries is to provide advisory services to the corporate
world.
Practising members are allowed to advertise the services provided and
particulars of his firm subject to the Guidelines for Advertisement by Company
Secretary in practice.
A company secretary in practice is entitled to issue and/or sign compliance
certificate and/or Annual Return for not more than 80 companies in aggregate in
a calendar year.
SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation.)
1. Explain the term secretary under the Companies Act, 1956. Is it necessary
for every company to have a secretary?
2. The status of secretary in the Indian corporate scene has undergone
significant changes during the last three decades. Discuss.
3. State the qualifications which a company secretary should possess for being
appointed as company secretary in a company.
4. How is the secretary in a company appointed? Also state, how the secretary
can be dismissed.
5. Enumerate the duties and liabilities of a Secretary.
6. Discuss the role of company secretary as a statutory officer, as co-ordinator
and as an administrative officer.
7. State the areas of practice specified for a company secretary in practice
under Section 2(2) of the Company Secretaries Act, 1980.
8. Define Secretary in whole-time practice.


Suggested Readings:
(1) The Company Secretaries Act, 1980 as amended by Company Secretaries
(Amendment) Act, 2006
(2) The Company Secretaries Regulations, 1982
(3) A Guide to Company Secretary in PracticeInstitute's Publication
(4) Company Law and PracticeA.K. Majumdar & G.K. Kapoor







STUDY XVIII
MANAGEMENT AND CONTROL OF COMPANIES-V
MEETINGS

LEARNING OBJECTIVES
Members of a company or the directors of a company can exercise their powers and
can bind the company only when they act as a body at a validly convened and held
meeting. An individual member or shareholder, irrespective of his shareholding cannot
bind a company by his individual act.
It is to be noted that every gathering or assembly does not constitute a meeting.
These must be convened and held in perfect compliance with the various provisions
of the Companies Act, 1956 and rules framed there under. This chapter covers the
following topics:
Introduction
Meaning of a Meeting
Kinds of Company Meetings
Requisites of Valid Meeting (General Meeting)
Quorum
Proxy
Voting at General Meeting
Chairman
Clause 49 of Listing Agreement on Corporate Governance
Motion
Methods of ascertaining sense of the Meeting
Resolutions
Registration of Resolutions and Agreements
Passing of resolutions by Postal Ballot
Adjournment
Holding of Meeting through teleconferencing
Minutes of proceedings of Meetings.

1. INTRODUCTION
Protection of investors is one of the main objectives of the Companies Act.
Companies Act, 1956 provides the shareholders, a forum of self-protection which is
the general meeting of shareholders. The incorporation of a company under the
Companies Act, 1956, whether as a private or as a public limited company gives it
the unique privilege of having a separate identity as a legal entity. However, a
company, being an artificial person, cannot act on its own. It, therefore, expresses its
will or takes its decisions through resolutions passed at validly held Meetings.
Determining what constitutes a Meeting is therefore an important issue. A Meeting
has been defined as coming together of two or more persons face to face so as to
be in each others presence or company. [In Re. Associated Color Laboratories Ltd.
687


(1970) 12 D.L.R.]. The primary purpose of a Meeting is to ensure that a company
gives reasonable and fair opportunity to those entitled to participate in the Meeting to
take decisions as per the prescribed procedures.
The decision making powers of a company are vested in the Members and the
Directors and they exercise their respective powers through Resolutions passed by
them. General Meetings of the Members provide a forum to them to express their will
in regard to the management of the affairs of the company.
One of the important tenants of law of meetings is that members or shareholders
of a company or the directors of a company can exercise their powers and can bind
the company only when they act as a body at a validly convened and held
meeting. They must act collectively and not individually. An individual member or
shareholder, irrespective of his shareholding, cannot bind a company by his individual
act.
Convening of one such meeting is compulsory every year. Holding of more
general meetings is left to the choice of the management or to a given percentage
of shareholders to exercise their power to compel the company to convene a
meeting.
The shareholders must have advance information of the date of the meeting. The
right to information has been provided a special status by providing that denial of
information would be an act which can be used to activate the machinery of
investigation under Section 237 or to provide a ground for disqualification under
Section 203 or constituting an act of oppression under Section 397 or
mismanagement under Section 398. The shareholder can use the forum for the
power to appoint directors as well as auditors of their own choice who may safeguard
them from possible manipulations. They also have the power to remove the directors
and auditors so appointed if they do not find them up to their expectations. The
business of the meeting is conducted in the form of resolutions proposed and passed.
Some resolutions require simple majority and some special majority of those present
and voting. Resolutions once passed become binding upon the company and all its
members.
2. MEANING OF A MEETING
A meeting may be generally defined as a gathering or assembly or getting
together of a number of persons for transacting any lawful business. There must be
atleast two persons to constitute a meeting. Therefore, one shareholder usually
cannot constitute a company meeting even if he holds proxies for other shareholders.
However, in certain exceptional circumstances, even one person may constitute a
meeting.
It is to be noted that every gathering or assembly does not constitute a
meeting. Company meetings must be convened and held in perfect compliance
with the various provisions of the Companies Act, 1956 and the rules framed
thereunder.
3. KINDS OF COMPANY MEETINGS


Meetings under the Companies Act, 1956 may be classified as:
I. Shareholders meetings:
(i)Statutory Meeting as per Section 165 of the Act;
(ii)Annual General Meetings as per Section 166 of the Act;
(iii)Extraordinary General Meetings;
(a) Convened by directors to transact business of special importance
that arises in between the two annual general meetings and justifies
the convening and holding a meeting of the shareholders
Regulation 47, Table A of Schedule I to the Companies Act; and
(b) Convened by directors on the requisition of the shareholders as per
Section 169 of the Act.
(iv)Class Meeting of Shareholders.
II. Meetings of the debentureholders.
III. (a)Meetings of creditors for purpose other than winding up.
(b)Meetings of creditors for winding up.
(c)Meetings of contributories in winding up.
IV. Board Meetings of the Board of Directors.
V. Meetings of the Board Committees.
3(I)(i) Statutory Meeting
Section 165 of the Companies Act, 1956 lays down:
(1) Every company limited by shares, and every company limited by guarantee
and having a share capital, shall, within a period of not less than one month nor
more than six months from the date at which the company is entitled to
commence business, hold a general meeting of the members of the company,
which shall be called the statutory meeting.
A meeting held before the statutory period of one month could not be called a
statutory meeting. Moreover, the notice must set out that meeting is intended to be
statutory meeting. [Gardner v. Iredale (1912) 1 Ch. 700].
Failure to hold such a meeting renders the company liable to be wound up under
Section 433 (b).
Section 165(10) provides that the provisions of Section 165 are not applicable to
a private company. It, therefore, follows that statutory meetings are required to be
convened only by a public company limited by shares or limited by guarantee and
having a share capital. Thus, such meetings are not required to be held by a
company limited by guarantee and not having a share capital or by a private
company.
The position of a private company which is converted into a public company is as
follows:


According to the departments clarification (Now, the Ministry of Corporate
Affairs) , the provisions of sections 149 and 165 of the Companies Act, 1956, relating
to the certificate of commencement of business and the statutory meeting would not
be applicable to a private company which has converted itself into a public company.
(Departments File No. 44/50-CL-IV/62)
Statutory Report
Sub-section (2) of Section 165 of the Act provides :
The Board of directors shall, at least twenty-one days before the day on which
the meeting is to be held, forward a report (referred to as the statutory report) to
every member of the company:
Provided that if the statutory report is forwarded later than is required above, it
shall, notwithstanding that fact, be deemed to have been duly forwarded if it is so
agreed to by all the members entitled to attend and vote at the meeting.
Contents of the Statutory Report
Sub-section (3) of Section 165 lays down the contents of the statutory report,
which in brief are:
(a) Shares allotted, amounts paid up thereon, and the consideration received, if
cash not received on those shares;
(b) Cash received on shares with an abstract of receipts and payments and
balance in hand;
(c) Preliminary expenses of the companyan account or estimate thereof;
(d) Names, addresses and occupations of the directors, auditors, manager and
secretary, and changes, if any, since incorporation;
(e) Particulars of contracts or modifications thereof, if any, proposed to be
submitted to the meeting for its approval;
(f) The extent, if any, to which each underwriting contract, if any, has not been
carried out, and the reasons therefor;
(g) Calls, if any, unpaid by the directors and manager;
(h) Particulars of commission and brokerage paid or payable to the directors or
the manager.
Certification of the Statutory Report
Sub-section (4) of Section 165 makes it obligatory that the Statutory Report be
certified by at least two directors, including the managing director, if there is one, and
also by the companys auditors in so far as the report relates to the shares allotted by
the company, cash received in respect of the shares and the receipts and payments
of the company.
Registration of the Statutory Report
In accordance with the provisions of Section 165(5) of the Act, the Board of
directors must file a copy of the Statutory Report duly certified as per Sub-section (4),
with the Registrar of Companies for registration, after copies thereof have been sent
to the shareholders of the company.
Notice of Statutory Meeting


In accordance with the provisions of Section 171 of the Act, notice for calling
every general meeting of a company, including a statutory meeting, must be given at
least twenty-one clear days before the meeting unless consent is accorded to a
shorter notice by members, holding not less than 95% of such paid-up capital as
gives right to vote or not less than 95% of the total voting power exercisable at the
meeting. The notice convening the meeting should state it to be the statutory
meeting. [Gardner v. Iredale (1912) 1 Ch. 700].
Time and Place for holding a Statutory Meeting
Section 165 of the Companies Act 1956 does not specify time and place for
holding a statutory meeting. Hence, it can be assumed that the meeting can be held
at any time and place as suited to the company.
Production of list of members at the Statutory Meeting
Sub-section (6) of Section 165 states that the Board shall cause a list showing
the names, addresses and occupations of the members of the company and the
number of shares held by them respectively, to be produced at the commencement of
the Statutory meeting. The list shall remain open and accessible to any member of
the company during the continuance of the meeting.
Scope of the Statutory Meeting
Sub-section (7) of Section 165 gives absolute liberty to members to discuss
any matter relating to the formation of the company or arising out of the statutory
report, whether previous notice has been given or not; but no resolution may be
passed of which notice has not been given in accordance with the provisions of the
Act.
Adjournment of the Statutory Meeting
In accordance with the provisions of Sub-section (8) of the said Section, statutory
meeting may be adjourned from time to time, and at any adjourned meeting any
resolution of which notice has been given in accordance with the provisions of the
Act, whether before or after the former meeting, may be passed; and the adjourned
meeting shall have the same powers as the original meeting.
Penalty for Default
If default is made in complying with the provisions of Section 165, every director
or other officer of the company who is in default shall be punishable with fine which
may extend to five thousand rupees.
3(I)(ii) Annual General Meeting (AGM)
An annual general meeting is required to be held every year by every company
whether, public or private, limited by shares or by guarantee, with or without share
capital or unlimited company. Section 166(1) of the Companies Act, 1956 states that
every company must, in each calendar year hold an annual general meeting, so
specified in the notice calling it, provided that not more than 15 months shall elapse
between two annual general meetings. However, a company may hold its first annual
general meeting within 18 months from the date of its incorporation. In that event it


need not hold any annual general meeting in the year of its incorporation or in the
following year. Thus, if a company is incorporated in December 2003, it may hold its
first annual general meeting in May 2005 and that meeting will be deemed to be the
annual general meeting for 2003, 2004 and 2005.
Sections 166 and 210 of the Companies Act provide that the subsequent annual
general meeting should be held on the earliest of the following dates:
(a) 15 months from date of the last annual general meeting;
(b) the last day of the calendar year;
(c) 6 months from the close of the financial year.
The fact that the company did not function is no excuse for not holding the annual
general meeting. [Madan Gopal Dev v. State of West Bengal, (Q969) 39 Com Cases
119: AIR 1968 Cal 790] or that its management was taken over by the Government,
[Hindustan Co-operative Insurance Society Ltd., Re, (1961) 31 Com Cases 193 : AIR
1961 Cal 443].
Extension of Validity Period of AGM
In the event of any difficulty in holding an annual general meeting (except the first
annual general meeting), the Registrar may, for any special reason shown, grant an
extension of time for holding the meeting by a period not exceeding three months.
Application seeking extension of time should be made before the due date for holding
annual general meeting.
The extension of time granted by the Registrar will apply to both the requirements
of the Section. Ministry of Corporate Affairs (earlier Department of Company Affairs)
expressed the following views:
Sections 166 and 210 when read together clearly suggest that the annual
general meeting should be held on the earliest date of the three relevant dates
prescribed under these two sections, i.e. 6 months after the close of the financial
year, 15 months from the previous annual general meeting and the last day of the
next calendar year, whichever is earlier. Otherwise one or the other section is bound
to be breached. Occasions may, however, arise where a company experiences
genuine difficulty in being unable to hold its annual general meeting within 6 months
of the close of the financial year though it can hold it within the time limit prescribed
under Section 166. The Registrars should be departmentally instructed that in such
cases they should, on the merits of each case, allow extensions under Section 166,
even though the periods prescribed under that Section are not likely to be exceeded,
so that the company can take advantage of the extension and is enabled to hold its
annual general meeting beyond the period of 6 months prescribed under Section 210
and upto nine months of the financial year (as in that case the company shall be able
to add the period of extension to the prescribed period of 6 months), even though the
meeting is held within the time prescribed under Section 166. [Departments File No.
8/16(1)/61-PR].
Due to conversion of a vacant piece of land into a township by a Tea estate


company, there were industrial disputes, labour unrests, intensive agitations, police
firing and death of a worker. The matter was reported in the media also. These
inevitable circumstances made it impossible for the company to convene the AGM for
2001-02 in the stipulated period. The company could not even make use of the
extension granted by ROC to convene its AGM by 31.12.2002. However, the
company filed necessary documents and returns with ROC on 19.2.2003 and filed a
petition in Calcutta High Court praying that the directors and the company should be
relieved of the responsibility as such. The court observed that the default was
committed by the company due to circumstances beyond its control and directed the
ROC not to take any punitive action against the applicant director and made the
company liable for payment of Rs. 1700 to ROC as the costs. [Tapan Kumar
Chowdhury v. Registrar of Companies, (2003) 55 CLA 80 (Cal.)].
In terms of Section 166 of the Companies Act, 1956 an annual general meeting
shall be held every year. Where a meeting called on 30th December, 1934 was
adjourned to the 31st March, 1935 and the next meeting was held on 28th January,
1936 it was held that Section 166 was not complied with and the company was rightly
convicted of an offence for not holding the meeting during the year 1935. [Sree
Meenakshi Mills Co. v Asst. Registrar, Madurai, (1938) 8 Com Cases 175, 176]. The
holding of an extraordinary general meeting will not do; only an annual general
meeting must be held [Emperor v. Nasurbhai Abdullah Bhai Lalji, AIR 1923 Born
194].
In the case of a company whose accounting year ends on 30th June 2003, it is
required to hold the Annual General Meeting latest by the 31st December 2003. If for
any reason, the Annual General Meeting cannot be held in December 2003 and if on
an application, the Registrar grants time to hold the meeting in February, 2004, the
company by holding the Annual General Meeting in February, 2004 is not complying
with the requirements of holding an Annual General Meeting every year. Still, it will
not be said to have contravened the provisions of Section 166.
If there is a delay in holding the annual general meeting beyond the time
permitted by a combined reading of Sections 166 and 210, including any extension
granted by the Registrar of Companies, the company and every officer of the
company in default shall be punishable with fine which may extend to fifty thousand
rupees and in the case of continuing default, with a further fine which may extend to
two thousand five hundred rupees for every day after the first day during which such
default continues. However, this does not affect the validity of the annual general
meeting itself. Consequently, all the resolutions passed at the annual general
meeting for the approval of the accounts and the directors report, declaration of
dividend, appointment of directors and auditors at the meeting are valid.
No distinction in regard to requirement of holding of an annual general meeting
could be made between a private and public limited company. [Registrar of
Companies v. Cabral & Co. Pvt. Ltd. and others (1988) 63 Comp. Cas. 126 (Bom)].
It has been clarified by the Department of Company Affairs (Now, Ministry of
Corporate Affairs) that delay in completion of audit of the annual accounts of the
company does not ordinarily constitute a special reason justifying the extension of
time for holding its annual general meeting. Similarly, the fact of not holding the
annual general meeting cannot be pleaded in defence to a prosecution for failure to
file the balance sheet etc. under Section 220. Each of them is an independent


requirement and default to comply with either constitutes a separate offence
punishable separately. [ROC v. RP, 1977 Tax LR 1610 (Orissa)].
Time and Place for Holding an Annual General Meeting
Every annual general meeting called after giving at least 21 clear days notice
must be held on a day other than a public holiday, i.e. it should be held on working
day, during business hours at the Registered Office of the company or at some other
place within the city, town or village in which the Registered office of the company is
situated. The meeting can be held at any place within the postal limit and local limits
of the city, town or village in which the Registered Office of the company is situated
and where the two do not coincide, the wider of the two. (Circular No. 1/1/80-CLV, dt.
16/02/81). The Central Government may, however, exempt any class of companies
from these provisions.
Section 2(38) defines a public holiday as public holiday within the meaning of the
Negotiable Instruments Act, 1881" and clarifies that if any day is declared by the
Central Government to be a public holiday after the issue of the notice convening
such meeting, it shall not be deemed to be a public holiday in relation to the meeting,
so that the meeting can be held on that day as scheduled, regardless of the day
having been declared as a public holiday.
Where 30th June and 31st December are declared as holiday under the
Negotiable Instruments Act for the limited purpose of half yearly closing of accounts
of banks, treasuries, etc. in that case these two holidays will not be treated as public
holidays for the purpose of Section 166 as per clarification issued by the Department
of Company Affairs vide letter No. 8/(66)/80-CL V dated 2.3.1981. Hence, an Annual
General Meeting can be held on these days.
No annual general meeting of any company shall be held on a public holiday.
The prohibition is, however, not extended to extraordinary general meetings.
There is no contravention of Section 166(2) if an adjourned meeting accidentally
comes to be held on a public holiday. (Departments Letter No. 8/16(1)/61-PR, dated
19th May, 1961).
It is further laid down that a public company or a private company which is a
subsidiary of a public company may, by its articles, fix the time for its annual general
meetings and may also by a resolution passed in one general meeting, fix the time for
its subsequent annual general meetings. A private company, which is not a
subsidiary of a public company, may in a like manner and also by a resolution agreed
to by all the members thereof, fix the time and place for its annual general meeting.
Section 166 does not prevent the articles of association from prescribing any time
limit for holding annual general meeting so long as the two mandatory conditions in
the section are fulfilled. The articles can, therefore, lay down that annual general
meeting shall be held before 31st March (or any such date) every year. [Balakrishna
Maheshwari v. Uma Shanker Mehrotra, (1947)].
Where the articles provided that meetings should be held in the month of August
and in keeping with that provision meetings were generally held on the 3rd or 4th
Monday of every August, but when in one year differences arose between the
management and a big shareholder and a meeting was fixed on 3rd August, at which
date it would have been too difficult for the big shareholder to exercise his voting


rights on recently purchased shares, the court stayed the meeting and ordered that it
should not be held before August 13, because by that time the big shareholders right
would accrue to him. [Cannon v. Trask].
Any direction by a court that the annual general meeting may be held
simultaneously at three different cities is invalid, because the section clearly requires
that the meeting must be held either at the registered office or at some other place
within the same city, town or village where the registered office is situated. [Dinekar
Rai D. Desai v. R.P. Bhasin, (1985) 1 Comp LJ 38].
Default in Holding Annual General Meeting
If a company defaults in holding an annual general meeting two consequences
will follow.
Firstly, any member may apply to the Company Law Board
1
which may call, or
direct the calling of the meeting, and give such ancillary or consequential directions
as it may consider expedient in relation to the calling, holding and conducting of the
meeting. The Company Law Board
1
may direct that one member present in person or
by proxy shall be deemed to constitute the meeting. A meeting held in pursuance of
this order will be deemed to be an annual general meeting of the company (Section
167). It may be noted in this context that at present, Company Law Board alone has
the power under this section to, permit calling of such a meeting, and it excludes the
Courts power to extend the time to hold the annual general meeting.
Secondly, the failure to call this meeting as required by Section 166 of the Act,
either generally or in pursuance of the order under Section 167(1) is an offence
punishable with fine which may extend to Rs. 50,000, on the company and every
officer of the company who is in default and for continuing default, a further fine of Rs.
2,500 per day during which the default continues [Section 168].
In Gracy Thomas v. Four Square Estates (P.) Ltd. [(2008) 83 SCL 404 (CLB
Chennai)]. It was held that application dismissed, by virtue of section 167, if default is
made in holding an annual general meeting by a company in accordance with section
166, the CLB may direct the calling of the annual general meeting. This section
explicitly provides that the CLB may exercise the power only if there is a default
committed in holding annual general meeting, as envisaged in section 166. In the
present case Validity of the AGMs held by the company was pending in a civil suit -
Applicants sought the CLB to issue directions to the company to hold AGM - Whether
it is possible for the CLB to do so. The verdict was in the negative.
Subject to the provisions in the articles, any general meeting of the company can
be called only on the authority of a Board resolution. If the managing director,
manager, secretary or other officer calls a meeting without the authority of the Board
of directors it will not be effectual unless the Board ratifies the convening before the
meeting is held. [Re. Haycraft Gold Reduction and Mining Co., (1900) 2 Ch 230]. Also
refer British Asbestos Co. Ltd. v. Boyd. (1903) 2 Ch 439.
A meeting can be called in accordance with a decision of the Board and does not
require confirmation at the next Board Meeting. [Karnataka Bank Ltd. v. A.B. Datar
(1993) 2 Kar LJ 230 at 243, 244: (1994) 79 Com Cases 417 (1994) 4 Comp LJ 125

1.
Substituted as Tribunal by the Companies (Second Amendment) Act, 2002, w.e.f. a date yet to be
notified.


(Kar)].
In Re. Asia Udyog Pvt. Ltd. (1961) 31 Comp. Cas. 269 the directors were unable
to convene the annual general meeting as the account books were lying in the
custody of the police. The offence was not punishable.
The annual general meeting must be called, whether or not the annual
accounts are ready for consideration at the meeting. There is a clear statutory
duty on the directors to call the meeting whether the accounts, the
consideration of which is only one of the matters to be dealt with at an annual
general meeting are ready or not [Re El Sombre Ltd., (1958) 3 All ER 1 at 6
(1958)]. The requirement of Section 166 for holding AGM within fifteen months of the
preceding AGM is independent of Section 210 requiring presentation of annual
accounts at the AGM. The tenure of additional directors would end on the date on
which an AGM following their appointment is held. The presentation of annual
accounts has no relevance to the duration of their appointment. But where the AGM
has been stayed or deferred at the orders of CLB, there is no default in holding AGM
and consequently the nominee director will remain in office till the stay order is
vacated or the meeting is actually held. [Ador-Samia Ltd. v. Indocan Engineering
Systems Ltd. (2000) 100 Comp. Cas. 370: (1999) 35 CLA 224 (CLB-PB)]. If the
annual accounts (i.e., the balance sheet and profit and loss account) are not ready for
being laid before the meeting, as required by Section 210(1), the usual practice is to
hold the meeting within the prescribed period and then adjourn it to a suitable date,
say a month later for considering the accounts.
This could be done earlier by a suitable resolution adjourning the annual general
meeting to a specific future date later on for the purpose of adoption of the accounts.
As an adjourned meeting is only the continuation of the original meeting and not a
new meeting [M.D. Mundhra v. Assistant Registrar of Companies (1980) 50 Comp.
Cas. 346 (Cal.)], the statutory requirement as to laying of the accounts before the
annual general meeting would be satisfied if the accounts were laid before the
adjourned meeting. [Sudhir Kumar Seal v. Assistant Registrar of Companies (1979)
49 Comp. Cas 462]. This was in accordance with the circular bearing No. 35/9/72-CL-
III dated 2.2.1974, issued by the Company Law Board, Ministry of Law, Justice and
Company Affairs, which has been superseded by their circular dated 20.3.1985
mentioned below:
A plea has been made that in accordance with the aforesaid Circular dated
February 2, 1974 it is possible for a company to adjourn the annual general meeting
in case the accounts are not ready without complying with the requirements of
Section 210 of the Act. In this connection, it may be stated that it is mandatory on the
part of the Board of directors of the company to lay the accounts at every annual
general meeting within the statutory period, as laid down in Sub-section (3) thereof. In
case the annual general meeting is held in accordance with the provisions of Section
166 of the Act, and the accounts are not placed thereat, the same not being ready, it
is no doubt open to the company concerned to adjourn the said annual general
meeting to a subsequent date for laying the accounts but then, the adjourned annual
general meeting must itself be held within the statutory period (including the period of
extension thereof, if any allowed, as provided in Section 166(1)). That being so,
procedure of adjourning the annual general meeting cannot be so adopted as to


bypass the provisions of Section 210 of the Act. Thus, in case the accounts are not
placed at the annual general meeting or the adjourned annual general meeting, in
either case, within the statutory period laid down in Sub-section (3) of Section 210 of
the Act, the delinquent directors are liable for prosecution under Sub-section (5)
thereof. In this connection, a reference may be made to decision of the Division
Bench of the Calcutta High Court in Bejoy Kumar Karnani v. Assistant Registrar of
Companies (W.B.), (1985) 58 Com Cases 293 (1985) 1 Comp LJ 21 (Cal), wherein it
has been held that if the said Circular dated February 2, 1974, is to be literally
construed divorced of the provisions of Sections 166 and 210 of the Act, such
adjournments may go on ad infinitum and in such an event not only the provisions of
Section 166 but also the provisions of Sections 168 and 210 of the Act would be
rendered negatory, leading to chaos and confusion in the matter of enforcement of
the relevant provisions of the Act by the Registrar of Companies. [Circular No. 8/1
(2)/220/85-CL.V., 2 of 1985, dated 25th March, 1985)].
In the view of the Department of Company Affairs also vide Circular No. 2/85
dated 25.3.1985, it is not possible for a company to adjourn Annual General Meeting
in case accounts are not ready without complying with the requirements of Section
210. The Circular No. 35/9/72-CL II dated 2.2.1974 of Department of Company
Affairs cannot be taken for support for by passing obligations of Section 210.
As per Section 220, as amended by Amendment Act of 1988, a company is
required to file the balance-sheet etc. with the Registrar even if the Annual General
Meeting is not held in time and is adjourned for any reason without adoption thereof.
The fact of not holding the annual general meeting cannot be pleaded in defence
to a prosecution for failure to file the balance-sheet etc. under Section 220. Each of
them is an independent requirement and default to comply with either constitutes a
separate offence punishable separately.
If after the Board of directors of a company failed to convene the annual general
meeting despite the directions of the Court and another Board of directors was
elected, the latter Board can neither be disqualified nor be held liable for failure of the
previous Board to hold the annual general meeting as per Court Order [Dirkar Rai D.
Desai v. R.P. Bhasin (1982) 3 Comp LJ 198 (Del)].
Again, if, at the time the annual general meeting is due to be held, there is only
one shareholder (the other having died), no offence is committed when the annual
general meeting is not held. [State of Kerala v. West Coast Planners Agencies Pvt.
Ltd. (1958) 28 Com. Cas. 13].
Consideration of Accounts of More than One Year at Annual General Meeting
The scheme of the Companies Act contemplates that there shall be at least
one annual general meeting in the course of one year. The Annual General Meeting
shall be in relation to the financial year as defined under Section 210(4) and the
business to be transacted at the annual general meeting must be in respect of the
financial year. On that account, it is not open to the company to submit accounts for
consideration at an annual general meeting of the Company in respect of more than
one year. For consideration of the Balance Sheet and Accounts of the Company,
there must be an Annual General Meeting and the accounts must be considered at


such meeting or at an adjourned annual general meeting.
Cancelling/Postponing of Convened General Meeting
Directors who have issued notice of Annual General Meeting for a particular date
have the power to postpone the date for valid, bonafide and proper reasons [Raj Pal
Singh v. State of U.P (1968) Comp LJ 21]. The more proper course would be for the
Board not to postpone the meeting but to hold the convened meeting and then have
the matter decided at the adjourned meeting.
In Smith v. Paringa Mines Ltd., (1996) 2 Ch 193, the Board of directors gave
notice of a general meeting and later desired to adjourn by a subsequent notice. It
was held that the Board of directors does not have this power. The best course would
be to hold a meeting and then adjourn it to any future convenient date.
Where some shareholders assembled at the appointed place and time of an
annual general meeting and took up the first item of business, viz. electing the
chairman, and the minutes stated that the meeting was adjourned, it was held that
the first meeting was considered to have been held inspite of the fact that no
resolution were recorded V.S. Mathew v. H.S. Mathur, 1977 Tax LR NOC 153 (All).
Object of holding an Annual General Meeting
An annual general meeting is an important meeting for safeguarding the interests
of the shareholders of a company. Since the ultimate control of the company should
vest in the hands of the shareholders, it is desirable, and, necessary that they should
meet at least once every year to review the working of the company during the
previous year. This meeting affords an opportunity to the shareholders to meet and
discuss about the working of the company. The annual general meeting is particularly
important because of the business essentially transacted at this meeting.
Business transacted at an Annual General Meeting
Section 173 of the Companies Act lays down that all business to be transacted at
an annual general meeting shall be deemed Special Business with the exception of
the Ordinary Business, relating to:
(a) the consideration of the accounts, balance sheet and the reports of the
Board of directors and auditors;
(b) the declaration of dividend;
(c) the appointment of directors in the place of those retiring; and
(d) the appointment of, and the fixing of remuneration of the auditors.
At the annual general meeting, all other business is special business. At an
extraordinary general meetings, every business is special business.
Applicability of provisions of Sections 171 to 186
Section 170 of the Act provides that
(i) Notwithstanding anything contained contrary in the Articles, the provisions of
Sections 171 to 186 apply to all public companies and private companies
which are subsidiaries of public companies.


(ii) In the case of other private companies also the provisions of these sections
will apply unless otherwise specified or unless the articles of the Company
provide otherwise. A private company which is not subsidiary of a public
company may exclude the application to itself of the provisions of any of
these sections (excepting provisions in any of these sections expressly
made applicable to all private companies such as Sub-section (1) of Section
174) and unless like in Section 182, it is stated that the provisions of the
section would not apply to a private company.
Sub-section (2) of Section 170 provides that
(a) Section 176, with such adaptations and modifications as may be prescribed
[i.e. by Rules made by the Central Government - Cf. Section 2 (33)] will
apply to meeting of any class or classes of members or of debenture-holders
and any class of debenture-holders of a company, in like manner as it
applies with respect to general meetings of a company.
(b) The other Sections 171 to 175 and 177 to 186 will apply to such class of
meetings to the extent to which the articles of the company whether public or
private do not provide otherwise.
3(I)(iii) Extraordinary General Meetings
All the general meetings of a company, with the exception of the statutory
meeting and the annual general meetings, are called extraordinary general meetings.
Types of Business Transacted at Extraordinary General Meetings
As already stated according to the provisions of Section 173 of the Companies
Act, 1956 all the business to be transacted at an Extraordinary General Meeting with
the exception of business relating to:
(i) the consideration of the accounts, balance sheet and the reports of the
Board of directors and auditors,
(ii) the declaration of a dividend,
(iii) the appointment of directors in the place of those retiring, and
(iv) the appointment of, and the fixing of the remuneration of the auditors
shall be deemed special. In the case of any other meeting, all business shall be
deemed special. At the Extraordinary General Meeting, only special business which
arises between two Annual General Meetings being urgent and cannot be deferred to
the next Annual General Meeting, is transacted.
Who may Convene Extraordinary General Meetings
Usually the articles of association of companies contain provisions with regard to
the calling of extraordinary general meetings.
Regulations 47 and 48 in Table A of Schedule I to the Companies Act, 1956
contain the following provisions:
Regulation 47: All general meetings other than annual general meetings shall be
called extraordinary general meeting.


Regulation 48: (1) The board may, whenever it thinks fit, call an extraordinary
general meeting.
(2) If at any time, there are not within India directors capable of acting who are
sufficient in number to form a quorum, any director or any two members of the
company may call an extraordinary general meeting in the same manner, as
nearly as possible, as that in which such a meeting may be called by the Board.
Notice of a general meeting given by secretary without the sanction of the
directors or proper authority is invalid [Re: State of Wyoming Syndicate (1901) 2 Ch
43]. A meeting convened as a meeting of the directors may be valid as a meeting of
the company if all the members are present [Re: Express Engineering Works (1920)
1 Ch 466].
Calling of Extraordinary General Meeting on Requisition
Section 169 of the Companies Act, 1956 provides:
(1) The Board of directors of a company shall, on the requisition of such number
of members of the company as is specified in Sub-section (4), forthwith
proceed duly to call an extraordinary general meeting of the company.
(2) The requisition shall set out the matters for the consideration of which the
meeting is to be called, shall be signed by the requisitionists, and shall be
deposited at the registered office of the company.
(3) The requisition may consist of several documents in like form, each signed
by one or more requisitionists.
(4) The number of members entitled to requisition a meeting in regard to any
matter shall be:
(a)In the case of a company having a share capital, such number of them as
hold at the date of the deposit of the requisition, not less than one-tenth
of such of the paid-up capital of the company as at that date carries the
right of voting in regard to that matter;
(b)In the case of a company not having a share capital, such number of them as
hold at the date of the deposit of the requisition, not less than one-tenth
of the total voting power of all the members having at the said date a
right of vote in regard to that matter;
(5) Where two or more distinct matters are specified in the requisition, the
provisions of Sub-section (4) shall apply separately in regard to each such
matter; and the requisition shall accordingly be valid only in respect of those
matters in regard to which condition specified in that sub-section is fulfilled.
(6) If the Board does not, within twenty-one days from the date of the deposit of
a valid requisition in regard to any matter, proceed duly to call a meeting for
the consideration of those matters on a day not later than forty-five days
from the date of the deposit of the requisition, the meeting may be called
(a)by the requisitionists themselves;
(b)in the case of a company having a share capital, by such of the requisitionists
as represent either a majority in value of the paid-up share capital held


by all of them or not less than one-tenth of such of the paid-up share
capital of the company as is referred to in clause (a) of Sub-section (4),
whichever is less; or
(c)in the case of a company not having a share capital, by such of the
requisitionists as represent not less than one-tenth of the total voting
power of all the members of the company referred to in clause (b) of
Sub-section (4).
The word valid used above has no reference to the object of the requisition but
rather to the requirement of section itself as to its contents; number of signatories etc.
and it would not be open to the Board of directors of a company to refuse to act on a
requisition on the grounds that although such requisition was in accordance with the
requirements of Section 169 it was otherwise invalid. [Cricket Club of India Ltd. v.
Madhav L. Apte (1975) 45 Comp. Cas. 574 (Bom.)].
(7) A meeting called under Sub-section (6) by the requisitionists or any of
them
(a)shall be called in the same manner as nearly as possible as that in which
meetings are to be called by the Board;
(b)shall not be held after the expiration of three months from the date of the
deposit of the requisition.
Sub-section (9) of Section 169 provides that any reasonable expenses incurred
by the requisitionists by reason of the failure of the Board to duly call a meeting shall
be repaid to the requisitionists by the company; and any sum so repaid shall be
retained by the company out of any sums due or to become due from the company
by way of fees or other remuneration for their services to such of the directors as
were in default.
However, it has been held in A.D. Chaudhary v. Mysore Paper Mills Ltd. (1976)
46 Comp. Cas. 548, that the Board of directors is right in refusing to call and hold an
extraordinary general meeting on the requisition of members where an order of
injunction restraining the company from holding any meeting is in force.
The Supreme Court has in the case of Life lnsurance Corpn. of lndia v.
Escorts Ltd. (1986) 59 Comp. Case. 548 held that every shareholder of a
company has a right to requisition an extraordinary general meeting in
accordance with the provisions of the Companies Act. He cannot be restrained
from requisitioning an extraordinary general meeting and he is not bound to
disclose the reasons for the resolutions proposed to be moved at the meeting.
Under Section 173(2) of the Companies Act, a duty has been cast on the
management to disclose, in an explanatory statement all material facts relating to
every special business coming up before the general meeting to enable the
shareholders to form a judgement on the business before them. The Act contains no
provision requiring the shareholders requisitioning a meeting to disclose the reasons
for resolutions, which they propose to move at the meeting.
In convening a requisitioned meeting a companys role is limited to forwarding of
material received by it from requisitionists to all members and nothing more and


where company had reproduced explanatory statement as given by requisitionists,
even assuming that explanatory statement attached by company did not reveal
alleged material particulars, company could be said to have complied with provisions
of law and as such, resolution passed in meeting would be valid. [Vijay M. Porwal v.
Pentokey Organy (india) Ltd. [1995] 6 SCL 123].
Calling of Extraordinary General Meeting by Company Law Board
1
/Tribunal
2

Section 186 of the Companies Act, 1956 provides:
(1) If for any reason it is impracticable to call a meeting of a company, other than
an annual general meeting, in any manner in which meetings of the company may be
called, or to hold or conduct the meeting of the company in the manner prescribed by
this Act or the articles, the Company Law Board
1
/Tribunal
2
may, either of its own
motion or on the application of any director of the company, or of any member of the
company who would be entitled to vote at the meeting
(a) order a meeting of the company to be called, held and conducted in such
manner as the Company Law Board
1
/Tribunal
2
thinks fit; and
(b) give such ancillary or consequential directions as the Company Law Board
1
/
Tribunal
2
thinks expedient, including directions modifying or supplementing
in relation to the calling, holding and conducting of the meeting, the
operation of the provisions of this Act and of the companys articles.
It should, however, be noted that this section even permits Company Law
Board
1
/Tribunal
2
(earlier the Court) suo-moto to call a meeting of the company
where it has become impracticable to call a meeting other than an annual general
meeting [Smt. Jain v. Delhi Flour Mills Co. (1974) 44 Comp. Cas. 228 (Delhi)].
(2) Any meeting called, held and conducted in accordance with any such order
shall, for all purposes, be deemed to be a meeting of the company duly called, held
and conducted.
A meeting which is not conducted in accordance with directions of Company Law
Board
1
/Tribunal
2
is not a meeting contemplated under Section 186(2) and business
conducted in that meeting will be invalid.
For seeking an order of the Company Law Board
1
/Tribunal
2
to convene an
extraordinary general meeting of the company, a petition under the Company Law
Board Regulations, 1991, is required to be preferred.
In Re. Lothian Jute Mills Ltd. (1950) 55 CWN 646, there was a dispute between
the shareholders of a company as to who were lawful directors of the company
entitled to call a meeting of the company. The word impracticable has been held to
mean impracticable from a reasonable point of view. It was held to be proper that the
Company Law Board should step in and call a meeting, the validity of which is
beyond question. The Company Law Board will interfere very sparingly, and only

1.
Existing.
2.
Proposed.


when the application has been made bona fide in the larger interests of the company
for removing the deadlock [In Re. Ruttonjee & Co. Ltd. (1968) 2 Comp. L.J. 155].
Impracticability of conducting a meeting also includes impracticability of holding a
meeting; holding of a meeting is impracticable where registered office of a company
is locked and is not available. [M.R.S. Rathnavelusami Chettiar v. M.R.S.
Manickavelu Chettiar (1951) 21 Comp. Cas. 93 (Mad.)].
The Company Law Board
1
/Tribunal
2
may exercise the power to order a meeting
to be convened even though it is opposed by some of the shareholders. [Re. El.
Sombrero Ltd. (1958) 3 All E.R].
If there is no allegation of impracticability of holding the meeting, the Company
Law Board
1
/Tribunal
2
will direct the holding of the meeting [In Re. Edward Ganj Public
Works A.P. Ltd. (1977) 47 Comp. Cas. 283].
Further the Company Law Board
1
/Tribunal
2
(earlier the court) has no power to
make an order regarding holding and conducting of a meeting which has already
been called under Section 186. [R. Rangachari v. Suppiah (1975) 45 Comp. Cas. 641
(S.C.)].
Where there were disputes among members of an association and the members
formed two rival groups running two parallel organisations, holding separate meetings
and appointing separate sets of office-bearers and claiming separate places as the
registered office of the association, it was held that there was sufficient material
before the Board to come to the conclusion that the calling of a meeting through the
domestic forum would be impracticable. Section 186 empowers the Company Law
Board
1
/Tribunal
2
to give ancillary and consequential directions in relation to the
meeting as is considered expedient; the Board
1
/Tribunal
2
could, therefore, decide to
allow undisputed nominees to attend the meeting so that an effective meeting could
be held, because allowing nominees to attend the meeting would defeat the meeting.
[Baptist Church Trust Association and Another v. Member, Company Law Board &
Others (1986) 60 Comp. Case 381 (Cal.)].
Company Law Board dismissed the application by the applicant requisitioning
EGM, where the applicant had not satisfied provisions of Section 186 of the Act in
terms of want of a list of the shareholders of the company. But as no material was
found to show that the applicant had called upon the company to furnish the same,
Company Law Board came to the conclusion that there was no impracticability for the
applicant to convene the extraordinary general meeting. [United Shippers Ltd. v.
Aluminium Industries Ltd. (2006)].
3(I)(iv) Class Meetings (Section 106)
Class meetings are those meetings which are held by holders of a particular
class of shares, e. g. preference shares. Need for such meetings arises when it is
proposed to vary the rights of a particulars class of shares. Thus, for effecting such
changes, it is necessary that a separate meeting of the holders of that class of shares

1
Existing.
2
Proposed.


is held and the proposed variation is approved at the meeting. For example, for
deciding not to pay the arrears of dividends on cumulative preference shares, for
which it is necessary to call a meeting of such shareholders and pass the resolution
as prescribed by Section 106 of the Act.
3 (II) Meetings of Debentureholders
When a company issues debentures it provides in the trust deed executed for
securing the issue for the holding of meetings of debentureholders and also gives
power to them to vary the terms of security or to alter their rights in certain
circumstances. All matters connected with the holding, conduct and proceedings of
the meetings of the debentureholders are given in the Debenture Trust Deed. The
decisions arrived at such meetings with the requisite majority, are valid and binding
upon the minority.
Very often a provision is made in the Debenture Trust Deed to dispense with the
holding of the meeting of the debentureholders. A provision is made whereby a
resolution by circulation duly signed by the debentureholders would be treated as the
decision of the debentureholders. In such a case, it is not necessary to adopt the
procedure for convening and holding a meeting of the debentureholders.
3(III) Meeting of Creditors
Sometimes, a company, either as running concern or in the event of winding up,
has to make certain arrangements with its creditors, which has to be worked out in
meetings of creditors. Strictly speaking, meetings of creditors are not company
meetings. Section 391 to 393 of the Act authorise the company to enter into
arrangements with the creditors with the sanction of the Court. The Court on
application, may order the holding of creditors meeting. If the scheme of arrangement
is agreed to by majority in number holding debts to the value of three-fourths of the
total value of the debts, the Court may sanction the scheme. A certified copy of the
Courts order is then filed with the Registrar and it is binding on all the creditors and
the company only after it is filed with the Registrar.
When a company goes into liquidation, a meeting of creditors and of
contributories is held to ascertain the total amount due by the company to its creditors
and also to appoint a liquidator to wind up the affairs of the company.
3 (IV) Meeting of the Board of Directors
The affairs of a company are managed by Board of directors. It is, therefore,
necessary that the directors should often meet to discuss various matters regarding
the management and administration of the affairs of the company in the best interests
of the shareholders and the public interest.
The power of directors may be grouped under three heads:
(1) Powers exercisable only at meetings of the Board.
These comprise the following:
(a)the power to make calls on shareholders [Section 292(1)(a)].
(aa)the power to authorise the buy back referred to in the first proviso to clause (b)


of Sub-section (2) of Section 77A [Section 292(1)(aa)].
(b)the power to issue debentures and borrow moneys otherwise than on
debentures [Section 292(1)(b) and (c)];
(c)the power to invest the companys funds and make loans
[Section 292(1)(d) and (e)];
(d)the delegation of the power to borrow (otherwise than by the issue of
debentures which cannot be delegated), and to invest and make loans
can also be effected only by means of resolutions passed at meetings of
the Board [Section 292(1) proviso and (2), (3) and (4)];
(e)the filling of casual vacancies on the Board (Section 262);
(f)appointing as managing director or manager a person who is managing
director or manager of another company (Sections 316 and 386);
(g)giving consent to contracts of company with any director or his relative, firm,
private company etc. in which he has interest (Section 297);
(2) Powers exercisable (in the case of a public company or a private company
which is subsidiary of a public company) only with the consent of the
company in general meeting:
(a)the power to sell, lease, otherwise dispose of the whole or substantially the
whole of the undertaking of the company [Section 293(1)(a)];
(b)power to remit debt due by a director to the company [Section 293(1)(b)];
(c)power to borrow in excess of capital and reserves of the company [Section
293(1)(d)];
(d)power to contribute to charities not directly relating to the business of the
company [Section 293(1)(e)];
(e) power to invest otherwise than in trust securities compensation amounts
received on compulsory acquisition of any of its undertaking referred to
in clause (a) of Section 293(1);
(3) the power to appoint sole selling agents (Section 294(2)].
(4) All other powers which, subject to the provisions of the Act, the company is
authorised to exercise. These may be exercised either at meetings of the
Board or by circular resolutions (Section 289) or by delegating the same to
committees or others.
Section 285 of the Act prescribes that in the case of every company, a meeting of
the Board of directors shall be held at least once in every three months and at least
four such meetings shall be held in every year. lt has been clarified so long as four
board meetings are held in a calendar year, one in each quarter, the interval between
two meetings may be more than three months. For instance, if a meeting is held on
January 1, the next meeting may be held on June 30, the third on 1st

July and the
fourth on the 31st December.
However, Clause 49 of listing agreement as inserted vide SEBI F.No. SMDRP/
Policy Cir. 10/2000 dated 21/2/2000, requires the listed companies to which this
clause is applicable to hold at least four Board meetings in a year with a maximum
time gap of four months between any two meeting.


Notice of Board Meetings
Section 286 of the Companies Act prescribes: (1) Notice of every meeting of the
board of directors of a company shall be given in writing to every director for the time
being in India, and at his usual address in India to every other director.
(2) Every officer of the company whose duty it is to give notice as aforesaid and
who fails to do so shall be punishable with fine which may extend to one thousand
rupees.
The notice should contain the time, date and place of meeting. Section 286 does
not provide for a minimum days for giving a notice for convening a Board meeting.
However, the articles of a company may prescribe such time-limit. It has been held that
even a few hours notice would suffice. [Browne v. La Trinidad, (1887) 37 Ch D 1 (CA)].
However, in another case it was held that a few hours notice was not sufficient
because the Board meeting was held by certain directors, who wanted to ensure that
by giving a short notice the other directors would not be able to attend the same. [In Re,
Homer District Consolidated Gold Mines, (1988) 39 Ch D 546 (CA)].
It would, of course, be sufficient compliance with the provisions of Section 286 if, for
instance, the directors are duly informed that in future the meeting would be held on the
first Saturday of every month. But even then the notice of meeting should be given.
Notice must be given even to a director who has stated that he will be unable to
attend the meeting.
If notice of the meeting is not given to one of the directors, meeting of Board of
directors is invalid and resolutions passed are inoperative. [Parmeshwari Prasad
Gupta v. Union of India (1947) 44 Comp. Cas. 1 (SC]. Where, however, notice is not
given as required but all the directors attend the meeting and do not object to the
absence of notice, the proceedings of the meeting will not be invalid. [Bharat Fire and
General Insurance Co. Ltd. v. P.P. Gupta (1974) Comp. Cas. 1 (S.C.)].
If, by an accidental omission the notice is not given to any director and a meeting
of the Board of directors is held, it is rendered irregular. If the directors nevertheless
transact business on behalf of the company at such a meeting. e.g. allot shares,
make contracts etc. the rule of indoor management as laid in Royal British Bank v.
Turquand applies where outsiders will not be prejudiced by such irregularities if they
have no notice of them. A subsequent regularly constituted board meeting may ratify
and confirm what was done irregularly, and it will then be valid ab initio.
There is no provision in the Act for notice of adjourned meeting and the Articles
of Association may provide for the same. [Promod Kumar Mittal v. Southern Steel
Ltd., (1980) 50 Com Cases 555]. Since an adjournment is only a continuation of the
meeting, the notice for the first meeting holds good for all the adjournments. [Kerr v.
Wilkie, (1860) 1 LT 501]. However, notice of adjourned meeting may be given to
directors, who did not attend the original meeting. Where the meeting is adjourned
sine die, a fresh notice must be given. Where new business is to be transacted, a
fresh notice would be required.
A director is entitled to a notice even though he is residing abroad provided he
has furnished his address to the company for sending such notice to him as the right


to receive notice cannot be waived. [H.M. Ebrahim Sait v. South Indian Industrial Ltd.
(1938) 8 Com Cases 308]. Exception can be made in cases where the Board has
decided to meet at fixed intervals. It is necessary to send notice to each and every
director who is for the time being in India, even if a particular director has informed
the company about his inability to attend the meeting.
When it is known to the directors that one of their collegues is residing mostly out
of India and they give him a notice of the Board meeting at his local address, it is
quite obvious that the notice is inadequate and it may not even reach him. Such
conduct would show lack of probity and fair play on the part of the directors incharge
of the companys affairs. It was held that the meeting and allotment of shares at the
meeting could be declared as null and void. [Kamal K. Dutta (Dr.) v. Ruby General
Hospital Ltd. (2000) 36 CLA 214, 231 (CLB-PB)].
If the articles are silent; the notice can be sent by pre-paid post or hand delivery.
Notice sent by fax is adequate notice [Ferruceio Sias v. Jai Manga Ram Mukhi,
(1994) 1 Comp L.J. 345 (Del.)]. But where a director gives specific directions about
serving notices, they must be adhered to as far as practicable.
Time and Place of Board Meetings
Unlike the provisions of Section 166, which require the Annual General Meeting
of the company to be held at the registered office of the company during the working
hours and on a day that is not a public holiday, there are no such restrictions in the
Act regarding the meeting of the Board of directors. The meetings of the Board of
directors may, therefore, be held at any place convenient to the Directors outside the
business hours and even on a public holiday unless the articles provide otherwise.
It has to be noted that there is no restriction regarding the holding of Board
meetings on any day, even if it be public holiday unless the articles provide
otherwise. But if, for want of quorum, a Board meeting has to be adjourned to the
same day next week as required by Sub-section (1) and if that day happens to be a
public holiday, the adjourned meeting should be held on the next day succeeding the
holiday or if that is a public holiday, till the next succeeding day which is not a public
holiday at the same time and place. The Department has clarified in connection with
Section 285 that it would not raise any objection if an adjourned Board meeting is
held on a public holiday, for the convenience of the directors although it considers
that an original meeting should also normally be held only on working day. [(Letter
No 8/11 (285) 63-PR dated 2-1-1963].
Section 301(5) of the Companies Act, 1956 provides, inter alia that the Register
of Contracts shall be kept at the registered office of the company. Accordingly, if a
Board meeting is held at a place other than the registered office, it will involve
removal of the register of contracts outside the registered office.
However, it has been clarified that it would be sufficient compliance with the
requirements of Section 301(5) of the Act if the company gives adequate notice to its
shareholders either once for all or from time to time indicating the precise periods
during business hours and the dates on which they could inspect the register under
Section 301(2) at the registered office of the company. In view of the Governments
clarification it is apparent that it is legally possible to hold board meetings at any


place if the requisite notice regarding inspection of register of contracts to
shareholders has been given.
Agenda
The law does not require that an agenda for meeting of the directors shall be
compulsorily preferred. At this point a comparison of Section 172 (dealing with
general meeting) with Section 286 (dealing with board meetings) is relevant.
Section 172(1) provides that every notice of a meeting of a company shall specify the
place and the day and hour of the meeting and shall contain a statement of the
business to be transacted thereat. Section 286 requires that notice of every meeting
of the Board of Directors of a company shall be given in writing to every director. Any
business whatsoever, thus can be transacted at a board meeting, while the
shareholders are required to be informed in advance of the agenda in the case of a
general meeting.
But even in the case of a Board meeting a few sections e.g., Section 316
(appointment as managing director of a person who is already managing
director/manager of another company); and 386 (appointment of a person as
manager who is already managing director/manager of another company), stipulate
that notice of the resolution to be passed thereat is required to be given to the
directors in India. It would follow, therefore, that in such cases it would be incumbent
on the company to circulate the agenda along with a copy of the proposed resolution
in respect of every such item. Apart from the foregoing, in view of the enormity of
problems faced by the companies and the number of important matters coming up for
decision before the Board, if details of the items for discussion in the Board meetings
are not circulated in advance, no meaningful discussion can take place in the Board
meeting for none of the outside directors will be aware of the matters to be discussed
in Board meetings. Therefore, good practice demands that the agenda containing
business to be transacted is circulated preferably along with the notice at least a
week before the date of the meeting. Most of the well-managed companies follow this
practice.
The agenda should contain notes on the items to be discussed and should be
circulated in advance so that the directors come to the meeting fully prepared to
contribute their best to the deliberations on each item of business so that decisions
taken at each Board meeting are sound and the best.
Usually a good part of the Board meeting agenda consists of routine items, the
drafting of which does not pose any problem. But, where there are important items
also, like reports on the working of the company, approval of capital projects, matters
calling for major policy decisions etc., agenda preparation requires drafting skill.
In the case of the progress report, it would be useful for directors if brief notes on
the present working of the company with comparative figures of the earlier period are
given in tabular form. Detailed information with regard to working of each Division,
Department or Branch or Segment of the companys activities should be attached as
an annexure.
Likewise, in the case of capital projects, it would facilitate their consideration by
directors if a short note is circulated along with the project report giving its
justification, estimated expenditure to be incurred, mode of financing, expected return
and probable time by which the project is likely to be completed.


As regards the items of business requiring policy decisions they must by very
carefully and precisely written so that the directors can deliberate upon them in
detail, consider every angle and take decisions in respect thereof.
It is advisable to circulate along with the notes on agenda, the proposed
resolutions to be moved at the meeting and to be passed by the directors. If the
directors have suggestions with regard to the proposed resolutions, they may offer
the same at the meeting and have the proposed resolutions suitably amended. The
agenda for the Board meetings should be conveniently grouped and divided so that
minimum time and energy of the directors are consumed on less important items.
Routine items are generally placed in the beginning and items which require detailed
consideration are taken up thereafter.
Resolutions Passed by Circulation by Directors
According to the provisions of Section 289 of the Companies Act, 1956, the right
to pass a resolution by circulation has been given only to the directors and their
committees. No such resolution will be deemed to have been duly passed unless (1)
it has been circulated in draft form together with necessary papers, if any, to all the
directors or to all members of the Committee of Directors, then in India, and to all
other directors, or members at their usual address in India, and (2) it has been
approved by such of the directors as are then in India or by a majority of them, as
are entitled to vote on the resolution. The number of directors or members in India to
whom the resolution is circulated should not be less than the quorum fixed for a
meeting of the Board or the Committee, as the case may be.
The passing of resolutions by circulation does not dispense with the statutory
requirement of holding the Board meeting at least once in every three months. Where
a resolution is passed by circulation, it should be got formally noted at the next Board
meeting and recorded in the Minutes Book.
Minutes of the Board Meetings
Section 193 requires that the minutes of the meetings of the Board of Directors
should be maintained in a separate book meant for that purpose. The minutes book is
to be bound and its pages should be consecutively numbered.
While preparing minutes of the proceedings of the meetings of the Board of
directors of a company, there are certain important statutory requirements, which
should be taken care of. They are:
(a) to give names of the directors present at the meeting;
(b) to give names of the directors absent and requested for the grant of leave of
absence by the Board;
(c) to give names of the directors voting for or against the various resolutions
under respective items of business;
(d) to read notice given by directors, if any, with regard to their directorships in
other companies as per Section 299(3) and their shareholdings as per
Section 308 of the Act;


(e) to specifically mention the fact of unanimity of decisions of directors as
contemplated by Sections 316, 372A and 386;
(f) to incorporate the resolutions for appointments of officers made at the Board
meetings.
It is not obligatory to wait for the next Board Meeting in order to have the minutes
of the previous meeting signed. Such minutes may be signed by the Chairman of the
Meeting at any time before the next meeting is held.
Where there is a practice of presenting the minutes of a meeting for confirmation
by the Board of Directors at the next meeting, it must be noted that if such minutes
have already been signed by the Chairman of the meeting concerned, the minutes
attract the presumption that until the contrary is proved, the meeting shall be deemed
to have been duly called and held, and all proceedings thereat have duly taken place.
It will be possible to have alteration in the minutes of the meeting only by way of fresh
resolution in the Board Meeting in which the minutes of the meeting in question are
discussed. Even if the minutes have not been signed but have been approved by the
Chairman of the meeting concerned, the same position as indicated above will
prevail. [Letter No. 8/2 (Misc) 75-CL dated. 5.5.75].
While drafting minutes of the Board meetings with regard to the delegation of
powers, both financial and administrative, to officers, care should be taken to draft the
resolutions in such a manner so as to provide for automatic cancellation of the
powers delegated when the delegate ceases to be in employment of the company.
Likewise, during the course of employment of a person in the company, the
designation of delegates are frequently changed on promotion or otherwise. Care
should be taken so that necessity of going to the Board too often may be avoided. In
such cases, it will be useful to adopt the following type of a resolution:
Resolved that the following powers be and are hereby delegated to Sarvashri
X,Y and Z and they are empowered to exercise the powers so long as they are in the
service of the company and notwithstanding change in their designations.
Quite often it becomes necessary to revise the delegation of powers consequent
upon the cessation of service of the delegates or the necessity of further delegation
to provide for smooth flow of work in the organisation. Usually, in such cases, the
original resolution delegating powers is modified to provide for the above. More often
than no such modification of the earlier resolution may lead to the cancellation of the
entire delegation. Therefore, great care has to be taken in drafting of the resolution
modifying the earlier delegation. Alternatively, in such cases, it is advisable to pass a
fresh resolution so that all concerned including banks are clear as to whom and what
powers have been delegated. The latter course is preferable.
As the minutes books of the meeting of Board of directors or of the general
meeting of company are primary documents and are evidence of the proceedings
recorded therein and where minutes are duly drawn and signed, presumption as
specified in Section 195 of the Act are required to be drawn until the contrary is
proved. It has been provided in the Act that the minute books should be kept at the
registered office of the company (File No. 8/16 (1)/61 - PR).


Section 193 of the Act requires that minutes of the meeting should be recorded
within thirty days and signed either by the Chairman of that meeting or by the
Chairman of the next meeting.
Quorum of Directors
Quorum is the minimum number of directors required to be present to validly
transact any business. The directors cannot proceed with a meeting unless the
required quorum of directors is present. Provision for quorum for meeting of directors
is not directory but it is mandatory. Any decision taken by a lesser number than the
quorum is void [Needle Industries (India) Ltd. v. Needle Industries Newey (India)
Holding Ltd. (1981) 50 Comp. Case. 743 (SC)].
Section 287(2) has fixed the quorum as one-third of the total strength of the
Board (any fraction contained in that one-third being rounded off as one) or two
directors, whichever is higher. If at any time the number of interested directors
exceeds or is equal to two-thirds of total strength, the number of remaining directors
present at the meeting being not less than two shall be the quorum during such
time.
In this section total strength means the total strength of the Board of directors
of a company as determined in pursuance of the Act after deducting therefrom the
number of the directors, if any, whose places may be vacant at that time.
Interested directors means any director whose presence cannot be counted for
the purpose of forming a quorum at a meeting of the Board, at the time of the
discussion or vote on any matter i.e., a contract or arrangement in which he is in any
way, whether directly or indirectly concerned or interested. It may be noted that in
case of Board meetings quorum is required throughout the meeting.
It follows that quorum at a Board meeting must be a disinterested quorum. In
other words, it must consist of directors who are entitled to vote on the particular
motion before the Board. If a director is concerned or interested in a transaction,
which is to be discussed, he is not counted for the purpose of quorum with respect to
that particular item of business. In this context, reference may be made to the
provisions of Section 300 which lays down that an interested director shall not vote
on the contract or arrangement in which he is interested and also that his presence
will not be counted for the purpose of quorum. These provisions do not apply to a
private company.
As a rule, in the case of a meeting of the Board of directors, the meeting cannot
transact any business, unless a quorum is present at the time of transacting the
business. It is not enough that a quorum was present at the commencement of the
business.
The quorum of the Board is required at every stage of the meeting and unless a
quorum is present at every such stage, the business transacted is void [Balakrishna
v. Balu Subudhi. AIR 1949 Pat 184].
Though Regulation 49 of Table A stipulates that no business shall be transacted at
any general meeting unless a quorum of members is present at the time when the
meeting proceeds to business. Where out of the three directors required to form a


quorum, two had resigned, the court held that the single remaining director had the
following three courses open to him: (1) He could get members to call a meeting under
Section 169, (2) he himself could call an extraordinary meeting of the shareholders
under the articles, or (3) he could move the court (Now CLB) to call a general meeting
under Section 186 [Sorabje v. Sind Punjab Co., (1906) 8 Com LR 478].
To deal with such circumstances Regulation 75 of Table A provides that if the
number of directors is reduced below the quorum fixed by the Act for a meeting of the
Board, the continuing directors or director may act for the purpose of increasing the
number of directors to that fixed for the quorum or for summoning a general meeting
of the company, but for no other purpose. It has been held that where a single
director is validly in office, he cannot act for anything else than for calling a general
meeting for the purpose of appointing directors so as to complete the quorum. [Rajan
Nagindas Doshi v. British Burma Petroleum Co. Ltd., (1972) 42 Com Cases 197
(Bom)].
It is open to the company, by its articles, to indicate a higher, but not a lower,
number or proportion in constituting a valid quorum. [Amrit Kaur Puri v. Kapurthala
Flour Oil & General Mills Co. P. Ltd., (1984) 56 Com. Cases 194 (P&H)].
That a meeting is valid or invalid one due to absence of quorum will have to be
challenged by the person aggrieved within a reasonable time. [Re, Plymoth
Breweries v. Penwill, (1967) 111 SJ 715].
As regards meeting of committees of directors where there is no provision of a
quorum, the whole of the Committee must meet. [Re Liverpool Household Stores
Association Ltd., (890) 59 LJ Ch 616]. Any excessive or irregular exercise of powers
by a Committee may, however, be ratified by the Board, as the Board by delegating
the powers to Committees, do not divest themselves of powers. [Huth v. Clarke.
(1890) 25 QBD 391].
If the required quorum is not present, then, unless the articles otherwise provide,
a meeting cannot be held and must automatically stand adjourned till the same day in
the next week, at the same time and place, and if that day is a public holiday, to the
succeeding day (Section 288).
Where the articles of association of a company provided that the quorum for a
meeting of the Board of directors shall be two directors and meetings called for was
adjourned for want of quorum and in the adjourned meeting only one director was
present, it was held that the resolution passed in that meeting was void. [Maharani
Yogeshware Kumari v. Lake Shore Palace Hotel [1996] 21 CLA 107 (Raj.)].
If for want of quorum a meeting of the Board duly called cannot be held then this
would not be deemed to have contravened the provisions of Section 285 which
requires the holding of a Board meeting at least once in every three months [Section
288 (2)].
If at any time the number of directors falls below the number fixed as the
minimum by the companys articles, the remaining directors prima facie cannot act.
[Re Alma Spinning Co. (1880) 16 Ch. D. 681]. But where there is an article on the
lines of article 75 of Table A, this will validate acts of the directors although they are


less than the specified minimum. This provision does not make the acts valid if the
minimum number of directors as required by the Articles were never appointed [Re.
Sly, Spink & Co. (1911) 2 Ch. 430].
Disclosure of Interest
Section 300 prohibits an interested director from being counted for the purpose
of quorum at the time of voting on any resolution in which he is interested. Disclosure
of interest has to be made at meeting of the Board of directors. It has to be made
formally, even if the interest in question is otherwise known to them. [Guinness PLC
v. Saunders (1988) 2 ALL ER 940].
If a director of a company or two or more of them together hold not more than
2% of the share capital of another company, disclosure of interest is not necessary.
The duty to disclose his interests applies also to alternate director or any other
director, including a Government nominee appointed under Section 408.
Chairman of Board Meeting
The term "Chairman" is not defined in the Act though regulation 76(1) of Table A
to Schedule I to the Companies Act, 1956 provides that the Board may elect a
chairman of its meetings and determine the period for which he is to hold office.
Normally, the directors elect one of them to be the chairman of the Board who
continues to be as such until he ceases to be a director or some other director is
appointed as the chairman. Basically, a chairman is a director who is authorised to
preside over the Board and general meetings. In Taylor v. Nesfield, it was held that
where a number of persons assemble and put a man on the chair, they devolve on
him by agreement the conduct of that body and give him the whole power of
regulating themselves individually, within reasonable bounds. In some companies it is
the practice to appoint an Executive Director namely the Managing Director or whole-
time director as chairman of the Board and there are other companies who elect a
non-executive director, i.e. the director who is not a managing or whole-time director
as chairman of the Board.
Regulation 76(2) provides that if no chairman is elected or if at any meeting the
chairman is not present within five minutes after the time appointed for holding the
meeting the directors present may choose one among them to be the chairman of the
meeting.
3 (V) Meetings of Committee of Directors
Directors must, as a general rule, act at Board meetings. The maxim delegates
nonprotest delegate A delegate cannot further delegate applies to directors as
it applies to all agents. But this rule is not rigid. In accordance with the articles the
delegation by the Board will be proper and valid. A delegation may be made by the
Board of any of its powers to a Committee consisting of its own members if it is
authorised by the articles or the Act or the Rules made under the Act.
A committee may consist of such number of directors as the Board may decide.
But in terms of lssue of Share Certificate Rules, 1960 where a committee is
appointed it shall consist of at least three directors where the strength of the Board
exceeds six directors.


Section 292 specifically empowers the board to delegate the following powers
among others to a committee of directors :
(a) to borrow moneys otherwise than on debentures;
(b) to invest the funds of the company; and
(c) to make loans.
Regulation 77 of Table A specifically permits delegation, stating that the Board
may, subject to the provisions of the Act, delegate any of its powers to Committees
consisting of such number of its body as it thinks fit. Any Committee so constituted
shall conform to any regulations that may be imposed on it by the board in the
exercise of powers delegated to it. The resolution delegating the powers generally
contains the extent of authority granted to the Committee. The Committee cannot
further delegate its power unless specifically empowered or authorised in this regard.
Under Section 292A, every public company having paid-up capital of not less than
five crores of rupees shall constitute a committee of the Board known as Audit
Committee.
The provisions relating to the meetings of a Committee of directors are by and
large the same as those of the Directors Meetings. For example, a Chairman
presides over the Meetings, questions arising at any meeting of a committee shall be
determined by a majority of votes of directors present, and in case of equality of
votes, the Chairman shall have a second or casting vote in case the Articles so
provide. (Regulations 78-80 of Table A).
According to Section 193 minutes of the proceedings of a Committee of directors
are also to be made and these are not open for inspection to general public.
GENERAL MEETINGS
4. REQUISITES OF VALID MEETING
For a meeting to be valid the following conditions must be satisfied:
(a) It must be duly convened. This means that (i) the person entitled to attend it
must have been summoned by the proper authority, i.e., normally the
chairman of the Board of directors, and (ii) proper and adequate notice must
have been given to all those entitled to attend.
(b) It must be properly constituted. This means that (i) the proper person must
be in the chair, (ii) the rules as to quorum must be observed, and (iii) the
provisions of the Act and the articles must be complied with.
(c) The business at the meeting must be validity transacted and sense of the
meeting ascertained on matter before it.
The conditions for a valid meeting are discussed herein below:
General Meeting to be Convened by Directors
The articles of association of a company normally empower the Board of
directors to convene general meetings, and they have this power at common law
even if they are not expressly conferred on them. The directors must convene a
general meeting when called upon to convene and hold it. When, therefore, directors


wish, or are bound by a requisition, to call a general meeting, they must do so by
resolution passed at a duly convened and constituted meeting of the Board. Notice of
a general meeting given by the secretary without the sanction of the Board of
directors is invalid, but such a notice may be ratified by the directors before the
meeting. However, the notice for a general meeting shall be approved by the Board in
advance.
Notice of Meeting
A meeting cannot be validly held unless a proper notice of it has been given.
Three things in connection with the notice have to be considered, namely (a) length
of notice, (b) to whom it must be given, (c) what should be its contents.
Length of Notice: Section 171(1) prescribes that a general meeting may be called
by giving not less than twenty-one days notice in writing. But Section 171(2) provides
that an annual general meeting may be called by giving a shorter notice, if it is
consented to by all the members entitled to vote at the meeting. And any other
meeting may be called and held with a shorter notice, if the holders of 95 per cent, of
the paid-up share capital or of the total voting power consent to a shorter notice. The
consent for shorter notice may be given either at or before the meeting in Form No.
22A as prescribed in the Companies (Central Governments) General Rules and
Forms, 1956.
The expression not less than twenty-one days has been construed as twenty-
one clear days, meaning thereby that the date of posting and the date of the meeting
are excluded when calculating the period of twenty-one days. Intervening holidays
are counted as period of notice. Further, if the notice is to be sent by post, another 48
hours are to be added. [Section 53(2)(b)(i)]. If a meeting is to be held on the 25th of a
month, notice is to be dated and posted not later than 23 days before that date i.e.
2
nd
of the month.
A private company may, by its articles, make its own regulations as regards the
length of notice. Notice of a meeting posted on August 31 and September 1, would
be deemed to be delivered on September 2 and 3 therefore, ineffective for a meeting
to be held on September 21 [Balwant Singh Sethi v. Sardar Z.H. Singh Anand (1988)
63 Com Cases 310 (Bom)]. The presumption as to deemed delivery cannot be
agreed to, when at the time of posting, the post-office was on strike within the
knowledge of the company. [Bradman v. Trinity Estate PLC. 1989 BCLC and 5 BCC
33)].
Merely the fact that notice of a meeting of shareholders to be held under direction
of the Court for consideration of a scheme of amalgamation, is delivered late to a
shareholder owing to postal delays or omissions on the postal authorities, would not
invalidate the meeting. [Maknam Investments Ltd., In re (1996) 87 Comp.Cas.689
(Ca.)].
Where a secretary issued notice calling a general meeting but he had no power
to do so under the articles of association of the company, it was held that the notices
were null and void and meeting held pursuant thereto was also null and void.
[Al-Amin Seatrans Ltd. v. Owners and Party Interested in Vessel M.V. Loyal Bird
(1996) 1 Comp. LJ 258 (Cal.)]. But it will be valid if before the meeting is held the
Board ratifies the act [Hooper v. Kevr Stuart & Co. (1900) 83 Law Tunes 729]. A
meeting convened by or under the authority of a Board which was subsequently


found to have been irregularly constituted was however held to be not invalidated for
that reason.
Service of Notice
Section 53 of the Companies Act provides (1) a document may be served by a
company on any member thereof either personally, or by sending it by post to him to
his registered address, or if he has no registered address in India, to the address, if
any, within India supplied by him to the company for giving notices to him.
(2) When a document is sent by post:
(a)service thereof shall be deemed to be effected by properly addressing,
prepaying and posting a letter containing the document, provided that
where a member has intimated to the company in advance that
documents should be sent to him under a certificate of posting or by
registered post with or without acknowledgment due and has deposited
with the company a sum sufficient to defray the expenses of doing so,
service of the document shall not be deemed to be effected unless it is
sent in the manner intimated by the member; and
(b)such service shall be deemed to have been effected:
(i) in the case of a notice of a meeting, at the expiration of forty-eight
hours after the letter containing the same is posted, and
(ii) in any other case, at the time at which the letter would be delivered in
the ordinary course of post.
(3) A document advertised in a newspaper circulating in the neighbourhood of
the registered office of the company shall be deemed to be duly served on
the day on which the advertisement appears, on every member of the
company who has no registered address in India and has not supplied to the
company an address within India for the giving of notices to him.
(4) A document may be served by the company on the joint-holders of a share
by serving it on the joint-holder named first in the register in respect of the
share.
(5) A document may be served by the company on the persons entitled to a
share in consequence of the death or insolvency of a member by sending it
through the post in a pre-paid letter addressed to them by name, or by the
title of representatives of the deceased, or assignees of the insolvent, or by
any like description at the address, if any, in India supplied for the purpose
by the persons claiming to be so entitled, or until such an address has been
so supplied by serving the document in any manner in which it might have
been served if the death or insolvency had not occurred.
If a notice is served by advertisement, as above, it is not necessary to advertise
along with such notice, the explanatory statement but it should be mentioned in the
advertisement that such explanatory statement has been forwarded to the members
of the company. This is in accordance with the proviso to Sub-section (2)(iii) of
Section 172 of the Act.
Where the documents were sent by Registered Post and for some reason they
were not delivered to the addressee, it could not be said that the company becomes


discharged from its obligations to send the documents again [Inter Sales v. Reliance
Industries Ltd. (1999) 35 CLA 370 (Cal.)].
When considering the provisions of Section 171, attention may also be given to
Section 53. In terms of clause (b) (i) of Sub-section (2) of Section 53, service of a
document sent by post in the case of notice of a meeting shall be deemed to have
been effected at the expiration of 48 hours after the document is posted.
But in Bharat Kumar Dilwali v. Bharat Carbon Ribbon Manufacturing Co. Ltd.,
(1973) 43 Comp. Cas. 197 (Delhi), the Court held that reference to Section 53(2)
while interpreting Section 171 has no justification. The Court further held that for
counting 21 clear days, each of the 21 days must be full or calendar days and the day
of service of the notice and the day of the meeting have to be excluded. Thus if a
notice is sent 23 days before the day of the meeting, it will be in order.
Entitlement of Notice
According to Sub-section (2) of Section 172 of the Act, notice of every meeting of
the company shall be given to (i) every member; (ii) to the persons entitled to share in
consequence of the death or insolvency of a member; and (iii) to the auditor or
auditors for the time being of the company.
It is to be noted that preference shareholders are also entitled to notice. But it is
clearly understood that unless the meeting is to consider any matter which affects the
rights of the preference shareholders or the dividend payable to them, they cannot
take part in the proceedings or vote on any resolution [Clarifications and Circulars on
Company Law p.83 Company News and Notes dated 16.6.64].
A Managing Director of a company who is not a shareholder cannot challenge
the regularity on the ground that no notice of the meeting was served on him
[Joginder Singh Palte v. Time Travels P. Ltd. (1984) 56 Com. Cases 103 (Cal.)]
Sub-section (3) of Section 172 lays down that an accidental omission to give
notice to, or the non-receipt of notice by, any member or other person to whom it
should be given, shall not invalidate the proceedings of the meeting. Even though a
member may give in writing that no notice should be given to him, the company is
bound to give notice in accordance with the statutory provisions.
The notice of a meeting of directors was claimed to have been handed over to
the assistant of the director, but the despatch register did not show the details of the
despatch. The court said that there could be no presumption of services. The meeting
was invalidated and, therefore, the resolution passed at a meeting was of no effect.
[M.S. Madhusoodanan v. Kerala Kaumudi P. Ltd. (2003) 117 Com Cases 19 (SC)].
Contents of the Notice
Section 172(1) prescribes that the notice of a meeting of a company shall specify
the place and the day and hour of the meeting, and shall contain a statement of the
business to be transacted thereat.
Where any item of business to be transacted at the meeting is deemed to be
special (at AGM any business other than consideration of accounts, declaration of a
dividend, appointment of directors in place of those retiring and the appointment of
and the fixing of the remuneration of the auditors), there shall be annexed to the


notice of the meeting, a statement setting out all materials facts concerning each
such item of business and interest by any director therein, if any [Section 173(2)].
This statement is called the "Explanatory Statement".
Section 173 of the Companies Act, 1956 is mandatory and not directory [Laljibhai
C Kapadia v. Lalji B. Desai (1973) 43 Comp. Cas.17 (Bom.)]. Explanatory statements
give all facts which have a bearing on the question on which the shareholders have to
form their judgement [Centron Industrial Alliance Ltd. v. Pravin Kantilal Vakil (1985)
57 Comp.Cas. 12(Bom.)]. But a minor defect arising out of absence of strict
conformity with the provisions of Section 173(2) might not render an amendment of
the articles of association null and void [Joseph Michael v. Travancore Rubber & Tea
Co. Ltd. (1986) 59 Comp.Cas. 898 (Ker.)].
A good notice must fairly disclose the purpose for which the meeting is called, must
be open, and free from vagueness and trickiness and must be in language understood by
common people [Kaye v. Croydon Tramways Co., (1898) 1 Ch 358 (CA)].
A meeting cannot pass a resolution, the subject matter of which is not specified in
the notice convening the meeting. [Pacific Coast Coal Mines Ltd. v. Arbuthnot, 1917
AC 607). Consequently if a resolution is passed without the notice fairly disclosing it,
it will be void. [Kaye v. Croydon Tramways Co. (1898) 1 Ch 358 (CA)].
But where an item of business not mentioned in the notice was taken up under
the caption any other business with the permission of the chair, the transaction was
held to be valid as it could have been ratified subsequently [Sunil Dev v. Delhi &
District Cricket Assn., (1990) 2 Comp LJ 245 : (1994) 80 Com Cases 174 Del)].
If any item of business consists of the according of approval to any document by
the meeting, the explanatory statement should indicate the time and place where the
same can be inspected [Section 173(3)].
Venue of the Meeting
According to Section 166 of the Act, every annual general meeting of a company
shall be held either at the registered office of the company or at some other place
within the city, town or village in which the registered office is situated. For this
purpose the twin cities of Delhi and New Delhi and Hyderabad and Secunderabad will
be deemed to be a single city. However, there is no such restriction on holding any
other general meeting of a company.
Notice for Adjourned Meeting
Articles of companies generally make provisions with regard to notice for
adjourned meeting. For example, regulation 53 of Table A provides that the chairman
may with the consent of any meeting at which a quorum is present and shall, if so
directed, by the meeting adjourn the meeting from time to time and from place to
place. The other requirements of regulation 53 are:
(i) No business shall be transacted at any adjourned meeting other than the
business left unfinished at the meeting from which the adjournment took
place.
(ii) When a meeting is adjourned for thirty days or more, notice of the adjourned


meeting shall be given in the case of an original meeting.
(iii) Save as aforesaid, it shall not be necessary to give any notice of an
adjournment or of the business to be transacted in an adjourned meeting.
It has been held by the Madras High Court that an adjourned meeting is a mere
continuation of the original meeting and so the provisions for the original meeting are
applicable to the adjourned meeting.
Day of the Meeting
In terms of the provisions of Section 166 of the Act, every annual general
meeting of a company shall be held on a day, that is not a public holiday.
There is, however, a view that as an adjourned Annual General Meeting which is
only a continuance of the original meeting cannot be held on a public holiday. This is
on the analogy provided in Section 288 of the Act which deals with the adjournment
of Board Meetings. It specifically provides that unless the articles otherwise provide if
the date of the adjourned Board meeting falls on a date which is a public holiday then
such adjourned Board meeting shall be held on the next succeeding day which is not
a public holiday. But if the intention of the law makers was that adjourned Annual
General Meeting should not be held on a public holiday they would have included
similar provisions in Section 174. The Department of Company Affairs has also
clarified that there is no contravention of Section 166(2), if the adjourned meeting
comes to be accidentally held on a holiday [File No.8/16(1)/61-PR).
Time of the Meeting
Section 166 of the Act provides that every annual general meeting should be
called for at a time during business hours which means that meeting should be held
during the normal working hours of the company. Therefore, it is technically possible
to call a general meeting other than the annual general meeting at a time which does
not fall within the business hours. However, apart from technical possibility, general
meetings should be held during business hours. But a general meeting, started
during business hours, may continue till late in the evening before it is concluded.
Agenda
Detailed agenda for a general meeting is not circulated to the shareholders and is
prepared only for the convenience of the chairman. All the items listed in a notice for
a general meeting are taken in the same order. However, the order may be altered
with the consent of the meeting. In the case of the annual general meeting Section
230 of the Act requires reading of the auditors report and this is mandatory. This
should be specifically indicated in the agenda and this requirement should be taken
care of while drafting the minutes of the meeting.
The agenda for the general meeting given to the chairman should also contain all
relevant supporting papers such as, precedents, previous dividend history, and a list
of possible queries that could be raised by shareholders on the annual accounts
together with suggested replies thereto to help the chairman in the smooth conduct of
the meeting.


5. QUORUM
Quorum is the presence of requisite number of members when a meeting can
validly commence its business. It is the minimum number of members of a company
whose presence is necessary for the transaction of business. In the case of a
company, the quorum is usually fixed by the articles.
Section 174(1) of the Act provides that unless the articles of a company provide
for a larger number, five members personally present in the case of public company
and two members personally present in the case of a private company shall be
quorum for a general meeting of a company.
At one time it was considered essential that the required quorum should remain
present throughout the proceedings. But in Re. Hartly Baird Ltd. (1955) Ch. 143, it
was held that where the companys articles were similar to Table A, a quorum need
be present only when the meeting commenced, and it was immaterial that there was
no quorum at the time when the vote was taken. This decision follows from the
wordings of Article 53 of the English Act, which states that no business shall be
transacted unless quorum present when the meeting proceeds to transact business
Regulation 49(1) of Table A of Schedule 1 of the Act also contains an identical
provision.
Section 174(3) further states that unless the articles otherwise provide, if within
half an hour from the time appointed for holding a meeting of a company, a quorum is
not present, the meeting, if called upon the requisition of members, shall stand
dissolved. According to Section 174(4) in any other case, the meeting shall stand
adjourned to the same day in the next week, at the same time and place, or to such
other day and at such other time and place as the Board may determine.
Section 174(5) lays down that if at the adjourned meeting also, quorum is not
present within half an hour from the time appointed for holding the meeting, the
members present shall constitute quorum.
A director who is not a member of a company cannot propose or second a
resolution and his presence cannot be counted for the purpose of quorum. He can,
however, be present at the meeting and with the permission of the chairman he can
speak on specific matters.
A quorum will always be presumed, unless it is questioned at the meeting or the
records show that quorum was not, in fact, present.
For the purpose of counting a quorum joint shareholders will be counted as one.
Even if the articles do not make any specific provisions, any one joint-holder present
at a meeting will be entitled to exercise voting power and will be counted for quorum.
But only one of the several joint-holders will be entitled to exercise voting power.
The common rule of a meeting is that there shall be at least two persons to
constitute a meeting and that a single member cannot do so even if he holds almost
all the shares which carry voting right [Sharp v. Dawes, (1876) 2 QBD 26 (CA)];
followed in London Flats Ltd. Re, (1969) 2 All ER 744 : (1969) 1 WLR 711 or carries
proxies for all other members. The use of the expression members also shows that


one individual alone does not constitute a meeting even if he, for example, is a
member and proxy for another member [Re M.J. Shanley Contracting Ltd. (1979) 124
SJ 239] or by being a member both in his own right and as trustee for another [James
Prain & Sons Ltd., petitioners 1947 SC 325].
The views of the Department on this issue are also that a single person cannot
by himself constitute a quorum at the adjourned annual general meeting. [Letter No.
8/16(1)/61-PR, dated 19/5/1961].
As per Section 87 preference shareholders are entitled only to vote in respect of
matters affecting their shares and they cannot be treated as members for a quorum
at any general meeting in regard to items of business in respect of which they have
no voting right under the Act. [Henderson v. Louttit & Co. Ltd., (1894) 21 Rettie 674].
The Department of Company Affairs is of the view that preference shareholders
cannot, therefore, be counted as members for determining quorum except in respect
of items of business, if any, where they have right to vote under the Act.
On the other hand, the words used in Section 174(1) are unless the articles of a
company provide for a larger number, five members personally present in the case of
a public company... shall be the quorum for a meeting of the company. Section
172(2)(i) requires that notice of every meeting shall be given to every member of the
company. The implication of both these sections is said to be that every member is
to be given notice of the meeting and he can attend and be counted for quorum
though he may not have a right to vote at the meeting.
The presence of a person, who has been appointed by the President of India or
by the Governor of a State, in his capacity as a member of a company, to represent
him at a company meeting, shall be counted for the purpose of a quorum in
accordance with the provisions of Section 187A of the Companies Act as also
persons authorised in terms of Section 187.
Even at an adjourned meeting, one member present will not constitute quorum,
for the section says that the members actually present shall be a quorum.
However, exceptions to this rule do exist. In East v. Bennet Bros. Ltd. (1911) Ch.
163, where all the preference shares in the company were held by one shareholder
only it was held that a meeting of preference shareholders (class meeting) attended
by only him was valid. Also, when the Company Law Board calls or directs the calling
of a meeting under Section 167 of the Act.
When default is made in holding an annual general meeting, the Company Law
Board may direct that one member present in person or by proxy shall be deemed to
constitute a meeting. Similarly, the Company Law Board may, under Section 186,
direct a meeting of a company (other than an annual general meeting) to be called
and held, where, for any reason it is impracticable to call a meeting, and also direct
that one member of the company present in person or by proxy shall be deemed to
constitute a meeting.
But if all members of the company are present in person, the proceedings will be
valid even if the quorum required by the articles is more than the total number of
shareholders. This can happen where originally the number of members of a


company was large, say 500 shareholders and the quorum fixed by the articles was
100 members present. Subsequently, 450 members have sold their shares which
have been acquired by some of the remaining 50 members. If a meeting is held to
transact some business, say to alter the articles to reduce the members required for
quorum, all the 50 members present in person will constitute quorum.
6. PROXY
The word proxy has two different meanings. Firstly, it means the agent appointed
by the members of a company to attend and vote on his behalf at a meeting of
members and secondly, it means the document by which such an agent is appointed.
Every member of a company having share capital has a right to appoint a proxy
to attend and vote at a general meeting on his behalf. In the case of a company not
having a share capital, this right is available only if the articles make a specific
provision for it.
A notice calling a meeting of any other public company must state with
reasonable prominence that a member entitled to attend and vote at a meeting is
entitled to appoint a proxy to attend and vote instead of himself and that a proxy need
not be a member of the company. A member can appoint one or more proxies to vote
in respect of the different shares held by him or he may appoint one or more proxies
in the alternative, so that if the first named proxy fails to vote, the second one may do
so, and so on. The proxy need not be a member of the company. In case of a private
company, a member can appoint only one proxy regardless of the number of votes
he may hold.
If a company is a member of another company, it may by resolution of its Board
of Directors or other governing body, authorise such person as it thinks fit to act as its
representative at any meeting of the company, or at any general meeting or at a
meeting of any class of members of the company.
A person authorised by resolution as aforesaid shall be entitled to exercise the
same rights and powers (including the right to appoint a proxy) on behalf of the body
corporate which he represents as that body could exercise if it were an individual
member of the company (Section 187).
Meeting under Section 187 refers to meetings of a company and not a meeting of
the Board of directors. [Motion Pictures Association In Re. (1984) 55 Comp. Cas. 375
(Delhi)].
Section 187A provides that where President of India or Governor of a State, is a
member of a company, he may appoint anyone to represent him at any meeting of
the company or at a meeting of any class of members of the company. A person
appointed to act as aforesaid shall, for the purposes of this Act be deemed to be a
member of such a company and shall be entitled to exercise the same rights and
power (including the right to vote by proxy) as the President or, the Governor as the
case may be, could exercise as a member of the company.
The right to appoint proxies would have been rendered ineffective if the Board of
directors could insist on the document appointing proxies to be lodged with the


company a considerable time before the meeting is held. Section 176(3), therefore,
provides that any provision in the articles which requires longer period than forty-eight
hours before the meeting for depositing a proxy, shall have the effect as if a period of
48 hours had been specified in such provision.
No public company or private company, which is subsidiary of a public company,
can make any provision requiring that proxies should be deposited earlier than
48 hours before the meeting at which they are to be used. Other private companies
are free to make their own regulations by their articles. The articles may also
follow regulation 61 of Table A which provides that the instrument appointing a proxy
and the power of attorney or other authority, if any under which it is signed or a
notarially certified copy of that power or authority shall be deposited at the registered
office of the company not less than forty-eight hours before the time for holding the
meeting or adjourned meeting at which the person named in the instrument proposes
to vote, or in, the case of a poll, not less than 24 hours before the time appointed for
the taking of the poll, and in default, the instrument of proxy shall not be treated as
valid.
Sunday is included in computation of 48 hours. Therefore, a proxy delivered on
Sunday for a meeting to be held on Tuesday, that is 48 hours later, would be valid
provided the receipt of the proxy at the time stated could be identified in some way
[K.P. Chachochan v. Federal Bank (1990)], 4, Section III, Corporate Law Adviser 1
(Kerala)].
Another statutory provision is contained in Section 176(4) which states that if an
invitation is issued at the expense of the company asking any member to appoint a
particular person as proxy, every officer in default shall be liable to fine upto
Rs. 10,000. But if a proxy instrument is sent at the request of a member, the officer
shall not be liable.
Where a poll is ordered and the meeting is postponed to a particular date, the
postponement does not tantamount to an adjournment of the meeting, but is only a
continuation of the original meeting and unless the articles provide otherwise fresh
proxies cannot be lodged 48 hours before the postponed meeting where the
postponement is only for taking a poll. In case, 48 hours preceding the meeting
happens to fall on a holiday, arrangements may have to be made for acceptance of
proxies lodged 48 hours before the time of the meeting.
It is also common practice to make out alternative proxies i.e. in favour of X or, in
his absence, Y so that if X is for any reason prevented from attending, Y may attend
and vote under the proxy.
Right to Inspect Proxies
A director has right to inspect proxies lodged with the company. [Armstrong v.
Landmark Corporation Ltd., (1967) NSWR 13 (Australia)].
Every member entitled to vote at a meeting of the company or on any resolution
is entitled, during the period beginning 24 hours before the time fixed for the
commencement of the meeting and ending with the conclusion of the meeting to
inspect proxies at any time during business hours of the company by giving not less
than 3 days notice in writing to the company of his intention to do so.


The Court has power to compel the company to give certified copies of proxy
forms filed with it so as to enable the complaining member to have his question
decided as to who is the right proxy of a member. [Swadeshi Polytex Ltd. v. V.K.
Goel, (1988) 63 Com Cases 688].
Form of Proxy
The instrument of proxy should be in writing and be signed by the appointer or
his attorney duly authorised in writing or if the appointer is a body corporate, be
signed by an officer or an attorney duly authorised by it. An instrument in any of the
forms set out in Schedule IX to the Companies Act, 1956 shall be accepted even if it
does not comply with any special requirements in the articles of the company. Form-II
in Schedule IX to the Companies Act, 1956, also gives an opportunity to the member
to direct the proxy to vote for or against a particular resolution.
In the case of General Commerce Limited v. Apparel Export Promotion Council
(Delhi) (1990), the question whether a company could frame rules prescribing the
form of proxy which is at variance with the form given in Schedule IX of the Act, came
up before the Delhi High Court. In this case the Election Rules framed by the AEPC
provided that any proxy appointed through any instrument other than the printed
instrument approved and despatched by the Council along with the notice of the
meeting shall not be valid. These Election Rules were questioned on the grounds that
they were in contravention of Section 176(6). Sub-section 6 of Section 176 provides
that "An instrument appointing proxy, in an any form set out in Schedule IX shall not
be questioned on the ground that it fails to comply with any special requirement
specified for such instrument by the Articles". The Court therefore, held that Section
176(6) of the Act makes it clear that the only proxy form which is required for the
purposes of enabling a person to cast his vote is one which is provided in form set
out in Schedule IX, that form cannot be added to or subtracted from. No special proxy
form issued by any body of persons which adds to the requirement of proxy by
imposing any condition or requiring it to be on specific proxy paper, as the case may
be, can be sustained. The Court thus held that the members of the company were
entitled to vote by proxies which were in accordance with the form prescribed by
Schedule IX to the Act.
Signing of Proxy
In the case of a proxy, the signature in the proxy form should tally with the
signature in the register of members or else the proxy will be liable to be rejected. If a
company rejects an unsigned proxy form, the shareholder should be informed
accordingly.
In the case of joint members all must sign the proxy, unless the articles authorise
one joint-shareholder to sign proxies.
Where the name in the register of members is as attorney, executors,
administrator or guardian, then papers showing the authority to sign a proxy should
accompany the proxy.
Rights of Proxy
A proxy is entitled to vote only on a poll but the articles of any company may
provide for a proxy voting by show of hands also. The chairman in ascertaining the


number of votes given on a show of hands must count the vote of each member who
also holds proxies as a single vote and not count a vote for each of the member
whose proxies are held by the person [Earnest v. Home Gold Mines Co. (1897) 1
Ch.1]. A proxy is not, as of right entitled to speak at a meeting, though he may be
permitted to put questions in writing and send the same to the chairman for an
answer.
A proxy can make a demand for a poll. A member holding a proxy for another
member may, on a poll, vote in respect of his own holding in a manner contrary to
that of the person whom he represents by a proxy [Foester v. Newlands West
Grigualand Diamond Mines Ltd. (1902) 18 TLR 497].
Consequences of Accepting Defective Proxies
If a company accepts defective proxies, the resolutions passed at the concerned
meeting may be held invalid by the courts even though they will uphold certain
categories of defective proxies on equitable grounds. Proxies with uncancelled
stamps are not regarded as valid.
While major mistakes in a proxy, which affect the exercise of the voting right in
any way will render it invalid, a small mistake on a proxy form which does not
conform to the articles which is not likely to mislead anybody and which does not
affect the proper exercise of the voting right in any way, does not render the votes
cast by a proxy-holder in exercise of his right of proxy invalid, e.g., where the proxy
form described the meeting as AGM when infact it was an extraordinary general
meeting. [Oliver v. John Dalgleish (1964) 1 Comp LJ 78].
Revocation of Proxies
The relationship between the proxy and the person appointing him is that of an
agent and principal, and the former must act in accordance with the instructions of
the latter. As their relationship is governed by the law of agency, proxy can be
revoked by the member at any time, Narayan Chettiar v. Kaleeswara Mills Ltd. and is
automatically revoked by the death or insolvency of the member. A member may
revoke the proxys authority by attending and voting himself before the proxy has
voted, the member cannot retract his vote. The vote given by a proxy is valid
notwithstanding its revocation provided no intimation in writing of the revocation is
received at the office of the company or by the chairman of the meeting before the
vote is given [K.P. Chachochan v. Federal Bank (1990)].
In Cousins v. International Bricks Co. Ltd., (1931) 2 Ch 90 (CA) at 101, it was
held that there was nothing in the articles of a company to stop a shareholder to
attend a meeting and vote in person, even though he had appointed a proxy to vote
for him at the same meeting; the fact that the proxy was not revoked in the manner
laid down in the articles did not prevent the member recording his vote in person to
the exclusion of the proxy holder. But in Narayanan Chettiars case (Supra), it was
held that a shareholders mere presence at the meeting will not have the effect of
revocation.
The revocation should be communicated before the meeting. Revocation will be
too late if communicated after the meeting commenced. In such a case the votes cast


by the proxy will be valid in a poll. [Spiller v. Mayo (Rhodeshia) Development Co.
(1908) Ltd., (1926) WN 78].
If one shareholder makes out two proxies in respect of the same shares, the
proxy bearing the later date will be valid as against the earlier proxy [Swadeshi
Polytex Ltd. Re. (1988) 63 Com Cases 709 (Del)]. If the proxies have the same
dates, both the proxies would be ineffective. But where a proxy was lodged before
and the other after the expiry of the date fixed for lodging proxies, the former will be
accepted.
Unstamped Proxy
Proxy is liable to stamp duty. Stamp duty on proxy is provided for in the central
list appended to the Constitution. The Chairman of a meeting is entitled to accept
unstamped proxies. If the company wishes subsequently to use them as evidence, it
may have them stamped, as an unstamped proxy cannot be accepted as evidence.
On the other hand, if the chairman decides to reject the proxies he does not have to
allow time for them to be got stamped. Therefore, where the chairman had once
accepted unstamped proxies, and objection to the invalid proxy was taken many days
after the meeting it was not sustainable and that the votes cast by proxy-holders were
accepted to be valid [Marx v. Estate and General Investment Ltd. (1976) 1 WLR 380 :
(1975) 3 All ER 1064 (Ch D)]. Even in the case of proxies executed outside India, a
revenue stamp of appropriate value has to be affixed and cancelled within three
months of its receipt in India [Saudagar Singh v. G.S. Gill (1980) 50 Com Cases 591
(DB (P&H)].
Validity of Proxies
It is for the Chairman to decide as to the validity of the proxies and his decision
will stand unless it was proved to the Court to be wrong [Indian Zoedone Co., Re.]
7. VOTING AT GENERAL MEETING
Section 183 of the Act regulates voting by members. It says that on a poll taken
at a meeting of a company, a member entitled to more than one vote, or his proxy, or
other person entitled to vote for him, as the case may be, need not, if he votes, use
all his votes or cast in the same way all the votes he uses.
Voting and Demand for Poll
A member may either vote personally or by proxy. Section 176(1)(c) allows for
the articles of a company to provide for voting by proxy on a show of hands. So
unless the articles otherwise provide, a proxy shall not be entitled to vote except on a
poll. A proxy has no right to speak at a meeting though; he can demand a poll and
vote. Sections 177 to 185 regulate voting and poll.
At any general meeting all resolutions are decided in the first instance by a show
of hands and each member has one vote (Section 177).
In a voting on a show of hands, proxies cannot be counted unless articles make
express provision therefor [Ernest v. Loma Gold Mines Ltd., (1897) 1 Ch 1, 5 (CA)
overruling Bidwell Bros, Re (1893) 1 Ch 603.]


However, a poll can be demanded without going through the formality of a show
of hands [Holmes v. Keys (Lord), (1959) 1 Ch 99].
Since the voting by the show of hands may not always reflect the opinion of
members on a value basis, Section 179 provides for the demand for poll. It states that
before or on the declaration of the result of the voting on any resolution on a show of
hands, the chairman may order suo moto (of his own motion) that a poll be taken, but
when a demand for poll is made, he must order the poll to be taken. The chairman
may order a poll when a resolution proposed by the Board is lost on the show of
hands. Also, if the chairman knows that proxies have been lodged and that on a poll
the decision taken on a show of hands is likely to be reversed, it is his duty to order a
poll. When a poll is taken the decision on the show of hands has no effect.
Poll must be ordered by the chairman if it is demanded:
(a) in the case of a public company, having a share capital, by any member or
members present in person or by proxy and holding shares in the company:
(i)which confer a power to vote on the resolution not being less than one-tenth
of the total voting power in respect of the resolution; or
(ii)on which an aggregate sum of not less than fifty thousand rupees has been
paid-up.
(b) In the case of a private company, having a share capital by one member
having the right to vote on the resolution and present in person or by proxy if
not more than seven such members are personally present, and by two such
members present in person or by proxy, if more than seven such members
are personally present.
(c) In the case of any other company, by any member or members present in
person or by proxy and having not less than one-tenth of the total voting
power in respect of the resolution [Section 179(1)].
As per Section 179(2), the demand for a poll may be withdrawn at any time by
the person or persons who made the demand.
Where meeting in question was only an adjourned meeting there was nothing
improper in using old proxies and it could not be said that the meeting was not
properly held [Kothari Industrial Corp. Ltd. v. Maxwell Dyes & Chemicals (P) Ltd.
(1995) 5 SCL 82].
While issuing notice for adjourned meeting, calling for fresh proxies is not illegal
for the simple reason that fresh proxies ought to be called for, as it is a matter of right
to the shareholders to change their respective proxies for the adjourned meetings
and for the new shareholders to give their own proxies for the adjourned meeting.
Where the notice of the adjourned meeting was issued with the same wording as
that of the previous notice, and the fresh proxy form was enclosed therewith, it could
not be categorised as an unlawful act on the part of the company. It would suffice if
the adjourned meeting transacts only the business left untouched in the original
meeting and no new business was transacted [Maxwell Dyes & Chemicals (P) Ltd. v.
Kothari Industrial Corpn. Ltd. (ibid)].


When poll is not demanded, chairman of meeting is not under an obligation to
order poll and a shareholder who did not demand poll cannot challenge a resolution
subsequently. [Jetu Jacques Tara Lalwani v. IBA Printing Inks Ltd. [1996] 20 CLA 12
(Bom.)].
The Chairman may also order for taking the poll suo moto, even though there is
no demand of poll by any member. When a poll is demanded, it must be taken
immediately by the Chairman and meeting is regarded as continuing until the
ascertainment of the result of the poll. [Holmes v. Lord Keyes (1958) 2 All ER 129;
(1958) 28 Com. Cases 419 (CA)].
Each resolution must be put to the poll separately, Blair Open Hearth Furnace
Co. Ltd. v. Reigart; (1913) 108 LT 665, and the result announced must indicate the
number of votes cast in favour and against each resolution.
Section 180 states that, if a poll is demanded, then, if it relates to the question of
election of chairman or adjournment of the meeting, the poll must be taken forthwith;
in other cases, it may be taken later, but within 48 hours of the demand.
A member, though he was not present at the meeting when the poll was ordered
to be taken, may vote personally on the poll. [Cf. Campbell v. Mound (1836) 5 Ad &El
1: (1835-42) All ER Reprint p. 648].
It should be noted that every holder of equity shares has a right to vote at a general
meeting. Section 182 provides that a company cannot prohibit any member from
exercising his voting right on the ground that he has not held his shares for any
specified period before the meeting or on any other ground. The only ground on which
the right to vote may be denied is non-payment of calls by a member or other sums due
from him or where the company has exercised its right of lien on his shares.
Unless the articles of a company otherwise provide only a person whose name is
entered in the register of members could vote and not a transferee of shares or a
person entitled to any shares by transmission by operation of law.
An insolvent shareholder so long as he remains in the register of a company as a
member, is entitled to exercise the votes, which are attributed to his status as
member. [Mergain v. Gray. (1953)].
Regulation 58 of Table A provides that a member of unsound mind, in respect of
whom an order has been made by any Court having jurisdiction in lunacy may vote,
whether on a show of hands or on a poll, by his Committee or other legal guardian,
and any such Committee or guardian may on a poll, vote by proxy.
Even if the articles do not make any specific provisions, any joint-holder present
at a meeting will be entitled to exercise voting power. But only the votes of one of the
several joint-holders will be accepted. The articles of a company may provide a
regulation similar to regulation 57 of Table A that in the case of joint-holders, the
votes of the senior who tenders a vote, whether in person or by proxy shall be
accepted to the exclusion to the votes of other joint-holders.
If the shares held by a minor are fully paid, the minor will be entitled to vote at the
meeting of the company in which he is a shareholder. The voting rights on shares are


regulated by the companys articles and by the provisions of Section 87(1) of the Act.
Section 87(1) provides that any member of a company limited by shares and holding
any equity share capital shall have the right to vote on every resolution put before the
meeting and his voting right on a poll shall be in proportion to his share in the paid-
up equity share capital of the company. Since no distinction has been made out in
case of minors, minors will also be entitled to vote in general meetings of the
company both on a show of hands and on a poll. However, as per Section 86 as
amended by Companies (Amendment) Act, 2000, equity shares with differential rights
as to dividend, voting can be issued.
Section 178 states that a declaration by the chairman, in pursuance of
Section 177 that on a show of hands, a resolution has or has not been carried, or has
or has not been carried either unanimously or by a particular majority, and an entry to
that effect in the books containing the minutes of the proceedings of the company,
shall be conclusive evidence of the fact, without proof of the number or proportion of
the votes cast in favour of or against such resolution.
Regulation 60 of Table A provides that no objection shall be raised to the
qualification of any voter except at the meeting or adjourned meeting at which vote
objected to is given or tendered, and every vote not disallowed at such meeting shall
be valid for all purposes. If objection is made in due time then it should be referred to
the chairman of the meeting whose decision is final and conclusive. It was held in
Wall v. London and Northern Assets Corporation (1898) 2 Ch. 469, that if the articles
so provide, the Chairmans decision as to the validity of a vote is conclusive but it will
not protect fraudulent or mala fide acts.
The provision here that the chairmans declaration shall be conclusive evidence
only means that, the entry in the minutes books is conclusive as between the parties
bound by the minutes.
The chairmans declaration may be disputed where fraud is proved or mistake is
shown or there is only a mistake and no fraud, the proper course is to call another
meeting.
Section 184 provides that where a poll is to be taken, the chairman of the
meeting shall appoint two scrutineers to scrutinise the votes given on the poll and to
report thereon to him. The chairman shall have power, at any time before the result of
the poll is declared, to remove a scrutineer from office and to fill vacancies in the
office of scrutineer arising from such removal or from any other cause. Of the two
scrutineers appointed under this section, one shall always be a member (not being an
officer or employee of the company) present at the meeting, provided such a member
is available and willing to be appointed.
Section 185 states that subject to the provisions of this Act, the chairman of the
meeting shall have power to regulate the manner in which a poll shall be taken. The
result of the poll shall be deemed to be the decision of the meeting on the resolution
on which the poll was taken.
The voting right of preference shareholders are restricted by Section 87(2) to the
extent that a preference shareholder has the right to vote only on a resolution which
directly affects the right attached to his preference shares. Any resolution for winding


up of the company or for the repayment or reduction of its share capital shall be
deemed directly to affect the rights attached to preference shares.
A preference shareholder shall also be entitled to vote on every resolution placed
before the company at any meeting, if the dividend has remained unpaid:
(a) in the case of cumulative preference shares, in respect of an aggregate
period of not less than 2 years preceding the date of the commencement of
the meeting; and
(b) in the case of non-cumulative preference shares, either in respect of a
period of not less than 2 years ending with the expiry of the financial year
immediately preceding the commencement of the meeting or in respect of
an aggregate period of not less than 3 years comprised in the 6 years
ending with the expiry of the financial year aforesaid.
Under Sections 187 and 187A, if a body corporate or the President of India or the
Governor of a State is a member of the company, the authorised representative will
be deemed to be exercising voting rights himself or through proxy appointed
regardless of the amount of shareholding [M.K. Sonthalia v. Nariman Private Ltd.
(1995) 84 Com Cases 559 (Madras)].
A casting vote is a second vote exercised by a chairman of a meeting in addition
to his own vote as a member.
8. CHAIRMAN
The Chairman plays a crucial role in a company meeting and is usually appointed
by the articles.
Section 175(1) states that unless the articles otherwise provide, the members
present in person at a meeting shall elect on a show of hands one of their members
to be the chairman. In this context, regulation 50, 52 of Table A are relevant.
Regulation 50 of Table provides that Chairman, if any, of the Board shall preside as
Chairman at every general meeting of the company.
If there is no Chairman or he is not present within fifteen minutes after the
appointed time of the meeting or is unwilling to act as Chairman of the meeting, the
directors present shall elect one among themselves to be Chairman of the meeting
(Regulation 51).
If, at any meeting, no director is willing to act as Chairman or if no director is
present within fifteen minutes after the appointed time of the meeting, the members
present should choose one among themselves to be the chairman of the meeting
(Regulation 52).
If after the election of a Chairman on a show of hands, poll is demanded, it must
be taken forthwith and the Chairman elected by show of hands will exercise the
powers of chairman till the poll is taken. If a different person is elected as chairman
on a poll, then he will be the chairman for the rest of the meeting. If the articles are
silent, the members can elect one among themselves as chairman of the meeting
through a show of hands, unless a poll is demanded. Usually the permanent


chairman is allowed a few minutes grace time, before another member is elected to
the chair. Such a chairman appointed to chair the meeting in question gives way to
the regular chairman upon the arrival of the latter, by vacating the chair. This
operates as a virtual resignation since in the absence of specific provision, no special
formality is required for a chairman to resign [Cane v. Jones (1981) All ER 533 at
543].
A person who has been chosen to chair the meeting in the absence of the
chairman may (but not necessarily) vacate if the chairman subsequently arrives. He
can however be removed by the meeting by a motion of no confidence in the chair
Cornwall v. Woods (1846) 4 Notes of Cases 555]. If such a resolution comes up, it is
necessary for the person to step down from the chair, until the result of the voting is
known.
Duties and Role of Chairman
The chairmans position is of great importance, as he is responsible for the
successful conduct of a meeting. The chairman has a duty to keep order, to see that
the business is properly conducted and to ensure that the sense of the meeting is
properly ascertained in regard to any question before it. A person who has no right to
be present is an intruder and is deemed to commit the tort of trespass. If any such
trespasser is present at the meeting, the chairman can order him to be removed by
use of minimum force necessary for the purpose. The chairman's duties inter alia are:
1. He must ensure that the meeting is properly convened and constituted, i.e.
proper notice has been given, rules as to quorum have been observed, and
his own appointment is in order.
2. He must ensure that the provisions of the Act and the articles in regard to
the meeting and its procedures are observed, and that the business is taken
in the order set out in the agenda, and that the business is within the scope
of the meeting.
3. He must act at all times bona fide and in the interest of the company as a
whole. He must give a reasonable chance to the members present, to
discuss any proposed resolution and ensure that views of all are adequately
heard. He must maintain strict impartiality.
4. He must decide questions arising for decisions during the meeting and must
ensure that the majority hears the minority. However, when the views of the
minority have been heard, the chairman must, with the sanction of the
majority, declare the discussion closed and put the question to vote.
5. He must ensure that the sense of the meeting is properly ascertained in
regard to any question before it.
6. He must exercise correctly his powers of adjournment. He has no powers to
adjourn the meeting at his own will and pleasure. If he declares the meeting
closed prematurely and leaves the chair, the members may resolve to
proceed with the meeting and elect another chairman and continue with the
business for which it was convened. He may, however, adjourn a meeting if
circumstances demand and he acts bona fide in the interest of the company.
7. It is his duty to preserve order and to see that the business is properly


conducted. He has the discretion with regard to the general conduct of the
meeting and he may not allow a member to talk as much as he likes. If a
member acts in a disorderly manner and frequently interrupts the proceedings
and obstructs transaction of business, the chairman may ask him to withdraw.
If the member refuses to do so, the chairman can order his removal.
8. He must exercise his power to order a poll correctly and must order it to be
taken when demanded properly.
9. He must exercise his casting vote, if available, bona fide in the interest of the
company.
Section 178 states that a declaration by the chairman, in pursuance of Section 177
that a resolution has been carried, is conclusive evidence of the fact without proof of
the number or proportion of the votes cast for or against the resolution. But if on the
face of the declaration that the resolution is passed, it is clear that the statutory majority
had not voted in its favour, the chairmans declaration, it seems will not be conclusive.
The court will not normally interfere with the bona fide decisions of the Chairman
unless there is an evidence of fraud or injustice. If the meeting has been conducted
regularly and is not fraudulent of the members, the Court will normally accept the
Chairmans declaration of the result of the voting as conclusive without further enquiry.
9. CLAUSE 49 OF LISTING AGREEMENT ON CORPORATE GOVERNANCE
The relevant paras of this clause relating to Board of directors meeting &
Shareholders meeting are given below:
SEBI vide circular SEBI/CFD/DIL/CG/1/2004/12/10 dated October 29, 2004
issued the revised Clause 49 of the listing agreement, which has come into effect
from January 1, 2006. These are reproduced as below.
Mandatory provisions:
1. If the non-executive Chairman is a promoter or is related to promoters or
persons occupying management positions at the board level or at one level
below the board, at least one-half of the board of the company should
consist of independent directors.
2. Disclosures of relationships between directors inter-se shall be made in
specified documents/filings.
3. The gap between resignation/removal of an independent director and
appointment of another independent director in his place shall not exceed
180 days. However, this provision would not apply in case a company fulfils
the minimum requirement of independent directors in its Board, i.e., one-
third or one-half as the case may be, even without filling the vacancy created
by such resignation/removal.
4. The minimum age for independent directors shall be 21 years.
Non-mandatory provisions:
The company shall ensure that the person who is being appointed as an
independent director has the requisite qualifications and experience which would be
of use to the company and which, in the opinion of the company, would enable him to
contribute effectively to the company in his capacity as an independent director.
In view of the above certain changes have to be incorporated in Clause 49,
details of which are placed in Annexure I.


Corporate Governance in Listed Companies Clause 49 of the Listing
Agreement
[Issued by the Securities and Exchange Board of India, vide SEBI/CFD/DIL/CG/
2/2008/23/10 dated 23.10.2008]
I. SEBI vide circular SEBI/CFD/DIL/CG/1/2008/08/04 dated April 08, 2008 amended
Clause 49 of the Equity Listing Agreement inter alia including a provision stating that
if the non-executive Chairman is a promoter or is related to promoters or persons
occupying management positions at the board level or at one level below the board,
at least one-half of the board of the company should consist of independent directors.
SEBI had received queries requesting to bring about further clarity on the said
amendment where the promoter of a listed company is a listed or unlisted entity. After
examining the same, it has been decided to include the following explanation to the
existing Clause 49.
In Item I, Para (A), in sub-clause (ii), after the proviso, the following Explanation
shall be inserted, namely:-
Explanation For the purpose of the expression related to any promoter
referred to in sub-clause (ii):
(a) If the promoter is a listed entity, its directors other than the independent
directors, its employees or its nominees shall be deemed to be related to it;
(b) If the promoter is an unlisted entity, its directors, its employees or its
nominees shall be deemed to be related to it.
II. Applicability:
The aforesaid amendments in Clause 49 of Equity Listing Agreement shall be
implemented as per the schedule of implementation given below:
(a) For entities seeking listing for the first time, at the time of seeking in-principle
approval for such listing;
(b) For existing listed entities which are required to comply with clause 49,
before March 31, 2009.
III. Advice to Stock Exchanges:
1. All Stock Exchanges are advised to:
(a)Give effect to the abovementioned policies and appropriately amend Clause
49 of Equity Listing Agreement in line with the text of the amendments
specified above.
(b)Make consequential changes, if any, in other clauses of Equity Listing
Agreement.
2. All Stock Exchanges are further advised to communicate to SEBI, status of
implementation of the requirements of this circular in their quarterly report for
the quarter ended March 31, 2009.
III. This circular is issued in exercise of powers conferred by sub-section (1) of
Section 11, read with sub-section (2) of Section 11A, of the Securities and Exchange
Board of India Act, 1992, to protect the interests of investors in securities and to


promote the development of, and to regulate the securities market.
IV. This circular is available on the SEBI website at www.sebi.gov.in.
Board Procedure
A. The company agrees that the board meeting shall be held at least four times
a year, with a maximum time gap of four months between any two meetings.
The minimum information to be made available to the board is given below:
1.Annual operating plans and budgets and any updates.
2.Capital budgets and any updates.
3.Quarterly results for the company and its operating divisions or business
segments.
4.Minutes of meetings of audit committee and other committees of the Board.
5.The information on recruitment and remuneration of senior officers just below
the board level, including appointment or removal of Chief Financial
Officer and the Company Secretary.
6.Show-cause, demand, prosecution notices and penalty notices which are
materially important.
7.Fatal or serious accidents, dangerous occurrences, any material effluent or
pollution problems.
8.Any material default in financial obligations to and by the company, or
substantial non-payment for goods sold by the company.
9.Any issue, which involves possible public or product liability claims of substantial
nature, including any judgement or order which, may have passed strictures
on the conduct of the company or taken an adverse view regarding another
enterprise that can have negative implications on the company.
10.Details of any joint-venture or collaboration agreement.
11.Transactions that involve substantial payment towards goodwill, brand equity,
or intellectual property.
12.Significant labour problems and their proposed solutions. Any significant
development in Human Resources/Industrial Relations front like signing of
wage agreement, implementation of Voluntary Retirement Scheme etc.
13.Sale of material nature of investments, subsidiaries, assets, which is not in
normal course of business.
14.Quarterly details of foreign exchange exposures and the steps taken by
management to limit the risks of adverse exchange rate movement, if
material.
15.Non-compliance of any regulatory, statutory nature or listing requirements and
shareholders service such as non-payment of dividend, delay in share
transfer etc.
B. (i)The Board meeting shall be held atleast 4 times a year, with a maximum time
gap of 4 months between two meetings. The minimum information to be
made available to the Board has been provided in Annexure-1A (As A
above).
(ii)The company further agrees that a director shall not be a member in more
than 10 committees or act as Chairman of more than five committees


across all companies in which he is a director. Furthermore it should be
a mandatory annual requirement for every director to inform the
company about the committee positions he occupies in other companies
and notify changes as and when they take place.
ExplanationFor the purpose of considering the limit of the committees on
which a director can serve, all public limited companies, whether listed
or not, shall be included and all other companies i.e. private limited
companies, foreign companies and companies of Section 25 of the
Companies Act, etc. shall be excluded.
(iii)Further only the three committees viz. the Audit Committee, the Shareholders
Grievance Committee and the Remuneration Committee shall be
considered for this purpose.
Management
A. The company agrees that as part of the directors report or as an addition
there to, a Management Discussion and Analysis report should form part of
the annual report to the shareholders. This Management Discussion &
Analysis should include discussion on the following matters within the limits
set by the companys competitive position:
(a)Industry structure and developments.
(b)Opportunities and Threats.
(c)Segment-wise or product-wise performance.
(d)Outlook.
(e)Risks and concerns.
(f)Internal control systems and their adequacy.
(g)Discussion of financial performance with respect to operational performance.
(h)Material developments in Human Resources/Industrial Relations front,
including number of people employed.
B. Disclosures should be made by the senior management to the board relating
to all material financial and commercial transactions, where they have
personal interest, that may have a potential conflict with the interest of the
company at large (for e.g. dealing in company shares, commercial dealings
with bodies, which have shareholding of management and their relatives etc.)
Senior Management has been defined as personnel of the company who
are members of its core management team excluding the board of directors.
This would also include all members of the management one level below the
executive directors including all functional heads.
Shareholders
A. The company agrees that in case of the appointment of a new director or
reappointment of a director the shareholders must be provided with the
following information:
(a)A brief resume of the director;
(b)Nature of his expertise in specific functional areas; and
(c)Names of companies in which the person also holds the directorship and the


membership of Committees of the board.
B. The company further agrees that information like quarterly results,
presentation made by companies to analysts shall be put on companys
web-site, or shall be sent in such a form so as to enable the stock exchange
on which the company is listed to put it on its own web-site.
C. Additional information as to shareholding of non executive directors (both own
or held by/for other persons on beneficial basis) in the listed company in which
they are proposed to be appointed as directors, prior to their appointment.
D. The company further agrees that a board committee under the chairmanship of
a non-executive director shall be formed to specifically look into the redressing
of shareholders and investors complaints like transfer of shares, non-receipt of
balance sheet, non-receipt of declared dividends etc. This Committee shall be
designated as Shareholders/Investors Grievance Committee.
E. The company further agrees that to expedite the process of share transfers
the board of the company shall delegate the power of share transfer to an
officer or a committee as to the registrar and share transfer agents. The
delegated authority shall attend to share transfer formalities at least once in a
fortnight.
Non-Mandatory Requirements
These shall be implemented as per discretion of the company. However, the
disclosures of adoption/non-adoption of the non-mandatory requirements shall be
made in the section of corporate governance of the Annual Report. Non mandatory
requirements are given below:
(a) Chairman of the Board
An non-executive Chairman should be entitled to maintain a Chairmans office at
the companys expense and also allowed reimbursement of expenses incurred in
performance of his duties.
(b) Remuneration Committee
(i) The board should set up a remuneration committee to determine on their
behalf and on behalf of the shareholders with agreed terms of reference, the
companys policy on specific remuneration packages for executive directors
including pension rights and any compensation payment.
(ii) To avoid conflicts of interest, the remuneration committee, which would
determine the remuneration packages of the executive directors should
comprise of at least three directors, all of whom should be non-executive
directors, the chairman of committee being an independent director.
(iii) All the members of the remuneration committee should be present at the
meeting.
(iv) The chairman of the remuneration committee should be present in the
annual general meeting, to answer the shareholders queries. However, it
would be upto the chairman to decide, who should answer the queries.
(c) Shareholders Rights
The half-yearly declaration of financial performance including summary of the
significant events in last six-months, should be sent to each household of
shareholders.


(d) Postal Ballot
Currently, though there is requirement for holding the general meeting of
shareholders, in actual practice only a small fraction of the shareholders of that
company do or can really participate therein. This virtually makes the concept of
corporate democracy illusory. It is imperative that this situation which has lasted too
long needs an early correction. In this context, for shareholders who are unable to
attend the meetings, there should be a requirement which will enable them to vote by
postal ballot for key decisions. Some of the critical matters which should be decided
by postal ballot are given below:
(i) Matters relating to alteration in the memorandum of association of the
company like changes in name, objects, address of registered office etc.;
(ii) Sale of whole or substantially the whole of the undertaking;
(iii) Sale of investments in the companies, where the shareholding or the voting
rights of the company exceeds 25%;
(iv) Making a further issue of shares through preferential allotment or private
placement basis;
(v) Corporate restructuring;
(vi) Entering a new business area not germane to the existing business of the
company;
(vii) Variation in rights attached to class of securities;
(viii) Matters relating to change in management.
(e) Independent Directors
Independent directors may have a tenure not exceeding in the aggregate a
period of nine (9) years.
(f) Training of Board Members
Company may train its Board members in the business model of the company as
well as the risk profile of the business parameters of the company, their
responsibilities as directors and the best ways to discharge them.
(g) Peer Group Evaluation
The performance evaluation of non-executive directors could be done by a peer
group comprising the entire Board of directors excluding the director being evaluated
and peer group evaluation could be the mechanism to determine whether to extend/
continue the terms of appointment of non-executive directors.
(h) Whistle Blower Policy
The company may establish a mechanism for employees to report to the
management concerns about unethical behaviour, actual or suspected fraud or
violation of the companys code of conduct or ethics policy. This mechanism could
also provide for adequate safeguards against victimization of employees who avail of
the mechanism and also provides for direct access to the chairman of the Audit
Committee in exceptional cases. Once established, the existence of the mechanism
may be appropriately communicated within the organisation.
10. MOTION


Motions and resolutions are used synonymously but in legal sense there is
difference between the two. Motion is a proposal submitted for a discussion and a
decision adopted by means of a resolution. A motion becomes a resolution only after
the requisite majority of members have adopted it. A motion should be in writing and
signed by the mover and put to the vote at the meeting by the chairman. In case of
company meetings, only such motions are proposed as are covered by the agenda.
However, certain motions may arise out of the discussion and the standing orders of
various bodies allow such motions to be discussed at the meeting without proper
notice in writing. There is no provision either in common law or under the Companies
Act, which provides that a motion should be proposed and seconded though this is
the commonly accepted practice.
Proposer and Seconder
It is common practice in company meetings that a motion is proposed by one
member and the same is seconded by another. But unless the articles of association
otherwise provide, no seconding is necessary for taking up a motion. After the motion
is discussed, the chairman puts the motion formally to vote by stating what the
resolution is and that it is proposed by A and seconded by B and then calls upon
the members for a show of hands to decide the issue.
Amendment
An amendment is any alteration, proposed by a member, of the main motion,
before it is voted upon and adopted. Amendment may be proposed by any member
who has not already spoken on the main motion or has not previously moved an
amendment, but a formal motion cannot be amended. Like the main motion, an
amendment should ordinarily be in writing, signed by the mover. The terms of the
amendment should be definite and in the affirmative and it should not raise any
question already decided upon at the same meeting. It should be relevant to and in
keeping with the main motion which it seeks to amend and must not merely negate
the main motion or introduce entirely a new subject.
The Chairman has the absolute discretion to accept or reject an amendment on
various grounds such as inconsistency, redundancy, irrelevance etc.
When an amendment has been moved, admitted and seconded discussion on
the main motion ceases and discussion on the amendment starts. Any one may
speak on the amendment even if he has already spoken on the main motion, but no
one is allowed to speak twice on the same amendment. After the amendment has
been thoroughly discussed, it is put to vote. If the amendment is carried, it is
incorporated in the body of the main motion. The altered motion which is known as
substantive motion is then put before the meeting. If the amendment is lost,
discussion on the main motion is resumed, but if the substantive motion is put to vote
and lost, the original motion cannot be revived.
Any number of amendments to the main motion can be moved. An amendment to
alter another amendment can also be moved, but an amendment can be amended only
once. When a large number of amendments to the main motion have been moved, the
original motion may be withdrawn by common consent and a new motion incorporating
all the amendments may be taken up. The Chairman has the discretion to decide in
what order the various amendments should be taken up for consideration.


General rules regarding Amendments
1. The amendment should always be worded in the affirmative and should be
in writing.
2. It should be seconded.
3. It should never be a counter proposal and therefore the person moving an
amendment should ensure that it is relevant to the main motion.
4. Amendments are incorporated in the main motion by the chairman of the
meeting only after the amendments have been carried out.
5. When the amended motion is put to the meeting, it becomes a substantive
motion and after a sufficient discussion, if passed, it becomes a resolution.
6. If the substantive motion is lost, the original motion to which an amendment
was moved cannot be revived.
7. All the amendments are placed before the meeting by the chairman in such
order as would affect the main motion.
8. All amendments pertaining to the same motion are put to the meeting by the
chairman for discussion in the order in which they have been moved.
9. When discussion on one amendment is going on and the decision to the
effect is not yet taken no member is allowed by the chairman to propose
another amendment. However, an amendment to an earlier amendment
may be allowed to be moved.
10. The mover of a motion with due consent of the meeting can withdraw it
before it is put to vote and also have a right to reply to the points raised
during the discussion on the motion moved by him.
The secretary advises and assists the chairman in regard to the above points
whenever an amendment is received from a member.
11. METHODS OF ASCERTAINING SENSE OF THE MEETING
Sense of the meeting means the will or intent of the assembly. Since unanimity
on all matters brought forward for discussion in a meeting is not possible, the
chairman has to take steps to ascertain the sense of the meeting. For this purpose he
has to put the question to vote. The means by which the persons present at a
meeting declare their approval is known as voting. The various alternative methods
which may be adopted for taking votes on a motion properly placed before a meeting
are as follows:
(i) by acclamation;
(ii) by voice;
(iii) by show of hands;
(iv) by division;
(v) by ballot; and
(vi) by poll.
(i) By Acclamation: Formal motions, like the motion of thanks to the chair, are


generally adopted unanimously by applause or shouting or cheering by members.
The method is not adopted in case of motions on which there is a sharp difference of
opinion. This method is normally used in deliberative or electroal assemblies like the
Parliament.
(ii) By voice: The method is also adopted when there is perfect or near unanimity
on the motion. The Chairman reads the motion and says As many as are of that
opinion, say Aye. He listens to those who says Aye (Yes). Then he says As many
as are of the contrary opinion, say No. From the volume of voice he judges which
side has the majority and then announces the verdict by saying, I think the Ayes (or
Nos, as the case may be) have it. Members dissatisfied with the Chairmans verdict,
should get up at this stage and demand a vote by show of hands. This method is not
used in company meetings.
(iii) By show of hands: According to this method, the Chairman calls upon the
persons present who are entitled to vote to raise hands in favour of the motion and on
counting them he proceeds to count the hands raised against the motion also. On
comparison of the hands shown for and against the motion, the Chairman announces
his verdict whether the resolution is carried or lost. Each member, irrespective of his
shareholding, or voting right, has one vote. Unless otherwise specified in the articles,
a proxy cannot vote here in terms of Section 177 at a general meeting of the
company, a resolution put to vote shall, unless a poll is demanded, be decided on a
show of hands.
Care, however, should be taken that a person does not raise both the hands on
a motion, if the Chairmans declaration is to be challenged, a second show of hands
should be demanded. Therefore, any objection as to its accuracy etc. should be
made at once. Section 177 of the Act provides that a resolution when put to vote at a
meeting shall be decided by a show of hands unless a poll is demanded under
Section 179.
(iv) By divisions: In this method, the Chairman requests those present to divide
themselves into two different blocks/rooms or lobbies. Those in favour of motion walk
into one block and those against the motion into another block. Number of persons in
each block are separately counted by tellers, one or two being appointed for each
side, and the result is accordingly declared by the Chairman. Only in members
personally present and not proxies can vote under this method. The method of voting
is normally used in Parliament and Assemblies.
(v) By ballot: Under this method ballot papers are distributed to everyone entitled
to vote. The members record their vote on the ballot paper by a suitable mark. These
papers are either deposited in a box or collected by tellers. This method is usually
adopted when:
(a) The issue is important;
(b) The difference of opinion is sharp and obvious;
(c) There is need for accuracy; and
(d) The consent of members who cannot attend the meeting is also required
which can be obtained by post.


(vi) By poll: Poll means counting of heads. We know that normally the members
present at a meeting are entitled to one vote each on a show of hands irrespective of
the number of shares held by them in the company. Accordingly, under the method of
show of hands the result of the meeting may not reflect the true position. Therefore,
Section 179 provides that the poll be taken if the Chairman or a prescribed number of
members are dissatisfied with the result of voting by show of hands.
In a poll, since the votes are counted on the basis of shareholdings of members,
the true sense of meeting can be ascertained. Further in a poll proxies can also
exercise their vote. In this system too, like ballot, the poll papers are given to persons
who are entitled to vote who indicate on them their names and whether they are
voting for or against the motion and also indicate therein the number of votes which
they are entitled to. Chairman appoints two scrutineers to scrutinise these poll papers
and submit the report to him, who declares the result of the poll. In company
meetings, the members present at a meeting can demand a poll either before or after
the declaration of the result of voting by show of hands. If there are several
resolutions, separate poll papers will be used for each resolution.
12. RESOLUTIONS
Decisions of a company are made by resolutions passed by the prescribed
majority of the members present at the meetings. Resolutions under present Act are
of three kinds, (a) ordinary, (b) special, and (c) resolutions requiring special notice.
Sections 189 of the Act defines the ordinary and special resolutions:
(a) A resolution, which requires simple majority of the members entitled to vote
and voting in person, or, where proxies are allowed, by proxy, is called an
ordinary resolution. The draft of a proposed ordinary resolution need not be
set out in the notice convening the meeting. If however, some special
business has to be transacted through an ordinary resolution, the notice
must state it as special business and the proposed resolution is set out in
the notice.
(b) A special resolution is one passed at a general meeting of a company when
(i) notice of the meeting specifying the intention to propose the resolution as
a special resolution has been duly given as required under the Act, and
(ii) the votes cast in favour of the resolution (whether on a show of hands or
on a poll by members who being entitled so to do, vote in person, or where
proxies are allowed by proxy) are not less than three times the number of
votes, if any, cast against the resolution by members so entitled to vote.
In short, a resolution is said to be a special resolution if notice of the intention to
move it as a special resolution is given specifically and it is passed by three-fourths
majority of the votes. The validity of a resolution passed at a meeting depends on the
proper constitution and conduct of the meeting, which means:
(a) a notice convening the meeting had been given on proper authority and in
accordance with the law;
(b) quorum was present;
(c) proper person was in the chair;


(d) the meeting was competent to pass the resolution;
(e) reasonable discussion was allowed;
(f) the motion was correctly voted upon.
Resolution requiring special notice
According to Section 190 of the Act, where by any provision in this Act or in the
articles, special notice is required of any resolution, notice of the intention to move
the resolution shall be given to the company not less than fourteen days before the
meeting at which it is to be moved, exclusive of the day on which the notice is served
or deemed to be served and the day of the meeting. On receipt of such a notice, the
company must give to its members, notice of the resolution in the manner in which it
gives notice of the meeting. In case it is not practicable, the company must give a
minimum of seven days notice to members through an advertisement in a newspaper
having an appropriate circulation or in any other mode allowed by the articles.
Resolutions passed at Adjourned Meeting
A resolution passed at an adjourned meeting either of a company or the holders
of any class of shares in a company or board of directors of a company shall be
treated as having been passed on the date on which it was infact passed and not on
an earlier date (Section 191).
Circulation of Members Resolution
Section 188 of the Act makes available to members the administrative machinery
of the company to introduce resolutions at the annual general meetings. Accordingly,
Section 188 provides that if members having one-twentieth of the total voting power
of all the members having right to vote on the resolution or business to which their
requisition relates, or if not less than 100 members having right to vote and holding a
paid-up share capital of Rs. 1,00,000 or more, require the company to do so, the
company must at the expense of the requisitionists, unless the company otherwise
resolves:
(a) give to the members entitled to receive notice of the next annual general
meeting notice of any resolution which may properly be moved and is
intended to be moved at that meeting;
(b) circulate to the members entitled to have notice of any general meeting sent
to them, any statement of not more than 1,000 words with respect to the
matter referred to in any proposed resolution, or any business to be dealt
with at that meeting.
The requisition, signed by all the requisitionists, must be deposited at the registered
office of the company at least 6 weeks before the meeting in the case of requisition
requiring notice of a resolution and not less than 2 weeks before the meeting in case of
any other requisition together with a reasonable sum to meet the expenses.
However, where a copy of the requisition requiring notice of resolution has been
deposited at the registered office of the company and an annual general meeting is
called for a date six weeks or less after the requisition is deposited, the copy though
not deposited within the time required by Section 188, is deemed to have been


properly deposited.
The company is required to serve notice of the resolution and/or the statement to
the members as far as possible in the manner and so far as practicable at the same
time as the notice of the meeting, otherwise as soon as practicable thereafter. The
following are the requirements for circulation of members resolution as incorporated
in Section 188.
(1) Requisition is given in writing duly signed by the following members:
(a)representing at least one-twentieth of the total voting power; or
(b)at least one hundred members holding shares of the paid-up value of Rs. One
lakh.
(2) Copy of the requisition signed by the requisitionists is deposited at the
registered office of the company (a) in case of a requisition requiring notice
of a resolution at least six weeks before the meetings (b) in any other case,
at least two weeks before the meetings
(3) Expenses for circulation of the resolution/statement by the company are
tendered by the requisitionists.
(4) The company shall not be bound to give notice of any resolution or to
circulate any statement unless the requisitionists comply with the conditions
as mentioned above.
(5) The company shall also not be bound under this section to circulate any
statement if, on the application either of the company or of any other person
who claims to be aggrieved, the Company Law Board is satisfied that the
rights conferred by this section are being abused to secure needless publicity
for defamatory matter; and the Company Law Board may order the companys
costs on an application under this section to be paid in whole or in part by the
requisitionists, notwithstanding that they are not parties to the application. A
banking company need not circulate such statement, if in the opinion of its
Board of directors the circulation will injure the interests of the company.
The company is no doubt to give notice of any resolution or to circulate any
statement provided there is full compliance of the provisions as contained in Sub-
section (4) of Section 188. These are mandatory provisions and there is no escape
from their application [Naresh Kumar Jain v. Union of India [1995] 23 CLA 238
(Delhi)].
13. REGISTRATION OF RESOLUTIONS AND AGREEMENTS
Section 192 of the Companies Act states that a copy of each of the following
resolutions (together with a copy of the statement of material facts annexed under
Section 173 to the notice of the meeting in which such resolution has been passed)
or agreement must, within 30 days after the passing or making thereof, be printed or
typewritten and duly certified under the signature of an officer of the company and
filed with the Registrar who shall record the same:
(a) special resolutions;
(b) resolutions which have been agreed to by all the members of a company,


but which if not so agreed to would not have been effected for their purpose
unless they had been passed as special resolutions;
(c) any resolution of the Board of directors of a company or agreement
executed by a company relating to the appointment, re-appointment or
renewal of the appointment, or variation of the terms of appointment, of a
managing director;
(d) resolutions or agreements which have been agreed to by all the members of
any class of shareholders but which, if not so agreed to, would not have
been effective for their purpose unless they had been passed by some
particular majority or otherwise in some particular manner; and all
resolutions or agreements which effectively bind all the members of any
class of shareholders though not agreed to by all those members;
(e) resolutions passed by a company (i) according consent to the exercise by its
Board of directors of any of the powers under clause (a), clause (d) and
clause (e) of Sub-section (1) of Section 293; (ii) approving the appointment
of sole selling agents under Section 294 or Section 294AA;
(f) resolution requiring a company to be wound up voluntarily passed in
pursuance of Sub-section (1) of Section 484; and
(g) copies of the terms and conditions of appointment of a sole-selling agent
appointed under Section 294 or of a sole selling agent or other person
appointed under Section 294AA.
Where articles have been registered, a copy of every such resolution which has
the effect of altering the articles and a copy of every agreement for the time being in
force shall be embodied in or annexed to every copy of the articles issued after the
passing of the resolution or the making of the agreement. Where the articles have not
been registered, a printed copy of every resolution or agreement shall be forwarded
to any member at his request on payment of one rupee.
Ordinarily the Registrar has no authority to enquire into the validity of a meeting
and the resolutions passed at it, [See Golkunda Industries (P) Ltd. v. R.O.C. (1968)].
But even so his role is not merely that of a mechanical agent to receive
documents with one hand and to file them with the other. On occasions he may have
to exercise his discretion. Accordingly where the documents like memorandum
containing unlawful clauses or a resolution containing matters in violation of law are
filed, Registrar may refuse registration. [Pioneer Mutual Benefit and friendin-Need
Society Ltd. v. Asst. Reg. Of Joint Stock Cos., (1933)].
14. PASSING OF RESOLUTIONS BY POSTAL BALLOT
A new Section 192A had been inserted by the Companies (Amendment) Act,
2000 (came into force from 15.6.2001) which provides as follows:
(i) Notwithstanding anything contained in the Companies Act, 1956, a listed
public company may, and in the case of resolutions relating to such
business as the Central Government may, by notification, declare to be
conducted only by postal ballot, shall get any resolution passed by means of
a postal ballot, instead of transacting the business in general meeting of the


company.
(ii) Accordingly where a company decides to pass any resolution by resorting to
postal ballot, it shall send a notice to all the shareholders, along with a draft
resolution explaining the reasons therefor, and requesting them to send their
assent or dissent in writing on a postal ballot within a period of 30 days from
the date of posting of the letter.
(iii) The notice shall be sent by registered post acknowledgement due, or by any
other method as may be prescribed by the Central Government in this
behalf. Also with the notice, there shall be included a postage pre-paid
envelope for facilitating the communication of the assent or dissent of the
shareholder to the resolution within the said period.
(iv) If a resolution is assented to by a requisite majority of the shareholders by
means of postal ballot, it shall be deemed to have been duly passed at a
general meeting convened in that behalf.
(v) If a shareholder sends his assent or dissent in writing as aforesaid on a
postal ballot and thereafter any person fraudulently defaces or destroys the
ballot paper or declaration of identity of the shareholder, such person shall
be punishable with imprisonment for a term which may extend to 6 months
or with fine of with both.
(vi) If a default is made in complying with the provisions of this section, the
company and every officer of the company who is in default shall be
punishable with fine which may extend to Rs. 50000 in respect of each such
default.
Central Government has prescribed the Companies (Passing of the Resolution
by Postal Ballot) Rules, 2001 vide notification No. G.S.R. 337(E) dated 10.5.2001.
The text of Rules is given below :
Companies (Passing of the Resolution by Postal Ballot) Rules, 2001
G.S.R. 337(E), dt. 10.5.2001.In exercise of the powers conferred by
Section 192A read with clauses (a) and (b) of Sub-section (1) of Section 642 of the
Companies Act, 1956 (1 of 1956) the Government hereby makes the following rules,
namely:
1. Short title and commencement.(1) These rules may be called the
Companies (Passing of the Resolution by Postal ballot) Rules, 2001.
(2) They shall come into force on the date of their publication in the Official Gazette.
2. Definitions.In these Rules, unless the context otherwise requires:
(a) Act means the Companies Act, 1956;
(b) Postal Ballot includes voting by shareholders by postal or electronic mode
instead of voting personally by presenting for transacting businesses in a
general meeting of the company;
(c) Requisite majority with regard to Special Resolution means votes cast in


favour of the business is three times more than the votes cast against, with
regard to ordinary resolution, votes cast in favour is more than the votes cast
against.
1
[2A. Method for sending notice.(a) The company may issue notices
either,
(i) under registered post acknowledgement due; or
(ii) under certificate of posting; and
(b) with an advertisement published in a leading English newspaper and in one
vernacular newspaper circulating in the State in which the registered office of the
company is situated, about having despatched the ballot papers.
3. Application.These Rules shall be applicable to listed companies and in
case of resolutions relating to such businesses as are specified under Rule 4.
4. List of businesses.List of businesses in which the resolutions
2
[shall be]
passed through Postal Ballot:
(a) alteration in the Object Clause of Memorandum;
(b) alteration of Articles of Associations in relation to
3
[***] deletion or insertion
of provisions defining private company;
(c) buy-back of own shares by the company under Sub-section (1) of Section
77A;
(d) issue of shares with differential voting rights as to voting or dividend or
otherwise under sub-clause (ii) of clause (a) of Section 86;
(e) change in place of registered office outside local limits of any city, town or
village as specified in Sub-section (2) of Section 146;
(f) sale of whole or substantially the whole of undertaking of a company as
specified under sub-clause (a) of Sub-section (1) of Section 293;
(g) giving loans or extending guarantee or providing security in excess of the
limit prescribed under Sub-section (1) of Section 372A.
(h) election of a director under the proviso to Sub-section (1) of Section 252 of
the Act;
(i)
1
[***]
(j) variation in the rights attached to a class of shares or debentures or other
securities as specified under Section 106.
5. Procedure to be followed for conducting business through Postal Ballot:
(a) The company may make a note below the notice of General Meeting for
understanding of members that the transaction(s) at Sl. No. requires consent
of shareholders through postal ballot;

1
Inserted by Amendment Rules, 2001 vide Notification GSR 773(E), dt. 11.10.2001.
2
Substituted by Amendment Rules, 2001 vide Notification GSR 773(E), dt. 11.10.2001.
3
Omitted by Amendment Rules, 2001 vide Notification GSR 773(E), dt. 11.10.2001


(b) The board of directors shall appoint one scrutinizer, who is not in
employment of the company, may be a retired judge or any person of repute
who, in the opinion of the board can conduct the postal ballot voting process
in a fair and transparent manner;

1
(c) The scrutinizer shall submit his report as soon as possible after the last date
of receipt of postal ballot;
(d) The scrutinizer will be willing to be appointed and he is available at the
registered office of the company for the purpose of ascertaining the requisite
majority;
(e) The scrutinizer shall maintain a register to record the consent or otherwise
received, including electronic media, mentioning the particulars of name,
address, folio number, number of shares, nominal value of shares, whether
the shares having voting, differential voting or non-voting rights and the
Scrutinizer shall also maintain record for Postal Ballot which are received in
defaced or mutilated form. The Postal Ballot and all other papers relating to
Postal Ballot will be under the safe custody of the Scrutinizer till the
Chairman considers, approves and signs the minutes of the meeting.
Thereafter, the scrutinizer shall return the ballot papers and other related
papers/register to the company so as to preserve such ballot papers and
other related papers/register safely till the resolution is given effect to;

1
(f) The consent or otherwise received after thirty days from the date of issue of
notice shall be treated as if reply from the member has not been received.
The Department of Company Affairs vide File No. 1/15/2000-CL.V dated
24.07.2001 has issued a clarification on the aforesaid Rules which is placed at
Annexure to the study.
However, the following points which have been clarified by the Department of
Company Affairs should be noted in this regard:
(1) The above-mentioned rules are applicable after 15th June, 2001.
(2) Advertisement giving the date of completion of dispatch of postal ballots is
not mandatory under Section 192A. However, as a measure of good
corporate governance, companies may publish it.
(3) The postal ballots should be serially numbered and have distinguishing
water marks to avoid printing of duplicate ballot papers.
(4) The companies are required to specify the last date of receiving the postal
ballots.
(5) The voting rights on postal ballots shall be in proportion to the shareholders
share of the paid-up equity capital.
(6) The Company Secretary with one of the functional directors shall be made
responsible, by passing a Board resolution, for the postal ballot process.
A copy of the Board resolution along with the item to be included in the calendar
of events should be dispatched within one week of passing of the Board resolution to
the concerned ROC for information.

1
Inserted by Amendment Rules, 2001 vide Notification GSR 773(E), dt. 11.10.2001.


The Companies (Passing of the Resolution by Postal Ballot) Rules, 2001
Departments Clarification vide General Circular No. 16/2001, File No. 1/15/2000
- CL. V dated 24.07.2001.
The Department received a number of queries from the professionals, Chamber
of Commerce & Industry, corporate sectors etc. on the above subject. The points
raised were carefully examined and Departments views thereon are indicated below:
1. The Companies (Passing of the Resolution by Postal Ballot) Rules, 2001
read with section 192A shall apply to notices calling meetings of the
shareholders approved by the Board of Directors after 15th June, 2001.
2. According to the provisions of Section 192A it is not mandatory for the
company to release an advertisement giving the date of completion of
despatch of postal ballots. However, as a measure of good corporate
governance, companies in their own interest may release an advertisement
for publishing the date of completion of despatch of postal ballots.
3. A specimen postal ballot form and items to be included in the calendar of
events for conducting voting through postal ballot are enclosed for the use
and convenience of the companies. The concerned companies must ensure
that the postal ballots are serially numbered and have distinguishing water
marks in order to avoid printing of any duplicate ballot papers.
4. The companies are required to specify the last date by which the postal
ballot must be received by the company keeping in view the provisions
contained in Rule 5(f) of the Companies (Passing of the Resolution by
Postal Ballot) Rules, 2001 and the instructions at serial number 5 of the
specimen postal ballot form.
5. It is clarified that voting right on postal ballot shall be in proportion to the
shareholders share of the paid-up equity share capital of the company.
6. The company secretary along with one of the functional directors should be
made responsible for the entire postal ballot process by means of an
appropriate board resolution. The resolution should be passed in the Board
Meeting in which notice required to be sent to the shareholder under
Section 192A(2) is approved by the Board. A copy of the board resolution
should be despatched alongwith item to be included in the calendar of
events within one week of passing of the Board resolution to the concerned
Registrar of Companies for information.
7. A query has been raised whether Companies (Passing of Resolution by
Postal Ballot) Rules, 2001 is applicable only in respect of list of businesses
as notified under rule 4 of the said rule. It is hereby clarified that the Central
Government may at any time include or delete the items to be transacted
through postal ballot, therefore, the procedure as specified in the rules has
to be followed for any business to be transacted through postal ballot.



XYZ LIMITED
Registered Office .............
Postal Ballot Form
1. Name(s) of Shareholder(s) __________________________________
(in block letters) __________________________________
(including joint holders, if any) __________________________________
2. Registered address of the sole/first
named shareholder
3. Registered folio No./DP ID No./Client
ID No.*
(* Applicable to investors holding shares
in dematerialized form)
4. Number of shares held
5. I/We hereby exercise my/our vote in respect of the ordinary/special resolution to
be passed through postal ballot for the business stated in the notice of the
Company by sending my/our assent or dissent to the said resolution by placing
the tick (3) mark at the appropriate box below.
Item No. No. of shares
I/We assent to the resolution
I/We assent to the resolution
Place:
Date:
________________________
(Signature of the shareholder)

INSTRUCTIONS
1. A member desiring to exercise vote by postal ballot may complete this
Postal Ballot Form and send it to the company in the attached self-
addressed envelope. Postage will be borne and paid by the company.
However, envelopes containing postal ballots, if sent by courier at the
expenses of the registered shareholder will also be accepted.
2. The self-addressed envelope bears the address of the scrutineer appointed
by the Board of Directors of the company.
3. This form should be completed and signed by the shareholder. In case of
joint holding, this form should be completed and signed (as per the
specimen signature registered with the company) by the first named
shareholder and in his absence, by the next named shareholder.
4. Unsigned Postal Ballot Form will be rejected.


5. Duly completed Postal Ballot Form should reach the company not later than
the close of working hours on ___________ (day) ___________ (date).
Postal Ballot Form received after this date will be strictly treated as if the
reply from the member has not been received.
6. Voting rights shall be reckoned on the paid up value of shares registered in
the name of the shareholders on the date of despatch of the notice.
Items to be included in the calendar of events
1. Date of Despatch of notice of Meeting in which the business as notified by
the Central Government will also be transacted through Postal Ballot.
2. Date of completion of despatch of notice along with Postal Ballot.
3. Date of appointment of scrutinizer.
4. Date on which consent given by the scrutinizer to act as scrutinizer.
5. Last date for receiving Postal Ballot papers by scrutinizer.
6. Date of signing of the minutes book by the Chairman in which the results
ballot is recorded.
7. Date of returning the Ballot papers, register required to be maintained by the
scrutinizer under rule 5(e) of the Companies (passing of the resolutions by
postal ballot) Rules, 2001 and other related papers to the Chairman by the
Scrutinizer.
8. Date of Board resolution authorising one of the functional directors and the
secretary to be responsible for the entire poll process.
9. Date of handling over the ballot papers to the designated authority.
15. ADJOURNMENT
Adjournment literally means an act of putting off or breaking off for resumption at
a later date, time and place. In relation to meetings, adjournment connotes a fact of
suspending a meeting after it has been duly commenced to be resumed at a later
time or date fixed in that meeting itself at the time of such adjournment or to be
decided later on. Where a meeting is adjourned without specifying the time after the
expiry of which it will be resumed, the meeting is said to have adjourned sine die. It is
also to be noted that the discussion on a particular business or motion may be
adjourned without adjourning the meeting itself.
The power of adjournment vests in the majority of those present at the meeting. If
the Chairman vacates his chair or adjourns the meeting ignoring the views of the
majority, then those remaining, even if in minority, can appoint a Chairman and
transact the business left unfinished. Where the Chairman unlawfully adjourns the
meeting realising that he may not be successful in achieving his objectives, the
remaining members will have the right to proceed with the meeting and complete the
untransacted business.
For the proper conduct of a meeting, power of adjournment is generally conferred
upon the Chairman. However such power of adjournment of meeting must be
exercised for the proper conduct of the meeting. Unless otherwise expressly


provided, the Chairman cannot be compelled to exercise the right of adjournment. At
the same time it should be noted that the Chairman cannot adjourn the meeting at his
own discretion without there being a good or valid cause for such an adjournment.
Where the Chairman, acting bona fide within his powers, adjourns the meeting, the
dissentient members cannot proceed to continue with such meeting and, if they do,
the proceedings thereof will be null and void.
However, the chairman has no power to stop or adjourn a meeting at his will. A
meeting of a company cannot be adjourned arbitrarily, for the members are entitled to
pursue to a conclusion of the business for which they have met. The articles of a
company may provide on the lines of Regulation 53(1) of Table A of the Companies
Act, which provides that the chairman may, with the consent of any meeting at which
a quorum is present and shall, if so directed by the meeting, adjourn the meeting from
time to time and from place to place. However, there are a number of judicial
pronouncements in this regard. A brief appraisal of them is as follows:
(1) The chairman has no power to stop the meeting and dissolve it before the
business of the meeting is over [Vakil v. Bombay Residency AIR 1845 Bom. 175].
(2) Where the articles provide that the chairman may with the consent of any
meeting, adjourn the meeting, he may, in his discretion refuse to adjourn
even though the meeting may resolve to do so (Salisbury Gold Mining Co. v.
Hathorn), but if the articles provide that he shall adjourn, he has no choice
but must adjourn if so resolved by the meeting. In the cited case, the articles
of the company stated that the chairman may with the consent of the
members present at any meeting adjourn from time to time and from place
to place. The chairman declined to put a motion to adjourn the meeting even
though it had been proposed and seconded and if put to vote would
probably have been carried, as the chairman felt that such adjournment
would prejudice the absentee shareholders. It was held that the chairman
had acted within the powers given to him by the articles even if the majority
required it, so business subsequently conducted was valid.
(3) The chairman cannot arbitrarily dissolve or adjourn a meeting and if he
prematurely closes a meeting or purports to adjourn it, his act will be
irregular and it will be open to the meeting to select another chairman and
proceed with the business [Seth Sobha Mal Lodha v. Edward Mills Ltd.
(1972) 42 Comp. Cas. 1 (D.B.) (Raj.)].
The following observations of Chitty, J. in National Dwellings Society v. Sykes are
worth noting:
It is not within the scope of the authority of chairman.......to stop the meeting at
his own will and pleasure.......he presides with reference to the business which is
then to be transacted. In my opinion, he cannot say, after the business has been
opened, I will have no more to do with it, I will not let the meeting proceed, I will
stop it, I declare the meeting dissolved, and I have the chair. In my opinion that is
not within his power. The meeting by itself.......can resolve to go on with the
business for which it has been convened and appoint a chairman to conduct the
business which the other chairman, forgetful of his duty or violating his duty has
tried to stop.


The chairman may, however, on his own authority adjourn a meeting, which is
disorderly so as to prevent the transaction of business or to make it unsafe to
continue the meeting. In John v. Rees, there was a great deal of heated and noisy
opposition to a proposal put forward by the chairman himself which had not been on
notice of the meeting, and on noticing bodily contact, but no real violence the
chairman adjourned sine die. On the facts of this case, it was held that the
adjournment was irregular, there had been no real violence to justify the order and
the chairman had also acted wrongfully by declaring the adjournment sine die instead
of for a short period. Further, the chairman was held to have been the cause of the
disorder himself by introducing a motion outside the scope of the notice convening
the meeting.
Salil K. Roy Chowdhury, J. of the Calcutta High Court in United Bank of India v.
United India Credit and Development Corpn. Ltd., has held that this inherent authority
must be exercised by the chairman out of his responsibilities to those present, if
employed, it is subject to two limitations; it should be used in good faith out of an
honest assessment of what is best for the meeting, and it should not be for any
longer than is necessary to restore calm.
Where the Chairman had to adjourn the meeting because of chaos and disorder
at the meeting, it was held that the action did not amount to adjournment sine die or
for the day and no subsequent date was required to be fixed by him giving the
requisite notice. The meeting had only been put off to a later hour, i.e. the
proceedings had only been suspended, to recommence when peace and order were
restored [Chandrakant Khaire v. Dr. Shantaram Kale & Others (1989) 65 Comp. Cas.
121, S.C.L.].
Whether Fresh Notice is Required
An adjourned meeting is merely the continuation of the original meeting so a
fresh notice is not necessary, if time, date and place for holding the adjourned
meeting are decided and declared at the time of adjourning. The rules may provide
for notice to be given for adjourned meeting if the interval exceeds a fixed time, e.g.,
30 days. If the meeting is adjourned sine die, fresh notice of the adjourned meeting is
necessary.
Since in law an adjourned meeting is a continuation of the original meeting only
the business not finished at the original meeting can be transacted at the adjourned
meeting unless proper notice as prescribed in the Act is given for a new proposal.
Whether Fresh Proxies are Required
Where meeting in question was only an adjourned meeting there was nothing
improper in using old proxies and it could not be said the meeting was not properly
held. [Kothari Industrial Corpn. Ltd. v. Maxwell Dyes & Chemicals (P) Ltd. [1995] 5
SCL 82].
While issuing notice for adjourned meeting, calling for fresh proxies is not illegal
for the simple reason that fresh proxies ought to be called for as it is a matter of right
to the shareholders to change their respective proxies for the adjourned meetings
and for the new shareholders to give their own proxies for the adjourned meeting.


Where the notice of the adjourned meeting was issued with the same wording as
that of the previous notice, and the fresh proxy form was enclosed therewith, it could
not be categorised as an unlawful act on the part of the company. It would suffice if
the adjourned meeting transact only the business left untouched in the original
meeting and no new business was transacted. [Maxwell Dyes & Chemical (P) Ltd. v.
Kothari Industral Corpn. Ltd. (ibid).
When poll is not demanded, chairman of meeting is not under obligation to order
poll and a shareholder who did not demand poll cannot challenge the resolution
subsequently. [Jetu Jacques Tara Lalwani v. JBA Printing Inks Ltd. [1996] 20 CLA 12
(Bom.)].
Postponement
Postponement of a meeting is to put off or defer the holding of a meeting before
the date originally fixed for the meeting has arrived. The postponement is the act of
the convening authority whereas the adjournment is the act of the meeting itself.
There is no general principle relating to postponement having universal
application and wide acceptance. Doubts have been expressed as to whether a duly
convened meeting can be properly postponed. It is felt that a meeting which has been
once duly convened cannot be postponed and if for any reason it is not convenient to
hold the meeting on the date originally fixed, the better course, in such cases would
be to hold the meeting first and then adjourn it to some other convenient date.
There is another view that the power to convene a meeting also implies the
power to postpone the meeting in case such a need arises. But such implied power of
postponement must be exercised bona fide and in the interest of the association or
the body concerned. Unanimity on the issue of postponement of a meeting is
desirable. It will, therefore, be worthwhile to make a provision in the relevant rules
and regulations of an association to postpone a meeting to take care of any
eventuality, which may be beyond the control of the association, in case the
postponement of meeting may become necessary for legitimate reasons.
Dissolution
Dissolution of a meeting refers to the situation where the meeting no longer
exists as such. Its proceedings are not merely suspended but exhausted.
As per Section 174 of the Companies Act, if within half an hour after the time
appointed for holding a general meeting; the quorum is not present, the meeting shall
stand dissolved if it was called on requisition.
16. HOLDING OF MEETINGS THROUGH TELECONFERENCING
Except on matters where it is permissible for the board to pass circular
resolutions, it is necessary for the Directors to attend personally for a face to face
meeting and discussion to decide on the subjects in the agenda. This principle also
applies to meetings of members to constitute a valid meeting. In India law does not
permit holding of meetings through teleconferencing. However, this is permitted in
some countries.


However, in Byng v. London Life Assurance Ltd. (1989) 2 WLR 738 it was
accepted that a meeting can be held simultaneously in several rooms connected by
adequate audio visual links, so long as those in the different rooms can see and hear
what is going on in the other rooms. This means that members attending need not be
in the same room, provided they have adequate audio visual links to see and hear
others participating in the meeting as in the case of closed circuit television or similar
arrangement. But a mere telephone conversation, lacking visual link, between
directors in Vancouver and California was incapable of constituting a meeting Re.
Associated Colour Laboratories Ltd., (1970) 12. DLR. (3d) 338. Thus, a conversation
by conference telephone without visual links cannot amount to a meeting to reckon
quorum and to take binding majority decisions. An Article in the Articles of
Association providing for such a telephone conference meeting of Directors without
visual link would be held invalid, in the absence of an enabling provision in the Indian
Companies Act.
Section 114(9) of the Canada Business Corporation Act (CBCA) provides as
follows:
Unless the byelaws otherwise provide, if all the directors of a corporation present
at or participating in the meeting consent, a meeting of directors may be held by
means of such telephone, electronic or other communication facilities as permit
all persons participating in the meeting to communicate with each other
simultaneously or instantaneously and a director participating in such a meeting
by such means is deemed, for the purposes of the Act, to be present at the
meeting. Standard form by law by Section 3.02 of CBCA provides for meetings
by telephone provided all the directors have consented in writing thereto and all
are able to participate in the meeting by conference telephone. The meeting by
conference call must have been duly convened as a meeting with due notice for
all directors to participate. If any director refuses to consent to the holding of a
meeting by telephone the meeting may not proceed in this manner. It is a moot
point whether directors will be able to recognise each others voice in a telephone
call meeting. Such doubt may not arise in a video conference call with the
director being able to see others physically presence and participation in the
discussions.
In the Australian case Magnacrete Ltd. v. Douglas Hill (1988) 7 ACLC 117 at 119
(Australia), Justice Berry remarked that the law has not yet advanced to the stage
where board meetings of directors may lawfully be held by phone conference under
the Australian law.
Advancements in technology have made the present day commercial world
integrated and interconnected through satellite communication and internet, and
geographical boundaries have become irrelevant. As a result of these developments,
directors situated at different places can participate in meetings through tele/video-
conferencing.
Meetings through tele/video-conferencing enable the participants located in
different geographical areas to communicate effectively. Tele/video-conferencing
replicates the features inherent in physical presence viz. expression, language and,
in the case of video-conferencing, face-to-face contact. As a result, effective
interaction of people situated at dispersed location is possible.


Courts too have taken a favourable view. In Horsleys book meetings
Procedure, Law and Practice, 4th Edition it is observed For many years, the court
regarded a meeting as not only something where people speak, but where they also
meet each other in the flesh. Accordingly, resolutions purportedly passed by
telephone hook-up were invalid: [Higgins v. OCrady (1971) IAS, Current Review
657]; although the possibility of meetings by telephone was contemplated in the
future: [Higgins v. Nicoi (1971) 18 FLR 343 atg 357]. It was, however, open for a body
to include a provision in its rules specifically authorizing the holding of meetings by
telephone (perhaps subject to certain conditions), in which case such meetings would
be valid. In 1994 Santow J of the New South Wales Supreme Court held that the
words meet together in a companys articles connoted a meeting of minds made
possible by modern technology, and did not refer to a meeting of bodies. As long as
the conversations over the telephone took place with everyone hearing everyone
else, the directors meeting would be valid: Wagner v. International Health
Promotions Pty Ltd. (1994) 15 ACSR 119.
It has been held in some Australian cases that there is no necessity of directors
to meet physically unless the articles specifically prohibit meeting held in any other
way. [Re. Giga Investments Pvt. Ltd. (1995) 13 ACLC 1050 (Aust.)].
The increasing globalisation of the world economy, international operations of
business and the formation of joint ventures necessitates participation of a large
number of directors, with varied experience in legal, financial and commercial
matters. The resources of such persons can be more effectively utilized by
encouraging holding of Board meetings through tele/video-conferencing. Further, in
the present scenario, with the increasing importance accorded to independent
directors and the need to attract talent and expertise, the facility to conduct Board
meetings through tele/video-conferencing will enable companies to reap the benefit of
professional advice from experienced directors, will facilitate effective participation by
directors and will also be cost effective by saving time and money.
Information Technology Act, 2000 (IT Act)
The IT Act has recognized communication in digital/electronic form. The concept
of digital signatures to authenticate and conclusively attribute the contents of such
communication too has been introduced.
Section 2(r) of IT Act defines, electronic form as, electronic form with reference
to information means any information generated, sent, received or stored in media,
magnetic, optical, computer generated micro fiche or similar device.
Keeping in mind the above definition of electronic form given under IT Act, it can
be inferred that a meeting of the Board of directors, wherein the directors participate
through tele/video-conferencing and validly communicate through electronic means
and where the data are also stored by way of digital records can be deemed to be a
meeting duly held in electronic form. Board meetings through electronic means are
therefore permissible under the IT Act but amendments have to be carried out under
the Companies Act.
17. MINUTES OF PROCEEDINGS OF MEETINGS
Every company is required to keep minutes of the proceedings of general
meetings and of the meetings of Board of directors and its committees. The minutes


are a record of business transacted at a meeting. With a view to ensuring the
authenticity of the minutes of proceedings of general meetings and those of Board
meetings or those of a Committee of a Board, Section 193 provides that every
company must keep minutes containing a fair and correct summary of all proceedings
of general meetings and Board and its committee meetings in books kept for that
purpose. The minutes books must have their pages consecutively numbered, and the
minutes must be recorded therein within 30 days of the meeting. They have to be
written directly on the numbered pages.
Sub-section (1A) of Section 193 provides that each page of every such minutes
book must be initialled or signed and last page of the record of proceedings of each
meeting in such books must be dated and signed
(a) in the case of the meeting of the Board of directors or Committee thereof, by
the Chairman of the said meeting or that of the succeeding meeting; and
(b) in the case of a general meeting, by the chairman of the same meeting
within the aforesaid 30 days or in the event of the death or inability of that
chairman within the period, by a director duly authorised by the Board of
directors for the purpose.
There is no legal requirement of obtaining confirmation of minutes of the Board
meeting in the succeeding meeting. The Chairman of the meeting has the full
authority to approve the minutes of the Board Meeting. Section 193(1A)(a) gives an
option to have the minutes signed by the Chairman of the meeting of the Board of
directors or the Chairman of the next succeeding meeting of the Board of directors.
Such minutes have to be recorded within 30 days of the date of the Board meeting,
however, as the minutes of a Board meeting could be signed by the Chairman of the
succeeding meeting, it cannot be insisted upon that the minutes of Board Meeting
have to be signed within 30 days.
The Company Law Board, however, may not object if the minutes are maintained
in the loose leaf form provided all other procedural requirements are complied with
and all possible safeguards against manipulation or interpolation of the minutes are
ensured. The loose leaves can be got bound at reasonable interval say, six months.
Entering the minutes, in the bound minutes book by a chemical process, which does
not amount to attachment to any book by pasting or otherwise is permissible provided
on the mechanical impression of the minutes, the original signatures of the Chairman
are given on each page.
Section 193 does not provide that minutes should be written up to the last page
of minutes book. Thus, where after recording the minutes of a condolence meeting of
the Board on the death of one of the directors, a new minute book was started, it was
held that, in the absence of allegation that the minutes were not written faithfully or in
time, it could not be contended that minutes book could not be relied upon to decide
allegation of oppression levelled against director [Mahrani Yogeshwari Kumari v.
Lake Shore Place Hotel [1996] 21 CLA 107 (Raj.)].


All appointments of officers made at any of the meetings must be included in the
minutes of the meeting. In the case of meeting of the Board of directors or its
Committee, the minutes must also state the names of directors present at the
meeting and the names of directors, if any, dissenting from, or not concurring to a
resolution passed at the meeting. The chairman may exclude from the minutes any
matter which is defamatory, irrelevant or immaterial or which are detrimental to the
interests of the company. The discretion of the chairman with regard to the inclusion
or exclusion of any matter is absolute and unfettered.
Section 194 states that the minutes of meetings kept in accordance with the
provisions of Section 193, as described above, shall be evidence of the proceedings
recorded therein. They are, however, only prima facie evidence and as such are
refutable. [Kern. John Mottram Ltd. (1940) Ch. 657].
Minutes books kept and maintained in the normal course of business is evidence
of proceedings at the meeting. The minutes book created the presumption that the
meeting of Board of directors was duly called and held and all the proceedings at the
meeting took place duly in accordance with the requirements of the Act. [M.S.
Madhusoodanan v. Kerala Kaumudi P. Ltd. (2003) 117 Com Cases 19 2004 CLC 117
(SC)].
Section 195 provides to the same effect and states that where minutes of the
proceedings of any meeting have been kept in accordance with the provisions of
Section 193, they are, unless the contrary is proved, presumed to be correct, and
show presumptive evidence that the meeting was duly called and held, and all
proceedings thereat to have duly taken place, and in particular, all appointments of
directors or liquidators made at the meeting shall be deemed to be valid.
So far as the presumption under Section 195, read with Section 193, in regard to
minutes of extraordinary general meetings are concerned, the same is neither
applicable nor available to the requisitioned extraordinary general meeting under
Section 169. [Bhankerpur Simbhaoli Beverages P. Ltd. v. Sarabhjit Singh (1996) 86
Comp. Cas 842 (P&H)].
The minutes book must be kept at the registered office of the company. Every
member has a right to inspect, free of cost during business hours at the registered
office of the company, the minutes book containing the proceedings of the general
meetings of the company. Further, any member shall be entitled to be furnished
within 7 days after he has made a request to the company, with a copy of any
minutes on payment of such sum as may be prescribed for every hundred words or
fraction thereof.
If any inspection is refused or a copy requested for is not furnished within the
time specified, every officer in default shall be punishable with fine which may extend
up to Rs. 500 for each offence. The Company Law Board can also by order compel
an immediate inspection or furnishing of a copy forthwith. But the minutes books of
the Board meetings are not open for inspection by members.


LESSON ROUND-UP
Decision making powers of a company are vested in the members and the
directors and they exercise their respective powers through resolutions passed
by them at the duly convened Meetings.
Company Meetings may be classified as
MEETINGS




Shareholders Board Meeting of
Meetings Meetings Contribu-
tories in
winding up
Meeting of
Statutory Extra Debenture-
Meeting Ordinary holders
(Sec- General
tion 165) Meeting Meeting of
Creditors
Annual Class
General Meeting
Meeting
(Section 166)

Board Meetings Meetings of for for purpose
of Board of Board winding other than
Directors Committees up winding up

Statutory meetings are required to be convened only by a public company limited
by shares or limited by guarantee and having a share capital.
An annual general meeting is required to be held every year by every company
whether public or private, limited by shares or by guarantee, with or without share
capital or unlimited company.
All business to be transacted at an annual general meeting shall be deemed
special business with the exception of the ordinary business, relating to items
provided u/s 173 of Companies Act. At an extraordinary general meeting, every
business is special business.
All the general meetings of a company with the exception of the statutory meeting
and the annual general meetings are called extra ordinary general meetings.
Class meetings are those meetings which are held by holders of a particular
class of shares e.g. preference shares.
There are certain items/matters provided in the Companies Act which can be
discussed at the duly convened and held meeting of Board of Directors.
The agenda of Board meeting should contain notes on the items to be discussed
and should be circulated in advance so that directors come fully prepared to
contribute their best at the meeting.
Minute books of meeting of Board of Directors or of the general meeting are
primary documents and are evidence of the proceedings recorded therein.
Quorum at a board meeting must be disinterested quorum.


For a General Meeting to be valid, it must be duly convened, properly constituted
and the business must be validly transacted.
Notice of every meeting of Company shall be given to (i) every member, (ii) the
persons entitled to shares in consequence of the death or insolvency of a
member and (iii) the auditor or auditors for the time being of the Company.
Proxy appointed to attend and vote at a general meeting need not be a member
of the company.
Proxy can be revoked by the member by attending and voting himself before the
proxy has voted.
Section 183 of the Act regulates voting by members.
Chairman plays a very important role in a meeting as he is responsible for
successful conduct of a meeting.
Companys whose securities are listed on any stock exchange are also required
to comply with the listing agreement in addition to the provisions of the
Companies Act. Clause 49 of the listing agreement also deals with Board
procedures and its constitution etc.
A motion becomes a resolution only after the requisite majority of members have
adopted it.
Various methods which may be adopted for taking votes on a motion properly
placed before a meeting are by acclamation, by voice, by show of hands, by
division, by ballot and by poll.
There are three kinds of resolutions under the Act (a) Ordinary Resolution
(S. 189), (b) Special Resolution (S. 189) (c) Resolution requiring special notice
(S. 190)
In accordance with Section 192 of the Act, certain resolutions are required to be
filed with the Registrar for its recording within 30 days of its passing at the
meeting.
There are certain businesses, specified under Section 192A of the Act, which are
required to be passed through postal ballot.
Postponement is the act of the convening authority whereas the adjournment is
the act of meeting itself.
Every company is required to keep minutes of the proceedings of general
meetings and of the meetings of Board of Directors and its committees.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation).
1. What are the items that constitute Ordinary Business in an Annual General
Meeting of a company?
2. Who shall be chairman of a general meeting of a company? What are the
provisions of the Companies Act, 1956 regarding his election?
3. Every Annual General Meeting of a company shall be called on a day which
is not a public holiday. Can an adjourned Annual General Meeting of a
company be called on a public holiday?
4. A shareholder having given proxy, personally attends and votes at the


meeting. Comment, illustrating a case law.
5. A valid demand of a poll was received at a general meeting. Thereafter,
those who made it, withdraw it. Examine the same in the light of the
provisions of the Companies Act.
6. Does a member have a right to use his votes differently?
7. At a general meeting, two joint holders voted on a resolution. Will the votes
of both the joint holders be accepted?
8. Differentiate between a motion and a resolution.
9. What are the provision of the Companies Act, in regard to the holding of a
Board Meeting?
10. What is quorum for a Board Meeting?
11. Write short notes on:
(i) Proxy; (ii) Statutory Report; (iii) Special Business; (iv) Quorum;
(v) Material Facts.
12. Can any company pass some resolutions through postal ballot? If yes, what
are the Rules in connection to it.


Suggested Readings:
(1) Guide to Companies ActA. Ramaiya.
(2) Company Notices, Meetings and ResolutionR. Suryanarayan.
(3) Company Law and PracticeA.K. Majumdar & G.K. Kapoor.
(4) Guidance Note on Meetings of the Board of DirectorsICSI Publication
(5) Guidance Note on General MeetingsICSI Publication
(6) Guidance Note on Passing of Resolutions by Postal BallotICSI Publication
(7) Consultative Paper on Meetings of the Board of Directors Through Tele/
Video-ConferencingICSI Publication

















STUDY XIX
INVESTMENTS AND LOANS
LEARNING OBJECTIVES
This lesson explains provisions of the Companies Act, 1956 in relation to inter-
corporate loans and investments. It describes the conditions wherein such loans and
investments can be made or not made by the corporates. It also gives provisions for
register of loans made, guarantees given, securities provided and investments made
as also register of investments not held in companys own funds. The lesson further
lists the circumstances wherein companies are not required to keep the investments
in its own name.
At the end of the lesson, you should be able to understand:
Inter-corporate loans and investments.
Blanket permission from shareholders not admissible.
Circular of MCA.
Register of loans made, guarantees given, securities provided and investments
made.
Inspection of register.
Penalties and exemptions.
Investments to be held in companys own name and exemptions.
Register of investments not held in companys own name.
Penalty for non-compliance.

1. INTRODUCTION
The word 'Investments' in common parlance would include any property or right
in which money or capital is invested. However, for the purpose of this study, the term
'Investments' is used in a limited sense to mean the investing of money in shares,
stock, debentures, or other securities.
The power to invest the funds of the company is the prerogative of the Board of
Directors. This power is derived by the Board under Section 292 of the Act. However,
that the Board may not misuse its powers, the Companies Act, 1956 contains
provisions for restrictions on investments that a company can make and loans it can
provide. Moreover, giving corporate guarantee or security is also as good as giving a
loan, because the person to whom guarantee or security is given can decide to
enforce the guarantee or security in certain conditions and in such a situation, the
company will have to pay the amount. Thus apart from loan and investments,
restrictions are also placed on the guarantees which the company can give or
security it can provide for a loan.
Provisions in respect of giving of loans, making investments, giving guarantee or
providing securities have been considerably modified w.e.f. 31.10.98 by inserting
Section 372A and providing that earlier Sections 370 & 372 shall not apply in respect
of loans/investment made or guarantees/securities provided after 31.10.1998. As of
now, an overall limit of 60% of paid-up capital plus free reserves or 100% of free
761


reserves, whichever is more has been fixed.
2. INTER-CORPORATE LOANS AND INVESTMENTS
As per Section 372A :
1. No Company shall, directly or indirectly:
(a)make any loan to any other body corporate;
(b)give any guarantee, or provide security, in connection with a loan made by
any other person to, or to any other person by, any body corporate; and
(c)acquire, by way of subscription, purchase or otherwise the securities of any
other body corporate;
exceeding 60% of its paid-up share capital and free reserves or 100% of its
free reserves, whichever is more.
2. However, a company may make loan, give any guarantee or provide
security and/or make investment in aggregate exceeding the aforesaid limits
of 60% or 100% if the same is previously authorised by a special resolution
passed in a general meeting.
3. The Board of directors may give guarantee without being previously
authorised by a special resolution if:
(a)a resolution is passed in the meeting of the Board authorising to give
guarantee in accordance with the provisions of Section 372A;
(b)there exist exceptional circumstances which prevent the company from
obtaining previous authorisation by a special resolution passed in a
general meeting for giving a guarantee; and
(c)the resolution of the Board is confirmed within twelve months, in a general
meeting of the company or the annual general meeting held immediately
after passing of the Board resolution, whichever is earlier.
4. Notice of such resolution shall indicate:
(i)the specific limits;
(ii)the particulars of body corporate in which the investment is proposed to be
made or loan or security or guarantee to be given;
(iii)the purpose of the investment, loan or security or guarantee;
(iv)specific sources of funding; and
(v)any other detail which is material.
5. No loan or investment shall be made or guarantee or security given by the
company unless the resolution sanctioning it is passed at a meeting of the
Board with the consent of all directors present at the meeting.
6. The company has to obtain prior approval of the public financial institution
referred to in Section 4A, where any term loan is subsisting.
7. However, the prior approval of Public Financial Institution shall not be
required where the aggregate of loans and investments so far made, the
amounts for which guarantee or security so far provided to or in all other
bodies corporate, alongwith the investments, loans, security or guarantee
proposed to be made or given does not exceed the limit of 60% specified


above and if there is no default in repayment of loan installments or payment
of interest thereon as per the terms and conditions of such loan to the public
financial institution.
8. Loan given to any body corporate shall carry the rate of interest not lower
than the prevailing bank rate being standard rate made public under Section
49 of the Reserve Bank of India Act, 1934.
9. No company, which has defaulted in complying with the provisions of
Section 58A shall directly or indirectly:
(a)make any loan to any body corporate;
(b)give any guarantee, or provide security, in connection with a loan made by
any other person to, or to any other person by, any body corporate; and
(c)acquire, by way of subscription, purchase or otherwise the securities of any
other body corporate,
till such default is subsisting.
This prohibition will operate in respect of any default under Section 58A and
the Rules made thereunder and not only on the default of repayment of
deposit or payment of interest thereon.
10. The Central Government may prescribe guidelines for the purposes of this
Section.
Explanations: For the purpose of this Section:
(a)"Loan" includes debentures or any deposit of money made by one company
with another company, not being a banking company;
(b)"Free reserves" means those reserves which as per latest audited balance-
sheet of the company, are free for distribution as dividend and shall
include balance to the credit of the securities premium account but shall
not include share application money.
Section 372A compared with Section 295 It should be noted that the
provisions of Section 295 of the Companies Act will be applicable in case a loan is
given by a company to another private company in which a director of the first
company is a director or member of the private company. As a result, prior approval
of the Central Government shall have to be taken for such a loan. Also in cases
where one or more directors of the lending company exercise 25% or more of the
total voting power in any other body corporate, approval of the Central Government
would be necessary.
Applicability of Section 372A to Section 25 Company or a guarantee Company
not having share capital The provisions of Section 372A shall also apply to these
Companies. In such cases where there is no share capital, computation shall be
based upon the free reserves of the company if any.
3. NO BLANKET PERMISSION FROM SHAREHOLDERS
We have already mentioned that every proposal in excess of the limits of 60% or
100% as the case may be, shall be specifically approved at the general meeting. A
blanket permission of the shareholders empowering the Board to make loan or
investments or give guarantee or security upto certain aggregate limit will not be


adequate compliance with the provisions.
4. CIRCULAR
The Department of Company Affairs, now Ministry of Corporate Affairs issued a
circular regarding the need for companies inter-alia to obtain specific approval of
shareholders and avoid enblock approval (except in the case of guarantees).
The Department of Company Affairs, now Ministry of Corporate Affairs has vide its
Circular No. 8/99-F No. 5/17/99CL.V dated 4.6.1999 cautioned companies on the
misuse of the liberalised provisions of Section 372A. The said circular is quoted below:
1. The provisions in the Companies Act, 1956 relating to inter-corporate
investments, loans and guarantees have been recently liberalised by the
Government through Companies (Amendment) Act, 1999. However,
apprehensions have been expressed in some quarters with regard to
possible misuse of these provisions by companies. I shall be grateful if the
Chamber could draw the attention of their constituents to the following:
(i)the companies are expected to obtain the approval for making investments
into securities or grant of loan to other companies of amounts which are
limited with the company's available financial measures and the
resolution for investment much beyond the networth should not be
passed by the companies.
(ii)the companies should specifically indicate in the explanatory statement to the
resolution, the specific securities in which it is proposed to invest the
amount. Enblock approval should normally be avoided (except in the
case of guarantees where the resolution can indicate an amount on an
annual basis).
2. If the above parameters are not complied with, the Government will be
constrained to take suitable action against those who contravene these.
5. REGISTER OF LOANS MADE, GUARANTEES GIVEN, SECURITIES
PROVIDED AND INVESTMENTS MADE
Sub-section (5) of Section 372A provides that:
(a) Every company shall keep a register showing the following particulars, in
respect of every investment or loan made, guarantee given or security
provided by it, in relation to any body corporate under Sub-section (1) namely:
(i)the name of the body corporate;
(ii)the amount, terms and purpose of the investment or loan or security or
guarantee;
(iii)the date on which the investment or loan has been made; and
(iv)the date on which the guarantee has been given or security has been
provided in connection with a loan.
(b) The particulars of investment, loan, guarantee or security referred to above
shall be entered chronologically in the register aforesaid within seven days
of the making of such investment or loan, or the giving of such guarantee or
the provision of such security.



Inspection of Register
The register referred to in Sub-section (5) shall be kept at the registered office of
the company concerned and:
(a) shall be open to inspection at such office; and
(b) extracts may be taken therefrom and copies thereof may be required;
by any member of the company to the same extent, in the same manner, and on
payment of the same fees as in the case of the register of members of the company;
and the provisions of Section 163 shall apply accordingly [Sub-section (6) of Section
372A].
Penalties
(i) If default is made in complying with the provisions of Sub-section (5) relating
to maintenance of Register of loans/investments made, guarantees given
and securities provided, the company and every officer of the company who
is in default shall be punishable with fine which may extend to five thousand
rupees and also with a further fine which may extend to five hundred rupees
for every day after the first day during which the default continues.
(ii) If default is made in complying with the provisions of Section 372A except
Sub-section (5), the company and every officer of the company who is in
default shall be punishable with imprisonment which may extend to two
years or with fine which may extend to fifty thousand rupees:
Provided that where any such loan or any loan in connection with which any such
guarantee or security has been given, or provided by the company, has been repaid
in full, no punishment by way of imprisonment shall be imposed under this sub-
section, and where such loan has been repaid in part, the maximum punishment
which may be imposed under the sub-section by way of imprisonment shall be
appropriately reduced:
Provided further that all persons who are knowingly parties to any such
contravention shall be liable, jointly and severally, to the company for the repayment
of the loan or for making good the same which the company may have been called
upon to pay by virtue of the guarantee given or the securities provided by such
company.
Exemptions
Nothing contained in Section 372A shall apply:
(a) to any loan made, any guarantee given or any security provided or any
investment made by
(i)a banking company, or an insurance company, or a housing finance company
in the ordinary course of its business, or a company established with the
object of financing industrial enterprises, or of providing infrastructural
facilities;
(ii)a company whose principal business is the acquisition of shares, stock,
debentures or other securities;
(iii)a private company, unless it is a subsidiary of a public company;
(b) to investment made in shares allotted in pursuance of clause (a) of Sub-


section (1) of Section 81.
(c) to any loan made by a holding company to its wholly-owned subsidiary;
(d) to any guarantee given or any security provided by a holding company in
respect of loan made to its wholly-owned subsidiary; or
(e) to acquisition by a holding company, by way of subscription, purchases or
otherwise, the securities of its wholly-owned subsidiary.
6. INVESTMENTS TO BE HELD IN COMPANY'S OWN NAME
According to Sub-section (1) of Section 49, investments made by a company
(other than an investment company) on its own behalf shall be made and held by it in
its own name.
The requirement that the investment made by the company must be held in its
own name is confined to only those investments which are made by it on its own
behalf and not on behalf of someone else. In a case where the company is a trustee,
the investment is supposed to be made on behalf of the beneficiaries of the trust and
not on its own behalf. Therefore, the investments by the company as a trustee and
held in the name of the beneficiaries is allowed.
Sub-section (2) of Section 49 provides that where a company has right to
nominate a director or directors on the Board of another company, it would be open
to the appointing or nominating company to hold the shares upto the amount of
qualification shares (i) in its own name, (ii) jointly in its own name and the name of
appointee or nominee director, or (iii) exclusively in the name of the appointee or
nominee. As per Section 49(3), a company may hold any share or shares in its
subsidiary through nominee or nominees of the company if it is so required to ensure
that the number of members of the subsidiary does not fall below the minimum
number prescribed under the Act for public and private companies.
Where the shares of a company were registered in the joint names of the
company and one of its directors, it was held that the director was a nominee
of the company for that purpose and could only act jointly as he had no rights
of his own. [Exchange Travel (Holdings) Ltd. Re, (1991) BCLC 728 (Ch D)].
If company holds shares in dematerialised form, the name of depository is
entered in the register of members as member of the company and the name of the
investing company as the beneficial owner of the said shares.
Section 49(6) provides that the certificate or letter of allotment relating to the
shares or securities in which investments have been made by a company shall,
except in two cases covered by Sub-sections (4) and (5) be in the custody of such
company or with the State Bank of India or a Scheduled Bank, being the bankers of
the company.
Exemptions
1. Sub-section (4) of Section 49 exempts a company from the requirement of
holding shares or securities on its own behalf and in its own name if its
principal business consists of buying and selling of shares or securities.


2. In terms of the provisions of Section 49(5), Section 49(1) does not prevent a
company:
(a)from depositing with the bank, being the bankers of the company, any shares
or securities for collection of any dividend or interest payable thereon; or
(b)from depositing with or transferring to, or holding in the name of, the State
Bank of India or a scheduled bank, being the bankers of the company,
shares or securities, in order to facilitate the transfer thereof. However, if
within a period of 6 months from the date from which the shares or
securities are transferred by the company to, or are first held by the
company in the name of, the State Bank of India or a scheduled bank as
aforesaid, no transfer of such shares or securities takes place, the
company shall, as soon as practicable, after the expiry of that period,
have the shares or securities retransferred to it from the State Bank of
India or the scheduled bank or, as the case may be, again hold the
shares or securities in its own name; or
(c)from depositing with, or transferring to, any person any shares or securities,
by way of security for the re-payment of any loan advanced to the
company or the performance of any obligation undertaken by it.
(d)from holding investments in the name of a depository when such investments
are in the form of securities held by the company as a beneficial owner.
Thus, it is not necessary for the company to hold the shares or stocks or
debentures in its own name if they are deposited with the bank as aforesaid. A
resolution of the Board of directors in this behalf is sufficient. The bank is entitled
to have the shares or debentures registered in its own name with the specific
purpose of collecting dividend or interest from the company whose shares or
debentures are deposited with the bank. The company holding the investment in
the name of the bank is only required to enter into a separate agreement wit h the
bank that the latter will collect dividend and interest and credit the company with
the amounts so collected. It may be noted that the deposit of shares, stocks and
debentures with the bank need not be by way of a pledge but may be made for
the specific object of enabling the banker to act as agent of the company to
collect dividend and interest.
7. SPECIAL COURT (TRIAL OF OFFENCES RELATING TO TRANSACTIONS IN
SECURITIES) ACT, 1992
Though not under the Companies Act, but under the aforesaid Act, in Harshad
Shanti Lal Mehta v. Custodian & Ors. (1998) 231 ITR 71 (SC); it has been held that
attached properties (securities) do not vest in the Custodian. In winding up
proceeding, the properties vest in the liquidator.
8. REGISTER OF INVESTMENTS NOT HELD IN COMPANY'S OWN NAME
When any shares or securities in which investments have been made by a
company are not held by it in its own name pursuant to permissible conditions in
Section 49, the company shall forthwith enter in a register maintained by it for the
purpose, particulars specified below :
(a) the nature, value, and such other particulars as may be necessary fully to


indentify the shares or securities in question; and
(b) the bank or person in whose name or custody the shares or securities are
held.
Such other particulars as aforesaid may include particulars relating to date of
investment; kind and number of securities in which investment is made; distinctive
number of securities; name of the person in whose name the investment is made;
where the company is a part of a group, the date on which it came within the group
and names of all companies within the group; the date of disposal; and price and
number of securities disposed of.
9. PENALTY
If default is made in complying with any of the requirements of Sub-sections (1)
to (8) of Section 49, the company and every officer of the company who is in default,
shall be punishable with fine which may extend to 50,000 rupees.

LESSON ROUND-UP
Investments has been used in a limited sense in the lesson to mean the
investing of money in shares, stock, debentures or other securities.
The power to invest the funds of the company is the prerogative of the Board of
Directors. However, that the Board may not misuse its powers, the Companies
Act, 1956 contains provisions for restrictions on investments that a company can
make and loans it can provide. Restrictions are also placed on the guarantees
which the company can give or security it can provide for a loan.
The provisions for restrictions on investments and loans by companies would
also apply to Section 25 companies and guarantee companies not having a
share capital.
Approvals for making investments and loans would have to be taken in
accordance with the specific provisions of the Companies Act. A blanket approval
of the shareholders for the purpose would not suffice.
The Companies Act provides for the particulars to be provided in the register of
loans made, guarantees given, securities provided and investments made and
the manner in which it is to be kept.
Provisions have also been given in relation to inspection of such register and
penalties imposable in case of defaults in maintaining the required registers.
However, there are certain exemptions wherein these provisions would not be
applicable.
As per the Act, investments made by a company (other than an investment
company) on its own behalf shall be made and held by it in its own name. This
requirement is confined to only those investments which are made by it on its
own behalf and not on behalf of someone else. However, in certain
circumstances, the Act exempts the companies from complying with the above
provisions.
When any shares or securities in which investments have been made by a
company are not held by it in its own name pursuant to permissible conditions
given in the Act, the company shall forthwith enter in a register maintained by it
for the purpose, particulars as specified in the Act.
In case of default, the company and every officer of the company who is in


default shall be punishable with fine.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answer to these questions are not to be
submitted for evaluation)
1. Discuss the law relating to inter-corporate loans and investments.
2. Which companies are exempt from the provisions with regard to inter-
company investments/loans?
3. What particulars are required to be entered in the Register of Loans and
Investments?
4. Your company, which is a public limited company wishes to make
investments in shares of a company. The total investment exceeds the
statutory limit stipulated by the Act. What are the formalities to be complied
with in this regard?
5. ABC Ltd. is a listed company having a shareholder fund of Rs. 60 crore out
of which Rs. 24 crore is general reserves. It desires to make a loan of Rs. 10
crore to XYZ Ltd. ABC Ltd. holds 60% of the equity shares in XYZ Ltd. ABC
Ltd. has already made investment in and given loans to other companies
aggregating to Rs. 30 crore. ABC Ltd. has not committed any default in
respect of institutional loans or in repayment of fixed deposits. You are the
Company Secretary of ABC Ltd. Advise your Managing Director of the steps
to be taken to implement the decision. Would your answer be different if
XYZ Ltd. is ABC Ltd.'s wholly-owned subsidiary.

Suggested Readings :
1. Guide to Companies Act A. Ramaiya.
2. Company Law & Practice A.K. Majumdar and G.K. Kapoor.



















STUDY XX
DEPOSITS
LEARNING OBJECTIVES
Companies prefer to raise finance by accepting deposits from the public instead of
taking loans from financial institutions. It is important to learn various provisions
governing deposits under the Companies Act.
This chapter covers the following topics:
Invitation and Acceptance of deposits
Application of provisions of Section 58A to Guarantee Companies and Section 25
Companies.
Non Banking non financial companies
Nomination by Depositors
Deposits from NRIs
Companies (Acceptance of Deposits) Rules, 1975
Constitutional validity of Section 58A of the Act and Rule 3A of Deposit Rules.
Form and particulars of Advertisement
Renewal of deposits
Repayment of Deposits
Penalties
Remedy if the company fails to repay on due date.
Power to grant extension of time and exemption.
1. INVITATION AND ACCEPTANCE OF DEPOSITS
Companies had been accepting deposits from the public at high rates of interest
and varying periods of time to augment their needs for corporate finance after
traditional sources of financing like share capital, debentures and institutional loans
reached the saturating point. But many such companies failed to refund the deposits
so collected, thereby causing untold hardships to the unwary depositors. A need was,
therefore, felt to regulate and control the invitation and acceptance of deposits with a
view to protect the interest of depositors. The first step in this direction was taken to
amend the Reserve Bank of India Act, 1934 by the Banking Laws (Miscellaneous
Provisions) Act, 1963 to confer powers on Reserve Bank of India to regulate the
quantum of and the manner in which the non-banking companies could accept
deposits w.e.f. 1.2.64.
Companies preferred to raise finance by accepting deposits from the public
rather than taking loans from financial institutions as :
(i) the interest payable on deposits is lower than the interest on other loans
from banks etc.
(ii) it is a simple mode of financing.
(iii) the company has not to provide any security as the deposits from public are
unsecured debts.
770


In exercise of the powers conferred on it, the Reserve Bank of India issued
directions regulating the acceptance of deposits by all non-banking companies. For
this purpose the non-banking companies were classified into following 3 categories,
namely:
(i) Non-banking non-financial companies.
(ii) Non-banking financial companies.
(iii) Miscellaneous non-banking companies.
The invitation and acceptance of deposits by the last two categories of companies
is still regulated by the Reserve Bank of India under its directions. The invitation and
acceptance of deposits by non-banking non-financial companies is regulated by the
Companies Act, 1956 w.e.f. 1.2.75 and the Rules, made thereunder. Two new Sections
viz. Section 58A and 58B were inserted by the Companies (Amendment) Act, 1974
in the Companies Act, 1956. Section 58A provides that the Central Government
may, in consultation with the Reserve Bank of India, prescribe the limits up to which,
the manner in which and the conditions subject to which, the deposits may be invited
and/or accepted by a company either from the public or from its members. In exercise of
its powers the Central Government has framed the Companies (Acceptance of Deposits)
Rules, 1975. Section 58A further states that no company shall invite or allow any other
person to invite or cause to be invited on its behalf any deposits unless deposits are
invited in accordance with the Rules framed thereunder and unless the company has not
defaulted in repaying deposit or interest thereon. The company is also required to issue
an advertisement in the prescribed form including therein a statement showing its
financial position for inviting deposits.
Section 291 of the Companies Act, 1956 entitles the Board of directors of a
company to exercise all such powers as the company is authorised to exercise but
the Board shall not exercise those powers which the company is required, by the Act
or by its memorandum or by its articles, to exercise in general meeting. According to
Section 292(1)(c) of the Act, the Board of directors of a company shall exercise its
power to borrow moneys otherwise than on debentures only by means of resolutions
passed at meetings of the Board.
Section 293(1)(d) of the Act lays down that the Board of directors of a company
shall not borrow, except with the consent of such company in general meeting,
moneys which together with the moneys already borrowed by the company (except
temporary loans obtained from the companys bankers in the ordinary course of its
business) exceed the aggregate of the paid-up capital of the company and its free
reserves.
2. APPLICATION OF PROVISIONS OF SECTION 58A TO GUARANTEE
COMPANIES AND SECTION 25 COMPANIES
The provisions of Sections 58A and 58B of the Companies Act and Companies
(Acceptance of Deposits) Rules are also applicable to companies limited by
guarantee and associations not for profit, viz., Section 25 Companies, having share
capital and formed for promoting commerce, art, science, religion, charity, etc.
However, guarantee companies which have no share capital have to comply with the
requirements of provisions of these sections and the Rules to the extent applicable.


3. NON-BANKING NON-FINANCIAL COMPANIES
Section 58A of the Act provides that the Central Government may, in consultation
with the Reserve Bank of India, prescribe the limits up to which, the manner in which
and the conditions subject to which, a company may invite or accept deposits from
the public or from its members. No company can invite or allow any other person to
invite or cause to be invited on its behalf any deposit unless :
(a) such deposit is invited or is caused to be invited in accordance with the rules
made under Sub-section (1) of Section 58A;
(b) an advertisement including therein a statement showing the financial
position of the company has been issued by the company in such form and
in such manner as may be prescribed; and
(c) the company is not in default in the repayment of any deposit or part thereof
and any interest thereupon in accordance with the terms and conditions of
such deposit.
It has been clarified by the Department of Company Affairs, that the expression
public includes a section of the public also. Therefore, the employees and ex-
employees of the companies are to be regarded as those falling in the category of
public and the deposits from them would as much attract the provisions of Section
58A of the Companies Act and the Rules framed thereunder as deposits accepted by
the companies from public. Therefore, the deposits accepted by the companies from
employees and ex-employees of the companies are not outside the scope of the
provisions of Section 58A of the Companies Act and the Rules framed thereunder
[Clarification No. 8/48/84-CL. X. dated 18.12.1984]. For the purpose of this section
deposit means any deposit of money with, and includes any amount borrowed by a
company but shall not include such categories or amount as may be prescribed in
consultation with the Reserve Bank of India.
Exemptions
Sub-section (7) of Section 58A provides that the provisions of Section 58A of the
Act shall not apply to :
(a) banking company; or
(b) such other companies as the Central Government may, after consulting the
Reserve Bank of India, specify in this behalf; or
(c) such classes of financial companies as the Central Government may, after
consultation with the Reserve Bank of India specify in this behalf except the
provisions relating to advertisement.
The Central Government has specified all classes of financial companies as
companies to which the provisions of Section 58A of the Act, except the provisions
relating to advertisement, contained in Clause (b) of Sub-section (2) of that Section
shall not apply [vide Notification No. 523 (E) dated 18.9.1975]. Financial Company
for this purpose means a non-banking company which is a financial institution within
the meaning of Clause (c) of Section 45I of the Reserve Bank of India Act, 1934. As a
result, a non-banking financial company must issue an advertisement for inviting
deposits in accordance with the provisions of Non-banking Financial Companies and


Miscellaneous Non-banking Companies (Advertisement) Rules, 1977, although it is
exempted from the application of other provisions of this section. In regard to other
matters such companies are governed by the directions of Reserve Bank of India.
Exemption for Small Scale Units
In pursuance of the powers conferred by sub-clause (ii) of clause (a) of
Section 58A(7) of the Act, the Central Government has, after consultation with the
Reserve Bank of India, granted exemption from the applicability of the provisions of
Section 58A to certain small scale units, vide Notifications No. GSR 50 (E) dated
1.2.77; GSR No. 655(E) dated 12.9.84 and GSR No. 48 (E) dated 21.1.86 and No.
73(E) dated 2.2.1996.
According to a Notification issued by Department of Company Affairs, the
exemption from the provisions of Section 58A of the Act is available to Small Scale
Industrial Units only if they fulfill all the following conditions, namely:
(a) The paid-up capital of the company does not exceed Rs. 25 lakhs;
(b) The company accepts deposits from not more than 100 persons;
(c) There is no invitation to public for deposits; and
(d) The amount of deposits accepted by the company does not exceed Rs. 20
lakhs or the amount of its paid up capital, whichever is less.
For the purpose of this notification, a Small Scale Industrial Unit means any
industrial undertaking registered with the Directorate of Industries or Small Scale
Industries, as the case may be, of the State Government and in respect of which the
investment in plant and machinery is not in excess of 60 lakhs of rupees in value.
The exemption of small scale units does not necessarily cover any ancilliary
industrial unit unless such unit is itself eligible to be treated as a small-scale one.
(Circular letter No. 4/13/77 dated 5.5.1977)
A claim for exemption which was rejected without giving opportunity was held to
be illegal in Career Savings and Investments (India) Ltd. v. UOI 2000 CLC 1665;
2000 39 CLA 92 (Raj.).
Deposit has the same meaning as in clause (b) of Rule 2 of the Companies
(Acceptance of Deposits) Rules, 1975.
4. NOMINATION BY DEPOSITORS
The Companies (Amendment) Act, 1999 had inserted a new Sub-section (11) in
Section 58A which allows depositors to make nomination of deposits. Accordingly, a
depositor may, at any time make a nomination and the provisions of Section 109A
and 109B shall, as far as may be, apply to the nomination made under this sub-
section. Nomination in the case of a deposit-holder in a non-banking non-financial
company shall be made in the prescribed Form No. 2B under Rule 4CCC of the
Companies (Central Governments) General Rules and Forms, 1956. In case of a
Non-Banking Finance Company, a deposit holder may nominate a person in
Form DA-1 under Rule 2(1) of the Banking Companies (Nomination) Rules 1985 in
terms of Section 45ZA of the Banking Regulation Act, 1949.


The nominee shall on the death of depositor become entitled to all rights in the
deposits to the exclusion of all other persons irrespective of anything contained in any
other law.
Amendment in Nomination Forms for Investors under Section 109A
Press Release, dt 9.11.2000.The Government (Department of Company
Affairs) has issued a Notification amending Form 2B of nomination form in the
Companies (Central Governments) General Rules and Forms, 1956. The amending
Notification has been issued under Clauses (a) and (b) of Sub-section (1) of Section
642 read with Sub-section (II) of Section 58A and Section 109A of the Companies
Act, 1956. Under the amendment, the nomination can be made by individuals only
applying or holding shares or debentures on their own behalf singly or jointly. Non-
individuals including society, trust, body corporate, partnership firm, Karta of Hindu
Undivided Family, holder of power of attorney cannot nominate. If the shares are held
jointly, all joint holders will sign the nomination form. In the amended form, space has
been provided as a specimen, if there are more joint holders, more sheets can be
added for signatures of holders of shares or debentures and witness.
A minor can be nominated by a holder of shares or debentures or deposits and in
that event the name and address of the Guardian shall be given by the holder. The
nominee shall not be a trust, society, body corporate, partnership firm, Karta of Hindu
Undivided Family or a power of attorney holder. A non-resident Indian can be a
nominee on repatriable basis. Nomination will stand rescinded upon transfer to share
or debenture or repayment or renewal of deposits made. Transfer of share or
debenture in favour of a nominee and repayment of amount of deposits to nominee
shall be valid discharge by a company against the legal heir. The intimation regarding
Nomination or Nomination Form shall be filled in duplicate with Company or Registrar
and Share Transfer Agents of the Company who will return one copy thereof to the
share or debentures or deposits holder.
Deposit in the name of the Minor
If the deposit is in the name of the minor, the name of the guardian should be
stated in the application and the guardian should sign the form for and on behalf of
the minor. The date of birth of the minor should also be mentioned in the application
form.
Deposit in joint name
In case of deposit in joint names
(i) All correspondence should be made in the name of the person whose name
appears first in the order of the joint names.
(ii) Any one of the joint holders may discharge the Fixed Deposit Receipt.
(iii) Repayment is normally made to the first named depositor only. In the case
of the death of the first named depositor, the repayment of the deposit
amount and payment of interest may be made to the person first in order of
the survivors.


Deposit Receipt Not Transferable
Deposit Receipt and/or the deposit comprised therein and/or any benefit arising
out of such deposit is not transferable by assignment, endorsement, transfer or
otherwise.
Addition to Names Not Permissible
Addition of one or more name(s), as joint holders, on a Fixed Deposit Receipt
during the period of the Fixed Deposit is not permissible.
5. COMPANYS RIGHT TO REJECT APPLICATION
The company reserves the right to reject an application for deposit without
assigning any reasons.
6. DEPOSITS FROM NRIs
(1) On Repatriation Basis: As per Schedule 6 of the Foreign Exchange
Management (Deposit) Regulations 2000 a company incorporated in India
(including a Non-banking Finance Company registered with the Reserve
Bank) may accept deposits from NRIs, on repatriation basis subject to the
following conditions:
(i)The deposits are received under a public deposit scheme.
(ii)If the deposit accepting company is a non-banking finance company, it should
be registered with the Reserve Bank and should have obtained the
required credit rating as stipulated under the guidelines issued by
Reserve Bank for such companies.
(iii)The amount representing the deposit is received by inward remittance from
outside India through normal banking channels or by debit to the Non-
Resident (External) Account or Foreign Currency (Non-Resident) (Bank)
Account maintained with an authorised dealer/authorised bank of India.
(iv)If the deposit accepting company is a non-banking finance company the rate
of interest payable on deposits shall be in conformity with the
guidelines/directions issued by Reserve Bank for such companies. In
other cases the rate of interest payable on deposits shall not exceed the
ceiling rate prescribed from time to time under the Companies
(Acceptance of Deposit) Rules, 1975.
(v)The maturity period of deposits shall not exceed 3 years.
(vi)The company accepting the deposits shall comply with the provisions of any
other law, rules, regulations, orders issued by the Government of India
or any other competent authority, as are applicable to it in regard to
acceptance of deposits.
(vii)The amount of aggregate deposits accepted by the company shall not exceed
35% of its net owned funds.
(viii)The payment of interest net of taxes may be made by the company to the


depositor by remittance through an authorised dealer or by credit to the
depositors NRE/FCNR(B)/NRNR/NRO/NRSR account as desired by
him.
(ix)The amount of deposits so collected shall not be utilised by the company for
re-lending (not applicable to a Non-Banking Finance Company) or for
undertaking agriculture/plantation activities or real estate business or for
investing in any other concern, firm or a company engaged in or
proposing to engage in agricultural/plantation activities or real estate
business.
(x)The repayment of the deposit may be made by the company to the depositor
by remittance from India through an authorised dealer or by credit to the
depositors NRE/FCNR(B) account maintained with an authorised dealer
in India, provided the depositor continues to be a non-resident at the
time of repayment. While applying to the authorised dealer for
remittance of maturity proceeds of deposit or credit thereof to
NRE/FCNR(B) account, the company should certify that the amount of
deposit was received either by inward remittance from outside India
through normal banking channels or by debit to the depositors
NRE/FCNR(B) account, as the case may be.
(xi)The amount representing repayment of deposit may also be credited to the
depositors NRNR/NRO or NRSR account, at the depositors option.
(2) On Non-repatriation Basis : As per the Schedule 7 of the Foreign Exchange
Management (Deposit) Regulations, 2000 a proprietorship concern or a firm
in India and a company incorporated in India (including a non-banking
finance company registered with Reserve Bank) may accept deposits on
non-repatriation basis from NRIs, subject to the following conditions :
(i)In the case of a company, the deposits may be accepted either under private
arrangement, or under a public deposit scheme.
(ii)If the deposit accepting company is a non-banking finance company, it should
be registered with the Reserve Bank and should have obtained the
required credit rating as stipulated under the guidelines issued by
Reserve Bank for such companies.
(iii)The maturity period of deposit shall not exceed 3 years.
(iv)If the deposit accepting company is a non-banking finance company the rate
of interest payable on deposits shall be in conformity with the
guidelines/directions issued by Reserve Bank for such companies. In
other cases the rate of interest payable on deposits shall not exceed the
ceiling rate prescribed from time to time under the Companies
(Acceptance of Deposit) Rules, 1975.
(v)The amount of deposit shall be received by debit to NRO account only,
provided that the amount of the deposit shall not represent inward
remittances or transfer of funds from NRE/FCNR(B) accounts into the
NRO account.
(vi)The proprietorship concern, firm or the company accepting the deposit should


comply with the provisions of any other law, rules, regulations or orders
made by Government or any other competent authority, as are
applicable to it in regard to acceptance of deposits.
(vii)The proprietorship concern, firm or the company accepting the deposit shall
not utilise the amount of deposits for relending (not applicable to a Non-
Banking Finance Company) or for undertaking agricultural/ plantation
activities or real estate business or for investing in any other concern or
firm or company engaged in or proposing to engage in
agricultural/plantation activities or real estate business.
(viii)The amount of deposits accepted shall not be allowed to be repatriated
outside India.
7. PROVISIONS RELATING TO PROSPECTUS APPLY TO ISSUE OF
ADVERTISEMENT
Section 58B states that the provisions of the Companies Act relating to
prospectus shall apply to advertisements to be issued under Section 58A. This
obviously means that as in the case of prospectus, an advertisement must also state
all the details required by the Act and the Rules. Also, as in the case of prospectus,
all statements made in the advertisement must be correct and truthful. Provisions of
Sections 62 and 63 as applicable in the case of a mis-statement in prospectus will
also apply to mis-statement in advertisement. Any person who makes a deposit on
the faith of a mis-statement in an advertisement will have a right to claim
compensation under Section 62 of the Act from directors and other person who
authorise the issue of advertisement. Criminal liability for untrue statements
contained in an advertisement inviting deposits will also be attracted by the person
issuing such advertisement as is attracted by persons who authorise the issue of
prospectus containing untrue statements under Section 63 of the Act.
Every person who authorises the issue of advertisement containing any untrue
statement is punishable with imprisonment up to two years or with fine up to
Rs. 50,000 or with both unless he proves either
(i) that the statement was inadvertent; or
(ii) that he had reasonable ground to believe and did upto the time of issue of
advertisement believe, that the statement was true.
8. COMPANIES (ACCEPTANCE OF DEPOSITS) RULES, 1975
In exercise of the powers conferred by Sub-section (1) of Section 58A of the
Companies Act, 1956 the Central Government has, in consultation with the Reserve
Bank of India, framed Companies (Acceptance of Deposits) Rules, 1975. These
Rules came into force with effect from 3rd February, 1975 and have been amended
several times. These Rules supplement the provisions of Section 58A and provide for
the limits up to which, the manner in which and the conditions subject to which the
deposits can be invited and/or accepted by non-banking non-financial companies.
These Rules do not apply to banking companies and financial companies.


Definition of Deposit
According to explanation to Section 58A of the Act read with Rule 2(b) of the
Companies (Acceptance of Deposits) Rules, 1975, deposit means any deposit of
money with, and includes any amount borrowed by a company but does not include:
(i) Amounts received from the Central or a State Government or any other
source and there payment of which is guaranteed by the Central or a State
Government, amounts received from a local authority a foreign Government,
or any other foreign citizen, authority or person [Rule 2(b)(i)].
(ii) Loans from any banking company or from State Bank of India or its
subsidiaries or from any other banking institution notified under Section 51 of
the Banking Regulation Act, 1949 or a corresponding new bank as defined
in clause (d) of Section 2 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970 or from a co-operative bank as defined
in clause (b)(ii) of Section 2 of the Reserve Bank of India Act, 1934 [Rule
2(b)(ii)].
(iii) Loans received from the following financial institutions :
(a)IFCI Limited;
(b)State Financial Corporations;
(c)Shipping Development Fund Committee;
(d)Unit Trust of India;
(e)Industrial Development Bank of India;
(f)Electricity Boards;
(g)Life Insurance Corporation of India;
(h)Rehabilitation Industries Corporation of India Ltd;
(i)State Trading Corporation of India Ltd;
(j)Minerals and Metals Trading Corporation of India Ltd;
(k)Rural Electrification Corporation Ltd;
(l)Agriculture Finance Corporation Ltd;
(m)Industrial Reconstruction Corporation of India;
(n)ICICI Ltd.;
(o)National Industrial Development Corporation of India Ltd.;
(p)Tamil Nadu Industrial Investment Corporation Ltd.;
(q)State Industrial and Investment Corporation of Maharashtra Ltd.;
(r)General Insurance Corporation of India, and its subsidiaries namely, the
National Insurance Company Limited, the New India Assurance
Company Limited, the Oriental Fire and General Insurance Company
Limited and the United Fire and General Insurance Company Limited.
(s)Gujrat Industrial Corporation Ltd.;
(t)Any financial company wholly owned by the Central or State Government;
(u)Oil Industry Development Board;


(v)Housing Development Finance Corporation Limited;
(w)any other financial company or public financial institution which may be
notified by the Central Government in this behalf in consultation with the
Reserve Bank of India [Rule 2(b)(iii)].
(iv) Amounts received by a company from any other company [Rule 2(b)(iv)].
(v) Amounts received by way of security deposits from the employees
[Rule 2(b)(v)];
It is reiterated that the employees and ex-employees are to be regarded as
those falling in the category of public and the deposit accepted from them
would as much attract the provisions of Section 58A and the rules made
thereunder as deposits from other categories of Public.
(Circular : No. 8/48/84-CL-X, dated 18-12-1984)
(vi) Amounts received as security or as an advance from any purchasing or
selling agent or other agents in the course of or for the purposes of the
business of the company or any advance received from customers for
supply of goods or properties or for rendering of any service [Rule 2(b)(vi)].
(vii) Amounts received by way of subscriptions to any shares, stock, bonds or
debentures, such bonds or debentures as are covered by sub-clause (x)
pending allotment of the shares, stock, bonds or debentures or calls
received in advance on shares in accordance with the articles of association
so long as such amount is not repayable to the members under the articles
of association of the company [Rule 2(b)(vii)].
(viii) Amounts received in trust or any amount in transit [Rule 2(b)(viii)].
(ix) Any amount received from a person who, at the time of the receipt of the
amount, was a director of the company or any amount received from a
relative of a director or its member by a private company:
Provided that the director, relative of a director or member, as the case may
be, from whom money is received, furnishes to the company at the time of
giving the money, a declaration in writing to the effect that the amount is not
being given out of funds acquired by him by borrowing or accepting from
others. [Notification G.S.R. 189 (E) : (12-Mar- 04)]
(x) Amounts raised by issue of bonds or issue of debentures secured by the
mortgage of any immovable property of the company or with an option to
convert them into shares in the company provided that in case of bonds or
debentures secured by mortgage of any immovable property, the amount of
such bonds or debentures shall not exceed the market value of such
immovable property [Rule 2(b)(x)].
(xi) Any amount brought in by the promoters by way of un-secured loans in
pursuance of stipulations of financial institutions subject to the fulfillment of
the following conditions, namely :
(a)the loans are brought in pursuance of the stipulation imposed by the financial
institutions in fulfilment of the obligation of the promoters to contribute
such finance;


(b)the loans are provided by the promoters themselves and/or by their relations,
and not from their friends and business associates; and
(c)the exemption under this sub-clause shall be available only till the loans of
financial institutions are repaid and not thereafter.
Explanation: For the purpose of this sub-clause the term financial institution
shall mean:
(a)a public financial institution specified in or under Section 4A of the Companies
Act, 1956;
(b)a State Financial, Industrial or Investment Corporation;
(c)the State Bank of India or subsidiary bank as defined in the State Bank of
India (Subsidiary Bank) Act, 1959, (38 of 1959);
(d)a nationalised bank, that is to say, a corresponding new bank as defined in
Section 2 of:
(i) the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1970 (5 of 1970); or
(ii) the Banking Companies (Acquisition and Transfer of Undertakings)
Act, 1980 (40 of 1980).
(e)the General Insurance Corporation of India established in pursuance of the
provisions of Section 9 of the General Insurance Business
(Nationalisation) Act, 1972 (57 of 1972);
(f)the Industrial Reconstruction Corporation of India; or
(g)any other Institution which the Central Government, may, by notification,
specify in this behalf.
(xii) any amount received as loan from National Dairy Development Board by the
companies owned by it directly or through its subsidiary companies.
[Notification GSR 300(E) dated 3.4.2003]
Any amount received by a private company from its shareholders is not regarded
as deposit in terms of sub-clause (ix) of clause 2(b) of the Deposit Rules. The
expression shareholder has also been used elsewhere in the Deposit Rules. In
Rameshwarlal Sanwarnal v. CIT, (1980) 2SCC 377 : AIR 1980 SC 372, the Supreme
Court has held that the word shareholder can mean only a registered shareholder,
i.e., it is only the person whose name is entered in the register of shareholders of the
company as the holder of the shares who can be said to be a shareholder of the
company and not the person beneficially entitled to the shares.
If the depositor ceases to be a shareholder or director, the deposits made by him
cease to qualify for exemption from the date of such cessation.
It has been clarified by the Department of Company Affairs that the amount
received by a company in the joint names of a director and a non-director or in the
case of a private company in the joint name of a shareholder and non-shareholder
will not be exempted. It has also been clarified that if all the partners of a lending firm
are not directors on the Board of directors of the borrowing company, the deposits


accepted from such firm would not be exempted and would be treated as deposits
(Circular No. 1/1/80 - CLV/7/33/78-CLX, dated 3.5.80).
Blanket exemption to exclude the promoters contribution (i.e. unsecured loans
received by a company in fulfillment of the obligation of the promoters as per
stipulation of the financial institutions) from the definition of deposit cannot be
accorded. However, the Government can consider giving exemption in individual
cases on merit in exercise of powers vested in it under Section 58A(8). (Letter No.
4/6/81-CL-X, dated 20.6.1981).
According to the clarification issued by Department of Company Affairs, vide its
letter No. 4/12/81-CL.X dated 10.3.91, unsecured debentures with an option to
convert a part of them into shares of company concerned do not fall into category of
exempted deposits. Further such unsecured debentures shall not be subject to the
discipline of Section 58A of the Companies Act only so long as the option to convert
them into shares remains in force.
In a further clarification, Department of Company Affairs (vide their file No.
4/12/81-CL.X dated 20 March, 1984) has stated that in the case of debentures which
are partly convertible into shares, only the convertible portion of the debentures is
exempt in terms of the provisions of Rule 2(b)(x) of the Companies (Acceptance of
Deposits) Rules. Even in regards to the convertible portion of debentures, once the
period of conversion is over, the un-converted portion of debentures would acquire a
character of loan and would fall within the definition of deposits like other loans,
provided they are not secured by mortgage of immovable property of the company
in terms of clause (x) of Rule 2(b) of the Deposit Rules. Similarly, where the period for
the exercise of option for conversion has expired, the convertible portion of the
debentures in respect of which no option has been exercised for conversion by the
debentureholders, will acquire the character of loan and will fall within the purview of
deposits as defined in the Companies (Acceptance of Deposits) Rules, if these
debentures are not secured in the manner mentioned above.
Deposits and Loan
There have been a number of judicial decisions bringing out distinction between
a loan and a deposit. In Annamalai v. Veerappan, AIR 1956 S.C. 12, it was held that
the term deposit and loan are not synonymous and whether a transaction is a
deposit or loan does not merely depend on the terms of document, but has to be
judged from the intention of the parties. [Refer also Ram Janki Devi v. Juggilal
Kamlapat, AIR 1971 SC 255]. In a sense, deposit is also a loan with this difference
that a loan is repayable the minute it is incurred. In the case of deposit the repayment
will depend on the maturity date fixed therefor or the terms of agreement relating to
the demand on the making of which the deposit becomes payable. In other words,
unlike a loan, there is no immediate obligation to repay in the case of deposits (Abdul
Hamid Sahib v. Rahmat Bi, AIR 1965 Mad. 417).
What must also be borne in mind is that under the Limitation Act, 1963, the
periods when limitation would begin in case of loan and in case of deposits are
provided for differently. In the former case the limitation commences from the date
when the loan is made, whereas in the latter from the date when the demand is
made. Therefore, the distinction between a loan and a deposit is fine but appreciable.


Deposit and Debenture
According to Section 2(12) of the Companies Act, 1956, debenture includes
debenture stock, bonds and any other securities of a company whether constituting a
charge on the assets of the company or not. A debenture is a document which either
creates or acknowledges a debt. A debenture may be secured or unsecured. Where
the debenture is unsecured, it will squarely fall within the definition of deposit. It is
only the debentures which satisfy the conditions stipulated in Rule 2(b)(x) of the
Companies (Acceptance of Deposits) Rules (discussed earlier), which are excluded
from the definition of deposits.
Depositor
Depositor includes any person who has given a loan to a company.
Acceptance of Deposits by Companies
Under Rule 3 of the Companies (Acceptance of Deposits) Rules, 1975, the
following types of deposits cannot be accepted or renewed by a company:
No company shall accept or renew any deposit which is repayable on demand or
on notice or after a period of less than six months or more than thirty six months from
the date of acceptance or renewal of such deposits.
No company with a net owned fund of less than Rs. 1 crore shall invite public
deposits. [Inserted by Third Amendment Rules 2001 vide Notification GSR 873(E)
dtd. 28.11.2001].
However, a company may for meeting short-term requirements of funds, accept
or renew short-term deposits for repayment earlier than six months from the date of
deposits or renewal provided that such deposits do not exceed 10% of the aggregate
of the paid-up share capital and free reserves of the company and such deposits are
not repayable earlier than three months from the date of deposits or renewal, as the
case may be.
On and from 1.3.1997 no company shall accept or renew any deposits in any
form if it is in default in the repayment of any deposit or part thereof and any interest
thereupon in accordance with the terms and conditions of such deposits.
9. CEILING LIMITS FOR ACCEPTANCE OF DEPOSITS
Under Rule 3(2) of the Companies (Acceptance of Deposits) Rules, 1975, a
company other than a Government Company can accept deposits subject to the
following ceiling:
(i) Deposits against unsecured debentures or deposits from shareholders or
deposits guaranteed by any person, who, at the time of giving the
guarantee, is a director of the company, together with such deposits, if any,
accepted already and outstanding on the date of acceptance or renewal of
such deposit cannot exceed 10 per cent of the aggregate of paid-up share
capital and free reserves.


(ii) Any other deposit together with such or other outstanding deposits on date
of acceptance or renewal cannot exceed 25 per cent of the aggregate of
paid-up share capital and free reserves of the company.
A Government Company can accept deposits from shareholders and others upto
35% of aggregate of its paid-up capital and free reserves [Notification No. GSR 7(E)
dated 2.1.1986].
Aggregate of Paid-up Share Capital and Free Reserves
In order to arrive at the aggregate of paid-up share capital and free reserves the
company has to deduct from the aggregate of paid-up share capital and free
reserves, as appearing in the latest audited balance sheet of the company, amounts
of accumulated balance of losses, balance of revenue expenditure and other
intangible assets if any, as disclosed in the said balance sheet. [vide Explanation to
Rule 3].
While it is obvious that the term accumulated loss should also include amount
of unprovided depreciation, yet it has come to the notice of the Department that in a
couple of cases companies have not deducted the amount of unprovided
depreciation while computing the permissible limits of deposits. It is essential to
deduct the amount of unprovided depreciation from the aggregate of paid-up share
capital and free reserves for determining the limits up to which deposits can be
accepted by them (Letter : 4/28/81-CL-X, dated 2-9-1981). The balance shown in
share premium account will be treated as part of the companys paid up share
capital and not its free reserves having regard to provisions of Section 78(1).
[Circular Nos. 3/77 (1/1/77-CL.V and 4/5/77-CL-XIV) dated 15.4.77].
The return of deposits required to be filed with the Registrar of Companies in
terms of Rule 10 of Companies (Acceptance of Deposits) Rules, should be made with
reference to the latest audited balance sheet irrespective of the date of audit,
provided it was completed by the time the return was filed on or before June 30.
It is prescribed in the explanation to Rule 3 that the latest audited balance sheet
means only the balance sheet of the company for a year in relation to which the
return is filed [Malayala Manorama Co. Ltd. v. Registrar of Companies (Kerala)
Comp. Cas. 69 (199)].
Changes in Paid-Up Capital subsequent to the Close of the Financial Year
The Department of Company Affairs has clarified that any change in the paid-up
capital of the company occurring after the close of the financial year of the company
is to be disregarded for the purposes of reckoning limits for acceptance of deposits.
The reason is that there are several elements other than the paid-up share capital
which go into computation of net worth on the basis of which the limits laid down
under Rule 3 of the Companies (Acceptance of Deposits) Rules for acceptance of
deposits are worked out. By taking into account only the increase in the share capital
of the company and at the same time ignoring the other components of net worth, the
position would get distorted (Communication No. 4/2/84-CL.X dt. 25.7.84 of the
Department of Company Affairs).


Definition of Free Reserves
According to Rule 2(d) of the Companies (Acceptance of Deposits) Rules, 1975,
free reserves include the balance in the share premium account, capital and
debenture redemption reserves and any other reserves shown or published in the
balance sheet of the company which are created by appropriation out of the profits of
the company but excludes any reserve created
(i) for repayment of any future liability or for depreciation in assets or for bad
debts;
(ii) by revaluation of any assets of the company.
The Department of Company Affairs has, vide Letter No. 3/1/80-CL.X dated
3.2.82, clarified that the amount of surplus in profit and loss account carried forward
under the heading Reserves and Surplus appearing in the balance sheet of a
company may form part of the Free Reserve as defined under the Companies
(Acceptance of Deposits) Rules, 1975 provided it arises by appropriation out of profits
of the company. The amount of depreciation not provided for is treated as part of
accumulated loss and required to be deducted from the aggregate of paid-up capital
and free reserves while computing permissible limits.
It has now been clarified by the Department of Company Affairs that subsidy
received under the Central Government Outright Grant and Subsidies Scheme, 1971,
is free reserve for the purpose of Companies (Acceptance of Deposits) Rules, 1975
provided the following conditions are fulfilled:
(i) the subsidy is received in cash;
(ii) the subsidy is utilised for the purpose for which it is received; and
(iii) the period of five years from the commencement of production has elapsed
and the subsidy has not become recoverable in terms of the conditions of
grant (Communication No. 3/5/84-CL.X, dated 5.12.1984).
Capital Redemption Reserve is to be treated as free reserve for the purpose of
Rule 2(d) if it has been created out of the profits actually realised by the company.
(Letter : No. 3/1/80-CL-X, dated 29-12-1976).
10. CEILING ON RATE OF INTEREST
The Companies (Acceptance of Deposits) Amendment Rules, 1987 provided for
the rate of interest on deposits at 14% w.e.f. 1.4.1987. The rate of interest has been
modified continuously by formulation of Amendment Rules.
The Department of Company Affairs has vide the Third Amendment Rules, 2003,
w.e.f. 29.9.03 amended the Rule 3(1)(c) of the said Rules to provide that the
maximum rate of interest on the deposits under Section 58A shall be such as may be
prescribed by Reserve Bank of India instead of a rate of 12.5% (Prevailing rate as
envisaged by Amendment Rules, 2002 w.e.f. 4.2.2002).
The rate as prescribed by the RBI vide Notification No. DNBS 165/CGM (CSM)
2003 dated 3.3.2003 is 11%.


The payment of compound interest in the case of cumulative deposits does not
contravene the ceiling on rate of interest prescribed in the Rules as the rules do not
specify whether the interest should be simple or compound. The only restriction is
that at the time of acceptance of deposits, no company should offer interest at a
higher rate than the prescribed rate.
11. RATE OF BROKERAGE
Rules 3(1) provides for payment of brokerage on deposits collected by or through
a broker and prescribes the limit upto which brokerage may be paid. The payment of
brokerage should be only on one time basis.
The rates of brokerage payable by the company on deposits collected by or
through brokers have been revised w.e.f. 2.1.86 vide Notification No. GSR 7(E) dated
2.1.86. The revised maximum rate of brokerage that can be paid by the company on
one time basis are as under:
(i) Deposits up to one year 1% of the deposits collected by or
through brokers.
(ii) Deposits for a period of more than
one year but up to 2 years
1-1/2% of the deposits collected by
or through brokers.
(iii) Deposits for a period exceeding 2
years.
2% of the deposits collected by or
through brokers.
The Department of Company Affairs has clarified vide their circular letter dated
18.9.88 that management charges, managers fees, service charges and such other
charges paid to agents would amount to brokerage and such brokerage in excess of
the rates specified in Rule 3(1)(d), would amount to contravention of the said Rule.
However, reimbursement of advertising or printing charges incurred by the agents or
managers would not tantamount to payment of brokerage.
The following Explanation has been inserted in Rule 3(1)(d) vide Notification No
GSR 551(E) dated 7.6.1990 w.e.f. 7.6.1990, namely:
Explanation: Any person who is authorised by a company, in writing, to solicit
deposits on its behalf and through whom deposits are procured will only be entitled to
brokerage and payment of brokerage to any other person for procuring deposits shall
be deemed to be not in conformity with the Rules.
12. MAINTENANCE OF LIQUID ASSETS
As per Rule 3A of the Companies (Acceptance of Deposits) Rules, 1975,
companies are required to deposit or invest, as the case may be, a sum which shall
not be less than 15 per cent of the amount of its deposits maturing during the year
commencing from 1st day of April and ending on 31st day of March of the following
year in any one or more of the following methods, namely:
(i) in a current or other deposit account with any scheduled bank, free from
charge or lien;
(ii) in unencumbered securities of the Central Government or any State
Government;


(iii) in unencumbered securities mentioned in clause (a) to (d) and (ee) of
Section 20 of the Indian Trusts Act, 1882 :
(a)promissory notes, debentures, stock or other securities of any State
Government or of the Central Government;
(b)securities both the principal whereof and the interest whereon have been fully
and unconditionally guaranteed by any State Government;
(c)stocks or debentures or shares of corporations, interest whereon has been
guaranteed by the Central Government or in debentures of the Bombay
Provincial Corporation Bank Ltd., the interest whereon has been
guaranteed by the State Government of Bombay;
(d)debentures or other securities for money issued under the authority of any
Central or Provincial Act or State Act or on behalf of any municipal body,
port or trust or city improvement trusts; and
(e)units issued by the Unit Trust of India under any unit scheme made under
Section 21 of the Unit Trust of India Act, 1963.
(iv) in unencumbered bonds issued by the Housing Development Finance
Corporation Ltd., Mumbai, a company incorporated under the Companies
Act, 1956 (1 of 1956) and notified under clause (f) of Section 20 of the
Indian Trusts Act, 1882 (2 of 1882).
This deposit of investment, as the case may be, is required to be made by the
30th day of April each year. The securities referred to in (ii) and (iii) above purchased
for the purpose of compliance with this requirement will be reckoned at market value.
The amount deposited, or invested as the case may be as per this requirement,
cannot be utilized for any purpose other than for the repayment of deposits maturing
during the year. It should, however be ensured that the amount remaining deposited
or invested, as the case may be, shall, not any time during the year fall below 15 per
cent of the amount of deposits maturing and remaining to be paid until, the 31st day
of March of that year.
13. CONSTITUTIONAL VALIDITY OF SECTION 58A OF THE ACT AND RULE 3A
OF DEPOSIT RULES
The vires of Section 58A read with Rule 3A of the Companies (Acceptance of
Deposits) Rules, 1975 was challenged before the High Courts, and the Supreme
Court of India.
In Calico Mills, Arvind Mills and Others v. Union of India it was contended before
the Gujarat High Court that Section 58A of the Act was ultra vires of the Articles 245
and 246 of the Constitution and Rule 3A of the Companies (Acceptance of Deposits)
Rules, 1975 was ultra vires of Section 58A of the Act, in as much as it transgresses
the scope and ambit of Section 58A and Rule 3A was violative of Articles 14 and was
arbitrary.
The Gujarat High Court dismissed the above contentions and held that
Section 58A fell squarely within Entries 43 and 44 of the Union List and, therefore, it
was within the legislative competence of Parliament to enact it. It was also held that
Rule 3A did not transgress the ambit of Section 58A of the Act and Rule 3A was not
ultra vires Section 58A and, therefore, was valid in so far as it was applicable to


deposits which a company received or might receive after 1st April, 1978.
In Modi Spinning and Weaving Mills Co. Ltd. v. Union Bank of India the vires of
Rule 3A was questioned before the Allahabad High Court more or less on the same
grounds mentioned in Calico Ltds case. While upholding the vires of Rule 3A the
Allahabad High Court observed that the principle on which the Rule had been framed
appeared to be in the larger public interest as well as in the broad interest of the
companies accepting deposits. It was a part of the measure to preserve the credit
structure on which the national economy was based and such a measure could not
be characterised as unjust or capricious or that it involved an oppressive interference
with the right of those to whom it applied.
The Supreme Court in the Delhi Cloth Mills Co. Ltd. and Others v. Union of
India and other, (1983), 2 Comp. LJ, 281 (SC) unpheld the Constitutional validity of
Section 58A and Rule 3A of the Companies (Acceptance of Deposits) Rules, 1975.
It is not outside the legislative competence of Parliament to enact such a provision
as it falls within the scope of Entries 43 and 44 of List I of the Seventh Schedule to
the Constitution. The Supreme Court observed, while upholding the vires of
Section 58A and Rule 3A, that no regulatory or protective measure could be
rejected as arbitrary on the short ground that it failed to protect fully the person for
whose benefit it was enacted. One has to keep in view the cumulative effect of
protective and regulatory measures. Requiring the company to invest 15 per cent
of its deposits maturing in a year with prescribed institutions or in trust securities
could not be termed deprivation of the funds of a company. It was measure to
ensure that part of the funds of a company was kept as liquid assets available for
use for specified purpose. Such regulatory measures ensuring availability of liquid
assets could not be termed as deprivation of property. In a welfare State, it was a
constitutional obligation of the State to protect socially and economically weaker
segments of the society from exploitation by corporations. Therefore, it could not
be contended that conditions prescribed had no relevance to object or the
purpose for which the power was conferred under Section 58A on the Central
Government. The Supreme Court further observed by applying the doctrine of pith
and substance, that as Section 58A was referable to Entries 43 and 44 in the Union
List and the enactment viewed as a whole, could not be said to be legislation on
money lenders and money lending referred to Entry 30 in the State List. It was also
noted that Companies (Acceptance of Deposits) Rules, 1975 have been framed in
the exercise of powers conferred by Section 58A and Section 642. Section 642
provides for placing before Parliament any rules framed in exercise of those
powers. Parliament, while considering such rules is empowered to suggest
modifications. There is therefore, no excessive delegation of essential legislative
functions. The Court also declared that there was no violation of Articles 14 and
19(1)(g) and hence Rule 3A and Section 58A were constitutionally valid.
14. FORM AND PARTICULARS OF ADVERTISEMENT
Every company intending to invite, allowing or causing any other person to invite,
deposits, shall issue an advertisement for the purpose in a leading English
newspaper and one vernacular newspaper circulating in the State in which the
registered office of the company is situated.


Such advertisement must be issued only on the authority and in the name of the
Board of directors of the company, and must contain a reference to the conditions
subject to which deposits shall be accepted by the company. The advertisement must
state the date on which the Board of directors approved the text of the advertisement
and the following information namely :
(a) name of the company;
(b) date of incorporation of the company;
(c) business carried on by the company and its subsidiaries with the details of
branches or units, if any;
(d) brief particulars of the management of the company;
(e) names, addresses and occupations of the directors;
(f) profits of the company, before and after making provision for tax, for the
three financial years, immediately proceeding the date of advertisement.
(g) dividends declared by the company in respect of the said years;
(h) a summarised financial position of the company as in the two audited
balance sheets immediately preceding the date of advertisement in the
following form namely:
Summarised financial position of the company as appearing in the two latest
audited balance sheets.
Liabilities Figures for
the latest
financial
year for
which
audited
accounts
are
available
Figures
for the
financial
year
previous
to the
year
referred
to in
column 2
Assets Figures for
the latest
financial
year for
which
audited
accounts
are
available
Figures
for the
financial
year
previous
to the
year
referred
to in
column 5
1 2 3 4 5 6
Share Capital
Reserve and
Surplus
Secured loans
Unsecured
loans Current
Liabilities and
provisions
Fixed assets
Investments
Current assets,
Loans and
Advances
Miscellaneous
expenditure
Profit and Loss
account

Total Total
Note: Brief particulars of Contingent Liabilities may be added by way of footnote.


(i) the amount which the company can raise by way of deposits under these
rules and the aggregate of deposits actually held on the last day of the
immediately preceding financial year;
(j) a statement to the effect that on the day of the advertisement, the company
has no overdue deposits other than unclaimed deposits or a statement
showing the amount of such overdue deposits, as the case may be;
(ja)the total number of small depositors and amount due to them in respect of
which default has been made.
(jb)the fact of waiver of interest accrued on deposits of small depositors.
(k) a declaration to the effect :
(i)that the company has complied with the provisions of the Companies
(Acceptance of Deposits) Rules, 1975;
(ii)that compliance with these rules does not imply the repayment of deposits is
guaranteed by the Central Government; and
(iii)that the deposits accepted by the company (other than secured deposits, if
any, accepted under the provisions of these rules, the aggregate
amount of which may be indicated) are unsecured and ranking pari
passu with other unsecured liabilities.
(iv)that the company is not in default in repayment of any deposit or part thereof
and any interest thereupon in accordance with terms and conditions of
such deposits.
An advertisement issued in accordance with this rule is valid until the expiry of six
months from the date of the closure of the financial year in which it is issued or until
the date on which the balance sheet is laid before the company in general meeting
or, where the annual general meeting for any year has not been held, the latest day
on which that meeting should have been held in accordance with the provisions of the
Act, whichever is earlier, and a fresh advertisement has to be
made in each succeeding financial year for inviting deposits subsequently [Rule 4,
Sub-rule (3)].
Notice/advertisement notifying merely alterations in the terms and conditions of
deposits including change in the rates of interest from a particular date is an
amendment to the statutory advertisement issued earlier and does not require to be
in form prescribed in Rule 4(2). While making announcement about alteration in the
terms and conditions including the change in the rates of interest on deposits, if the
company, inter alia, invites deposits by indicating, for example, that deposits were
continued to be accepted, that the higher rates would be applicable in case the
existing deposits were renewed or in case fresh deposits were made, that necessary
application forms for accepting deposits were available with the company and/or its
agents and so on, such announcement tantamounts to invitation of deposits and
require advertisement in the form prescribed in Rule 4(2), failing which the
advertisement is construed to be not in conformity with the provisions of
Section 58A(2) and penal provisions of Section 58A(6)(a)(ii) read with
Section 58A(6)(b) become attracted.


Delivery of the Text of Advertisement to the Registrar
No advertisement shall be issued by or on behalf of a company unless, on or
before the date of its issue, there has been delivered to the Registrar a copy thereof
signed by a majority of the directors on the Board as constituted at the time of
approval of the advertisement or their agents duly authorised in writing [Sub-rule (4)
of Rule 4].
The date of issue of an advertisement is the date on which it appears in the
newspaper, [vide Explanation to Sub-rule (4) of Rule 4].
Statement in Lieu of Advertisement (Rule 4A)
Every company intending to accept deposits without inviting deposits is required
to file with the Registrar a statement in lieu of advertisement containing the same
particulars as in the case of advertisement referred above and signed in the same
manner as advertisement before accepting any deposits. The period of validity of this
statement is the same as in the case of advertisement and a fresh statement has to
be filed if it is intended thereafter to accept deposits without inviting.
Signing of Advertisement
Prior to the commencement of the Amendment Rules, 1978, the rules required
that the advertisement should be signed by all the directors of the company, which
created operational difficulties. Therefore, the rule was amended to provide that on or
before the date of issue, the advertisement should be signed by a majority of the
directors of the company as constituted at the time the Board approved the
advertisement or their duly authorised agent in writing and a copy of the same should
be delivered to the Registrar for registration. Even a letter of authority is sufficient for
this purpose and power of attorney is not necessary [Circular No. 23/75 (91/14/75-
CL.XIV) dated 25.9.1975 of the Department of Company Affairs].
15. FORM OF APPLICATION FOR DEPOSITS (RULE 5)
No company shall accept or renew any deposit unless an application is made by
the intending depositor for the acceptance of such deposit and such application
contains a declaration by such person to the effect that the amount is not being
deposited out of the funds acquired by him by borrowing deposits from any other
person.
The application form shall be supplied by the company and such form shall be
accompanied by a statement containing all the particulars specified in the
advertisement issued by the company incorporating all changes in such particulars
that may have been made upto the date on which the application form is issued by
the company.
16. FURNISHING OF RECEIPTS TO DEPOSITORS (RULE 6)
Every company shall, on the acceptance or renewal of a deposit, furnish to the
depositor or his agent, a receipt for the amount received by the company within a
period of eight weeks from the date of receipt of money or realisation of cheques.
This deposit receipt shall be signed by an officer of the company duly authorised by
the company in this behalf and shall state the date of deposit, the name and address


of depositor, the amount received by the company as deposit, the rate of interest
payable thereon and the date on which the deposit is repayable.
The terms and conditions of the deposits cannot, after receipt of deposits, be
altered to the prejudice or disadvantage of the depositor and the company cannot
reserve to itself any right to do so either directly or indirectly.
The Company Law Board dismissed the application for recovery of deposit (with
interest) from the company, where while accepting the money, none of the
requirements of Rules 3, 4, 5 and 6 pertaining to interest rate, issuance of
advertisement, furnishing of receipt, were satisfied by the applicant as well as the
company. Therefore, it was held not amounting to deposit for the purposes of
Section 58A. [Gopal K. Maheshwari v. Hawk Multimedia P. Ltd. (2005)].
17. REGISTERS OF DEPOSITS (RULE 7)
Every company accepting deposits shall keep at its registered office one or more
registers in which there shall be entered separately in the case of each depositor the
following particulars, namely
(a) name and address of the depositor;
(b) date and amount of each deposit;
(c) duration of the deposit and the date on which each deposit is repayable;
(d) rate of interest;
(e) date or dates on which payment of interest will be made;
(f) any other particulars relating to the deposit.
The register or registers must be preserved in good order for a period of not less
than 8 calendar years from the financial year in which the latest entry is made in the
register. This register or registers is/are part of the books of a company and hence
not normally open for inspection by members of the company.
18. GENERAL PROVISIONS REGARDING PREMATURE REPAYMENT OF
DEPOSITS (RULE 8)
Where a company makes repayment of a deposit after the expiry of a period of
six months from the date of such deposit but before the expiry of the period for which
such deposit was accepted by the company, the rate of interest payable by the
company on such deposit shall be reduced by 1 per cent from the rate which the
company would have paid, had the deposit been accepted for the period which such
deposit had run, and the company shall not pay interest at any rate higher than the
rate so reduced.
The Government has notified that where a company permits a depositor to renew
his deposit, before the expiry of the period for which such deposit was accepted by
the company, for availing of the higher rate of interest, the company shall pay interest
to such depositor at higher rate if:
(i) such deposit is renewed in accordance with the other provisions of these
rules and for a period longer than the unexpired period of the deposit, and
(ii) the rate of interest as stipulated at the time of the acceptance or renewal of


deposit is reduced by one per cent for the expired portion of the deposit and
is paid or adjusted or recovered accordingly.
Where the period for which the deposit had run contains any part of a year, then,
if such part is less than six months, it shall be excluded and if such part is six months
or more, it shall be reckoned as one year for this purpose.
Exemption
The provisions of Rule 8 regarding the reduction in the rate of interest on
premature deposits is not applicable where the deposits are repaid prematurely solely
for the following purposes :
(a) complying with the provisions of the Non-banking Non-financial Companies
(Reserve Bank) Directions, 1966; or
(b) complying with the provisions of Rule 3; or
(c) converting, with the consent of the depositors into secured debentures in
accordance with the guidelines, issued by the Government of India from
time to time, regarding the issue of rights debentures; or
(d) providing War risk or other related benefits to the personnel of the naval,
military or air forces or to their families, on an application made by the
associations or societies formed by such personnel, during the period of
emergency declared under Article 352 of the Constitution.
Rule 8 of the Companies (Acceptance of Deposit) Rules has been amended with
effect from 10.1.1992, vide Notification No. GSR 39(E) dated 10.1.1992, to provide
for acceptance of deposits in joint names. Sub-Rule (2) of Rule 8 provides that where
the depositor so desires, deposits may be accepted in joint names not exceeding
three with or without any of the clauses, namely, Either or Survivor, Number One or
Survivor or Any one or Survivor.
Penal Rate of Interest (Rule 8A)
For any public deposit matured and claimed but remaining unpaid, the company
should pay a penal interest of 18% for overdue period. In case of penal interest by a
small depositor, this penal interest shall be 20% compounded on an annual basis.
19. POWER OF THE CENTRAL GOVERNMENT (RULE 9)
Rule 9 provides that if any question arises as to whether these Rules are or are
not applicable to a particular company, such question shall be decided by the Central
Government in consultation with the Reserve Bank of India.
20. RETURN OF DEPOSITS (RULE 10)
Rule 10 requires the company to which these rules apply to file with the Registrar
on or before the 30th day of June, every year, a return in the prescribed form and,
furnishing the information contained therein as on the 31st March of that year duly
certified by the auditor of the company. A copy of the return shall also be
simultaneously furnished to the Reserve Bank of India.
Nil Return not necessary


Unless a company accepts a deposit within the meaning of the Rules, the Rules
do not become applicable to that particular company and consequently there is no
need to submit a nil return under Rule 10 (Departments Letter No. 4/1/76-CL-XIV,
dated 5th February 1976).
21. RENEWAL OF DEPOSITS
The word renew also amounts to acquire again. The renewal amounts to
receiving or acquiring fresh deposits within the meaning of Section 58-A [Sujani
Textiles Pvt. Ltd. v. Assistant Registrar of Companies (1980) 50 Com Cases 276
(Mad)].
Need for advertisement in case of renewal of existing deposits
Rule 4 of the Companies (Acceptance of Deposits) Rules 1975 requires every
company intending to invite or allowing or causing any other person to invite deposits
to issue an advertisement for the purpose. A question has been raised as to whether
an intimation to a depositor on the eve of maturity of his deposit indicating the date of
maturity coupled with a statement that the depositor may renew his deposit if deemed
necessary would amount to an invitation, and hence call for issue of an
advertisement. This Department has considered the matter and is of the view that
such an intimation would amount to an invitation, and hence the company should
comply with requirements of sub-rule (1) of Rule 4 of the said Rules. In short, there
must be a valid advertisement in force which would permit such an invitation (Circular
No. 5 of 1976 dated the 10th March, 1976 on File No. 4/3/76-CL.XIV).
22. REPAYMENT OF DEPOSITS
Sub-section (9) of Section 58A provides that where a company has failed to
repay any deposit or part thereof in accordance with the terms and conditions of such
deposit, the Company Law Board may, if it is satisfied, either on its own motion or on
the application of the depositor, that it is necessary so to do to safeguard the interests
of the company, the depositors, or in public interest, direct, by order, the company to
make repayment of such deposit or part thereof forthwith or within such time and
subject to such conditions as may be specified in the order :
Provided that the Company Law Board may, before making any order under this
sub-section give a reasonable opportunity of being heard to the company and the
other persons interested in the matter. Under the provisions of Sub-sections (3A), (9)
and (10) of Section 58A inserted by Amendment Act of 1988, the Company Law
Board may take cognizance of any case of non-repayment of deposits. Depositors
may also seek relief from the Company Law Board on the companys failure to make
repayment.
In Edpuganti Bapanaiah v. K.S. Raju, [(2007) 79 SCL 468 (AP) decided on
03.08.2007, during pendency of the petition seeking approval of a scheme for
the repayment of deposits, Respondent No. 1, along with group companies,
filed affidavits giving undertaking to the CLB that they would abide by the
scheme and pay off the depositors in accordance with scheme. On that
assurance, the CLB approved the scheme.
Thereafter, Respondent No. 1 claimed that there was a change in the


management of respondent No. 3 company and so he had no control over that
company. Also, he sought for relieving him as well as the group companies
from the undertaking.
CLB declined for the same and further ordered that the undertaking given
by them would continue till the repayment.
Since no amount was paid, therefore, the petitioner filed contempt petition
before the High Court, seeking to punish the respondents for deliberate
violation of the orders of the CLB as well as the undertaking. The Respondents
contested the petition.
The decision of the case was that the Petition was allowed. Reason behind
the decision was that when Respondent No. 1 availed the benefit from the CLB,
by representing as well as filing affidavits, undertaking that they would see that
the order of the CLB was implemented, once scheme was approved. Order of
approval of the scheme was binding on all the parties to it. Now rescheduling
the payments to depositors was clearly not only in violation of the orders of the
CLB as well as the undertaking, but also a deliberate attempt to circumvent the
proceedings of the CLB.
If respondent No. 1 was permitted to transfer his obligations to some third
party and then claiming that had no control over respondent No. 3 and,
therefore, he could not be held responsible for non-compliance, then there
would not be any sanctity to the judicial proceedings and the orders passed by
the judicial authorities, especially when an undertaking has been filed before
the authority for obtaining an order. Further, an attempt was also made to get
out of the proceedings, by seeking permission to withdraw the affidavits. Under
the above circumstances, the liability of respondent No. 1 would continue and
failure to comply with the order would amount to deliberate attempt to
circumvent the orders of the CLB by his own action, which was not approved
by the competent authority which passed the order against him. The CLB is not
vested with powers to deal with cases under the provisions of the Contempt of
Courts Act. Therefore, such powers are to be exercised only by the High Court
for any alleged contempt of CLB similar to the civil courts. Further, as the
orders of the CLB are appealable under Section 10F before the High Court, the
CLB should be treated as subordinate to the High Court and, therefore, the
High Court is well within its powers in entertaining the contempt proceedings,
and the contentions to the contra were devoid of merit.
Respondent No. 1 was liable for punishment, as by his actions, he tried to
overreach the CLB as well as the Court, having collected huge amounts from
the public and failed to repay the same to them.
Therefore, respondent No. 1 was liable for severe punishment, which could
be shown as an example for such persons not to indulge in such activities by
deliberate, false representations before the CLB as well as before the Court.
The sub-section does not refer to interest on deposits. In Re : Ambalal Sarabhai
Enterprises Ltd. (1991) 2 Comp LJ 447, the Company Law Board has ordered the
company to pay unpaid interest within the time specified in the order. In Re : Pure
Drinks Ltd. (1991) CLA 188, payment of interest at an enhanced rate has been


ordered by the Company Law Board.
In Re. Ambalal Sarabhai Enterprises Ltd. (ibid) the Company Law Board has
exercised suo moto jurisdiction in pursuance of reference made to it by the Law
Commission of India ordering the company to make repayment of the principal
amounts of the deposits. The Company Law Board can thus exercise the powers
conferred upon it on the basis of information received by it or on an application
received by it from a depositor.
Where a company had defaulted in repayments on maturity, the CLB invoked suo
motu power under Section 58A(9). The company accepted its liability and contended
that while it was financially sound and stable, it suffered from liquidity problem and
that brought about the default. The company prayed for sanction of scheme for
clearance of all matured deposits in a phased manner over a period of time. The CLB
sanctioned the scheme having regard to the interest of the company, interest of
depositors and also public interest at large [Morpen Laboratories Ltd. Re., (2003) 48
SCC 720 (CLB)].
Power of the Consumer Protection to order repayment of deposit
In Neela Raje v. Amogn Industries [RP No. 409 of the 1992 dated 26.8.93 (1993)
840 (1993) 12 CLA 90 (NCDRC)], the National Commission was faced with a query
as to whether a complaint lodged in regard to the failure to pay interest on repayment
of the principal amount on the maturity of a deposit by a company could entertained
by a consumer forum. The commission pointed out that after the Amendment Act,
1993, a consumer forum can direct payment of amounts due to a depositor under the
provisions of Section 14 of the Consumer Protection Act, 1986. An order directing
payment of the outstanding amount to the depositor can now be made under the
provisions of the said Section 14.
The power of the Company Law Board (CLB) under Section 58A read with
Section 45 QA of the RBI Act does not have the effect of debarring a depositor from
approaching to a Consumer Redressal Forum even after exercising a remedy under
the above sections. When the CLB has ordered re-scheduling, even then the
depositor can approach a Consumer Forum for any defaults by the company in
complying in implementing orders. [Predential Capital Market P. Ltd. v. State of A.P.
(2000) 27 SCL 482 (A.P.)].
Whoever fails to comply with any order made by the Company Law Board under
Sub-section (9) shall be punishable with imprisonment which may extend to three
years and shall also be liable to a fine of not less than rupees five hundred for every
day during which such non-compliance continues [Sub-section (10)].
Repayment before maturity
Deposits are not repayable before maturity. However, in the event of the company
agreeing in any exceptional circumstances at its absolute discretion to premature
repayment, the rate of interest payable by the company on such deposits agreed to be
repaid before maturity shall be reduced by such rate as may from time to time be


specified in the Companies (Acceptance of Deposits) Rules, 1975 as amended.
Repayment before the period of maturity was offered at reduced rate of interest
in exercise of the power under Clause 11 of the rules framed by the company. The
depositor accepted the same. He was estopped from challenging the reduction
saying subsequently that his consent was not taken in advance [Umanath Baliga v.
SRP Tools Ltd., 2003 CLC 1139: (2003) 47 SCL 146 (CLB)].
23. PENALTIES
Penalty (Rule 11)
Rule 11 provides that any contravention of the Rules for which no punishment is
provided in the Act is punishable with fine up to Rs. 500 and for continued
contravention, Rs. 50 per day during the continuance of the contravention.
Penalties for Contravention of Section 58
Under Section 58A of the Act, any deposit received in contravention of the
provisions of the Act must be paid back by the company within 30 days from the date
of acceptance of such deposit, or within such extended time, not exceeding 30 days,
as the Central Government may, on sufficient cause being shown by the company,
allow.
Section 58A(6) provides that where a company accepts or invites or allows or
causes any other person to accept or invite on its behalf any deposits in excess of the
limits prescribed by the Rules or in contravention of the manner or conditions
prescribed by the Rules
(a) the company shall be punishable :
(i)where such contravention relates to the acceptance of any deposit, with fine
which shall not be less than an amount equal to the amount of deposit
so accepted;
(ii)where such contravention relates to the invitation of any deposit, with fine
which may extend to Rs. ten lakh, but not less than Rs. 50,000.
(b) every officer of the company who is in default shall be punishable with
imprisonment upto 5 years and shall also be liable to fine.
In both these cases of acceptance or invitation of deposit in contravention of the
requirements of Section 58A and the rules made thereunder, every officer of the
company who is in default shall be punishable with imprisonment for a term which
may extend to 5 years and shall also be liable to fine [H.H. Marthanda Varma & H.H.
Bhupendra Narayana Singh v. Registrar of Companies [1988] 64 Comp. Cas. 125.]
Defaults in Repayment of Deposits to Small Deposit holders
Section 58AA had been introduced by the Companies (Amendment) Act, 2000 to
protect the interest of small deposit holders. A small deposit holder has been defined
to mean a deposit holder who has deposited in a financial year a sum not exceeding
Rs. 20,000 in a company and includes his successors, nominees and legal


representatives. Under this section the Company Law Board
1
/Tribunal
2
has been
empowered to deal with defaults on part of companies in repayment of deposits of
small deposit holders. In case of default of repayment of small deposits or interest
thereon the company is required to inform the Company Law Board
1
/Tribunal
2
within
60 days of such default. The Company Law Board
1
/Tribunal
2
shall, on receipt of
intimation of such default in payment, either on its own motion direct the company to
make repayment of deposit and interest thereon forthwith or within such time and
subject to such conditions as may be specified in the order or it may, pass any
appropriate order within a period of 30 days.
Sub-section (4) prohibits companies from accepting further deposits from small
depositors till they repay the matured deposits of each small depositor including
interest accrued thereon. Further, every defaulting company shall state in every
future advertisement and application form inviting deposits from public, not only the
total number of small depositor and amount due to them in respect of which such
default has been made but also of any waiver of interest on the deposit of small
depositors.
Sub-section (7) of the section provides that where a company has accepted
deposits from small depositors and subsequently obtains funds by taking a loan for
purposes of its working capital from any bank, it is required to first utilise the funds to
repay any deposits or part thereof or any interest thereon to the small depositors
before applying such funds to any other purpose.
Sub-section (8) provides that every application form issued by a company to a
small depositor for accepting deposits from him, shall contain a statement to the
effect that the applicant had been apprised of (a) every past default by the company
in the repayment of deposit or interest thereon, if any. Such default has occurred; and
(b) the waiver of interest under Sub-section (6), if any, and reasons therefor.
Sub-section (9) provides that whoever fails to comply with the provisions of this
section or fails to comply with any order of the Company Law Board
1
/Tribunal
2
shall
be punishable with imprisonment which may extend to three years and shall also be
liable to fine for not less than rupees five hundred for every day during which such
non-compliance continues. Further Sub-section (10) provides that if a company or
any other person contravenes any provision of this section, every person, who at the
time of such contravention, was a director of the company, as well as the company,
shall be deemed guilty of the offence and shall be liable to be proceeded against and
punished accordingly.
Section 58AAA was also inserted by the Companies (Amendment) Act, 2000.
This section makes every offence connected with or arising out of acceptance of
deposits under Section 58A or Section 58AA a cognizable offence under the Code of
Criminal Procedure, 1973. This provision was inserted to provide for a strict and
immediate action against companies that accept deposits and do not repay the same
on maturity.

1
. Existing.
2
. Proposed.



As such, the offence is not compoundable under Section 621A of the Act.
However, it has been provided that no court shall take cognizance of the offence
except on a complaint made by the Central Government or any officer authorised by
it in this behalf.
24. REMEDY IF THE COMPANY FAILS TO REPAY ON DUE DATE
Earlier, there was no provision in the Companies Act, 1956 or the Companies
(Acceptance of Deposits) Rules 1975 empowering the Government to compel
repayment of public deposits in case of default, by non-banking non-financial
companies to the depositors on maturity. However, the Companies (Amendment) Act,
1988 has included such a provision by inserting two new Sub-sections (9) and (10) to
Section 58A.
As stated earlier Section 58A(9) provides that where a company has failed to
repay any deposit as per the terms and conditions of such deposit, the Company Law
Board
1
/Tribunal
2
may direct the company, if it deems necessary to safeguard the
interests of the company, its depositors or public interest, either on its motion or on
the application of the depositor, to repay such deposit forthwith or within such time
and subject to such conditions as the Company Law Board
1
/Tribunal
2
may specify.
Where a depositor wishes to make an application, it should be submitted in duplicate
in Form No. 4 of Annexure II to the Company Law Board Regulations, 1991 with a fee
of Rs. 50. It may be noted that no affidavit is required to be filed with this application.
However, the application should be accompanied by the following documents:
(i) copy of the deposit receipt;
(ii) copy of the correspondence exchanged with the company;
(iii) bank draft evidencing payment of application fee.
It would be necessary for a complainant to furnish afterwards the terms and
conditions of the deposits and the dates of maturity because without such particulars
it would be very difficult for Company Law Board
1
/Tribunal
2
to come to a positive
conclusion as to the alleged violation [Kanak Vinod Mehta (Mrs.) v. Jyoti Wire
Industries Ltd., (1991) 72 Com Cases 366 : (1991) 2 Comp LJ 428 (CLB)].
In this regard, the students are advised to refer to a Press Release dated
18.6.2001, as provided in Annexure I to this chapter.
According to the proviso to Section 58A(9), the CLB
1
/Tribunal
2
before making any
order give the company and other interested persons a reasonable opportunity of
being heard.
Where the company was able to convince the CLB
1
/Tribunal
2
as to the reasons
for its inability to refund deposits as they mature, the company was ordered to pay
the principal amount at once and the interest as directed. [Ambalal Sarabhai
Enterprises Ltd., (ibid)]. But where a company was not able to give a proof as neither
its application for relief was accepted by BIFR nor it had filed a schedule for
repayment as promised, the company was ordered to pay back within a period
specified in the order [Genlec Ltd. Re (1991) 2 Comp LJ 450 (CLB)].

1
Existing.
2
Proposed.



Even where a notification had been issued declaring the company a relief
undertaking under the Bombay Relief Undertakings Special Provisions Act, 1958 and
the application of the company before the BIFR was pending, the CLB ordered, that
because of the substantial amount and large number of applicants involved that the
company should pay back all the matured deposits held by Financial Institutions
[Nirlon Ltd. Re (1991) 3 Comp LJ 208 : (1992) 73 Com Cases 190 (CLB)].
In other cases, in addition to relief under Section 58A(9) depositors may also take
action against the defaulting company under the Civil Law.
While making an order for repayment, Company Law Board
1
/Tribunal
2
should
give reasonable opportunity to all concerned including the company and should keep
in mind the interest of the depositors and the public. The interest of small depositors
is of prime importance and the management has to strain its resource to give priority
to small depositors Modern Denim Ltd., In Re (1998) 15 SCL 436 (Company Law
Board New Delhi). It was further observed that while considering proposal for
extension of time for repayment:
(i) needs of depositors who are in indigent circumstances like hospitalisation,
old age, marriage in the family, etc., have to be kept in view.
(ii) no proposal for repayment can extend to a period exceeding 3 years.
(iii) the chairman of the company can be ordered to execute a personal
guarantee in favour of the Secretary, Company Law Board
1
/Tribunal
2
which
shall be liable to be implemented in case of any deviation from the
Schedule.
In Members of Public Holding Public Deposits in the Company v. DCM Financial
Services Ltd. (1998) 18 SCL 1 (Company Law Board New Delhi) the company
proposed a lesser rate of interest than that contracted for and the same was not
accepted.
Where reference to BIFR was made because the company has become
potentially sick, Company Law Board held that since the rehabilitation proposals were
under consideration, the repayment of the deposits should be justifiably postponed
for a period of 2 years from the date of maturity. However, the deposits of those
persons who were in financial stringency or facing situations like sickness, etc., could
be paid. Besides company agreed to pay the current interest on deposits, the arrears
of accumulated interest, if any, within one month from the date of receipt of copy of
the Order [Savita Jain v. Viniyoga Clothex Ltd. (1998) 17 SCL 309 (Company Law
Board - New Delhi)].
The company failed to comply with the repayment of the first instalment itself.
The Company Law Board in order to ensure that the repayment does take place, as
per the Schedule, ordered that in the event of any default, Vice-Chairman/Director
shall be identified as the officer in default [Air Force Naval Housing Board v. KHSL
Industries Ltd. (1998)/6 SCL 631 (Company Law Board - New Delhi)].
However, CLB refused to grant any further time for repayment where the
company complained of only a mismatch in cash flows and that too without any
supporting data, it held that there was no justification to compromise the public
interest and to allow the company further time for repayment [B. Bharathiv. Rockland


Leasing Ltd. (1988) 17 SCL 243 (Company Law Board - New Delhi)]. The fact that
the company could not repay deposits was not accepted by the Company Law Board
since its balance sheet showed a strong financial position, Company Law Board
ordered the company to repay deposits within one month [Cebon India Ltd., In re
(1998) 17 SCL 152 (Company Law Board - New Delhi)].
It may be clarified that in the following circumstances, application under
Section 58A(9) of the Act will not lie :
(i) Deposit made for booking/purchase of scooter, car, etc.
(ii) Deposits accepted by financial companies like hire-purchase, finance
company, a housing finance company, an investment company, a
loan/mutual benefit financial company, an equipment leasing company, a
chit fund company or a company, which receives deposits under any
scheme or arrangement by way of contributions/subscriptions or by sale of
units/certificates.
(iii) Deposits accepted by a sick industrial company covered by the Sick
Industrial Companies (Special Provisions) Act, 1985, in respect of which the
Board for Industrial and Financial Reconstruction, has specifically, by order,
suspended the operation of any contract, agreement, settlement, etc. under
Section 22(3) of the said Act.
(iv) Deposits accepted by relief undertakings which are notified as such under
the State laws. (Letter : No 1/6/88CL-V dated 8.3.1990)
In A Karishma v. Premier Nitrates & Chemicals (P) Ltd. Bidar (1997) 90 Com
Cases 285 an unsecured loan of Rs. 10 lakhs was raised by a company on the
condition that the lender will be made a director. Rupees Five lacs was meant to be
appropriated towards share capital and the balance as deposits. The company
contended that since allotment of shares was made, the balance of Rs. 5 lakhs is not
a deposit under rule 2(b)(ix) of the Companies (Acceptance of Deposits) Rules, 1975,
the Company Law Board held that Section 58A(9) of the Companies Act does not
contain anything that the provision would cover the deposits received under Section
58A only. Since, the amount was held by the company as a deposit (may not be a
deposit under Section 58A), the provisions of Section 58A(9) will be attracted and the
company is bound to repay the deposit.
25. POWERS TO GRANT EXTENSION OF TIME AND EXEMPTION
Sub-section (8) of Section 58A of the Act, which was inserted by the Companies
(Amendment) Act, 1977, enables the Central Government to grant extension of time
to a company or a class of companies either prospectively or retrospectively from a
date not earlier than 1.2.1975, to comply with, or exempt any company or class of
companies from all or any of the provisions of Section 58A, for any specified period.
In relation to a class of companies an order granting exemption can be issued by the
Central Government only after consultation with the Reserve Bank of India. The
exemption or extension of time may be with reference to particular provisions of
Section 58A or all the provisions of that section. The Central Government may
impose such conditions as it may think fit while granting exemption of time. These
provisions have been made to grant relaxation for removing hardships in repayment
of deposits by companies.


The Central Government has promulgated the Companies [Application for
Extension of Time or Exemption under Sub-section (8) of Section 58A] Rules, 1979,
laying down the procedure for making application seeking exemption or extension of
time. In terms of these Rules, every company seeking extension of time or exemption
is required to make an application in a prescribed form (Form I) of the Rules referred
to above, furnishing the particulars specified therein. Along with the application the
company has to attach the following documents:
(i) one copy of the Memorandum and Articles of Association of the company;
(ii) one copy of each of the latest audited accounts of the company together
with directors reports and auditors reports;
(iii) a copy of the resolution of the Board of directors in support of the proposal;
(iv) one copy of each quarterly, half-yearly or other proforma accounts of the
company subsequent to the latest audited accounts;
(v) one copy each of the advertisement issued in newspapers pursuant to
Rule 4 of the Companies (Acceptance of Deposits) Rules, 1975;
(vi) copy of previous approval/order, if any obtained by the company from the
Central Government granting exemption/extension of time during last 10
years;
(vii) certificates from the Statutory Auditors that:
(a)there was no contravention of any provision or rules for acceptance of
deposits.
(b)deposits have been accepted which were within the specified limits.
(viii) deposit position of the company as at 31st March during the current year
and the past two years showing the specified details.
(ix) original newspaper clippings of the public notices published in English and
vernacular language of the region in which registered office of the company
is situated in the manner specified in Form 2 appended to the rules.
(x) Application fee as per details given below:
Companies with authorised capital Amount of fee
(a) Less than Rs. 25 lacs Rs. 500/-
(b) Rs. 25 lacs or more but less than Rs. 5 crores Rs. 1,000/-
(c) Rs. 5 crores or more Rs. 2,000/-
The application is also required to be accompanied by a demand draft drawn in
favour of Pay and Accounts officer, Department of Company Affairs, New Delhi,
towards payment of the requisite fees specified.
Under Rule 4 of these Rules, a company intending to make an application is
required to publish a general notice to the members of the general public at least
once in an English daily newspaper and at least once in a newspaper published in
the language of the region having wide circulation in the region in which the
registered office of the company is situated. The advertisement is to be published in
the prescribed form (Form II of the aforesaid Rules). The Central Government after
considering the application may exempt a company from the application of the
provisions of section or grant extention of time, as the case may be.


Some Relevant Notifications
1. Payment for penal interest @18% p.a. shall be made by the company for
deposits, which have matured and are claimed as well but they have
remained unpaid. However, in case of deposits made by small depositors
the penal interest rate shall be @20% p.a. which shall be compoundable
with annual rests. [Notification No. GSR 873(E) dated 28.11.01].
2. The fee to be enclosed with the application to seeking exemption from
Central Government under Section 58A(g) shall be accompanied with fees
as per the following scale.
Authorised capital of the company Fee (Rs.)
1. Less than Rs. 25 lakhs 500
2. From Rs. 25 lakhs to Rs. 500 lakhs 1,000
3. Rs. 500 lakhs and above 2,000
[Notification No. GSR 501 dated 6th July, 1999].
Guidelines for filing statutory applications under Section 58A(8) of the
Companies Act, 1956
An application submitted under Section 58A(8) of the Companies Act, 1956
should be in accordance with the Companies (Application for Extension of Time or
Exemption under sub-section (8) of Section 58A) Rules, 1979 and be accompanied
by the following:
Original newspaper clippings of the public Notices published in English and
vernacular language of the region in which registered office of the company
is situated in the manner specified in Form 2 appended to the Rules.
Certified copy of Resolution of the Board of Directors approving the proposal
of the company.
Copy of previous approval/order, if any, obtained under Section 58(A) from
the Central Government granting exemption/extension of time during last ten
years.
Certificates from the statutory Auditors:
to the effect that the company has not contravened any other provisions of
Section 58A of the Companies Act, 1956 and the Companies
(Acceptance of Deposits) Rules, 1975 except those for which the
application is submitted.
to the effect that the deposits held by the company are within limits and that
no contravention of the provisions of Section 58A of the Companies Act,
1956 and the Companies (Acceptance of Deposits) Rules, 1975 exists
at present.
Deposit position of the company as at 31st March during the current year
and the past two years showing the details as under:
One copy each of the advertisement issued in newspapers pursuant to Rule
4 of the Companies (Acceptance of Deposits) Rules, 1975.



ANNEXURE I
Non-payment of Matured Deposits Remedies available to Investors
Press Release, dt. 18.6.2001
The procedure of filing an application for non-payment of matured deposits or
investments by a Company before the Company Law Board (CLB) provides for filing
Form No. 4 prescribed under the CLB Regulations, 1991 in duplicate along with
photocopy of deposit receipts accompanied by a demand draft of Rs. 50 drawn in
favour of Pay and Accounts Officer, Department of Company Affairs (DCA) payable
at New Delhi, Mumbai, Kolkata and Chennai as the case may be. Each depositor is
required to file separate Form No. 4. Those having more than one deposits in the
same company may file only one Form No. 4 application. Jurisdiction of the Bench is
as per the location of registered company.
There are four CLB Benches located at New Delhi, Mumbai, Kolkata and
Chennai with the Principal Bench in Delhi.
In case of non-compliance of CLB orders by Non-Banking Financial Company
(NBFC), depositors are required to lodge a complaint with the Reserve Bank of India
in area of registered office of the company.
For non-compliance of CLB orders by other companies, complaints are to be filed
with the Registrar of Company (ROC) of a State wherein registered office of the
company is situated. Besides, there are procedures under Sections 397 and 398 of
the Companies Act, 1956. Requisite fee towards a petition is Rs. 5,000 and Rs. 50
towards application by way of demand draft favourable to Pay and Accounts Officer,
DCA, involving large depositors or investors at Delhi or Chennai. Petition
accompanied by affidavits verifying application from all the petitioners drawn on non-
judicial stamp paper of requisite value duly attested by Notary Public or Oath
Commissioner may are to be filed. [Press Release issued by PIB on 18.6.2001].
ANNEXURE II
Investors Grievances Relating to Deposits, Mutual Funds, Collective
Investment Scheme, Companies in Liquidation and other Investor Complaints
Press Note 3/2001, dt. 2.7.2001
The Department of Company Affairs receives from general public a number of
complaints relating to Deposits, Mutual Funds, Collective Investment Schemes,
companies in liquidation and also other investor complaints.
2. The complaints relating to deposits in Banking Companies and Non-Banking
Financial Companies are dealt with RBI. Investors complaints relating to Non-Banking
Non-Financial Companies (Listed) are dealt with by the Securities and Exchange Board
of India (SEBI). The complaints in respect of Non-Banking Non-Financial Companies
(Unlisted) are dealt with by the Department of Company Affairs. The public are advised
to approach these regulatory bodies for redressal of their grievances in the first
instance itself. Similarly, complaints against companies in liquidation should be
addressed to the concerned Official Liquidators attached to the High Courts.
3. In the case of deposits from Non-Banking Non-Financial Companies, the
depositors should, in the first instance, approach the Company Law Board and if the
orders passed by the above Board are not honoured then they should approach the
concerned Registrar of Companies with a certified copy of the order of CLB.


4. Investors complaints of Unlisted companies are dealt with by the Department
of Company Affairs. These may be, in the nature of non-registration of transfer of
shares, non-refund of share application money, non-receipt of dividends, non-receipt
of duplicate shares, non-issue of share certificates, non-receipt of debenture
certificates, bonus shares, share certificates on conversion, after endorsement etc.
On receipt of a complaint, the same is registered and number is given. The
Department pursues the matter with the company and in the case of non-settlement
of the complaint, the matter is referred to Registrar of Companies for prosecution.
The status of the complaint is also displayed in the Website of the Department at
http:/www.nic.in/dca. [No. 5/13/2001-CL.V, issued by DCA].

LESSON ROUND-UP
The invitation and acceptance of deposits by non-banking non-financial
companies is regulated by the Companies Act, 1956 and the rules framed
thereunder.
Central Government has framed the Companies (Acceptance of Deposits) Rules,
1975.
Section 58A of Companies Act states that no Company shall invite or allow any
other person to invite any deposits unless deposits are invited in accordance with
the Rules framed thereunder, an advertisement has been issued by the company
in such form and manner as may be prescribed and unless the company has not
defaulted in repaying deposit or interest thereon.
Governing sections empowering the company to accept deposits are
Sections 58A, 58AA, 58AAA, 58B, 291, 292(1)(c), 293(1)(d) of the Companies Act.
Section 58A(7) provides non-applicability of the provisions of this section to
certain companies.
Depositor may make a nomination and provisions of Sections 109A and 109B
shall apply to the nomination of deposits.
A minor, non-resident can be nominated by holder of deposits.
The nominee shall not be trust, society, body corporate, partnership firm, Karta of
HUF or a power of Attorney holder.
Foreign Exchange Management (Deposit) Regulations 2000 regulates
acceptance of deposits from NRIs.
The provisions of the Companies Act relating to prospectus shall apply to
advertisements to be issued under Section 58A.
Companies (Acceptance of Deposits) Rules, 1975 provides for the limits upto
which, the manner in which and the conditions subject to which the deposits can
be invited and/or accepted by the non banking non-financial companies.
Rule 2(b) of the said rules, defines the term deposit
Rule 3(2) of the rules provides the ceiling upto which deposits can be accepted
by the company.
Ceiling on rate of interest is provided in Rule 3(1)(c) of the Rules.
Rule 3A deals with maintenance of liquid assets.
Supreme Court in Delhi Cloth Mills Co. Ltd. and Others vs. Union of India and
other upheld the Constitutional validity of Section 58A and Rule 3A of the
Companies (Acceptance of Deposits) Rules, 1975.
Company Law Board may direct the company to make repayment of deposits or
part thereof subject to such conditions as may be prescribed in the order.


SELF TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation)
1. Explain the manner in which the Companies Act, 1956 regulates and
controls the invitation for and acceptance of deposits by the companies from
their members and the public at large.
2. Discuss the limits of accepting deposits as prescribed under the
Companies (Acceptance of Deposits) Rules, 1975 as amended up-to-date.
3. What are the legal requirements if a company wants to invite deposits from
the public?
4. What transactions are not deemed to be deposits?
5. What are the particulars to be included in an advertisement inviting deposits
by a company?
6. What is the validity period of such an advertisement inviting deposits by a
company?
7. What kind of deposits are not deposits as per the definition of 'deposits'
under the Companies (Acceptance of Deposits) Rules, 1975?
8. Explain:
(a)Non-financial companies can accept deposits.
(b)Advertisement in the context of public deposits.
9. Write short notes on :
(i)Statement in lieu of advertisement
(ii)Return of deposits.
(iii)Small deposit holder
10. Insertion of Section 58AAA is intended to take a strict view against
companies that accept deposits and do not repay the same on maturity.
Comment.


Suggested Readings :
1. A Guide to Companies Act : A. Ramaiya.
2. Company Law & Practice : A.K. Majumdar & Dr. G.K. Kapoor.








STUDY XXI
CORPORATE ACCOUNTABILITY - I
ACCOUNTS AND AUDIT
LEARNING OBJECTIVES
This lesson explains the provisions for keeping books of accounts, inspection of
books of accounts and other provisions for balance sheet and profit and loss account
under the Companies Act. It also discusses provisions for audit and auditors, their
appointment, qualifications, resignation, removal, duties and liabilities.
At the end of the lesson, you should be able to understand:
Requirement of keeping books of accounts.
Inspection of costing records and stock records.
Maintenance of costing records and stock records.
Statutory books and statistical books.
Annual accounts: Balance Sheet and profit and loss account.
Authentication of annual accounts.
Directors report and Directors responsibility statement.
Liability of statements in the boards report.
Accounts of holding and subsidiary company.
Audit and its need.
Appointment of auditor.
Qualifications and disqualifications of audit.
Method of appointment of auditor.
Remuneration of auditor and their term of office.
Resignation and removal of auditors.
Auditors of government companies.
Rights, powers, duties and liabilities of auditors.
Audit of branch accounts.
Special audit and cost audit.
Cost audit report.
Social audit.
Notes on accounts and its contents.

ACCOUNTS
The shareholders provide capital to the company for running the business. They
are in a way, the owners of the company. But, all of them cannot take part in
managing the affairs of the company as their number is usually much more. But they
have every right to know as to how their money has been dealt with by the directors
in a particular period. This is why perhaps compulsory disclosure through annual
information to the shareholders by the directors about the working and financial
806


position of the company enables them to exercise a more intelligent and purposeful
control over the affairs of the company. For preparation of annual accounts the
maintenance of proper books of account is a must. Section 209 of the Companies
Act, 1956 contains such provisions for maintenance of proper books of accounts.
The requirement of maintenance of proper books of accounts has been further
amplified through the provisions of Section 541 of the Companies Act. Though the
provisions of this section relate to a situation involving winding up of a company, as a
general rule, they are relevant.
In terms of Section 541(2) of the Companies Act, 1956, proper books of accounts
shall be deemed to have been kept by a company if such books exhibit and explain
the transactions and financial position of the business of the company, including
books containing sufficiently detailed entries of daily cash receipts and payments.
Further, where the business of the company has involved dealings in goods,
statements of the annual stock takings and (except in the case of goods sold by way
of ordinary retail trade) of all goods sold and purchased, showing the goods and the
buyers and the sellers thereof in sufficient detail to enable those goods and those
buyers and sellers to be identified should also be maintained.
1. REQUIREMENT OF KEEPING BOOKS OF ACCOUNT
Section 209 of the Companies Act requires every company to keep at its
registered office proper books of account with respect to the following transactions:
(a) all sums of money received and expended by the company and the matters
in respect of which the receipt and expenditure took place;
(b) all sales and purchases of goods by the company;
(c) the assets and liabilities of the company;
(d) in the case of a company engaged in production, processing, manufacturing
or mining activities, such particulars relating to utilisation of material or
other items of cost as may be prescribed relating to certain class of
companies as the Central Government may require.
From the above it can be seen that this section does not name the books of
accounts which a company should keep. They may keep whatever books they like,
provided all the aforesaid transactions are recorded therein. Sub-section (3) of
Section 209 provides that proper books of account shall not be deemed to have been
kept with respect to aforesaid matters (i) if there are not kept such books as are
necessary to give a true and fair view of the state of affairs of the company or the
branch office, if any, and to explain its transactions; and (ii) if such books are not kept
on accrual basis and according to double-entry system of accounting.
Apart from the aforesaid books of account Sub-section (1)(d) of Section 209
provides that in case a company is engaged in production, processing, manufacturing
or mining activities, the Central Government may prescribe the maintenance of cost
accounting records for recording the utilisation of materials or other items of cost. So
far, the Government has issued Cost Accounting Records Rules for about forty-seven
different classes of companies engaged in the manufacture of Cement, Sugar,
Vanaspati, Fans etc. The aforesaid provisions of maintaining proper books as in Sub-


section (3) also applies to Cost Records.
Place of Keeping Books of Account
Section 209 requires every company to keep the aforesaid books of account at its
registered office. However, all or any of the books of accounts may be kept at such
other place in India as the Board of directors may decide. When the Board so decides
the company is required within seven days of such decision to file with the Registrar a
notice in writing giving full address of that other place in e-Form No. 23AA alongwith
requisite filing fee. If the accounting records are kept at a place other than the
registered office of the company they may be subject to a lien, e.g. a solicitors lien.
Books of Accounts in Respect of Branch Office
Where a company has a branch office whether in India or outside, the books of
account relating to transactions effected at the branch office may be kept at that
office. However, proper summarised returns must be sent by the branch office to the
registered office or to such other place where the books are kept at intervals of not
more than three months [Section 209(2)].
True and Fair View
The books of account should be kept on accrual basis and according to double
entry system of accounting. Further, they must give a true and fair view of the affairs
of the company or branch office and explain its transactions. The books of account
should not suppress any transaction nor should they contain any fictitious transaction.
These and other books and papers shall be open to inspection by any director during
business hours, as also by the Registrar or an officer authorised by the Central
Government/SEBI.
Preservation of Books of Account
Section 209(4A) casts an obligation upon a company to preserve in good order
the books of account together with the vouchers relevant to the entry in such books,
relating to the period of at least 8 years immediately preceding the current year, or if
the company has not been in existence for 8 years, then for the whole period of its
existence. As per Section 2(8) of Act, book includes a voucher also. Therefore, the
related vouchers and documents for 8 years have also to be preserved. It has been
clarified by the Department of Company Affairs in its Circular No. 2/83 dated 2/3/1983
that the books of account should be prepared and maintained in indelible ink (and not
in pencil) for giving a proper and adequate meaning to the words, proper books of
account in Section 209.
Under SEBI (Registrar to Issue and Share Transfer Agents) Rules, 1993, the
period prescribed for preservation of documents and records is that of three years. It
has been held that the documents relating to public issues are also a part of the
records under the Companies Act which requires the records to be preserved for
eight years. Hence the period prescribed by the Companies Act will prevail over that
prescribed by SEBI Regulations. [Rajesh Gupta v. SEBI (2000) 39 CLA 82 (SAT)].
Apart from the specific requirements of the Act as regards the keeping of
accounts, the manner of keeping the accounts should be the same as prudent


businessmen generally adopt [Hinds, v. Buenous Ayres Grand National Tramways
Co. Ltd. (1906) 2 Ch 654].
2. INSPECTION OF BOOKS OF ACCOUNT
Directors right of inspection
Sub-section (4) of Section 209 provides that books of account and other books
and papers should be available for inspection by any director on working days during
business hours. Book and Paper have been defined in Section 2(8) to include
accounts, deeds, vouchers, writings and documents.
Though generally the director should personally exercise this right of inspection,
the right is not so restricted that it can only be exercised personally by the director. In
Vakharia v. Supreme General Film Exchange Co. Ltd. (1948) 18 Com Cases 34 :
AIR 1948 Bom 301 it was held that a director is entitled to take inspection of
accounts personally or through an agent provided that there is no reasonable
objection to the person chosen and the agent undertakes not to utilise the
information obtained by him for any purpose other than the purpose of his
principal. The judgement was also endorsed in the case of Sugrabai Alibhai v.
Amtee Properties (P) Ltd., (1984) 55 Com Cases 734: (1982) 3 Comp LJ 159 (Bom).
In M.L. Thukral v. Krone Communications Ltd., (1996) 86 Com Cases 643 (CLB-
New Delhi), the petitioners (directors) wanted to exercise their right of inspection of
books of account accompanied by a chartered accountant. The Board (CLB) allowed
it subject to the undertaking being given by the Chartered Accountant that he would
disclose the information obtained through inspection only to the petitioners and not to
others.
The right of inspection can however, be refused if it is found that the inspection is
being sought to pass on the information to a rival business of the company.
Inspection by the Registrar/Officers of SEBI
Section 209A empowers the Registrar and any other officer authorised by the
Central Government to carry out inspection of books of account.
In Bajoria BM v. Union of India, (1972) 42 Com Cases 338 : 1971 Tax LR (Del),
the court held that the power of inspection under Section 209A is different from an
investigation under Section 235 and 237 and that it is not necessary for the Registrar
filing a complaint on the basis of inspection of accounts to give to the company before
hand a copy of the inspection report. In Indian Express (Madurai) P. Ltd. v. Chief
Presidency Magistrate, (1974) 44 Com Cases 106: it was held that these powers may
be overlapping but there is nothing to show that the power under this section cannot
be exercised when an inspection and investigation of affairs is going on under any
other provision.
The books of account can also be inspected by such officers of the SEBI as may
be authorised by it, in respect of matters covered under sections referred to in
Section 55A i.e. Sections 55 to 58, 59 to 84, 108, 109, 110, 112, 113, 116, 117, 118,
119, 120, 121, 122, 206, 206A and 207.


Members right of inspection of accounting records
Members of a company do not have a right of inspection of its accounting records
[Latika Rajya Lakshmi v.Indian Motor Co. Ltd.]. Table A, Article 95(2) also provides
that no members (not being a director) shall have any right of inspecting any account
or book or document of the company except as conferred by law or authorised by the
Board or the company in general meeting.
Where books of account of the company are with the managing director in his
official capacity, the third parties in a suit, which is not against the company, cannot
ask for the production of books of accounts [A.K. Chinnathambi Chettiar v. G.S.
Murugan, (1968) 2 Comp LJ 260 (Mad)]. The right of inspection of documents and
books of a company is not limited to the Board of Directors. In order to prove
allegations made in a petition under Sections 397 and 398, the shareholders are also
entitled to be allowed inspections of the books of account and other relevant papers
of the company.
Auditors right of inspection of accounts Section 227(1) empowers an
auditor with the right of access at all times to the companys accounts, whether kept
at the head office of the company or elsewhere.
3. MAINTENANCE OF COSTING RECORDS AND STOCK RECORDS
Section 209(1) read with Section 541(2) provides for the maintenance of proper
books of account and they obviously include the cost accounting records
[Section 209(1)(d)] and stock records [Section 541(2)], apart from normal books of
account. Section 209(1)(d) was included in the Act in 1965 to ensure that companies
engaged in production, processing, manufacturing or mining activities, if specifically
required by the Central Government, maintain detailed cost records in the manner
specified by the Central Government. Similarly, proper maintenance of stock records
is also a necessity as in the absence of proper stock record the truth and fairness of
the annual statement of accounts cannot be properly understood.
4. PERSONS RESPONSIBLE FOR KEEPING THE BOOKS OF ACCOUNT
Sub-section (6) of Section 209 specifies the persons who have been made
responsible for keeping the books of account and securing compliance by the
company with the requirements of Section 209 of the Act, they are:
(i) managing director or manager and all officers and other employees of the
company, and
(ii) where the company has neither a managing director nor manager then
every director of the company.
If any of the persons referred to above fails to take all reasonable steps to secure
compliance by the company with the requirements for keeping books of account or
has by his own wilful act been the cause of any default by the company in this
respect, he shall be punishable with imprisonment up to six months or with fine which
may extend to Rs. 10,000 or with both. No person shall be sentenced to
imprisonment unless it is proved that the contravention was committed by him wilfully.
However, in any proceedings against a person in respect of an offence under this


section consisting of a failure to take reasonable steps to secure compliance by the
company with the requirements of this section, it shall be a defence to prove that a
competent and reliable person was charged with the duty of seeing that those
requirements of this section were complied with and was in a position to discharge
that duty. It is also provided that no person shall be sentenced to imprisonment for
any such offence unless it was committed wilfully.
If any person other than those mentioned above, having been charged by the
managing director, manager or Board of directors, as the case may be, with the duty
of seeing that the requirements of this section are complied with makes default in
doing so, he shall in respect of each offence, be punishable with imprisonment for a
term which may extend to six months, or with fine which may extend to ten thousand
rupees or with both.
5. STATUTORY BOOKS
In addition to the books of account mentioned earlier, the Companies Act, 1956,
specifically requires certain other books to be kept by a company for maintaining a
record of its different activities in order to safeguard the interests of the shareholders
and creditors. These books are known as Statutory Books. According to the
Companies Act, 1956 the following books must be maintained by the company:
1. Register of investments in securities made by the company but not held by it
in its own name [Section 49(7)].
2. Register of fixed deposits.
3. Register of Securities bought back [Section 77A(9)].
4. Register of charges [Section 143(1)].
5. Register of Members [Section 150(1)].
6. Index of Members where the number is more than fifty unless the Register of
Members itself affords an index [Section 151(1)].
7. Register of Debentureholders [Section 152(1)].
8. Index of Debentureholders where the number is more than fifty unless the
Register of Debentureholders itself affords an index [Section 152(2)].
9. Register and Index of Beneficial Owners [Section 152A].
10. Foreign Registers of Members and Debenturesholders and their duplicates
[Sections 157(1) and 158(4)].
11. Books for recording minutes of proceedings of general meetings
[Section 193(1)].
12. Books for recording minutes of Board Meetings [Section 193(1)] and of
Committees of Directors.
13. Dividend Register.
14. Books of account [under Section 209(1)(a) to (c)].
15. Cost account records [under Section 209(1)(d) for companies engaged in


industries so specified by the Central Government].
16. Register of contracts, companies and firms in which directors are interested
directly or indirectly [Section 301(5)].
17. Register of directors, managing directors, manager and secretary
[Section 303(1)].
18. Register of directors shareholdings [Section 307(1)].
19. Register of investments or loans made, guarantee given or security provided
under Section 372A [w.e.f. 31.10.1998].
20. Register of renewed and duplicate share certificates [Rule 7 of the
Companies (Issue of Share Certificates) Rules, 1960].
21. Register of Postal Ballot.
Under Section 209(4) of the Companies Act, 1956 books of account and other
books and papers can be inspected by the directors of the company. It is, therefore,
implied that all the above statutory books can be inspected by the directors of the
company. These can also be inspected by the Registrar and any person so
authorised by the Central Government and Securities and Exchange Board of India
without giving any previous notice to the Company provided SEBI can inspect in
matters relating to Sections specified in Section 55A. (Section 209A).
Further, all the above books except books at Serial Nos. 12, 18, 19, 20 and 21
can be inspected by the members of the company; however, the register of directors
shareholding would be available for inspection only for 14 days before the Annual
General Meeting and 3 days after that. Copies can be obtained by the members,
debenture holders, creditors or public as the case may be except of Registers at
Serial Nos. 1, 4, 13 and 14, on the prescribed payment.
6. STATISTICAL BOOKS
In addition to the books of account and statutory books mentioned earlier, a
company usually maintains a number of statistical books in order to keep complete
records of the numerous details connected with the business operations. The keeping
of such books has become a necessity although there is no legal compulsion for the
same. The following is a list of such important books:
1. Share Application and Allotment Book
2. Share Call Book
3. Share Certificate Book
4. Share Transfer Book
5. Debenture Interest Book
6. Directors Attendance Book
7. Agenda Book
8. Dividend Mandate Register
9. Share Warrants Register
10. Register of certified transfers
11. Register of lost share certificates


12. Register of powers of attorney
13. Register of probates
14. Register of declaration under Section 187C
15. Register of documents sealed
16. Register of proxies
17. Register of inspection
18. Register of records and documents destroyed
19. Register of investors complaints
20. Register of transmission of shares
21. Register of transfer of debentures
22. Register of transmission of debentures
23. Register of employee stock options
24. Register of Sweat Equity Shares
25. Register of respect of SEBI (Substantial Acquisition of Shares and
Takeovers) Regulations, 1997
26. Register of respect of SEBI (Prohibition of Insider Trading) Regulations,
1992
27. Annual Return
7. ANNUAL ACCOUNTS : BALANCE SHEET AND PROFIT AND LOSS
ACCOUNT
In fact, the expression annual accounts embraces both balance sheet and profit
and loss account. In a wider sense, it also covers cash and fund flow statements,
directors report etc.
Section 210 of the Companies Act provides for laying of annual accounts before
Annual General Meeting and Section 211 relates to form and content of balance
sheet and profit and loss account.
Meaning of Balance Sheet
The term Balance Sheet means a statement prepared from the books of a
concern showing the debit and credit balances after the trading and profit and loss
accounts have been prepared a statement drawn up at the end of each trading
or financial period, setting forth the various assets, and liabilities of a concern at a
particular date. It is also described as a classified summary of the debit and credit
balance existing in the ledger after the Profit and Loss Account has been constructed,
because a balance sheet often contains items which cannot, strictly speaking, be
characterised either as assets or as liabilities. The balance sheet is arranged in such
a way as to show the assets and debit balances on the right hand side and liabilities
and credit balances on the left hand side and it represents the culmination of the
system of book-keeping and it should be a document setting forth the true position of
the business on the date as on which it is drawn up. It was stated in Legal
Remembrance v. Aktul Bandhu Gupta, ILR (1937) 1 Cal 328 A balance sheet is a
pictorial representation of the trading position of a company, easily appreciated not by


the ignorant people, but persons who are reasonably able to understand commercial
expressions and commercial conditions. The balance sheet is a shareholders quick
guide to ascertain the financial position of the company. A properly drawn up Balance
Sheet should give the following :
(i) the nature and the cost of assets of the company on the date of the balance
sheet;
(ii) the nature, extent and the type of liabilities on that date;
(iii) whether the company is solvent and whether it is over trading.
If the total assets exceed the total liabilities, the company is said to be solvent i.e.
it is able to pay its debts in full. On the other hand, if the total liabilities of a company
exceeds its total assets the company is said to be financially unsound.
Balance sheet when final
The provisions of Sections 205, 210, 215, 216 and 220 (2) of the Companies
Act make it clear that it is only after the balance sheet and profit and loss account
have been placed before and considered by the general body of the shareholders
of the company that they are finally accepted. It would, therefore, be correct to say
that the balance sheet and the accounts of the company are finalised only after the
seal of approval of the shareholders is obtained [Commissioner of Income Tax v.
National Industrial Corporation, (1982) 52 Com Cases 5353 : (1983) 1 Comp LJ
100 (Del)].
Balance sheet as acknowledgement of debt
The balance sheet of a company wherein the company admits its
indebtedness in a certain sum, to any person, is sufficient acknowledgement of
the debt. The approval of the balance sheet in Board meeting and signing of it
by two directors, as required by the Companies Act, is sufficient
acknowledgement for purpose of the Limitation Act [Jones v. Bellegroves
Properties Ltd., (1949) 2 All ER 198 (CA)].
It must, however, be noted that, though the balance sheet is signed by the
directors on behalf of the company several months after the balance sheet date, the
acknowledgement of debt relates to the date of the balance sheet and not the date on
which the directors sign it. [Re Gee & Co. (Woolwich) Ltd., (1974) 1 All ER 1149 (Ch
D)].
Preparation of Balance Sheet and Profit and Loss Account
From the books of account as mentioned above every company has to prepare a
balance sheet and profit and loss account for each financial year. According to
Section 211, every Balance Sheet of a company shall give a true and fair view of the
state of affairs of the company as at the end of the financial year and shall be in the
form set out in Part I of Schedule VI or as near thereto as circumstances permit. This
requirement is not applicable to a Banking or an Insurance Company or to any other
class of companies for which a form of balance sheet has been specified in the
separate Acts governing such companies. Every profit and loss account and balance
sheet of the company shall comply with the accounting standards recommended by
the Institute of Chartered Accountants of India and as may be prescribed by the


Central Government in consultation with the National Advisory Committee on
Accounting Standards. It has been also provided that the standards of accounting
specified by the Institute of Chartered Accountants of India shall be deemed to be the
Accounting Standards until the Accounting Standards are prescribed by the Central
Government. Where the profit and loss account and the balance sheet of the
company do not comply with accounting standards, it shall disclose in its profit and
loss account and balance sheet the deviation from accounting standards, reasons for
such deviation and the financial effect, if any, arising due to such deviation. The
Central Government may exempt any class of companies from compliance with any
of the requirements of Schedule VI relating to the form and contents of the balance
sheet if in its opinion it is necessary to grant exemption in the public interest. The
Central Government may modify on the application or with the consent of the Board,
in relation to that company, any of the requirements of Schedule VI as to the matters
to be stated in the balance sheet for the purpose of adapting it to the circumstances
of the company.
If any person who is responsible for keeping proper books of account fails to take
all reasonable steps to secure compliance by the company with the requirement of
law relating to the form and contents of the balance sheet, he is liable for each
offence to imprisonment for term extending up to six months or to a fine up to
Rs. 10,000 or with both.
The Department of Company Affairs, now Ministry of Corporate Affairs, has
issued a Notification No. GSR 305(E) on 14.5.2002 in order to modify Companies
(Fees on Applications) Rules, 1999, by inserting a fresh Rule 2(4), which provides
that every application made to the Central Government by a Hotel Company under
Section 211(4) of the Companies Act, 1956, seeking exemption from Paras 3(i)(a)
and 3(ii)(d) of Part II of Schedule VI, of the Act, shall be accompanied with the fees
as per following structure:
TABLE
A Hotel Company having an authorised share capital of Amount of
fees to be paid
(Rs.)
(i) Less than Rs. 25 lakhs 2,500
(ii) Rs. 25 lakhs or more but less than Rs. 5 crores 5,000
(iii) Above Rs. 5 crores. 10,000
The exemption, if so granted, shall be applicable for a period of 3 years.
Rounding off the figures in Balance Sheet
The Department of Company Affairs, now Ministry of Corporate Affairs, has
inserted a new note no. 3 to the notes to the Part I of the Schedule I of the Act,
through a Notification No. GSR 545(E) dated 1.8.2002. The new note, as per this
notification, allows the companies to round off the figures of their balance sheets as
per following guidelines:
Turnover in a Financial year (Rs.) Level of Rounding off permitted (Rs.)


(i) Less than 100 crores To the nearest hundreds or thousands,
or decimals thereof.
(ii) 100 crores or more but less than
500 crores
To the nearest hundreds, thousands,
lakhs or millions, or decimals thereof.
(iii) 500 crores or more To the nearest hundreds, thousands,
lakhs, millions or crores or decimals
thereof.
Further, the Department of Company Affairs, now Ministry of Corporate Affairs,
vide General Circular No. 20/2003 dated 25.4.2003 has clarified that the aforestated
rules for rounding off the figures in balance sheet, shall also be applicable to profit
and loss accounts of the concerned companies, so as to benefit the readers of these
statements, by making them consistent across both the balance sheet and profit and
loss account.
Investor Education and Protection Fund
An item named as Investor Education and Protection Fund has been added to
the current liabilities and provisions in part I of Schedule VI of the Act through a
Notification No. GSR 762(E) dated 13.11.2000 and effective from that date, so as to
make it mandatory for the companies to credit the following amounts to this fund:
(a) unpaid dividend;
(b) unpaid application money received by the companies for allotment of
securities and which are due for refund;
(c) unpaid matured deposits;
(d) unpaid matured debentures;
(e) interest accrued on (a) to (d) above.
(f) grants and donations given to the fund by the Central Govt., State Govts.,
Companies or any other institutions for the purposes of the fund.
(g) the interest or other income received out of the investments made from the
fund.
Form of Balance Sheet
As stated above, Part-I Schedule VI sets out the form in which the balance sheet
is to be prepared, gives details of the various items which must be disclosed and
gives instructions in accordance with which assets and liabilities should be set out.
Two forms have been prescribed for the balance sheet, one is the conventional form
called the horizontal form of balance sheet. In this form the liabilities including the
share capital are placed on the left side and assets of all types on the right. The main
heads in this form are arranged as under:
Liabilities Assets
(a) Share Capital (a) Fixed assets
(b) Reserves and surplus (b) Investments


(c) Secured Loans (c) Current assets, loans and advances
(d) Unsecured Loans (d) Miscellaneous expenditure to the
extent not written off or adjusted
(e) Current liabilities and
provisions
(e) Profit and Loss Account (debit
balance)
Total
The other prescribed form is usually called the vertical form of balance sheet. In
this form the various heads of liabilities and assets are arranged vertically and current
liabilities are shown as deduction, from current assets. A company can prepare its
balance sheet in any one of these forms. As per Section 211(4), the Central
Government may, on the application or with the consent of the Board of Directors of
the company, by order, modify in relation to that company, any of the requirements as
to matters to be stated in the companys balance sheet or profit and loss account for
adapting them to the circumstances of the company.
All information which are required to be given in the horizontal form have also to
be given where a company adopts the vertical form. Summarised prescribed vertical
form of balance sheet is given below :
I. Sources of Funds
(1)Shareholders funds:
(a) Capital
(b) Reserves and Surplus
(2)Loan funds :
(a) Secured Loans
(b) Unsecured Loans
Total
II. Application of Funds
(1)Fixed assets;
(2)Investments
(3)Current assets, loans and advances
Less: Current liabilities and provisions
(4) (a) Miscellaneous expenditure to the extent not written of or adjusted.
(b) Profit and Loss Account
Total
Meaning of Profit and Loss Account
Profit and loss account is the account by which the directors disclose to the
shareholders of the company the result of the actual working of the company. It
serves to give the shareholders an idea of the earning capacity of the company in
relation, to its capital, and enables them to judge about the administration and
management of the affairs of the company. Many people pay too much attention to a
companys balance sheet and too little attention to its Profit and Loss Account. It is
true that a companys balance sheet exhibits a position which is the result of
transactions that have taken place during the whole of its life, whereas the profit and
loss account only shows what the profits are for the year. It may also be true that


owning to special circumstances the profits for that particular year are abnormally
high or abnormally low and therefore afford little guide as to future profitability; but a
comparison of the result with that of preceding years, coupled with such information
as is given in the Directors Report should furnish a reliable guide to the earning
capacity of the business. By making the publication of the annual profit and loss
account compulsory, the law has recognised its importance for the purpose of
assessing the value of a companys business.
Contents of Profit and Loss Account
No standard form is prescribed for the profit and loss account or for the Income
and Expenditure Account of the company as has been done for the balance sheet
because there are many different types of industries and business interests and one
set of form may not be suitable for every company. Some companies which have
adopted horizontal form of balance sheet prepare their profit and loss account by
putting all the expenses on the left side of the account and income on the right side.
On the other hand, the companies who have adopted vertical form of balance sheet
also prepare their profit and loss account in vertical form by putting expenditure below
the income.
Every profit and loss account of a company shall give a true and fair view of the
companys profit or loss for the financial year for which it is drawn up. For this
purpose profit and loss account must be drawn in accordance with the requirements
of Part II of Schedule VI of the Companies Act, 1956. The profit and loss account
should disclose the following:
1. the result of the companys working during the period covered,
2. every material feature including credits and debits in respect of non-
recurring transactions or transactions of an exceptional nature,
3. transfers to and from reserves and provisions,
4. any material effect to transactions or circumstances of an abnormal,
exceptional or non recurrent nature,
5. any material effect of change in the basis of accounting.
In fact, profit and loss account is the account by which the directors disclose to
the shareholders of the company the result of the actual working of the company and
serves to give the shareholders an idea of the earning capacity of the company in
relation to its capital and enables them to judge about the administration and
management of the affairs of the company.
The Profit and Loss Account should consider all items of expenditure and income
which are related to the current year of operations. It should also provide for all
liabilities of a revenue nature related to the current year which could be estimated
with substantial accuracy.
It may also be noted that every company which makes a political contribution as
permitted under Section 293A is under an obligation to disclose in its profit and loss
account any amount or amounts contributed by it to any political party or for any
political purpose to any person during the financial year to which the account relates.
Such disclosure should give the particulars of the total amount contributed, name of


the party or person to which or to whom such amount has been contributed
[Section 293A(4)].
The Ministry of Corporate Affairs is of the view that there is a statutory obligation
on the part of companies to provide for proposed dividends in the profit and loss
account. Likewise the Ministry is of the view that gratuity should be provided for in the
accounts. In case it is not so provided a note should be appended in the accounts to
that effect stating the estimated liability under this head.
8. ANNUAL ACCOUNTS TO COMPLY WITH ACCOUNTING STANDARDS
Sub-section (3A) of Section 211 of Companies Act 1956 inserted by the
Companies (Amendment) Act, 1999 provides that every profit and loss account and
balance sheet of the company shall comply with the accounting standards.
Sub-section (3B) of the said section provides that where the profit and loss
account and the balance sheet of the company do not comply with the accounting
standards such companies shall disclose in their profit and loss account and balance
sheet, the following namely:-
(a) the deviations from the accounting standards;
(b) the reasons for such deviations; and
(c) the financial effect, if any, arising due to such deviations.
Sub-section (3C) of the said section lays down the meaning of the expression
accounting standards as the standards of accounting recommended by the Institute
of Chartered Accountants of India constituted under the Chartered Accountants Act,
1949 (38 of 1949), as may be prescribed by the Central Government in consultation
with the National Advisory Committee on Accounting Standards established under
Sub-section (1) of Section 210A.
9. NATIONAL ADVISORY COMMITTEE ON ACCOUNTING STANDARDS
The Companies (Amendment) Act, 1999 had inserted a new Section 210A in the
Companies Act, 1956 which provides for constitution of a National Advisory
Committee on Accounting Standards (hereinafter referred to as the Advisory
Committee) to advise the Central Government on the formulation and laying down of
accounting policies and accounting standards for adoption by companies or class of
companies. According to Section 210A, the Central Government may, by notification
in the Official Gazette constitute such Advisory Committee. The Advisory Committee
shall consist of the following members, namely:
(a) a chairperson who shall be a person of eminence well-versed in
accountancy, finance, business administration, business law, economics or
similar discipline;
(b) one member each nominated by the Institute of Chartered Accountants of
India, the Institute of Cost & Works Accountants of India and the Institute of
Company Secretaries of India.
(c) one member each nominated by Central Government, Reserve Bank of


India, Comptroller and Auditor General of India and SEBI;
(d) the chairman of the Central Board of Direct Taxes constituted under the
Central Boards of Revenue Act, 1963 or his nominee;
(e) a person who holds or has held the office of professor in accountancy,
finance or business management in any University or deemed University;
and
(f) two members to represent the Chambers of Commerce and Industry to be
nominated by the Central Government.
The Advisory Committee gives its recommendations to the Central Government
on such matters of accounting polices and standards and auditing as may be referred
to it for advice from time to time.
The members of the Advisory Committee hold office for such term as may be
determined by the Central Government at the time of their appointment and any
vacancy in the membership in the Committee shall be filed by the Central
Government in the same manner as the member whose vacancy occurred was filed.
The non-official members of the Advisory Committee shall be entitled to such
fees, travelling, conveyance and other, allowances as are admissible to the officers of
the Central Government of the highest rank.
In exercise of the powers conferred by clause (a) of sub-section (1) of
Section 642 of the Companies Act, 1956, read with sub-section (3C) of Section 211
and sub-section (1) of section 210A of the said Act, the Central Government, in
consultation with National Advisory Committee on Accounting Standards, issued, the
Companies (Accounting Standards) Rules, 2006.
Rules 3 specifies that the Central Government prescribes Accounting Standards
1 to 7 and 9 to 29 as recommended by the Institute of Chartered Accountants of
India. These Accounting Standards have been given as Annexure to these rules.
Every company and its auditor(s) shall comply with the Accounting Standards in the
manner specified in Annexure to these rules.
The Accounting Standards shall be applied in the preparation of General Purpose
Financial Statements. Accounting Standards, which are prescribed, are intended to
be in conformity with the provisions of applicable laws. However, if due to subsequent
amendments in the law, a particular accounting standard is found to be not in
conformity with such law, the provisions of the said law will prevail and the financial
statements shall be prepared in conformity with such law. Accounting Standards are
intended to apply only to items which are material.
The Central Government, in consultation with National Advisory Committee on
Accounting Standards has made the rules to be called the Companies (Accounting
Standards) Rules, 2006 vide notification No. G.S.R. 739(E) dated 07.12.06.
10. BALANCE SHEET ABSTRACT AND COMPANYS GENERAL BUSINESS
PROFILE
Part III of Schedule VI contains interpretation of Parts I and II of this Schedule.


Part IV provides for Balance Sheet Abstract and Companys General Business
Profile. Under this head a company is required to give the following information:
(i) Registration Details, Registration No., State Code, Balance Sheet Date.
(ii) Capital raised during the year separately through public issue, rights issue,
bonus issue and private placement.
(iii) Position of Mobilisation and Deployment of Funds separately giving sources
of funds and application of funds.
(iv) Performances of the company during the year in terms of its turnover, total
expenditure, profit /loss before and after tax as well as earnings per share
and rate of dividend declared.
(v) Generic names of three principal products/services of the company
detailing item code number (ITC Code) and product description.
11. LAYING OF ACCOUNTS
Section 210 requires that at every annual general meeting of the company, the
Board of directors must lay before the shareholders of the company a balance sheet
and a profit and loss account for the period specified in Sub-section (3); and in the
case of non profit companies, an income and expenditure account. The following
provisions of the Act are required to be kept in mind:
(1) Balance Sheet and Profit and Loss Account are to be prepared as per
provisions of Section 211 as discussed above.
(2) Auditors Report and Directors Report should be attached to the balance
sheet as required under Section 216 and 217 of the Act.
(3) The profit and loss account to be placed in the first annual general meeting
should relate to the period beginning with the incorporation of the company
and ending with a day, the interval between which and the date of the
meeting does not exceed nine months. [Section 210(3)(a)].
(4) In the case of subsequent annual general meetings, the profit and loss
account should relate to a period beginning with the day immediately after
the period for which the preceding profit and loss account was made and
ending with a day, the interval between which and the date of the meeting
should not exceed six months. Where the Registrar has granted extension of
time for holding the AGM under Section 166, such interval should not
exceed six months and the extended period [Section 210(3)(b)].
(5) The period to which the profit and loss account relates is known as the financial
year. It may be more or less than a calendar year, but it must not exceed 15
months or with the special permission of the Registrar, 18 months [210(4)].
Default in Laying of Accounts
According to Sub-section (6) of Section 210 of the Act, if any director fails to take


all reasonable steps to comply with the aforesaid requirements of Section 210 he is,
in respect of each offence liable to be punished with imprisonment upto six months or
with fine up to Rs. 10,000/- or with both. However, if some other competent person
had been charged with the duty of ensuring the compliance with the requirements
then he would be liable for such non-compliance. The legal position in this issue as
laid down through various case laws is as follows:
(i) The directors of a company cannot evade liability for failure to lay the
accounts and balance sheet before the Annual General Meeting merely by
stating that the auditor had not sent his report.
(ii) The directors must prove that some other competent and reliable person
was charged with the duty of seeing that the provisions of this section
were complied with [State of Bihar v. Linkers Pvt. Ltd., (1970) 40 Com
Cases 17].
(iii) That the Managing Director was looking after the accounts is also not a
defence unless the directors prove that he was charged with the duty. [State
of Bihar v. Linkers (Private) Ltd., AIR 1968 Pat 445].
(iv) Where the accounts were not placed before the company in annual general
meeting pending the disposal of a petition for amalgamation, but, relying
upon a circular of the Company Law Board, the directors adjourned the
annual general meeting, it was held that the directors could not be
prosecuted under Section 210(5). [Mundhra M.D. v. Assistant Registrar of
Companies (1980)].
(v) Where the default was due to reasons beyond the control of the persons
concerned, it is hard to fasten criminal liability on them. [Public Prosecutor
v. H.R. Basavaraj, (1963) 1 Comp LJ 130 (AP)].
(vi) In the case of default under this section no question as to whether such
default is wilful or not will arise. [Registrar of Companies, Orissa v. Radhika
Prasad Nanda (1978) 48 Com Cases 102 (Ori)].
(vii) The directors cannot be made liable for a default which took place long
before they became directors or officers of the company or after they ceased
to be directors by resignation. [Krishna Kumar Khemka v. R.O.C. West
Bengal (1986) 2 Crimes 604, 608 (Cal)].
(viii) The offence under Section 210 is not a continuing offence. [Dhanalaxmi
Chemical Industries (P) Ltd. v. Asstt. Registrar, 1988 LW (Cri) 180, 184
(Mad)].
(ix) The Asstt. Registrar of Companies is a person aggrieved and may file a
complaint under Section 210(5). [Bhagabati Prasad Tantia v. Asstt. Registrar
of Cos, (1983) 53 Com Cases 56 (Cal)].
(x) The Department of Company Affairs (Now Ministry of Corporate Affairs) in
its Circular no. 4/74 dated 2.2.1974 has clarified that in case where accounts
are not ready up to the holding of the annual general meeting, the same can


be adopted at the adjourned annual general meeting. The Division Bench of
Calcutta High Court in Bejoy Kumar Karnani v. Asstt. Registrar of
Companies, 88 CWN 1073 has held that if the Department Circular No. 4/74
dated 2.2.1974 is to be literally construed, the adjournment may go ad
infinitum and in such an event not only the provisions of Section 166 but
also the provision of Sections 168 and 210 would be rendered negatory
leading to chaos and confusion in the matter of enforcement of the relevant
provisions of the Act by the Registrar of Companies. Consequently, the
Department of Company Affairs, further clarified vide its circular No 2/85
dated 20.3.85 that no doubt, it is open to the company to adjourn the annual
general meeting to a subsequent date for laying the accounts but then, the
adjourned
meeting must itself be held within the statutory period [including the period of
extension thereof if any allowed as provided in Section 166(1)]. Thus, if the
accounts are not placed at the Annual General Meeting in either case
within the statutory period laid down in Sub-section (3) of Section 210
the delinquent directors are liable for prosecution under Sub-section (5)
thereof.
12. APPROVAL OF BALANCE SHEET AND PROFIT AND LOSS ACCOUNT
The balance sheet and profit and loss account must be approved by the Board of
directors and signed by the directors before they are submitted to the auditors for
their report (Section 215). In the case of a banking company the balance sheet and
profit and loss account shall be signed by the person mentioned in clause (a) or
clause (b) of Section 29(2) of the Banking Regulation Act, 1949. In the case of other
companies, the balance sheet and profit and loss account of a company must be
signed on behalf of the Board of directors by two directors and the manager, or
secretary, if any. If the company has a managing director, he should be one of the
signing directors.
13. PENALTY
Section 218 provides for penalty for non compliance with the provisions of
Sections 212, 215, 216 and 217. Thus, the company and every officer of the company
who is in default shall be punishable with fine which may extend to Rs. 5,000/- if:
(i) any copy of balance sheet and profit and loss account is, without being
signed as required by Section 215, issued, circulated or published; or
(ii) any copy of a balance sheet is issued, circulated or published without there
being annexed or attached thereto, as the case may be, a copy each of,
(a)the profit and loss account;
(b)any accounts, reports or statements which, by virtue of Section 212, are
required to be attached to the balance sheet;
(c)the auditors report; and
(d)the Boards report.


It may be noted that the proviso to Sub-section (1) of Section 383A requires that
company shall attach with the Boards report a copy of compliance certificate
obtained from secretary in whole time practice.
14. AUTHENTICATION OF ANNUAL ACCOUNTS BY SECRETARY
In terms of the provisions of Section 215, the signature by the secretary, if the
company has one, is mandatory. However, there may be companies who have, in spite
of legal obligation, not appointed a Managing Director and/or secretary. Where the
company has not appointed a secretary, despite the legal obligation in this regard, the
accounts would be deemed to have been property authenticated if they have been
signed by two directors, including the managing director, if any. Likewise, where the
annual accounts of such a company, which does not at the relevant time appointed a
Managing Director would be deemed to have been properly authenticated if they have
been authenticated by the secretary/manager, if any and two directors.
As the authentication by the secretary is on behalf of the Board of directors and
not in his personal capacity the secretary can be held responsible regarding errors,
etc. only as an officer of the company within the meaning of Section 628 and not
because of authentication by him under Section 215 as such. Where however, the
secretary is charged with the responsibility of maintaining the accounts and also
assisting the auditor at the time of auditing, he cannot conceivably escape
consequence of any wrong statement in the account (DCA's Circular No. 7 of 1972,
dated 12.5.1972).
Authentication, however, does not mean that the facts and figures or truth or
accuracy of the transactions in the accounts are all certified as true. Authentication only
implies that the documents authenticated are genuine and not fake. The secretary or
an ordinary director, for instance, who signs the balance sheet or profit and loss
account cannot be expected to guarantee the truth and accuracy of the transactions
and figures in the accounts presented, as it is not part of the duty of the secretary or
ordinary directors to vouch the truth or correctness of the items in the accounts as the
duty lies in those in management and/or responsible for maintaining the accounts.
15. AUTHENTICATION OF ANNUAL ACCOUNTS WHEN ONLY ONE DIRECTOR
IS AVAILABLE
As stated earlier, the balance sheet and the profit and loss account shall be
signed on behalf of the Board by (a) the manager or secretary if any and by (b) two
directors one of whom shall be a managing director where there is one. If there is no
managing director, then by (a) the manager or secretary, if any and (b) any two
director, shall sign the same. If only one director or managing director is, for the time
being in India, he can sign the balance sheet and the profit and loss account.
However, in such a case he is required to file with the Registrar of Companies, along
with the balance sheet and the profit and loss account, a signed statement explaining
the reason as to why compliance with the provisions of Sub-section (1) of
Section 215 was not possible.
16. TIME GAP BETWEEN AUTHENTICATION OF ACCOUNTS AND SIGNING BY
AUDITOR


Ministrys views Responsibility for the preparation of the accounts of a
company belongs to the directors who have to approve them before the auditors
make their report thereon. The Act is apparently silent on when the auditors may
commence their work of audit. In other words, it does not clarify whether they have
simply to await the directors report on the accounts or proceed with the audit work in
the meantime immediately after their appointment at the last annual general meeting.
The auditors report comes at the end of the audit process and Section 215 mentions
nothing of the process preceding the preparation of the audit report by the auditors.
Section 227 of the Companies Act, 1956, gives the auditors access at all times to the
books of account and vouchers of the company, which amply suggests that they do
not have to remain idle at any time after their appointment as auditors. Subject to the
convenience of the company, he may actually commence the checking up of
vouchers, etc., and the company may prepare Trial balances, balance sheets etc,
which will save time for the auditors in the preparation of their report in due course.
Thus, if the auditor signs the balance sheet on the same date on which the directors
have approved it, it may not be inferred from this circumstances that the auditor has
not performed the audit efficiently (Circular No. 7 of 1974 dated 26th April, 1974).
There is no violation of Section 215 where the audit is completed before approval of
the balance sheet by the Board of directors (Letter No. 8/13 (215)/5 CLV, dated
29.9.1965).
It appears that the Act contemplates two Board Meetings, one for the approval of
the accounts and another to answer any reservation, qualification or adverse, remark
in the auditors report, including the report under the Manufacturing and Other
Companies (Auditors Report) Order 1988, pursuant to provisions of Section 217(4). It
is, however, a common practice of practically all the companies to hold only one
Board Meeting for this purpose, after the auditors draft report is made available for
Boards consideration. This practice of submitting draft report by the auditor is to
avoid any discrepancy in the facts on which the auditors conclusions and Boards
replies thereto are based.
17. APPROVAL OF ANNUAL ACCOUNTS BY DELEGATION
The Department of Company Affairs (Now Ministry of Corporate Affairs) vide its
letter dated 27.10.1976 has clarified that in the absence of any specific provision in
Section 215, the power of the directors to approve the annual accounts cannot be
delegated to a committee of directors or some of the directors. It, inter alia, states that
the approval of annual accounts which are to be ultimately placed before the
shareholders of the company is not to be treated as a routine or part of day to day
work. Hence the Board of Directors must themselves consider the annual accounts
and approve them before the accounts are handed over to the statutory auditor of the
company.
18. CIRCULATION OF BALANCE SHEET AND AUDITORS REPORT
Section 219 of the Companies Act requires that a copy of every balance sheet,
profit and loss account, auditors report and every other document required to be
annexed or attached to the balance sheet must be sent not less than twenty-one
days before the annual general meeting at which they are to be laid, to:


(i) every member of the company;
(ii) every trustee for debenture holders whether such member or trustee is
entitled to have notice of general meeting to be sent to him or not; and
(iii) all other persons who are entitled to have notice of general meetings.
In the case of a company not having a share capital, the above documents need
not be sent to a member, or debenture holder who is not entitled to have notice of
general meetings.
Section 219(1)(b)(iv) provides that in case of listed companies, the company may
keep the aforesaid documents available for inspection at its registered office during
working hours for a period of twenty-one days before the date of the meeting and
send to every member and trustee for debentureholders only a statement containing
the salient features of these documents in the prescribed form.
Rule 7A has been inserted in the Companies (Central Governments) General
Rules and Forms, 1956 which prescribes Form 23AB for sending statement
containing salient features to members.
It is also provided that if the copies of documents are sent less than twenty-one
days before the date of the meeting, they shall, notwithstanding that fact, be deemed
to have been duly sent if it is so agreed by all the members entitled to vote at the
meeting.
If any default is made in complying with Sub-section (1), of Section 219 the
company and every officer of the company who is in default, shall be punishable with
fine which may extend to Rs. 5,000/-.
Any member or holder of debentures of a company and any person from whom
the company has accepted a sum of money by way of deposit shall, on demand, be
entitled to be furnished free of cost, with a copy of the last balance sheet of the
company and of every document required by law to be annexed or attached thereto,
including the profit and loss account and the auditors report [Section 219(2)].
If any person makes a demand for a copy of any document with which he is
entitled to be furnished by virtue of Sub-section (2), and if default is made in
complying with the demand within seven days after the making thereof, the company,
and every officer of the company who is in default, shall be punishable with fine which
may extend to five thousand rupees, unless it is proved that person had already
made a demand for and been furnished with a copy of the document.
Amendment of listing agreement submission of complete balance sheet
SEBI had in 1994, directed all Stock Exchanges to amend the relevant clause of
their listing agreement to provide that the companies shall supply a copy of the
complete and full Balance Sheet, Profit and Loss Account and the Directors Report
to each shareholder. However, in view of the various representations received,
according to which, the directions resulted in waste of paper, cost and time etc.,
particulary when shareholders reside in one household, SEBI has now advised all
stock exchanges to amend clause 32 (vide SM DRP/policy/Cir-98 dated 28.5.99) as
under:


Clause 32
The Company will supply a copy of the complete and full Balance Sheet, Profit
and Loss Account and the Directors Report, to each Shareholder and upon
application to any member of the Exchange.
However, the company may supply single copy of complete and full Balance Sheet
and Profit and Loss Account and Directors Report to the shareholders residing in one
household (i.e., having same address in the Books of Company/Registrars/Share
transfer agents). Provided that, the company on receipt of request shall supply the
complete and full Balance Sheet and Profit and Loss Account and Directors Report
also to any shareholder residing in such household. Further, the company will supply
abridged Balance sheet to all the shareholders in the same household.
In case the company has changed its name suggesting any new line of business
(including software business), after 1
st
January, 1998 or it changes the name
hereafter, then the company will disclose the turnover and income, etc., from such
new activities separately in the annual results for a period of 3 years from the date of
change in the name of the company.
In addition to the above provisions, listed companies which decide to change
their names would be required to comply with the following conditions:
1. a time period of at least 1 year should have elapsed from the last name
change
2. at least 50% of the total revenue in the preceding 1 year period should have
been accounted for by the new activity suggested by the new name.
The new name along with the old name shall be disclosed through the web sites
of the respective stock exchange/s where the company is listed and also through the
EDIFAR web site for a continuous period of one year, from the date of the last name
change.
The Company will also give a Cash Flow Statement along with Balance Sheet
and Profit and Loss Account. The Cash Flow Statement will be prepared in
accordance with the Accounting Standard on Cash Flow Statement (AS-3) issued by
the Institute of Chartered Accountants of India, and the Cash Flow Statement shall be
presented only under the Indirect Method as given in AS-3.
The company will mandatorily publish Consolidated Financial Statements in its
Annual Report in addition to the individual financial statements. The company will
have to get its Consolidated Financial Statements audited by the statutory auditors of
the company and file the same with the Stock Exchange.
The company will make disclosures in compliance with the Accounting Standard
on Related Party Disclosures in its Annual Report.
Disclosure of loans/advances and investments in its own shares by the listed
companies, their subsidiaries, associates etc.
The following disclosure requirements shall be complied by the companies in the
Annual Accounts:


Sr.
No.
In the accounts of Disclosures of amounts at the year end and the
maximum amount of loans/advances/investments
outstanding during the year.
1. Parent Loans and advances in the nature of loans to
subsidiaries by name and amount.
Loans and advances in the nature of loans to associates
by name and amount.
Loans and advances in the nature of loans where there is
(i) no repayment schedule or repayment beyond seven
years or
(ii) no interest or interest below section 372A of
Companies Act by name and amount.
Loans and advances in the nature of loans to firms/
companies in which directors are interested by name and
amount.
2. Subsidiary Same disclosures as applicable to the parent company in
the accounts of subsidiary company.
3. Parent Investments by the loanee in the shares of parent
company and subsidiary company, when the company
has made a loan or advance in the nature of loan.
Note: (1) For the purpose of the above disclosures the terms parent and
subsidiary shall have the same meaning as defined in the Accounting Standard on
Consolidated Financial Statement (AS-21) issued by ICAI.
(2) For the purpose of the above disclosures the terms Associate and Related
Party shall have the same meaning as defined in the Accounting Standard on
Related Party Disclosures (AS-18) issued by ICAI.
(3) For the purpose of above disclosures directors interest shall have the same
meaning as given in Sec. 299 of Companies Act.
The above disclosures shall be applicable to all listed companies except for listed
banks.
Petition before CLB
An aggrieved person may make an application to the Company Law Board for a
direction to a company to make available to him the necessary balance sheet etc.
The petition should be made in Form No. 1 of Annexure II to the Company Law Board
Regulations, 1991 [Regulation 14]. A fee of Rs. 50/- is required to be paid for every
such petition.
Copy of balance-sheet etc., to be delivered to Reserve Bank
As per the Reserve Banks directions issued to all non-banking companies


receiving deposits (which term includes borrowings) an audited balance-sheet as on
the last date of each financial year and an audited profit and loss account in respect
of that year as passed by the company in general meeting within fifteen days of such
meeting should be furnished by such companies to the Department of Non-Banking
Companies of the Reserve Bank (See Notifications Nos. DNBC./ 1 & 2/ED (S)-66
both, 29th October, 1966 and DNBC 21/DG/(S)-73, 23rd August, 1973).
19. ADOPTION OF ACCOUNTS AT ANNUAL GENERAL MEETING
An important business to be transacted at an annual general meeting is adoption
of the accounts including the balance sheet, profit and loss account and the directors
report thereon.
It may be noted that the balance sheet and profit and loss account are required to
be placed only at an annual general meeting and not at any other general meeting.
In case the annual accounts are not ready for laying at the appropriate annual
general meeting, the company may adjourn the said annual general meeting to a
subsequent date when the annual accounts are expected to be ready for laying. This
may be done by adopting a suitable resolution adjourning the said annual general
meeting to a specified date, or to a date to be specified later.
However, the adjourned annual general meeting should, inter alia, be held within
the time frame laid down in Sections 166 and 210 [Departments Circulars No. 4/47
dated 22.2.1974 and No. 2/85 dated 25.3.1985].
20. FILING OF ANNUAL ACCOUNTS WITH THE REGISTRAR
Section 220 requires every company to file with the Registrar within 30 days from the
day on which the balance sheet and profit and loss account were laid before the
company at the annual general meeting, a copy of its balance sheet and profit and loss
account signed by the managing director, manager or secretary of the company or if
there be none of these by a director of the company together with a copy of all
documents which are required by the Act to be annexed or attached thereto.
While requiring a private company also to file three copies of the balance sheet and
profit and loss account, Section 220 safeguards its privacy. Consequently, a private
company can file copies of balance sheet and profit and loss account separately.
Where the annual general meeting of a company for any year has not been held,
there shall be filed with the Registrar, a copy of the balance sheet and profit and loss
account, duly signed, within thirty days from the latest day on or before which that
meeting should have been held in accordance with the provisions of the Act. Section
220(2) provides that if for any reason, the annual general meeting before which a
balance sheet is laid does not adopt it, or is adjourned without adopting the balance
sheet or if the annual general meeting of a company for any year has not been held,
a statement of the fact and reasons therefor must also be annexed to the balance
sheet and to the copies thereof to be filed with the Registrar.
If default is made in complying with the requirements of Section 220 regarding
the filing of copies of balance sheet and profit and loss account, then the company
and every officer of the company who is in default shall be punishable with fine which
may extend Rs. 500 for every day during the period the default continues.
Kishan Prasad Palaypu v. Registrar of Companies [(2008) 83 SCL 376 (AP)]. A
director of the company along with another director were prosecuted under section 220


for their failure to file return, annual accounts and audited balance sheet required to be
laid before the annual general meeting. The director moved the Court under Section
482 of the Code of criminal procedure for quashing the proceedings contending that the
complaints filed were barred by limitation. Dismissing the petition, the Court held that
Section 162(1) provides for penalty at the rate of Rs.50 for every day till the default
continues, it must be held that default in complying with the provisions of Section
220(1) is a continuing default covered by Section 472 of the Code of Criminal
Procedure. The contravention of Section 220(1) made punishable under Section 220(3)
is a continuing offence and the period of limitation prescribed under Section 468 of the
Code does not apply to the prosecution launched against the company.
Where the default was due to reasons beyond the control of the company and
the officers concerned, it is hard to fasten criminal liability on them. But whether the
circumstances in any case were beyond control or not will be a question of fact.
[Great Indian Steam Navigation Co. Ltd. v. State, (1967) 37 Com Cases 135 (Cal)].
The prosecution has to prove that the person in question was a director at the
material time and also an officer in default, otherwise the case would fail.
Nothwithstanding the fact that a director who had sent in his resignation prior to the
due date of filing the copies of balance sheet he could still be held responsible for
the offence [Bipin Behari Nayak v. Registrar of Cos., (1988) 63 Com Cases 271
(Orissa)]. A director must be shown to be guilty of default [Ramacast Ltd. v. Asst.
Registrar of Cos., (1987) 3 Comp LJ 242].
As per Sub-section (1) of Section 220, a company is liable to file balance sheet
etc. whether the annual general meeting has been held in time or not, or whether the
balance sheet etc. is laid thereat or not; or, whether the annual general meeting is
adjourned, without the balance sheet etc. being laid or adopted thereat. The company
becomes punishable for its failure to do so per se because there is no excuse even
on the ground of sufficient reasons. [Asst. Registrar of Cos. v. Sudarsan Linkers
Ltd., (1988) 1 Comp LJ 107 (Mad)]. The Court will not quash a complaint for default in
filing balance sheets merely because a director claims to have retired from the post.
The fact that the company did not function is no excuse. So long as a company is
in existence and not wound-up, nothing stood in the way of holding a meeting or
preparing a balance sheet and profit and loss account and submitting the annual
return [Madan Gopal Dey. v. State of W.B., AIR 1968 Cal 79].
21. CLARIFICATIONS ISSUED BY THE DEPARTMENT OF COMPANY AFFAIRS
WITH RESPECT TO FILING OF ANNUAL ACCOUNTS:
1. Whether Registrar can take balance sheet and profit and loss account on record
if not laid before annual general meeting?
It has come to the notice of this Department that a company has sent to the
Registrar of Companies, for filing under Section 220, its balance sheet and profit and
loss account which had been laid before a general meeting and not an annual
general meeting. In this context the question arose for consideration as to whether
the Registrar could take the document on record in view of the clear provisions of
Sub-section (1) of Section 210 read with Sub-section (1) of Section 220 requiring the
balance sheet and profit and loss account to be laid before a company at an annual
general meeting before sending it to the Registrar for filing. The Department has
been advised that the balance sheet and profit and loss account are required to be


placed only at an annual general meeting and not at any other general meeting. In
case the annual accounts are not ready for laying at the appropriate annual general
meeting, it is open for the company concerned to adjourn the said annual general
meeting to a subsequent date when the annual accounts are expected to be ready
for laying. This may be done by adopting a suitable resolution adjourning the said
annual general meeting to a specified date or to a date to be specified later on.
In future balance sheets and profit and loss accounts which are not laid before an
annual general meeting of the company but submitted to the Registrar of Companies
for filing under Section 220 would not be taken on record. The question of launching
prosecution in such cases would be considered.
2. Whether Boards report is to be filed along with the balance sheet and profit and
loss account with the Registrar?
Second 220(1)(a) provides that three copies of the balance sheet and the profit
and loss account, together with three copies of all documents which are required to
be annexed or attached to the balance sheet and profit and loss account, shall be
filed with the Registrar of Companies. Since by virtue of Section 217(1), the Boards
report is a document required to be attached to the balance sheet, copies of said
report have also necessarily to be filed with the Registrar in terms of Section
220(1)(a). [Letter No. 44(69)-CL-IV/61, dated 11.12.1961].
3. Whether Registrar should call for separate report by auditors on profit and loss
account?
A private company is not required to attach to its profit and loss account, filed
with the Registrar of Companies, separate auditors report signed by the auditors.
Unless a private company has on its own volition reproduced the auditors report in
full on the balance sheet as well as on the profit and loss account, all that the
company should be able to do is to adopt either of the following two alternatives:
(a) to attach to the profit and loss account a copy, authenticated in the manner
specified in Section 220(1)(a), of the full auditors report as attached to the
balance sheet;
(b) to attach to the balance sheet a copy of the relevant extracts from the
auditors report pertaining to the balance sheet only and to attach to the
profit and loss account a copy of the full auditors report the copy of the
auditors report in each case to be authenticated in the manner specified in
Section 220(1)(a).
The Registrar should put to the company concerned both the alternatives and
leave it to the choice of adopting either of the alternatives. In no case should they call
for a separate report by the auditors on the profit and loss account of a private
company [Letter No. 15(62)-CL-VI/61, dated 2.3.1962.].
4. Whether separate filing fee is required for profit and loss account and whether
only members are to be permitted to inspect profit and loss account?
No separate filing fee in respect of the profit and loss accounts of private
companies filed under Section 220 need be charged, if filed at the same time as the
balance sheet is filed.


If a person seeks inspection of the profit and loss accounts of a private company,
the Registrar should make sure that he is a member of the company by referring to
the list of members and demanding to see share scrip duly endorsed in his favour.
[Letter No. 8/16(1)(61)-PR, dated 25.2.1961].
5. Reopening/Revision of Annual Accounts after adoption in Annual General
Meeting
It has been clarified that a company could reopen and revise its accounts even
after their adoption in the annual general meeting and filing with the Registrar of
Companies in order to comply with technical requirements of any other law to achieve
the object of exhibiting true and fair view. The revised Annual Accounts would be
required to be adopted either in the extraordinary general meeting or in the
subsequent annual general meeting and filed with the Registrar of Companies.
[Circular No. 1/2003 dated 13th January, 2003].
22. INSPECTION OF ANNUAL ACCOUNTS IN CASE OF PRIVATE COMPANIES
No person other than a member of the company is entitled to inspect, or obtain
copies, of the profit and loss account under Section 610 of the Act, in the case of:
(i) a private company which is not a subsidiary of public company;
(ii) a private company whose entire paid-up capital is held by one or more
bodies corporate incorporated outside India.
23. DUTY OF OFFICER TO MAKE DISCLOSURE OF PAYMENTS, ETC.
Section 221 provides that where any particulars or information is required to be
given in the balance sheet or profit and loss account of a company or in any
document required to be annexed or attached thereto, it shall be the duty of the
concerned officer of the company to furnish without delay to the company, and also to
the companys auditor whenever he so requires, those particulars or that information
in as full manner as possible.
The particulars or information referred to herein may relate to payments made to
any director or other person by any other company, body corporate, firm or person.
24. CONSTRUCTION OF REFERENCES TO DOCUMENTS ANNEXED TO
ACCOUNTS (SECTION 222)
References in this Act to documents annexed or required to be annexed to the
companys accounts or any of them shall not include the Boards report, the auditors
report or any document attached or required to be attached to those accounts.
It is however provided that any information which is required by this Act to be
given in the accounts and is allowed by it to be given in a statement annexed to the
accounts, may be given in the Boards report instead of in the accounts, and if any
such information is so given, the report shall be annexed to the accounts and this Act
shall apply in relation thereto accordingly, except that the auditors shall report
thereon only in so far as it gives the said information.
25. DETERMINATION OF NET PROFITS
The Companies Act, 1956, provides that Net Profit for the purposes of


calculating managerial remuneration is to be computed in accordance with the
provisions of Section 349 and 350 of the Act.
The provisions of the above sections require that in computing net profits of a
company in any financial year for the purpose of calculating managerial remuneration
the following points should be considered:
(1) Credit shall be given for:
Bounties and subsidies received from any Government or any public
authority constituted or authorised in this behalf by the Government unless
the Central Government otherwise directs.
(2) Credit shall not be given for the following sums:
(a)profits, by way of premium, on shares or debentures of the company which
are issued or sold by the company;
(b)profits on sales by the company of forfeited shares;
(c)profits of capital nature including profits from the sale of the undertaking or
any of the undertakings of the company, or of any part thereof;
(d)profits from the sale of any immovable property or fixed assets of a capital
nature comprised in the undertaking or any of the undertaking of the
company unless the business of the company consists, whether wholly
or partly, of buying and selling any such property or assets.
Provided that where the amount for which any fixed assets is sold exceeds the
written down value thereof referred to in Section 350, credit shall be given for so
much of the excess as is not higher than the difference between the original cost of
that fixed asset and its written down value.
(3) The following sums shall be deducted:
(a)all the usual working charges;
(b)directors remuneration;
(c)bonus or commission paid or payable to any member of the companys staff,
or to any engineer, technician or person employed or engaged by the
company, whether on a whole-time or on a part-time basis;
(d)any tax notified by the Central Government as being in the nature of a tax on
excess or abnormal profits;
(e)any tax on business profits imposed for special reasons or in special
circumstances and notified by the Central Government in this behalf;
(f)interest on debentures issued by the company;
(g)interest on mortgages executed by the company and on loans and advances
secured by a charge on its fixed or floating assets;
(h)interest on unsecured loans and advances;
(i)expenses on repairs, whether to immovable or to movable property, provided
the repairs, are not of a capital nature;
(j)outgoings, inclusive of contributions made under clause (e) of Sub-section (1)
of Section 293 which states as follows:
The Board of directors of a public company or of a private company which is


a subsidiary of a public company, shall not, except with the consent of
such public company or subsidiary in general meeting, contribute to
charitable and other funds not directly relating to the business of the
company or the welfare of its employees, any amounts the aggregate of
which will, in any financial year, exceed Rs. 25,000 or 5% of its average
net profits as determined in accordance with the provision of Sections
349 and 350 during three financial years immediately preceding,
whichever is greater.
(k)depreciation to the extent specified in Section 350 which allows the following
deductions:
(i) the amount calculated with reference to the written down value of the
assets as shown by the books of the company at the rate specified in
Schedule XIV;
(ii) excess of written down value over the sale proceeds or scrap value
of the asset if it is sold, discarded, demolished or destroyed before
the depreciation on such asset has been provided in full.
(l)the excess of expenditure over income, which had arisen in computing the net
profits in accordance with Section 349 in any year which begins at or
after the commencement of this Act, in so far as such excess has not
been deducted in any subsequent year preceding the year in respect of
which the net profits have to be ascertained;
(m)any compensation or damages to be paid by virtue of any legal liability,
including a liability arising from a breach of contract;
(n)any sum paid by way of insurance against the risk of meeting any liability such
as is referred to in clause (m);
(o)debts considered bad and written off or adjusted during the year of account.
(4) The following sums shall not be deducted:
(a)income-tax and super-tax payable by the company under the Income-tax Act,
1961 or any other tax on the income of the company not falling under
clause (d) and (e) of (3) above;
(b)any compensation; damages or payments made voluntarily that is to say,
otherwise than in virtue of a liability such as is referred to in clause (m)
of (3) above;
(c)loss of a capital nature including loss on sale of the undertaking or any of the
undertakings of the company or of any part thereof not including any
excess referred to in the proviso to Section 350 of the written down
value of any asset which is sold, discarded, demolished or destroyed,
over its sale proceeds or its scrap value.
It is to be noted here that the above provisions do not apply to a private
company, unless it is subsidiary of a public company.
26. DIRECTORS REPORT
Section 217 provides that there shall be attached to every balance sheet laid


before a company in general meeting (in practice, the annual general meeting) a
report by its Board of directors, with respect to:
(a) the state of the companys affairs;
(b) the amount, if any, which it proposes to carry to any reserves in such
balance sheet;
(c) the amount, if any, which it recommends should be paid by way of dividend;
(d) material changes and commitments, if any, affecting the financial position of
the company which have occurred between the end of the financial year of
the company to which the balance sheet relates and the date of the report.
(e) the conservation of energy, technology absorption, foreign exchange
earnings and outgo, in such manner as may be prescribed [Section 217(1)].
Events occurring after the Balance Sheet Date
It may happen that an event occurring after the balance sheet date, which affects
materially the solvency of the undertaking of the company or is otherwise of great
importance to the shareholders cannot be taken into account in drawing up the
balance sheet and the profit and loss account. Professional bodies in advanced
countries have recommended that such an event should be brought to the notice of
the shareholders either in the directors report or in the chairmans statement.
Although the expression material changes and commitments if any, affecting the
financial position of the company.... occurring in the new clause (d) of Sub-section
(1) of Section 217 seems to be clear enough to itself, it may be stated, purely by way
of illustration, that the expression would include event such as the following, namely,
the disposal of a substantial part of the undertaking, the profit or loss whether of a
capital or revenue nature, changes in the capital structure, alteration in the wage
structure arising out of trade union negotiations, purchases, construction, sale or any
catastrophe befalling the fixed assets, incurring or any reduction of long term
indebtedness, awards in litigation entering to a cancellation of contracts and refund of
taxes or completion of assessments. [Department of Company Affairs Vide Letter No.
8/16(1)61-PR dated 9.5.1961].
The Boards report shall, so far as is material for the appreciation of the state of
the companys affairs by its members and will not in the Boards opinion be harmful
to the business of the company or of any of its subsidiaries, deal with any changes
which have occurred during the financial year:
(a) in the nature of companys business;
(b) in the companys subsidiaries or in the nature of the business carried on by
them; and
(c) generally in the classes of business in which the company has an interest
[Section 217(2)].
Finney and Miller in their book Principles of Accounting suggest that Material
Changes, to be disclosed might include the following :
(a) The purchase, sale or destruction of plant or the destruction of inventories.
(b) A material decline in the market value of inventories or investments.


(c) The expiration of a patent which had given the company a virtual monopoly
in the sale of its principal products.
(d) The settlement of tax liabilities of prior period or the settlement of any legal
or other proceedings either favourably or adversely, if they were pending at
the balance sheet date.
(e) The institution of important proceedings against the company.
(f) Material changes in the capital structure resulting from the issuance,
retirement or conversion of share capital or stock.
Particulars in respect of certain employees Sub-section (2A) of
Section 217 provides that the Boards report shall also include a statement showing
the name of every employee of the company who (i) if employed throughout the
financial year, was in receipt of remuneration for that year which, in the aggregate,
was not less than such sum as may be prescribed (Presently, Rs. 24,00,000 w.e.f.
17.4.2003; or (ii) if employed for a part of the financial year, was in receipt of
remuneration for any part of that year, at a rate which, in the aggregate, was not less
than such sum per month as may be prescribed (Presently, Rs. 2,00,000, Notification
No. GSR No. 288(E) dated 17.4.2002); or (iii) if employed throughout the financial
year or part thereof, was in receipt of remuneration in that year which, in the
aggregate, or as the case may be, at a rate which, in the aggregate, is in excess of
that drawn by the managing director or whole-time director or manager and holds by
himself or along with his spouse and dependent children, not less than two per cent
of the equity shares of the company. Remuneration has the meaning assigned to it
in the Explanation to Section 198.
The aforesaid shall also indicate (i) whether any such employee is a relative of
any director or manager of the company and if so, the name of such director or
manager, and (ii) such other particulars as may be prescribed.
The particulars in respect of employees have been prescribed by the Companies
(Particulars of Employees) Rules, 1975. They are as follows :
(a) Designation of the employee;
(b) Remuneration received, including allowance and perquisites, i.e., all
expenses incurred by the company in providing any benefit or amenity to the
employee, and not net take home pay. In other words, total amount spent
by the company on the employee is to be disclosed.
(c) Nature of employment, whether contractual or otherwise;
(d) Other terms and conditions;
(e) Name of duties of the employee;
(f) Qualification and experience of the employee;
(g) Date of commencement of employment;
(h) Age;
(i)Last employment held by such employee before joining the company. Last


employment means the post last held in any other company or in any
organisation, etc. The particulars of the last employment including the
designation of post and the period during which it was held may also be
indicated.
(ii)The percentage of equity shares held by the employee in the company within
the meaning of Sub-clause (iii) of Clause (a) of Sub-section (2A) of
Section 217 of the Act.
The Boards report shall also specify the reasons for the failure, if any, to
complete the buy-back within the time specified in Sub-section (4) of Section 77A.
[Sub-section (2B) of Section 217.
Conservation of energy, technology absorption, foreign exchange earnings
and outgo. The Boards report has to give prescribed details about consumption of
electricity, coal and furnace oil and others, either from internal generation or otherwise,
in respect of difference products and items including any variation thereof, with
reference to any of the twenty-one industries listed in the schedule to the Companies
(Disclosure of Particulars in the Report of Board of Directors) Rules, 1988. The
corresponding particulars for the previous financial year have also to be disclosed.
Although clause (e) of Sub-section (1) of Section 217 does not make any specific
mention of research and development efforts made by the company, Form B which
lays down the particulars to be disclosed, as regards technology absorption, is
divided into two parts, one relating to research and development and the other
relating to technology absorption and innovation. This is quite understandable
because technology absorption cannot be thought of, except for imported technology,
without development of indigenous technology and such development can take place
only through research and development efforts. Similarly, technology absorption
cannot be totally divorced from adaptations and innovations in the direction of
absorption. It is significant to note that there is no requirement of disclosure in respect
of imported technology which is more than six years old.
Although clause (e) of Sub-section (1) uses the expression foreign exchange
earnings and outgo, the particulars required to be disclosed also cover, besides total
foreign exchange used and earned, activities relating to exports, initiative taken to
increase exports, development of new export market of products and services and
also export plans for the future. It is pertinent to note that as regards foreign
exchange earnings and outgo, details are required to be furnished as per the
requirements of Part II of Schedule VI.
27. DIRECTORS RESPONSIBILITY STATEMENT
The Boards report shall also include a Directors Responsibility Statement as
required under Section 217(2AA) indicating therein
(i) that in the preparation of the annual accounts, the applicable accounting
standards had been followed along with proper explanation relating to
material departures;
(ii) that the directors had selected such accounting policies and applied them
consistently and made judgements and estimates that are reasonable and


prudent so as to give a true and fair view of the state of affairs of the
company at the end of the financial year and of the profit or loss of the
account for that period;
(iii) that the directors had taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of this Act
for safeguarding the assets of the company and for preventing and detecting
fraud and other irregularities;
(iv) that the directors had prepared the annual accounts on a going concern
basis.
Directors Responsibility Statement is aimed at highlighting the accountability of
the directors with a view to ensuring good corporate governance. It will make the
directors accountable to safeguard the assets of the company and to take positive
steps in this regard.
Any information required by the Act to be stated in the accounts which may as
well be included in a statement annexed thereto, may be given in Boards report
instead of being given in the accounts. In such a case, the report must be annexed to
the accounts and the auditors must report on the information given in the report in
addition to the report on the accounts (Proviso to Section 222).
Comment on Auditors Report
The Board is also bound to give fullest information and explanation as regards
any reservation, qualification or adverse remarks contained in the auditors report; in
an addendum to the report [Section 217(3)]. This obviously means that where the
auditors of the company have made a separate or qualified report the Board should
meet again and add an addendum to its report, containing explanation on the matters
raised by the auditors in their report. Reference to notes made in the accounts by the
auditors in their report is treated as a qualified report by the auditors to which the
Board must reply.
28. DIRECTIONS OF RBI
Apart from the foregoing provisions of 217 of the Companies Act, 1956, Reserve
Bank of India has on 31.1.1998 issued certain directions to be complied with by all
non-banking companies receiving deposits, with regard to their report to be attached
to every balance sheet to be placed before the shareholders at every annual general
meeting. The Boards report of such a company shall include the following particulars
or information, namely
(i) the total number of accounts of public deposit of the company which have
not been claimed by the depositors or not paid by the company after the
date on which the deposits became due for repayment.
(ii) the total amounts due under such accounts remaining unclaimed or unpaid
beyond the dates referred to in clause (i) aforesaid.
The above mentioned RBI directions further lay down that the said particulars
shall be furnished with reference to the position as on the last day of the financial


year to which the report relates, and if the amounts remaining unclaimed or
undisbursed, as referred in sub-clause (ii) above of the preceding clause, exceed in
the aggregate the sum of Rupees five lakhs, there shall also be included in the report
a statement on the steps taken or proposed to be taken by the Board of directors for
the payment of the amounts due to the depositors and remaining unclaimed or
undisbursed.
29. SIGNING OF BOARDS REPORT
The Boards report and any addendum thereto must be signed by its chairman if
he is authorised in that behalf by the Board, or alternatively by at least two directors
one of whom must be the managing director of the company, where there is one.
Default by a director, or by any other person who has been charged by the Board
with the duty of seeing that the provisions of this section are complied with and fails
to take all reasonable steps to comply with the provisions of the section or if a
chairman signs the Boards report without being authorised so to do will render
himself liable for each offence to be punishable with imprisonment upto 6 months or
with fine upto Rs. 20,000 or with both. The punishment of imprisonment can be
ordered only if the offence was committed wilfully.
In T.P.G Nambiar v. ROC (1998) 92 Comp. Cas. 564 (Kar), it was held that just
because statement under Section 217 furnished to Registrar of Companies was not
properly numbered or it was in a blue sheet etc., that by itself could not be an offence
to proceed against directors.
Besides, in any proceedings against a person in respect of an offence under
Sub-section (1) of Section 217, it shall be a defence to prove that a competent and
reliable person was charged with the duty of seeing that the provisions of that sub-
section were complied with and that person was in a position to discharge that duty.
30. LIABILITY FOR STATEMENTS IN THE BOARDS REPORT
On the principle laid down in Hedley Byrne & Co. Ltd. v. Heller and Partners Ltd.
(1963) 2 All ER 575 (HL) : (1964) 1 Comp LJ 14 (HL) a director may incur liability to
individual shareholders who act in reliance upon a negligent misstatement made, e.g,
in the directors report since the relationship between a director and the members will
normally be such as to impose a duty to take care in making such statements.
Whether a similar liability may be incurred to non members is a question of fact in
each case, depending upon the circumstances in which the statement is made.
31. COMPLIANCE CERTIFICATE
The Companies (Amendment) Act, 2000 had inserted a proviso to Sub-section
(1) of Section 383A of the Companies Act, 1956 with regard to issue of Compliance
Certificate. As per the proviso, every company not required to employ a whole time
secretary under Section 383A(1) of the Companies Act and having a paid-up share
capital of ten lakh rupees or more shall file with the Registrar a certificate from a
secretary in whole-time practice in such form and within such time, as to whether the
company has complied with all the provisions of the Companies Act, 1956 and a copy
of such certificate shall be attached with Boards report referred to in Section 217. In
terms of this proviso, the Central Government has prescribed the Companies


(Compliance Certificate) Rules, 2001 which have come into force w.e.f. February 1,
2001.
Every company to which these Rules apply is required to file with the Registrar
the Compliance Certificate within 30 days from the date on which its annual general
meeting is held. Where the annual general meeting of such company for any year
has not been held, such certificate is required to be filed with the Registrar within 30
days from the latest day on or before which that meeting should have been held in
accordance with the provisions of the Companies Act. In case the annual general
meeting is held and adjourned, the Compliance Certificate should be filed with the
ROC within 30 days from the date on which such adjourned meeting was held
provided such adjourned meeting is held within the statutory limit.
32. CORPORATE GOVERNANCE REPORT
Corporate governance aims to improve the companys image, efficiency,
effectiveness and social responsibility. It encompasses in itself a range of corporate
controls and accountability mechanisms designed to meet the aims of corporate
stockholders. It deals with issues regarding transparency, accounting integrity,
composition of the board of directors, the role of non-executive directors and their
accountability to the shareholders, etc.
To implement the concept of corporate governance, SEBI advised all stock
exchanges to amend their listing agreement to incorporate a clause in respect of
corporate governance. In terms of this clause (Clause 49 of the listing agreement),
annual report of company shall include a separate section on corporate governance,
with a detailed compliance report on corporate governance. Non-compliance of any
mandatory requirement, i.e. which is part of the listing agreement with reasons
thereof and the extent to which the non-mandatory requirements have been adopted
should be specifically highlighted.
33. ACCOUNTS OF HOLDING AND SUBSIDIARY COMPANIES
The Balance sheet of a holding company, which is placed before the
shareholders for adoption in an annual general meeting under Section 210, should
have annexed to it the following documents relating to each of its subsidiaries
(Section 212):
(a) a copy of the balance sheet of the subsidiary;
(b) a copy of its directors report;
(c) a copy of its profit and loss account;
(d) a copy of its auditors report;
(e) a statement containing the following particulars:
(1)the extent of holding companys interest in the subsidiary at the end of the last
financial year.
(2)The net aggregate amount of profits or losses in the subsidiary so far as it
concerns the members of the holding company and is not dealt with in
the holding company accounts;
(3)any change in the holding companys interest in the subsidiary;


(4)details of any material change occurring between the end of the financial year
of the subsidiary and the financial year of the holding company in
respect of :
(i) the subsidiarys fixed assets;
(ii) its investments;
(iii) the moneys lent by it; and
(iv) the moneys borrowed by it for any purpose other than that of meeting
current liabilities.
Where the Board of directors of the holding company is unable to obtain the
necessary information for the purpose aforesaid, then a report to that effect should be
annexed to the balance sheet of the holding company.
The Central Government may, on the application or with the consent of the Board
of directors of the company, waive the compliance of these requirements either
wholly or to such an extent, as may be directed, in relation to any subsidiary [Section
212(8)]. The profit and loss account, the report of the Board of directors and the
report of the auditors in respect of the subsidiary company are to be made out in the
same manner as required under the Act for the holding company.
Where any person responsible for securing compliance with the provisions of
Section 212, fails to take all reasonable steps to comply with the provisions of this
section, he shall, in respect of each offence be punishable with imprisonment for a
term which may extend to six months or with fine which may extend to one thousand
rupees or with both.
Provided that in any proceedings against a person in respect of an offence under
this section it shall be a defence to prove that a competent and reliable person was
charged with the duty of seeing the provisions of this section were complied with and
was in a position to discharge that duty. It is also provided that no person shall be
sentenced to imprisonment for such offence unless it was committed wilfully
[Section 212(9)].
The financial year of the subsidiary company may end on the same day or not as
that of the holding company, but should not be earlier than six months from the day
on which the holding companys financial year ends. Where the subsidiary has a
shorter year, then the documents referred to above should be for two or more
financial years, the total duration of which is not less than the duration of the financial
year of the holding company. A holding company may by resolution, authorise its
representatives to inspect the books of its subsidiaries (Section 214).
With a view to securing uniformity where it appears to the Central Government
desirable for a holding company or a holding companys subsidiary, to extend its
financial year and for that purpose to postpone the submission of the relevant
accounts, to a general meeting, the Central Government may, under Section 213 on
the application of or with the consent of the directors of the company whose financial
year is to be extended, direct that in the case of that company, the submission of
accounts to a general meeting, the holding of an annual general meeting or the
making of an annual return shall not be required to be submitted, held or made,


earlier than the dates specified in the direction.
Under Section 212(1)(e) of the Companies Act, a statement of the holding
companys interest in the subsidiary as specified in Sub-section (3) shall be attached
to the balance sheet of a holding company having a subsidiary at the end of the
financial year as at which the holding companys balance sheet is made out. No
standard form in respect of the statement referred to above has, however, been given
in the Act. The statement referred to in the above section is to be signed by two
persons by whom the balance sheet of the holding company is required to be signed.
This statement is not required to be certified by the Auditors.
Besides the compliance of the provisions of Section 212 of the Companies Act,
1956, the companies shall also comply with the requirements of Accounting Standard
21 issued by the Institute of Chartered Accountants of India.
34. CHAIRMANS SPEECH
The Companies Act, 1956 does not have any statutory provision regarding
circulation, publication or otherwise of Chairmans Speech. However, it is customary
in big companies for the chairman to make a speech highlighting the various aspects
of companys operations during the year and indicating the prospects of the company
for the future. Basically, the chairmans speech is to give details or highlight aspects
which are not covered in the directors report as the latter document includes only
statutory information.
The chairmans speech is delivered by him at the annual general meeting before
the meeting takes up the consideration of the statutory items starting from reading of
the notice, auditors report and the discussion on the accounts of the company.
Copies of the speech are sometimes distributed to the members attending the annual
general meeting.
It is also customary to publish the chairmans speech or an abridged version
thereof in leading newspapers for the interest of the general public and prospective
investors. A note is also added that the speech published does not purport to be the
proceeding of the meeting as a pre-cautionary measure since Section 197 of the Act
prohibits the publication at the companys cost any report of the proceedings of a
meeting unless it covers all the matters given in Section 193.
The Department of Company Affairs, has, however, advised vide circular No.
3/91 dated 15.2.1991 that from the point of view of economy in expenditure as also
saving newsprint which is imported out of scarce foreign exchange resources,
publication of chairmans speech in newspapers/magazines be avoided.
Like the directors report, the chairmans speech is drafted by the secretary in
coordination with the heads of other operating functions before it is finalised by the
chairman. Since there is no statutory provision relating to chairmans speech there is
no hard and fast rule as to what it should contain and thus the length, style and
nature of the speech varies from chairman to chairman and company to company.
The chairmans speech for a particular company may differ from year to year
depending on the circumstances, but the matters which are generally included in the


speech are:
(a) review of the companys working;
(b) progress during the year;
(c) difficulties and constraints faced by the company during the year;
(d) measures initiated to overcome such difficulties; and
(e) immediate and future prospects of the company.
Where the chairman delivers his speech before commencing the statutory items
of business at the annual general meeting the minutes of the meeting must include a
reference to this and could be worded either that after the chairmans speech, he
requested the secretary to read the auditors report or include a brief summary of the
speech in the minutes of the meeting.
AUDIT
35. WHAT IS AUDIT?
Audit is an examination of accounting records undertaken with a view to
establishing the correctness or otherwise of the transactions reflected therein. It
involves the intelligent scrutiny of the books of account of a company with reference
to documents, vouchers and other relevant records to ensure that the entries made
therein give a true picture of the business conducted during the period under review,
that every transaction has been properly authorised by the appropriate authority and
that effect of all the entries in the books of account has been duly reflected in the final
accounts.
The main object of audit is to ensure that the statement of accounts of the
relevant financial year truly and fairly reflect the state of affairs of the company. Audit
also provides a moral check on those who are entrusted with the task of running
business and of keeping and maintaining the books of account of the company.
Need for Audit
Audit of accounts is a sine qua non of any business however, big or small it may
be. During the course of business, proprietor, creditor, purchaser or a seller has to
deal with various financial statements. Nobody would rely on an audited financial
statements prepared by the management because this would be just like having a
judge for hearing a case in which he himself is a litigant. When a business is run by a
proprietor himself, the need for audit may be limited because the business is under
his direct control. But where the business is run by persons other than the owners in
a company, an independent review of the books of account becomes absolutely
necessary in order to safeguard the interest of the shareholders who with the help of
the audited accounts are enabled to know how their funds have been utilised during
the financial year, whether proper books of account have been maintained, whether
profit and loss account discloses true affairs of the company, profit earned or loss
suffered by the company and whether the balance sheet gives a true and fair view of
the state of affairs of the company on the date on which it is drawn. Another reason
for making audit compulsory in a company is the fact that the shareholders and the
directors who are shareholders enjoy the benefit of limited liability. Audit is also a tool


to safeguard the interest of the creditors.
An audit of accounts is conducted with two-fold purpose: (i) detection and
prevention of errors; (ii) detection and prevention of fraud.
Audit is useful only if it is conducted by some independent and qualified authority.
The auditor must possess requisite qualifications and must act in an independent
capacity. He should not be an employee of the company and his action should not be
subject to the supervision of the management of the company. The provisions
relating to audit and auditors including their qualifications, rights and powers are
contained in Sections 216, 218 and from 224 to 233B of the Act. Section 216 lays
down that auditors report should be attached with the balance sheet. Circulation of
any balance sheet and profit and loss account without auditors report is an offence
punishable with a fine of Rs. 5000/- under Section 218 of the Act.
36. APPOINTMENT OF AUDITOR
Section 224 of the Companies Act provides for compulsory appointment of an
auditor by every company whether public or private. It provides that every company
shall, at each annual general meeting appoint an auditor or auditors to hold office from
the conclusion of that meeting until the conclusion of next annual general meeting.
The auditors are appointed at the annual general meeting by an ordinary
resolution. However, special resolution may become necessary in certain situations
as are specified under Section 224A. First auditors are to be appointed by the Board
of directors within one month of the date of registration of the company and auditor or
auditors so appointed are to hold office until the conclusion of first annual general
meeting.
37. QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITORS
Section 226 contains provision as regards qualifications and disqualifications of
auditors. These apply to all companies whether public or private or Section 25
companies or a Government company.
Qualification of Auditors
Section 226 provides that only a Chartered Accountant within the meaning of
Chartered Accountants Act, 1949 can act as an auditor of a limited company. Though
the auditor should be a Chartered Accountant, only Chartered Accountants in
practice can act as auditors of companies. It may be pointed out that Section 6 of the
Chartered Accountants Act, 1949 lays down that no Chartered Accountant can
practice in India, or elsewhere unless he obtains a certificate of practice from the
Institute of Chartered Accountants of India. Thus, only those Chartered Accountants,
who have obtained a certificate of practice from the said Institute, can act as an
auditor of a company. As soon as the certificate of practice is suspended or
withdrawn by the said Institute he becomes ineligible to continue or to act as auditor.
A firm whereof all the partners are practicing Chartered Accountants can be
appointed by its firm name as auditor in which case any partner may act in the name
of the firm. Further, the Department of Company Affairs has expressed its view vide
Circular No. 29/76, dated 27.8.1976 amended by 5/77, dated 8.4.1977 that the


auditor of a company should not accept the job of an internal auditor of the company
because he would thereby become an employee and his independent position will be
undermined and he will also not be able to perform his duty under the Manufacturing
and Other Companies (Auditors Report) Order, 1988 (MAOCARO), to report whether
there is adequate internal control procedure commensurate with the size of the
company, the nature of its business, etc. and in the case of companies having more
than rupees twenty-five lakhs paid-up share capital, to report whether there is any
internal audit system commensurate with the size and nature of business.
Appointment of a firm as auditors shall be made in the name of the firm whereas
the appointment of a proprietary concern as auditor shall be made in the name of the
individual i.e., the proprietor [vide Circular No. 8/229/56-PR, dated 20.3.1957].
Disqualification of Auditors
Under Section 226(3), none of the following shall be qualified for appointment as
auditor of a company:
1. A body corporate;
2. An officer or employee of the company (officer includes director, manager
or secretary);
3. A person who is a partner or who is in the employment of an officer or
employee of the company;
4. A person who is indebted to the company for more than Rs. 1,000/- or who
has guaranteed the repayment of any debt of more than Rs. 1,000/- due to
the company by a third person;
5. A person holding any security of that company after a period of one year
from the date of commencement of the Companies (Amendment) Act, 2000
i.e. 13 December, 2000 [Section 226(4)].
6. A person who is disqualified for appointment as auditor of the companys
subsidiary or holding company, or a subsidiary of its holding company.
The Department of Company Affairs, vide Circular No. 5/77 dated 8.4.1977 has
clarified that a statutory auditor cannot act also as internal auditor of the company.
Where the Chartered Accountant is employed whole-time, he is an employee of the
company. In other cases, there would appear to be only a contract for service and not a
contract of service between the company and the Chartered Accountant [In
Dharangdhara Chemical Works v. State of Saurashtra, AIR 1957 SC 264]. Therefore,
the Chartered Accountant who is in whole-time employment of the company cannot be
appointed as its auditor. If an auditor becomes disqualified in any of the above ways
after his appointment as auditor, then he shall be deemed to have vacated his office.
38. METHOD OF APPOINTMENT OF AUDITORS
Provisions relating to the appointment of auditor are contained in Sections 224
and 224A of the Companies Act, 1956. The provisions with regard to the appointment
of an auditor can be divided into three categories :


(a) First auditor
(b) Subsequent auditor
(c) Filling of casual vacancy
Appointment of First Auditors
Section 224(5) provides that the first auditor or auditors are to be appointed by
the Board of directors within one month of the date of the registration of the company.
It is further provided that if the Board of directors fails to appoint the first auditors
within one month of its incorporation, the company in general meeting, may appoint
the first auditors. Further, the appointment of auditor is mandatory in the annual
general meeting for the ensuing year. [Institute of Chartered Accountants v.
Jhanendranath Saikia (1955) 25 Com Cases 53, 55 (Assam)].
Period of Office
The first auditor or auditors so appointed are to hold office until the conclusion of
the first annual general meeting of the company. However, the auditor or auditors so
appointed may be removed earlier, if the company at a general meeting appoints
another auditor, of whose nomination, notice has been given by any member to the
members not less than 14 days before the meeting. This means, that the first auditor
can be removed at any general meeting prior to the first annual general meeting.
Special notice is not required for the removal of the first auditor or auditors.
Subsequent Appointment of Auditors
Section 224(1) provides that every company must appoint an auditor or auditors
at each annual general meeting to hold office from the conclusion of that annual
general meeting until the conclusion of the next annual general meeting, and must,
within 7 days of the appointment, give intimation thereof to the auditors so appointed.
As per Section 224(1A), every auditor so appointed must, within 30 days of the
receipt from the company of the intimation of his appointment, inform the Registrar in
writing in Form No. 23B that he has accepted the appointment or refused it.
It is, however, necessary for every company, before making an appointment or
reappointment at any general meeting of an auditor or auditors, to obtain from the
auditor or auditors proposed to be appointed a certificate to the effect that the
appointment or re-appointment, if made, will be in accordance with the limits on the
number of audits specified in Sub-section (1B) of Section 224.
Ceiling on appointment as auditor
Sub-section (1B) of Section 224 provides that no company or its Board of
directors shall appoint or reappoint any person who is in full-time employment
elsewhere, or if he is at the date of such appointment or re-appointment holding
appointment as an auditor of specified number of companies i.e. 20 companies, out
of which not more than 10 shall be companies each of which has a paid-up share
capital of Rs. 25 lakhs or more.
Where a firm is appointed auditor, the ceiling of 20 will be per partner who is not
in full time employment elsewhere. Where any partner of a firm of auditors is also a


partner in any other firm or firms of auditors, the overall ceiling in relation to such
partner will also be 20 companies. It is also provided that where any partner of firm of
auditors is also holding office, in his individual capacity, as the auditor of one or more
companies, the number of companies which may be taken into account in his case
shall not exceed the specified number in aggregate.
While calculating the specified limit, branch audits of Indian companies and the
audit of Indian business accounts of foreign companies are to be excluded. [Vide
Department of Company Affairs Circular No. 21/75 dated 24.9.1975].
It is provided that the provisions of Sub-section (1B) of Section 224 shall not
apply, on and after the commencement of the Companies (Amendment) Act, 2000, to
a private company.
Thus private companies shall also be excluded in reckoning the aforesaid
number of companies which an auditor can audit. This implies than an auditor can
now take up audit work of 20 public companies out of which not more than 10 shall
be such as having paid up share capital of Rs. 25 lakhs or more and any number of
private companies.
Appointment of auditor An ordinary business
Under Section 173(1)(a)(iv), the appointment of, and the fixing of the
remuneration of the auditors is an ordinary business to be transacted at an Annual
General Meeting of a company. Only an ordinary resolution is to be passed for this
purpose except in the circumstances stated under Section 224A which require
passing of a special resolution.
Auditors signing Form 23B in firms name without disclosing identity of
signatory
It is necessary that the identity of person who signs Form 23B, whether he be a
partner or a clerk of the firm, must be disclosed as such, as it will not be enough if the
form is signed only in the firms name, without disclosing the identity of the signatory
since the firm has no locus standi of its own in the eyes of law. Futher, since Form
23B is a statutory document, it is all the more necessary that a person duly
authorised by the concerned firm should be the signatory and his name must be
disclosed therein, in addition to the name of the firm. (Departments Letter No.
7/26/76, IGC-dated 31.10.1977). This will help to fix responsibility of any wrong or
false statement made in such a document.
The Department of Company Affairs has further clarified that the intimation to the
Registrar regarding acceptance of appointment by a firm of auditors, i.e. Form 23B
should be signed by the partner of the firm or any other authorised person but not in
the name of the firm (Letter No. 7/26/76-IGC dated 31.10.1977).
Re-appointment of Auditors
Section 224(2) states that subject to Sub-section (1B), with regard to the ceiling
of 20 companies, and Section 224A, regarding appointment of auditors by special
resolution in certain cases, at any annual general meeting, a retiring auditor, by
whatsoever authority appointed shall be re-appointed unless:


(a) he is not qualified for re-appointment;
(b) he has given to the company notice in writing of his unwillingness to be re-
appointed;
(c) a resolution has been passed at that meeting appointing somebody instead
of him or providing expressly that he shall not be re-appointed; or
(d) where notice has been given of an intended resolution to appoint some
person or persons in the place of a retiring auditor, but owing to that
persons death, incapacity or disqualification, the resolution cannot be
proceeded with and so must be dropped.
Appointment of Auditor Other Than a Retiring Auditor
Sub-section (2) of Section 224 provides that the retiring auditor shall be re-
appointed unless any of the circumstances specified in clauses (a) to (d) thereof
exists. Neither the Board of directors nor the company in general meeting has the
power to refuse re-appointment of the retiring auditor. But if any of the circumstances
mentioned in clauses (a) to (d) of Sub-section (2) intervenes, there is no obligation on
the part of the company to re-appoint the retiring auditor and the company may
proceed to appoint as auditor any person other than the retiring auditor having the
requisite qualifications. It is, however, to be noted that the re-appointment of the
existing auditor is not automatic as there must be an act of the company re-
appointing him by passing a resolution. Where the retiring auditor is re-appointed and
a person other than him is proposed to be appointed as an auditor, a special notice
has to be given proposing that such a resolution would be moved at the next annual
general meeting [Section 225(1)]. On receipt of the special notice, the company
should send a copy thereof to the retiring auditor. The Department has advised to
send the notice by registered post acknowledgement due. (Circular No. 2/81, dated
17.10.1981).
The Department has clarified that in view of Section 225 special notice shall be
required for a resolution appointing as an auditor a person other than the retiring
auditor. Non-compliance with the provisions of the said section would render such a
resolution illegal and ineffective. (Circular No. 2/72 dated 21.2.1972).
Rights of retiring auditor [Section 225(2) & (3)]
A retiring auditor, for whom it has been proposed that he shall not be reappointed
or that a person other than him be appointed, has been given certain rights under the
provisions of Section 225(2) and (3) of the Companies Act. These rights, which follow
the principles of natural justice are:
(1) right to receive notice of the resolution.
(2) right to make a written representation to the company and request its
notification to members of the company.
(3) right to get his representation circulated among the members. (The fact that
the representation has been received must be mentioned in any notice of
the resolution given to members).
The company or any other aggrieved person may make an application to the
Company Law Board alleging that by his written representation, the auditor
is abusing the rights conferred by this section to secure needless publicity


for defamatory matters. The Company Law Board may, on such an
application, direct that the representation need not be circulated or read out
at the meeting and award costs against the auditor notwithstanding that the
auditor is not a party to the application.
(4) right to get his representation read out at the meeting, if it has not been sent
to the members because they were received too late or because of default
on the part of the company.
(5) right to be heard at the meeting.
Filling Casual Vacancy
Sub-section (6) of Section 224 provides that the casual vacancy in the office of
auditor may be filled by the Board. But where the vacancy is caused by resignation of
auditor, such vacancy shall only be filled by the company in general meeting. The
remaining auditor or auditors may act notwithstanding the casual vacancy. The
auditor appointed in the casual vacancy holds office till the conclusion of the next
annual general meeting.
Power of the Central Government to Appoint Auditors
If no auditors are appointed or re-appointed at the annual general meeting, the
Central Government may appoint a person to fill the vacancy [Section 224(3)]. The
company is required to give within one week notice to the Central Government that
the power has become exercisable. If a company fails to give such notice, then the
company and every officer of the company who is in default shall be punishable with
fine upto Rs. 5000/-.
Appointment of Auditors by Special Resolution
Section 224A provides that in the case of company in which not less than 25 per
cent of the subscribed share capital is held, whether singly or in any combination by:
(a) a public financial institution or Government company or Central Government
or any State Government; or
(b) any financial, or other institution established by any Provincial or State Act in
which State Government holds not less than 51 per cent of the subscribed
share capital; or
(c) a nationalised bank or an insurance company carrying on general insurance
business;
the appointment or re-appointment at each annual general meeting of an auditor
or auditors shall be made by a special resolution.
Where any such company as mentioned above fails to pass at its annual general
meeting any special resolution appointing an auditor or auditors it shall be deemed
that no auditor or auditors had been appointed by the company at its annual general
meeting and thereupon the Central Government may appoint an auditor or auditors to
fill the vacancy.
This provision is significant as it implies that, in reality, a company in which 25%
or more of the subscribed share capital is held by any of the aforesaid institutions,


can appoint or re-appoint auditors only with the concurrence of such institutions.
The Department of Company Affairs has clarified vide General Circular No.
14/2001 dated 16.7.2001 that three clauses - (a) to (c) to Sub-section (1) of Section
224A are not mutually exclusive. The provisions of Sub-section (1) would, therefore
apply to all cases of shareholdings in any combination by any of the institutions
mentioned in the three clauses.
Changes in percentage of holding after notice of meeting
Material date for 25% holding of subscribed share capital: If, after the notice of
the annual general meeting is issued in the usual course and before the holding of
the meeting, it happens that the holdings of the public financial institutions have
reached 25% of the total subscribed share capital, the proper course to follow will be
to adjourn the meeting and after issuing notice under this section, pass the necessary
special resolution appointing the auditor or auditors.
If no such procedure is adopted, Sub-section (3) of Section 224 will take effect.
The text of the DCA Circular in this respect is reproduced hereunder:
A doubt has been expressed as to the material date, i.e. whether the date of the
notice of the meeting, or the date of passing the special resolution shall be taken into
consideration. The matter has since been examined in the Department, and it is to be
clarified that the material date is the date of the Annual General Meeting at which the
special resolution is required to be passed. Moreover, since generally, Articles of
Association of Companies provide for closure of the Register of Members before
general meeting during a period not exceeding thirty days at any one time, it is
unlikely that the position regarding shareholding in the company will be different
between the date of issue of notice and the date of the general meeting.
In exceptional cases, however, where a change in the shareholding pattern in the
company has taken place, between the date of issue of notice of the annual general
meeting and the date of actual passing of this resolution regarding appointment of
auditor, the company may either
(i) adjourn the meeting to another date, and later issue the required notice in
accordance with law and thereafter pass the special resolution required to
be passed under Section 224A of the Companies Act, 1956, or
(ii) omit or pass over the item on the agenda regarding appointment of auditor.
In the event of the company adopting the procedure at (ii) above, the situation
would be then covered by Sub-section (2) of Section 224A of the Companies Act,
1956. (Circular No. 2/76 dated the 5th June, 1976 on File No. 35/4/75-CL. III).
39. REMUNERATION OF AUDITORS
The Board fixes the remuneration of the first auditor, where the Central
Government makes an appointment as per Sub-section (4) of Section 224, it may fix
the remuneration. Where the auditor is appointed or re-appointed by the general
meeting, the remuneration is fixed by the general meeting. In practice, the
remuneration is recommended by the Board which is approved by the general


meeting or the general meeting authorises the Board to fix the remuneration. Where
the Central Government appoints the auditors but does not fix their remuneration,
remuneration shall be fixed by the company in general meeting or in such manner as
the company in general meeting may determine. In case of an auditor appointed
under Section 619 by the Comptroller and Auditor General of India, it shall be fixed by
the company in general meeting or in such manner as the company in general
meeting may determine.
Connotation of remuneration
For the purposes of Section 224(8), any sums paid by the company in respect of
the auditors expenses shall be deemed to be included in the expression,
remuneration.
The remuneration which has been fixed for an auditor is considered to be
inclusive of all expenses allowable to him and consequently, he cannot claim any
amount in addition to the fixed remuneration. The expenses of the auditors are
included in the remuneration. If these are to be paid separately it has to be
sanctioned specifically by the sanctioning authority i.e. the company, Board of
directors or the Central Government, as the case may be.
Where expert advice is sought by an auditor in respect of any legal or technical
matter for the proper discharge of his duties, the cost of such advice is permissible as
an extra expenditure which can properly be claimed from the company.
Besides remuneration for audit work, as per para 4-B of Part II of Schedule VI, the
auditor may also be paid extra remuneration as for services rendered in any other
capacity. It is necessary to the disclose in the Profit and Loss account of detailed
information in regard to amounts paid to the auditor whether as fees, expenses or
otherwise for services rendered (a) as auditor, and (b) in any other capacity.
The point to be noted here is that the profit and loss account should contain
detailed information as regards all amounts paid to the auditor and not merely a bare
mention of the amounts paid.
40. TERM OF OFFICE
Section 224(1) provides that an auditor is appointed for a particular period, i.e,
from the conclusion of one annual general meeting until the conclusion of the next
annual general meeting. In case where an annual general meeting is not held within
the period prescribed by Section 166, the auditor will continue in office until the next
annual general meeting is held and concluded. If the next annual general meeting for
any reason, happens to get adjourned, the auditor will continue to hold office until the
conclusion of the adjourned meeting.
Section 224(5) requires that the first auditors of a company shall be appointed by
the Board of directors within one month of the companys registration and the
auditors so appointed shall hold office until the conclusion of the first annual general
meeting of the company. If the board fails to appoint such auditors, the company in
general meeting may appoint them, and where they are appointed by the Board, the
company at a general meeting, may remove them and appoint other auditors in their
place who have been nominated by a member of the company and of whose


nomination notice has been given to the members of the company not less than 14
days before the date of the meeting. Further, any auditor appointed in casual vacancy
shall hold office until the conclusion of the next annual general meeting.
41. RESIGNATION BY AN AUDITOR
The auditor may vacate his office by tendering a resignation. Where the auditor
resigns his office, the vacancy arising therefrom can be filled only by the company at
a general meeting. The board has no power to fill casual vacancy caused by
resignation. The auditor appointed to fill the casual vacancy caused by the
resignation holds office until the conclusion of the next annual general meeting of the
company. Besides the remaining auditor or auditors, if any, may act while any such
casual vacancy continues.
42. REMOVAL OF AUDITORS
The proviso to Section 224(5) states that the first auditor appointed by the Board
of directors may be removed at a general meeting by the company and other
appointed in his place.
Section 224(7) states that except as provided in the proviso to Sub-section (5)
any auditor appointed under this section may be removed from office before the
expiry of his term only by the company in general meeting, after obtaining the
previous approval of the Central Government in that behalf.
In Fortune Stones Ltd. v. Registrar of Companies [(2008) 84 SCL 479(DEL)], the
company had appointed T as its first statutory auditor. Subsequently, T expressed its
inability to audit the accounts and, therefore, the petitioner appointed a new auditor in
the EGM. T filed a complaint before the Regional Director, Department of Company
Affairs against the company as well as the new auditor alleging violation of Section
224(7). The company filed the instant petition seeking quashing of the complaint and
the proceedings before the trial court. Allowing the Petition, the court held that a
perusal of the complaint would show that the offence was for the contravention of
Section 224(7) which required a company to obtain the previous approval of the Central
Government for removal of the auditor at a general meeting. Admittedly, the prior
approval of the Central Government was not obtained when T was removed as an
auditor at the EGM. The subsequent obtaining of the permission of the Central
Government cannot rectify the contravention of section 224(7) which mandates a prior
approval. By the very nature of the statutory requirement, the contravention can
constitute only a one time offence and not a continuing one. The contention that the
contravention in the instant case was a continuing one was to, accordingly, rejected.
The punishment for contravention of section 224(7) is only a fine as is evident from a
reading of Section 629A. In terms of section 468(2) (a) of the Code of Criminal
Procedure the Trial Court was required to take cognizance within a period of six
months. In the present case the complaint was filed more than four years after the
commission of the offence. For the aforesaid reasons, the Trial court ought not to have
taken cognizance of the offence under section 224(7) as it was beyond the period of
limitation stipulated under section 468(2)(a) of the Code of Criminal Procedure.
Therefore, the petition is allowed and the complaint filed in the Court of the Chief
Metropolitan Magistrate and all proceedings consequent thereto are quashed.
At the expiry of his term, the company may in general meeting appoint another
person in his place; but a special notice of any such resolution will be necessary. A


copy of the resolution is required to be sent immediately to the auditor as he has the
right to make a representation. A copy of his representation, if any, and if so desired
by the auditor, should be sent to every member to whom notice of the meeting has
been sent, and if this is not practicable the representation should be read out at the
meeting [Section 225(3)]. But the representation need not be sent to the members or
read out at the meeting if, on the application of the company or of any aggrieved
person, the Company Law Board is satisfied that the right of representation is being
abused to secure needless publicity for defamatory matter. The Company Law Board
may also direct that the companys costs on such application to be paid by the auditor
notwithstanding that he is not a party to the application. The same procedure has to
be followed in regard to a resolution for removal of an auditor.
43. STATUS OF THE AUDITOR
(i) An agent of the members An auditor is an agent of the shareholders. He is
expected to safeguard their interests. In Spackman v. Evans 2 H.L. 236 Lord Cranworth
said. The auditors may be agents of the shareholders, so far as relates to the audit of the
accounts. For the purposes of the audit, the auditors will bind the shareholders.
He is also an agent of the members of the company in certain respects e.g, he
will be liable for improper payments made by the directors and naturally resulting
from his breach of duty. An auditor is specifically mentioned as an agent of the
company for the purposes of Section 240 dealing with the production of documents
and the giving of evidence on investigation and as an agent of the company he may
be examined on oath by an inspector. He is not, however, an agent of the company
and his signature in the statutory report or the balance sheet will not amount to an
acknowledgement on behalf of the company of a debt referred to in that report.
Thus, in Re. Transplanters Holding Co. Ltd. (1958) 1 W.L.R. 822 a company
went into liquidation in 1955 and A claimed a statute barred debt. Balance sheets of
the company for 1951 and 1953 referred to the debt and were signed by the two
directors of the company (one of whom was A) and certified by the auditors. A
argued that signatures consisted a written acknowledgement of the debt by the
company. Held, the auditors were not on these facts, agents of the company for the
powers of giving an acknowledgements of the debt.
Thus, although an auditor is an agent of the shareholders and according to the law
of agency the knowledge of the agent is the knowledge of the principal, the
shareholders are not bound for any information which the auditor might have acquired
during the course of audit if he had not communicated it to the shareholders.
Again, if the auditor had given an information to the directors, it will not amount to
giving the information to shareholders. If they have to communicate anything to the
shareholders, they must do it through their report to them.
(ii) As an officer of the Company An auditor is not an officer of the company
within the meaning of Section 2(30) of the Act.
In London and General Bank case, an auditor was held to be an officer of the
Company. Lord Lindely said:
It seems impossible to deny that for some purpose, and to some extent, an
auditor is an officer of the company. He is appointed by the company and his position
is described in the section as that of an officer of the company. He is not a servant of


the directors. On the contrary, he is appointed by the company to check the directors
and for some purposes and to some extent, it seems to me quite impossible to say
that he is not an officer of the company.
Similarly, in Kingston Cotton Mill Co. Ltd. (1896) 2 Ch. 279, it was decided that
the auditors are officers of the company.
In India, in Connell v. Himalaya Bank Ltd. (1895), it was held auditors, if
appointed at a general meeting of the company and if also paid by the company were
officers of the company.
44. AUDITORS OF GOVERNMENT COMPANIES
Section 619 of the Act provides that the auditor of a Government company shall
be appointed or re-appointed by the Comptroller and Auditor-General of India
provided that the limits specified in Sub-section (1B) and (1C) of Section 224 apply to
such auditor.
In Comptroller and Auditor General v. Kamlesh Vadilal Mehta (2003)(I) Scale
351, a question was raised whether the Comptroller and Auditor General (CAG) can
sub-classify the eligibility qualification by inviting applications for empanelment of
firms of Chartered Accountants for the purposes of auditing the accounts of the
Government companies and PSUs by way of debarring the proprietary firms even to
submit their application. Supreme Court held that the CAG can not create a sub-
classification from the general class of eligible Chartered Accountants and also
observed that once a person is qualified, experienced and efficient then there is no
ground of discrimination against him.
In the case of Government Companies, practically there is no difference in the
procedure of appointment of first auditor and the subsequent auditor as in all the cases
the auditor is to be appointed by the Comptroller and Auditor General of India. However,
under Section 619 read with Sub-section (5) of Section 224 of the Act, the first auditors of
Government company should be appointed by the Comptroller and Auditor General of
India (C. & A.G.) within one month of the date of registration of the company.
For subsequent appointment of auditors again the government company shall
write to the C & A.G. with a copy to the Central Government immediately after the
Annual General Meeting is held for recommending the appointment of their auditor to
the Central Government.
The statutory auditors are appointed for a period of one year. The remuneration
of the statutory auditors is fixed by the company in general meeting or in such
manner as the company in general meeting may determine.
Further the Comptroller and Auditor General of India shall have the power:
(a) to direct the manner in which the companys accounts shall be audited by
the auditor so appointed as mentioned above and to give such auditor,
instructions in regard to any matter relating to the performance of his
functions as such; and
(b) to conduct supplementary or test audit of the companys accounts by such
person or persons as he may authorise in this behalf; and for the purpose of
such audit, to require information or additional information to be furnished to
any person or persons so authorised, on such matters, by such person or


persons, and in such form, as he may, by general or special order, direct.
The auditor shall submit a copy of his audit report to the Comptroller and Auditor
General of India who shall have the right to comment upon or supplement, the audit
report in such manner as he may think fit.
Any such comments upon, or supplement to, the audit report shall be placed
before the annual general meeting of the company at the same time and in the same
manner as the auditors report.
The main duty in respect of audit of government companies is that the Secretary
should hand over the audited accounts to the Government auditors for their report
and comments. On receipt of comments from Government auditors, further reports
should be prepared by the Secretary to be placed before the Board. If all the
comments given by the Government auditors are satisfactorily replied to, a certificate
to that effect will be obtained from the Accountant General of the respective state (in
the case of State Government Companies) and the Comptroller and Auditor General
of India (in respect of Central Government Companies).
Provisions of Section 619 to apply to certain companies
Section 619B inserted by the Companies (Amendment) Act, 1975 extends the
applicability of Section 619 to certain companies even though they are not strictly
Government Companies as defined in Section 617 of the Act. According to Section
619B, the provisions of Section 619 shall apply to a company in which not less than
fifty-one per cent of the paid-up share capital is held by one or more of the following
or any combination thereof as if it were a Government company, namely:
(a) the Central Government and one or more Government Companies;
(b) any State Government or Governments and one or more Government
Companies;
(c) the Central Government, one or more State Governments, and one or more
Government Companies;
(d) the Central Government and one or more corporations owned or controlled
by the Central Government;
(e) the Central Government, one or more State Governments and one or more
corporations owned or controlled by the Central Government;
(f) one or more corporations owned or controlled by the Central Government or
the State Government;
(g) more than one Government company.
It implies therefore that in the case of a company which falls in any of the
aforesaid categories the same provisions relating to auditor would apply as they
apply to Government Company.
45. RIGHT AND POWERS OF AUDITORS
The various rights and powers enjoyed by the auditors under the Companies Act,
1956 are as follows:
1. Right to access to books, accounts and vouchers: The auditor of a company
shall have right of access, at all times, to the books, accounts and vouchers of


the company, whether kept at the head office of the company or elsewhere
[Section 227(1)].
The auditor shall also have access to books of account containing cost data
which, under Section 209(1)(d), the Central Government requires from certain
classes of companies to include in its accounts, in respect of utilisation of
material, labour or other terms or costs.
The term vouchers includes, in addition to vouchers of sales, purchases,
receipts and payments, all documents, correspondence, agreements, etc. which
may in any way serve to vouch for the accuracy of the books and accounts.
The term 'books' includes the financial, statutory and statistical books.
They must have free access to the information which is necessary material for
their report [Newton v. Birmingham Small Arms Co. Ltd., (1906) 2 Ch 378]. The
court will grant to an auditor an injunction for enforcing this right only when there
has been a general meeting decision to appoint him or to continue his
appointment [Cuff v. London and County Land and Building Co. Ltd., (1912) 1
Ch 440 (CA)].
The right of access to books can be enforced by mandatory injuction but not
where litigation is pending between the company and the auditor. Where the
auditors were refused access to the books in a case of their alleged negligence,
the court refused to make an order for access to be given but directed that the
members of the company should meet for that purpose. [Cuff v. London and
County Land & Building Co. Ltd., (supra).
2. Right to obtain information and explanation : The auditor shall be entitled to
require from the officers of the company such information and explanation as he
thinks necessary for the performance of his duties as auditor [Section 227(1)]
the Articles of a company cannot preclude the auditor team from availing himself
of all information which is material to enable him to make his report and from
fulfilling his statutory duties to the shareholders [Newton v. Birmingham Small
Arms Co., (1906) 2 Ch. 378]. In case the information is not supplied to the
auditor, he can report the same to the members.
3. Right to sign the audit report: Only the person appointed as auditor of the
company, or where a firm is so appointed, only a partner in the firm practising in
India, may sign the auditors report, or sign or authenticate any other document
of the company required by the law to be signed or authenticated by the auditor
(Section 229).
4. Right to receive notice of and attend General Meeting : The auditors have the
right to attend any general meeting and to receive any notice and other
communications relating thereto which members are entitled to receive and to
be heard at any general meeting on any part of the business which concerns
them as auditors [Section 231].
5. Right to visit branch office and right of access to books: Where the accounts of
any branch office are audited by a person other than the companys auditor, the
companys auditor
(a) shall be entitled to visit the branch office, if he deems it necessary to do so
for the performance of his duties as auditor; and


(b) shall have a right of access at all times to the books and accounts and
vouchers of the company maintained at the branch office.
In the case of a banking company having a branch office outside India, it shall
be sufficient if the auditor is allowed access to such copies of, and extracts from,
the books and accounts of the branch as has been transmitted to the principal
office of the company in India. [Section 228(2)].
6. Right to receive remuneration: The auditor shall have the right to receive
remuneration for auditing the accounts of the company [Section 224(8)].
The right of an auditor cannot be limited or abridged either by the Articles or by
any resolution of the members [Newton v. Birmingham Small Arms Co. Ltd., (supra).
46. DUTIES OF AUDITORS
The scope and true purpose of an auditor and the duties of the auditor were discussed
in a decision of the Madras High Court in Registrar of Companies v. Arunajatai, (1962), 32
Com Cases 1153 : (1963) 1 Comp LJ 323 (Mad), [See also Institute of Chartered
Accountants v. P.K. Mukherjee, (1968) 38 Com Cases 628 : AIR 1968 SC 1104], where it
was pointed out that where there was material before the auditor to arouse suspicion, he
should have at least apprised of it in his report to the shareholders.
The duties of an auditor are many and varied. He must examine the original
books of account, kept by the company to discover any inaccuracies or omissions
therein, to examine the companys balance sheet and profit and loss account, and
report on the original books of account and the annual accounts to the members.
Section 227(1A) requires an auditor to inquire:
(a) whether loans and advances made by the company on the basis of security
have been properly secured and whether the terms on which they have
been made are not prejudicial to the interests of the company or its
members;
(b) where the transactions of the company which are represented merely by
book entries are not prejudicial to the interests of the company;
(c) where the company is not an investment or a banking company, whether so
much of the assets of the company as consists of shares, debentures and
other securities have been sold at a price less than that at which they were
purchased by the company;
(d) whether loans and advances made by the company have been shown as
deposits;
(e) whether personal expenses have been charged to revenue accounts;
(f) whether cash has actually been received in respect of any shares shown in
the books to have been allotted for cash;
(g) whether the position as stated in the books is correct, regular and is not
misleading.
Under Section 227(2), it is the duty of the auditor to make a report to the
members of the company on the accounts examined by him, and on every balance
sheet, every profit and loss account and on every other document declared by the Act
to be part of or annexed to the balance sheet or profit and loss account and laid
before the company in general meeting during his tenure of office. The report,


besides other things necessary in any particular case, must expressly state:
(1) Whether, in his opinion and to the best of his information and according to
explanation given to him, the accounts give the information required by the
Act and in the manner as required;
(2) Whether the balance sheet gives a true and fair view of the companys
affairs as at the end of the financial year and the profit and loss account
gives a true and fair view of the profit or loss for the financial year;
(3) Whether he has obtained all the information and explanations required by
him for the purposes of his audit;
(4) Whether, in his opinion, proper books of account as required by law have
been kept by the company, and proper returns for the purposes of his audit
have been received from the branches not visited by him;
(5) Whether the companys balance sheet and profit and loss account dealt with
by the report are in agreement with the books of account and returns.
(6) Whether in his opinion, the profit and loss account and balance sheet
comply with the accounting standards referred to in Sub-section (3C) of
Section 211;
(7) In thick type or in italics the observation or comments of the auditors which
have any adverse effect on the functioning of the company.
(8) Whether any director is disqualified from having appointed as director under
clause (g) of 274 (1).
Sections 227(4) states that where any of the above matters is answered in the
negative or with a qualification, the auditors report must state the reason for the
same.
Under Sub-section (4A) of Section 227 the Central Government is empowered to
issue order requiring the auditor to include in his report a statement on such matters
as may be specified. In exercise of this power the Central Government had issued an
order called Companies (Auditors Report) Order, 2003. It is the duty of the auditor to
comply with this order when making his report to the shareholders. (See
Annexure I)
Only the person appointed as auditor of the company or where a firm is so
appointed, only a partner in the firm practising in India, may sign the auditors report,
or sign or authenticate any other document of the company required by law to be
signed or authenticated by the auditor (Section 229).
47. JUDICIAL PRONOUNCEMENTS ON THE DUTIES OF AUDITORS
The auditor owes a number of duties to the company and its shareholders. The
foremost among them is to examine the books to ascertain that they are right. In
the discharge of his duty, he must exercise a reasonable amount of care and skill.
Therefore, an auditor will be liable to the company for any loss suffered due to breach
of his duty of care and reasonable skill.
Auditors are, however, bound to see what exceptional duties are cast upon them
by the statute. Ignorance of the special provisions, as in Section 227(1A) and the
special order issued by the Central Government under Section 227(4A) imposing


exceptional duties on the auditor would not afford any legal justification for not
observing them.
The Courts have laid down the following rulings on auditors duties:
(a) The auditor must check the companys own cash account with its bank pass
book and cheque counterfoils and with statement of its account obtained
from its bank [Fox and Son v. Morrish Grant & Co. (1918) 35 T./L.R. 126].
He is not entitled to assume that directors, officers or servants of the
company who have kept its cash accounts have done so correctly, and so
dispense with checking.
(b) The auditor need not check that the company possesses the stock-in trade
stated in its books of account or stock records, nor need to value its stock in
trade, work-in-progress or finished products, [In Re. Kingston Cotton Mills
Co. Ltd., (No. 2) (1896) 2 Ch. 279]. He should obtain a certificate as to the
amount and value of stock-in-trade from the officer or servant of the
company charged with keeping it, and if this certificate agrees with the
companys books and stock records, he need not investigate the matter
further, unless the information in his possession should arouse his
suspicion.
In practice, however, auditors check the valuation of stock-in-trade and
work-in-progress more extensively than the law requires by ensuring that the
company has an efficient system of recording purchases, sales and storage
of stock and raw materials and for calculating the cost of each
manufacturing process on its products, and also by making a few checks of
items of stock-in-trade at random to make sure that they are correctly
entered in the companys stock records.
(c) If the company owns securities, the auditor should see that they are in
proper custody. He should not be content with a certificate that the securities
are in possession of a particular company, firm or person, unless the
company, firm or person is trustworthy, and is respectable and is one that in
the ordinary course of its business, keeps securities for its customers, i.e., it
is a bank or a broker. [In Re. City Equitable Fire Ins. Co., (1925) 1 Ch 407].
In this case the stock brokers of the company certified to the auditors that
they were holding the companys securities, when in fact they did not do so
and the company suffered loss. The auditors were held guilty of negligence.
They should have set the matter right or reported to the shareholders.
(d) An auditor, however, is not concerned with the policy of the company. In the
words of Lord Justice Lindley in Re London and General Bank (No. 2) (1895) 2
Ch 673: It is no part of an auditors duty to give advice either to directors or
shareholders as to what they ought to do. An auditor has nothing to do with the
prudence or imprudence of making loans with or without security. It is nothing to
him whether the business of the company is being conducted prudently or
imprudently, profitably or unprofitably. It is nothing to him whether dividends are
properly or improperly declared, provided he discharges his own duty to the
shareholders. He should bring these facts to the notice of the shareholders in his
report. His business is to ascertain and state the true financial position of the
company at the time of the audit ...
In another passage in the same case Lord Lindley, L.J. observed : An auditor,


however, is not bound to do more than exercising reasonable care and skill in
making inquiries and investigations. He is not an insurer: he does not guarantee
that the books do correctly show the true position ... His obligation is not so
onerous as this. Such I take to be duty of the auditors: he must be honest, i.e. he
must not certify what he does not believe to be true, and he must take
reasonable care and skill before he believes that what he certifies is true. (See
also Union Banks case in Re. AIR 1925 All. 519).
(e) In the well known passages, in Re Kingston Cotton Mills Co., (1896) 2 Ch 279.
Lopes L.J. said : An auditor is not bound to be detective or to approach his work
with suspicion or with a foregone conclusion that here is something wrong. He is
a watchdog, not a bloodhound; he is justified in believing tried servants of the
company in whom confidence is placed by the company. He is entitled to
assume that they are honest, and so rely upon their representations provided he
takes reasonable care. Therefore Donovan J. said in International Laboratories
Ltd. v. Dewar, (1933) I.D.L.R. 34, regarding the watchdog that he will not have
performed the functions of his office if after one howl he retreats under the
barn, or if he confines his protest to a fellow watchdog.
In a case before Bombay High Court, the court held that the auditor is required
to employ reasonable skill and care, but he is not required to begin with
suspicion and to proceed in the manner of trying to detect a fraud or a lie, unless
some information has reached which excites suspicion or ought to excite
suspicion in a professional man of reasonable competence. An auditors duty is
to see what the state of the companys affairs actually is, and whether it is
reflected truly in the accounts of the company, upon which the balance sheet
and the profit and loss accounts are based, but he is not required to perform the
functions of a detective. What is reasonable care and skill must depend upon the
circumstances of each case. Where there is nothing to excite suspicion and
there is an atmosphere of complete confidence, based on the record of
continued success in financial matters, less care and less severity of scrutiny
may be considered reasonable. Whereas reasonable care and skill may be
regarded as not exercised when, inspite of the presence of unusual features in
the accounts or other prima facie reasons for believing that the affairs of the
company may not be in order, the examination is perfunctory and not sufficiently
detailed. [Tri-Sure India v. A.F. Ferguson & Co. (1987) 61 Comp. Cas. 548].
(f) When the auditor forms an opinion he must exercise reasonable care and skill. If
he performs the mental operations without exercising reasonable care and skill
and then proceeds to give an unqualified statement, in other words, a clear
certificate, he is in breach of his statutory duty. Once the auditor discovers
alterations, mutilations in the invoices it is his duty to put an inquiry and he is not
entitled to rest contented with the assurances of managing director of the
company [Thomas Gerard & Sons Ltd. In Re (1967) 2 All E.R. 525].
(g) Lord Denning M.R. in Fomento (Sterling Areas) Ltd. v. Selsdon Fountain Pen
Co., (1958) 1 All ER 11 (HL) observed : An auditor is not to be confined to the
mechanics of checking vouchers and making arthmetical computations. He is
not to be written of as a professional add-upper and substractor. His vital task
is to take care to see that errors are not made, be they errors of computations,
or errors of omission or commission, or downright untruths. To perform this task


properly he must come to it with an inquiring mind not suspicious of dishonesty. I
agree, but suspecting that someone may have made mistake somewhere and
that a check must be made to ensure that there has been none.
(h) In Deputy Secretary to Government of India v. S.N. Das Gupta, A.I.R. 1955 Cal
414, Chakravati, C.J. said, vis-a-vis the shareholders the auditor holds a
position of trust and it is his bounden duty to honour that trust by being candid
with the shareholders, and telling them frankly and fully everything with regard to
the affairs of the company which has come to his knowledge and which is
material for the shareholders to know ... his duty is to make a full, careful and
truthful report, in default of which he must be held to have failed in the
discharge of his obligations.
(i) It has been held in Council of Institute of Chartered Accountants of India v. V.
Rajaram (1960) 30 Comp. Cas 67, that a Chartered Accountant should himself
verify the assets of the company of which he has been appointed auditor, and
should not rely on the verification done by special examiners appointed by
company itself according to the articles. If he fails to do so, he will be guilty of
misconduct. Therefore, an auditor is personally liable for neglecting wilfully to
perform his duties imposed by law.
Summary of Auditors Duties
For the convenience of students, the various duties of an auditor are summarised
below:
1. An auditor must make himself acquainted with his duties under the Act and
articles, as well as the rules made under the Act.
2. He must act honestly and with reasonable skill, care and caution: and must
not allow himself to be influenced by others in the discharge of his duties.
3. He must show the true financial position of the company as disclosed by the
books. If proper books of account have not been kept, or they do not, in his
opinion, show a true and fair view of the companys affairs he must state that
fact in his report and even refuse to certify the accounts.
4. He must report all material facts and points to the shareholders.
5. He is not bound to give advice nor is he concerned with the policy or
management of business. He must simply state the effect of what has been
done, or not done, and the remedy for bad management will lie with the
shareholders who can remove the directors or at least raise the matter at a
meeting.
6. He is justified in trusting the servants of the company, provided he uses
reasonable care.
7. If any suspicion occurs, he is bound to probe deep into it.
8. He is not an insurer; he does not guarantee that the books do correctly show
the true position of the company's affairs.
9. He is not under a duty to take stock, unless there are suspicious
circumstances but he should make sure that the amount of stock stated to
exist is a reasonable probable figure.
10. He must check the cash in hand and in the bank balance.


11. He must verify the existence of the companys securities and see that they
are in safe custody. Thus, he should actually see the securities unless they
have been deposited in the ordinary course of business e.g., with as bank.
12. Normally, an auditor owes no duty of care to a third party, except where he
knows that the audited accounts are intended to be produced to that third
party to induce him to invest in the company.
13. Where he has been asked to conduct a special audit, he must exercise the
same amount of skill and care as a company auditor and make report to the
Central Government.
14. His report must also contain the matters specified in the Companies
(Auditors Report) Order, 2003.
48. LIABILITIES OF AN AUDITOR
Apart from liability under the common law, the statutory liabilities of an auditor
could be either Civil or Criminal.
Civil Liability
An auditor may be held liable to the company for negligence where loss is
caused to the company due to the failure of the auditors to perform his duties with
reasonable care and skill. He is also liable for (i) breach of trust regarding any money
or property of the company or (ii) breach of duty.
Criminal Liability
An auditor is responsible for the destruction, mutilation, alteration, falsification or
fraudulent concealment of any books, papers or documents belonging to the
company with an intent to defraud or deceive; and also where he makes intentionally
any false statement in any report or document prepared by him.
Criminal liability of an auditor may extend to imprisonment for a period of seven
years and/or fine at the discretion of the court.
49. AUDIT OF BRANCH ACCOUNTS
Section 228 provides that if a company has branch offices, the accounts of every
branch office must be audited by the companys auditor or the company may appoint
another qualified auditor for the purpose. If any branch office of the company is outside
India, the accounts shall be audited by a person qualified to audit accounts according to
laws of that country or the companys auditor or a person qualified for appointment as
auditor under the Companies Act, 1956. The appointment of a branch auditor must be
made and his remuneration fixed, by the company in general meeting or by the Board
of directors if so authorised by the general meeting, in consultation with the companys
auditor. Where the accounts of a branch have been audited by a person other than the
companys auditor, the companys auditor (a) shall be entitled to visit the branch if he
considers it necessary for the performance of his duties as auditor and (b) shall have a
right to access at all times to the books and accounts and vouchers of the company
maintained at the branch office.
Provided that in the case of a banking company having a branch office outside


India, it shall be sufficient if the auditor is allowed access to such copies of, and
extracts from, the books and accounts of the branch as have been transmitted to the
principal office of the company in India.
Where a company in general meeting decides to have the accounts of a branch
office audited otherwise than by the companys auditor, the company in that meeting
shall for the audit of those accounts appoint a person qualified for appointment as
auditor of the company under Section 226, or where the branch office is situate in a
country outside India, a person who is either qualified as aforesaid or an accountant
duly qualified to act as an auditor of the accounts of the branch office in accordance
with the laws of that country, or authorise the Board of directors to appoint such a
person in consultation with the companys auditor.
The person appointed to audit the accounts of the branch office shall have the
same powers and duties in respect of the branch audit as the companys auditor. He
shall submit his report to the companys auditor.
Sub-section (4) of Section 228 empowers the Central Government to make rules
providing for the exemption of any branch office from the aforesaid provisions to the
extent specified in the rules.
In making such rules, the Central Government shall have regard to all or any of
the following matters, namely:
(a) the arrangement made by the company for the audit of accounts of the
branch office by a person otherwise qualified for appointment as branch
auditor even though such person may be officer or employee of the
company;
(b) the nature and quantum of activity carried on at the branch office during a
period of three years immediately preceding the date on which the branch
office is exempted from the provisions of this section;
(c) the availability at a reasonable cost of a branch auditor for the audit of
accounts of the branch office;
(d) any other matter which, in the opinion of the Central Government justifies
the grant of exemption to the branch office from the provisions of this
section.
In pursuance of these powers, the Central Government has framed the
Companies (Branch Audit Exemption) Rules, 1961.
Branch audit may be carried out at head office
Where the auditor of the company is also the auditor of a branch office, he may
do the audit of the branch office at the registered or the head office itself, where all
the documents necessary for his working should be provided to him or in the
alternative he may do the job at the branch itself or he may visit the branch at his
discretion. The Department has issued a clarification (File No. 8/16/(1)/61-PR),
stating that there is no compulsion for the companys auditor to visit branches, but
here again, it is a matter of discretion.
Branch audit report to be forwarded to statutory auditor


The branch/internal auditor shall forward his report on the accounts of the branch
directly to the statutory auditor. If the statutory auditor requires any
explanation/comments from the management in regard to the branch audit report, he
would no doubt do so before making the observations in his audit report. There
would, however, be no administrative objection to a copy of the branch audit report
being sent to the Board of directors simultaneously with the direct transmission of the
original branch audit report to the statutory auditor. [No. 10(1) CL. VI/61, dated 27th
April, 1961].
Remuneration of branch auditor
The power to fix remuneration or to decide terms and conditions of appointment
generally vests in the appointing authority. Sub-section (3)(d) of Section 228 makes
a provision to this effect, namely that the branch auditor shall receive such
remuneration and shall hold office subject to such terms and conditions as may be
fixed either by the company in general meeting or by the Board of directors, if so
authorised by the company in general meeting.
50. SPECIAL AUDIT
Section 233A empowers the Central Government to appoint either any Chartered
Accountant or the companys own auditor to conduct a special audit in certain
circumstances. Accordingly Section 233A provides that where the Central
Government is of the opinion
(a) that the affairs of any company are not being managed in accordance with
sound business principles or prudent commercial practices; or
(b) that the company is being managed in a manner likely to cause serious
injury or damage to the interests of the trade, industry or business to which it
pertains; or
(c) that the financial position of any company is such so as to endanger its
insolvency.
The Central Government may at any time by order direct that a special audit of
the companys accounts for such period as may be specified in the order, shall be
conducted by a Chartered Accountant specially appointed by the Central Government
for the purpose or it may be conducted by the company's own auditor. Such special
auditor shall have the same powers and duties in relation to the special audit as an
auditor of a company has under Section 227 and shall report to the Central
Government. The report is to include all matters required to be included in auditors
report under Section 227 and if the Central Government so directs, also include a
statement on any other matter referred to him by that Government. The Central
Government on the receipt of the special report shall take such action on the report
as it may consider necessary. But if the Government does not take any action on
report within 4 months from the date of its receipt, it shall send to the company, a
copy of the report with its comments for circulation among the members of the
company. The expenses of the special audit, as determined by the Government, shall
be paid by the company as an arrear of land revenue. The Central Government may
also order any person to furnish any specified information to the special auditor.
Failure to comply with such order will render the person punishable with fine up to Rs.
5000.


The Central Government on the receipt of the special report shall take such
action on the report as it may consider necessary. But if the Government does not
take any action on the report within four months from the date of its receipt, it shall
send to the company, a copy or relevant extract from the report with its comments
thereon and require the company either to circulate that copy or those extracts to the
members or to have such copy or extracts read before the company at its next
general meeting [Section 233A(6)].
The expenses of and incidental to, any special audit under this section (including
the remuneration of the special auditor) shall be determined by the Central
Government (which determination shall be final) and paid by the company and in
default of such payment shall be recoverable from the company as an arrear of land
revenue [Section 233A(7)].
There is nothing in the section to indicate that the Central Goverment should,
before appointing a special auditor, give the company or its management an
opportunity of being heard.
In R Hiralal Gulabchand (P) Ltd. Re C.P. Nos. 11 and 12/90/CLB, a petition
under Section 397/398 had been filed by the applicant before the High Court on
grounds similar to those on which he wanted the appointment of a special auditor.
The Company Law Board held that since the allegations made were sub judice
before the High Court, having wider powers to set the controversy at rest, and since
the company was a closely held one and no public interest was involved, this was not
a fit case for an order under Section 233A.
51. COST AUDIT
Section 209(1)(d) provides that a company pertaining to any class of companies
engaged in production, processing, manufacturing or mining activities, should keep
proper books of account showing such particulars relating to utilisation of material
and labour or to other items of cost as may be prescribed, if such class of companies
is required by the Central Government to include such particulars in the books of
account.
In pursuance of the provisions of Section 209(1)(d) of the Act, the Central
Government has notified Cost Accounting Records Rules for a number of specified
industries with a view to ensuring that the records so maintained highlight the area of
inefficiencies or high costs. These rules prescribe the manner in which the Cost
Accounting Records should be maintained and also specify the particulars, which
should be entered in the books of account.
When a company is required to include in its books of account the aforesaid
particulars, Section 233B empowers the Central Government to direct, whenever it is
necessary to do so, that an audit of cost accounts of the company should be
conducted in such manner as may by specified in the order by a Cost Accountant
within the meaning of the Cost and Works Accountants Act, 1959. However, if in the
opinion of the Central Government, sufficient number of qualified Cost Accountants
are not available, that Government may by notification in the Official Gazette direct
that for a specified period, a Chartered Accountant possessing the prescribed
qualifications may be appointed to audit the cost accounts of the company.


The auditor under this section will be appointed by the Board of directors of the
company in accordance with the provisions of Sub-section (1B) of Section 224 and
with the previous approval for the Central Government, and not by the company in
general meeting. Provided before the appointment of any auditor is made by the
Board, a written certificate shall be obtained by the Board from the auditor proposed
to be so appointed to the effect that the appointment, if made, will be in accordance
with the provisions of Sub-section (1B) of Section 224. An auditor of the company or
a person disqualified from being appointed as an auditor of a company, cannot be
appointed as cost auditor. Further if the cost auditor, after his appointment as such
suffers from any of the disqualifications, he must cease to act as cost auditor. The
disqualifications are the same as prescribed in Section 226(3) for a company auditor,
already dealt with earlier in the study.
Since the cost auditor is required to comment on the scope of and performance
of internal audit as per the provisions of Cost Audit (Reports) Rules, 2001, it would
tend to militate against proper and dispassionate discharge of the duties of the cost
auditor if he was also the internal auditor of the company for the same period for
which he is conducting the cost audit. Therefore, the cost auditor should not be also
the internal auditor of a company for the period for which he is conducting the cost
audit. [DCA Circular No. 1/83 dated 20.1.1983].
An auditor can be proceeded under Section 543 as an officer only if he is formally
appointed. Thus, he is not an Officer if he is only appointed ad hoc for a limited
purpose, by the directors for a private audit, [R.V. Shacter, (1960) 2 Q.B. 252, C.A.].
He is, on the other hand a servant of the company or shareholders and must examine
the affairs of the company on their behalf at the end of the year and report to them
what he has found (Deputy Secretary to Government of India v. S.N. Dass Gupta
A.I.R. 1956 Cal 414).
The cost audit conducted under Section 233B shall be in addition to an audit of
the company conducted by auditor appointed under Section 224. The cost auditor
shall have the same powers and duties as the company auditor, but he will make his
report to the Central Government, forwarding a copy thereof to the company, within
180 days from the end of the companys financial year to which the cost audit report
relates. The company, shall within 30 days from the date of receipt of a copy of the
report, furnish the Central Government with full information and explanations on
every reservation or qualification contained in such report. The Central Government
may, after considering the report and information and explanations furnished by the
company, take such action on the report as it may consider necessary. The Central
Government may direct the company to circulate the whole or a specified portion of
the report with the notice of next annual general meeting. Failure to comply with the
provisions of this section has been made punishable with fine upto Rs. 5,000 so far
as the company is concerned, and every officer who is in default shall be liable to be
punished with imprisonment for a term which may extend 3 years, or with fine up to
Rs. 50,000 or with both.
52. COST AUDIT REPORT
In exercise of powers confined by Sub-section (4) of Section 233B read with
Section 227(1) and Clause (b) of Section 642(1) of the Act and in suppression of Cost


Audit (Report) Rules, 1996, the Central Government has issued Cost Audit (Report)
Rules, 2001 vide Notification No. G.S.R. 924(E) dated 27.12.01 containing inter alia
provisions regarding the form of the Report, time limit of submission of the report,
authentication of the annexure to the report, furnishing of records to the Cost auditor
and penalties and action to be taken in case of contravention of the Rules.
The Cost Audit (Report) Rules, 2001 are as under:
1. Short title and commencement (1) These rules may be called the Cost
Audit (Report) Rules, 2001.
(2) They shall come into force on the date of their publication in the Official
Gazette.
2. Definitions In these rules, unless the context otherwise requires,
(a) Act means the Companies Act, 1956 (1 of 1956);
(b) Cost Auditor means an auditor directed to conduct an audit under Sub-
section (1) of Section 233B of the Act;
(c) Form means the Form of the Cost Audit Report and includes auditors
observations and suggestions, Annexure and Proforma to the Cost Audit
Report;
(d) Report means Cost Audit Report duly audited and signed by the Cost
Auditor in the prescribed form of Cost Audit Report;
(e) Product under reference means the product or activity to which the Report
relates;
(f) All other words and expressions used in these rules but not defined, and
defined in the Act and rules made under clause (d) of Sub-section (1) of
Section 209 of the Act shall have the same meanings as assigned to them in
the Act or rules, as the case may be.
3. Application These rules shall apply to every company in respect of which
an audit of the cost accounting records has been ordered by the Central Government
under Sub-section (1) of Section 233B of the Act. The Cost Audit Report submitted
on or after 1st October, 2002, irrespective of the financial year of the company to
which it relates, shall be in the form prescribed under these rules.
4. Form of the Report (1) Every Cost Auditor, who conducts an audit of the
cost accounting records of the company shall submit the report (a hard copy and a
soft copy) along with auditors observations and suggestions, Annexure and Proforma
to the Central Government in the prescribed form and at the same time forward a
copy of the report to the company.
(2) Every Cost Auditor, who submits a report under sub-rule (1), shall also give
clarifications, if any, required by the Central Government on the Cost Audit Report
submitted by him, within thirty days of the receipt of the communication addressed to
him calling for such clarifications.
(3) The Forms prescribed in these rules may be filed through electronic media or
through any other computer readable media as referred under Section 610A of the


Companies Act, 1956 (1 of 1956).
(4) The electronic form shall be authenticated by the authorised signatories using
digital signatures, as defined under the Information Technology Act, 2000 (21 of 2000).
(5) The forms prescribed in these rules, when filed in physical form, may be
authenticated by authorized signatory by affirming his signature manually.
5. Time limit for submission of Report The Cost Auditor shall forward his
report referred to in sub-rule (1) of Rule 4 to the Central Government and to the
concerned company within one hundred and eighty days from the close of the
companys financial year to which the report relates.
6. Cost Auditor to be furnished with the cost accounting records etc.
Without prejudice to the powers and duties the Cost Auditor shall have under Sub-
section (4) of Section 233B of the Act, the company and every officer thereof,
including the persons referred to in Sub-section (6) of Section 209 of the Act, shall
make available to the Cost Auditor within one hundred and thirty five days from the
close of the financial year of the company, such cost accounting records, cost
statements, other books and documents, Annexure and proforma to the Report, duly
completed, as would be required for conducting the cost audit, and shall render
necessary assistance to the Cost Auditor so as to enable him to complete the cost
audit and submit his report within the time limit specified in Rule 5.
7. Authentication of Annexure to the Cost Audit Report The Annexure
and Proforma prescribed with the Cost Audit Report shall be approved by the Board
of Directors before submitting the same to the Central Government by the Cost
Auditor. The Annexure and Proforma, duly audited by the Cost Auditor, shall also be
signed by the Company Secretary and at least one Director on behalf of the
company. In the absence of Company Secretary in the company, the same shall be
signed by at least two Directors.
8. Penalties (1) If default is made by the Cost Auditor in complying with the
provisions of Rule 4 or Rule 5, he shall be punishable with fine, which may extend to
five thousand rupees.
(2) If the company contravenes the provisions of Rule 6 or Rule 7, the company and
every officer thereof who is in default, including the persons referred to in Sub-section (6)
of Section 209 of the Act, shall, subject to the provisions of Section 233B of the Act, be
punishable with fine which may extend to five thousand rupees and where the
contravention is a continuing one, with a further fine which may extend to five hundred
rupees for every day after the first day during which such contravention continues.
9. Saving of action taken or that may be taken for contravention of Cost
Audit (Report) Rules, 1996 It is hereby clarified that the supersession of the Cost
Audit (Report) Rules, 1996, shall not in any way affect
(i) any right, obligation or liability acquired, accrued or incurred thereunder;
(ii) any penalty, forfeiture or punishment incurred in respect of any
contravention committed thereunder;
(iii) any investigation, legal proceeding or remedy in respect of any such right,
privilege, obligation, liability, penalty, forfeiture or punishment as aforesaid,


and; any such investigation, legal proceeding or remedy may be instituted,
continued or enforced and any such penalty, forfeiture or punishment may
be imposed as if those rules had not been superseded.
53. SOCIAL AUDIT
Section 227 (4A) empowers the Central Government to require, by order, that in
the cases of such class or description of companies as may be specified in the order,
the auditors report will include a statement on such matters as may be specified
therein. Before making such order, the Central Government may consult the Institute
of Chartered Accountants of India in regard to the class or description of companies
and other ancillary matters proposed to be specified therein. The Government has
also the power to decide when such consultation is not necessary or expeditent in
any case.
The Government, in consultation with the Institute of Chartered Accountants of
India issued a Notification on 12th June, 2003 called Companies (Auditor's Report),
Order 2003 as empowered by Section 227(4A) of the Companies Act, whereby audit
report shall have to contain additional information on the working of the company and
the audit has been given the nomenclature social audit.
In a socialistic society, where public participation in decision-making process is
accepted, at least in theory, it is imperative that from a mere statutory financial audit
we must move towards performance audit and efficiency audit. Social audit is a
combination of these two functions. It is not enough to reveal the assets and liabilities
of a company as at a particular date. What is needed is how effectively were the
assets utilised for optimum usage and benefit to the community. This audit is
designated Social Audit and because it deals with the social benefit derived, like,
current value accounting or is related to human assets accounting. What is implied is
to give emphasis on the expenses side of the profit and loss account and the benefits
acquired due to each expenditure and take credit in the Social Audit and any failure
to take corrective action by management ought to be taken to be debit side of he
Social Audit. Because of the Social Audit, and management, worth the name, will
ensure that debit or negative factors do not find place in the auditors report as
adverse publicity will be difficult to explain.
54. PROPER BOOKS OF ACCOUNTS
As we have seen a company is required by law, to maintain proper books of
account with respect to its income and expenditure, sales and purchase of goods and
assets and liabilities. A company engaged in producing, processing, manufacturing or
mining activities is further required to maintain such particulars relating to utilisation of
machine or labour and in respect of other items of costs as may be prescribed by the
Central government [Section 209(1)]. The books of account to be maintained by a
company should be proper as provided in Section 209(3) of the Act. It is provided
that the maintenance of books would be deemed to be proper only if :
(i) the books of account give a true and fair view of the state of affairs of
company or the branch office, as the case may be;
(ii) the books of account explain the transactions; and


(iii) the books of account are kept on accrual basis and according to the double-
entry system of accounting.
The shareholders, creditors and public financial institutions; who provide the
funds and other authorities and persons, who have to deal with the company, are
entitled to be provided with the true state of affairs of the company, so as to enable
them to form a correct opinion about the true state of financial health of the company.
If the books of account do not project the true state of affairs of the company, they
are not deemed to be proper. The statutory auditor of the company is also required
to state mandatorily in his report whether the company has maintained proper books
of account or not. If he does not so state, he will be held liable for misfeasance along
with the Directors and other officers of the company in default. Sub-section (2) of
Section 541 of the Act provides, in the context of the winding up of the company, that
it shall be deemed that proper books of account have not been kept in the case of
any company if there have not been kept:
(a) such books or accounts as are necessary to exhibit and explain the
transactions and financial position of the business of the company, including
books containing entries made from day to day in sufficient detail of all cash
received and all cash paid; and
(b) where the business of the company has involved dealings in goods,
statements of the annual stock takings and (except in the case of goods sold
by way of ordinary retail trade) of all goods sold and purchased, showing the
goods and the buyers and sellers thereof in sufficient detail to enable those
goods and those buyers and sellers to be indentified.
The expression proper is difficult to define precisely; its import will have to be
gathered from the facts of each case. The term signifies that there should neither be
suppression of any transaction nor inclusion of any fictitious transactions in the books
of account.
55. TRUE AND FAIR VIEW
The auditor, in his report under Section 227(2) of the Companies Act, 1956, is
required to state inter alia:
(i) Whether, in his opinion, proper books of accounts as required by law, have
been kept by the company;
(ii) Whether in his opinion and to the best of his information, the accounts of the
company give the information required by the Act in the manner so required;
(iii) Whether the balance sheet gives a true and fair view of the companys
affairs at the end of financial year; and
(iv) Whether the profit and loss account gives a true and fair view of the profit
and loss of the company for the financial year.
In the absence of any definition of the term true and fair view in the Act, the
meaning and scope has to be perceived and understood with reference to particular
facts and circumstances of each case. Towards this end, the auditor is duty bound to


ensure that:
(i) proper books of accounts and other records are maintained;
(ii) the balance sheet and profit and loss accounts are drawn up in a format and
in accordance with the provisions of the Act and the Schedule VI thereto;
(iii) the financial position and working results of the company are stated clearly.
There should neither be an over statement nor an under statement in this
regard;
(iv) any material change in the method of accounting and the effect thereof on
the financial position of the company is clearly indicated; and
(v) there is a proper and full disclosure of the financial position of the company.
Section 211 of the Act also enjoins that every balance sheet of a company shall
give true and fair view of the state of affairs as at the end of the financial year and
every profit and loss account should give true and fair view of the profits or losses of
the company for the financial year. The Section, therefore, provides that the balance
sheet of a company shall be in the form set out in Part I, Schedule VI or as near
thereto as the circumstances admit or in such other form as the Central Government
may approve either generally on in any particular case. The profit and loss account of
the company should be drawn up as per the requirements of Part II of Schedule VI
and must give the particulars prescribed therein as far as applicable.
Thus, the annual accounts of the company should not only be made out correctly
in the prescribed format and in accordance with the requirements of the law but
should also convey the fair view of the actual state of affairs and working results of
the company. Consequently, every information which is considered relevant and
necessary should be disclosed even if it is not specifically required by the law to be
shown. Further, the information should be given unambiguously, in clear and precise
terms and should be according to the commonly accepted accounting policies.
56. NOTES ON ACCOUNTS
One of the main objectives of the Annual Accounts of a company is to
communicate effectively its strengths and weaknesses. The bare figures
encompassing the amounts are not sufficient by themselves to depict and explain the
true and fair view of the state of affairs of a company. It has, therefore, become
necessary to explain and communicate some of the vital information through Notes
on Accounts. By and large the notes on accounts are explanatory. They elucidate the
figures in the accounts and explain their significance. Sometimes, these notes are
clarificatory to meet the requirements of law. Whether a particular note is explanatory
or clarificatory will depend on the facts in each case and the manner in which it is
stated. Notes on accounts form an integral part of the accounts of a company and
contain very interesting and vital information.
Contents of notes on accounts
The notes on accounts are intended to clarify and elucidate the financial position
of a company as disclosed in its balance sheet and profit and loss account. Generally
the notes on accounts dwell on the following matters:


1. Basis of accounting;
2. Significant accounting policies;
3. Material changes, if any, in the method of accounting;
4. The effect of material changes in the method of accounting on any item in
the financial statement in physical terms to the extent ascertainable. Where
such amount is not ascertainable, either wholly or in part, the fact should be
stated;
5. Method of valuation of fixed assets;
6. Method of valuation of trade and other investments;
7. Method of providing depreciation;
8. Valuation of inventories;
9. Treatment of any income and expenditure on cash basis as against accrual
basis;
10. Expenditure in foreign currency account;
11. Foreign exchange conversion;
12. Any disputed liabilities and claims against the company;
13. Any major litigation pending by or against the company;
14. Method of providing for retirement and terminal benefits;
15. Remuneration paid to managerial personnel and their calculation thereof.
The above list is only illustrative and not exhaustive. There could be many other
items in the Books of Accounts which may be required to be explained, clarified or
amplified so as to project a true and fair view of the state of affairs of the company.
57. GUIDELINES FOR FILING STATUTORY APPLICATIONS
Under Section 211
Applications seeking exemption under Section 211 of the Companies Act should
be accompanied by:
Specified Board resolution in support of the proposal indicating specific
paras of Part II of Schedule VI and the financial year in respect of which
exemption is sought.
Copies of approvals under Section 211 obtained, if any, during the last three
financial years.
The following information should invariably be furnished with the application in
the fields forming part of the e-Form:
The financial year for which exemption is sought.
Precise reasons/justification for seeking exemption.
If the company had been complying with the requirements in the past,
reasons as to how the company has been complying in the past.


It should be indicated as to whether the company is maintaining proper
purchase/sales/stock registers so as to furnish true and fair view of its state
of affairs in compliance of Section 209/211 read with Schedule VI to the Act.
Details of total turnover and exports made by the company during the
financial year in respect of which exemption is sought.
The companies may have to furnish any other additional information as may be
asked for by the Department.
Under Section 212
Applications seeking exemption under Section 212 of the Companies Act should
be accompanied by:
Specified Board resolution in support of the proposal mentioned inter alia
the names of subsidiaries and their financial year in reference.
Copies of approvals under Section 212 obtained, if any, during the last three
financial years.
The following information should invariably be furnished with the application in
the fields forming part of the e-Form:
The financial year for which exemption is sought. This year should also be
the year mentioned in the accompanying board resolution.
Precise reasons/justification for seeking exemption.
Names of subsidiaries in respect of which exemption is sought.
Dates on which the companies became subsidiaries of the applicant
company.
The financial years of the holding and subsidiary companies under
reference.
The companies may have to furnish any other additional information as may be
asked for by the Department.
ANNEXURE I
Vide Notification No. GSR 480(E) vide F. No. 2/28/2002-CL-V dated 12th June,
2003, the Central Government has, in exercise of the powers conferred by Section
227(4A) issued Companies (Auditor Report) Order, 2003 which is reproduced below:
COMPANIES (AUDITORS REPORT) ORDER, 2003
[Issued by the Ministry of Finance and Company Affairs (Department of Company
Affairs) vide F. No. 2/28/2002-CL-V; Published in the Gazette of India Extraordinary
Part-II, Section 3, Sub-section (i) dated 12-6-2003].
G.S.R. No. 480(E): In exercise of the powers conferred by Sub-section (4A) of
Section 227 of the Companies Act, 1956 (1 of 1956), read with the Notification of the
Government of India in the Department of Company Affairs, No GSR 443(E) dated
the 18th October, 1972, as amended from time to time and in supersession of the
Order No. GSR 909(E) dated the 7th September, 1988, published in the Gazette of
India, Part II, Section 3, Sub-section (i) except as respects things done or omitted to
be done before such supersession, and after consultation with the Institute of


Chartered Accountants of India [constituted under the Chartered Accountants Act,
1949 (38 of 1949)], in regard to class of companies to which this order applies and
other ancillary matters, the Central Government hereby makes the following Order,
namely:-
1. Short title, application and commencement
(1) This order may be called the Companies (Auditors Report) Order, 2003.
(2) It shall apply to every company including a foreign company as defined in
Section 591 of the Act, except the following:
(i)a banking company as defined in clause (c) of Section 5 of the Banking
Regulation Act, 1949 (10 of 1949);
(ii)an insurance company as defined in clause 21 of Section 2 of the Act;
(iii)a company licensed to operate under Section 25 of the Act; and
(iv)a private limited company with a paid up capital and reserves not more than
fifty lakh rupees and has not accepted any public deposit and does not
have loan outstanding ten lakh rupees or more from any bank or
financial institution and does not have a turnover exceeding five crore
rupees.
(3) It shall come into force on the 1st day of July, 2003.
2. Definitions
In this Order, unless the context otherwise requires:
(a) Act means the Companies Act, 1956 (1 of 1956);
(b) Chit fund company, nidhi company or mutual benefit company means a
company engaged in the business of managing, conducting or supervising
as a foreman or agent of any transaction or arrangement by which it enters
into an agreement with a number of subscribers that every one of them shall
subscribe to a certain sum of instalments for a definite period and that each
subscriber, in his turn, as determined by lot or by auction or by tender or in
such other manner as may be provided for in the agreement, shall be
entitled to a prize amount, and includes companies whose principal business
is accepting fixed deposits from, and lending money to, members.
3. Auditors report to contain matters specified in paragraphs 4 and 5
Every report made by the auditor under Section 227 of the Act, on the accounts
of every company examined by him to which this Order applies for every financial
year ending on any day on or after the commencement of this Order, shall contain the
matters specified in paragraphs 4 and 5.
4. Matters to be included in the Auditors Report
The Auditors report on the accounts of a company to which this Order applies
shall include a statement on the following matters, namely:-
(i) (a)whether the company is maintaining proper records showing full particulars
including quantitative details and situation of fixed assets;


(b)whether these fixed assets have been physically verified by the management
at reasonable intervals; whether any material discrepancies were
noticed on such verification and, if so, whether the same have been
properly dealt with in the books of account;
(c)If a substantial part of fixed assets have been disposed off during the year,
whether it has affected the going concern;
(ii) (a)whether physical verification of inventory has been conducted at reasonable
intervals by the management;
(b)are the procedures of physical verification of inventory followed by the
management reasonable and adequate in relation to the size of the
company and the nature of its business. If not, the inadequacies in such
procedures should be reported;
(c)whether the company is maintaining proper records of inventory and whether
any material discrepancies were noticed on physical verification and if
so, whether the same have been properly dealt in the books of account?
(iii) (a)has the company granted any loans, secured or unsecured to companies,
firms or other parties covered in the register maintained under Section
301 of the Act. If so, give the number of parties and amount involved in
the transactions; and
(b)whether the rate of interest and other terms and conditions of loans given by
the company, secured or unsecured, are prima facie prejudicial to the
interest of the company; and
(c)whether receipt of the principal amount and interest are also regular; and
(d)if overdue amount is more than rupees one lakh, whether reasonable steps
have been taken by the company for recovery of the principal and
interest; and
(e)has the company taken any loans, secured or unsecured from companies,
firms or other parties covered in the register maintained under Section
301 of the Act. If so, give the number of parties and the amount involved
in the transactions; and
(f)whether the rate of interest and other terms and conditions of loans taken by
the company, secured or unsecured, are prima facie prejudicial to the
interest of the company; and
(g)whether payment of the principal amount and interest are also regular;
(iv) is there an adequate internal control system commensurate with the size of
the company and the nature of its business, for the purchase of inventory
and fixed assets and for the sale of goods and service. Whether there is a
continuing failure to correct major weaknesses in internal control system;
(v) (a)whether the particulars of contracts or arrangements referred to in section
301 of the Act have been entered in the register required to be
maintained under that section; and
(b)whether transactions made in pursuance of such contracts or arrangements


have been made at prices which are reasonable having regard to the
prevailing market prices at the relevant time;
(vi) in case the company has accepted deposits from the public, whether the
directives issued by the Reserve Bank of India and the provisions of
Sections 58A, 58AA or any other relevant provisions of the Act and the rules
framed thereunder, where applicable, have been complied with. If not, the
nature of contraventions should be stated; If an order has been passed by
Company Law Board or National Company Law Tribunal or Reserve Bank of
India or any Court or any other Tribunal whether the same has been
complied with or not?
(vii) in the case of listed companies and/or other companies having a paid-up
capital and reserves exceeding Rs. 50 lakhs as at the commencement of the
financial year concerned, or having an average annual turnover exceeding
five crore rupees for a period of three consecutive financial years
immediately preceding the financial year concerned, whether the company
has an internal audit system commensurate with its size and nature of its
business;
(viii) where maintenance of cost records has been prescribed by the Central
Government under Clause (d) of Sub-section (1) of Section 209 of the Act,
whether such accounts and records have been made and maintained;
(ix) (a)is the company regular in depositing undisputed statutory dues including
Provident Fund, Investor Education and Protection Fund, Employees
State Insurance, Income-tax, Sales-tax, Wealth-tax, Service tax, Custom
Duty, Excise Duty, cess and any other statutory dues with the
appropriate authorities and if not, the extent of the arrears of outstanding
statutory dues as at the last day of the financial year concerned for a
period of more than six months from the date they became payable,
shall be indicated by the auditor;
(b)in case dues of Income-tax/Sales tax/Wealth tax/Service tax/Custom
duty/Excise duty/cess have not been deposited on account of any
dispute, then the amounts involved and the forum where dispute is
pending shall be mentioned.
(A mere representation to the Department shall not constitute the dispute).
(x) whether in case of a company which has been registered for a period not
less than five years, its accumulated losses at the end of the financial year
are not less than fifty per cent of its net worth and whether it has incurred
cash losses in such financial year and in the immediately preceding financial
year;
(xi) whether the company has defaulted in repayment of dues to a financial
institution or bank or debenture holders? If yes, the period and amount of
default to be reported;
(xii) whether adequate documents and records are maintained in cases where
the company has granted loans and advances on the basis of security by
way of pledge of shares, debentures and other securities; if not, the
deficiencies to be pointed out.


(xiii) whether the provisions of any special statute applicable to chit fund have
been duly complied with? In respect of nidhi/mutual benefit fund/societies:
(a)whether the net-owned funds to deposit liability ratio is more than 1:20 as on
the date of balance sheet;
(b)whether the company has complied with the prudential norms on income
recognition and provisioning against sub-standard/doubtful/loss
assets;
(c)whether the company has adequate procedures for appraisal of credit
proposals/requests, assessment of credit needs and repayment capacity
of the borrowers;
(d)whether the repayment schedule of various loans granted by the nidhi is
based on the repayment capacity of the borrower;
(xiv) if the company is dealing or trading in shares, securities, debentures and
other investments, whether proper records have been maintained of the
transactions and contracts and whether timely entries have been made
therein; also whether the shares, securities, debentures and other
investments have been held by the company, in its own name except to the
extent of the exemption, if any, granted under Section 49 of the Act;
(xv) whether the company has given any guarantee for loans taken by others
from bank or financial institutions, the terms and conditions whereof are
prejudicial to the interest of the company;
(xvi) whether term loans were applied for the purpose for which the loans were
obtained;
(xvii) whether the funds raised on short-term basis have been used for long term
investment, if yes, the nature and amount is to be indicated;
(xviii) whether the company has made any preferential allotment of shares to
parties and companies covered in the Register maintained under
Section 301 of the Act and if so whether the price at which shares have
been issued is prejudicial to the interest of the company;
(xix) whether security or charge has been created in respect of debentures
issued?
(xx) whether the management has disclosed on the end use of money raised by
public issues and the same has been verified;
(xxi) whether any fraud on or by the company has been noticed or reported
during the year; if yes, the nature and the amount involved is to be indicated.
5. Reasons to be stated for unfavourable or qualified answers
Where, in the auditors report, the answer to any of the questions referred to in
paragraph 4 is unfavourable or qualified, the auditors report shall also state the
reasons for such unfavourable or qualified answer, as the case may be. Where the
auditor is unable to express any opinion in answer to a particular question, his report
shall indicate such fact together with the reasons why it is not possible for him to give
an answer to such question.



LESSON ROUND-UP
Proper books of accounts shall be deemed to have been kept by a company if
such books exhibit and explain the transactions and financial position of the
business of the company, including books containing sufficiently detailed entries
of daily cash receipts and payments.
Every company is required to keep books of account at its registered office in
respect of specified transactions. However, all or any of the books of accounts
may be kept at such other place in India as the Board of directors may decide.
The books of account should be kept on accrual basis and according to double
entry system of accounting. Further, they must give a true and fair view of the
affairs of the company or branch office and explain its transactions.
As per the Act, books of account and other books and papers should be available
for inspection by any director on working days during business hours.
The Companies Act, 1956, specifically requires certain other books to be kept by
a company for maintaining a record of its different activities in order to safeguard
the interests of the shareholders and creditors. These books are known as
Statutory Books.
In addition to the books of account and statutory books, a company usually
maintains a number of statistical books in order to keep complete records of he
numerous details connected with the business operations.
The expression annual accounts embraces both balance sheet and profit and
loss account. In a wider sense, it also covers cash and fund flow statement,
directors report etc.
The term Balance Sheet means a statement prepared from the books of a
concern showing the debit and credit balances after the trading and profit and
loss accounts have been prepared a statement drawn up at the end of each
trading or financial period, setting forth the various assets, and liabilities of a
concern at a particular date.
Profit and loss account is the account by which the directors disclose to the
shareholders of the company the result of the actual working of the company. It
serves to give the shareholders an idea of the earning capacity of the company in
relation to its capital, and enables them to judge abut the administration and
management of the affairs of the company.
The Act provides that every profit and loss account and balance sheet of the
company shall comply with the accounting standards.
The Act requires that at every annual general meeting of the company, the Board
of directors must lay before the shareholders of the company a balance sheet
and a profit and loss account for the period as specified therein; and in the case
of non profit companies, an income and expenditure account.
The balance sheet and profit and loss account must be approved by the Board of
directors and signed by the directors before they are submitted to the auditors for
their report. The Act gives other provisions also for authentication of annual
accounts. The Act also requires the company to file such annual accounts with
the Registrar of Companies.
The Act provides that there shall be attached to every balance sheet laid before a
company in general meeting (in practice, the annual general meeting) a report by
its Board of directors, with respect to items as specified therein. The Boards
Report shall also include a Directors Responsibility Statement as required
under the Act.
Every company not required to employ a whole time secretary under the


Companies Act and having a paid-up share capital of ten lakh rupees or more
shall file with the Registrar a certificate from a secretary in whole-time practice in
such form and with such time, as to whether the company has complied with all
the provisions of the Companies Act, 1956 and a copy of such certificate shall be
attached with Boards report.
The main object of audit is to ensure that the statement of accounts of the
relevant financial year truly and fairly reflect the state of affairs of the company.
Audit also provides a moral check on those who are entrusted with the task of
running business and of keeping and maintaining the books of account of the
company. An audit of accounts is conducted with two-fold purpose: (i) detection
and prevention of errors; (ii) detection and prevention of fraud.
The Act provides that every company shall, at each annual general meeting
appoint an auditor or auditors to hold office from the conclusion of that meeting
until the conclusion of next annual general meeting. The Act also provides for
methods of appointment of auditors along with their qualifications and
disqualifications.
The Act provides that the auditor of a Government company shall be appointed or
re-appointed by the Comptroller and Auditor General of India within the limits
specified.
The various rights and powers of auditors include right to access to books,
accounts and vouchers, obtain information, sign the audit report, receive notice of
and attend the general meeting, visit branch offices and receive remuneration.
The duties of an auditor are many and varied. He must examine the original
books of account, kept by the company to discover any inaccuracies or omissions
therein, to examine the companys balance sheet and profit and loss account,
and report on the original books of account and the annual accounts to the
members.
Apart from liability under the common law, the statutory liabilities of an auditor
could be either Civil or Criminal.
The Act empowers the Central Government to appoint either any Chartered
Accountant or the companys own auditor to conduct a special audit in certain
circumstances.
The Central Government has notified Cost Accounting Records Rules for a
number of specified industries with a view to ensuring that the records so
maintained highlight the area of inefficiencies or high costs.
The Act empowers the Central Government to direct, whenever it is necessary to
do so, that an audit of cost accounts of the company should be conducted in
such manner as may be specified. The Central Government has issued Cost
Audit (Report) Rules, 2001 containing inter alia provisions regarding the form of
the Report, time limit of submission of the report, authentication of the annexure
to the report, furnishing of records to the Cost auditor and penalties and action to
be taken in case of contravention of the Rules.
Social audit is a combination of performance audit and efficiency audit.
By and large the notes on accounts are self-explanatory. The notes on accounts
are intended to clarify and elucidate the financial position of a company as
disclosed in its balance sheet and profit and loss account.




SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for revaluation).
1. (a)What books of account are required to be kept by a company?
(b)Who are the persons who can inspect books of account?
(c)Can a director make inspection of the books of account?
2. Explain the law relating to the authentication, circulation, adoption and filing
of the annual accounts.
3. (a)How is the first auditor of a company appointed?
(b)What are the disqualifications of an auditor?
(c)Can an internal auditor act as a Statutory Auditor?
4. What are the statutory rights and duties of an auditor?
5. Write a short note on appointment of cost auditor.
6. State the provisions of the Companies Act, 1956 in respect to the filling a
casual vacancy.
7. Auditor appointed at the Annual General Meeting of XYZ Ltd. resigned
within 2 months of appointment. State the legal position.
8. Write a note on Corporate Governance. Is it compulsory for all companies to
adhere to the disclosures for corporate governance.
9. What is Social Audit? State the matters to be included in the Report of the
Auditors, in the light of CARO, 2003.
10. Explain the provisions for the following as regards Clause 49:
(i)Audit committee.
(ii)Board of Directors and remuneration of Directors.
(iii)List of items to be placed before the Board of Directors.
(iv)Suggested list of items to be included in the Report on corporate governance.


Suggested Readings
(1) Guide to Companies Act A Ramaiya
(2) Company Law & Practice A.K. Majumdar and G.K. Kapoor
(3) Circulars and Clarifications on Company Law Taxman Publication










STUDY XXII
CORPORATE ACCOUNTABILITY - II
DIVISIBLE PROFITS AND DIVIDENDS
LEARNING OBJECTIVES
According to the generally accepted definition, dividend means the profit of a
company which is not retained in the business and is distributed among the
shareholders in proportion to the amount paid up on the shares held by them.
Section 2(14A) defines Dividend to include interim dividend. Both interim and final
dividend when declared become debt. When the amount in the unpaid dividend
accounts remain unclaimed and unpaid for a period of seven years once become due,
it shall be credited to Investor Education and Protection fund.
This study covers various aspects relating to dividend, topics covered are:
Definition and meaning of dividend
Restrictions on declaration of dividend and purpose behind it.
Ascertainment of divisible profits and dividends
Declaration of dividend
To whom paid
When payable
Establishment of Investor Education and Protection Fund
Dividend warrants
Payment of interest out of capital
Remittance of dividend or interest or sale proceeds to NRIs, foreigners and
foreign companies.

1. DEFINITION AND MEANING OF DIVIDEND
Dividend is the return on the share capital subscribed for and paid to a company
by its shareholders. The term dividend has been defined under Section 2(14A) of
the Companies Act, 1956 (the Act) as dividend includes any interim dividend. The
dictionary meaning of the term dividend is sum payable as interest on loan or as
profit of a company to the creditors of an insolvents estate or an individuals share of
it. In commercial parlance, however, dividend is the share of the companys profit
distributed among the members.
Difference between Dividend and Interest
While dividend is paid on preference and equity shares, interest is paid on
debentures and long term and short term loans/borrowings including fixed deposits.
Interest is a debt which like all debts is paid out of the companys assets generally. A
dividend, however becomes a debt only after it has been declared by the company.
Dividend cannot be paid out of the assets of the company, generally it can be
declared only out of the profit available for the purpose. Interest is a charge on profits
while dividend is an appropriation of profits. The power to pay dividend is inherent in
882


a company and is not derived from the Companies Act, 1956 or the Memorandum or
Articles of Association although the Act and the Articles generally regulate the
manner in which dividends are to be declared.
Right to claim dividend will only arise after a dividend is declared by the company
in general meeting and until and unless it is so declared, the shareholder has no
claim against the company in respect of it. The observation of the Bombay High Court
in Bacha F Guzdar v. CIT (1952) 22 Comp Cases 198 (Bom) was improved upon by
the Supreme Court saying that the right to participation in the profits exists
independent of any declaration by the company with only difference that the
enjoyment of profits is postponed until dividends are declared [Bacha F Guzdar (Mrs.)
v. CIT (1955) 25 Com. Cases 1 at p. 6]
Types of Dividend
Final Dividend
Final dividend is recommended by the Board of directors in its report to the
shareholders, as per the requirements of Section 217 of the Companies Act, which is
attached to the balance sheet for the relevant financial year. It is declared by the
shareholders at the annual general meeting. Usually articles of association of
companies provide that the shareholders cannot increase the rate or amount of
dividend than the one recommended by the Board. The shareholders may, however,
declare the payment of dividend on equity shares at a rate lower than the one
recommended by the directors in their report.
It is the discretion of the Board of directors to recommend or not to recommend
the declaration of final dividend, which has to be exercised in good faith in the interest
of the company. The shareholders have no power to declare final dividend in the
absence of a recommendation of the Board of directors in this regard.
Interim Dividend
Section 2(14A) defines 'Dividend' to include interim dividend. The Companies
(Amendment) Act, 2000 has amended Section 205 to make provisions for interim
dividend. The Board of directors may declare interim dividend. The interim dividend is
paid between two annual general meetings of the company.
A company can normally estimate its profits for the current financial year on a
fairly reasonable basis and in that event it can allocate to the reserves the prescribed
percentage of profits on the basis of its estimated profits. As a measure of precaution,
the company may allocate to the reserves a higher amount than the actual amount
based on the prescribed percentage of its estimated profits.
Further, it should also provide for depreciation in full. It should transfer to the
reserves an amount based on estimated profits after the end of the financial years
and before the finalisation of the amounts for the financial year and thereafter decide
to pay an interim dividend to its shareholders.
Prior to the coming into force of the Companies (Amendment) Act, 2000, the Act
did not contain specific provisions for payment of interim dividend. However, if the
articles of association of company authorised payment of interim dividend as per


regulation 86 of the Table A of Schedule I, then the Board of directors of such
company could declare an interim dividend where its profits warranted such payment.
A mere resolution for declaration of an interim dividend did not create any liability and
could be rescinded at any time before actual payment. This was so even if the cash
to cover the proposed dividend had been placed into a separate account. The
distinction between interim and final dividend was that, unlike interim dividend, a final
dividend once declared by the company in general meeting was a debt and created
an enforceable obligation. [Punjab National Bank v. Union of India (1986) 59 Comp
Cases 35 (Del.)]
With the enactment of the Companies (Amendment) Act, 2000, this position has
changed. Interim dividend stands on the same footing as that of the final dividend.
Both interim and final dividend when declared become debt and are payable within
30 days of declaration.
In the present circumstances provided in the Act, it is not mandatory that an
interim dividend declared by the Board of directors and paid to the shareholders in
accordance with the provisions of the Act be included as an item in the notice of
forthcoming annual general meeting of the members of the company for their
confirmation. This view has the support of the argument that the interim dividend
has already been accounted for in the Balance Sheet and Profit & Loss Account
which are to be adopted by the members of the company. As such, the interim
dividend declared and paid carries the confirmation of the members of the company
automatically and no separate confirmation is required. A dividend can be defined to
mean the share, of companys profit legally available for distribution and divided
amongst the members. Subject to any restrictions, which may be imposed by its
memorandum, every company has implied power to apply its profits to the distribution
of dividend amongst its members. Under Section 25 of the Act it is incumbent on a
association for promoting art, commerce, science, religion, charity or any other useful
objective desiring itself to be registered under the said section thereby enabling it to
dispense with the requirement of Limited as the last word in the name of the
company, to provide in its constitution i.e. memorandum, that the company is
required to apply its profits, if any, or other income in promoting its objects and is
prohibited from paying any dividend to its members. The inherent power of dividing its
profit amongst its members, which a company generally possesses, reflects the fact
that the company is conceived as a form of organisation and as such is motivated by
profit earning. In view of this, no express power to pay dividends is required in the
memorandum or articles.
The possession of this inherent power to distribute its profits to its shareholders
by a company does not mean that, while being a going concern it is bound to do so.
On the contrary it is entitled to retain a part or whole of it, for promoting the purposes
of the company. Under Sub-section (2A) of Section 205, no dividend can be declared
or paid by a company for any financial year out of its profits except after transfer to
the reserves of the company of such percentage of its profits for that year as may be
prescribed, the maximum being 10 per cent. Usually, the articles of companies leave
it to the discretion of the direction as to what part of the profits available for
distribution shall be carried to reserve or otherwise set aside or carried forward and
what part shall be made available for dividend.


Dividend on Preference Shares
A Preference share carries a preferential right as to dividend in accordance with
the term of issue and the articles of association, subject to the availability of
distributable profits. The preferential right to a dividend could either be a fixed amount
or an amount calculated at a fixed rate. It may be cumulative or non-cumulative.
Preference shares can carry dividend of a fixed amount, before any dividend is paid
on the equity shares. If there are two or more classes of preference shares, the
shareholders of the class which has priority are similarly entitled to their preferential
dividend before any dividend is paid in respect of the other class. But these rights in
respect of dividends are subject to three conditions. Firstly, preference shares are
part of the companys share capital, consequently, preference dividends can be paid
only if the company has earned sufficient profits. Secondly, a dividend becomes
payable to the shareholders only when it is declared in the manner laid down in the
Act and by the companys articles. Thirdly, there should have been a formal
declaration. Preference shareholders are not entitled to treat the preference dividend
as a debt and sue for its payment in the first instance. Though, if the articles specify
that the companys profit shall be applied, by way of payment of the preference
dividend, the preference shareholder can sue for it even though it has not been
declared [Evling v. Israel & Oppenheimer Ltd. (1918) 1 Chh. 101].
Dividend on Equity Shares
Dividend on equity shares are to be paid in accordance with the rights of the
respective classes of shares. Equity shareholders are entitled to be paid dividend on
their shares only after all dividends on preference shares have been paid to date.
Although the equity shareholder stands second in preference to preference
shareholders, he enjoys a privilege of a higher dividend as the preference dividend is
fixed and cannot be increased, however, large the companys profits may be, unless
the preference shares carry the right to participate in surplus profits. Except in that
case, therefore, the whole of the residual profits of the company after paying the
preference dividend may be paid out as dividend to the equity shareholders either
immediately or in later years.
Section 78 does not permit the amount standing to the credit of the Securities
Premium Account to be distributed by way of dividend to the shareholders. Earlier it
was so usable and its distribution among shareholders was regarded as a dividend
[Bharat Fire and Gen. Ins. Ltd. v. CIT (1964) 34 Com. Cases 683].
The profits of a business means the net proceeds of the concern after deducting
the necessary expenses without which those proceeds could not be earned. [Bharat
Insurance Co. Ltd. v. CIT (1931) 1 Com Cases 192, 196 (Lah)].
2. RESTRICTIONS ON DECLARATION OF DIVIDEND AND PURPOSE BEHIND
IT
The restriction that the company law puts on declaration of dividends by
companies is that they must be paid only out of profits and after providing for
depreciation. Of course, losses, if any of the previous years must be set off before
declaring dividend.


However, in exceptional circumstances, the Central Government has the power
to exempt a company or a class of companies from the provision of providing
depreciation before declaration of dividend. The purpose of imposing this restriction is
to ensure that the assets of companies are preserved for the benefit of their creditors
and not to be distributed among members of the companies in the guise of dividends.
Sub-section (2B) has been inserted to Section 205 which provides that if a
company fails to comply with the provisions of Section 80A i.e. redemption of
irredeemable preference shares, it shall not declare any dividend on its equity shares
so long as such failure continues.
3. ASCERTAINMENT OF DIVISIBLE PROFITS AND DIVIDENDS
Divisible profits means the profits which the law allows the company to distribute
to the shareholders by way of dividend. According to Palmers Company Law, the
terms divisible profits and profits in the legal sense are synonymous. The profits of
a business mean the net proceeds of the concern after deducting the necessary
outgoings without which those proceeds could not be earned. [Bharat Insurance Co.
Ltd. v. CIT (1931) 1 Com. Cases 192, 196 (Lah)]. Profits available for dividend has
been held to mean the profits which the directors consider should be distributed after
making provision for depreciation or past losses, for reserves or for other purposes.
A proposal for declaration of dividend involves various considerations like the
annual working of the company, future prospects of the companys business, building
up of adequate reserves for future expansion etc. Simply because the companys
accounts disclose profits in any year, it does not follow that declaration of dividend is
a must. The concept of divisible profits is undefined and is a highly relative term. The
quantum of profit, the rate of dividend previously maintained, tax liabilities,
employees claim on bonus and similar other factors that are likely to claim a share in
the profits have to be carefully scrutinised.
The question that would arise is as to how profits are calculated for this purpose.
Under Section 205(1) of the Act dividend can be paid by a company.
(a) out of the profits of the company for that year after providing for depreciation
under Section 205(2); and/or
(b) out of the profits of the company for the previous financial year or years
arrived at after providing for depreciation under Section 205(2) and
remaining undistributed; or
(c) out of moneys provided by the Central or State Government for the payment
of dividend pursuant to a guarantee given by the Government.
Excepting this, one cannot get any guidance from the Act as to how the profits
are to be calculated for the purpose of payment of dividend. However, under
Section 211(2) every profit and loss account of a company should give a true and fair
view of the profit or loss of the company for the financial year and shall, subject, as
aforesaid, comply with the requirements of Part II of Schedule VI, so far as they are
applicable thereto. Therefore, it should be assumed that profit and loss account
should be prepared in accordance with Part II of Schedule VI. As it is not compulsory
to provide depreciation under Part II of Schedule VI, it has been provided under


Section 205 that depreciation should be provided before dividend is declared out of
profits. It should be noted that the Act provides for detailed guidelines for computation
of profits for the purpose of managerial remuneration, payment of donations to
charitable and other purposes not connected with the business of the company in
Sections 349 and 350 of the Act.
Depreciation
Under Section 205(2) depreciation should be provided in any one of the following
ways before arriving at the distributable profits, viz:
(a) to the extent specified in Section 350; or
(b) in respect of each item of depreciable asset, for such an amount as is
arrived at by dividing ninety-five per cent of the original cost thereof to the
company by the specified period in respect of such asset; or
(c) on any other basis as approved by the Central Government which has the
effect of writing off by way of depreciation ninety-five per cent of the original
cost to the company of each such depreciable asset on the expiry of the
specified period; or
(d) in respect of depreciable assets where no rate of depreciation has been
provided in this Act or any rules made thereunder, on such basis as is
approved by the Central Government.
Section 350 of the Companies Act, 1956 [as amended vide Companies
(Amendment) Act, 2000] provides that the amount of depreciation to be deducted is
the amount of depreciation on assets as shown by the books of the company at the
end of the financial year at the rates specified in Schedule XIV. Schedule XIV
prescribes the rates of depreciation of various assets both under Written-Down-
Value Method and Straight Line Method for Single Shift, Double Shift and Triple Shift
basis.
Under proviso to Section 350, where any asset is sold, discarded, demolished or
destroyed for any reason before depreciation of such asset has been provided for in
full, the excess, if any of the written down value of such asset over its sale proceeds
or as the case may be, its scrap value, shall be written off in the financial year in
which the asset is sold, discarded, demolished or destroyed.
Section 205(5) specifies the period in respect of any depreciable asset to mean
the number of years at the end of which at least ninety-five per cent of the original
cost of that asset to the company would have been provided for by way of
depreciation if depreciation were to be calculated in accordance with the provisions of
Section 350.
Provision of Depreciation
Schedule XIV which was inserted by the Companies (Amendment) Act, 1988
contains the rates of depreciation for various assets. Prior to the Companies
(Amendment) Act, 1988, Companies while determining distributable profits for the


purposes of declaring dividend had to provide for depreciation at the rates specified
for various assets by the Income-tax Act, 1961.
Accordingly clause (d) of Sub-section (2) of Section 205 which provides guidance
as to how depreciation should be provided, was amended and the expression the
Indian Income-tax Act, 1922 or the rules made thereunder was substituted by the
expression this act or any rules made thereunder.
Clause (c) of the proviso to the Sub-section (1) of Section 205 of the Act
empowers the Central Government to allow any company to declare or pay dividend
for any financial year out of profits for that year or any previous financial year(s)
without providing for depreciation.
For obtaining approval of the Central Government, the Board of directors of a
company proposing to pay dividend without providing for depreciation, should pass a
resolution authorising the managing director or the company secretary to make an
application to the Central Government.
As stated earlier the Companies (Amendment) Act, 2000 has amended the
provisions of Section 350 to the effect that the depreciation on assets as shown by
the books of the company at the rate specified in Schedule XIV may be taken into
account for payment of dividend.
Manner of providing depreciation
According to clause (k) of Sub-section (4) of Section 349, in computing net profit
for the purpose of Section 349, depreciation to the extent specified in Section 350
shall be deducted.
Section 350 lays down that the amount of depreciation to be deducted in
pursuance of clause (k) of Sub-section (4) of the Section 349 shall be the amount of
depreciation on asset as shown by the books of the company at the end of the
financial year expiring at the commencement of the Act or immediately thereafter and
at the end of each subsequent financial year, at the rate specified in Schedule XIV.
Therefore, for the purposes of the Companies Act, depreciation has to be
calculated in accordance with the rates specified in Schedule XIV. In this Schedule,
assets have been classified into (I) Buildings; (ii) Plant and Machinery; (iii) Furniture
and fittings; and (iv) ships.
Under each class, several items of assets have been given and for each of them
or group of them, depreciation rates have been prescribed under the writtendown
value method (WDV) and the straight line method (SLM). A company is free to adopt
either of the two methods of depreciation and use appropriate rates of depreciation.
In the event of adoption of the straight line method of depreciation by a company the
concept of specified period has no relevance.
So far as the class plant and machinery is concerned, two sets of depreciation
rates, viz. General rate and special rate, have been prescribed, under each of the
aforesaid methods, viz., WDV method and the SLM method. General rate is
applicable in respect of items of plant and machinery and continuous process plants,
which are operated all the 24 hours a day, which are not covered by special rates.


The items of plant and machinery, which are covered by special rates, have been put
under four categories and for each of the said categories special rates of depreciation
have been specified.
Loss of previous year(s) to be set off against profits of current year or previous
years.
As per clause (b) of proviso to section 205(1) of the Companies Act, where a
company has incurred any loss in any financial year or years falling after the
commencement of the Companies (Amendment) Act, 1960, then the lower of the
following two amounts, namely:
(a) the amount of the loss, or
(b) the amount of depreciation provided for that year or those years,
Should be set off against the profits of the year for which the dividend is
proposed to be declared or against the profit of the company for any previous
financial years arrived at after providing for depreciation under Sub-section (2).
Certain legal pronouncements on divisible profits
There have been a number of important legal decisions regarding divisible
profits. Some of them are briefly discussed below:
1. Lee v. Neuchatel Asphalt Co. Ltd. (1988) 41 Ch.1 A company may
distribute dividend without making good the depreciation of wasting assets.
2. Botton v. Natal Land & Colonisation Co. Ltd. (1892) 124 Ch. In this case
the plaintiff sought to restrain the payment of dividend by a company dealing
with land on the ground that the book value of the land was much higher
than the true value and must be written down before profit can be
distributed. Held that a loss of capital need not be made good before
declaring a payment of dividend out of current profits.
3. Bond v. Barrow Haematite Steel Co. Ltd. (1902) 1 Ch. 353 In this case the
preference shareholders brought a suit against the company on the ground
that, by contract, they were entitled to be paid a preferential dividend out of
the balance to the credit of profit and loss account in each year and that the
company cannot appropriate any part of such balance to reserves. The
Court held that it could not compel the directors to pay dividends as the
credit in the profit and loss account was such they would not be applied to
the payment of such dividend as the articles empowered to put certain sums
to reserves before the payment of dividend.
4. Verner v. The General & Commercial Investment Trust Ltd. (1842) 2 Ch. 239
In this case the company decided to pay dividend before making good the
loss arising from the diminution in the value of investments. It was held that
a company may pay dividends out of current profits without making good the
loss of capital. Justice Lindley held that:
The broad question raised by this appeal is whether a limited company
which had lost part of its capital, can lawfully declare or pay a dividend


without first making good the capital which has been lost. I have no doubt, it
can that is to say, there is no law which prevents it in all cases and under all
circumstances. Such may be perfectly legal and may yet be opposed to
sound commercial principles. We, however, have only to consider the
legality or illegality of what is complained of. There is no law which prevents
a company from sinking its capital in the purchase or production of money
making property or undertakings, and in dividing the money annually yielded
by it without preserving the capital sunk so as to be able to reproduce it
intact, either before or after the winding up of the company.
5. Profit means the net proceeds of the company after deducting the necessary
expenses without which those proceeds could not be earned [Bharat
Insurance Co. Ltd., Lahore v. Commission of Income Tax (1931) 1 Comp.
Cases 192 (Lah.)].
The Act requires a company to prepare a profit and loss account which should
give a true and fair view of the profit or loss of the company for a financial year.
The Act does not define the word profit or the expression true and fair. These
words and expressions should therefore be understood within their natural and
proper sense.
This would imply that the profit and loss account should be prepared and
presented in conformity with the requirements set out in the Act and the
generally accepted principles of accounting, which should be consistently
applied.
6. The term profit available for distribution as Dividend means such profit after
tax which the Directors decide to distribute. Such decision should be based
on a consideration of the comments, if any, of auditors which have a bearing
on profits, and after setting off past losses and making provision for transfer
of the statutory reserves and other appropriations and provisions. If the
Directors have on some fair basis taken a decision as to the proportion of
profits which should be distributed by way of dividend, the Courts do not
interfere in these matters even if there are larger profits and more Dividend
could have been paid [Stewart v. Sashatite Ltd. (1936) 2 All ER 1481]. The
Courts do not compel Directors to declare a Dividend against their
judgement. [Bond v. Barrow Haematite Steel Co. Re. (1902) 1 Ch. 353].
Transfer of Profits to Reserves
As we have discussed earlier, under Sub-section (2A) of Section 205 no
dividend can be declared by a company for any financial year except that
transfer to reserve of the company of such percentage of its profits for that year, upto
10 per cent as has been prescribed. On exercise of their power under this sub-section
the Central Government have issued the Companies (Transfer of Profits to Reserves)
Rules, 1975 prescribing the percentages of profits to be transferred to reserves before
declaring dividend. The text of the rules is reproduced in Annexure I. Under these rules
the following percentages of profit will have to be transferred before a dividend is
declared:


Rate of dividend
Amount to be
transferred to


Reserves

(a)If the proposed dividend exceeds 10% but does Not less than 2.5% of the
not exceed 12.5% of the paid-up capital
current profits.
(b)If the proposed dividend exceeds 12.5% but Not less than
5% of the
does not exceed 15% of the paid-up capital current profits
(c)If the proposed dividend exceeds 15% but Not less than
7.5% of the
does not exceed 20% of the paid-up capital current profits.
(d)If the proposed dividend exceeds 20%
Not less than 10% of the
of the paid-up capital
current profits.

However, if a company wishes to transfer more than 10% of profits to reserves in
a year, it can do so after complying with the provisions of Rule 3 of Companies
(Transfer of Profits to Reserves) Rules, 1975.
The conditions as per Rule 3 are:
1. Where a dividend is declared
(a)it should not be less than the average of the rates at which dividends were
declared by the company for the last three years immediately preceding
the financial year; or
(b)where Bonus shares have either been issued in the financial year in which
dividend is declared or in the three years immediately preceding the
financial year, it should not be less than the average amount (quantum)
of dividend declared for the last three years immediately preceding the
financial year.
The conditions are not applicable where the net profits after the tax are
lower by 20% or more than the average net profits after tax of the two
financial years immediately preceding the financial year.
2. Where no dividend is declared, the amount proposed to be transferred to the
reserves from the current profits shall be lower than the average amount of
the dividends to the shareholders declared in the three years immediately
preceding the financial year.
A newly incorporated company is prohibited from transferring more than ten
per cent of its profits to its reserves. [Circular No. 20/76 (5/10/76-CL-XIV and


1/1/76-CL.VI) 26.07.1976].
The Department of Company Affairs has given the certain clarifications in
regard to the aforementioned rules which are reproduced in Annexure II.
As an incentive to increase the investment in the desired area higher rates of
depreciation has to be provided under Section 205 of the Act than warranted on the
basis of the effective working life of the assets resulting in diminution of profits both
for distribution of dividend and for managerial remuneration. In order to remove
hardship on this count the Department of Company Affairs (DCA) approves of
proposals for provisions of depreciation at lower rates on such assets in order to
enable companies to pay dividend to shareholders. An application will have to be
made to DCA for obtaining the approval showing the profits earned before provision
of depreciation and after provision of depreciation on the normal rates arrived at and
the quantum of dividend proposed together with a certificate from the suppliers of
machinery or approved valuers about the normal working life of asset.
Dividend in Case of Absence or Inadequacy of Profits
In case of absence or inadequacy of profits, dividend can be declared under
Section 205A(3) of the Act out of the accumulated profits earned by the company in
the previous years and transferred by it to reserves. Such declaration should be in
accordance with the rules prescribed in this regard by the Government. If such a
declaration does not conform to the rules, the declaration of dividend will require the
previous approval of the Central Government. In exercise of its powers under this
sub-section, the Central Government has framed rules known as Companies
(Declaration of Dividend Out of Reserves) Rules, 1975 (Annexure III).
Under these rules dividend can be declared from amounts drawn from reserves
(i.e. free reserves only and not from any specific reserves) in case of absence or or
inadequacy of profits subject to the following conditions:
(a) the rate of dividend declared shall not exceed the average of the rates of
dividend declared by it during the immediately preceding last five years or
10% of the paid-up capital, whichever is less;
(b) the amount to be drawn shall not exceed 10% of its paid-up capital and
free reserves and the amount so drawn should be first utilised to set off
the losses incurred in the financial years before any dividend in respect of
preference as equity shares is declared; and
(c) the balance of reserves after such drawal shall not fall below 15% of the
paid-up share capital
It should be noted that this rule will not apply to declaration of dividend out of the
profits/surplus carried forward to the Balance Sheet by a company. It will apply only to
declaration of dividend out of the profits of the previous years transferred to the reserves.
4. DECLARATION OF DIVIDEND
A dividend when declared becomes a debt and a shareholder is entitled to sue
for recovery of the same after expiry of the period of 30 days prescribed under


Section 207, in Re Sehern and Wye & Sehern Bridge Rly. Co. (1986) 1, Ch 559. A
dividend when proposed does not become a debt but only becomes debt when
declared (Kastur Chand Jain v. Gift Tax Officer AIR 1961 Cal. 649).
The Act does not specifically provide who shall declare final dividend. But under
Section 173(1), the declaration of a dividend has been shown as ordinary business at
an annual general meeting of a company. Similarly there is a reference to dividend in
Section 217 whereunder directors are required to mention in their report to the
shareholders the amount, if any, which they recommend by way of dividend.
Therefore, it could be assumed that the intention of the legislature is to empower the
annual general meeting to declare final dividend. In Raghunandan Neotia v.
Swadeshi Cloth Dealers Ltd. (1964) 34 Comp. Cas. 570 (Cal.) the Calcutta High
Court held that the cumulative effect of all the provisions of the Act is that the
declaration of dividends should be made at the annual general meetings. In Kantilal
v. CIT, (1956) 26 Comp. Cas. 357 (Bom.), the Bombay High Court has held that it is
well established and the law is quite clear that a dividend can only be declared by the
shareholders of the company. Articles of companies usually contain provisions with
regard to declaration of dividends. These will be on the pattern of Regulations 85-94
of Table A of Schedule I to the Act. It would be seen that under Regulation 85 the
power to declare a dividend vests with the general meeting, but it has no power to
declare a dividend exceeding the amount recommended by the Board.
But if a dividend is so declared at the general meeting, the company cannot
declare a further dividend for the same year (Circular No. 2 issued by the Department
of Company Affairs dated 25.10.75) There can be no declaration of dividend for past
years in respect of which the amounts have already been closed at previously held
annual general meeting. [Raghunandan Neotia v. Swadeshi Cloth Dealers Ltd.
(Supra)]. Under Section 205(1A) of the Act, the Board of directors is authorised to
declare interim dividend. Hence, if articles does not provide otherwise, Board may
declare interim dividend.
Revocation of Declared Dividend
As already stated earlier, a dividend including interim dividend once declared
becomes a debt and cannot be revoked, except with the consent of the shareholders.
If a dividend is declared and paid to shareholders, the character of the payment
cannot be altered by a subsequent resolution.
But where a dividend has been illegally declared, the directors will be justified in
revoking the declared dividend. If an illegally declared dividend is paid then the
directors shall be responsible, liable and accountable to the company personally.
Payment of Dividend in Cash or in Kind
According to Section 205(3), dividend can be paid only in cash, not in kind. The
articles may provide that any meeting of the company declaring a dividend may
resolve that the dividend be paid wholly or partly by distribution or issue of paid-up
shares. In the absence of such express authority dividends may not be paid
otherwise than in cash. In one case, where the dividend was paid by allotting shares,
it was held that the market value of the shares on the date of the declaration of


dividend was to be taken into consideration for computing the income of shareholders
for the purposes of tax.
Liability of Directors, Shareholders and Auditors for Improper Dividend
The directors are personally liable to account for improper payment of dividend to
the extent to which it has caused loss to the company. If for instance they have paid
dividend out of capital they have to compensate the company for the loss. On the
other hand, if a member received dividend knowing that it is paid out of capital he is
liable to make good the loss of the company and the directors can recover the
amount so paid. At the instance of any individual shareholder, the directors can be
restrained from going ahead with the payment of an improper and illegal dividend
[Hook v. Great Western Rly Co. (1867) 3 Ch. App. 262].
An auditor who is party to the payment of dividend which is improper is liable to
be proceeded against and the amount which is improperly paid may be recovered
from him.
Shareholders Right to Dividend
Once a dividend is declared a shareholder has the right to claim dividend against the
company. (Bacha F. Guzadar (Mrs.) v. CIT (1955) 25 Com. Cases I: AIR 1955 SC 74). A
shareholder cannot compel the company by any process of law to declare a dividend.
The usual practice is for the Board to recommend and the annual general meeting to
declare the dividend. The annual general meeting will have the power, subject to the
provisions of the Act to determine the amount of dividend to be distributed.
5. TO WHOM PAID
Under Section 206 of the Act a dividend in respect of a share has to be paid to the
registered shareholder of the share or to his order or to his bankers. For this purpose,
usually companies close the register of members under Section 154 of the Act or fix a
record date, of which 7 days notice should be given by publication of advertisement in
two newspapersone in English and the other in the language of the region in which
the registered office of the company is situate. The purpose of such notice is to give an
opportunity to those who hold blank transfer deeds to lodge them with the company
duly completed. Dividend is paid to those whose names appear on the record date or
the last day of the closure of register of members, as the case may be. The dividend is
payable to the shareholder whose name appears in the register of members on the
appropriate date even though prior to that date he has sold the shares and the transfer
deed in respect thereof has not been lodged with the company [Chunilal Khushaldas
Patel v. H K Adhyam (1956) 26 Comp. Cas 168 (S.C)].
Recently, it was held in the case of Commissioner of Income-Tax v. Aatur
Holdings P. Ltd. [(2008) 146 Comp Cas 152 (Bom)], that merely because a person
may have purchased or been in receipt of shares, in the absence of the shares being
registered in his name in the books of account of the company, such a person is not
entitled to receive the dividend. The dividend has to be paid by the company in the
name of the registered shareholders and it is the registered shareholders alone who
claim dividend under section 27 of the Securities Contracts (Regulation) Act, 1956.
Section 206A was inserted by the Companies (Amendment) Act, 1988 w.e.f.
15.6.1988 providing for right to dividend, rights shares and bonus shares to be held in
abeyance pending registration of transfer of shares. It provides that in case


instrument of transfer of shares is pending registration with the company, the
dividends in relation to such shares should be transferred to the special bank account
opened by the company under Section 205A unless the company is authorised by the
registered shareholders in writing to pay such dividend to the transferee specified in
the instrument of transfer. In S V Nagarajan v. Lakshmi Vilas Bank Ltd. (1997) 26
CLA 308 (CLB) it was held that a company returns a transfer deed on the ground of
non-tally of the transferors signature on the deed with the one in its own records,
before the date of issue/allotment of bonus/rights shares, there will be no application
for registration pending with it on that date and it cannot be faulted for its failure to
comply with Section 206A of the Act.
6. WHEN PAYABLE
Under Section 207 of the Companies Act, 1956, dividend has to be distributed
within 30 days of the declaration. Posting of dividend warrants within 30 days will be
deemed to be payment irrespective of the fact whether the warrant has been encashed
or not under regulation 91 of Table A of Schedule I to the Act. In the case of joint
holders the warrant has to be sent to the registered address of the first named joint
holder or to such person and to such address as the joint holders may in writing direct.
However, as per proviso to the Section 207 in the following circumstances
dividend need not be paid within 30 days viz.:
(i) Where dividend could not be paid by reason of the operation of any law e.g.
in the case of non-residents, dividend need not be paid within 30 days if
permission for remittance where required has not been received therefor
from the Reserve Bank of India within 30 days;
(ii) Where a shareholder has given directions to the company regarding the
payment of dividend and these directions cannot be complied with;
(iii) Where there is a dispute regarding the right to receive dividend;
(iv) Where the dividend has been lawfully adjusted by the company against any
sum due to it from the shareholder; or
(v) Where for any other reason for failure to pay the dividend or to post the
warrant was not due to any default on the part of the company.
N.Kumar v. M.O.Roy, Assistant Director, S.F.I.O [(2007) 80 SCL 55 (MAD)], a
company, for the financial year 1995-96, declared the dividend on 19-9-1996 and
failed to distribute same within the prescribed period. A complaint has been filed
against the company and its directors on 23-8-2006 for the contravention of
provisions under Section 207 of the Companies Act, 1956. A director contended that
he had resigned before the declaration of dividend so he could not be held liable for
the contravention of Section 207. The court held that the director was not a whole-
time director to be aware about the entire affairs of the company. The director could
not be held vicariously liable for the contravention under Section 207 and therefore
the proceedings were liable to be quashed as against the director.
Any failure to comply with the requirements of Section 207 renders every director
of the company, who is knowingly a party to the default, liable for punishment with
simple imprisonment for a term which may extend to three years and he shall also be
liable to a fine of one thousand rupees for every day during which such default
continues and the company shall be liable to pay simple interest at the rate of 18%


p.a. during the period for which default continues.
As per Section 55A, non-payment of dividend shall, in case of listed public
companies and in case of those public companies which intend to get their securities
listed in any recognised Stock Exchange in India be administered by the SEBI.
The obligation to post the dividend warrant and the failure to satisfy that
obligation would occur at the place where the obligation has to be performed and that
place would be the registered office of the company and not the address at which the
warrant has to be posted. Hence, jurisdiction to punish an offence under Section 207
is of the Court at the place where the registered office of the company is situate.
[Hanuman Prasad Gupta v. Hiralal (1970) 40 Comp. Cas 1058 (S.C)]
Under Section 205A, if a dividend declared by a company has not been paid or
claimed within 30 days of the declaration, the same shall within 7 days thereafter i.e.
(7 days after the expiry of 30 days from the date of declaration, have to be transferred
to a special account to be opened by the company in that behalf in any scheduled
bank to be called Unpaid Dividend Account of.Company
Limited/Company (Private) Limited. Subsequently dividend claims will be met from
this account. According to Section 205A(5), if any amount remains unpaid or
unclaimed for a period of seven years from the date of such transfer, the amount so
remaining unpaid/unclaimed together with any interest credited thereto should be
transferred to the Investor Education and Protection Fund.
A company had deposited the unpaid dividend into the special dividend account,
unless the petitioners had got knowledge about non-encashment, the question of
transferring the said amount to an unpaid dividend account would not arise, because
that amount was already in that account. [Kerbs Biochemicals Ltd. v. ROC (2002)
CLC 1564 (AP)].
The foregoing provisions shall equally apply to payment of interim dividend.
Under Section 205(3) dividend has to be paid in cash. Dividend can be
distributed in cash or by issue of a cheque or warrant.
In Kerbs Biochemicals Ltd. & Ors. v. ROC [(2003) 57 CLA 75 (AP)], the
company transferred dividend to a special dividend account and also postal dividend
warrants to the shareholders with stipulated 42 days from the date of the declaration
of dividend. The Registrar of companies carried out an inspection of the company on
29.09.1997 and concluded that the company had failed to transfer the unpaid
dividend to the special account within the time stipulated under Section 205A(1) of
the Act. The special account within the time stipulated under Section 205A(1) of the
Act. The ROC initiated prosecution proceedings against the company and its
directors and filed a complaint on 15.4.1998. The company and its directors
challenged the prosecution before the High Court contending that it had deposited
the entire dividend amount in a separate dividend account and dispatched the
dividend warrants within stipulated time and that the complaint of ROC was barred by
limitation also (which is 6 months as per Section 468(2) of Cr.P.C.).
Allowing the appeal of the company, the Court stated that once the limitation
period begins, it cannot be stopped. The averments made in the complaint do not
constitute an offence under Section 205A of the Act and is barred by limitation.



7. ESTABLISHMENT OF INVESTOR EDUCATION AND PROTECTION FUND
The provisions of Section 205C inserted with effect from 31.10.1998 are as follows:
The Central Government shall establish a fund to be called the Investor
Education and Protection Fund (hereafter referred to as the Fund) [Sub-section (1)].
There shall be credited to the Fund the following amounts, namely:
(a) amounts in the unpaid dividend accounts of companies;
(b) the application moneys received by companies for allotment of any
securities and due for refund;
(c) matured deposits with companies;
(d) matured debentures with companies;
(e) the interest accrued on the account referred to in clauses (a) to (d);
(f) grants and donations given to the Fund by the Central Government, State
Government, companies or any other institutions for the purposes of the
Fund; and
(g) the interest or other income received out of the investments made from the
Fund.
Provided that no such amounts referred to in clauses (a) to (d) shall form part of
the fund unless such amounts have remained unclaimed and unpaid for a period of
seven years from the date they became due for payment.
The explanation to Sub-section (1) of Section 205C clarifies that no claims shall lie
against the Fund or the company in respect of individual amounts which were
unclaimed and unpaid for a period of seven years from the dates that they first became
due for payment and no payment shall be made in respect of any such claims.
The Fund shall be utilised for promotion of investor awareness and protection of
the interests of investors in accordance with such rules as may be prescribed.
The Central Government shall, by notification in the Official Gazette, specify an
authority or committee, with such members as the Central Government may appoint,
to administer the Fund, and maintain separate account and other relevant records in
relation to the Fund in such form as may be prescribed in consultation with the
Comptroller and Auditor-General of India [Sub-section (4)].
It shall be competent for the authority or committee appointed under Sub-
section (4) to spend moneys out of the Fund for carrying out the objects for which the
Fund has been established.
For the text of the Investor Education and Protection Fund (Awareness and
Protection of Investors) Rules 2001, please see Annexure IV to this study.
8. DIVIDEND WARRANTS
Clause (b) of Sub-section 205 specifically provides that any dividend payable in
cash may be paid by cheque or warrant and it shall be deemed to have been paid
when the cheque or warrant therefor is posted to the registered address or to such
other address as provided by the shareholder entitled to the payment of dividend. So
far as the company is concerned, the person entered in the Register of members is
the holder of shares though he may be merely a benamidar having no beneficial
interest in the shares for another person (a beneficiary).


Dividend warrant is an order by the company to its banker to pay the amount
specified therein to the shareholder whose name is written therein. The shareholder
may, at his discretion thereafter draw the amount of the warrant from his account with
the bank and with whom he deposits the warrant for collection.
A company cannot take any notice of any private arrangement between the
vendor and purchaser of shares. If a dividend warrant issued to but not received by a
shareholder, is encashed by an unauthorised person directly or indirectly, the
company will have to bear the loss, because in such cases the dividend cannot be
said to have been paid to the registered holder within the meaning of Section 206.
For this reason, a warning note is printed on the reverse of the dividend warrant to
save the company from the liability due to dividend warrant falling in hands of
fraudulent persons.
However, companies have also been authorised to make the payment of
dividend through ECS facility.
Distribution of dividend through ECS
1. DCC/FITTC/Cir-3/2001 dated 15.10.2001 issued by the SEBI, Depositories and
Custodian Cell
It has been brought to our notice that some of the companies are not utilising the
facility of Electronic Clearing Services (ECS) for distributing dividends, other cash
benefits, etc., to the investors. It is advised that all the companies should mandatorily
use ECS facility wherever available. In the absence of availability of ECS facility, the
companies may use warrants for distributing the dividends.
2. DCC/FITTC/Cir-4/2001 dated 13.11.2001 issued by SEBI, Depositories and
Custodian Cell
Please refer to our Circular No. DCC/FITTC/CIR-3/2001, dt. 15.10.2001.
It is further advised that at present only some of the companies print the bank
account details of the investors on the warrants (payment instrument), for distribution
of dividends, other cash benefits, etc. There are some companies, which are not
printing the bank account details on the payment instruments. SEBI has also received
complaints about fraudulent encashment of the dividend and other cash benefit
instruments. To avoid such situations the companies are advised to mandatorily print
the bank accounts details furnished by the depositories, on the payment instruments.
*Dividend Mandate
*

The shareholders may desire that their dividends be credited directly to their
bank account. The request will be made in a form duly filled and sent to the company.
This is known as Dividend Mandate. This authorises the company to pay dividends
directly to bank account of the shareholder. This form is also used for purposes like
payment of interest on debentures and other securities.


*
The TDS may be printed on the reverse side of the Counterfoil (of the Dividend Warrant) duly signed by
persons responsible for deduction of tax. General Circular No. 10/2003 dated 13.02.2003.


Use of information technology in cash transaction of listed companies for
payment of dividends
The shareholders have complained in the past about loss of dividend warrants
sent by post due to pilferage in transit or undue delay in receipt of dividend warrants
through post.
Under Section 205(5)(b) of the Companies Act, 1956 a company may remit
dividend in cash or by cheque or by warrant. It is however well-known that the
amount of dividend can also be transmitted electronically to the shareholders after
obtaining their consent in this regard and asking them to nominate the specific bank
account number to which the dividend due to them should be remitted.
The Central Vigilance Commissioner has issued an order dated 27.11.1998
directing that the Banks may switch over to remittance of dividends by computerised
means as it will help to improve the vigilance administration. The Central Vigilance
Commissioner has also requested the Department of Company Affairs that in the
interest of greater transparency listed companies in India may be directed that they
should go in for computerised cash transaction so far as payment of dividend,
interest, refund etc. are concerned.
Consequently, the Department of Company Affairs, has now advised listed
companies to encourage their shareholders to send their authorisation to remit
dividend to their designated bank account by means of electronic transfer as this will
result in avoiding delay in remittance of dividends etc.
Can Dividends be Paid out of Capital
Dividend cannot be paid out of capital, even if the articles of association
authorise such payment. As per Section 205, dividend may be paid out of the
following three sources only:
out of current profits;
out of profits for any previous financial year or years; and
out of moneys provided by the Central or State Government for the payment
of dividend.
Directors who knowingly paid dividends out of capital shall be held personally
liable to make good the amount to the company. When a misrepresentation was
made to the shareholders by the directors that the dividends were being paid out of
profits while they were actually paid out of capital, the shareholders would not be
accountable and the directors alone would be accountable to the company [Oxford
Benefit Building & Investment Society, In re (1886) 35 Ch. D]. But if the members
knowingly received dividend which was paid out of capital, the directors would have a
right of indemnity against such members. The shareholders cannot keep the dividend
with them and have to return the amount received to the company (Towers v. African
Tub Bo. (1904) 1 Ch. 558 (CA)Moxham v. Grant (1900) 1 QB 88 (CA). In another
case, due to an unintentional mistake on the part of the directors, dividend was paid
out of capital, on realising/mistake the directors recovered such dividend. No action
can be taken against such directors.
However, interest may be paid out of capital, on the shares of the company, with


the previous approval of the Central Government under Section 208.
Therefore, it is clear that directors and officers of the company making such
payment would commit an offence under the Act and they will also be liable to make
good the amount so paid as dividend to the company.
9. PAYMENT OF INTEREST OUT OF CAPITAL
The normal rule of law is that dividend can be paid only out of profits and must
not be paid out of capital. An exemption to the rule is contained in Section 208 which,
in effect, provides that where shares are issued to raise money to defray the cost of
works or building or of plant or project which cannot be made profitable for a long
period, the company may pay interest on the amount of the capital paid-up in respect
of such shares and may charge the same to capital as part of the cost of works,
buildings or project or plant provided the following conditions are satisfied:
(a) Authority and Sanction of the Central GovernmentThe payment should be
authorised by the articles. In the alternative, a special resolution is passed
and prior sanction of the Central Government is obtained. Prior sanction of
the Central Government is necessary even when the articles authorise such
payment. Before sanctioning any such payment, the Central Government is
empowered to appoint a person to inquire into and report to the Central
Government on the circumstances of the case. It may even require the
company to give security for payment of the costs of the inquiry.
(b) Time PeriodThe payment of interest shall be made only for such period as
may be determined by the Central Government and that period shall in no
case extend beyond the close of the half-year next after the half-year during
which the work or building has been actually completed or the plant
provided.
(c) Rate of InterestThe rate of interest shall, in no case, exceed four per cent
per annum or such other rate as the Central Government may notify in the
Official Gazette.
(d) Charge to CapitalThe payment of interest shall not operate as a reduction
of the amount paid up on the shares in respect of which it is paid.
Payment of Dividend out of Capital Profits
The term capital profits may be defined to mean those profits which arise
otherwise than in the normal course of the business and earned out of capital
transactions. The usual sources of capital profits are:
(1) Profits on sale of fixed assets.
(2) Profits on revaluation of fixed assets.
(3) Premium on issue of shares/debentures/bonds/redemption of debentures.
(4) Profits on reissue of forfeited shares.
(5) Capital redemption reserve account.


(6) Profit prior to incorporation i.e. profits which accrues to a company till the
date of incorporation.
The Companies Act does not mention specifically whether capital profits i.e.
profits which arise where a company sells part of its fixed assets at a price higher
than the original cost of such asset, can be distributed as dividend.
However, in the two important cases of Lubbock v. British Bank of South America
(892) 2 Ch. 198 and Foster v. The New Trinidad Co. Ltd. (1901) 1 Ch.208 the courts
have held that capital profits cannot be considered as available for distribution as
dividend unless:
(a) the articles of association authorise such a distribution; and
(b) the surplus is realised and remains after a valuation of the whole of the
assets and liabilities.
10. REMITTANCE OF DIVIDEND OR INTEREST OR SALE PROCEEDS TO NRIS,
FOREIGNERS AND FOREIGN COMPANIES
In terms of Foreign Exchange Management (Current Account Transaction)
Rules, 2000 read with AD (MA Series) Circular No.11, dated 16.5.2000, an
authorised dealer is empowered to remit payment of dividend by Indian companies to
non-resident shareholders. For the purpose, the authorised dealers are empowered
to devise their own documentation complying with Section 10(5) of Foreign Exchange
Management Act, 1999.
Rate of Dividend on Preference Shares
Schedule 1 to Foreign Exchange Management (Transfer or Issue of Security by a
Person Resident Outside India) Regulations, 2000 prescribe the rate of dividend on
preference shares or convertible preference shares issued under these regulations.
Accordingly, the rate of dividend shall not exceed 300 basis points over the Prime
Lending Rate of State Bank of India prevailing as on the date of the Board Meeting of
the company in which the issue of such share is recommended.
Students may note that the Institute has published Secretarial Standard on
Dividend (SS-3) and a Guidance Note on Dividend.
ANNEXURES
ANNEXURE I
THE COMPANIES (TRANSFER OF PROFITS TO RESERVES) RULES, 1975
In exercise of the powers conferred by Sub-section (2-A) of Section 205 read with
clause (a) of Sub-section (1) of Section 642, of the Companies Act, 1956 (1 of 1956),
the Central Government hereby makes the following rules, namely:
1. Short title These rules may be called the Companies (Transfer of Profits to
Reserves) Rules, 1975.
2. Percentage of profits to be transferred to reserves No dividend shall be
declared or paid by a company for any financial year out of the profits of the company


for that year arrived at after providing for depreciation in accordance with the
provisions of Sub-section (2) of Section 205 of the Act, except after the transfer to the
reserves of the company of a percentage of its profits for that year as specified
below:
(i) Where the dividend proposed exceeds 10 per cent but does not exceed 12.5
per cent of the paid-up capital the amount to be transferred to the reserves
shall not be less than 2.5 per cent of the current profits;
(ii) Where the dividend proposed exceeds 12.5 per cent but does not exceed 15
per cent of the paid-up capital, the amount to be transferred to the reserves
shall not be less than 5 per cent of the current profits;
(iii) Where the dividend proposed exceeds 15 per cent, but does not exceed 20
per cent of the paid-up capital, the amount to be transferred to the reserves
shall not be less than 7.5 per cent of the current profits; and
(iv) Where the dividend proposed exceeds 20 per cent of the paid-up capital, the
amount to be transferred to reserves shall not be less than 10 per cent of the
current profits.
3. Conditions governing voluntary transfer of higher percentage Nothing
in Rule 2 shall be deemed to prohibit the voluntary transfer by a company of a
percentage higher than 10 per cent of its profits to its reserves for any financial year,
so however that:
(i) Where a dividend is declared
(a)a minimum distribution sufficient for the maintenance of dividends to
shareholders at a rate equal to the average of the rates at which
dividends declared by it over the three years immediately preceding the
financial year; or
(b)in a case where bonus shares have been issued in the financial year in which
the dividend is declared or in the three years immediately preceding the
financial year, a minimum distribution sufficient for the maintenance of
dividends to shareholders at an amount equal to the average amount
(quantum) of dividend declared over the three years immediately
preceding the financial year, is ensured:
Provided that in a case where the net profits after tax are lower by 20 per cent
or more than the average net profits after tax of the two financial years
immediately preceding, it shall not be necessary to ensure such
minimum distribution.
(ii) Where no dividend is declared, the amount proposed to be transferred to its
reserves from the current profits shall be lower than the average amount of
the dividends to the shareholders declared by it over the three years
immediately preceding the financial year.
4. Penalty If a company fails to comply with any of the provisions contained in
these rules, the company and every officer of the company in default shall be
punishable with fine which may extend to five hundred rupees, and, where the


contravention is a continuing one, with a further fine which may extend to fifty rupees
for every day, after the first, during which such contravention continues.
ANNEXURE II
CLARIFICATIONS OF THE DEPARTMENT
Queries arising from the Companies (Transfer of Profits to Reserves) Rules,
1975 and the Companies (Declaration of Dividend Out of Reserves) Rules, 1975
answered.
The Department has received a number of queries in respect of the
abovementioned rules. The points raised have been duly considered and the
Departments views thereon indicated below:
Query 1: Whether arrears of depreciation mentioned in Sub-section (1) of
Section 205 should also be provided before arriving at the profits for the purpose of
transfer of specified percentage thereof to reserve in terms of Rule 2 of the Transfer
of Profits to Reserves Rules?
Answer: Yes, arrears of depreciation mentioned in Sub-section (1) should also
be provided.
Query 2: Whether the term current profits used in rule 2 refers to profits after tax
or before tax?
Answer: It refers to profit after tax.
Query 3: Whether the profits transferred to development rebate reserve should
be excluded in working out current profits for ascertaining the amount to be
transferred to reserves under the rules?
Answer: The current profits mean profits after statutory transfer to the
development rebate reserve.
Query 4: Whether reference to dividend made in the rules is to both equity and
preference dividend or to equity dividend alone?
Answer: The reference is to equity dividend and also to that portion of dividend
relating to participating preferences shares over and above the fixed rate of
preference dividend.
Query 5: Whether transfer to development rebate reserve, capital reserve or
special reserve will meet the requirement of transfer to reserves under the rules?
Answer: The reply is in the negative.
Query 6: Whether in case of proposed dividend is less than 10 per cent, is it
necessary to transfer any amount to reserves under the rules?
Answer: No amount is required to be transferred to reserve in such cases.
Query 7: Whether a company can transfer to reserves a higher percentage of its
dividend than that applicable to the proposed dividend slab such transfer being of
less than 10 percent of its current profits.


Answer: The reply is in the affirmative.
Query 8: Whether for the purposes of Rule 3(i) it is necessary to declare a
dividend?
Answer: Yes, it is necessary to declare dividend.
Query 9: Whether these Rules make the provisions of Section 5A of the
Companies (Temporary Restrictions of Dividend) Act, 1974 mandatory in certain
cases?
Answer: Since there is no inconsistency with the provisions of the Companies
(Temporary Restrictions on Dividend) Act, the provisions of these Rules will have to
be complied with.
Query 10: Whether after transfer of 10 percent of the current profits to reserve,
the remaining undistributed profits could be carried forward in the profit and loss
account?
Answer: The Rules do not prohibit a company from carrying forward any balance
of current profit and loss account without transferring them to reserves.
Query 11: Whether for working out of the average rate of dividends for the
purpose of rule 2(1), no dividend years should be excluded?
Answer: The reply is in the negative.
Circular No. 8/76/(1/1/76-CL-V). Dated 18.5.1976, read with 12/76 (1/176-CL-V),
dated 10.06.1976.
Enquiries have made in regard to the clarification of the term reserves
mentioned in the Transfer of Profits to Reserves Rules framed in pursuance of
Section 205(2A). The matter has been examined and the Department is of the view
that the term reserves referred to in the said rules means only free reserves.
Circular No. 21/76(8/30(205A)/75-CL-V), dated 19.07.1976.
Query: Rule 2 prescribes that amounts should be transferred to reserves
depending on the amount of dividends to be declared. The amount to be transferred
is expressed as a percentage of current profits. Neither the Act nor the rules define
current profits. Having regard to the word current used, it would appear that past
losses are not to be deducted as required for the computation of net profits under
Section 349. Further, there is a controversy whether the profit should be the amount
before tax or the amount after tax. Having regard to the words profit after tax used in
rule 3 in contradiction to the words current profits used in rule 2 and the ordinary
meaning of the words current profits, it would appear that the profits after tax have to
be considered as current profits. It is not clear whether items like development rebate
reserve written back or adjustments relating to previous years can be taken into
account arriving at current profits.
Answer: Sub-section (2A) of Section 205 provides for the declaration or payment


by a company of a dividend only after providing for depreciation and after the transfer
to the reserves of a percentage of its profits. The profits available for distribution as
dividends can only be the profits after tax and not before tax. The expression current
profits used in rules 2 and 3 of the Transfer of Profits to Reserve Rules accordingly
refers to profits after tax. Further items like development rebate reserve written back,
or adjustments relating to previous years will also have to be taken into account
before arriving at the current profits for the purpose of the said Rules.
Letter No. 6/13/75-CL-XIV, dated 7.2.1976.
ANNEXURE III
THE COMPANIES (DECLARATION OF DIVIDEND OUT OF
RESERVES) RULES, 1975
[GSR No. 427(E), dated July 24, 1975]
In exercise of the powers conferred by Sub-section (3) of Section 205A, read with
clause (a) of Sub-section (1) of Section 642, of the Companies Act, 1956 (1 of 1956),
the Central Government hereby makes the following rules, namely:
1. Short title These rules may be called the Companies (Declaration of
Dividend out of Reserves) Rules, 1975.
2. Declaration of Dividend out of Reserves In the event of inadequacy or
absence of profits in any year, dividend may be declared by a company for that year
out of the accumulated profits earned by it in previous years and transferred by it to
the reserves, subject to the conditions that
(i) the rate of the dividend declared shall not exceed the average of the rates at
which dividend was declared by it in the five years immediately preceding
that year or ten per cent of its paid-up capital, whichever is less;
(ii) the total amount to be drawn from the accumulated profits earned in
previous years and transferred to the reserves shall not exceed an amount
equal to one-tenth of the sum of its paid-up capital and free reserves and the
amount so drawn shall first be utilised to set off the losses incurred in the
financial year before any dividend in respect of preference or equity shares
is declared; and
(iii) the balance of reserves after such drawal shall not fall below fifteen per cent
of its paid-up share capital;
(iv) the Forms prescribed in these rules may be filed through electronic media or
through any other computer readable media as referred under Section 610A
of the Companies Act, 1956 (1 of 1956);
(v) the electronic form shall be authenticated by the authorised signatories using
digital signatures, as defined under the Information Technology Act, 2000 (21
of 2000);
(vi) the Forms prescribed in these rules, when filed in physical form, may be
authenticated by authorized signatory by affixing his signature manually.


Explanation For the purposes of this rule, profits earned by a company in
previous years and transferred by it to the reserves shall mean the total amount of
net profits after tax, transferred to reserves as at the beginning of the year for which
the dividend is to be declared; and in computing the said amount, the appropriations
out of the amount transferred from the Development Rebate Reserve [at the expiry of
the period specified under the Income-tax Act, 1961 (43 of 1961)] shall be included
and all items of Capital Reserves including reserves created by revaluation of assets
shall be excluded.
ANNEXURE IV
INVESTOR EDUCATION AND PROTECTION FUND
The Central Government vide Notification No. GSR 750(E) dated 1.10.01 has
formulated the Investor Education and Protection Fund (Awareness and Protection of
Investors) Rules, 2001. Such rules provide inter alia for the details regarding the
amounts to be credited to the fund, the manner of accounting of funds, the audit of
the accounts of the fund and provisions regarding constitution, functions, meetings,
agenda and voting of the committee, minutes of the meetings of the committee and
conditions for utilisation of the amount lying in the fund.
The above-mentioned Rules are given hereunder:
Investor Education and Protection Fund (Awareness & Protection of Investors)
Rules, 2001
1. Commencement
(1) These rules may be called the Investor Education and Protection Fund
(Awareness and Protection of Investors) Rules, 2001.
(2) They shall come into force on the date of their publication in the Official
Gazette.
2. Definitions
In these rules, unless the context otherwise requires:
(a) Act means the Companies Act, 1956;
(b) Fund means the Investor Education and Protection Fund (IEPF)
established under Sub-section (1) of 205C of the Act, 1956 (1 of 1956);
(c) Ministry or Department means Ministry or Department of the Central
Government dealing the Company Affairs;
(d) Committee/Sub-Committee means the Committee specified by Central
Government under Sub-section (4) of Section 205C of the Act to administer
the Fund;
(e) Form means forms prescribed by these rules;
(f) Words and expressions used in these rules and not defined herein but
defined in the Act shall have the meaning respectively assigned to them in


the Act.
3. Credits to the Fund
(i) Any amount required to be credited by the companies to the Fund, as
provided in the Act shall be remitted into the concerned specified branches
of Punjab National Bank, within a period of thirty days of such amounts
becoming due to be credited to the Fund and the amount so credited shall
be accounted for as provided in Rule 4 below.
(ii) (a)The amount shall be tendered by the companies on behalf of the Central
Government in such branches of Punjab National Bank along with
Challan (in triplicate) and the Bank will return two copies duly stamped
to the Company as token of having received the amount.
(b)Every Company shall file with the concerned Registrar of Companies one
copy of the Challan referred to in (a) evidencing deposit of the amount to
the Fund. The Company shall fill in the full description and the nature of
the amount tendered and its Head of Account.
(c) (i) Every Company shall, when effecting a credit to the account of the
Fund, will separately furnish to the concerned Registrar of
Companies a statement in Form 1 duly certified by a chartered
accountant or a company secretary or a cost accountant practising
in India or by the statutory auditors of the company. Provided that
each Company shall keep a record relating to folio number,
Certificate Number etc. in respect of persons to whom the amount
of unpaid or unclaimed dividend, application money, matured
deposit or debentures, interest accrued or payable, for a period of
three years and the Committee or Sub-Committee shall have
powers to inspect such records of that period.
(ii) On receipt of this statement, the concerned Registrar of Companies
shall enter the details of such receipt in a register and reconcile the
amount so remitted and collected, with the concerned Pay and
Accounts Officer, on monthly basis.
(iii) Each Registrar of Companies shall furnish an abstract of such
receipt received during the month to Department of Company
Affairs within seven days after the close of the month.
(iv) Department of Company Affairs shall maintain a consolidated
abstract of receipts and shall reconcile them on a quarterly basis
with Principal Pay and Account Office of the Department of
Company Affairs.
(d)The Forms prescribed in these rules may be filed through electronic media or
through any other computer readable media as referred under Section
610A of the Companies Act, 1956 (1 of 1956)
(e)The electronic-form shall be authenticated by the authorized signatories using


digital signatures, as defined under the Information Technology Act,
2000 (21 of 2000).
(f)The Forms prescribed in these rules, when filed in physical form, may be
authenticated by authorized signatory by affixing his signature
manually.
4. Manner of Accounting
(i) (A) All amounts received shall be accounted for under the following Heads of
account, which shall thereafter be transferred to the Fund.
MAJOR HEAD 0075MISCELLANEOUS GENERAL SERVICES
Minor Head 104 Unclaimed and unpaid dividends, deposits and debentures etc. of
Investors in Companies
(a) Unpaid dividend
(b) Unpaid application money received by Companies for allotment of securities
and due for refund.
(c) Unpaid Matured Deposit.
(d) Unpaid Matured Debentures.
(e) Interest accrued on (a) to (d).
(i)Interest on unpaid dividend.
(ii)Interest on unpaid application money received by Companies for allotment of
securities and due for refund.
(iii)Interest on unpaid matured deposits.
(iv)Interest on unpaid matured debentures.
Note: (a) to (d) shall be sub-heads. (i) to (iv) shall be detailed heads.
(i)(B) Grants and donations given to the fund by State Governments,
Companies or any other Institutions will be credited under a separate
Sub-head under the minor head 800 Other Receipts below the Major
head 0075 Miscellaneous General Services.
(ii)All expenditure for the purposes of carrying out of the objects for which the
Fund has been established shall be incurred under the functional head
expenditure head of Department of Company Affairs and equivalent
amount will be shown as deduct entry by transfer of amount from the
fund.
(iii)Surplus amount, if any, from the fund accounts shall not, for the present, be
utilised for investment purpose.
5. Expenses of the Committee
(a) The official member of the committee or sub-committee shall be entitled to


Travelling Allowance according to the rules regulating their official position.
(b) For journeys performed by a non-official member of the Committee or sub-
committee or a special invitee in connection with the work of the committee
or a sub-committee shall be entitled for TA/DA as per supplementary Rules
of Central Government.
(c) Committee shall have powers to recommend appointment/remuneration to
any experts in such areas as may be considered necessary.
(d) Committee shall have powers to recommend appointment of Auditors and
for scrutinizing the accounts of the voluntarily agencies registered with it.
6. Audit of Accounts
The accounts of the Fund shall be audited by internal audit party of the
Department of Company Affairs every year and will also be subject to audit by the
office of Comptroller and Auditor General of India.
7. Constitution and Functions of the Committee
(a) The Committee shall consist of ten members, excluding the chairperson who
is Secretary, to the Department of Company Affairs. The members shall be
nominated by Reserve Bank of India, the Securities and Exchange Board of
India and or from any other Ministry or Department of Central Government
dealing with investor protection activities and experts from the field of
investors education and protection. The non-official Members shall hold
office for a period of two years. The Official members shall hold office for a
period of two years or until they occupy their position whichever is earlier.
The constitution of the Committee shall be notified in the Official Gazette.
(b) Functions of the Committee
The Committee shall recommend the following activities relating to investors
education, awareness and protection:
(a)Education Programs through Media;
(b)Organizing Seminars and Symposia;
(c)Proposals for registration of Voluntary Associations or Institution or other
Organizations engaged in Investor Education and Protection activities;
(d)Proposals for projects for Investors Education and Protection including
research activities and proposals for financing such projects;
(e)Coordinating with institutions engaged in Investor Education, awareness and
protection activities.
The Committee may also be entrusted with such other functions for carrying
out the objects for which the Fund has been established.
(c) Proposals for setting up of institutional arrangements or infrastructure for
taking up programmes; projects and action plans keeping in view the


objectives and expenditure relating thereto, including research and training
activities.
(d) (i)The Committee may appoint one or more sub-committees whenever it
considers necessary to facilitate efficient and speedy discharge of its
functions.
(ii)Sub-committee shall be constituted from amongst the members.
(iii)The Chairperson of the Committee may nominate any one of the members of
the sub-committee as its convenor and where no such nomination has
been made, the members of the sub-committee elect a convenor
amongst themselves.
(iv)The Committee may have Sub-Committee to examine the end use of grants
and assistance and recommend release of funds.
8. Power to call upon a Company
(i) The Committee shall have suo moto powers to call upon any company to
pay the amount due to the Fund.
(ii) Committee shall call upon any company to give estimates of the amounts to
be credited to the Fund in Form 2.
9. Report by the Committee
The Committee shall furnish its activity report for every six months period to the
Central Government.
10. Meetings
(i) One third of the total members subject to five members in the case of
meeting of committee and three members in case of sub-committee meeting
shall constitute a quorum.
(ii) The Chairperson of the Committee and the convenor of a sub-committee,
respectively, shall preside over the meetings of the Committee or the sub-
committee as the case may be. In the event of the Chairperson or, as the
case may be, the convenor being unable to attend the meeting for any
reason, the members present may elect one amongst themselves to preside
over the meeting.
(iii) The Chairperson of the Committee or the convenor of a sub-committee may,
call meeting of the Committee or a sub-committee:
Provided that the Chairperson or the Convenor, as the case may be, shall
also call a meeting if a requisition for that purpose is presented to him by at
least five members in the case of the Committee and three members in the
case of a sub-committee.
(iv) At least fourteen clear days notice indicating the time and place of the
meeting shall be sent to the members of the Committee or the Sub-
committee as the case may be:


Provided that in case of urgency, a special meeting of the Committee or
Sub-committee may be called at any time by the Chairperson or the
convenor, who shall inform the members at least three clear days in
advance of the subject matter for consideration at the meeting and the
reasons for which he considers the meeting urgent;
Provided further that no other business shall be transacted at such a
meeting.
(v) The Chairman or the convenor, as the case may be, may invite any person
to attend any meeting of the Committee or sub-committee as a special
invitee but such person shall not be entitled to vote.
11. Agenda
(i) At least seven clear days before any meeting of the Committee or a sub-
committee, except meetings referred to in proviso to sub-rule (iv) to Rule 10,
a list of business proposed to be transacted at the meeting shall be sent to
the members of the Committee or of a sub-committee, as the case may be.
(ii) No business, not included in the list of business, shall be transacted at a
meeting without the permission of the chairperson presiding over the
meeting.
12. Voting
(i) Every question brought before any meeting of the Committee or sub-
committee, as the case may be, shall be decided by a majority vote of
members present and voting at the meeting. No member shall vote by proxy.
(ii) In the event of equality of votes, at a meeting, the Chairperson or the
convenor, as the case may be or in his absence, the person presiding, shall
have a second or casting vote.
13. Minutes
The minutes of the meeting of the Committee or Sub-Committee shall be caused
to be recorded and circulated among the members.
14. Conditions for Utilization of Funds by the Committee
(i) The Committee may register from time to time various Associations or
institutions or organisations engaged in activities relating to investor
awareness, education and protection and proposing for investors
programme; organising seminar, symposia and undertake projects for
Investor Protection including research activities.
(ii) Application for registration by such organisations referred to in sub-rule (i) be
made in Form 3.
(iii) Application for release of funds for the activities listed in Rule 7(i) from the
organizations or Institutes registered with the Department of Company
Affairs shall be made in Form 4.


(iv) A copy of the summary or recommendations of the seminar or programme
conducted and copy of Accounts for such activity by such organisation e.g.
registered associations or chambers of commerce or institutes shall be
provided to the Committee within ten days of the conclusion of the seminar
or programme.
(v) The organisation or Associations registered shall be considered for grant of
funds as a grant-in-aid either as one time measure or in stages or by way of
reimbursement depending upon the nature of the activity proposed.
(vi) The Committee shall be entitled to examine the end use of grants and
assistance before recommending release of funds.
(vii) The Committee shall cause to draw at the end of each financial year, a
statement of total receipts from various sources indicated in Section 205C of
the Companies Act, 1956 and the grants disbursed or the expenditure
incurred in connection with the activities organised by the Committee or
Sub-Committee and other expenditure incurred for holding the meetings.
(viii) The Committee shall maintain the necessary records showing amount
disbursed, date of disbursal, the name of Organisation or Voluntary agency,
the activities of the agency for which such disbursal was made.


FORM 1
Statement of amounts credited to investor
education and protection fund
[Pursuant to Rule 3 of the Investor Education
and Protection Fund (Awareness and Protection
of Investors) Rules, 2001]

NOTE: All fields marked in * are to be mandatorily filled.

1. (a) *Corporate Identity Number (CIN)
of the company
(b) Global Location Number (GLN)
of company

2. (a) Name of the company

(b) Address of the registered
office of the company


3.*Date of payment of amount to the fund
(DD/MM/YYYY)
4. *Mode of payment

Pre-fill


Cash
Demand draft
5.Details of the amount credited to the fund
(a) Amount in the unpaid dividend
account of companies
(in Rs.)

(b) The application money received by
companies for allotment of any
securities and due for refund
(in Rs.)

(c) Matured deposits with companies (in Rs.)

(d) Matured debentures with companies
(in Rs.)
(e)Interest accrued on the amounts referred to in clause (a) to (d)
above

(i) Unpaid dividend
(in Rs.)

(ii)Application money due for refund
(in Rs.)

(iii)Matured deposit with companies
(in Rs.)

(iv)Matured debentures with companies
(in Rs.)

(f) Grants and donation
(in Rs.)

6.Financial year(s) to which the amount(s) relates



7.Details of filing Form 1 under Sections 205A(6) and 205A(7) of the Companies
Act, 1956





Attachments

1.*Copy of challan evidencing deposit of the amount to the fund
Attach



2.Optional attachment(s) if any



List of
attachments









Declaration
To the best of my knowledge and belief, the information given in this form and its
attachments is correct and complete. I have been authorized by the board of
directors resolution dated * (DD/MM/YYYY) to sign and submit this
form.
To be digitally signed by
Managing director or director or manager or
secretary of the company
Certificate
It is hereby certified that I have verified the above particulars from the books of
accounts and records of
M/s
and found them to be true and correct.

Chartered accountant or cost accountant or company
secretary (in whole-time practice) or statutory auditor




For office use only:
This e-Form is hereby registered
Digital signature of the authorizing officer
Submit to BO
Submit Pre-scrutiny Check Form Modify
Remove attachments
Attach



LESSON ROUND-UP
Under Section 2(14A) of the Companies Act, 1956, dividend includes any interim
dividend.
Dividend is the share of the companys profit distributed among the members.
Final dividend is recommended by the Board of Directors in its report to the
shareholders.
The interim dividend is paid between two annual general meetings of the
company.
Both interim and final dividend when declared become debt and are payable
within 30 days of declaration.
A preference share carries a preferential right as to dividend in accordance with
term of issue subject to availability of distributable profits.
Dividend must be paid only out of profits and after providing for depreciation as
provided u/s 205 of Companies Act, 1956.
Central Government is empowered to allow any company to declare or pay
dividend for any financial year out of profits for that year without providing for
depreciation.
Relevant sections for calculating depreciation are Sections 205, 349, 350,
Schedule XIV of the Companies Act. Companies (Transfer of profits to Reserves)
Rules, 1975 are also applicable. Further in case of Absence or inadequacy of
profits, declaration of dividend should be in accordance with the rules known as
Companies (Declaration of Dividend out of Reserves) Rules, 1975.
Under Section 173(1), declaration of dividend is an ordinary business at an
annual general meeting.
Dividend can be paid only in cash.
A dividend in respect of a share has to be paid to the registered shareholder of
the share or to his order or to his banker.
Any failure to comply with the requirements of distribution of dividend renders
every director liable. In case of listed companies, non payment of dividend shall
be administered by SEBI also.
Unclaimed and unpaid dividend amounts which were unclaimed and unpaid for a
period of seven years from the date of becoming due shall be transferred to
Investor Education and Protection Fund. No claim shall lie against the fund or the
Company in respect of such amounts.
There is an exemption to the general rule that dividend can be paid only out of
profits and must not be paid out of capital. U/s 208, with the previous approval of
the Central Government, interest may be paid out of capital.
Institute of Company Secretaries of India has published Secretarial Standards on
Dividend i.e., SS-3 and a Guidance Note on Dividend.







SELF TEST QUESTIONS
(These are meant for recapitulation only. Answer to these are not to be submitted
for evaluation)
1. An equity dividend of 12% was declared at the annual general meeting of Z
Ltd. The directors convened an extra-ordinary general meeting of the
company to consider and approve a further 3% equity dividend for the same
year, on the plea that the earlier profit were not correctly computed. Some of
the shareholders of the company raised objection to this additional dividend.
Examine the legality of the directors proposal.
2. Define Interim Dividend. Distinguish between Interim Dividend and Final
Dividend.
3. (a) Explain the law relating to declaration and payment of final dividend.
(b)State the legal provisions relating to disposal of unpaid and unclaimed
dividend.
4. Whether the statement is true or false and why:-
Interim dividend once declared becomes debt.

Suggested Readings:
1. A Guide to Companies Act A. Ramaiya
2. Company Law B.K. Sen Gupta
3. Company Law & Practice A.K. Majumdar & Dr. G.K. Kapoor
4. Secretarial Standard on Dividend ICSI Publication
5. Guidance Note on Dividend ICSI Publication
























STUDY XXIII
SOLE SELLING AND SOLE BUYING AGENTS
LEARNING OBJECTIVES
This lesson explains the meaning and appointment and re-appointment of sole-selling
agents. It also gives the powers of the Central Government to investigate in the terms
of appointment of sole-selling agents and prohibit the appointment in certain cases.
The lesson also enumerates the duties of a secretary in this respect.
At the end of the lesson, you should be able to understand:
Meaning of sole-selling agents.
Appointment of sole-selling agents.
Powers of the Central Government to investigate in the terms of appointment.
Companys duty in the investigation and penalties.
Powers of the Central Government to prohibit the appointment of sole-selling
agents in certain cases.
Re-appointment of sole-selling agents.
Duties of a Secretary.
Remuneration of sole-selling agents.
Sole buying or purchasing agents.
No compensation to sole-selling agents for loss of office.
The Companies (Appointment of Sole Agents) Rules, 1975.

1. SOLE SELLING AGENTS MEANING
The expression "Sole Selling Agent" has not been defined in the Companies Act,
1956. However, Section 294AA of the Act makes a mention of "individual, firm or
body corporate" as a sole selling agent. Therefore, we may define a sole selling
agent of a company as an individual, firm, or body corporate, who or which has been
appointed by an agreement with the company as an agent with exclusive rights to sell
the specified products of the company in a specified area.
The relationship of sole selling agent and the appointing company is that of a
principal and an agent and is governed by the provisions contained in Chapter X of
the Indian Contract Act, 1872. Section 182 of the Contract Act lays down that an
"agent" is a person employed to do any act for another, or to represent another in
dealings with third persons. The relationship is to be determined not by name but by
the conduct of the parties and the purport of their dealings. The appointing company
is called the "principal".
Therefore, when a company gives a person exclusive right to sell its specified
goods in a specified area, he is called a "sole selling agent". The sole selling agent
has the authority to the exclusion of all others.
While determining whether an individual, a firm or a company is a sole selling
916


agent or not, regard shall be had to the actual relationship existing between the
parties. Though in the agreement, the expression "principal to principal basis" may
be used yet its terms may lead to the conclusion that the sole selling agent has been
appointed. In Shalagram J hajharia v. National Company Ltd., (1965) 35 Comp.
Cas. 706, a company appointed a "corporation as its exclusive distributors in
U.S.A., its possessions, Canada and Mexico for sale of jute backing cloth.....",
the Calcutta High Court had held the corporation to be a sole selling agent. The
relationship is to be determined not by name but by conduct of the parties and
the purport of their dealings.
It was held in W.T. Lamp & Son v. Goring Brick Co., 1932 1 KB. HO and Hope
Prudhomme & Co v. Hamel & Harley, A.I.R. 1925 P.C. 161 that a "sole selling agent"
has to be distinguished from "a buyer with the sole right to sell the goods of a
particular manufacturer".
Sole Selling Agents are not employees of company [J.Sarabhai and Co. v. New
Swadeshi Mills of Ahmedabad, (1967) 37 Comp. Cas. 753 (Guj)].
2. APPOINTMENT OF SOLE SELLING AGENTS
Section 294 of the Companies Act regulates the appointment of sole selling
agents. It provides:
No company shall appoint a sole selling agent for any area for a term exceeding
five years at a time. Provided that nothing in the foregoing shall be deemed to prohibit
the re-appointment or the extension of the term of office, of any sole selling agent by
further periods not exceeding five years on each occasion.
Sub-section (2) of the section, lays down that the Board of directors of a
company shall not appoint a sole selling agent for any area except subject to the
condition that the appointment shall cease to be valid if it is not approved by the
company in the first general meeting held after the date on which the appointment is
made. Sub-section (2A) clarifies that if the company in general meeting as aforesaid
disapproves the appointment, it shall cease to be valid with effect from the date of
that general meeting.
In Arantee Manufacturing Corporation v. Bright Bolts Pvt. Ltd. (1967) 37 Comp.
Cas. 758, the Bombay High Court had held that the provisions of Section 294(2) are
mandatory and not directory and added that section 294(2) contains a condition
precedent to that of its very act of making the appointment of a sole selling agent by
the Board of directors. Therefore, if any appointment is made by the Board without
such a condition, namely, that the appointment shall cease to be valid if it is not
approved by the company in the next general meeting of the company as is
mentioned in sub-section (2) of section 294 the same would be contrary to the
provision and would be void ab initio.
In Shalagram Jhajharia v. National Company Ltd. (ibid), the Calcutta High Court
had held that the agreement or the contract of appointment of sole selling agent in
that case was void ab initio in as much as it did not contain the requisite condition
mentioned in section 294(2). Therefore, there was nothing which could be approved
of or ratified by the general body of shareholders.
The Department of Company Affairs, now Ministry of Corporate Affairs after


examining the implications of the decision in Arantee's case had clarified that the sole
selling agency agreement which does not incorporate the condition prescribed in
section 294(2) will be void ab initio and will continue to remain so even if it is
approved by the company in the first general meeting held after the date on which the
appointment is made, as an agreement which is invalid from the start cannot be
treated as valid if the general meeting approves it [Circular No. 12(11)-CL
VI/68/dated 06.11.1968].
If the appointment of a sole selling agent was not placed at all at the first general
meeting held after the appointment, or if the appointment for some reason was not
considered though placed at the first general meeting, and was thus not approved at
such meeting, the appointment would be invalid from its very inception. In any case, it
would become invalid after the first general meeting if the appointment was not
approved at the meeting and an appointment which became invalid could not be
resuscitated or revived and could not be ratified by approval at subsequent meeting.
[Shalagram Jhajharia v. National Company Ltd. (ibid)].
3. POWERS OF THE CENTRAL GOVERNMENT TO INVESTIGATE TERMS OF
APPOINTMENT
Section 294(5) contains the relevant provisions. The sub-section reads:
"(a) Where a company has a sole selling agent (by whatever name called) for
an area and it appears to the Central Government that there is good
reason so to do, the Central Government may require the company to
furnish to it such information regarding the terms and conditions of the
appointment of the sole selling agent as it considers necessary for the
purpose of determining whether or not such terms and conditions are
prejudicial to the interests of the company;
(b) if the company refuses or neglects to furnish any such information, the
Central Government may appoint a suitable person to investigate and report
on the terms and conditions of appointment of the sole selling agent;
(c) if after perusal of the information furnished by the company or, as the case
may be, the report submitted by the person appointed under clause (b), the
Central Government is of the opinion that the terms and conditions of
appointment of the sole selling agent are prejudicial to the interests of the
company, the Central Government may, by order, make such variations in
those terms and conditions as would, in its opinion, make them no longer
prejudicial to the interests of the company;
(d) as from such date as may be specified by the Central Government in the
order aforesaid, the appointment of the sole selling agent shall be regulated
by the terms and conditions as varied by the Central Government.
In Nanavati & Co. (P) Ltd. v. R.C. Dutt & Others (1975) 45 Comp. Cas. 91, the
Bombay High Court had held that the power exercisable by the Company Law Board
under sub-section (5)(c) is neither violative of Article 14 of the Constitution nor
opposed to natural justice. The Court had further held that any proceedings initiated
under Sub-section (5) of Section 294 should be guided by the principles of natural
justice. When the Central Government makes an order varying the terms of a sole
selling agency agreement, it should give an opportunity to the sole agent or agents


affected, to be heard before making any order prejudicial to him or them, even though
the order may be only an administrative order.
Section 294(5)(c) empowers the Central Government to vary terms of sole selling
agency, but it does not empower Central Government to change character of agency
so as to make it an ordinary agent; character of selling agency has to be retained but
with such terms and conditions as are no longer prejudicial to the interests of
company.
With regard to the investigation of the terms and conditions of appointments by a
company which has more selling agents than one in any area or areas and in
accordance with the provisions of sub-section (6) of section 294 of the Act, if it
appears to the Central Government that there are good reasons so to do, the Central
Government may require the company to furnish to it such information regarding the
terms and conditions of appointment of all the selling agents as it considers
necessary for the purpose of determining whether any of those selling agents should
be declared to be the sole selling agent for such area or any of such areas.
According to sub-section (6)(b) of section 294, if the company refuses or neglects
to furnish any such information, the Central Government may appoint a suitable
person to investigate and report on terms and conditions of appointment of all the
selling agents.
Sub-section 6(c) of Section 294 confers further powers on the Central
Government. It lays down: "if after perusal of the information furnished by the
company or, the report submitted by the person appointed under clause (b), as the
case may be the Central Government is of the opinion that having regard to the terms
and conditions of appointment of any of the selling agents and to any other relevant
factors, that selling agent is for all intents and purposes, the sole selling agents for
such area, although there may be one of more other selling agents of the company
operating in that area, the Central Government may by order declare that selling
agent to be the sole selling agent of the company for that area with effect from such
date as may be specified in the order and may make suitable variations in such of the
terms and conditions of appointment of that selling agent as are, in the opinion of the
Central Government, prejudicial to the interests of the company." As from the date
specified in clause (c) appointment of the sole selling agent declared to be the sole
selling agent, shall be regulated by the terms and conditions as varied by the Central
Government [Section 294(6)(d)].
Company's Duty in Investigation
Sub-section (7) of section 294 lays down that : "It shall be the duty of the
company
(a) to produce to the person appointed under clause (b) of sub-section (5) or
clause (b) of sub-section (6), all books and papers of, or relating to, the
company which are in its custody or power; and
(b) otherwise to give to that person all assistance in connection with the
investigation which the company is reasonably able to give.



Penalty
Sub-section (8) of section 294 contains penalty provision in the event of the
company refusing or neglecting to comply with the provisions of sub-section (7). It
lays down:
"(8) If a company refuses or neglects
(a)to furnish the information required by the Central Government under clause
(a) of sub-section (5) or clause (a) of sub-section (6), or
(b)to produce to the person appointed under clause (b) of sub-section (5) or
clause (b) of sub-section (6) any books and papers which are in its
custody or power or otherwise to give to that person any assistance
which it is reasonably able to give,
the company and every officer of the company who is in default shall be
punishable with fine which may extend to fifty thousand rupees and with a further fine
of not less than five hundred rupees for every day after the first during which such
refusal or neglect continues".
4. POWER OF THE CENTRAL GOVERNMENT TO PROHIBIT THE APPOINTMENT
OF SOLE SELLING AGENT IN CERTAIN CASES (SECTION 294AA)
Section 294AA of the Companies Act, 1956 imposes restrictions on the
appointment of sole selling agents and vests in the Central Government power to
prohibit the appointment of sole selling agents in certain cases.
Sub-section (1) of the Section lays down:
"(1) Where the Central Government is of opinion that the demand for goods of
any category, to be specified by that Government, is substantially in excess
of the production or supply of such goods and that the services of sole
selling agents will not be necessary to create a market for such goods, the
Central Government may, by notification in the Official Gazette, declare that
sole selling agents shall not be appointed by a company for the sale of such
goods for such period as may be specified in the declaration."
In pursuance of these powers, the Central Government prohibited the
appointment of sole selling agents by a company in respect of the following five
goods for periods and with effect from the date noted against each:


Initial
Extensions

duration of
granted

prohibition
recently

(i) Sugar
5 years from 5 years


from

5.9.1975
10.9.1995
(ii) Vanaspati
5 years from2 years from 21.12.2000

5.9.1975
vide Gazette Notification


GSR 927(E) dated


21.12.2000
(iii) Cement
5 years from 2 years
from

18.9.1975
18.9.2000 GSR


726(E) dated


18.9.2000
(iv) Paper
5 years from
-do-

18.9.1975
(v) Every category of "bulk 3 years from
3 years from
drug", "drugs" and "formu- 18.4.1985
27.4.2000 vide
lation" as defined in the
GSR 223(E)
Drugs (Price Control)_
dated 27.4.2000
Order, 1979, not being:
(i) any bona fide prepara-
tion included in Ayur-
vedic (including Siddha)


or Unani (Tibb) systems
of medicine; or
(ii) any preparation inclu-
ded in the homoeopathic
system of medicine.

Vide GSR 130(E) dated 23rd February, 2004 in exercise of the powers conferred
by Sub-section (1) of Section 294AA of the Companies Act, 1956 (1 of 1956), the
Central Government, being of the opinion that the demand for the category of goods
specified in the Table below is substantially in excess of the production or supply of
such goods and that the services of the sole selling agents will not be necessary to
create a market for such goods, hereby declares that sole selling agents shall not be
appointed by any company for the sale of such goods in India for a period of three
years from the date of publication of this notification in the Official Gazette.
TABLE
Every category of Bulk drugs, drugs and formulations as defined in the
Drugs (Prices Control) Order, 1995, not being,
(i) any bonafide preparation included in the Ayurvedic (including Siddha) or
Unani (Tibb) systems of medicine; or
(ii) any preparation included in the Homoeopathic system of medicine.
The Central Government has been given power to approve or to refuse to
approve the appointment of a sole selling agent, who has a substantial interest in the
company. Sub-section (2) of section 294AA lays down: "No company shall appoint
any individual, firm or body corporate, who or which has a substantial interest in the
company, as sole-selling agent of that company unless such appointment has been
previously approved by the Central Government".
The Department of Company Affairs, now Ministry of Corporate Affairs has clarified that
in case the provisions of Section 294AA (2) are not attracted to the appointment of sole
selling agents at the time of entering into the agreement with them, it will not be obligatory
on the companies to comply with the said provisions for the continuance of the said
appointment for the remaining duration of their current tenure but not during any extension
thereof, even if the provisions of sub-section (2) of section 294AA become applicable after
the appointment due to the sole selling agent's acquiring substantial interest as defined in
the Explanation under the Section (vide Circular No. 1/78 dated 7.3.1978).
The provisions of Sub-section (3) of Section 294AA of the Act are more stringent.
They are: "No company having a paid-up share capital of rupees fifty lakhs or more
shall appoint a sole selling agent except with the consent of the company accorded
by a special resolution and the approval of the Central Government."
However, it has been clarified by the Department of Company Affairs, now
Ministry of Corporate Affairs, that where the provisions of section 294AA(3) were not
attracted to the appointment of sole selling agent at the time of entering into an
agreement with the sole selling agent, it will not be obligatory on the companies to
comply with the said provisions for the continuance of the appointment already made
for the remaining duration of the current tenure even if section 294AA(3) becomes


applicable after the appointment due to increase in capital. (Vide Circular No. 11/17
dated 21.11.1977).
The term "substantial interest" has been defined in Explanation (b) to sub-section
(8) of section 294AA as:
(b) "substantial interest",
(i) in relation to an individual, means the beneficial interest held by such
individual or any of his relatives, whether singly or taken together, in the
shares of the company, the aggregate amount paid-up on which exceeds
five lakhs of rupees or five per cent of the paid-up share capital of the
company, whichever is the lesser;
(ii) in relation to a firm, means a beneficial interest held by one or more partners
of the firm or any relative of such partners, whether singly or taken together,
in the shares of the company, the aggregate amount paid-up on which
exceeds five lakhs of rupees or five per cent of the paid-up share capital of
the company, whichever is the lesser;
(iii) in relation to a body corporate, means the beneficial interest held by such
body corporate or one or more of its directors or any relative of such
director, whether singly or taken together, in the shares of the company, the
aggregate amount paid-up on which exceeds five lakhs of rupees or five per
cent of the paid-up share capital of the company, whichever is the lesser.'
The object of this provision is to safeguard against the siphoning of the
company's funds by way of commission charged by the sole selling agents having
substantial interest in the company to the detriment of other shareholders.
In order to keep check on the undesirable activities of the managing/whole-time
directors to appoint such organisations as selling agents in which they are interested
either directly and/or through their family members, the Central Government takes
into consideration the following guidelines:
(a) Where the involvement of the proposed sole selling agent either directly or
through his family members, in the selling agency is quite substantial, the
appointment is not approved.
(b) Where, however, the interest of the proposed sole selling agent and/or his
family members in the selling agency is nominal, then the appointment is
approved but with certain conditions to safeguard the interest of the company.
(c) Where it is not expressly stated, the Central Government directs the
concerned company to incorporate a clause, on the following lines, in the
agreement with the Managing Directors: "The Managing Director shall not,
so long as he functions as such, become interested or otherwise concerned
directly or through his wife and/or minor children in any selling agency of the
company in future without the prior approval of the Central Government.
(d) Where it is found that the appointment of the sole selling agency/company
as also the person proposed as managing/whole-time director is essential
for the efficient conduct of the business of the company, the Central
Government while fixing his managerial remuneration, takes into account the
monetary benefits which the appointee concerned, directly or indirectly will
be getting from the selling agency company. (Company Law Board's Annual


Report 1968-69, Para 95).
The Central Government has notified the Companies (Appointment of Sole
Agents) Rules, 1975 containing rules and forms of application for approval by the
Central Government to the appointment of the sole selling agents by companies. It
may be mentioned here that some of these provisions are equally applicable to the
appointment of sole purchasing or buying agents appointed by companies.
Sub-section (7) of Section 294AA clarifies that if a company in general meeting
disapproves the appointment referred to in Sub-section (3), the appointment if already
made by the Board of directors, shall cease to have effect from the date of the general
meeting even though the Central Government may have accorded its approval.
The provisions of the Act in regard to appointment of sole selling agents may be
tabulated as under:
Paid-up capital structure of the company
appointing sole selling agents
Statutory requirements for the
appointment of sole selling agents
1 2
Where the company's paid up share
capital is less than rupees fifty lakhs.
Ordinary resolution Section 294(2)
Where the company's paid-up share
capital is rupees fifty lakhs or more.
Special resolution and approval of the
Central Government Section 294AA(3)
Where the company's paid-up share
capital is less than rupees fifty lakhs but
the proposed sole selling agent has
substantial interest in the company.
Previous approval of the Central Govern-
ment and consent of the company in
general meeting by ordinary resolution
Section 294AA(2) read with 294(2)
Where the company's paid-up share
capital is rupees fifty lakhs or more and
the proposed sole selling agent has
substantial interest in the company.
Previous approval of the Central
Government and consent of the
company in general meeting by ordinary
resolution Section 294AA(2) and (3).
5. RE-APPOINTMENT OF SOLE SELLING AGENTS
The term 'appointment' in relation to sole selling agent and sole buying or
purchasing agent includes re-appointment. [Explanation (a) to section 294AA].
Therefore, initially the appointment can be made for a period of five years only, but
the term may be extended from time to time for five years on each occasion [Section
294(1) and the proviso].
6. DUTIES OF A SECRETARY
It is the duty of the Secretary
(a) to ensure that appointment of sole selling agent is not prohibited by the
Central Government under section 294AA;
(b) to examine carefully, the terms and conditions of appointment of the
proposed sole selling agent keeping in view, inter alia, the provisions of the
Indian Contract Act, 1872 and also the M.R.T.P. Act, 1969;


(c) to ensure that the sole selling agency agreement is properly drafted and in a
precise language free of words and expression which may be opened to
varying interpretations;
(d) to place the proposal for the appointment before the Board of directors of
the company in all its details and with full disclosures, particularly the
interest of any of the directors of the company;
(e) to ensure that the Board resolution approving the appointment contains
authorisation for execution of the agreement for and on behalf of the
company, for affixation of the common seal of the company in the presence
of the authorised directors and persons in accordance with the provisions of
the articles of association of the company. The resolution must also contain
authority in favour of the company secretary to file a certified true copy with
the Registrar of Companies;
(f) to have the appointment approved by the shareholders by ordinary or
special resolution, as the case may be, at the general meeting held after the
appointment, for which the secretary must have issued notice under the
authority of the Board of directors of the company and also appended
thereto the prescribed Explanatory Statement as laid down in Section 173(2)
of the Companies Act;
(g) to make application to the Central Government for approval of the
appointment of the sole selling agent, in the prescribed e-Form I as per Rule
2 of the Companies (Appointment of Sole Agents) Rules, 1975, either before
appointment or subsequent to the appointment, as the case may be.
7. IMPORTANT NOTE
The agreement to be entered into by and between the company and the sole
selling agent (appointed by the Board of directors) must contain the conditions as
prescribed in section 294(2) of the Companies Act, "that the appointment shall cease
to be valid if it is not approved by the company in the first general meeting held after
the date on which the appointment is made."
8. REMUNERATION OF SOLE SELLING AGENTS
The Companies Act, 1956 does not specify or limit the remuneration payable to
the sole selling agents. However, the remuneration should not be excessive and
should be commensurate with the nature of services being rendered. The quantum of
remuneration is subject to the approval by the company in general meeting by a
special resolution and also by the Central Government in the case of those
companies whose paid-up share capital is rupees fifty lakhs or more.
9. SOLE BUYING OR PURCHASING AGENTS
Sub-section (8) of Section 294AA of the Companies Act provides that the
provisions of the section except those of sub-section (1), shall apply so far as may be
to the appointment by company of a sole agent for buying or purchasing of goods on
behalf of the company. It means that a company shall not appoint any individuals,
firm or body corporate having substantial interest in the company as its sole buying or
purchasing agent unless such an appointment has been previously approved by the


Central Government.
A company having a paid-up share capital of rupees fifty lakhs or more shall not
appoint a sole buying or purchasing agent except with the consent of the company
accorded by a special resolution and the approval of the Central Government.
If the company in general meeting disapproves the appointment of the sole
buying or purchasing agent, such appointment shall cease to have effect from the
date of the general meeting.
A company seeking approval for appointment of sole buying or purchasing agent
shall furnish to the Central Government such particulars as may be prescribed.
Section 294AA (4) of the Act provides that the provisions of Sub-sections (5), (6)
and (7) of section 294 of the Act shall so far as may be, apply to the sole purchasing
or buying agents of a company.
The appointing company has to make an application to the Central Government
for its approval to the appointment, in Form II under Rule 2 of the Companies
(Appointment of Sole Agents) Rules, 1975.
10. NO COMPENSATION TO SOLE SELLING AGENT FOR LOSS OF OFFICE
According to Section 294A, no company shall pay or be liable to pay any
compensation to its sole selling agent for the loss of his office in the following cases:
(a) where the appointment of the sole selling agent ceases to be valid by virtue
of sub-section (2A) of section 294;
(b) Where the sole selling agent resigns his office in view of the reconstruction
of the company or its amalgamation with any other body corporate or bodies
corporate and is appointed as the sole selling agent of the reconstructed
company or of the body corporate resulting from the amalgamation;
(c) where the sole-selling agent resigns his office, otherwise than on the
reconstruction of the company or its amalgamation as aforesaid;
(d) where the sole selling agent has been guilty of fraud or breach of trust in
relation to, or of gross negligence in, the conduct of his duty as the sole
selling agent;
(e) where the sole selling agent has instigated or has taken part directly or
indirectly in bringing about the termination of the sole selling agency.
In other cases compensation for loss of office may be paid.
With regard to the amount of compensation payable to a sole selling agent in the
event of loss of his office, Sub-section (2) of Section 294A lays down:
"The compensation which may be paid by a company to its sole selling agent for
loss of office shall not exceed the remuneration which he would have earned if he
had been in office for the unexpired residue of his term, or for three years, whichever
is shorter, calculated on the basis of the average remuneration actually earned by
him during a period of three years immediately preceding the date on which his office
ceased or was terminated, or where he held his office for a lesser period than three


years, during such period."
11. MEANING OF RELATIVE
Section 6 of the Companies Act, 1956, states that a person shall be deemed to
be a relative of another, if, and only if;
(a) they are members of Hindu Undivided Family; or
(b) they are husband and wife; or
(c) the one is related to the other in the manner indicated in Schedule IA to the
Act.
Schedule IA gives the following list of relatives:
1. Father
2. Mother (including step-mother)
3. Son (including step-son)
4. Son's wife
5. Daughter (including step-daughter)
6. Father's father
7. Father's mother
8. Mother's mother
9. Mother's father
10. Son's son
11. Son's son's wife
12. Son's daughter
13. Son's daughter's husband
14. Daughter's husband
15. Daughter's son
16. Daughter's son's wife
17. Daughter's daughter
18. Daughter's daughter's husband
19. Brother (including step-brother)
20. Brother's wife
21. Sister (including step-sister)
22. Sister's husband.
12. THE COMPANIES (APPOINTMENT OF SOLE AGENTS) RULES, 1975
In exercise of the powers conferred by Section 294AA read with Clause (a) of
sub-section (1) of section 642 of the Companies Act, 1956, the Central Government,
vide Notification G.S.R. No. 137(E) dated 1.3.1975, made the Companies
(Appointment of Sole Agents) Rules, 1975. The Rules came into force with effect
from March 1, 1975.


Rule 2 of the said Rules provides that every company seeking approval of the
Central Government for the appointment of sole selling agents or sole agents for the
buying or purchasing of goods on behalf of the company under section 294AA of the
Companies Act, 1956, shall apply in Form I or Form II, respectively, and furnish the
particulars specified therein.
Rule 2A of these rules provides that the Forms prescribed in these rules may be
filed through electronic media or through any other computer readable media as
referred under Section 610A of the Companies Act, 1956 (1 of 1956);
Rule 2B provides that the electronic form shall be authenticated by the authorised
signatories using digital signatures, as defined under the Information Technology Act,
2000 (21 of 2000);
Rule 2C provides that the Forms prescribed in these rules, when filed in physical
form, may be authenticated by authorized signatory by affixing his signature manually.
Rule 3 of the said Rules lays down that every application made by a company
under these Rules shall be accompanied by the following:
1. Application fee as per details given below:
(GSR 501, dated 6.7.1999 refers)
Companies with authorized capital Amount of fee
(a) Less than Rs. 25 lacs Rs. 500/-
(b) Rs. 25 lacs or more but less than Rs. 5 crores Rs. 1000/-
(c) Rs. 5 crores or above Rs. 2000/-
Application fee shall be paid by Demand Draft drawn in favour of Pay and
Accounts Officer, Department of Company Affairs, New Delhi.
Rule 3 provides for the payment options. Accordingly, where application is filed
through electronic media or through any other computer readable media, the user
may choose any one of the following payment options namely (i) Credit Card; or (ii)
Internet Banking; or (iii) Remittance at the Bank Counter; or (iv) any other mode as
approved by Central Government. The requisite fee as specified in the Companies
(Fees on Applications) Rules, 1968, shall be payable through any of the accredited
branches of following Banks
(a) Punjab National Bank
(b) State Bank of India
(c) Indian Bank
(d) ICICI Bank
(e) HDFC Bank.
The Rules also contain Form I and Form II relating to application for Central
Governments approval for appointment of agents.
Attachments with Form I
1. Certificate from the auditor of the sole selling agent certifying the figure of


expenditure
2. Copy of proposed agreement
3. Details of the interest of the sole selling agent in the shares of the company
4. Copy of the particulars of directorship in the company held or controlled by
the sole selling agent
5. Particulars of inter-se relationship to other sole selling agent in other areas
for same products of the company
6. Break-up of sales in respect of each of the last three years (In respect of the
product in which the sole selling agent under consideration has been
appointed and for the territory for which he has been so appointed)
7. Foreign shareholding in the principal company and the sole selling agent
and the profits remitted to the foreign countries on these shareholdings
during the last three years
8. In case the sole selling agent is a partnership firm, details of working partners,
details of capital invested in the partnership firm during the last three years
and details of the profits earned by the partners during the last three years
9. Optional attachment(s) if any
Attachments with Form II
1. Copy of certificate from the auditor of the sole buying agent certifying the
figure of expenditure.
2. Copy of proposed agreement.
3. Details of the interest of the sole buying agent in the shares of the company.
4. Copy of the particulars of directorship in the company held or controlled by
the sole buying agent.
5. Details of persons and their relationship to the directors of the buying agency.
6. Optional attachment(s) if any.
13. GUIDELINES FOR FILING STATUTORY APPLICATIONS UNDER
SECTION 294AA OF THE COMPANIES ACT 1956
An application submitted under Section 294AA of the Companies Act, 1956
should be in accordance wit the Companies (Appointment of Sole Agents) Rules,
1975 and be accompanied by the following:
A copy each of certified copies of Board of Directors resolution/and Special
Resolution by members approving the proposal to appoint Sole Selling
Agent and the terms and conditions of appointment.
A copy of previous approval obtained from the Central Government in
respect of appointment of the Sole Selling Agents for earlier period, if any.
A certified copy of the Marketing/Sole Selling Agency Agreement proposed
to be entered into with the Sole Selling Agents.
Percentage of shares held by the applicant company, its directors and their
relatives in the Sole Selling Agent/profit sharing ratio, if the proposed Sole
Selling Agent is a partnership firm.
Percentage of shares held by the Sole Selling Agents, its directors and their


relatives in the applicant company/their profit-sharing ratio.
Justification for variation, if any, of rate(s) of commission for earlier
appointment and those proposed (in case of reappointment(s)).

LESSON ROUND-UP
We may define a sole selling agent of a company as an individual, firm, or body
corporate, who or which has been appointed by an agreement with the company
as an agent with exclusive rights to sell the specified products of the company in
a specified area.
The relationship of sole selling agent and the appointing company is that of a
principal and an agent and is governed by the provisions of the Indian Contract
Act, 1872.
No company shall appoint a sole selling agent for any are for a term exceeding
the prescribed time. Provided that nothing in the forgoing shall be deemed to
prohibit the re-appointment or the extension of the term of office, of any sole
selling agent by further periods as prescribed.
The Act empowers the Central Government to vary terms of sole selling agency
but not the character of the agency. If it appears to the Central Government that
there are good reasons so to do, the Central Government may require the
company to furnish to it such information regarding the terms and conditions of
appointment of all the selling agents as it consider necessary for the purpose of
determining whether any of those selling agents should be declared to be the
sole selling agent for such area or any of such areas. The Act also confers further
additional powers on the Central Government.
The companys duties have also been identified in the investigation process.
Penalty in the event of the company refusing or neglecting to comply with the
specified provisions has been imposed under the Act.
The Companies Act imposes restrictions on the appointment of sole selling
agents and vests in the Central Government power to prohibit the appointment of
sole selling agents in certain cases.
The term appointment in relation to sole selling agent and sole buying or
purchasing agents includes re-appointment.
The secretary has also been given certain duties in this respect under the Act.
The remuneration of the sole-selling agents should not be excessive and should
be commensurate with the nature of services being rendered.
A company shall not appoint any individuals, firm or body corporate having
substantial interest in the company as its sole buying or purchasing agent unless
such an appointment has been previously approved by the Central Government.
No company shall pay or be liable to pay any compensation to its sole selling
agent for the loss of his office in the cases enumerated under the Act.
In respect of appointment of sole-selling agents, the Central Government has
made the Companies (Appointment of Sole Agents) Rules, 1975.





SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answer to these questions are not to be
submitted for evaluation).
1. XYZ Ltd., has several factories producing a number of consumable goods.
The company desires to appoint a sole selling agent for two of its major
products for the whole of India. The company's present paid-up capital is
Rs. 10 crores. Prepare a note for the Board detailing legal requirements and
restrictions, if any, on such appointments.
2. Explain and illustrate the meaning of 'relative' under the Companies Act, 1956.
3. Analyse in detail the provisions relating to appointment of sole selling
agents.
4. Explain how the provisions of the Companies Act, 1956 regarding
appointment of 'sole selling agents' protect the interests of the shareholders
of the company and consumers.
5. Explain the provisions relating to the re-appointment of Sole-Selling Agent.
6. Is there any law relating to the remuneration of Sole Selling Agent?
7. What is the scope of power of the Central Government in relation to the
appointment of Sole Selling Agent?
8. Prepare a note detailing various restrictions on the appointment of sole
selling agents for consideration of your sales director, who is planning to
appoint sole selling agent.


Suggested Readings:
(1) Guide to the Companies Act A. Ramaiya
(2) Company Law and Practice A.K. Majumdar and G.K. Kapoor
(3) Circulars and Clarifications on Company Law & SEBI Taxmann's
(4) Company Law Ready Reckoner R. Suryanarayanan


















STUDY XXIV
BOARDS REPORT AND DISCLOSURES

LEARNING OBJECTIVES
It is mandatory for the Board of Directors of every company to present annual
accounts to the shareholders along with its report, known as the Boards Report.
The Boards Report enables shareholders, lenders, bankers, government and the
public to make an appraisal of the companys performance. It also reflects the level of
corporate governance in the company. After going through this chapter, you will be
able to learn the following:
Introduction
Disclosures under Companies Act
Disclosures under Listing Agreement
Disclosures pursuant to SEBI Guidelines
Disclosures pursuant to directions of RBI
Approval, Signing and Dating of the Boards Report
Filing of the Boards Report
Right of Members to copies of Balance Sheet, Boards Report, etc.
Liability for mis-statement
Chairmans Speech
Compliance Certificate
Need for Compliance Certificate
Scope of Compliance Certificate
Penalty for Non-compliance, for false Compliance Certificate
Certification without Qualification
Professional Responsibility.
1. INTRODUCTION
The Board of Directors of a company must strive to maximize wealth while
adhering to good corporate governance principles and practices. The efficacy of the
Board of Directors is not determined simply by gauging whether it fulfils its legal
requirements but, more importantly, by its philosophy and the manner in which it
translates the understanding of its responsibilities for the benefit of the stakeholders
of the company.
The Boards Report, is a comprehensive document circumscribing both financial
and non-financial information, serving to inform the stakeholders about the
performance and prospects of the company, relevant changes in management,
capital structure, major policies, recommendations as to the distribution of profits,
future programmes of expansion, modernization and diversification, capitalization of
reserves, further issue of capital, etc.
The matters to be included in the Boards Report have been specified in


Section 217 of the Companies Act, 1956. Apart from this, Sections 212, 219, 220,
222, 292A and 383A of the Companies Act, 1956 also contain provisions in relation to
the Boards Report. The Boards Report of companies whose shares are listed on a
stock exchange must include additional information as specified in the Listing
Agreement. Further, the Reserve Bank of India Act, 1934, the Securities and
Exchange Board of India Act, 1992 and the regulations, rules, directions, guidelines,
circulars, etc. issued thereunder, necessitate certain additional disclosures to be
made in the Boards Report.
2. DISCLOSURES UNDER COMPANIES ACT
Disclosures under Section 217(1)
Section 217 provides that there shall be attached to every balance sheet laid
before a company in general meeting (in practice, the annual general meeting) a
report by its Board of Directors, with respect to:
(a) the state of the companys affairs;
(b) the amount, if any, which it proposes to carry to any reserves in such
balance sheet;
(c) the amount, if any, which it recommends should be paid by way of dividend;
(d) material changes and commitments, if any, affecting the financial position of
the company which have occurred between the end of the financial year of
the company to which the balance sheet relates and the date of the report.
(e) the conservation of energy, technology absorption, foreign exchange
earnings and outgo, in such manner as may be prescribed [Section 217(1)].
For proper appreciation of State of Affairs of the Company, information like
financial results, further issue of capital or debentures; change in accounting year;
production and sales targets and achievement thereof; marketing policies; manpower
training and executive development programmes may be disclosed.
The Boards Report should disclosed the amount which has been transferred to
reserves in the balance sheet, for instance, general reserve, debenture redemption
reserve, capital redemption reserve, etc. if no amount is proposed to be transferred to
reserves, a statement to that effect should be incorporated in the Boards Report.
Regarding recommendation of dividend in the Boards Report, it should not be
recommended subject to any condition such as approval of financial institutions or
banks or foreign collaborators or compliance with any contractual obligations.
Further, if any interim dividend has been paid during the year, details of the
amount per share and percentage of such interim dividend should also be disclosed
in the Boards Report.
Regarding events occurring after the balance sheet date, it may happen that an
event occurring after the balance sheet date, which affects materially the solvency of
the undertaking of the company or is otherwise of great importance to the shareholders
cannot be taken into account in drawing up the balance sheet and the profit and loss
account. Professional bodies in advanced countries have recommended that such an
event should be brought to the notice of the shareholders either in the directors report


or in the chairmans statement. Although the expression material changes and
commitments if any, affecting the financial position of the company.... occurring in the
new clause (d) of Sub-section (1) of Section 217 seems to be clear enough to itself, it
may be stated, purely by way of illustration, that the expression would include event
such as the following, namely, the disposal of a substantial part of the undertaking, the
profit or loss whether of a capital or revenue nature, changes in the capital structure,
alteration in the wage structure arising out of trade union negotiations, purchases,
construction, sale or any catastrophe befalling the fixed assets, incurring or any
reduction of long term indebtedness, awards in litigation entering to a cancellation of
contracts and refund of taxes or completion of assessments. [Department of Company
Affairs Vide Letter No. 8/16(1)61-PR dated 9.5.1961].
The Boards Report should include a statement as per the Companies
(Disclosure of Particulars in the Report of Board of Directors) Rules, 1988 with
respect to the matters of conservation of energy; technology absorption and foreign
exchange earnings and outgo.
The Boards report has to give prescribed details about consumption of electricity,
coal and furnace oil and others, either from internal generation or otherwise, in respect
of difference products and items including any variation thereof, with reference to any of
the twenty-one industries listed in the schedule to the Companies (Disclosure of
Particulars in the Report of Board of Directors) Rules, 1988. The corresponding
particulars for the previous financial year have also to be disclosed.
Although clause (e) of Sub-section (1) of Section 217 does not make any specific
mention of research and development efforts made by the company, Form B which
lays down the particulars to be disclosed, as regards technology absorption, is
divided into two parts, one relating to research and development and the other
relating to technology absorption and innovation. This is quite understandable
because technology absorption cannot be thought of, except for imported technology,
without development of indigenous technology and such development can take place
only through research and development efforts. Similarly, technology absorption
cannot be totally divorced from adaptations and innovations in the direction of
absorption. It is significant to note that there is no requirement of disclosure in respect
of imported technology which is more than six years old.
Although clause (e) of Sub-section (1) uses the expression foreign exchange
earnings and outgo, the particulars required to be disclosed also cover, besides total
foreign exchange used and earned, activities relating to exports, initiative taken to
increase exports, development of new export market of products and services and
also export plans for the future. It is pertinent to note that as regards foreign
exchange earnings and outgo, details are required to be furnished as per the
requirements of Part II of Schedule VI.
Disclosures under Section 217(2)
The Boards report shall, so far as is material for the appreciation of the state of
the companys affairs by its members and will not in the Boards opinion be harmful
to the business of the company or of any of its subsidiaries, deal with any changes
which have occurred during the financial year:
(a) in the nature of companys business;


(b) in the companys subsidiaries or in the nature of the business carried on by
them; and
(c) generally in the classes of business in which the company has an interest.
Finney and Miller in their book Principles of Accounting suggest that Material
Changes, to be disclosed might include the following:
(a) The purchase, sale or destruction of plant or the destruction of inventories.
(b) A material decline in the market value of inventories or investments.
(c) The expiration of a patent which had given the company a virtual monopoly
in the sale of its principal products.
(d) The settlement of tax liabilities of prior period or the settlement of any legal
or other proceedings either favourably or adversely, if they were pending at
the balance sheet date.
(e) The institution of important proceedings against the company.
(f) Material changes in the capital structure resulting from the issuance,
retirement or conversion of share capital or stock.
Accounts of Holding and Subsidiary Companies
The Balance sheet of a holding company, which is placed before the
shareholders for adoption in an annual general meeting under Section 210, should
have annexed to it the following documents relating to each of its subsidiaries
(Section 212):
(a) a copy of the balance sheet of the subsidiary;
(b) a copy of its directors report;
(c) a copy of its profit and loss account;
(d) a copy of its auditors report;
(e) a statement containing the following particulars:
(1)the extent of holding companys interest in the subsidiary at the end of the last
financial year.
(2)The net aggregate amount of profits or losses in the subsidiary so far as it
concerns the members of the holding company and is not dealt with in
the holding company accounts;
(3)any change in the holding companys interest in the subsidiary;
(4)details of any material change occurring between the end of the financial year
of the subsidiary and the financial year of the holding company in
respect of:
(i) the subsidiarys fixed assets;
(ii) its investments;
(iii) the moneys lent by it; and
(iv) the moneys borrowed by it for any purpose other than that of meeting
current liabilities.


Where the Board of directors of the holding company is unable to obtain the
necessary information for the purpose aforesaid, then a report to that effect should be
annexed to the balance sheet of the holding company.
The Central Government may, on the application or with the consent of the Board
of directors of the company, waive the compliance of these requirements either
wholly or to such an extent, as may be directed, in relation to any subsidiary [Section
212(8)]. The profit and loss account, the report of the Board of directors and the
report of the auditors in respect of the subsidiary company are to be made out in the
same manner as required under the Act for the holding company.
Where any person responsible for securing compliance with the provisions of
Section 212, fails to take all reasonable steps to comply with the provisions of this
section, he shall, in respect of each offence be punishable with imprisonment for a
term which may extend to six months or with fine which may extend to one thousand
rupees or with both.
Provided that in any proceedings against a person in respect of an offence under
this section it shall be a defence to prove that a competent and reliable person was
charged with the duty of seeing the provisions of this section were complied with and
was in a position to discharge that duty. It is also provided that no person shall be
sentenced to imprisonment for such offence unless it was committed wilfully
[Section 212(9)].
The financial year of the subsidiary company may end on the same day or not as
that of the holding company, but should not be earlier than six months from the day
on which the holding companys financial year ends. Where the subsidiary has a
shorter year, then the documents referred to above should be for two or more
financial years, the total duration of which is not less than the duration of the financial
year of the holding company. A holding company may by resolution, authorise its
representatives to inspect the books of its subsidiaries (Section 214).
With a view to securing uniformity where it appears to the Central Government
desirable for a holding company or a holding companys subsidiary, to extend its
financial year and for that purpose to postpone the submission of the relevant
accounts, to a general meeting, the Central Government may, under Section 213 on
the application of or with the consent of the directors of the company whose financial
year is to be extended, direct that in the case of that company, the submission of
accounts to a general meeting, the holding of an annual general meeting or the
making of an annual return shall not be required to be submitted, held or made,
earlier than the dates specified in the direction.
Under Section 212(1)(e) of the Companies Act, a statement of the holding
companys interest in the subsidiary as specified in Sub-section (3) shall be attached
to the balance sheet of a holding company having a subsidiary at the end of the
financial year as at which the holding companys balance sheet is made out. No
standard form in respect of the statement referred to above has, however, been given
in the Act. The statement referred to in the above section is to be signed by two
persons by whom the balance sheet of the holding company is required to be signed.
This statement is not required to be certified by the Auditors.


Besides the compliance of the provisions of Section 212 of the Companies Act,
1956, the companies shall also comply with the requirements of Accounting Standard
21 issued by the Institute of Chartered Accountants of India.
Particulars in respect of certain employees [Section 217(2A)]
Boards report shall also include a statement showing the name of every
employee of the company who (i) if employed throughout the financial year, was in
receipt of remuneration for that year which, in the aggregate, was not less than such
sum as may be prescribed (Presently, Rs. 24,00,000 w.e.f. 17.4.2003; or (ii) if
employed for a part of the financial year, was in receipt of remuneration for any part
of that year, at a rate which, in the aggregate, was not less than such sum per month
as may be prescribed (Presently, Rs. 2,00,000, Notification No. GSR No. 288(E)
dated 17.4.2002); or (iii) if employed throughout the financial year or part thereof, was
in receipt of remuneration in that year which, in the aggregate, or as the case may be,
at a rate which, in the aggregate, is in excess of that drawn by the managing director
or whole-time director or manager and holds by himself or along with his spouse and
dependent children, not less than two per cent of the equity shares of the company.
Remuneration has the meaning assigned to it in the Explanation to Section 198.
The aforesaid shall also indicate (i) whether any such employee is a relative of
any director or manager of the company and if so, the name of such director or
manager, and (ii) such other particulars as may be prescribed.
The particulars in respect of employees have been prescribed by the Companies
(Particulars of Employees) Rules, 1975. They are as follows:
(a) Designation of the employee;
(b) Remuneration received, including allowance and perquisites, i.e., all
expenses incurred by the company in providing any benefit or amenity to the
employee, and not net take home pay. In other words, total amount spent
by the company on the employee is to be disclosed.
(c) Nature of employment, whether contractual or otherwise;
(d) Other terms and conditions;
(e) Name of duties of the employee;
(f) Qualification and experience of the employee;
(g) Date of commencement of employment;
(h) Age;
(i)Last employment held by such employee before joining the company. Last
employment means the post last held in any other company or in any
organisation, etc. The particulars of the last employment including the
designation of post and the period during which it was held may also be
indicated.
(ii)The percentage of equity shares held by the employee in the company within
the meaning of Sub-clause (iii) of Clause (a) of Sub-section (2A) of
Section 217 of the Act.


Directors Responsibility Statement [Section 217(2AA)]
The Boards report shall include a Directors Responsibility Statement as required
under Section 217(2AA) indicating therein
(i) that in the preparation of the annual accounts, the applicable accounting
standards had been followed along with proper explanation relating to
material departures;
(ii) that the directors had selected such accounting policies and applied them
consistently and made judgements and estimates that are reasonable and
prudent so as to give a true and fair view of the state of affairs of the
company at the end of the financial year and of the profit or loss of the
account for that period;
(iii) that the directors had taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of this Act
for safeguarding the assets of the company and for preventing and detecting
fraud and other irregularities;
(iv) that the directors had prepared the annual accounts on a going concern
basis.
Directors Responsibility Statement is aimed at highlighting the accountability of
the directors with a view to ensuring good corporate governance. It will make the
directors accountable to safeguard the assets of the company and to take positive
steps in this regard.
Any information required by the Act to be stated in the accounts which may as
well be included in a statement annexed thereto, may be given in Boards report
instead of being given in the accounts. In such a case, the report must be annexed to
the accounts and the auditors must report on the information given in the report in
addition to the report on the accounts (Proviso to Section 222).
Comment on Auditors Report [Section 217(3)]
The Board is also bound to give fullest information and explanation as regards
any reservation, qualification or adverse remarks contained in the auditors report; in
an addendum to the report. This obviously means that where the auditors of the
company have made a separate or qualified report the Board should meet again and
add an addendum to its report, containing explanation on the matters raised by the
auditors in their report. Reference to notes made in the accounts by the auditors in
their report is treated as a qualified report by the auditors to which the Board must
reply.
Other Disclosures
The Boards report shall also specify the reasons for the failure, if any, to
complete the buy-back within the time specified in Sub-section (4) of
Section 77A. [Sub-section (2B) of Section 217.
Where a company fails to make preferential allotment within 12 months from
the date of passing of Special Resolution by the shareholders, a disclosure
should be made in the Broads Report along with the reasons for such
failure.


Section 292A(1) stipulates that every public company having a paid up
capital of not less than Rs. 5,00,00,000 should constitute an Audit
Committee. In terms of Sub-section (4) of Section 292A, the annual report of
the company should disclose the composition of the Audit Committee.
Unless it is reported elsewhere, this information should be furnished in the
Boards Report.
Further, Sub-section (9) of Section 292A provides that if the Board does not
accept the recommendations of the Audit Committee, it shall record the
reasons therefore and communicate such reasons through the Boards
Report to the shareholders.
It is desirable that where the redemption of debentures or preference shares
was due during the year but has not taken place, the Boards Report should
explain the reasons therefore.
The Boards Report should specify the resolutions which were passed by the
shareholders in the previous meeting(s) but which have not been acted
upon and the reasons therefore.
Any appointment, reappointment or change in the office of a director
(including whole-time director, additional director, alternate director or a
director filling a casual vacancy) whether by virtue of rotation, resignation,
death or otherwise should be indicated in the Boards Report.
As a good corporate practice, the Boards Report should disclose if any
director has incurred any disqualification on account of non-compliance with
any of the provisions of the Act. Acts of omission/commission by the
company itself, as a result of which the directors may be liable for
disqualification, should be disclosed.
The Board should, as a good corporate practice, inform the shareholders
about the amounts, if any, which have been transferred during the year to
the Investor Education and Protection Fund established under Section 205C
and the Rules framed thereunder.
Compliance Certificate
According to the proviso to Sub-section (1) of Section 383A, every company not
required to employ a whole-time secretary and having a paid-up capital of
Rs. 10,00,000 or more must attach to the Boards Report a Compliance Certificate
from a Secretary in whole-time practice as to whether the provisions of the Act have
been complied with or not.
The Board should give full information and explanation in its Report on every
reservation, qualification or adverse remark contained in the Compliance Certificate.
3. DISCLOSURES PURSUANT TO THE LISTING AGREEMENT OF STOCK
EXCHANGES
Management discussion and analysis report (MDAR) (Clause 49 of the Listing
Agreement)
The MDAR should either form a part of the Boards Report or be given as an
addition thereto in the annual report to the shareholders. The MDAR should include a


discussion on the industry structure and development; opportunities and threats;
segment-wise or product-wise performance; outlook; risks and areas of concern;
internal control systems and their adequacy; discussion on financial performance with
respect to operational performance; material developments in human
resources/industrial relations front, including number of people employed.
MDAR should be considered and approved by the Board in a meeting of the
Board and not through resolution passed by circulation.
Report on Corporate Governance
Corporate governance aims to improve the companys image, efficiency,
effectiveness and social responsibility. It encompasses in itself a range of corporate
controls and accountability mechanisms designed to meet the aims of corporate
stockholders. It deals with issues regarding transparency accounting integrity,
composition of the board of directors, the role of non-executive directors and their
accountability to shareholders, etc.
A compliance report on corporate governance should be included as a separate
section in the annual report confirming compliance/non-compliance of the
requirements of Clause 49 of the listing agreement with reasons for non-compliance.
The extent to which the non-mandatory requirements have been adopted should be
specifically highlighted.
The reference of inclusion of report on corporate governance in the annual report
should be made in the Boards Report and, as a good corporate practice, information
relating to any non-compliance of the requirements of Clause 49 of the listing
agreement should be incorporated in the Boards Report.
Other Clauses
The following disclosures are also to be made by the Board in its report:
(i) in case the shares are delisted, the fact of delisting, together with reasons
therefore;
(ii) in case the securities are suspended from trading, the reasons therefore;
(iii) the name and address of each stock exchange at which the companys
securities are listed and also confirmation that annual listing fee has been
paid to each such exchange.
4. DISCLOSURES PURSUANT TO EMPLOYEE STOCK OPTION AND
EMPLOYEES STOCK PURCHASE SCHEMES
SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme)
Guidelines, 1999 provide that the Board shall disclose, either in the Boards Report or
in an annexure to the Boards Report, various details with regard to ESOS.
5. DISCLOSURES PURSUANT TO DIRECTIONS OF RBI
Apart from the foregoing provisions of 217 of the Companies Act, 1956, Reserve
Bank of India has on 31.1.1998 issued certain directions to be complied with by all
non-banking companies receiving deposits, with regard to their report to be attached
to every balance sheet to be placed before the shareholders at every annual general


meeting. The Boards report of such a company shall include the following particulars
or information, namely
(i) the total number of accounts of public deposit of the company which have
not been claimed by the depositors or not paid by the company after the
date on which the deposits became due for repayment.
(ii) the total amounts due under such accounts remaining unclaimed or unpaid
beyond the dates referred to in clause (i) aforesaid.
The above mentioned RBI directions further lay down that the said particulars
shall be furnished with reference to the position as on the last day of the financial
year to which the report relates, and if the amounts remaining unclaimed or
undisbursed, as referred in sub-clause (ii) above of the preceding clause, exceed in
the aggregate the sum of Rupees five lakhs, there shall also be included in the report
a statement on the steps taken or proposed to be taken by the Board of directors for
the payment of the amounts due to the depositors and remaining unclaimed or
undisbursed.
6. APPROVAL OF THE BOARDS REPORT
The Boards Report should be considered, approved and signed at a meeting of
the Board, convened in accordance with the provisions of the Act and not by means
of a resolution passed by circulation.
As specimen of the Board resolution for approval of the Boards Report is as
follows:
RESOLVED that, pursuant to Section 217 and subject to the Auditors Report
under Section 227(2) of the Companies Act, 1956, being without any reservation or
disqualification or adverse remark, the draft of the Boards Report for the year
ended, 2007, as laid on the table, be and is hereby approved and that the said
Report be signed by the Chairman on behalf of the Board and that the Secretary of
the company be directed to issue the same to the members of the company together
with the printed copies of the audited accounts, and the Auditors Report.
A specimen of the Boards resolution for approval of the Boards Report
containing response to Auditors comments and qualifications is as follows:
RESOLVED that, pursuant to Section 217 of the Companies Act, 1956 the draft
of the Boards Report for the year ended .., 2007 as circulated earlier and as
modified by incorporating the information and explanation given by the Board on
every reservation, qualification or adverse remark contained in the Auditors Report
under Section 217, and as laid on the table, be and is hereby approved and that the
Boards Report be signed by the Chairman on behalf of the Board and that the
Secretary of the company be directed to issue the same to the members of the
company together with the printed copies of the audited accounts, and the Auditors
Report.
7. SIGNING AND DATING OF THE BOARDS REPORT
Section 217(4) provides that the Boards Report and any addendum thereto
should be signed by the Chairman of the Board if he is authorized in that behalf by


the Board and, where he is not so authorized, by not less than two directors of the
company, one of whom shall be a managing director, where there is one.
The Boards Report may bear the same dates as that of the auditors report but it
could be dated later than the date of auditors report if, in the case of any reservation,
qualification or adverse remark contained in the auditors report, the Board has
responded with its comments and given full information and explanations in its report.
Default by a director, or by any other person who has been charged by the Board
with the duty of seeing that the provisions of this section are complied with and fails
to take all reasonable steps to comply with the provisions of the section or if a
chairman signs the Boards report without being authorised so to do will render
himself liable for each offence to be punishable with imprisonment upto 6 months or
with fine upto Rs. 20,000 or with both. The punishment of imprisonment can be
ordered only if the offence was committed wilfully.
In T.P.G Nambiar v. ROC (1998) 92 Comp. Cas. 564 (Kar), it was held that just
because statement under Section 217 furnished to Registrar of Companies was not
properly numbered or it was in a blue sheet etc., that by itself could not be an offence
to proceed against directors.
Besides, in any proceedings against a person in respect of an offence under
Sub-section (1) of Section 217, it shall be a defence to prove that a competent and
reliable person was charged with the duty of seeing that the provisions of that sub-
section were complied with and that person was in a position to discharge that duty.
8. FILING OF THE BOARDS REPORT
Section 220 provides that after the balance sheet and the profit and loss account
have been laid before the company at an annual general meeting, three copies of the
balance sheet and the profit and loss account along with all documents required to be
annexed or attached thereto should be filed with the Registrar of Companies within
30 days, along with the prescribed fees. The Boards Report has to be attached to the
balance sheet.
Non-banking financial company accepting/holding public deposits should deliver
to RBI an audited balance sheet as on the last day of each financial year and an
audited profit and loss account in respect of that year as adopted by the company in
general meeting together with a copy of the report of the Board laid before the
company in such meeting in terms of Section 217(1), within 15 days of such meeting
as also a copy of the report and the notes on accounts furnished by its auditor.
[Direction 8(1) of the Non-Banking Financial Companies Acceptance of Deposits
(Reserve Bank) Directions, 1998].
In the case of listing companies, the full version of the annual report, including
the Boards Report, should be filed on EDIFAR, the electronic data information filing
and retrieval website.
9. RIGHT OF MEMBERS TO COPIES OF BALANCE SHEET, BOARDS
REPORT, ETC.
Section 219(1) provides that a copy of the balance sheet and profit and loss
account, Boards Report and auditors report should be sent to every member atleast


21 days before the date of the annual general meeting. Proviso (b)(iv) to
Section 219(1), which contains an exception to this rule, states that listed companies
may send a statement containing the salient features of the above documents in
Form 23AB (i.e. abridged balance sheet and abridged profit and loss account)
instead of sending the full balance sheet, profit and loss account, etc., if copies of the
full balance sheet, profit and loss account, etc., are made available for inspection at
the companys registered office during working hours for a period of 21 days before
the date of the annual general meeting. Further, as per Section 219(1)(c), the copies
may be sent less than 21 days before the date of the meeting, where it is so agreed
by all members entitled to vote at the meeting. Since Compliance Certificate should
also be sent along with the other documents referred to in Section 219(1) of the Act.
In terms of Clause 32 of the Bombay Stock Exchange listing agreement, a copy
of the Boards Report alongwith a copy of the complete and full Balance Sheet and
Profit and Loss Account should be sent by the company to each shareholder and
upon application to any member of the Exchange. The company may supply a single
copy of complete and full Balance Sheet, Profit and Loss Account and Boards Report
to shareholders residing in one household (i.e. having same address in the books of
the company/registrars/share transfer agents). However on receipt of request, such
documents should be supplied to any shareholder in such household.
10. LIABILITY FOR MIS-STATEMENT
The Board shall be collectively responsible for any statement in its Report which
is false in any material particular, or for any omission of a material fact, knowing it to
be material. In terms of Section 628 of the Act, any person (including a director)
making or omitting any such statement shall be punishable with imprisonment for a
term which may extend to two years and with fine.
On the principle laid down in Hedley Byrne & Co. Ltd. v. Heller and Partners Ltd.
(1963) 2 All ER 575 (HL): (1964) 1 Comp LJ 14 (HL) a director may incur liability to
individual shareholders who act in reliance upon a negligent misstatement made, e.g,
in the directors report since the relationship between a director and the members will
normally be such as to impose a duty to take care in making such statements.
Whether a similar liability may be incurred to non members is a question of fact in
each case, depending upon the circumstances in which the statement is made.
11. CHAIRMANS SPEECH
The Companies Act, 1956 does not have any statutory provision regarding
circulation, publication or otherwise of Chairmans Speech. However, it is customary
in big companies for the chairman to make a speech highlighting the various aspects
of companys operations during the year and indicating the prospects of the company
for the future. Basically, the chairmans speech is to give details or highlight aspects
which are not covered in the directors report as the latter document includes only
statutory information.
The chairmans speech is delivered by him at the annual general meeting before
the meeting takes up the consideration of the statutory items starting from reading of
the notice, auditors report and the discussion on the accounts of the company.
Copies of the speech are sometimes distributed to the members attending the annual
general meeting.


It is also customary to publish the chairmans speech or an abridged version
thereof in leading newspapers for the interest of the general public and prospective
investors. A note is also added that the speech published does not purport to be the
proceeding of the meeting as a pre-cautionary measure since Section 197 of the Act
prohibits the publication at the companys cost any report of the proceedings of a
meeting unless it covers all the matters given in Section 193.
The Department of Company Affairs, has, however, advised vide circular
No. 3/91 dated 15.2.1991 that from the point of view of economy in expenditure as
also saving newsprint which is imported out of scarce foreign exchange resources,
publication of chairmans speech in newspapers/magazines be avoided.
Like the directors report, the chairmans speech is drafted by the secretary in
coordination with the heads of other operating functions before it is finalised by the
chairman. Since there is no statutory provision relating to chairmans speech there is
no hard and fast rule as to what it should contain and thus the length, style and
nature of the speech varies from chairman to chairman and company to company.
The chairmans speech for a particular company may differ from year to year
depending on the circumstances, but the matters which are generally included in the
speech are:
(a) review of the companys working;
(b) progress during the year;
(c) difficulties and constraints faced by the company during the year;
(d) measures initiated to overcome such difficulties; and
(e) immediate and future prospects of the company.
Where the chairman delivers his speech before commencing the statutory items
of business at the annual general meeting the minutes of the meeting must include a
reference to this and could be worded either that after the chairmans speech, he
requested the secretary to read the auditors report or include a brief summary of the
speech in the minutes of the meeting.
12. COMPLIANCE CERTIFICATE UNDER SECTION 383A
The Companies (Amendment) Act, 2000 has inserted a new proviso in sub-
section (1) of Section 383A of the Companies Act, 1956. As per this proviso every
company not required to employ a whole-time secretary under Sub-section (1) and
having a paid-up share capital of ten lakh rupees or more shall file with the Registrar
a certificate from a secretary in whole-time practice in such form and within such time
and subject to such conditions as may be prescribed, as to whether the company has
complied with all provisions of the Act and a copy of such certificate shall be attached
with Boards report referred to in Section 217. Accordingly, every company having a
paid-up share capital of rupees ten lakhs or more but less than rupees two crores is
required to file with the Registrar of Companies a Compliance Certificate from a
Secretary in Whole-time Practice and also attach a copy of that certificate with
Boards report which are not required to employ a whole-time secretary but has
nevertheless employed. However the Department of Company Affairs has vide its
circular dated 11th December, 2003 clarified that company which is not required to


employ a whole-time secretary but has nevertheless employed a whole-time
company secretary, such a company is not required to obtain compliance certificate
from a practising company secretary.
A member of the Institute in practice who is entitled
(i) to issue compliance certificate pursuant to the proviso to Sub-section (1) of
Section 383A of the Companies Act, 1956 (1 of 1956); and/or
(ii) to sign an Annual Return pursuant to the proviso to Sub-section (1) of
Section 161 of the Companies Act, 1956 (1 of 1956), shall be deemed to be
guilty of professional misconduct if he-
issues compliance certificates; and/or
signs Annual Return
for more than eighty companies in aggregate, in a calendar year.
Provided, however, that in the case of a firm of Company Secretaries, the ceiling
of eighty companies aforesaid would apply to each partner therein who is so entitled
to issue the compliance certificate; sign Annual Return.
13. NEED FOR COMPLIANCE CERTIFICATE
The successive Annual Reports on the Working and Administration of the
Companies Act, 1956 reveal that a large number of documents are returned for
rectification of defects and also remain pending for being taken on record. While this
state of affairs has perhaps resulted from the constraints under which the offices of
the ROCs operate, it cannot be denied that in case of documents returned for
rectification, a large number of errors or omissions arise on account of mis-
interpretation or ignorance of the provisions of law.
Further, the Department of Company Affairs institutes every year a large number
of prosecutions against the companies and their officers in default for contravention
of various provisions of the Companies Act. Most of the companies against which
prosecutions are instituted are private limited companies or small public limited
companies which do not have the benefit of expert professional services of qualified
Company Secretaries.
Thus, it is well established fact that smaller companies fall prey to violations of
the provisions of the Companies Act in the absence of professional support as
compared to companies which have employed a qualified Company Secretary.
Compliance Certificate is, therefore, salutary as it creates an awareness among
companies to comply with provisions of the Companies Act and also provides a
mechanism for self regulation by companies.
Compliance Certificate will not only act as an effective mechanism to ensure that
the legal and procedural requirements under Companies Act are duly complied with
but also instill professional discipline in the working of the company besides building
up the necessary confidence in the state of affairs of the company. It will relieve the
company and its directors including the nominee directors from the consequences of
unintended non-compliance of the provisions of the Companies Act. It will further curb
the tendency on the part of the smaller companies to short circuit the procedural


requirements which primarily occur due to ignorance or lack of professional support.
It will act as a pre-emptive check to monitor compliance with the requirements of the
Companies Act and the Rules made thereunder.
The Company Secretaries, while undertaking the work of issuing Compliance
Certificate will act as a friend and guide to the management of companies.
In terms of the newly inserted proviso to Sub-section (1) of Section 383A, the
Central Government has prescribed the Companies (Compliance Certificate) Rules,
2001 for issue of Compliance Certificate by a Secretary in Whole-time Practice. The
Rules have also prescribed the form for compliance certificate. The certificate may be
issued in the prescribed form or as near thereto as circumstances admit. Certain
amount of flexibility in the form has been provided which means that if any
information required to be given in the certificate does not fit in format necessary
modification may be made in format.
According to Sub-rule (1) of Rule 3, every company not required to employ a
whole-time secretary under Section 383A(1) of the Act and having a paid-up share
capital of ten lakh rupees or more shall obtain a certificate from a secretary in whole-
time practice.
For the purpose of this proviso the relevant date for determining the paid-up
share capital shall be date on which the Boards report is signed. Further Sub-rule (2)
of Rule 3 provides that the Compliance Certificate shall relate to the period pertaining
to the financial year of the company. So, every company to which the section is
applicable is required to attain a Compliance Certificate from a secretary in whole-
time practice for the financial year in which the Boards report is signed.
Under e-filing system of MCA, companies are required to file Compliance
Certificate on line with the Registrar of Companies within 30 days from the date on
which its Annual General Meeting is held, along with e-form 66. Provided that where
the annual general meeting of such company for any year has not been held there
shall be filed with Registrar such certificate within thirty days from the latest day on or
before which that meeting should have been held in accordance with the provisions
of the Act. In case, AGM is held and adjourned the Compliance Certificate should be
files with ROC within 30 days from the date on which such adjourned meeting is held
provided such statutory meeting was held within statutory limit.
It may be noted that for e-filing purpose, Compliance Certificate is required to be
converted in pdf file and then the said pdf file is to be attached to e-form 66.
As per Sub-rule (3) of Rule 3 secretary in whole-time practice, for the purpose of
issue of Compliance Certificate, shall have right to access at all times the registers,
books, papers, documents and records of the company and shall be entitled to
require from the officers or agents of the company, such information and explanations
as he may think necessary for the purpose of such certificate.
The Compliance Certificate must be laid by the Company at its Annual General
Meeting (Sub-rule (4) of Rule 3). As a good secretarial practice, the certificate should
be read at the meeting and also made available to the members for inspection. It is
also necessary for the company to attach a copy of the Compliance Certificate with


the Boards report while forwarding the same to members and others under
Section 219 of the Act.
14. SCOPE OF COMPLIANCE CERTIFICATE
The scope of Compliance Certificate would comprise of certification of the
compliance of various requirements under the Companies Act and the Rules
thereunder. The PCS should certify compliance only in respect of matters specified in
the Form prescribed under the Rules and where any matter is not applicable, he
should specify accordingly.
At the time of issue of the first Compliance Certificate, PCS should verify the
registers and records maintained by the company from the first day of the financial
year except where there are reasons for PCS to verify the records for the earlier
years. Such occasions may arise in respect of maintenance of registers, retirement of
directors by rotation, issue of share certificate when the allotments were made in the
earlier years, payment of managerial remuneration, etc.
15. PENALTY FOR NON-COMPLIANCE
Where a company fails to comply with the requirement of filing the Compliance
Certificate with the ROC or attaching the copy of such certificate with Boards Report,
in terms of Sub-section (1A) of Section 383A the company and every officer of the
company who is in default shall be punishable with fine which may extend to Rs. 500
for every day during which the default continues.
16. MODE AND PERIOD OF APPOINTMENT OF PCS
As the Compliance Certificate is required to be addressed to the members of the
company, it would be in the fitness of things that the appointing authority is the
members to whom this certificate is addressed. It is advisable that the PCS is
appointed by the members in the annual general meeting of the company. Such
appointment shall be from the conclusion of that annual general meeting until the
conclusion of the next annual general meeting. It is also recommended that the first
appointment of the PCS may be made by the Board of directors to hold office until the
conclusion of the annual general meeting held after such appointment.
The Board may fill any casual vacancy in the office of PCS to hold office until the
conclusion of the next annual general meeting. However, if such a vacancy is caused
by the resignation of PCS, it is advisable that the vacancy is filled up by the company
in general meeting.
17. CERTIFICATION WITH QUALIFICATION
As specified in the Form, the qualification, reservation or adverse remarks, if any,
may be stated by the PCS at the relevant places. It is recommended that the
qualifications, reservations or adverse remarks of PCS, if any, should be stated in
thick type or in italics in the Compliance Certificate.
If the scope of work required to be performed, is restricted on account of
limitations imposed by the client or on account of circumstantial limitations (like
certain books or papers being in custody of another person or Government Authority)
the certificate may be qualified as such.


PCS shall have due regard to the circulars and/or clarifications issued by the
Department of Company Affairs from time to time. It is recommended that a specific
reference of such circulars at the relevant places in the certificate may be made,
wherever necessary.
18. PENALTY FOR FALSE COMPLIANCE CERTIFICATE
Section 628 deals with penalty for false statements. According to this section, if in
any return, report, certificate, balance sheet, prospectus, statement or other
document, required by or for the purpose of any of the provisions of the Act, any
person makes a statement-
(a) which is false in any material particular, knowing it to be false; or
(b) which omits any material fact, knowing it to be material;
he shall, except as otherwise expressly provided in the Act, be punishable with
imprisonment for a term which may extend to two years and shall also be liable to
fine.
In view of this, a PCS will be attracting the penal provisions of Section 628, for
any false statement in any material particular or omission of any material fact in the
Compliance Certificate. However, a person will be penalized under Section 628 in
case he makes a statement, which is false in any material particular, knowing it to be
false, or which omits any material fact knowing it to be material.
19. PROFESSIONAL RESPONSIBILITY
While the newly inserted provision has opened up the much awaited significant
area of practice for company secretaries, it equally casts onerous responsibility on
them and poses a greater challenge whereby they have to justify fully the faith and
confidence reposed by the Government and trade and industry and measure up to
their expectations. Company Secretaries must take adequate care while issuing
Compliance Certificate. It is based on this certificate that confidence of the company,
Government and trade and industry will build-up vis--vis our profession. Any failure
or lapse on the part of PCS in issuing a Compliance Certificate may not only attract
penalty for false statement under Section 628 and disciplinary action for professional
or other misconduct under the provisions of the Company Secretaries Act, 1980 but
also make him liable for any injury caused to any person due to his negligence in
issuing the Compliance Certificate. Therefore, it becomes imperative for the PCS that
he exercises great care and caution while issuing the Compliance Certificate and also
adheres to the highest standards of professional ethics and excellence in providing
his services.







LESSON ROUND-UP
Attaching Boards report to every balance sheet is mandatory. Apart from giving a
complete review of performance of company for the year under report, it
highlights various disclosures having impact on business. It also highlights the
future strategy of the company.
The matters to be included in Boards Report should be under the provisions of
Companies Act, Listing Agreements, SEBI Guidelines and RBI directions.
Under Companies Act the matters to be included should be with respect to state
of companys affairs, the amount which it proposes to carry to any reserves,
recommendation of amount of dividend, material changes, conservation of
energy, technology absorption, foreign exchange, earning and outgo, particulars
in respect of certain employees, directors responsibility statement, Audit
Committee, Account of holding and subsidiary company.
As per listing agreement, management discussion and analysis report, Report on
Corporate Governance, fact of delisting, suspension of securities are the matters
to be included in the Report.
SEBI (Employee Stock Option Scheme and Employee Stock Purchase Scheme)
Guidelines, 1999 provides for certain disclosures.
As per RBIs directions, certain disclosures are required to be made by non-
banking companies receiving deposits.
Boards report should be signed by the Chairman of the Board, if so authorized
and if not so authorized then by not less than two directors of the company, one
of whom shall be managing director, where there is one.
The Board shall be collectively responsible for any statement in its Report which
is false in any material particular or for any omission of a material fact.
In accordance with the proviso to Sub-section (1) of Section 383A of the
Companies Act, 1956, a company is required to file with Registrar a Compliance
Certificate in e-form 66 within 30 days from the date on which AGM is held.
Compliance Certificate would comprise of Certification of the Compliance of
various requirements under the Companies Act and the Rules thereunder.
Institute has published Guidance Note on Boards Report.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answer to these questions are not to be
submitted for evaluation).
1. Boards Report is a comprehensive document circumscribing both financial
and non-financial information. Explain how?
2. State the disclosures in Boards Report under listing agreement.
3. State the provisions for signing and dating of Boards Report.
4. What is the need and scope of Compliance Certificate.






STUDY XXV
REGISTERS AND RETURNS
LEARNING OBJECTIVES
Under the Companies Act, 1956, a company is required to maintain certain registers
and records. There are some other registers and records, the maintenance of which is
not statutorily required but is essential for the smooth, efficient and systematic
functioning of the company. This chapter covers the maintenance, authentication,
preservation and inspection of statutory book/registers prescribed under various
provisions of the Company Law, non-statutory books, various forms/returns required
to be filed to Registrar of Companies, provisions relating to Annual Return under the
following topics:
Statutory Books/register
Secretarial Standard-4
Electronic forms
Statutory books elaborated (covering Annual Return)
Procedure for keeping registers and returns at a place other than the registered
office
Non-statutory Registers
Filing of various forms/Returns with Registrar of Companies
Preparation and filing of returns with the Registrar of Companies
Guidelines for preparing/filing forms, documents, returns etc.
Condonation of Delay
Penalty for filing false documents/statements with the Registrar.
Note: The e-forms are being constantly revised to be compatible with the technical
requirements. The updated forms are available at the website of MCA
(www.mca.gov.in)

1. STATUTORY BOOKS/REGISTERS
The Companies Act, 1956 lays down that every company incorporated under this
Act must maintain and keep at its registered office certain books, registers and copies
of certain returns, documents etc. and to give certain notices, file certain returns,
forms, reports, documents etc. with the Registrar of Companies within certain
specified time limits and with the prescribed filing fees. These books are known as
Statutory Books. Some of the statutory registers are required to be kept open by the
company for inspection by directors, members, creditors of the company and by other
persons. The company is also required to allow extracts to be taken from certain
documents, registers, returns etc. and furnish copies of certain documents on
demand by a member or by any other person on payment of specified fees.
Every company incorporated under the Act is required to keep at its registered
office, inter alia, the following statutory books and registers
1. Register of investments in securities not held in companys name.
[Section 49(7)]
949


2. Register of deposits. [Section 58A and the Companies (Acceptance of
Deposits) Rules, 1975 and the RBI Non Banking Financial Companies
Directions]
3. Register of securities bought back. (Section 77A)
4. Register of charges. (Section 143)
5. Register and index of members. [Sections 150, 151 and the Companies
(Issue of Share Capital with Differential Voting Rights) Rules, 2001]
6. Register and index of debenture holders. (Section 152)
7. Register and index of beneficial owners. (Section 152A)
8. Foreign register of members and debenture holders and their duplicates.
[Section 157(1) and 158(4)]
9. Annual Return (Section 163)
10. Books containing minutes of general meeting and of Board and of
committees of Directors. [Section 193(1)]
11. Register of Postal Ballot [Section 192A and the Companies (Passing of the
resolutions by postal ballot) Rules, 2001]
12. Books of accounts. [Section 209(1)(a) to (c)]
13. Cost account records for Companies engaged in industries so specified by
Central Government [Section 209(1)(d)]
14. Register of contracts with companies/firms in which directors are interested.
[Section 301(5)]
15. Register of Directors/Managing Directors/Managers/Whole-time Directors/
Secretary. (Section 303)
16. Register of directors shareholdings. (Section 307)
17. Register of loans or investments made, guarantees given and security
provided to other body corporate. (Section 372A)
18. Register of Renewed and Duplicate Share Certificates. [Rule 7 of the
Companies (Issue of Share Certificate) Rules, 1960]
19. Register of records and documents destroyed [Section 163 and the
Companies (Preservation and Disposal of Records) Rules, 1966]
20. Register of sweat equity shares [Section 79A and the Unlisted Companies
(Issue of Sweat Equity Shares) Rules, 2003]
21. Dividend Register
2. SECRETARIAL STANDARDS
The Institute has issued Secretarial Standard number 4 (SS-4) on register and
records. It seeks to prescribe a set of principles in relation to various registers and
records including the maintenance and inspection thereof. In the initial years
adherence by the Company to the Secretarial Standard will be recommendatory.
3. ELECTRONIC FORMS
The Companies (Amendment) Act 2006, has introduced, inter alia, new
provisions relating to filing of applications, documents, inspection etc. through


electronic form. The said provisions are contained in newly inserted Section 610B,
which reads as under:
Provisions relating to filing of applications, inspection of documents, etc.,
through electronic form.
610B. (1) Notwithstanding anything contained in this Act, and without prejudice to
the provisions contained in section 6 of the Information Technology Act, 2000 (21 of
2000), the Central Government may, by notification in the Official Gazette, make
rules so as to require from such date as may be specified in the rules, that
(a) such applications, balance sheet, prospectus, return, declaration,
memorandum of association, articles of association, particulars of charges,
or any other particulars or document as may be required to be filed or
delivered under this Act or rules made thereunder, shall be filed, through the
electronic form and authenticated in such manner as may be specified in the
rules;
(b) such document, notice, any communication or intimation, required to be
served or delivered under this Act, shall be served or delivered under this
Act through the electronic form and authenticated in such manner as may be
specified in the rules;
(c) such applications, balance sheet, prospectus, return, register, memorandum
of association, articles of association, particulars of charges, or any other
document and return filed under this Act or rules made thereunder shall be
maintained by the Registrar in the electronic form and registered or authenti-
cated, as the case may be, in such manner as may be specified in the rules;
(d) such inspections of the memorandum of association, articles of association,
register, index, balance sheet, return or any other document maintained in
the electronic form, which is otherwise available for such inspection under
this Act or rules made thereunder, may be made by any person through the
electronic form as may be specified in the rules;
(e) such fees, charges or other sums payable under this Act or rules made
thereunder shall be paid through the electronic form and in such manner as
may be specified in the rules;
(f) the Registrar shall, register change of registered office, alteration of
memorandum of association or articles of association, prospectus, issue
certificate of incorporation or certificate of commencement of business,
register such document, issue such certificate, record notice, receive such
communication as may be required to be registered or issued or recorded or
received, as the case may be, under this Act or rules made thereunder or
perform duties or discharge functions or exercise powers under this Act or
rules made thereunder or do any act which is by this Act directed to be
performed or discharged or exercised or done by the Registrar, by the
electronic form, in such manner as may be specified in the rules.
(2) The Central Government may, by notification in the Official Gazette, frame a
scheme to carry out the provisions specified under sub-section (1) through the
electronic form:
Provided that the Central Government may appoint different dates in respect of


different Registrar of Companies or Regional Directors from which such scheme shall
come into force.
The Companies (Amendment) Act, 2006 has also introduced few other provisions
in the Act which support the maintenance of records in electronic form, electronic
filing and eGovernance. These are contained in new Section 610C, Section 610D
and Section 610E. The same are reproduced below:
Power to modify Act in relation to electronic records (including the manner
and form in which electronic records shall be filed).
610C. (1) The Central Government may, by notification in the Official Gazette,
direct that any of the provisions of this Act, so far as it is required for the purpose of
electronic record specified under section 610B in the electronic form,
(a) shall not apply, in relation to the matters specified under clauses (a) to (f) of
sub-section (1) of section 610B, as may be specified in the notification; or
(b) shall apply, in relation to the matters specified under clauses (a) to (f) of sub-
section (1) of section 610B only with such consequential exceptions,
modifications or adoptions as may be specified in the notification:
Provided that no such notification which relates to imposition of fines or
other pecuniary penalties or demand or payment of fees or contravention of
any of the provisions of this Act or offence shall be issued under this sub-
section.
(2) A copy of every notification proposed to be issued under sub-section (1), shall
be laid in draft before each House of Parliament, while it is in session, for a total
period of thirty days which may be comprised in one session or in two or more
successive sessions, and if, before the expiry of the session immediately following
the session or the successive sessions aforesaid, both Houses agree in disapproving
the issue of the notification or both Houses agree in making any modification in the
notification, the notification shall not be issued or, as the case may be, shall be
issued only in such modified form as may be agreed upon by both the Houses.
Providing of value added services through electronic form.
610D. The Central Government may provide such value added services through
the electronic form and levy such fees as may be prescribed.
Application of provision of Act 21 of 2000.
610E. All the provisions of the Information Technology Act, 2000 relating to the
electronic records (including the manner and format in which the electronic records
shall be filed), in so far as they are not inconsistent with this Act, shall apply, or in
relation, to the records in electronic form under Section 610B."
The Ministry of Corporate Affairs has amended the Companies (Central
Government) General Rules and Forms 1956 to enable electronic filing of
documents. The amended rules have been notified vide GSR No 56(E) dated 10th
February 2006. New electronic forms are made operational from 18th February,
2006. Wherever the word 'electronic form' is used in this study material, it signifies
the new electronic forms as notified by the Ministry of Corporate Affairs, from time to


time. Wherever the word 'electronic form' is not used, it signifies that the Ministry has
not yet notified electronic form for the same. However, the Ministry is in the process
of notifying few more electronic forms. Students are, therefore, advised to keep
themselves updated on new electronic forms being notified by the Ministry from time
to time. It may also be noted that all electronic forms requires documents and
attachments to be in standard 'pdf format'.
Digital Signature
The electronic forms under the Companies Act are required to be signed by
affixing digital signature. The term 'affixing digital signature' means adoption of any
methodology or procedure by a person for the purpose of authenticating an electronic
record by means of digital signature. [Section 2(1)(d) of the Information Technology
Act 2000]. Thus, wherever under the Companies Act, directors or manager or
secretary is required to sign the prescribed form for the purpose of filing with the ROC
or Central Government, then the same should be signed using digital signatures. It
necessarily follows that directors, managers and secretaries should have their digital
signatures.
Now we shall discuss in detail the relevant provisions of the Companies Act,
1956 requiring the registers, books etc. to be kept, manner of their keeping, their
place of keeping, entry of particulars and information to be made and recorded
therein, their inspection etc.
4. STATUTORY BOOKS ELABORATED
(1) Register of Investments Not Held in Companys Name
Section 49 of the Act provides that the investments of a company must be held in
its own name, except as allowed by Sub-sections (2), (3), (4) and (5) of the Section. It
is stated that, if any shares or securities in which investments have been made by a
company are not held by it in its own name, the company shall forthwith enter in a
register maintained by it for the purpose:
(a) the nature, value and such other particulars as may be necessary to fully
identify the shares or securities in question; and
(b) the bank or person in whose name or custody the shares or securities are
held.
The register should be maintained at the registered office of the company. This
register has to be kept open for the inspection of any member or debenture holder of
the company during the business hours of the company, without paying any charge,
during business hours, subject to such reasonable restrictions as the company may,
by its articles or in general meeting, impose, so that not less than two hours in each
day are allowed for inspection. Only one person at a time should be allowed to
inspect the register.
If default is made in the maintenance of the register, the company and every
officer of the company who is in default, shall be punishable with fine which may
extend to fifty thousand rupees. If inspection required (as mentioned above) is


refused, the Company Law Board
*
may, by order, direct an immediate inspection of
the register.
Entries in the register should be authenticated by the Secretary of the company
or by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register should be preserved permanently and should be kept in the custody
of the secretary of the company or any other person authorized by the Board for the
purpose.
(2) Register of Deposits
As per Rule 7 of the Companies (Acceptance of Deposits) Rules, 1975, every
company other than a banking company accepting deposits has to keep at its
registered office one or more registers in which there shall be entered separately in
the case of each depositor the following particulars, namely:
(a) name and address of the depositor and details of nominee, if any;
(b) date and amount of each deposit;
(c) duration of deposit and the date on which each deposit is repayable;
(d) rate of interest;
(e) date/dates on which payment of interest on the deposits is to be made;
(f) any other particulars relating to deposit.
The register should be maintained deposit receipt number-wise.
The register of deposits is required to be preserved in good order for a period of
not less than eight calendar years from the financial year in which the last entry is
made in the register.
If default is made, the company and every officer of the company in default shall
be punishable with fine up to Rs. 500/- each and further fine of Rs. 50/- per day if
default continues.
Register of deposits can be taken to be a part of books of accounts within the
meaning of Section 209. Hence, where the work regarding fixed deposits is entrusted
to a Registrar by a company, it is advisable for the Board to approve of keeping the
said Register with the Registrar and file a copy of the said resolution with the ROC.
As per Rule 4(16) of the Non Banking Financial Companies (Reserve Bank)
Directions, 1998, every non-banking financial company shall keep one or more
registers in respect of all deposits in which the particulars of each depositor shall be
entered separately. The register shall be kept at the branch office in respect of the
deposits accounts opened by that branch of the company and a consolidated register
at the registered office of the company. The Register shall be preserved in a good
order for a period of not less than eight calendar years following the financial year in
which the latest entry is made. However, if the company keeps the books of accounts
referred to in Sub-section (1) of Section 209 of the Companies Act, 1956 at any place

*
It shall be substituted by Central Government after the commencement of Companies (Second
Amendment) Act, 2002.


other than its registered office in accordance with the proviso to that sub-section, it
shall be deemed to be sufficient compliance with the clause if the register aforesaid is
kept at such other place, subject to the condition that the company delivers to the
Reserve Bank of India a copy of the notice filed with the Registrar of Companies
under the proviso that sub-section within seven day of such filing.
The register is not open for inspection.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register should be kept in the custody of the secretary of the company or any
other person authorized by the Board for the purpose.
(3) Register of Securities Bought Back
Under Section 77A(9) every company is required to keep at its registered office a
Register of securities bought-back and enter therein the following particulars, namely:
(i) the consideration paid for securities bought back;
(ii) the date of cancellation of securities;
(iii) the date of extinguishing and physically destroying of securities and such
other particulars as prescribed in Form No. 4B of the Companies (Central
Governments) General Rules and Forms, 1956 and Annexure B to the
Private Limited Company and Unlisted Public Limited Company (Buy-back
of Securities) Rules, 1999.
Entries in the register should be made in chronological order.
If company fails to maintain this register then the company and every officer of
the company who is in default shall be punishable with fine which may extend to fifty
thousand rupees, or with imprisonment for a term which may extend to two years, or
with both.
The register is not open for inspection.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register should be preserved for a minimum period of 8 years from the date
of completion of buy-back and should be kept in the custody of the secretary of the
company or any other person authorized by the Board for the purpose.
(4) Register of Charges
Under Section 143, every company is required to keep at its registered office a
Register of charges and enter therein all charges specifically affecting property of the
company and all floating charges on the undertaking or any property of the company.
The Register should contain the following:
a short description of the property charged;
the amount of the charge;


except in the case of bearer securities, the names of the persons entitled to
the charge; and
particulars of any modification of a charge and every satisfaction of a
charge.
(6) Entries in the register should be made in chronological order of creation of
the charge and modification thereof.
If any officer of the company knowingly omits or willfully authorises or permits the
omission of any entry required to be made as per the Act, he is punishable with fine
which may extend to five thousand rupees.
Under Section 144, the Register of charges and instruments creating charge
shall be open for inspection by any member or creditor without fee and of any other
person on payment of fee of such sum as may be prescribed, during business hours
for not less than two hours each day. The Central Government has vide notification
dated 13.7.88 w.e.f. 15.7.88, prescribed a fee of Rs. 10 for inspection of this register
by persons other than members and creditors. However, company is not required to
supply copies of these. If default is made, the company and every officer in default is
punishable with fine upto rupees five hundred each and further fine of rupees two
hundred for each day during which the refusal continues.
In the wake of MCA-21 project, the physical data of the companies in Registrar of
Companies is being digitized. The documents, in so far as these are available in
digitised form, shall be available for public inspection through electronic means using
the internet.
The Company Law Board
*
may also by order compel an immediate inspection of
the said copies or register.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
Instrument creating a charge should be preserved for a period of 8 years from the
date of satisfaction of charge and should be kept in custody of the secretary of the
company or any other person authorized by the Board for the purpose.
The register should be preserved permanently in the custody of the secretary of
the company or any other person authorized by the Board for the purpose.
(5) (a) Register of Members
Every company is required to maintain a register of members, which should
indicate the following particulars:
Name, address and the occupation of the member;
Date on which he was entered as a member;
Date on which he ceased to be a member;
The details of the shares standing in his name, such as, the number of the

*
It shall be substituted by Central Government after the commencement of Companies (Second
Amendment) Act, 2002.


certificate, distinctive number of the shares, etc.
In addition to the aforesaid particulars the register of members should also be in
conformity with the format as prescribed under Rule 7 of the Companies (Issue of
Share Certificates) Rules, 1960. The Appendix to the rules provide the format of
register of members. In the case of Joint shareholders, the particulars of each joint
holder should be recorded in the register.
Separate register should be maintained for each class of equity and preference
shares.
Apart from the aforesaid information, this format provides for giving information
about cash payable on shares, cash paid on shares and full particulars of transfer of
shares. Further, all entries in this register are required to be authenticated by the
secretary or any other person so authorized by the Board of directors [Rule 7 of the
Companies (Issue of Share Certificates) Rules, 1960].
Further, particulars of every share certificate issued in accordance with rule-4,
sub-rule (1), shall be entered in the Register of Members maintained in the form set
out in the appendix annexed to the abovesaid rules of persons to whom it has been
issued, indicating the date of issue.
Under Section 163 of the Companies Act, 1956, register of members should be
kept at the registered office of the company and except when it is closed under the
provisions of the Act, shall be open during business hours (subject to such
reasonable restrictions as the company may impose, so that not less than two hours
in each day are allowed for inspection) to inspection of any member or debenture
holder without fee, and of any other person, on payment of such sum as may be
prescribed for each inspection. The Central Government has vide notification dated
13.7.88 w.e.f. 15.7.88 prescribed a sum of Rs. ten for inspection hereunder. Further,
the member or debenture holder or other person may make extracts from the
register, index, etc. without fee or require a copy of any such register, index or copy
or any part thereof on payment of such sum as may be prescribed for every 100
words or part thereof required to be copied. Vide Governments notification dated
13.7.88 w.e.f. 15.7.88 the sum prescribed for requiring a copy of the register as
above is, rupee one for every 100 words or part thereof.
A member can obtain on requisition, copies of register of members only on
prescribed payment and a mere request to chairman by letter is insufficient. [Maknam
Investments Ltd. In re [1996] 87 Comp. Cas 689 (Cal.)].
The company is required to send the copy within ten days of receiving the
requisition together with the charges therefor. The penalty for not allowing inspection
of register or not supplying a copy would involve fine which may extend to five
hundred rupees for every day during which the default continues. The register of
members can be kept at a place other than the registered office of the company
within the city, town or village in which the registered office is situated if
(a) Such other place has been approved for this purpose, by a special
resolution passed by the company in general meeting; and
(b) The Registrar has been given in advance a copy of the proposed resolution.


After such a special resolution is passed, a copy of the same has to be filed
with the Registrar of Companies as required under Section 192 of the
Companies Act, 1956.
As per provisions of Section 154 of the Companies Act, 1956, the register of
members of a company can be closed, after giving not less than seven clear days
previous notice, by advertisement in a newspaper circulating in the district in which
the registered office of the company is situated, for any period not exceeding in the
aggregate forty five days in each year but not exceeding thirty days at any one time.
The register of members is usually closed immediately prior to the Annual General
Meeting for the purpose of finalising the list of shareholders to determine persons
entitled to dividend, if declared at the annual general meeting and also for updating
the list of shareholders as on the day of annual general meeting. The register of
members is also closed for the purpose of determination of entitlement when rights or
bonus shares are issued. Where the shares are listed the requirements as per the
Listing Agreement should also be complied with.
Under Section 153 of the Companies Act, 1956, no notice of any trust, express,
implied or constructive, shall be entered on the register of members or of debenture
holders. The object of this provision is to relieve the company from taking notice of
equitable interest in shares and to preclude persons claiming under equitable title by
converting the company into a trustee for them. In other words, the company looks
only to the person whose name is in the register and so far as the company is
concerned, that person has complete control of the shares registered in his name
except where an executor or administrator has been appointed.
However, this provision has been watered down by the Companies Amendment
Act, 1975 and companies have been required to take notice of benami transactions
by the provisions contained in Section 187C of the Companies Act, 1956. Under this
section, if a shareholder holds shares in a company and if he has no interest therein,
he should declare to the company the name of the beneficial shareholder and the
extent of his interest in such shareholding, etc. Similarly, a duty is cast upon the
beneficial shareholder to make a declaration to the company. Such declarations
received from the shareholder as well as the holder of beneficial interest in the shares
have to be filed with the Registrar of Companies. In spite of this notice, the company
is specifically not required to take any notice of the beneficial interest declared and it
can continue to pay dividend to the shareholder whose name is entered in the
register of members as the holder thereof.
According to Companies (Declaration of Beneficial Interest in Shares) Rules,
1975, a person whose name is entered in the register of members as the holder of a
share but who does not hold the beneficial interest in such share should within 30
days after his name is entered in the register of members as the holder of a share,
make a declaration to the company in Form I of the Rules in duplicate specifying the
name and other particulars of the person who holds the beneficial interest in such
share.
A person who holds beneficial interest in the share, should make a declaration to
the company in Form II of the Rules in duplicate, within 30 days after becoming the
beneficial owner, specifying the nature of his interest, particulars of the person in
whose name the share stands registered in the books of the company and such other


particulars as prescribed in Form II. Whenever there is a change in the beneficial
interest, the beneficial owner should within 30 days from the date of such change
make declaration to the company in Form II.
Whenever any declaration is made to the company in Form I or Form II, the
company should make a note of such declaration in the register of members and
should file within 30 days from the date of receipt of the declaration, a return in Form
22B with the Registrar with regard to such declaration.
The Department of Company Affairs vide its circular No. 5/75 dated 31st March,
1975 has clarified the applicability/non-applicability of Section 187C read with
Companies (Declaration of Beneficial Interest in Shares) Rules, 1975 to the following
cases:
(i) The provisions of Section 187C is not attracted in the case of joint holders of
shares, as no trustee, beneficiary relationship arises inter se in the eyes of
law. Similarly, the section is not attracted to shares owned by a public
charitable trust held in the names of the trustees.
(ii) If the shares are held by a guardian in his own name without reference to
minors name in the register of members, the provisions are applicable.
(iii) The provisions are not applicable, if the shares belonging to a Hindu
undivided family are held by the Karta of the family having regard to the
position of the Karta and to the peculiar character of the interest which
accrues to the coparceners in the joint estate. Where the Karta has any
special relation with a member of the Hindu family in respect of shares not
comprised in the family estate, the provisions will apply.
(iv) Where the shares of a partnership firm are entered in the name or names of
one or a few of the partners, the provisions are attracted.
(v) Where the shares stand in the name of a bank in the register of members,
whereas the rights to the shares pertain to some other person, the
provisions are attracted. Where the name of the executor under a Will or an
administrator to whom letters of administration have been granted is clear
from the entry in the register, the provisions will not be applicable but if this
is not clear, the disclosure is required to be made.
(vi) The provisions are not attracted to shares held by official designations only
e.g. Court Receiver, Official Liquidator, Income-tax or Wealth-tax
Commissioner, etc.
Entries in the register and index should be authenticated by the secretary of the
company or by any other person authorized by the Board for the purpose, by
appending his signature to each entry.
The register and index should be preserved permanently and should be kept in
the custody of the secretary of the company or any other person authorized by the
Board for the purpose.
The register of members is only prima facie evidence of membership and any
person can say either (a) that his name should no longer appear or should never
have been placed in the register at all, and (b) that his name has wrongfully been
removed from the register, and (c) that his name should be entered as a member.


The aggrieved person may apply to the Company Law Board
*
under Section 111A of
the Companies Act, for rectification of the register. The Company Law Board* has full
powers to decide any question relating to the title of any person entered or omitted
from the register of members. It may either reject the application or order rectification
of the register and also direct a company to pay damages if any, sustained by any
party aggrieved. The Company Law Board* may also make such interim orders
including any orders as to injunction of stay, as it may deem fit and just; such orders
as to costs as it thinks fit; and incidental or consequential orders regarding payment
of dividend for the allotment of bonus or right shares. If default is made in giving
effect to the order of the Company Law Board* hereunder, the company, and every
officer of company who is in default shall 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 day for which the default continues. An application for rectification of the
register of members shall be made by petition in writing and shall be accompanied by
such fee as may be prescribed. The provisions of Sub-sections (5), (7), (9), (10) and
(12) of Section 111 shall apply in respect of Section 111A. Section 111 applies in the
case of a private company.
(5) (b) Index of Members
Every company having more than 50 members must maintain an index of
members, unless the register of members in itself constitutes an index. The index
may be a card index or bound one. Any alterations or changes made in the register of
members must be recorded in the index within 14 days. The provisions of inspection
and getting copies of the register of members as discussed above are applicable to
index of members also.
(6) (a) Register of Debenture holders
Section 152 requires every company to maintain a register of debenture holders
and enter therein the following particulars:
(a) the name and address, and the occupations, if any, of each debenture
holder;
(b) the debentures held by each holder, distinguishing each debenture by its
number, except where such debentures are held with a depository and the
amount paid or agreed to be considered as paid on those debentures;
(c) the date on which each person was entered in the register as debenture
holder; and
(d) the date on which any person ceased to be a debenture holder.
In the case of joint holding, the particulars of each joint holder should be kept in
the register.
No notice of any trust, express, implied or constructive, should be entered in the
register of debenture holders.
Except when the register is closed under the provisions of the Act as aforesaid,
the register alongwith index should be open for inspection during the business hours

*
It shall be substituted by Tribunal after the commencement of Companies (Second Amendment) Act,
2002.


of the company, subject to such reasonable restrictions as the company may impose
by its articles or in general meeting so that not less than 2 hours in each working day
of the company are allowed for inspection.
Members, debenture holders and trustees of debenture holders can inspect the
register and the index without payment of any fee and any other person can inspect
the register on payment of the requisite fee.
Copies of the register can be demanded by any person who inspects the register.
Entries in the register and index should be authenticated by the secretary of the
company or by any other person authorized by the Board for the purpose, by
appending his signature to each entry.
The register and index should be preserved for a period of 15 years from the date
of redemption of debentures and should be kept in the custody of the secretary of the
company or any other person authorized by the Board for the purpose.
Further, the provisions of Sections 111 and 111A shall apply in relation to the
rectification of the register of debentureholders as they apply in relation to the
rectification of the register of members.
(6) (b) Index of Debenture holders
As in the case of a register of members, there must be kept an index of
debenture holders where a company has more than 50 debenture holders. Similar
provisions apply to it as to an index of members.
(7) Register and Index of Beneficial Owners
Section 152A of the Companies Act, 1956 was inserted by the Depositories Act,
1996 w.e.f. 20.9.1995, providing that the Register and Index of Beneficial Owners
maintained by a depository under Section 11 of the Depositories Act, 1996 shall be
deemed to be a register of members and debentureholders, as the case may be, for
the purposes of this Act. The amendment was considered necessary as securities
held in depository mode are fungible.
Section 11 of the Depositories Act, 1996 provides that every depository shall
maintain a register and an index of beneficial owners in the manner provided in
Sections 150, 151 and 152 of the Companies Act, 1956.
(8) Foreign Register of Members and Debenture Holders
The foreign register of members or debenture holders resident outside India, if
maintained, shall be deemed to be a part of the register of members or debenture
holders of the company and should be maintained from the date of allotment of
shares or debentures to foreigners, in an office located in the foreign country.
The company should, within 30 days from the date of the opening of any foreign
register, file with the Registrar of Companies a notice of the situation of the office
where such register is kept. In the event of any change in the situation of such office
or of its discontinuance, the company should, within 30 days from the date of such
change or discontinuance, file notice of such change or discontinuance with the
Registrar of Companies.


If a foreign register is maintained, a duplicate thereof should be maintained at the
registered office of the company or at such other place where the register of
members or debenture holders is kept.
The register should contain particulars in respect of each member or debenture
holder in the same format as are contained in the register of members or debenture
holders kept at the registered office of the company.
Where a company closes its foreign register of members or debenture holders, it
should give not less than 7 days previous notice by advertisement in a vernacular
newspaper circulating in the district where the foreign register is kept.
Except when the register is closed under the provisions of the Act as aforesaid,
the register should be open for inspection during business hours, subject to such
reasonable restrictions as the company may impose by its articles or in general
meeting so that not less than2 hours in each working day are allowed for inspection.
Members or debenture holders can inspect the register without payment of any
fee and any other person can inspect the register on payment of the requisite fee.
Copies of the register can be demanded by any person who inspects the register.
Entries in the foreign register should be authenticated by the person in charge of
the office in the foreign country, by appending his signature to each entry.
The register should be kept in the custody of the person in charge of the office in
the foreign country.
The foreign register of members should be preserved until discontinued.
The foreign register of debenture holders should be preserved for a period of 15
years from the date of redemption of debentures.
(9) Annual Return
Annual Return is perhaps the most important document required to be filed by
every company with the Registrar. Apart from the Balance Sheet and Profit & Loss
Account, this is the only document to be compulsorily filed with the Registrar every
year. The importance of this document can best be highlighted by comparing it with
some other documents required to be filed under the Act.
Annual Return and Balance Sheet: While the Balance Sheet and Profit & Loss
Account given information on the financial performance of a company, it is the Annual
Return which gives greater insight into the company relating to the people behind a
corporate entity the Shareholders, who as a body, constitute its ownership, the
Directors, who exercise control over the affairs of the company, the extent of dilution
or concentration of ownership, the details of debentureholders, who have contributed
to the loan funds, the extent of indebtedness, and last but not the least, the Company
Secretary who is the conscience-keeper of the company.
Further it contains more up-to-date information than that of the latter. Section 210
of the Act, requires that normally, the Balance Sheet and the Profit and Loss Account
should be placed before the Annual General Meeting within six months of the


financial year ending, and section 220 provides that copies of Balance Sheet and
Profit and Loss Account should be filed within 30 days from the date on which the
balance sheet and the profit and loss account were so laid (whether adopted or not)
or where the annual general meeting has not been held, within 30 days of the latest
date on or before which the annual general meeting should have been held. This
means that the information contained in the Balance Sheet is at least half an year old
by the time it is open for public inspection. On the other hand, the Annual Return is
made upto the date of the Annual General Meeting, and should be filed within 60
days from that date.
Annual Return and other Documents: Other documents have to be filed with the
Registrar of Companies only on the happening of certain events. For instance, e-
Form No. 2 has to be filed only when the company allots shares. E-Form No. 8 only
in case of creation and modification of charge, under section 135 of the Act, e-Form
No. 17 only in the case of satisfaction of charge. E-Form No. 32 only in case of
change in particulars of Directors and so on. But in the case of Annual Return, it has
to be compulsorily filed every year, independent of any contingency. Further, the
particulars of many other documents filed during the year are summarized and
included in the Annual Return.
Thus, the Annual Return provides in a nutshell, every comprehensive information
about various aspects of a company updated till the date of Annual General Meeting
every year. It is not an exaggeration, therefore, to state that the study of Annual
Return provides birds eye view of the capital structure, constitution and management
of the company concerned.
Sub-section (1) of section 159 prescribes the details that should be furnished in
the Annual Return of a company having a share capital.
They are:
(a) The address of its Registered Office.
(b) Register of Members and Debentureholders.
(c) Summary of the details of its share capital and debentures.
(d) The indebtedness of the Company.
(e) Details of its Members and Debentureholders, past and present.
(f) Details of its Directors, Managing Directors, Manager and Secretary, past
and present.
In respect of details of past and present members it is necessary to give the full
details only once in six years. For the intervening period of five years, it is adequate if
only the details of changes are given.
The format of Annual Return is prescribed in Part II of Schedule V to the Act
[Section 159(2)]. The same sub-section also allows certain amount of flexibility in the
format by stating that Return should conform to the prescribed form or, as near
thereto as circumstances admit. This means that if any information required to be
given in the Annual Return does not fit into the format, necessary modifications may
be made in the format by the company concerned.
The Annual Return should be made upto earlier of the following dates:


(i) The date of the latest Annual General Meeting; or
(ii) The latest date on which the Annual General Meeting of the company
should have been held under the provisions of Section 166 of the Act.
The date under (ii) above is applicable only in case the company fails to hold the
Annual General meeting within the time prescribed under Section 166 of the Act. In
other words, if the company has not been able to hold the Annual General Meeting
within the time prescribed under Section 166, it will be required, nevertheless to
prepare the Annual Return made up to the latest allowed date for holding the Annual
General Meeting under that section and file it with the Registrar.
The only exception to this rule is in case of an extension of time for holding the
Annual General Meeting granted by the Registrar.
Annual Return is required to be attached with the e-form 20B with in 60 days
from the date of the Annual General Meeting and if no Annual General Meeting is
held then within 60 days from the date on which the AGM ought to have been held.
In case the Annual General Meeting is held and adjourned, the Annual Return
should be made upto the date of the original meeting.
The Annual Return should be signed by two officers of the company consisting
of:
(i) The Manager or Secretary of the company; and
(ii) A Director of the company.
If the company does not have a Manager or Secretary, the Annual Return should
be signed by two Directors, one of whom should be the Managing Director, where
there is one.
Thus, it can be seen that the primary responsibility for signing the Annual Return
is vested in the Manager or Secretary of the company as also the Director/ Managing
Director. It is customary for the Secretary to sign the Annual Return in the case of
companies where there is a Secretary, though he is bracketed along with the
Manager. Only in cases where a company does not have Secretary, the Return is to
be signed by two Directors including a Managing Director, where there is one.
In addition to the above officers to the company, the proviso to Section 161(1) of
the Act requires that the Annual Return should also be signed by a Secretary in
whole-time practice, in the case of companies whose shares are listed on a
recognized Stock Exchange.
When a Secretary in whole-time practice signs the Annual Return filed by a listed
company with the Registrar, he thereby authenticates the Return as binding on him
and certifies that the facts stated and the material furnished in the return are duly and
fully (i.e. correctly and completely) stated and given.
As provided by Section 161(2) of the Act, the following certificates should be filed
along with the Annual Return:
(i) A certificate affirming that facts as stated in the Return are correct and
complete; and


(ii) A certificate conforming that transfers of all the shares and debentures
received by the company since the date of the last Annual Return have been
duly registered by the company.
In addition to the above, another certificate confirming that the whole of amounts
envisaged in clauses (a) to (e) of Sub-section (2) of Section 205C of the Companies
Act, 1956 remaining unpaid or unclaimed for a period of seven years from the date
they become payable by a company have been credited to investor education and
protection fund.
Section 162 of the Act, prescribes penalty where a company fails to comply with
any of the provisions contained in Sections 159, 160 or 161. Accordingly, the
company and every officer of the company who is in default shall be punishable with
fine which may extend to Rs. 500/- for every day during which the default continues.
Section 628 deals with penalty for false statements. According to this section, if in
any return, report, certificate, balance sheet, prospectus, statement or other
document, required by or for the purposes of any of the provisions of the Act, any
person makes a statement
(a) which is false in any material particular, knowing it to be false; or
(b) which omits any material fact, knowing it to be material;
he shall, except as otherwise expressly provided in the Act, be punishable with
imprisonment for a term which may extend to two years and shall also be liable to
fine.
Every company should maintain copies of all annual returns alongwith copies of
certificates and documents required to be annexed thereto at the registered office of
the company.
The copies of annual returns and certificates required to be annexed thereto
should be open for inspection during the business hours of the company, subject to
such reasonable restrictions as the company may impose by its articles or in general
meeting so that not less than 2 hours in each working day of the company are
allowed for inspection.
Members or debenture holders can inspect the annual returns without payment of
any fee and any other person can inspect the annual returns on payment of the
requisite fee.
Copies of the last 8 annual returns and all certificates and documents required to
be annexed thereto should be preserved in the custody of secretary of the company
or any other person authorized by the Board for the purpose.
(10) Minutes Books
Every company must maintain minutes books for recording the minutes of
proceedings of all general meetings of the shareholders and of all proceedings of
every meeting of its Board of directors or every committee of the Board (Section 193).
The minutes must be entered in the minutes book within 30 days of the meeting. The
pages of a minutes book must be consecutively numbered. Each page of the minutes


book must be initialled and the last page of the record of proceedings of each
meeting in the minutes books must be dated and signed:
(i) in the case of minutes of Board or Committee meetings by the Chairman of
the said meeting or of the next meeting; and
(ii) in the case of minutes of general meetings by the Chairman of the same
meeting within 30 days of the meeting and in the event of his death or
inability of that chairman within that period, by any director so authorised by
the Board for the purpose.
The minutes books should be kept at the registered office of the company. These
are primary documents and an evidence of the proceedings recorded therein and
when the minutes are duly drawn and signed, presumptions as specified in Section
195 of the Act may be drawn until the contrary is proved.
According to Sub-section (4) of Section 193, in the case of a Board meeting or of
a Committee of the Board, the minutes shall also contain
(a) the names of the directors present at the meeting; and
(b) in the case of each resolution passed at the meeting, the names of the
directors, if any, dissenting from, or not concurring in, the resolution.
Sub-section (5) of the section prohibits the inclusion in any minutes of any matter,
which, in the opinion of the chairman of the meeting
(a) is or could reasonably be regarded as defamatory of any person;
(b) is irrelevant or immaterial to the proceedings; or
(c) is detrimental to the interests of the company.
It has been explained at the end of this Sub-section that the chairman shall
exercise an absolute discretion in regard to the inclusion or non-inclusion of any
matter in the minutes on the grounds specified in this Sub-section.
Sub-section (6) imposes a fine of five hundred rupees for default in complying
with the provisions of Section 193.
Section 193 of the Companies Act, 1956, envisages minutes to be kept in a book.
However, the Department of Company Affairs has, by its letter No. 16047/ TA/VII,
dated 16th December, 1972, clarified that the minutes can be maintained by a
company in the loose-leaf form, provided it complied with the other procedural
requirements of the section and at the same time took all possible safeguards against
manipulation or interpolation of the minutes and bound up the loose-leaves in books
at reasonable intervals, say, six months.
Section 194 lays down that the minutes of meetings kept in accordance with the
provisions of Section 193 shall be evidence of the proceedings recorded therein.
According to Section 195 of the Act, where minutes of proceedings of any
Board/committee/general meeting have been kept in accordance with the provisions
of Section 193 of the Act, then, until the contrary is proved, the meeting shall be
deemed to have been duly called and held, and all proceedings thereat to have duly
taken place, and in particular, all appointments of directors or liquidators made at the
meeting shall be deemed to be valid.


Section 196 requires that the minutes books or proceedings at general meeting
must be kept open for inspection at the registered office of the company for at least
two hours everyday. A member can ask for a copy of the minutes at a notice of 7
days on payment of such sum as may be prescribed for every hundred words or
fraction thereof. The Central Government has vide notification dated 13.7.88 w.e.f.
15.7.88 prescribed a sum of Re. 1 for every 100 words for taking a copy of the
minutes herein. However, the minute books of Directors meeting cannot be
inspected by the members.
In case of refusal, the company, and every officer of the company shall be liable
to a fine up to Rs. 5000/-. In case of such refusal, the Company Law Board
*
may, by
order, compel an immediate inspection of the minute books or direct that the copy
required shall forthwith be sent to the person requiring it. The minute books of
directors' meetings are not available for inspection, except to directors.
(11) Register of Postal Ballot [Section 192A and the Companies (Passing of the
resolutions by postal ballot) Rules, 2001]
As per section 192A, a listed public company shall, in the case of resolutions
relating to such business as the central government may, by notification, declare to
be conducted only by postal ballot, ,get such resolutions passed by means of a postal
ballot, instead of transacting the business in general meeting of the company. In
respect of resolutions not specified by the Central government, a listed company may
at its discretion get the resolution passed by postal ballot.
Section 192A read with Rule 5(e) Companies (Passing of the resolutions by
postal ballot) Rules, 2001, the scrutiniser shall maintain the register of postal ballot in
which there shall be entered the following:
(a) Particulars in respect of consent or dissent received, including electronic
media
(b) Name and address of shareholders
(c) Folio number
(d) Number of shares held
(e) Nominal value of shares
(f) Whether the shares have voting rights (differential voting or non-voting
rights)
Scrutiniser shall also maintain record for postal ballot which are received in
defaced or mutilated form.
In addition to aforesaid particulars the register of postal ballot should also be in
conformity with the Companies (Passing of the Resolutions by Postal Ballot) Rules,
2001. The Appendix to the rules provides:
(a) method of sending notice,
(b) applicability of rules,
(c) the list of businesses in which the resolutions shall be passed through postal

*
It shall be substituted by Central Government after the commencement of Companies (Second
Amendment) Act, 2002.


ballot,
(d) procedure to be followed for conducting business through postal ballot.
The register, postal ballot forms and all other related records are not available for
inspection.
All postal ballot forms should be authenticated by the Scrutinizer. Entries in the
register should be authenticated by the Scrutinizer.
Register of postal ballot should be kept at the registered office of the company
and will be kept under the safe custody of the scrutiniser till the chairman considers,
approves and signs the minutes of the meeting. Thereafter, the scrutiniser shall
return the register to the company so as to preserve such register safely till the
resolution is given effect to.
The Scrutinizers report and office copies of he notices should be preserved in
good order until the resolution has been implemented or for a period of 10 years,
whichever is later.
(12) Books of Account
Section 209 (1) of the Act states that a company shall maintain such books as
will give a true and fair view in respect of:
(a) all sums of money received and expended by the company and the matters
in respect of which the receipts and expenditures takes place;
(b) all sales and purchases of goods by the company;
(c) all assets and liabilities of the company; and
(d) such particulars regarding utilisation of material or labour or other items of
cost as may be prescribed by the Central Government in respect companies
which are required to keep cost accounts.
These books must be preserved for a minimum period of 8 years immediately
preceding the current year. The books are open to inspection by directors. Under
Section 209A the Registrar and officers authorised by the Central Government and
such officers of the SEBI as may be authorised by it, can inspect the books of
accounts and other books and papers of a company kept under Section 209 of the
Act. These books are normally kept at the registered office of the company, but the
Board of directors may decide to keep all books of account or any of them at a place
other than the registered office provided the Registrar is informed in electronic Form
No. 23AA of the Companies (Central Governments) General Rules and Forms, 1956
within seven days of its decision.
Sub-section (6) of Section 209 provides that the following persons shall be
responsible for keeping the books of accounts and securing the compliance by the
company with the requirement of the Act:
(a) where the company has a managing director or manager, such managing
director or manager and all officers and other employees of the Company;
and
(b) where the company has neither a managing director nor a manager, every
director of the company.


Where a company has a branch office then the books of account can be kept at
such branch also, but properly summarised returns made upto date, at intervals of
not more than three months, have to be sent by the branch office to the company at
registered office or to other place where books of accounts of the company as
mentioned above are maintained. The purpose of this provision is that entire picture
of the accounts of the company be available at one place for those who are
inspecting the books of account.
The books of account together with vouchers, records and papers relevant to any
entry in the books, should be preserved for a period of not less than 8 years
immediately preceding the current accounting year.
The penalty for the contravention of this section is imprisonment upto 6 months
or fine up to Rs. 10,000/- or both to the persons responsible for the default as
indicated in Sub-section (6) of Section 209 of the Act.
(13) Cost Record
As would be seen from sub-para (d) above under the head books of account a
company is required to keep such particulars regarding utilisation of material, labour
or other items of cost as may be prescribed by the Central Government. The Central
Government so far has prescribed the maintenance of such records in some notified
industries like cycles, refrigerators, caustic soda, vanaspati, bulk drugs, cotton
textiles, milk food, fertilizers etc. For this purpose, separate Rules have been framed
for each such industry. The cost records kept under
Sub-section (1)(d) of Section 209 are governed by the same provision relating to
maintenance, preservation, inspection and penalty etc. as are applicable to books of
account.
(14) Register of Particulars of Contracts in which Directors are Interested
(Section 301)
Every company must maintain the register to record the following particulars:
(a) the date of the contract or arrangement in which directors are interested;
(b) the names of the parties to such contracts or arrangements;
(c) the principal terms and conditions thereof;
(d) the date when the contract of this type was placed before the Board of
directors; and
(e) the names of the directors voting for or against the contract or arrangement
and the names of those remaining neutral.
Entries relating to contract or arrangement must be made within seven days from
the date on which the contract or arrangement is approved by the Board wherever
applicable or in respect of other contract within 30 days of the date of the contract.
The previous approval of the Central Government is necessary in case of a
company having paid-up share capital of Rupees one crore or more, entering into
contracts in which directors are concerned or interested as per the proviso to Section
297(1).
This is the only register which requires to be signed by all the directors present at
the Board meeting following the meeting in which the contracts are considered. After


the Board meeting, the register must be completed by showing the names of the
directors who have voted for and against the contracts. The names of the directors
remaining neutral must also be stated.
This register is also required to be maintained at the registered office of the
company and it shall be open for inspection and extract and copies can be taken in
the same manner by the members of the company as in the case of register of
members. If default is made in the maintenance of this register, the company and
every officer in default shall be liable for a fine up to Rs. 5000/- each and for refusal
of inspection etc., fine up to Rs. 500/- per day of default.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register should be preserved permanently and should be kept in the custody
of the secretary of the company or by any other person authorized by the Board for
the purpose.
(15) Register of Directors, etc.
As per Section 303 of the Companies Act, 1956, every company must keep at its
registered office, a Register of Directors, Managing Director, Manager and Secretary.
The necessary particulars regarding name, surname, in the case of a women, her
husbands name, nationality, occupation, usual residential address, managerial
position in other companies and date of birth in the case of a public company, must
be entered in the register. Besides, the names and particulars of directors nominated
have also to be included in the register. Every company, is required to send
electronically a return giving the particulars contained in the register to the Registrar.
Any changes in the managerial personnel should also be intimated to the Registrar.
The time allowed for filing the returns is 30 days and so is for notification of a change
in the managerial personnel. The register can be inspected by members free of
charge, and by outsiders on payment of a fee of
Re. 1. However, there is no provision for supplying of copies or extracts from this
register. Apart from this, the Registrar is also required to keep a register for entering
particulars received in respect of directors. The register is also open to inspection on
payment of prescribed fee. With the launch of MCA-21 project, users shall have
facility for public inspection through electronic means.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register should be preserved permanently and should be kept in the custody
of the secretary of the company or by any other person authorized by the Board for
the purpose.
If default is made in the maintenance of this register, the company and every
officer in default shall be liable for a fine up to Rs. 500/- for every day during which
the default continues.
(16) Register of Directors Shareholdings


This register is to be maintained according to Section 307. Every company shall
keep a register showing, in respect of each director of the company, the number,
description and amount of any shares in, or debentures of the company or any other
body corporate, being the companys subsidiary or holding company, or a subsidiary
of the companys holding company, which are held by him or in trust for him, or of
which he has any right to become the holder whether on payment or not [Section
307(1)].
The purpose of maintenance of this register must be understood. The directors of
the company during the course of their duties come to know about the present and
the future policy of the company and the way in which it is going and it intends to go.
In order to prevent any misuse of the position resulting in any dishonest financial gain
by dealing in the shares of the company, and of its subsidiaries, it is prescribed that
all transactions relating to the Directors shareholdings must be reported to the
company and the same must be entered in the register.
The register containing these particulars must be kept open for inspection by
members and debenture holders for a period of 17 clear days 14 days before the
annual general meeting and 3 days after it (Saturdays and Sundays should be
disregarded for the purpose of counting this period). The register will always be open
to inspection by the Registrar or any person authorised by the Central Government.
Further, the Registrar or the Central Government can call for a copy of this register or
any part thereof. However, members have not been given any such right of getting
copies of this register or extracts thereof.
The most important part of the legal requirements in connection with this register
is that the nature and extent of any interest or right in or over any shares or
debentures recorded in respect of a director in the said register shall, if he so
requires, be indicated in the register. These provisions are applicable to a manager
as they apply to directors.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register should be preserved permanently and should be kept in the custody
of the secretary of the company or by any other person authorized by the Board for
the purpose.
(17) Register of Investment, Loan Made, Guarantee Given or Security Provided to
Other Body Corporate
The Companies (Amendment) Act, 1999 has inserted Section 372A in the
Companies Act, 1956. As per Sub-section (5) of Section 372A of the Companies Act,
1956, every company shall keep a register showing the following particulars in
respect of every investment made in the securities of other bodies corporate, all the
loans given to other bodies corporate, guarantees given and security provided in
connection with loans made by other persons to, or to any other persons by, the
company:
(i) the name of the body corporate;
(ii) the amount, terms and purpose of the investment or loan or security or


guarantee;
(iii) the date on which the investment or loan has been made; and
(iv) the date on which the guarantee has been given or security has been
provided in connection with a loan.
The particulars as above shall be entered in the register in chronological order
within seven days.
The register shall be kept at the registered office of the company and shall be
open to inspection at such office and extracts may be taken therefrom and copies
thereof may be required by any member of the company in the same manner as in
the case of register of members.
If default is made in the maintenance of this register, the company and every
officer of the company who is in default shall be punishable with fine which may
extend to five thousand rupees and also with a further fine which may extend to
rupees five hundred for every day during which the default continues.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register should be preserved permanently and should be kept in the custody
of the secretary of the company or by any other person authorized by the Board for
the purpose.
(18) Register of Renewed and Duplicate Certificates
Under the Companies (Issue of Share Certificates) Rules, 1960, companies are
required to maintain the aforesaid register. The register should contain the following
particulars:
The name(s) of the person(s) to whom the certificates were issued.
The number and date of issue of the share certificates in lieu of which the
new certificates have been issued.
The number and date of the new share certificate and the number of shares
it covers.
The register should be maintained at the registered office of the company. The
register is not open for inspection.
All entries in this register are required to be authenticated by the secretary or any
other person authorised by the Board of directors.
The register should be preserved permanently and should be kept in the custody
of the secretary of the company or by any other person authorized by the Board for
the purpose.
(19) Register of records and documents destroyed [Section 163 and the Companies
(Preservation and Disposal of Records) Rules, 1966]


As per Rule 4 of the Companies (Preservation and Disposal of Records) Rules,
1966, a company shall maintain a register of records and documents destroyed,
which should indicate the following:
(a) particulars of documents destroyed
(b) date and mode of destruction with the initials of secretary or other authorised
person
The register is not open for inspection.
All entries made in the register shall be authenticated by the secretary or such
other person as may be authorised by the Board for the purpose. Contravention of
any of these rules shall be punishable with fine which may extend to five hundred
rupees.
The register should be preserved permanently and should be kept in the custody
of the secretary of the company or by any other person authorized by the Board for
the purpose.
(20) Register of sweat equity shares [Section 79A and the Unlisted Companies
(Issue of Sweat Equity Shares) Rules, 2003]
The company shall maintain a register of sweat equity shares issued under
section 79A in the form specified in Rule 5 of the Unlisted Companies (Issue of Sweat
Equity Shares) Rules, 2003 in which there shall be entered the following particulars:
(a) serial number
(b) folio number or certificate number
(c) date of passing of resolution
(d) date of issue of sweat equity shares
(e) name of the allottee
(f) status of the allottee whether director or employee
(g) reference to entry in register of members
(h) number of sweat equity shares issued
(i) face value of the share
(j) price at which shares issued
(k) total consideration paid by employee / director
(l) lock in period till which date
The register should be open for inspection during the business hours of the
company, subject to such reasonable restrictions as the company may impose by its
articles or in general meeting so that not less than 2 hours in each working day of the
company are allowed for inspection.
Members can inspect the register without payment of any fee. Copies of the
register can be demanded by any person who inspects the register.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.


The register should be preserved for a period of 8 years from the financial year in
which the latest entry is made and should be kept in the custody of the secretary of
the company or by any other person authorized by the Board for the purpose.
5. PROCEDURE FOR KEEPING REGISTERS AND RETURNS AT A PLACE
OTHER THAN THE REGISTERED OFFICE
Pursuant to the provisions of Section 163 of the Companies Act, 1956, the
Register of members/debentureholders, Index of members/debentureholders and
copies of annual returns together with copies of certificates and documents required
to be annexed thereto may, instead of being kept at the registered office of the
company, be kept at any other place within the city, town or village in which the
registered office is situate. The procedure is as under:
1. Call a meeting of the Board of Directors of the company by giving notice to
all the Directors of the Company as per Section 286 of the Act;
2. Hold the Board Meeting and decide
(a)to keep the registers and the returns at the place, other than the Registered
Office of the Company, in the same city, village or town in which the
Registered Office is situate;
(b)to recommend a special resolution to the shareholders of the company to
consider and pass, with or without modifications at the general meeting
(Annual or Extra-ordinary, as the case may be);
(c)to fix up date, time, place and agenda for convening a general meeting; and
(d)to approve draft notice of the general meeting and authorise the company
secretary to sign and issue notice of the meeting in accordance with the
provisions of the Act.
(Specimen of the Board resolution is given at Annexure II).
3. Send notice of the general meeting at least 21 clear days before the date of
meeting.
4. Send three copies of the notice of the meeting to the stock exchanges
where the company is listed.
5. Send a copy of the proposed special resolution to the concerned Registrar
of Companies in advance to the passing of the special resolution.
6. Hold the general meeting and pass the special resolution as proposed or
with such modification(s) as may be considered necessary by not less than
3/4th majority of the members presenting in person by show of hands
(excluding of the proxy holder) and if on poll, by 3/4th majority of votes of the
members including proxy holder present at the meeting entitled to votes.
(Specimen of the special resolution is given at Annexure III)
7. File electronic Form No. 23 with a certified copy of the special resolution and
the Explanatory Statement relating to them with requisite filing fees within 30
days from the date of passing the resolution with the concerned Registrar of
Companies.
8. Paint or affix the name and address of the registered office on the outside of
such office in the language(s) which is in general use in that locality.


(Section 147 of the Act).
6. NON-STATUTORY REGISTERS
Besides the above-detailed statutory registers, which every company is required
to keep, there are quite a few registers which are required to be maintained for the
smooth, systematic and efficient functioning of the company. These registers have
been established over a long period of time on the basis of experience as per
requirements of companies. These registers are given below
1. Directors attendance book.
2. Shareholders/proxies attendance register.
3. Register of documents executed under common seal.
4. Register of share applications and allotments.
5. Register of investors complaint.
6. Register of share transfers/transmissions.
7. Register of Debenture transfers/transmissions.
8. Dividend register.
9. Register of powers of attorney/probate/letters of administration/death
certificates/succession certificates.
10. Register of dividend mandates.
11. Register of Bank A/c particulars.
12. Register of electronic clearing service.
13. Register of fixed assets.
14. Register of Form No. 24AA from directors.
15. Register of nominations.
16. Register of share warrants.
17. Register of proxies.
18. Register of employee stock option.
19. Register under SEBI (Substantial Acquisition of Shares and Takeovers)
Regulation, 1997.
20. Register under SEBI (Prohibition of Insider Trading) Regulations, 1992.
21. Register of inspection.
We shall discuss in detail the need for keeping these registers and the particulars
that are usually entered therein.
(1) Directors attendance book
A company must possess proof or evidence of the fact that at a particular Board
meeting, the directors who were present, absent and who had sought leave of
absence from the Board because of their inability to attend a meeting.
According to clause (g) of Sub-section (1) of Section 283 of the Companies Act,
1956, the office of a director becomes vacant if he absents himself from three
consecutive meetings of the Board of directors, or from all meetings of the Board for


a continuous period of three months, whichever is longer, without obtaining leave of
absence from the Board.
If at any stage, the Board declares vacant the office of any one of its directors,
the company must have a proper record of attendance of its directors at each Board
meeting to establish that the particular director had in fact absented, without leave of
the Board, from the specified number of meetings or from all the meetings for the
specified period of time.
In compliance with the provisions of sub-section (4) of Section 193 of the
Companies Act, 1956, the minutes of each Board meeting contain the names of all
the directors present at the meeting. In fact minutes of each Board meeting
commence with the caption Directors present at the meeting.
Articles of most of the companies contain a provision to the effect that the
directors attending a Board meeting must sign in the book kept by the company for
the purpose. This is based on regulation 71 in Table A of Schedule I to the
Companies Act, 1956, which reads as: Every director present at any meeting of the
Board or a committee thereof shall sign against his name in a book to be kept for that
purpose.
In view of the above provisions, a practice has been established with companies
to keep a directors attendance book, in which attendance of each director is marked
by writing his name below details of the meeting. Signatures of all the directors
attending Board meetings are obtained by the company secretary before the
commencement of the meeting. Attendance of special invitees, like the solicitors,
advocates, advisers, senior managers of the company etc. is also marked in the said
register by writing names and designations.
The Directors attendance book is not open for inspection.
Some companies, instead of keeping a supplementary record in the form of a
separate book for directors attendance, get the signatures of the attending directors
on the pages of the minutes themselves instead of keeping a separate book of
directors attendance. This is done by preparing the first page of minutes of each
Board meeting in advance and at the time of the meeting, directors are requested to
put their signatures against their names. The following specimen will make this clear:
(Name of the Company)
Minutes of the meeting of the Board of directors of the company held
at.................. Hrs. on .................... (day), the ............. day of ................. 2003 at the
registered office of the company at ............................................................ Present:

Sl. No. Name
Designation
Signature

1. Shri ............................................ Managing
Director
2. Shri ............................................ Wholetime
Director


3. Shri ............................................ Director
4. Shri ............................................ Director

Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The book should be preserved for a period of 8 years and should be kept in the
custody of the secretary of the company or by any other person authorized by the
Board for the purpose.
(2) Shareholders/Proxies Attendance Register
For keeping proper record of the members attending every general meeting of a
company, a register referred to as shareholders attendance register is maintained.
The secretarial staff present at the venue of each general meeting of the
company, take the signatures of the members/proxies coming for attending the
meeting, before they enter the meeting hall.
The register has the following columns:
1. Name of the shareholder
2. Folio No. of the shareholder
3. No. of shares registered in his/her name
4. Name of the proxyholder and No. of shares for which proxy is given
5. Signature of the shareholder or proxyholder
The register should be maintained at the registered office of the company.
The register of Shareholders/proxies attendance in relation to a particular
meeting should be open for inspection to every member entitled to vote at that
meeting, during the period beginning 24 hours before the time fixed for the
commencement of the meeting and ending with the conclusion of the meeting.
No person is entitled to copies of the register or any portion thereof.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register should be preserved for a period of 8 years from the date of the
meeting and should be kept in the custody of the secretary of the company or by any
other person authorized by the Board for the purpose.
(3) Register of Documents executed under Common Seal
Section 34 of the Act provides that from the date of incorporation of a company,
the subscribers to its memorandum shall be a body corporate by the name contained
in the memorandum, capable forthwith of exercising all the functions of an
incorporated company, and having perpetual succession and a common seal, but
with such liability on the part of the members to contribute to the assets of the
company in the event of its being wound up, as is mentioned in the Act.


Underlining the importance of the common seal of a company, Section 48 (1) of
the Act lays down that a company may, by writing under its common seal, empower
any person, either generally or in respect of any specified matters, as its attorney, to
execute deeds on its behalf in any place either in or outside India.
Sub-section (2) stipulates that a deed signed by such an attorney on behalf of the
company and under his seal where sealing is required, shall bind the company and
have the same effect as if it were under its common seal.
Whether attestation required for affixing common seal
In view of the provisions of Section 48 of the Act above, the affixing of the
common seal of a company on the authority of a Board resolution, on a document is
sufficient without its being witnessed. However, articles of association of most of the
companies contain an article describing the mode and method of affixing common
seal of the company, which also makes attestation by one or two directors and the
company secretary, compulsory. A standard wording is The common seal of the
company shall be affixed on a document on the authority of a Board resolution and in
the presence of one or two directors and the company secretary, who shall also sign
the same.
Where the articles have such a provision, the signatures of the directors are not
an attestation in the ordinary sense, but a part of the execution of the deed. [Shears
v. Jacob, z(1866) L.R.1 CP 513; Deffel v. White, (1866) LR 2 CP 144.] Without such
signatures, the execution is not complete, but there is no direct judicial decision to
this effect.
With the forgoing importance of Common Seal, it should be kept in safe custody
and its renewal/replacement should be through Board meeting.
Maintenance of the Register of Sealed Documents
In view of the importance of the common seal of a company, companies maintain
a register of sealed documents, on which the following details of the documents on
which the common seal of the company is affixed, are usually entered:
1. Serial number and date of the entry;
2. Particulars of the document on which common seal has been affixed;
3. Date of affixing the seal;
4. Name(s) of the director(s)/company secretary, in whose presence the seal
has been affixed; and
5. Initials/signatures of the persons signing and making entries in the register
and maintaining the register.
This Register should be maintained at the registered office of the company.
The register is not open for inspection.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.


The register should be preserved permanently and should be kept in the custody
of the secretary of the company or by any other person authorized by the Board for
the purpose.
(4) Register of Share Applications and Allotment
This register is usually prepared by the registrar to the public issue of a company,
who feeds in their computers, each and every piece of information relating to all the
applications for shares, which are received by the company in response to the
prospectus issued by it, during the entire process of public issue.
This register, when complete, is placed before the Board of directors of a
company at its meeting which is convened and held for allotment of shares. The
Board considers all the particulars entered in the register alongwith the share
applications and other relevant records, and passes a resolution for allotment of
shares giving a reference of the register in the resolution.
The register usually contains the following columns:
1. Serial No. allotted to the application.
2. Name of the applicant/allottee.
3. Postal address of the applicant/allottee.
4. Occupation, if any, of the applicant/allottee.
5. Fathers/husbands name of the applicant/allottee.
6. No. of shares applied for.
7. No. of shares allotted.
8. Amount received with the application.
9. Amount appropriated on allotment.
10. Amount to be refunded. A separate register/list of persons entitled for refund
or details of refund made, Refund order no. and date.
11. Register of members folio No. allotted to each allottee.
12. Total number of shares on each page (allotted).
13. At the end of the register are given:
(i)total number of allottees, and
(ii)cumulative total of the number of shares allotted with distinctive numbers;
(iii)total amount (a) collected, (b) adjusted on allotment (c) Refund amount (d)
amount due on allotment.
Note: Each page of the register is initialled and the last page is signed by the
chairman of the meeting with date of the Board meeting. The company secretary also
signs below the signature of the chairman.
The register should be maintained at the registered office of the company.
The register should be open for inspection during the business hours of the
company, subject to such reasonable restrictions as the company may impose by its
articles or in general meeting so that not less than 2 hours in each working day of the
company are allowed for inspection.


Members or debenture holders can inspect the register without payment of any
fee.
No person is entitled to copies of the register or any portion thereof.
Various volumes of this register are to be preserved for at least eight years.
However it is permanent record for a company.
(5) Register of Investors Complaints
Every company should maintain a register of investors complaints and enter
therein the particulars of complaints received from depositors and holders of
securities of the company.
The register should contain the following particulars in respect of each complaint
received: date of receipt of complaint; nature of complaint; name of the person
lodging the complaint; deposit receipt number or folio number/client ID number; date
of interim reply, if any; date on which complaint was fully satisfied; time taken for
resolving the complaint.
Entries in the register should be made forthwith in chronological order of date of
receipt of the complaint.
The register should be maintained at the registered office of the company or,
where the company has appointed a Registrar and Transfer Agent (RTA), at the
office of RTA.
The register should be open for inspection during the business hours of the
company, subject to such reasonable restrictions as the company may impose by its
articles or in general meeting so that not less than 2 hours in each working day of the
company are allowed for inspection.
Any investor can inspect the register without payment of any fee.
No person is entitled to copies of the register or any portion thereof.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register should be preserved for a period of 8 years from the date of the last
entry and should be kept in the custody of the secretary of the company or any other
person authorised by the Board for the purpose.
(6) Register of share transfer/transmissions
According to the Companies Act, 1956, every transfer/transmission lodged with
the company must be processed and the relevant share certificates duly endorsed
must be sent to the transferees within two months. However, those companies whose
securities are listed on one or more recognised stock exchanges, are required to
complete this process including despatch of share certificates duly transferred within
thirty days of the lodgement of the transfer deed.
Every time share transfers/transmissions are received in the office of a company


or in the office of the Share Transfer Agents/Registrar of a Companies, their details
are entered in this register and on specific intervals, this is placed before the Board or
a Committee of the Board looking after the share transfer/ transmission work, which
is pursued alongwith the share transfer/transmission applications and the relevant
share certificates. When the registration of transfer/transmission of the shares is
approved by the Board or the Committee or Share Transfer Agent or Company
Secretary if authorised by the Board of Directors, the register is initialled by the
chairman of the meeting and the last page of the register is signed with date by the
chairman of the Board/Committee or the person authorised in this regard.
Usual columns in this register are:
1. Serial No. of share transfer/transmission.
2. Date of registration of transfer.
3. Date of Board Meeting at which the transfer was passed.
4. Name and address of transferor.
5. The amount paid on each shares, if shares are partly paid.
6. The number of shares transferred with distinctive numbers.
7. The name, address and description of transferee.
The register is not open for inspection
The register of should be preserved for a period of 8 years from the date of the
last entry and should be kept in the custody of the secretary of the company or by
any other person authorized by the Board for the purpose.
(7) Register of Transfer/Transmission of Debentures
Every company that allots debentures should maintain a register of debenture
transfer/transmission and enter therein particulars of every debenture transferred/
transmitted.
The register should contain the following particulars: transfer serial number; date
of lodgement of transfer application; total number of debentures; consideration;
transferors name and folio number; number of debentures; certificate number(s),
distinctive numbers; transferees name and folio number, address, occupation,
fathers/husbands name; date of Board/committee resolution approving transfer; new
certificate number, if any; date of dispatch of the certificate.
In case of transmission, transmission serial number; date of lodgement of
transmission etc.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register should be preserved permanently and should be kept in the custody
of the secretary of the company or by any other person authorized by the Board for
the purpose.


(8) Dividend register
Whenever a company pays dividend, interim or final, this register is used. Details
of every dividend are entered in the register. This register is to be maintained as a
permanent record. The register contains the following columns:
1. Name of the company.
2. Registered office address of the company.
3. On top of the register a label is affixed with its title written on it, e.g.,
(a)Name of the company
(b)Registered Office address of the Company
(c)Register of Dividend/Interim Dividend for the year/period
4. Name of the shareholder
5. Register of members Folio No.
6. Number of shares held
7. Amount of dividend/interim dividend payable
Remarks column for initials of the authenticating officer of the company.
Entries in the register should be made within 7 working days of the date of
payment of dividend.
The register should be maintained at the registered office of the company.
The register is not open for inspection.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature thereto.
The register should be preserved for a period of 8 years from the date of
payment and should be kept in the custody of the secretary of the company or by any
other person authorized by the Board for the purpose.
Dividend reconciliation statement should be preserved as long as any dividend
remains unclaimed.
(9) Register of powers of attorney/probate/letters of administration/death
certificates/succession certificates
This register is meant to register certain legal representations viz.,
(i) power of attorney executed by a member of the company on a non-judicial
stamp paper of the appropriate value as is required in the State wherein the
same is executed in favour of another person authorising him to deal with
the company on his behalf;
(ii) probate, which is a duly certified copy of the Will of a deceased member of
the company, and is sent to the company by the legatee of the Will, with a
request that the company to proceed on the basis of the contents of the
probate in respect of the shares held by the deceased member;
(iii) letter of administration is a term broadly applied to denote the authorisation


issued in favour of a person appointed by an authority of law to take charge
of and manage the estate of another person. In the case of a company, this
estate is the shares registered in the name of a member of the company.
The holder of a letter of administration requests the company to register his
authority in respect of the shares held by the registered member of the
company; and
(iv) death certificate is a document issued by the Registrar of Births and Deaths
which certifies the time, date and place of death of a person. The heirs of a
deceased member obtain such a certificate in order to have the shares
registered in the name of the deceased member transmitted in their names.
On receipt of the above-mentioned documents by the company, their particulars
are entered in the register kept for the purpose. A registration number is allocated to
each such document, which is communicated to the person from whom such a
request has been received, so that if on the basis of the same document a share
transfer/transmission is lodged with the company in future and the person who has
lodged the same, quotes the registration number of the document allotted to it by the
company, he need not send the original document to the company again and again.
For the first time, such a document is sent to the company along with a
photocopy of the same. The photocopy of the document is certified by a responsible
officer of the company, preferably by the company secretary, and the original is
returned to the sender along with a covering note intimating that the document has
been registered in the office of the company under a certain registration number and
all future correspondence on the strength of the same document should bear a
reference of the registration number of the document and the original need not be
sent to the company.
Usual columns in the register are:
1. Serial No. of registration of the document
2. Name and address of the person who has lodged the document with the
company for registration
3. Type of document, its No. and date
4. Issuing authority
5. Name, Folio No. and address of the shareholder to whom the document
pertains and also number of shares.
Any other important information may be recorded in the register. This is also a
very important register and must be preserved as a permanent record.
(10) Register of Dividend Mandates
Section 206(1)(a) of the Companies Act, 1956, lays down that no dividend shall
be paid by a company in respect of any share therein, except, inter alia, to the
registered holder of such share or to his order or to his bankers.
Pursuant to the above provision, a member of a company may write to the
company and request that the dividends on the shares, which are registered in his
name, be paid to a particular person, whose name, address, specimen signature and
other required particulars be communicated to the company. This request by a


shareholder is known as dividend mandate.
As and when such dividend mandates are received by a company, their
particulars are entered in the register of dividend mandates and at the time of mailing
of the dividend warrants, this register is referred to and the dividend warrants of the
requesting members are mailed to their mandates.
The following columns may be made in this register:
1. Name, address and folio No. of the member
2. Number and type of shares (with their distinctive numbers) registered in the
name of the member
3. Name, full postal address of the person to whom the dividend warrant is
required to be sent.
This register is to be maintained on continuous basis. The company has to
update this register on regular basis with the request for variations in earlier mandate
cancellation thereof and registration of new mandate.
(11) Register of Bank A/c Particulars
In order to avoid fraudulent encashment of dividend/interest warrants, the Bank
account particulars i.e. the Bank A/c No. (saving/current A/c), name of the bank,
Branch address and folio No. are being obtained from the shareholders/debenture
holders/depositors. These particulars are incorporated on the warrant in addition to
the name of payee. Such practice discourage fraudulent practice of encashing
warrants by other than payees. The company has to keep and maintain this register
in addition to the Register of mandate. These particulars are desirable to be
incorporated in case of payment is to be made to mandatee. In case of mandatee,
the bank A/c particulars of the mandatee are to be collected and incorporated in the
dividend/interest warrant. This register is required to be updated regularly and
annually. The columns are the following:-
1. Serial No., 2. Date, 3. Folio No., 4. Name of Shareholder/debenture holder/
depositor, 5. Bank A/c no., 6. Banks Name, 7. Branch address.
(12) Register of Electronic Clearing Service
For better services to and protecting interest of corporate investors, the Reserve
Bank of India has introduced a new method of payment of dividend/ interest through
Electronic Clearing Service (ECS). Under this system, the payee can collect
dividend/interest directly through his/her bank account rather than receiving them
through post. His/her bank account is directly credited through ECS and an advice
thereof would be issued by paying company after the transaction is effected. Initially
this mechanism covers each of the transactions upto Rs. 1,00,000 and is presently
available at sixteen selected centres. The benefits of this scheme are
1. Instant credit to the investors bank A/c at no extra cost;
2. Exposure to delays in postal service avoided;
3. No loss in transit of the instrument avoids issue of duplicate instrument;
4. Prompt credit of dividend/interest is assured;


5. No chance of fraudulent encashment of instrument.
A company which provides such facility to its investors, shall have to keep and
maintain a separate register for the investors who opts this ECS mechanism. Its
columns are the same which are given for the Register of Bank A/c Particulars.
(13) Register of Fixed Assets
Under the Companies (Auditors Report) Order 2003 (CARO), the Auditors have
to include a statement in their report which inter alia specify whether the company is
maintaining proper records to show full particulars including quantitative details and
situation of fixed assets. Hence, this register is a statutory register. Each company
should keep and maintain this register. Maintenance of such register shall help the
management to fix accountability and detect misuse, misappropriation and fraud
about the assets of the company. The following may be the columns of this register:
1. Serial No., 2. Date of entry, 3. Particulars of assets, 4. Quantity, 5. Cost price,
6. Date of purchase, 7. Situation, 8. Details of disposal, 9. Remarks.
(14) Register of Form No. 24AA from Directors
Under Section 299 of the Companies Act 1956, every director of a company has
to give a general notice in Form No. 24AA prescribed under the Companies (Central
Government's) General Rules and Forms 1956, to the Board of Directors of the
Company to the effect that he is a director or a member of a specified body corporate
or is a member of a specified firm and is to be regarded as concerned or interested in
contracts or arrangements with them. This form is to be given initially at the time of
appointment and also it is required to be renewed every year. This notice expires at
the end of the financial year in which it is given. It is to be renewed every year before
it expires.
Failure to comply with the provisions of this section by a director, makes him
punishable with fine which may extend to fifty thousand rupees. Besides, the office of
such defaulting director shall become vacant under Section 283(1) (i) of the
Companies Act, 1956.
In view of the above, a company secretary has to keep and maintain this register
as to ascertain the director whose office shall fall vacant and who shall be punishable
for non-compliance. Its columns may be the following:
1. Serial No. 2. Name of director, 3. Date of appointment, 4. Details of
Form 24AA received (i) Date of receipt, (ii) Date of Board meeting where it was read
and recorded, (iii) Date of validity.
(15) Register of Nomination
Under Section 109A of the Companies Act 1956, every holder of shares in, or
holder of debentures, of a company may, at any time, nominate in the prescribed
manner, a person to whom his shares in, or debentures of, the company shall vest in
the event of his death.
Under Rules 4CCC and 5D of the Companies (Central Governments) General
Rules and Forms, 1956, Form No. 2B has been prescribed.


In view of the above, every company should keep and maintain a Register of
Nominees for each class of shares, and debentures separately. Simultaneously, the
details of the nominee should be recorded in the respective folio of the Register of
Members and Register of Debenture holders. The following may be the columns of
this register:
1. Serial No., 2. Date of entry, 3. Date of receipt of Nomination Form, 4. Name &
address of nominee, 5. Date of birth (minor), 6. Name & address of guardian of
nominee (minor), 7. No. of shares/debentures, 8. Remarks.
This register is required to be maintained permanently.
(16) Register of Share Warrants
When a company issues share warrants, this register is required to be
maintained. The name of the warrant holder is struck off from the register of members
after making an appropriate reference there. His name and other relevant particulars
are entered in the register of share warrants.
The register must have, inter alia, the following columns:
1. Name of share warrant holder
2. Address of share warrant holder
3. No. and date of issue of share warrant
4. His register of members folio no.
5. No. of shares, with distinctive numbers, in lieu whereof share warrants have
been issued
6. Remarks (for any other information and for signature of the Company
Secretary, who must authenticate each entry in the register).
(17) Register of Proxies
For keeping record of valid proxies received for attending a general meeting of a
company, which may be required at any point of time, this register is maintained for
each meeting. It has the following columns:
1. Name and address of the member whom the proxy represents.
2. No. and type of shares registered in the name of the member, with
distinctive numbers.
3. Folio No. of the member.
4. Name of the proxy.
5. No. of shares for which proxy is given.
The register should be maintained at the registered office of the company.
The register of proxies in relation to a particular meeting should be open for
inspection to every member entitled to vote at that meeting, during the period
beginning 24 hours before the time fixed for the commencement of the meeting and
ending with the conclusion of the meeting.
No person is entitled to copies of the register or any portion thereof.


Entries in the register should be authenticated by the secretary of the company
or by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register of proxies should be preserved for a period of 8 years from the date
of the meeting and should be kept in the custody of the secretary of the company or
by any other person authorized by the Board for the purpose.
(18) Register of Employee Stock Options
Every company which issues employee stock options should maintain a register
of employee stock options and enter therein particulars of options granted.
The register should contain the following particulars in relation to each scheme:
date of special resolution approving the scheme; category of employees entitled to
participate in the scheme; total number of options granted; market price per share on
the date of grant; name of the grantee; number of options granted; vesting period;
options vested; exercise period; options exercised; exercise price and market price
per share; number of shares arising as a result of exercise of option; options lapsed,
if any; any variation of terms of the scheme; date of special resolution passed for
variation; lock-in-period; money realized by exercise of options; total number of
options in force; amount adjusted towards allotment and amount refunded.
The register should be maintained at the registered office of the company or at
such other place as the Board may decide.
The register should be open for inspection during the business hours of the
company, subject to such reasonable restrictions as the company may impose by its
articles or in general meeting so that not less than 2 hours in each working day of the
company are allowed for inspection.
Members can inspect the register without payment of any fee. No person is
entitled to copies of the register or any portion thereof.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register of should be preserved for a period of 15 years from the date of
exercise of options and should be kept in the custody of the secretary of the company
or by any other person authorized by the Board for the purpose.
(19) Register in Respect of SEBI (Substantial Acquisition of Shares and Takeover)
Regulation, 1997
Every listed company should maintain a register in the format prescribed by SEBI
(Substantial Acquisition of Shares and Takeover) Regulation, 1997.
The register should contain the following particulars: names of persons holding
more than the specified percentage of voting rights or number of shares, names of
the promoter and every person having control over a company and names of the
persons acting in concert, number of shares/voting rights held by each of them and
the total number and percentage of the shares/voting rights held by them to the total


paid-up capital of the target company.
The register should be maintained at the registered office of the company.
The register should be open for inspection during the business hours of the
company, subject to such reasonable restrictions as the company may impose by its
articles or in general meeting so that not less than 2 hours in each working day of the
company are allowed for inspection. Members can inspect the register without
payment of any fee. No person is entitled to copies of the register or any portion
thereof.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register of should be preserved permanently and should be kept in the
custody of the secretary of the company or by any other person authorized by the
Board for the purpose.
(20) Register in Respect of SEBI (Prohibition of Insider Trading) Regulation, 1992
Every listed company should maintain year-wise, a register in terms of SEBI
(Prohibition of Insider Trading) Regulation, 1992.
The register should contain the following particulars: name of the companies
officer; date of initial and continual disclosures made by directors, officers and
designated employees; disclosures made by the company to the Stock Exchange;
date of opening and closing of trading window; whether in ESOSs exercise of option
was allowed when trading window was closed; date of application made by
director/designated employees/relatives of director to the compliance officer for pre-
clearance of trades; date of approval; date of clearance of trade(s) or reasons for
non-clearance of trade(s); reasons for waiver of holding period of 30 days.
Entries in the register should be made forthwith.
The register should be maintained at the registered office of the company or at
such other place as the Board may decide.
The register should be open for inspection during the business hours of the
company, subject to such reasonable restrictions as the company may impose by its
articles or in general meeting so that not less than 2 hours in each working day of the
company are allowed for inspection.
Members can inspect the register without payment of any fee. No person is
entitled to copies of the register or any portion thereof.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register of should be preserved for a period of 5 years and should be kept in
the custody of the secretary of the company or by any other person authorized by the
Board for the purpose.
(21) Register of Inspection


Every company should, from the date of its registration, maintain a register of
inspection in which particulars of inspection of registers or records of the company
should be entered.
The register should contain the following particulars in respect of each inspection:
date and time of inspection; name and address of the person who inspected the
registers and records; particulars of registers and records inspected; copies, if any,
taken; fees, if any, received; and signature of the person who inspected the registers
and records.
Entries in the register should be made forthwith.
The register should be maintained at the registered office of the company.
The register is not open for inspection.
Entries in the register should be authenticated by the secretary of the company or
by any other person authorized by the Board for the purpose, by appending his
signature to each entry.
The register of should be preserved for a period of 8 years and should be kept in
the custody of the secretary of the company or by any other person authorized by the
Board for the purpose.
7. FILING OF VARIOUS FORMS/RETURNS WITH REGISTRAR OF COMPANIES
(A) Forms, Returns etc. filed with ROC for Registration
The following forms etc. prescribed under the Companies Act, 1956 and the
Companies (Central Governments) General Rules and Forms, 1956, are required to
be filed with the Registrar of Companies for the purpose of getting the company
incorporated:
Documents:
(i) A printed copy of memorandum and articles of association duly stamped,
signed and dated.
It may be noted that in the case of a public limited company, registration of
articles of association with the Registrar is optional, but in the case of a
private limited company, registration of articles of association with the
Registrar is compulsory [Refer Section 3(1) (iii)] of the Companies Act,
1956].
(ii) Any agreement that the company on incorporation proposes to enter into
with any person for appointment as its managing director or whole-time
director or manager.
(iii) General power of attorney on a non-judicial stamp paper of the appropriate
value as applicable in the State in which the document is executed, duly
signed by all the subscribers to the memorandum, in favour of one of them
or any other person, for making alterations etc., on their behalf, in the
memorandum and articles of association and other documents/forms filed
with the Registrar of Companies, if suggested by the Registrar.


(iv) A certified true copy of the letter received from the Registrar of Companies
intimating about the name availability.
Forms:
(i) A statutory declaration in electronic Form No. 1 as prescribed in the
Companies (Central Governments) General Rules and Forms, 1956,
executed by an advocate of the Supreme Court or of a High Court, an
attorney or a pleader entitled to appear before a High Court, or a secretary,
or a chartered accountant in practice in India, who is engaged in the
formation of the company, or by a person named in the articles as a director,
manager, or secretary of the company, to the effect that all the requirements
of the Act and the rules thereunder have been complied with in respect of
registration of the company and matters precedent and incidental thereto
[Refer Section 33 (2)].
(ii) Electronic Form No. 18 containing notice of situation of the registered office
of the company.
(iii) Electronic Form No. 32 containing prescribed particulars of directors
including Managing/Whole-time Director/Manager/Secretary, if any as well
as consent to act as director of the company, by each proposed director
including the Managing/Wholetime Director, if any. This form also contains
an undertaking to take and pay for the qualification shares, if any, prescribed
in the articles of the company.
It may be noted that it is not a statutory requirement to file the above-mentioned
forms except electronic Form No. 1 alongwith the memorandum and articles of
association for registration of a company. However, it has become a practice with the
Registrars to insist on filing these forms along with the memorandum and articles for
registration of the company.
(B) Filing of Various Forms/Returns with the ROC after Incorporation
Every company registered under the Companies Act, 1956, is required by various
provisions of the Act to file, deliver, submit to the Registrar of Companies various
types of notices, returns, reports, copies of resolutions and other documents,
subsequent to their incorporation. (For a list of such form, returns, etc. please see
Annexure VI).
Special Resolutions for Registration with ROC
Every company is required to file with the ROC, electronic Form No. 23 along
with a certified copy of every resolution passed and explanatory statement relating
thereto for the following purposes and under the sections given against each, within
thirty days of the passing of the resolution, along with the filing fee:
altering the provisions of the companys memorandum of association, to
change the objects clause in the companys memorandum of association
and to change the place of a companys registered office from one state to
another Section 17;
for changing the name of a company Section 21;


for changing the name of a charitable or other non-profit company by
omitting the word Limited or the words Private Limited Section 25(3);
for altering the articles of association of a company Section 31;
for authorising buy-back of securities of the company;
for authorising issue of sweat equity shares;
for issuing shares without pre-emptive rights [Section 81(1)] to non-
members [Section 81(1-A)] or to convert loans or debentures into shares
Section 81(3);
for determining that any portion of the share capital of a company not
already called up shall not be called up except in the event of, and for the
purpose of, its winding up Section 99;
for reduction of share capital of a company, subject to authorisation by its
articles and confirmation by Court Section 100;
for approval of variation of rights of special classes of shares in a company
Section 106;
for removal of the registered office of a company outside the local limits of
the village, town or city in which it is situated Section 146;
for commencement of any new line of business by a company
Section 147(2A);
for keeping registers and returns at any other place within the city, town or
village in which the registered office of a company is situated
Section 163;
for authorising the payment of interest on the paid-up amount of share
capital raised for the purpose of defraying the expenses of construction of
any works or building or for the provision of any plant that cannot be made
profitable for a long period of time Section 208(2);
for appointing auditors in the case of a company in which the Central and/or
any State Government, and/or public financial institution or institutions
together hold twenty-five per cent or more of its subscribed capital Section
224A;
for requesting the Government to investigate the affairs of a company and
for appointing inspectors for the purpose Section 237;
for appointing sole selling or buying or purchasing agent in the case of
companies having paid-up share capital of rupees fifty lakhs or more
Section 294AA;
for fixing remuneration of directors other than managing director where the
articles require such a resolution Section 309(1);
for sanctioning remuneration to directors other than the managing or whole-
time director on percentage of profit basis in certain instances
Section 309(4) and renewal under Sub-section (7);
for according consent to a director or his relative or partner or firm or private
company holding an office or place of profit, except that of the managing
director, manager, banker or trustee for debenture-holders of the company
Section 314;


for making the liability of any director or manager unlimited, where so
authorised by the articles Section 323;
for making loans or acquiring securities of other bodies corporate or
providing guarantee or security to other companies beyond the prescribed
overall limit of sixty per cent of the companys paid up share capital and free
reserves or hundred per cent of free reserves, whichever is higher Section
372A;
for applying to a Court for winding up of the company Section 433(a);
for winding up of a company voluntarily Section 484(1)(b);
for winding the company by arrangement made under Section 517;
for various other matters pertaining to the winding up of a company
Sections 433(a), 494(1)(b), 507, 512(1), 546(1)(b), 550(1)(b);
for altering the constitution of a company registered under part IX of the Act
Section 579(1).
8. PREPARATION AND FILING OF RETURNS WITH THE REGISTRAR OF
COMPANIES
As stated above, a company has to file certain returns and statements with the
Registrar of Companies from time to time. These returns can be classified into two
categories, namely:
(a) Returns on occurrence of certain events.
(b) Periodical Returns.
The first type of returns are those returns which are required to be filed as and
when contingency arises. Whereas periodical returns have to be filed after a specified
period. Among the first type of returns the important ones are, the creation of charge,
return of allotment, change of directors, change in the registered office, passing of a
special resolution, etc. (The classification of returns is given for facility of
understanding and has no legal or statutory basis).
Periodical Returns
There are three important periodical returns. These are:
(i) Annual Return under Section 159 or 160,
(ii) Balance Sheet and Profit and Loss Account under Section 220; and
(iii) Compliance Certificate under Section 383A.
(1) Annual Return
Sections 159 to 161 deal with annual return. Section 159 provides that every
company having a share capital must within 60 days from the day on which each of
the annual general meeting is held, prepare and file with the Registrar (annual return
contains the particulars specified in Part I of Schedule V), regarding:
(a) registration details
(b) its registered office
(c) the register of its members
(d) the register of its debenture holders


(e) its shares and debentures
(f) its indebtedness
(g) its members and debenture holders, past and present
(h) its directors, managing director, manager and secretary, past and present.
In the case of big companies, preparation of correct annual return is a crucial
task. Help of Electronic Data Processing Section of the Company must be taken. The
Register of members is usually maintained alphabetically. If the company is
maintaining off and on book which contains transactions of additions and
deductions during the year, there should not be any difficulty in reconciling the
number of shares stated in the new annual return.
The contents of annual return are to be given in the form prescribed in Part II
of Schedule V to the Companies Act, 1956. New electronic form no. 20B has
been notified, for filing annual return by a company having share capital
and electronic form no. 21A for filing annual return by a company not having share
capital.
The annual return filed with the Registrar must be signed both by a director and
by the manager or secretary of the company or where there is no manager or
secretary, by two directors of the company, one of whom shall be the managing
director where there is one. In case of listed company, it shall also be signed by a
secretary in whole-time practice.
As per provisions of Section 163, copies of all the annual returns prepared by the
company under Sections 159 and 160 together with the documents required to be
annexed thereto under Sections 160 and 161 shall be kept at registered office of the
company and are to be made available for the inspection of the members of the
company and copies thereof supplied to them on request in the same manner as
those of Register of members highlighted earlier in this study under the main head
Statutory Registers Elaborated.
If the Annual Return is not kept, prepared or filed, the company and every officer
in default shall be punishable with a fine of Rs. 500/- per day during which the default
continues. Where inspection is refused or extracts and copies are not supplied, the
fine would be up to Rs. 500/- per day.
Balance Sheet and Profit and Loss Account
As per the provisions of Section 210 and 211 read with Schedule VI, a company
has to prepare a Balance Sheet and Profit and Loss Account, get it audited and place
it before the shareholders for adoption in the annual general meeting which is
required to be held as per provisions of Section 166. Under Section 220, three copies
of the Balance Sheet and Profit and Loss Account, Auditors Report and Directors
Report have to be filed within 30 days of the date on which the balance sheet and
profit and loss are laid at the annual general meeting (A.G.M.) or if the A.G.M. is not
held, within 30 days of the last day on which the same meeting ought to have been
held.
New electronic forms no. 23AC and 23ACA has been notified w.e.f. 10.2.2006,
for filing balance sheet and profit & loss account respectively.


(iii) Compliance Certificate
As per the newly inserted proviso to Sub-section (1) of Section 383A of the Act
every company not required to employ a whole-time secretary under Sub-section (1)
and having a paid-up share capital of ten lakh rupees or more shall file with the
Registrar, a certificate from a secretary in whole-time practice in such form and within
such time and subject to such conditions as may be prescribed, as to whether the
company has complied with all the provisions of this Act and a copy of such
certificate shall be attached with Boards report referred to in Section 217. In terms of
this proviso, the Central Government has prescribed the Companies (Compliance
Certificate) Rules, 2001 for issue of Compliance Certificate by a secretary in whole-
time practice. These rules have come into force w.e.f. 1st February, 2001. Sub-rule
(2) of Rule 3 of aforesaid rules specifies that the compliance certificate shall be in
form appended to the rules or as near thereto as circumstances admit. Certain
amount of flexibility in the form has, therefore, been provided which means that if any
information required to be given in the certificate does not fit into the format,
necessary modifications may be made in the format by secretary in whole-time
practice. A company secretary in practice shall be deemed to be guilty of professional
misconduct if he issues compliance certificate to more than 50 companies in a
calendar year commencing from 01.01.03. In case of firm of company secretaries, the
ceiling of 50 companies shall apply to each partner of the firm who is so entitled to
sign the certificate. [Notification No. 1001/1/DR dated 27.02.03 issued by ICSI].
Every company to which these rules apply is required to file with the Registrar the
compliance certificate within 30 days from the date on which its annual general
meeting is held or from its due date. In case of adjourned annual general meeting this
certificate should be filed with the ROC within 30 days from the date on which such
adjourned general meeting was held provided such adjourned meeting is held within
the statutory limit. New electronic Form No. 66 has been notified, for filing compliance
certificate and the same needs to be filed with ROC electronically by converting the
compliance certificate into 'pdf format'.
Sub-rule (3) of Rule 3 provides that the secretary for the purpose of issue of
compliance certificate shall have right to access at all times to the registers, books,
papers, documents and records of the company, whether kept in pursuance of the
Act or any other Act or otherwise or whether kept at the registered office of the
company or elsewhere. He shall also be entitled to require from the officers or agents
of the company, such information and explanations as he may think necessary for the
purpose of such certificate.
Where a company fails to comply with the requirement of filing the compliance
certificate with the ROC or attaching the copy of such certificate with Boards report,
in terms of Sub-section (1A) of Section 383A, the company, and every officer of the
company who is in default shall be punishable with fine which may extend to Rs. 500
for every day during which the default continues.
Returns on Occurrence of Certain Events
A Detailed list of the returns and other documents which are required to be filed
with the Registrar of Companies along with the period upto which these are to be filed
and the relevant sections has been given as Annexure I.


We shall discuss here about the returns required to be filed under the Companies
Act:
(a) Returns as to Allotment
By virtue of Section 75 of the Act, whenever a company having a share capital
makes any allotment of its shares, it must, within 30 days, file with the Registrar a
return of allotment stating the number and nominal amount of the shares comprising
the allotment, the names, addresses and occupations of the allottees and the
amount, if any, paid or due on each share. In case of shares allotted for consideration
other than cash, all particulars must be entered in the return. The return must also
state in case of bonus shares the number and nominal amount of such shares, and
the names, addresses, etc., of the allottees and a copy of the resolution authorising
the issue of such shares. The return is to be filed in electronic Form No. 2 of the
Companies (Central Governments) General Rules and Forms, 1956. If the shares
are allotted for consideration other than cash, and there is no written agreement, then
electronic Form No. 3 is also required to be filed giving full details of the
arrangements.
(b) Returns of Directors
A company is required to maintain a register of its directors, managing director,
manager and secretary to comply with the provisions of Section 303. This section
further provides that the company must send to the Registrar a return in the
prescribed form containing the particulars specified in the said register and a notice,
in the prescribed form of any change among its directors, managing director,
manager or secretary, specifying the date of the change. The return must be filed and
the other documents be sent within 30 days from the date of the appointment of the
first directors of the company and within thirty days from the date of any change in
the composition of the Board of directors, in electronic Form No. 32 of the Companies
(Central Governments) General Rules and Forms, 1956 and also in respect of
change in the appointment of Manager, and Secretary if any.
(c) Return as to Alteration of Memorandum
When a company alters its memorandum by special resolution for which
confirmation by the Company Law Board on the alteration is required, then the
company must file within 3 months, a certified copy of the order of the Company Law
Board together with a printed copy of the memorandum as altered, with the Registrar
who shall register the same and certify the registration within one month from the
date of filing such documents. This has to be filed in electronic Form No. 21. Students
shall also note that as per Companies (Amendment) Act, 1996, the alteration of the
objects can be made by a special resolution and no confirmation by CLB is required.
(d) Return as to Alteration of Share Capital
A company, if authorised by its articles, can alter its share capital in the manner
laid down in the Act. When a company does alter its share capital, it must, within 30
days after doing so, give notice to the Registrar in electronic Form No. 5 of the
Companies (Central Governments) General Rules and Forms, 1956.
Increase in the authorised share capital of the company or of members requires a
resolution of the shareholders and electronic Form No. 5 is to be filed with the


Registrar of Companies along with filing fee based on the increased share capital
within 30 days of passing the resolution. In case the company wants to issue bonus
shares and the authorised share capital is, required to be increased to implement the
decision, it can be done in the same General Meeting at which issue of bonus shares
is approved. First the resolution for increase in the authorised share capital will be
required to be passed and thereafter resolution for issue of bonus shares out of the
increased authorised share capital can be passed.
(e) Return of Charges
Under Section 125 and Section 127, the following charges require registration
with the Registrar of Companies:
a charge for the purpose of securing any issue of debentures;
a charge on uncalled capital of the company;
a charge of any immovable property, wherever situate, or any interest
therein;
a charge on any book debts of the company;
a charge, not being a pledge, on any movable property of the company;
a floating charge on the undertaking or any property of the company
including stock in trade;
a charge on calls made but not paid;
property acquired which is already subject to charge;
a charge on a ship or any share in a ship;
a charge on goodwill, on a patent or a licence under a patent, on a trade
mark, or on a copyright or a licence under a copyright.
All modifications of charges are also required to be filed with the Registrar. The
charges or modifications thereof are required to be filed in electronic Form No. 8.
Similarly, satisfaction of charges are also required to be filed in electronic Form No.
17 within 30 days of satisfaction. Requirement of filing Form 13 (alongwith a fee of
Rs. 10) alongwith Form 8 or Form 17 is discontinued after commencement of
electronic filing of forms.
Electronic Form No. 10 shall be filed for issue of debentures (Section 128).
(f) Return of Resolutions and Agreements
Under Section 192 of the Act, the following resolutions/agreements have to be
filed with the Registrar of Companies:
Special Resolutions;
Resolutions of the Board of directors regarding Managing Director;
(Section 269);
Resolution regarding disposal of property; [(Section 293(1)(a)]
Agreement regarding Managing Director; (Section 269)
Resolution regarding borrowing limit; [Section 293(1)(d)]


Resolution regarding limit on donations; [(Section 293(1)(e)]
Resolution regarding appointment of sole selling agents; (Sections 294 and
294AA)
Agreement with sole selling agent and sole agent for buying; (Sections 294
and 294AA)
Resolution regarding voluntary winding-up (Section 484).
These resolutions/agreements have to be filed in electronic Form No. 23, of the
Companies (Central Governments) General Rules and Forms, 1956, within 30 days
after passing of the resolution or entering into agreement as the case may be, and
together with the filing fees.
(g) Return of Foreign Companies
The obligation cast on a foreign company in regard to filling of various returns
and particulars, as required under Part XI of the Companies Act, 1956, have been
discussed herein below very briefly:
1. Within 30 days after establishing a place of business in India, a foreign
company has to file the information as required under Section 592 in
electronic Form No. 44 of the Companies (Central Governments) General
Rules and Forms, 1956 to the ROC, New Delhi and send a copy to the ROC
of the State in which the company has its place of business. Refer also
Section 597 and Rule 17 of the Companies (Central Government's) General
Rules and Forms, 1956.
2. If a foreign company makes any alteration in any of its documents, its
director or secretary, or the principal place of business in India, then the
company must deliver to the Registrar, returns containing the prescribed
particulars of the alteration as follows:
(a)Return in respect of the matters specified in clauses (a), (b) & (c) of Section
593 of the Act should be made in electronic Form No. 49 of the
Companies (Central Governments) General Rules and Forms, 1956, to
the Registrar for registration on or before 31st January of the year
following the year in which the alteration was made or occurred See
Rule 18(1).
(b)Return in respect of the matters specified in Section 593(d) and (e) should be
made to the Registrar for registration in electronic Form
No. 52 of the Companies (Central Governments) General Rules and
Forms, 1956, within one month from the date on which the alteration
was made or occurred See Rule 18(2).
3. The documents to be delivered to the Registrar under Section 594 of the Act
should be delivered to the Registrar within a period of 9 months of the close
of the financial year of the foreign company to which documents relate.
However, the Registrar may for any special reason and on application made
in writing by the foreign company concerned, extend the said period by a
period not exceeding 3 months See Rule 18A.
4. Where a foreign company ceases to have a place of business in India, it
should forthwith give notice of the fact in electronic Form No. 52 to the


Registrar having jurisdiction over New Delhi, as well as to the Registrar of
the State in which the principal place of business of the company was
situate. The obligation of the company to deliver documents to the Registrar
shall cease as from the date on which notice was so given, provided it has
no other place of business in India Refer Section 597(3).
Note: According to Section 597 of the Act, any document which a foreign
company is required to deliver to the Registrar should be delivered to the
Registrar having jurisdiction over New Delhi and to the Registrar of the State
in which the principal place of business is situate.
According to Rule 19 of the Companies (Central Governments) General
Rules and Forms, 1956, where any document or any portion of any
documents required to be filed by or registered with the Registrar or
containing any fact required to be recorded by him, in pursuance of any
provisions of the Companies Act, 1956 contained in any Part of the Act
(except Part XI) is not in English or in Hindi, a translation of that document or
portion either in English or in Hindi certified by a responsible officer of the
company to be correct, shall be attached to every copy of the document
which is furnished to the Registrar.
5. The provisions of Part V (Sections 124 to 145) of the Companies Act, 1956
apply mutatis mutandis to a foreign company. (Refer Section 600).
Therefore, a foreign company:
(i)has to file within 30 days of the creation of charge on properties in India in
electronic Form No. 8 of the Companies (Central Governments)
General Rules and Forms, 1956, to the Registrar of Companies for
Registration of Charges;
(ii)within 30 days of acquiring properties in India, a foreign company has to file in
electronic Form No. 8, the particulars of charges subject to which the
property in India has been acquired;
(iii)the particulars of an issue of debentures in a series should be filed with the
Registrar in electronic Form No. 10 within 30 days of execution of
Debenture Trust Deed or after the issue of debentures, where no
Debenture Trust Deed is executed. The particulars of series of
debentures containing, or giving by reference to any other instrument,
any charge, the benefit of which the debenture holders of the said series
are entitled part passu created by a foreign company should be filed
within 30 days of execution of the deed or issue of debentures in
electronic Form No. 10.
(iv)A foreign company has to file particulars of modification of charge in electronic
Form No. 8 within 30 days of modification of charge. However,
modification of charge can be filed with the Registrar, if the property is
situated outside India, within 30 days after the date on which the original
instrument or a copy thereof if despatched with due diligence by post
should reach India.
(v)Memorandum of complete satisfaction of charge should be filed in electronic
Form No. 17 within 30 days of satisfaction of the charge.


9. FILING FEE FOR COMPANIES REGISTERED IN INDIA
Filing fee is to be paid to the Registrar on all the documents filed with him as
prescribed under Schedule X to the Companies Act. The filing fee varies with the
authorised capital of the company. It is Rs. 100/- per document for a company having
authorised capital of less than one lakh, Rs. 200/- where authorised capital is one
lakh but less than five lakhs, Rs. 300/- where authorised capital is five lakhs but less
than twenty five lakhs and Rs. 500/- where authorised capital is twenty five lakhs and
above.
In case, where Central Government has delegated the powers to Registrars,
such as under the Sections 21, the fee payable to him would be prescribed under the
Companies (Fees on Applications) Rules, 1968.
Filing Fee by Foreign Companies
For Foreign Companies the filing fee is Rs. 1000/- per document. Fees is payable
only when document is filed with the ROC, New Delhi. No fee is payable when copy
is delivered to the ROC of the jurisdiction where the foreign company has its place of
business [Refer also Section 601].
Payment of fees
Under electronic filing system, the payment can be made in one of the following
ways:
Credit Card (online)
Internet Banking (online)
Challan (offline)
User can make the payment by challan/offline by taking the printout of pre-filled
challan generated by MCA21 system and visiting any of the authorized bank
branches to make the payment through Cash/demand draft/Local Cheque. The user
can find the list of authorised bank branches accepting payment on behalf of MCA on
MCA portal http://www.mca.gov.in.
10. COMPANY SECRETARYS ROLE IN FILLING AND FILING RETURNS AND
FORMS
Filling and filing of forms is an important part of the secretarial function of a
company secretary. Normally, where company appoints a company secretary, he is
designated as the officer responsible for compliance under the Companies Act and
other allied legislations. Therefore, for any lapse in complying with the various
provisions of the Companies Act or such other legislations, the compliance of which
has company secretary been entrusted with, he becomes liable as officer in default.
Filling and filing of forms, returns and applications demand intimate knowledge of
substantive as well as procedural law. The Registrar of Companies registers the
documents if found in order and filed within the prescribed time. Often, a large
number of documents filed with the Registrar of Companies are not taken on record
due to technical lapses which result in avoidable correspondence, frequent visits to
the office of the Registrar. In order to avoid such errors, every care should be taken
to ensure that the forms filled in and filed should be proper.


Company Secretaries, under electronic filing system is required to be acquainted,
inter alia, with using computer, internet, MCA21 electronic filing system, pdf files and
using digital signatures.
11. GUIDELINES FOR PREPARING/FILING FORMS, DOCUMENTS, RETURNS,
ETC.
While preparing the forms, documents, returns to be filed with the Registrar, the
following points are to be kept in view:
(a) The company master data, which can be accessed from MCA21 portal,
http://www.mca.gov.in, must be thoroughly verified. If the master data of the
company is not update, the same must be updated with the ROC office.
(b) The company Corporate Identification Number (CIN) with which it has been
registered should be correctly entered. The CIN can be found for the
company from the MCA21 portal by entering name and the registration
number given in the Certificate of Incorporation. Indication of the proper
CIN number is essential. Upon filling CIN in electronic form, the name and
the registered office of the company is automatically filled up in the
electronic form. This helps in ascertaining the fees to be paid by the
company. For all the electronic forms, help file associated with the form shall
be read for correct filing of the form.
(c) All electronic forms require, the date of board meeting to be specified under
the head verification. In the said column, the date of the board meeting at
which the person is authorised to sign and submit form shall be specified.
Where the document, form is required to be signed by specific persons or
number of persons, it should be so digitally signed. For example, electronic
Form No. 1 may be completed and signed by an Advocate, an attorney or
pleader entitled to appear in High Court or a Secretary or a Chartered
Accountant in whole-time practice in India who is engaged in the formation
of the company or by person who is named as a director, manager or
secretary, Annual Return by such persons as prescribed in Section 161(1)
and other forms usually (unless otherwise indicated) by a director, Managing
Director, Manager or Secretary. However, in the case of resolutions passed
for winding up, the liquidator is also competent to file the resolution etc., and
other connected papers.
(d) While filling up forms care should be taken to fill up each and every column
properly. All the columns marked with asterisk (*) are compulsory fields. .
(e) Regulation 19 of the Companies Regulations, 1956 provides that on every
document registered, recorded or filed with the Registrar the number of the
company, its serial number and the date on which it is registered, recorded,
filed should be properly endorsed.
(f) All documents/forms/returns, etc., are to be submitted in English or Hindi
and where a document is in any language other than English and Hindi, a
translation of that document or portion into either English or Hindi certified by
a responsible officer of the company to be correct, shall be attached to each
copy of the document which is furnished to the Registrar. All such


documents shall be converted into electronic form in pdf format.
(g) The amount of filing fee for registration of a company or for filing any
documents is to be ascertained by reference to Schedule X to the Act-Table
of fees to be paid to the Registrar. For payment of filing fees, using challan,
consider the following:
For example, consider a case of filing of Form 32 for appointment of
Director. If the date of appointment is Nov 1, 2006 and the user submits the
form at MyMCA portal on Nov 10, 2006 the fee amount will be normal fee.
However, if the user submits the form at MyMCA portal on Nov 26, 2006, the
fee amount will be normal fee.
If the user submits the form at MyMCA portal on Dec 1, 2006, the fee
amount will be normal fee and additional fee for one-month delay in
payment.
If the user does not make the payment in bank branch by pay by date, the
submission of form on the portal shall be regarded as incomplete. The
applicant will be sent an email that his form cannot be regarded as filed due
to non-payment of fee.
(h) For all the electronic forms only one copy is required to be filed.
(i) All the documents/forms should be filed at MCA21 portal http://www.mca.
gov.in
(j) For every filing through MCA21 portal, Service Request Number (SRN) is
generated by the system. This SRN number is to be noted for future
reference. SRN number can be found on Challan (offline payment method)
and also on filing receipt (online payment method).
(k) There are certain forms which needs to be delivered for registration in
physical form, in such cases, those forms should preferably be free from
corrections and erasure. If there is any correction or erasure, it should be
duly authenticated by the person signing the document or the return.
(l) In certain cases the Act requires copies of certain documents also to be filed
with certain forms. (In case of e-filing, there is no need for any number of
copies of document.)
A return is deemed to be incomplete where the required documents are not
enclosed.
12. DEFECTIVE FORMS/DOCUMENTS
A form or document is defective for any one of the following reasons:
(i) the form or document does not contain the necessary enclosures;
(ii) certain particulars in the document or form have been left unfilled;
(iii) certain particulars apparent on the face of it seem false;


(iv) the document is not filed in proper time or is not accompanied by the
requisite filing fee;
(v) the document is not properly signed or certified.
If a document is found to be not in order for any of the reasons stated above the
Registrar will not register the document until the particulars left unfilled are filled or
the error is rectified by the company. For this purpose, facility of resubmission is
available under MCA21 portal. However resubmission can be made, only when the
ROC requires that the company resubmit the form with corrections. If within the date
document is required to be filed, the blank is not filled in or the apparent error is not
corrected then the Registrar is at liberty to launch prosecution against the company
and its officers for default in filing the document. If the defect is one which requires
filing of a revised document, then, in certain cases, the Registrar of Companies may
accept the revised form on payment of additional fee which he may determine in
terms of Section 611(2) of the Act, which should not be more than ten times of the
specified fee. However additional fees have been standardised by the Central
Government.
Condonation of Delay
Under Section 637-B of the Act the Central Government may for reasons to be
recorded in writing, condone the delay where any document required to be filed with
the Registrar under any provision of the Act is not filed within the time specified
therein. As already stated earlier in this study, the Registrar of Companies has been
given the power to condone a delay of 30 days in filing electronic Form No. 8 relating
to charges under Section 125 or modification of charges under Section 135. He has,
however, no such power relating to satisfaction of charges. Delay of more than 30
days in filing electronic Form No. 8 and satisfaction of charges in electronic Form No.
17, can be condoned only by Company Law Board
*
under Section 141.
Procedure for Condonation of Delay by Central Government in Relation to
Filing of Documents with Registrar of Companies
The Company Secretary should follow the procedure as laid below:
(1) Convene a Board Meeting and pass a resolution for seeking condonation of
delay in filing the document.
(2) Submit an application to the Central Government, in pdf format, as
attachment to electronic form no. 65, to this effect indicating alongwith the
reasons for such delay. The application should be accompanied by a copy of
the Board Resolution seeking condonation of delay, latest audited balance
sheet and profit and loss account, certified copy of the memorandum and
articles of association and filing fees.
(3) The Central Government may for reasons to be recorded in writing, condone

*
It shall be substituted by Central Government after the commencement of Companies (Second
Amendment) Act, 2002.


the delay.
13. PENALTY FOR FILING FALSE DOCUMENTS/STATEMENTS WITH THE
REGISTRAR
According to Section 628 if in any return, report, certificate, balance sheet,
prospectus, statement or other document, required by or for the purposes of any of
the provisions of this Act, any person makes a statement which is false in any
material particular, knowing it to be false; or which omits any material fact, knowing it
to be material, he shall, except when otherwise expressly provided in this Act, be
punishable with imprisonment for a term which may extend to two years and shall
also be liable to fine.
ANNEXURE I
RETURNS, PAPERS AND DOCUMENTS TO BE FILED OR
DELIVERED TO THE REGISTRAR
Section Particulars of Returns, Papers and Documents
(1) (2)
5(f) and 5(g) Where a person or director is entrusted for complying
certain provisions, electronic Form 1AA and 1AB be filed.
Revocation of consent to be filed in electronic Form 1AA.
18(1) and 18(3) Certified copy of order of Company Law Board confirming
the alteration of the memorandum of association within 3
months from the date of the orders on electronic Form
No. 21.
31(2A) Printed copy of the Articles within 30 days of obtaining the
approval of the Central Government for converting a
public company into a private company.
33(1) and 33(2) Memorandum, articles or agreements mentioned in
Clause (c) of Section 33(1) and Declaration of compliance
with the application for registration of company in
electronic form 1.
43A(2A) Intimation that the deemed company has become a
private company.
44(1)(b) If a private company alters its articles in such a manner
that it ceases to be a private company a prospectus or
a statement in lieu of prospectus as specified in
Section 44(2) within 30 days from the date of alteration.
58A read with the
Companies (Acceptance
of Deposits) Rules, 1975
Return of deposit made-up to 31st of March each year by
non-banking non-financial companies, before the 30th
June every year on a prescribed Form under the Rules.
Advertisement/statement in lieu of advertisement inviting fixed
deposits, before it is published before deposits accepted.
60(1) Copy of prospectus in compliance with Section 60 on


Form prescribed under Schedule II to the Companies Act,
1956.
70(1) A statement in lieu of prospectus in compliance of Section
70 three days before the first allotment of any share or
debenture on Form prescribed in Schedule III to the Act.
75(1)(a) Return of allotment of shares only within 30 days from the
date of allotment or within such extended date as the
Registrar of Companies has allowed, on electronic Form
No. 2.
(1) (2)
75(2) Particulars of contract relating to shares (not being bonus
shares) allotted otherwise than in cash where such
contract is not reduced in writing within 30 days from the
date of allotment, on electronic Form No. 3.
75(1)(c) Copy of resolution for issue of bonus shares/shares at a
discount alongwith a copy of the Court
*
order.
76(1) Statement of particulars of underwriting commission for
underwriting shares or debentures, before payment of
commission on electronic Form No. 4.
Copy of contract for payment of commission, at the time
of registration of prospectus.
77A Declaration of solvency before making buy-back of
securities.
79 read with rule 37(2) of
Company Law Board
(Bench) Rules
A certified copy of the Company Law Board
**
Order
sanctioning the issue of shares at a discount within one
month, on electronic Form No. 21.
94A (3) Return for increase in share capital under Section 81(4)
within 30 days of the receipt of the order from the Central
Government, on electronic Form No. 5.
95 Notice of Consolidation, conversion, division,
cancellation, etc. of shares, within 30 days of doing so, on
electronic Form No. 5.
97 Notice of increase of share capital beyond the authorised
capital, or increase in the number of members beyond the
registered number, within 30 days of passing the
resolution in this regard on electronic Form No. 5.
103 Order of the Court
***
confirming reduction of share capital

*
It shall be substituted by Tribunal on the commencement of Companies (Second Amendment) Act,
2002.
**
It shall be substituted by Central Government on the commencement of Companies (Second
Amendment) Act, 2002.
***
It shall be substituted by Tribunal on the commencement of Companies (Second Amendment) Act,
2002.


along with certified copy of the order and minutes
approved by the Court***, on electronic Form No. 21. No
time specified. Order of reduction effective from the date
it is registered by the Registrar.
107(5) A copy of the order of Court*** passed under Section
107(3) within 30 days of serving the order on the
company, on electronic Form No. 21.
(1) (2)
108(1A) Share Transfer Form
108(1D) Application for extending validity of transfer deed.
125/127 Registration of charges created by a company registered
in India/subject to which property has been acquired by a
company registered in India, within 30 days, on electronic
Form No. 8.
128 Particulars of entire series of debentures giving pari
passu rights in terms of any instruments, deeds etc.
within 30 days after execution of the deed, on electronic
Form No. 10.
129 Particulars in case of commission etc. on debentures
within 30 days.
134 Registration of charge created by the company and of
every issue of debentures.
135 Particulars of modification of charges within 30 days of
such modification, on electronic Form No. 8.
137(1) Notice of appointment of receiver or manager within 30
days of the appointment/passing order, on electronic
Form No. 15.
137(2) Notice of ceasing of receiver or manager, forthwith in
electronic Form No. 15.
138 Memorandum of complete satisfaction of charge within 30
days from the date of such payment or satisfaction, on
electronic Form No. 17
141 Order of the Company Law Board
*
extending the time for
filing the charge or modification of the Register of
Charges, on electronic Form No. 21.
146(2) Situation/change of registered office within 30 days from
the date of incorporation/change on electronic Form
No. 18.

*
It shall be substituted by Tribunal on the commencement of Companies (Second Amendment) Act, 2002.


149(1)(d) Duly verified declaration of compliance with the provisions
of electronic Section 149(1)(a), (b) and (c) where
prospectus has been issued, before commencement of
business, on electronic Form No. 19.
149(2)(c) Duly verified declaration of compliance with the provisions
of Section 149(2)(b), before the commencement of
business, on electronic Form No. 20.



(1) (2)
149(2A)(ii) Duly verified declaration of compliance with the provisions
of Section 149(2A)(i), or 149(2B), as the case may be,
before commencement of new business, on electronic
Form No. 20A.
157(2) Notice of the situation of the office where foreign register
is kept, within 30 days from the date of opening of foreign
register or change of situation of such or its
discontinuance.
159 Annual return for companies having a share capital within
60 days from holding of annual general meeting or if the
AGM is not held within 60 days when it ought to have
been held (Form prescribed in Schedule V, Part II to the
Companies Act). [to be attached with electronic Form
20B]
159 read with
Application of
Section 159 to Foreign
Companies Rules, 1975
Modified Annual Return within 60 days of the Annual
General Meeting. [to be attached with electronic
Form 20B]
160 Annual Return of a company not having a share capital
within 60 days from holding of annual general meeting, on
electronic Form No. 21A.
165 Statutory Report, in electronic Form 22, immediately after
sending the report to the members.
187C(4) Filing of declarations received within 30 days on
electronic Form No. 22B. It replaced Form No. III
prescribed under the Companies (Declaration of
Beneficial Interest in Shares) Rules, 1975.
192 Copy of every resolutions and agreements mentioned in
Section 192(4), within 30 days after the passing or
making the same in electronic Form No. 23.
205A(6) Statement (in duplicate) of unpaid or unclaimed dividend
transferred from the unpaid dividend account of the
company to the fund established under Sub-section (1) of
Section 205C.
209(1) Keeping books of account at any place other than the
registered office within 7 days of the decision of the Board.
220 A copy of the Balance Sheet and the Profit and Loss
Account within 30 days from the date of holding the
Annual General Meeting or if AGM is not held within 30
days when it ought to have been held. (In case of private


(1) (2)
companies copies of Balance Sheet and Profit & Loss
Account are to be filed separately). To be filed with
electronic Form No. 23AC
224(1A) Appointment of auditor other than a retiring auditor within
30 days of the receipt of the intimation from the company.
This is to be filed by the auditor.
234 Information or explanation required by the Registrar
under Section 234(1) or 234(3A) to be filed within such
time as may specified in the Registrars order.
264(2) Consent to act as director and/or undertaking to pay for
qualification shares within 30 days of appointment of
director. Now the consent is covered by new electronic
Form No. 32 itself.
262(a) Sch. XIII Intimation about appointment of managing or whole-time
director or manager having complied with the provisions
of Part I and II of Schedule XIII in electronic Form
No. 25C.
303(2) Particulars of directors, managing directors, manager and
secretary and changes among them within 30 days from
the appointment/change in electronic Form No. 32.
383A(1) proviso Compliance certificate within 30 days of the annual
general meeting.
391(3) Certificate copy of an order sanctioning the compromise
or arrangement under Section 391(2), on electronic Form
No. 21.
394(3) Certified copy of an order passed by the Court
*
under
Section 394(1) within 30 days after the making of the
order, on electronic Form No. 21.
395(4A)(a)(i) Circular containing offer of a scheme or contract involving
the transfer of shares, before issuing to the shareholders,
on electronic Form No. 35A.
404(3) Certified copy of every order of the Court* under Section
397 or 398 within 30 days after the making of the order,
on electronic Form No. 21.
421/424 Abstracts of receipts and payments of receivers or
managers, once in every half year and also on ceasing to
act as receiver or manager, on electronic Form No. 36.

*
It shall be substituted by Tribunal on the commencement of Companies (Second Amendment) Act, 2002.


(1) (2)
445(1) Copy of the order of winding up made by the Court* within
30 days from the date of the order, on electronic Form
No. 21.
462(4) One copy of the audited account of liquidator.
466(3) Copy of the order of the Court* staying the winding up
proceedings under Section 466(1), on electronic Form
No. 21.
481(2) Copy of the Courts* order dissolving the company within
30 days of the order, on electronic Form No. 21.
488(2)(a) Declaration of solvency within 5 weeks of the date of
passing the resolution for voluntary winding up on Form
No. 149 of the Companies (Court) Rules, 1959.
493 Notice of appointment of liquidator within 10 days.
497(3) Copy of the account and a return of the final meeting in a
members voluntary winding up within one week after the
meeting.
501(1) Notice of resolution passed by the creditors meeting in a
creditors voluntary winding up within 10 days of the
passing of the resolution.
509(3) Copy of the account and a return of the holding of the
final meeting in a creditors voluntary winding up within
one week after the date of the meeting.
516(1) Notice of appointment of liquidator in the prescribed form
in a voluntary winding up within 30 days after the
appointment.
518(5) A copy of order staying proceeding in voluntary winding up
under Section 518, forthwith, on electronic Form No. 21.
551(1) and (2) Particulars of information as to the pending liquidation
within 2 months of the expiry of such year.
555(3) Statement of unclaimed dividend or undistributed assets
paid into the companys liquidation account in the
Reserve Bank of India, when making credit into the
account.
559(2) A certified copy of the order declaring the dissolution of a
company void within 30 days after the order.


(1) (2)
560(7) Copy of the order passed by the Court
*
under
Section 560(6) restoring the company to register, on
electronic Form No. 21.
565, 566 and 567 Application for registration as a limited/unlimited company
by an existing joint stock company, before registration, on
electronic Form No. 37 and electronic Form No. 39 for
Section 565(1) proviso.
565, 568 Application for registration as a limited/unlimited company
by an existing company other than joint stock company,
before registration, on electronic Form No. 37.
567(a) Registration of an existing company list of members,
before registration, on electronic Form No. 39.
567(c) Registration of an existing company as a limited company
Statement specifying certain particulars before
registration, on electronic Form No. 39.
568(a) Lists of names, addresses and occupation of the directors
etc., before registration on electronic Form No. 39.
592 Documents to be delivered for registration by a foreign
company, within 30 days of the establishment of the place
of business within India, on electronic Form
No. 44.
593(a)(b)(c) Particulars of any alteration specified in Section 593
within prescribed time from the date of alteration, on
electronic Form No. 49.
593(d)(e) Particulars of any alteration specified in Section 593
within 30 days from the date of alteration, on electronic
Form No. 52.
594 Three copies of the documents specified in Sub-section
(1) and the documents mentioned in Section 594(3).
597(3) Notice of cessation of business by a foreign company, on
electronic Form No. 52.
600 read with
Section 125, 127, 128,
129, 135 and 138
Registration of charges, satisfaction of charges and
appointment of receiver in respect of foreign company,
within 30 days, on electronic Form No. 17.
605 Prospectus before issue.


*
It shall be substituted by Tribunal on the commencement of Companies (Second Amendment) Act, 2002.



LESSON ROUND-UP
Every company incorporated under the Act is required to keep at its registered
office various books and registers in accordance with the various provisions
under the Companies Act.
The Institute has issued Secretarial Standards on registers and records.
The Companies (Amendment) Act, 2006 has introduced inter alia new provisions
relating to filing of applications, documents, inspection etc. through electronic
form vide section 610B.
Annual Return provides very comprehensive information about various aspects of
a company like capital structure, constitution and management of the company
concerned updated till the date of Annual General Meeting.
Instead of being kept at the registered office of the company registers and returns
may be kept at any other place within the city in which registered office of
company is situated in accordance with the provisions of Section 163A of the Act.
Non-statutory books are required to be maintained for smooth and efficient
functioning of the company.
For the purpose of incorporation of company, the forms required are e-forms 1A,
1, 18, 32, 19, 20, 20A etc.
Compliance related filing (Annual or event based)e include e-forms 2, 3, 4, 4C,
20B, 21A, 22, 23, 23AC etc.
Change services i.e. those pertaining to any change in the capital structure,
increase in authorized capital, increase in number of members, change in
situation of registered office of company, e-forms required are e-form 1A, 32, 5,
18, 1B etc.
Registration of modification, satisfaction of charges are to be filed in e-forms 8,
17, 10, etc.
E-forms 24, 25A, 25B, DD-C relate to the managerial personnel.
For getting approval from MCA, various forms are 23AAA, 65, 63, 24B, 24AB,
23C, 23AAB, DD-C, 1AD, 64, 24A, 1B, 61 etc.
For Annual filing, e-forms are 23AC, 23ACA, 20B, 21A, 66.
Under the electronic fling system, company secretaries and other officers are
required to be acquainted inter-alia with using computer, internet, MCA21
electronic filing system and using digital signatures.










SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation).
1. Write the provisions of maintenance, preservation and signing of the
following registers:
(a)Register of Directors
(b)Minute Book
2. What are the particulars to be entered in the
(i)Register of Securities bought back
(ii)Register of Fixed Deposits
(iii)Register of Charges
(iv)Register of Postal Ballot.
3. What is the procedure for keeping the Register and Returns at a place other
than the Registered office?
4. Briefly explain the important returns which are required to be filed with the
Registrar of Companies.
5. Write a short note on
(i)Compliance Certificate
(ii)Annual Returns
(iii)Register of Postal Ballot.
6. What are the statutory books and registers to be kept and maintained by the
company incorporated under the Companies Act, 1956?
7. What are the particulars to be recorded in the register of members? Where
is the register to be maintained and who has to maintain it? Can a member
access to this register?



















STUDY XXVI
INSPECTION AND INVESTIGATION
INSPECTION

LEARNING OBJECTIVES
This lesson explains the provisions for inspection under the Companies Act. It also
describes the nature of inspection and rights of directors and members to make
inspection along with powers of inspectors. The lesson also gives provisions for
investigation, its meaning and its kinds. It also explains preparation by a company
secretary to face inspection and investigation.
At the end of the lesson, you should be able to understand:
Nature of inspection and who can make it.
Directors right and members right to make inspection.
Time, place and notice for inspection.
Powers of inspector and inspection report.
Penalty for default.
Preparation by company secretary to face inspection.
Meaning and objective of inspection.
Kinds of investigation and investigation of affairs of a company by the Central
Government.
Powers of inspectors and inspectors report.
Expenses of investigation.
Preparation by company secretary to face investigation.
Investigation of ownership of company.
Restrictions on shares and debentures.
Protection of employees of the company during investigation.

1. INTRODUCTION
Section 209A of the Companies Act, 1956 contain provisions in respect of
inspection of books of account and other books and papers of every company. This
section provides exhaustive powers to the Registrar or Officers authorised by the
Central Government or Securities and Exchange Board of India, as the case may be,
to conduct inspection in order to ascertain that all transactions have been validly
entered into and recorded in appropriate books and that applicable laws, rules and
procedures have been complied by the company. Section 209A does not specify the
circumstances or pre-conditions which must be satisfied for invoking these
provisions. The cardinal objectives of conducting such inspections may be thus:
1. To detect concealment of income by falsification of accounts.
2. To secure knowledge about the mismanagement of the business of a
company and transactions entered into with an intent to defraud creditors,
shareholders or otherwise for fraudulent or unlawful purposes.
1013


3. To ascertain whether the statutory auditors have discharged their functions
and duties in certifying the true and fair view of a companys accounts and
their proper maintenance.
4. To enable the Government to take effective remedial measures to protect
the company against liquidation and thus to save the industry or trade and
prevent distress to the employees of company.
5. To enable the Government to ascertain the quantum of profits accrued but
not adequately accounted for.
6. To detect misapplication of funds leading a company to a state of perpetual
financial crisis.
7. To keep a watch on the performance of the company.
8. To detect misuse of fiduciary responsibilities by the companys management
for personal aggrandisement.
Inspection is intended to be a routine and not an ad hoc or special affair.
However, if sufficient evidence of the companys affairs being mismanaged and/or
managed in fraudulent way is revealed, the inspection can lead to orders for
investigation into the affairs of the company.
Note on Strategy on Inspection is as under:
Note on Strategy on Inspection
*

Inspection under Section 209A is neither audit of books of account, nor
investigation into the affairs of a company. It can only be an appraisal of the overall
activities of a company, except in complaint cases. Such appraisal cannot be done
merely by inspecting the records on 'as is where is basis but certain amount of
verification and cross verification of the records, on the style of auditing, is necessary.
The following points may be useful for conducting inspection of accounting records:
(1) It is always better for an inspecting officer to go through the documents filed
by the company with the Registrar. In case certain documents are not
filed/taken on record (for any reason), efforts should be made to get the
records made up-to-date.
(2) An inspecting officer may find it useful to acquaint himself with the basic
information about the industry concerned. In particular, attention may be
drawn to the special type of accounting records maintained by the industry,
production process involved, etc. The previous inspection reports, if any,
may also be looked into. It may avoid wastage of time later on.
(3) The following broad guidelines/general approaches may lead to finding out
the acts of mismanagement, including the channels of syphoning of funds:
(a)Ask for and go through monthly trial balances and profit and loss accounts
prepared by the company. This will give an idea about the volume of
activity and the monthly profitability, with which the companys activity
for the whole year can be assessed. Significant variation, if any, in the
estimates and the entries in the books may, then, come to the notice of
the inspector.

* Excerpts from the Institutes publication Inspection and Investigation, Study IX.


(b)Ask for and go through unit/product-wise and divisionwise monthly profit and
loss accounts. This would give an idea about the unit/divisions making
profits and contributing for recoveries of fixed costs, and others which
are not contributing. This kind of comparison will be absolutely
necessary for multi-unit/multi-product companies.
(c)The existing Management Information System, at least in the areas of
accounts and finance, should be reviewed. Cashflow analysis can show
the details of sources and application of cash. Funds-flow analysis
exhibits the details of sources and application of funds. Analyse
revenue and capital expenditure. Month-wise analysis of capital
expenditure may also reveal useful information. In this process, wrong
or mis-classification of capital and revenue expenditure (with a view to
understating or overstating the profits, and the reasons therefor) may be
found out.
(d)Revenue items of sales and purchases must be checked, bearing in mind the
overall activity of the company. Month-wise analysis of purchases and
sales will show the quantum of variance The reasons therefor should be
looked into. At the end of the year, to ensure that there is no inflation or
deflation of sales or purchases, basic documents should be checked as
on the Cut-Off date. For example, if the year end falls on 31st
December, the basic documents (i.e. delivery challans for sales) falling
within that period should have been accounted for within that year.
Similarly, in respect of purchases, goods inward notes falling within the
period should have been accounted for in the same period. This
exercise would reveal attempt, if any, of deflation or inflation of
purchases/sales. The turnover figures can be cross checked with sales
tax return, excise duty records, returns submitted to banks for
borrowings, etc.
(e)In a manufacturing company, the 'consumption figures should be examined.
A brief industry-wise study of input (raw material) output (finished
products) ratios should be made and particularly, the companys
performance should be evaluated in that background. This evaluation
may lead to other concomitant areas like under-production, production
not being shown on records, excess scrap, unsatisfactory scrap
accounting, etc.
(f)At the time of inspection, it would be difficult to decide as to what should be
inspected as regards the revenue and expenditure of the company. For
this purpose, the expenditure of the company should be classified under
8 to 10 broad heads. Percentage of the sales expenditure to sales and
also to the total expenditure should be calculated. This would reveal
whether any type of expenditure has increased in real terms when
compared to other expenditure, and to the income of the company.
(g)As regards the books to be inspected, it is preferable to go through the cash
book for cash and cheque books for non- cash payments for the last
month of the year. It should be seen whether the company keeps heavy
cash at the end of the year, if so, for what purpose. Besides, the journal
entries should also be inspected for the last month of the year, since all
adjustments are made at the year-end through such entries. After


covering cash and non-cash transactions on random basis, entries
relating to provisions for liabilities for expenses, depreciation, etc.,
should be seen. Provision for expenses is a sensitive area leading to
over-statement or under-statement of expenses. In the same context,
'debits relating to prior periods and 'excess provision written back, if
any, should also be analysed.
(4) In respect of a manufacturing company, another area to be looked into is
capacity utilisation. The percentage of capacity utilised for different products
for the last three years should be worked out. Any under-utilisation of
capacity means non-recovery of fixed overheads to a certain extent,
resulting in losses. If, in spite of full utilisation of capacity, there are losses,
then it may be presumed that either the machines need modernisation or
there is mismanagement.
(5) As regards diversion of funds by companies, the main modes of diversion
may be(i) through their distributors or selling agents by paying huge
commission; (ii) giving loans to sister companies without stipulations
regarding repayment (and companies write them off as bad debts);
(iii) huge advances to parties for purchases without any actual (or without
even an intention to) purchase; (iv) payment of huge donations to Trusts
coming under the group, etc. The inspecting officer can look into all these
areas. In this process, both 'diversion of funds and 'diversion of profits will
come to notice.
(6) Working capital analysis: The current ratio should be worked out for the last
three years to see the trend. On the basis of ratios, the current assets
should be analysed to see if their structure is simply hyperbole. For
instance, bills receivable and sundry debtors may relate to very old periods
to the point of becoming 'bad. Similarly, the inventory position should also
be analysed to see the 'age of inventory. Any mismanagement of
'receivables and 'inventory can lead a company to financial crisis. Heavy
and constant working capital deficits, in spite of good sales and profits,
mean sundry debtors are not realised in time. Thus, an analysis of working
capital will help in identification of the causes of sickness of the company
concerned.
(7) Stock verification and valuation: Manipulation of quantity and value of
inventory can change the entire complexion, since it would affect both profit
and loss account and balance sheet. In an inspection, it is not possible to
physically verify stock. However, very costly items of inventory can be test-
checked. Here, stock declarations made to banks for obtaining cash credits,
consumption figures of the previous years, etc., would be of some help to
assess the situation. As regards valuation, the application of the maxim
cost or market price whichever is lower should be checked. Very often,
discrepancies arise at the time of valuation of finished products. For
example, for the purpose of valuation of finished product, an expenditure like
'depreciation is not taken into account for determining the 'cost on the
ground that the company has not charged depreciation in the books for want
of profits. This is sometimes done, in spite of the fact that the depreciation is
an important element of cost, with intention to undervalue finished products.
Such blatant departures from accepted accounting practices should be


brought out in the inspection report.
(8) Investments: As regards the purchase and sale of investments, it should be
seen that the timing of such purchase and sale is appropriate so as to
benefit the company. How the company managed funds, or what the
company did with the sale proceeds, should also be looked into. Some
companies may have the practice of advancing heavy amounts to certain
sharebrokers to enable them to buy and sell shares to incur huge losses. At
other times, the same brokers buy the companys shares at high prices just
on the eve of annual general meeting to boost the image of the company.
Such questionable practices should also be brought out in the report.
(9) Fixed assets: The fixed assets schedule should be gone through to see if
there is any substantial change by way of purchase or sale of fixed assets.
This will also be reflected in the capital reserve account. Here again, the
'timing of sale or purchase, necessity for such sale or purchase, etc., should
be inquired into, besides looking into the fact as to what the company did
with sale proceeds.
(10) Analysis of subsidiary ledgers: An analysis of subsidiary ledgers for sundry
debtors and sundry creditors will reveal the extent of companys funds
blocked with others. Advances given for purchase of materials, etc., should
be analysed to see(i) if the parties are suppliers prima facie; (ii) whether
any interest is charged on the outstanding balance, etc. This exercise may
also help to find out compliance or otherwise of Sections 372A and 295 of
the Act.
(11) Loans utilisation: The borrowings of a company are from commercial banks,
financial institutions, fixed deposits, etc. In respect of these borrowings,
besides checking compliance with company law, it should be seen whether
the loans are utilised for the purpose for which they were obtained; whether
the borrowings from public financial institutions are utilised to give loans to
group companies or to invest in group company shares, etc.
(12) Importance should also be given to contingent liabilities (since the liabilities
might have been actual liabilities), events occurring after balance sheet date
and the statutory auditors report to see if the auditors have correctly applied
materiality concept while making the audit report, and internal audit
reports. Sometimes, income-tax assessment orders also give clue about
irregular transactions.
(13) New projects: In respect of new projects/ventures commenced by a
company, the 'Pay Back Period and the 'Internal rate of Return as prepared
by the company can be reviewed to see if projections in this regard would
materialise. Similarly, the technique of inter-firm comparisons can also be
applied to assess the comparative performance of the company.
The above steps may not only help expeditious completion of inspection, but also
ensure that any important area is not omitted during the course of inspection.
2. NATURE OF INSPECTION
The inspection under Section 209A of the Companies Act, 1956, is not an
investigation, though it may lead to one, in case any wrong or objectionable or


fraudulent practice in the affairs of company is detected by the Inspector. In Indian
Express (Madurai) Pvt. Ltd. v. Chief Presidency Magistrate (1974) 44 Com. Cases
106, it was held that on a perusal of the inspection report, the Central Government
may lay the information to the police for the purpose of investigation under the
Criminal Procedure Code instead of proceeding under Section 235 and 237 of the
Companies Act, 1956. It is not necessary for the Registrar or Central Government
to disclose to the company, reasons for conducting the inspection, nor is it
necessary to come to any conclusion regarding existence of certain circumstances
as is necessary before ordering investigation into the affairs of Company under
Section 237(b) of the Act.
3. INSPECTION BY WHOM
According to Section 209A(1) of the Act, the inspection of books of account and
other books and papers of every company may be conducted by the Registrar or by
such officers of Central Government or Securities and Exchange Board of India, as
may be authorised in this behalf, at any time during business hours. Any inspection
by the officers of the Securities and Exchange Board of India shall be made in
respect of matters specified in Section 55A i.e. provisions relating to issue, transfer of
securities and non-payment of dividend. Such power of inspection by the officers of
Securities and Exchange Board of India can be exercised only in respect of Listed
public companies or those public companies which intend to get their securities listed
on any recognized stock exchange in India.
The books of account and other books and papers of every company are open
to inspection by the Registrar of Companies. As defined in Section 2(40) of the
Act, the word 'Registrar includes 'Additional Registrar, and 'Asstt. Registrar.
Therefore, inspection under aforesaid clause (i) can be carried out by the
'Registrar, 'Additional Registrar, or 'Asstt. Registrar of Companies. However, as
officers in the office of the Registrar are often pre-occupied with work regarding
registration of companies, filing of balance sheets and other documents by
companies, their scrutiny and recording, and allowing their inspection, etc., they
can find very little time to carry out, a comprehensive inspection of the books and
papers of companies, and, only a few comprehensive or regular inspections are
carried out by the Registrars.
Most of the inspections are carried out by the officers authorised under clause (ii)
of Section 209A(1) ibid, such as Joint Directors (Inspection), Deputy Directors
(Inspection) and Asstt. Directors (Inspection). These officers are posted in the offices
of the Regional Directors of the Ministry of Corporate Affairs at Kanpur, Calcutta,
Bombay and Madras and Head Quarters of the Ministry at New Delhi. Officers at
Kanpur inspect companies in North India comprising U.P., Delhi, Rajasthan, Haryana,
Punjab, Himachal Pradesh, Jammu and Kashmir and Chandigarh. Officers at
Calcutta inspect companies in East India, officers at Bombay, companies in West
India and officers at Madras, companies in South India. Officers at Headquarters can
be ordered to inspect companies anywhere in India, but, generally, they are ordered
to inspect companies at or near Delhi.
4. DIRECTORS RIGHT TO MAKE INSPECTION


As per Section 209(4) of the Companies Act, 1956, the books of account and
other books and papers shall be open to inspection by any director during business
hours. The right of inspection given under said sub-section is not so restricted that it
can only be exercised personally by the director. In Vakharia v. Supreme General
Film Exchange Co. Ltd. (1948) 18 Com. Cases 34: AIR 1948 Bom. 301 it was held
that a director is entitled to take inspection of accounts personally or through an
agent provided that there is no reasonable objection to the person chosen and the
agent undertakes not to utilize the information obtained by him for any purpose other
than the purpose of his principal.
As the right of inspection is a statutory right given under sub-section (4), a
director, who is prevented from or refused inspection may enforce his right through
Court. The right, however, is not an absolute right. Where on the facts and
circumstances it is clear in any case that there is reason to believe that the inspection
is sought for supplying information to rival in business of the company or for any
purpose which is prejudicial or injurious to the interests of the company, the
inspection may properly be refused.
5. RIGHT OF MEMBERS TO MAKE INSPECTION
Neither Sections 209, 209A nor any other section of the Companies Act gives any
statutory right of inspection of books of account to a shareholder. However articles of a
company may give such a right to the shareholders. As per Regulation 95 of Table A of
Schedule I to the Companies Act, 1956, the Board shall from time to time determine
whether and to what extent and at what times and places and under what conditions or
regulations, the accounts and books of the company or any of them, shall be open to
the inspection of members not being directors. Further no member (not being a
director) shall have any right of inspecting any accounts or books or documents of the
company except as conferred by law or authorized by the Board or by the company
general meeting. Thus in the absence of any such right in the articles, a shareholder
has no right to inspect the books of account of the company.
In order to prove allegations made in a petition under Section 397 and 398 the
shareholders are also entitled to be allowed inspection of the books of account and
other relevant papers of the company. Where there are allegations and counter
allegations in the petition regarding misuse of the funds of the company in an
arbitrary manner it is only with the help of the books of account that the matter can be
investigated and the parties should, in such a case, be at liberty to look into the books
of account. Where, under an order of the company judge in an application, inspection
of the companys books had already been completed, it was held that there could be
no valid reason for refusal to supply Xerox copies of the said documents which in fact
would facilitate trial of the main petition. (Rajdhani Roller Flour Mills Pvt. Ltd. v.
Mangilal Bagri, (1991) 70 Com. Cases 788 (Del-DB).
In case of Section 25 companies, members of such company have a right to
inspect its books of account. As per format of memorandum of association prescribed
under the Companies Regulations, 1956, subject to any reasonable restrictions as to
the time and manner of inspecting the same that may be imposed in accordance with
the regulations of the company for the time being in force, the accounts shall be open
to the inspection of the members.



6. TIME AND PLACE OF INSPECTION
In terms of Section 209A of the Companies Act, 1956, inspection may be made
without giving any previous notice to the company or any officer thereof. Thus no
previous notice is required to be given for making inspection of the books of account
and other books and papers of a company. The books of account are required to be
kept either at the registered office of the company or at some other place, after
intimation to the Registrar. Therefore the books of account can be inspected at such
other place also. Further in terms of Section 209A(5)(iii), inspection of any books,
registers and other documents may be made at any place. Thus it is within the
powers of the inspecting officer to demand inspection of the books of account at his
office. (Indra Prakash Karnani v. ROC (1985) 57 Comp. Cas. 62).
7. INSPECTION OF BOOKS OF ACCOUNT AND OTHER BOOKS AND PAPERS
The Registrar or officers of Central Government or Securities and Exchange
Board of India, as the case may be, are authorised under Section 209A(1) of the Act
to inspect the books of account and other books and papers of every company. As
per Section 2(8) of the Act, the terms 'book and paper and 'book or paper include
accounts, deeds, vouchers, writings and documents. Thus all books of account,
vouchers, writing and documents and other records of the company are open to
inspection under Section 209A of the Act. However, a Division Bench of Kerala High
Court in Karuppunni (C.V.) v. Joint Director, Inspection, Company Law Board, (1986)
59 Com. Cases 814 (Ker), held that the principles of ejusdem generis has to be
applied in deciding as to the type of books and documents, inspecting officers were
entitled to inspect. The documents and papers mentioned in Sub-section (1) must be
those which have the character of books of account.
8. NOTICE FOR INSPECTION
As per proviso to Section 209A(1) of the Act, the inspection may be made without
giving any previous notice to the company or any officer thereof. However, in usual
practice, about two weeks before commencement of inspection of books of a
company, Joint Director or Deputy Director (Inspection) who supervises the work of
concerned Inspecting Officers, writes a letter to the company requesting it to supply
its Memorandum of Association, Articles of Association and certified true copies of its
annual reports for the last three years, information regarding its shareholding pattern
management pattern, purchase and sale arrangements etc. and to provide facilities to
the Inspecting Officer to enable him to carry out the inspection.
9. DUTIES OF DIRECTORS, OTHER OFFICERS AND EMPLOYEES
Section 209A(2) of the Companies Act, 1956 casts a duty on every director, other
officer or employee of the company
(i) to produce to the person making inspection, all such books of account and
other books and papers in his custody or control; and
(ii) to furnish him with any statement, information or explanation relating to the
affairs of the company as the said person may require of him within such
time and at such place as he may specify.


Section 209A(3) of the Act requires every director, other officer or employee of
the company to give to the person making inspection under this section, all
assistance in connection with the inspection which the company may be reasonably
expected to give.
10. POWERS OF INSPECTOR
Section 209A(4) empowers the person making the inspection to make or cause
to be made copies of books of account and other books and papers or place or cause
to be placed any marks of identification thereon in token of inspection having been
made. Further, if the Inspecting Officer, considers it necessary, for the completion of
inspection to summon and enforce the attendance of any directors, other officer
and/or employee of the company and examine them on oath, he is empowered to do
so under sub-section (5) of Section 209A which lays down that the Inspecting Officer
shall have the same powers as are vested in a Civil Court under the Code of Civil
Procedure, 1908 while trying a suit in respect of following matters:
(i) the discovery and production of books of account and other documents at
such place and such time as may be specified by such person;
(ii) summoning and enforcing the attendance of persons and examining them on
oath;
(iii) inspection of any books, registers and other documents of the company at
any place.
11. INSPECTION REPORT
In accordance with Section 209A(6) of the Act, the person making an inspection
is required to make a report to the Central Government after inspection of books of
account and other books and papers of the company. However, no time limit has
been prescribed under the Companies Act, 1956 for completion of inspection or
submission of report. Where the inspection is carried out by an officer of the
Securities and Exchange Board of India, the report should be submitted to the SEBI.
12. FOLLOW-UP ACTION ON THE REPORT OF INSPECTING OFFICER
The officer who supervises the work of the Inspecting Officer(s) forwards a copy
of the Inspection Report to the Regional Director and the Registrar concerned as well
as to the Ministry. Officers dealing with follow-up of inspection reports in the offices
of the Registrar, Regional Directors and the Ministry of Corporate Affairs go through
the Report and take appropriate action including prosecution of the company and
its responsible officers on the grounds of violations of the provisions of Companies
Act etc., and other irregularities revealed in the Report which fall within their
respective jurisdiction. If further explanations etc. are to be obtained from the
company, the same are generally called for by the Registrar, who sends further
reports to the Regional Directors, who, in his turn, sends further report on matters
falling within the Departments purview to the Department.
In some cases, information and evidence revealed in the Inspection Report, and,
subsequently collected may lead to orders for investigation under Section 235 or
Section 237 of the Act, or orders for special audit under Section 233A or appointment
of Government directors under Section 408.


At times, the information contained in the Report may be of use to other
Government Departments and organisations such as Department of Industry, Income
Tax Department and Department of Banking etc. and accordingly, the same is
communicated to them for necessary action.
Except as aforesaid, there is no provision in the Act for furnishing a copy of the
Report or enabling its inspection to anyone, including the company. However, if
Government launches prosecution against the company and its responsible officers
on the basis of information contained in the Inspection Report, the defendants can
ask for a copy of the Inspection Report as a matter of natural justice, or, alternatively,
the court may ask the Government to produce the Report for its inspection, and
Government shall have to produce the Report for inspection of the Court to avoid any
adverse conclusion by the Court.
13. PENALTY FOR DEFAULT
According to Section 209A(8), if a default is made in complying with the
provisions of this Section, every officer of the company, who is in default, shall be
punishable with fine which shall not be less than fifty thousand rupees and also with
imprisonment for a term not exceeding one year. It must be noted that offence under
Section 209A is not compoundable under Section 621A of the Act. In State v. S.
Seshamal Pandia (1986) 60 Com Cases 889 (Mad.), it was held that the offence
under this section is not a continuing offence and is deemed to be committed on a
particular date. Limitation begins to run on that date. A prosecution launched more
than one year after the date of offence, is barred by Limitation.
14. PREPARATION BY COMPANY SECRETARY TO FACE INSPECTION
The Company Secretary should take all possible steps to comply with the
provisions of the Act and other laws. When inspection of books (by the Registrar or
an officer of the Central Government or SEBI) is anticipated, he/she should make
sure that the following statutory registers and records are being maintained upto date
by the company:
1. Register of Investments in shares or securities owned by the company, but
not held in its name pursuant to provisions contained in Sub-sections (2),
(3), (4) or (5) of Section 49 in compliance with Section 49(7).
2. Register of Charges as required in Section 143. Provisions contained in
Section 125(4)(e) exempting pledge(s) on any moveable property of the
company from registration, with Registrar of Companies do not apply to
maintenance of Register of Charges, and, therefore, even particulars of
pledges should be recorded in the Register of Charges.
3. Register of Members as required in Section 150 read with the Appendix to
the Companies (Issue of Share Certificates) Rules, 1960.
4. Index of Members, if the number of members exceeds fifty, and the Register
of Members is not maintained alphabetically or otherwise in a form as in
itself to constitute an index as per Section 151.
5. Register of Debenture holders as required in Section 152(1).


6. Index of Debenture holders, if the number of debenture holders exceeds fifty
and the Register of Debenture holders is not in such a form as to itself
constitute an index as required in Section 152(2).
7. Foreign Register of Members, and of Debenture holders if required to be
maintained under Section 157(1).
8. Minutes Books of the proceedings of meetings of Board of directors and its
Committees required to be maintained under Section 193(1).
9. Minutes Books of proceedings of general meetings as per Sections 193(1).
10. Books of Account, and Cost Records if prescribed under Section 209(1)(d).
11. Register of Contracts, Companies and Firms in which directors of the
company are interested as per Section 301.
12. Register of Directors, Managing Director, Manager and Secretary as
required in Section 303.
13. Register of Shareholdings and Debenture holdings of Directors as required
in Section 307.
14. Register of loans made, guarantees given and securities provided by a
public company to, and investments made in shares and debentures of other
companies in terms of Section 372A.
15. Register of Deposits as required in Section 58A read with the Companies
(Acceptance of Deposits) Rules, 1975.
16. Register of Renewed and Duplicate Share Certificates as required in
Rule 7(2) of the Companies (Issue of Share Certificates) Rules, 1960.
17. Register of Fixed Assets containing particulars of each asset acquired by a
company including its price and location to meet stipulations specified
in Section 209 and the Manufacturing and Other Companies (Auditors
Report) Order, 1988.
18. Register of buy-back of securities [Section 77A(9)].
Rule 7(3) of the Companies (Issue of Share Certificates) Rules, 1960 requires
that all entries made in the Register of Members and the Register of Renewed and
Duplicate Share Certificates shall be authenticated by the secretary or such other
person as may be appointed by the Board of Directors for sealing and signing the
share certificates.
If the company maintains the following registers, they should also be maintained
up-to-date:
1. Share Transfer Register.
2. Directors Attendance Register for Board Meetings.
3. Members Attendance Register for General Meetings.
4. Proxy Register.
15. POWERS OF REGISTRAR TO CALL FOR INFORMATION OR
EXPLANATION
A company has to file with the Registrar, its Memorandum of Association and


Articles of Association as required in Section 33, its Annual Report as required in
Section 220, and certain resolutions and agreements as required in Section 192 and
other sections of the Act. Where on perusing such documents, the Registrar is of the
opinion that any information or explanation is necessary with respect to any matter to
which such documents purport to relate, he is empowered under Section 234(1) of
the Act, to call, by a written order, on the company submitting the documents to
furnish in writing, such information or explanation, within such time as he may
specify in the order. On receipt of such order, it shall be the duty of the company,
and of all persons who are officers of the company, to furnish such information or
explanation to the best of their power vide Sub-sections (2) and (3) of Section 234 of
the Act.
If no information or explanation is furnished within the specified time, or if the
information or explanation furnished is, in the opinion of the Registrar, inadequate,
the Registrar is empowered under Sub-section (3A) of Section 234 to call on the
company by another written order, to produce before him for his inspection, such
books and papers as he considers necessary within such time as he may specify in
the order and it shall be the duty of the company and of all persons who are officers
of the company, to produce such books and papers. In case of any default in
complying with these requirements, the company and each such person shall be
punishable with fine up to five thousand rupees for each such offence and for
continuing default, five hundred rupees per day during such default. Further, the court
trying the offence may, on the application of the Registrar and after notice to the
company, make an order on the company for production before the Registrar of such
books and papers as may be required by Registrar. On receipt of the required
information, or explanation, or of any book, or paper the Registrar may annex that
writing to the document to which it relates and the matters, thus annexed, may be
inspected, and extracts thereof may be taken as the document itself.
If it is represented to the Registrar on materials placed before him by any
contributory or creditor or any other person interested, that the business of a
company is being carried on to defraud its creditors or persons dealing with it, or
otherwise for a fraudulent or unlawful purpose, the Registrar, after giving the
company an opportunity of being heard, is empowered under Sub-section (7) of
Section 234 of the Act, to call upon the company by a written order, to furnish in
writing any information or explanation on matters specified in the order, within such
time as he may specify.
Default to comply with any of these requirements, renders the company and
every officer in default as per Section 629A, liable to fine up to Rs. 5,000 for each
offence and for continuing default, Rs. 500 per day during such default.
It is not necessary that the sole object of the operations complained of should be
fraudulent and unlawful. It is sufficient if one of the objects is fraudulent or unlawful.
Where a company is consistently violating the provisions of the Act and is yet
carrying on substantial business, the Registrar is competent to take steps for
investigation of the affairs of the company. (Re. Standards Brand Ltd. (1980) 50
Comp. Cas. 75).
Under Sub-section (7), the representation of the complainant must be supported


by sufficient materials to show that there is a prima facie case for the Registrar to ask
for the information. If the Registrar is of opinion that the allegations might be true, he
would take further actions in the matter. But the Registrar need not come to a finding
or be satisfied that the company is guilty of the allegation. (Coimbatore Spinning and
Weaving Company Ltd. v. N.S. Srinivasan AIR (1959) 29 Comp. Cas. 97).
Only a person interested can make representation to the Registrar and not any
stranger, for instance, a rival company or its directors or members as such cannot be
said to have any interest. Further as the sub-section refers to business being carried
on, the fraud alleged must be a present and continuing fraud. It does not apply to a
case of past fraud.
This Section can not be invoked by a decree holder for Courts direction to
Registrar to recover the decretat amount on his behalf. It was for the decree holder to
execute the decree at the address given by the Registrar. Hamsa Koya v. Sakthi
Automobiles (Pvt.) Ltd., (1992) 73 Comp. Cases 74, 77.
Reports by Registrar
The Registrar can report in writing the circumstances of the case to the Central
Government as per Sub-section (6) of Section 234 if information or explanation
called for under Sub-sections (3A) and (4) of Section 234 is not furnished within the
specified time or if after perusal of such information or explanation, he is of the
opinion that the documents together with such information or explanation or such
books and papers discloses an unsatisfactory state of affairs or does not disclose a
full and fair statement of any matter to which the document purports to relate.
Seizure of documents by Registrar
As per Section 234A, where upon information in his possession or otherwise, the
Registrar has reasonable grounds to believe that books and papers of, or relating to,
any company or other body corporate or managing director or manager of such
company or other body corporate may be destroyed, mutilated, altered, falsified, or
secreted, the Registrar may make an application to the Magistrate of the First Class
or as the case may be, the Presidency Magistrate having jurisdiction, for an order for
the seizure of such books and papers, and after considering the application and
hearing the Registrar, if necessary, the Magistrate may, by order, authorise the
Registrar to enter, with necessary assistance, the place(s) where such books and
papers are kept, search the place(s),and seize such books and papers as he
considers necessary.
The Registrar may take copies or extracts from them or place identification mark
on them or any part thereof or deal with them in such manner as he considers
necessary, and shall within thirty days of the seizure, return those books and papers
to the company or the other body corporate or, as the case may be, to the managing
director or the manager or any other person, from whose custody they were seized
and inform the Magistrate accordingly.




INVESTIGATION
16. MEANING AND OBJECT
Shareholders have been vested with various rights including the right to elect
directors under the Companies Act, 1956. However, shareholders are often ill-
equipped to exercise effective control over the affairs of companies, and, particularly
in companies whose shareholders are widely scattered, the shareholders are, by and
large, sleeping and passive partners, and the affairs of such companies are managed
to all intents and purposes, by its Board of directors to the exclusion of a predominant
majority of shareholders. Such a situation leads to abuse of power by persons in
control of the affairs of company. It became, therefore, imperative for the Central
Government to assume certain powers to investigate the affairs of the company in
appropriate cases particularly where there was reason to believe that the business of
the company was being conducted with the intent to defraud its creditors or members
or for a fraudulent or unlawful purpose, or in any manner oppressive of any of its
members. Sections 235 to 251 of the Companies Act, 1956, contain provisions
relating to investigation of the affairs of company.
Investigation within the meaning of the relevant provisions of the Act is a form of
probe; a deeper probe; into the affairs of a company. It is a fact finding exercise. The
main object of investigation is to collect evidence and to see if any illegal acts or
offences are disclosed and then decide the action to be taken. The said expression
also includes investigation of all its business affairsprofits and losses, assets
including goodwill, contracts and transactions, investments and other property
interests and control of subsidiary companies too [R. v. Board of Trade, Ex parte St.
Martin Preserving Co. Ltd., (1964) 2 All. E.R. 561 (Q.B.D.)].
17. KINDS OF INVESTIGATION
The Companies Act, 1956 provides for carrying out the following kinds of
investigation:
1. Investigation of the affairs of the company whose business is being
conducted in fraudulent or unlawful manner or in a manner oppressive of
any member (Section 235 and Section 237);
2. Investigation of the affairs of related companies (Section 239);
3. Investigation of ownership of the company for the purpose of determining
the true persons who are or have been able to control or materially influence
the policy of the company or who are or have been financially interested in
the success or failure, whether real or apparent of the company. (Section
247).
18. INVESTIGATION OF THE AFFAIRS OF A COMPANY BY THE CENTRAL
GOVERNMENT
The Central Government has been empowered to conduct investigation into the
affairs of the company in the following circumstances:
(i) On the Report of Registrar
Section 235(1) of the Companies Act, 1956 empowers the Central Government


to order investigation into the affairs of the company on the report of the Registrar.
Accordingly, the Central Government may, where a report has been made by the
Registrar under Section 234(6) and (7), appoint one or more Inspectors to investigate
the affairs of the company and to report thereon in such manner, as the Central
Government may direct.
As per Section 234(6), the Registrar shall report in writing, the circumstances of
the case, to the Central Government in the following cases:
(a) where the information or explanation required by the registrar has not been
furnished to him within the specified time.
(b) where, after perusal of such information or explanation or of the books and
papers produced before him, the Registrar is of the opinion that the state of
affairs of the company is unsatisfactory.
(c) where, after perusal of such information or explanation or of the books and
papers produced before him, the Registrar is of the opinion that the required
documents do not disclose a full and fair statement of any matter.
(ii) On the application of Members
Under Section 235(2) of the Companies Act, 1956, the Company Law Board
may, on the application from a specified number of shareholders and after giving the
parties an opportunity of being heard, declare that the affairs of the company ought to
be investigated by an inspector or inspectors and on such declaration being made,
the Central Government shall appoint one or more competent persons as inspectors
to investigate the affairs of company and to report thereon in such manner as the
Central Government may direct. The shareholders competent to make an application
to the Company Law Board are:
(a) in case of company having a share capital, not less than two hundred
members or members holding not less than one-tenth of the total voting
power therein, and
(b) in case of company having no share capital, not less than one-fifth of the
persons on the companys register of members.
In terms of Section 236 of the Companies Act, 1956 the aforesaid application
by members of a company must be supported by such evidence as may be
required by Company Law Board for the purpose of showing that applicants have
good reasons for requiring the investigation and the Central Government may
before appointing an Inspector, require the applicants to give security, for such
amount not exceeding one thousand rupees, as it may think fit, for meeting the
expenses of the investigation.
Petition moved by a non-member for investigation of the affairs of company will
not be maintainable. [Narinder Jeet Kanwar v. Appollo Tyres Ltd. (CLB)].
(iii) On the passing of special resolution or Order of the Court
According to Section 237(a)(i) and (ii) of the Act, if the company, by special
resolution, or the Court by order, declares that the affairs of the company ought to be
investigated by an Inspector appointed by the Central Government, then it is
obligatory for the Central Government to appoint one or more competent persons as
Inspectors to investigate the affairs of company and to report thereon in such manner
as the Central Government may direct.


It may be noted that the type of the general meeting in which the resolution is
passed and the number of persons (members as well as proxies) present at such
meeting (as compared to the total number of members of the company) are
immaterial so long as the meeting is validly called and constituted, and the resolution
is passed in accordance with the provisions of the Companies Act, 1956.
The order of the court in respect of investigation of the affairs of the company
may be passed in any proceeding in which the Court is seized of the companys
affairs or in independent proceedings for investigation of the companys affairs. The
Court has no power to appoint an inspector; it can only make an order directing the
Central Government to do so. The power of the Court in this regard is not subject to
the conditions stipulated in Section 235 or Section 237(b) of the Act. The Legislature
in its wisdom has not thought fit to circumscribe the discretion or jurisdiction of the
Court in any manner. [In Re. Alembic Glass Industries Ltd., (1972) 42 Comp. Cas.
63 (Guj.)]. See also in Re. Delhi Flour Mills Co. Ltd., (1975) 45 Comp. Cas. 33 (Del.).
It had been contended in several cases that the power and discretion of the Court
were uncontrolled and the Court could direct an investigation whenever it suspected
that all was not well with the company, and it was not necessary for the petitioner to
prove his allegations before the Court for, he could prove them before the Inspectors.
For instance, in Mrs. U.A. Sumathy v. Dig Vijay Chit Fund (P) Ltd., (1983) 53 Comp.
Cas. 493 (Ker.), the contention was on the above lines. While dismissing the
contention, the Kerala High Court observed:
No doubt, clause (a)(ii) of Section 237 does not lay down what circumstances
are to be proved before the Court and on what materials, the Court could act. But that
does not mean that mere allegations are sufficient. A Court can act only on the
materials placed before it, and those materials should at least be such as to satisfy
the Court that a deeper probe into the Companys affairs is desirable in the interest of
the company itself. [See also P. Sreenivasan v. Yoosuf Sagar Abdulla & Sons (P)
Ltd., (1983) 53 Comp. Cas. 485].
In proceedings under Section 237(a)(ii), the Court will look into only those
allegations which have a bearing on the fiduciary obligation of the majority to abide by
law. The Court has also to satisfy itself that the petitioner has come to Court bona fide.
An isolated instance of mismanagement already remedied may not justify the passing
of an order under Section 237(a)(ii). Kusumasursi v. Mathru Bhumi Printing &
Publishing Co. Ltd., 1982 Tax. L.R. 2431 (at p. 2434); (1983) Comp. Cas. 370 (Ker.).
The jurisdiction of the Court is only confined to passing of the order to declare
that affairs of company require an investigation. Thereafter, it is for the Central
Government to do the rest, namely to appoint Inspector and to take up the matter in
its hand after receiving the investigation report and do such other things as are
necessary and expedient in public interest.
Special Resolution under Section 237(a)(ii) to
investigate the affairs of the Company
RESOLVED THAT, pursuant to Section 237(a)(ii) of the Companies Act, 1956,
the affairs of the company ought to be investigated by one or more competent
inspector(s) and that the Board of Directors be and is hereby authorised to approach
the Central Government in this behalf.


RESOLVED FURTHER THAT Mr. X, Company Secretary be and is hereby
authorised to make the necessary application and to do all such acts in this regard."
Explanatory Statement
The company has been suffering losses for the last two years and no dividend
could be declared. Numerous complaints have been made by shareholders that the
creditors and members are being defrauded by the management and that the
managing director is being paid commission without the knowledge and approval of
the shareholders. This has had the effect of tarnishing the image of the management
which had been running the company efficiently and effectively. In order to regain
the confidence of the shareholders and to maintain the companys image in the
industry, the directors recommend the proposed resolution for investigation of the
affairs of the company by an inspector to be appointed by the Central Government.
No director is interested in the resolution except as a member. On passing of this
resolution, the Board will take the necessary steps to approach the Central
Government in this behalf.
The clarifications issued by the Department of Company Affairs in respect of
Registrars power under Section 234 and Guidelines for ordering investigation into
the affairs of company are given hereunder:
Clarifications with respect to Sections 234, 235, 237 and 241
of the Companies Act, 1956
Section 234: RegistrarPower to call for informationProbe into balance sheets of
past years by Registrars officeWhether could be roving
Companies file balance sheets within six months to a year after the close of the
financial year. The scrutiny work is undertaken only after the receipt of the accounts.
The cases may be disposed of more promptly. The Registrar of Companies calls for
information relating to balance sheet for due performance of his responsibilities or
when any complaints are received from the shareholders, or in certain cases, the
information so obtained disclosed other aspects on which further scrutiny becomes
necessary. The suggestion that in the absence of a complaint, the Registrar should
not ask questions, is not acceptable. The point that the inquiry should not be roving
and there should be greater circumspection on the part of the scrutinising officer is
legitimate and will be kept in view.
Source: Clarification given by Department of Company Law Administration.
Section 234: RegistrarPower to call for informationWhether information or
explanation called for under the section should have some bearing on items
mentioned in balance sheet, profit and loss account, annual return, etc.
Query: The power of the Registrar under Section 234 to call for information or
explanation is interpreted by the Administration to extend to calling for information or
explanation in respect of purchases, etc., even where such purchases are not made
from associates or organizations in which relatives of directors are interested. It
appears to us that such interpretation is likely to interfere with, and delay, the day-to-
day working of industries and other organisations.


Answer: The Departments view on the subject is that the information or
explanation called for under Sub-section (1) of Section 234 should have some
bearing on items mentioned in the balance sheet, profit and loss account, annual
returns, etc. However, in case of complaints from creditors or contributories of a
company, the Registrar has also the power to call for information or explanation on
the allegations made against the company.
Source: Company News and Notes, July 1, 1963 issue.
Section 235/237: InvestigationGuidelines for ordering investigations into companys
affairs
The powers conferred on the Central Government for ordering investigation of
the affairs of companies are discretionary, while those conferred by Section 237(a) by
virtue of the provisions of Section 235, 237(b) and 247 are obligatory. In exercising
the discretionary powers under Sections 235 and 237(b), the Central Government,
while examining each case on its merits, applies certain tests which are calculated to
ensure that a substantial and worthwhile basis exists, warranting investigation. Where
the allegations are more of a recriminatory nature arising out of factional fights
between two or more predominant groups of shareholders, the Government will not
ordinarily lend itself to be a party to such disputes. In other cases, attracting the
relevant provisions of Company Law or any other law in force, the following
objectives may generally form the prerequisites for the ordering of an effective
investigation:
1. Whether an inspector can bring to light any major contravention of Company
Law or any other law on the basis of which necessary corrective or remedial
measures can be applied?
2. Whether the application of such measures alone will be enough to lend
succour to the aggrieved parties, where necessary, or to set right the affairs
of companies so as to bring them in conformity with the accepted principles
and standards of good and efficient management?
3. Whether the allegations bring out clearly or, by implications, a charge of
irregular accounting, the truth of which can be established only by the
analysis of the books by a qualified chartered accountant?
Source: Clarification issued by Department of Company Affairs.
Section 241: InvestigationCriteria for publishing Inspectors report
It has been decided by the Company Law Board that in important cases where the
reports of investigation into the affairs of ownership of companies by Inspectors
appointed for the purpose are likely to be of interest the general public, such reports will
be published. The criterion selection would be the size, the extent of public interest and
participation, the nature of industry engaged in, the extent of consumer creditors
interests and the relationship, if any, with other companies fulfilling these requirements.
Source: Company News and Notes, August 7, 1964.


(iv) On the opinion of Company Law Board
According to Section 237(b) of the Companies Act, 1956, the Central
Government may appoint one or more competent persons as inspectors to
investigate the affairs of company and to report thereon, in such manner as the
Central Government may direct, if in the opinion of Company Law Board there are
circumstances suggesting that
(i) the business of the company is being conducted with intend to defraud its
creditors, members or any other persons or for a fraudulent or unlawful
purpose or in a manner oppressive of any of its members or that the
company was formed for any fraudulent or unlawful purpose;
(ii) persons concerned in the formation of company or the management of its
affairs have in connection therewith been guilty of fraud, misfeasance or
other misconduct towards the company or towards any of its members; or
(iii) the members of the company have not been given all the information with
respect to its affairs which they might reasonably expect, including
information relating to the calculation of the commission payable to a
managing or other director or the manager of company.
It is important to note that these three grounds limit the jurisdiction of the
Company Law Board. Before ordering an investigation under Section 237(b) of the
Act or forming an opinion for investigation, the Company Law Board must satisfy itself
whether the circumstances of case fall under any one or more of the above grounds
and it has no jurisdiction to go on a fishing expedition to find evidence (Barium
Chemicals Ltd. and Another v. Company Law Board, (1966) 2 Comp LJ 151
(SC). In this case, the Secretary of the Company Law Board (CLB) issued an
Order under Section 237(b) appointing four persons to investigate the affairs of
company, which was challenged. The Chairman of the Company Law Board in
his affidavit alleged that there was delay, bungling and faulty planning of the
project entailing double expenditure, continuous losses resulting in one third
of the share capital being wiped out, shares being quoted at half their face
value and severance of their connection by some eminent persons. The Court
held that these circumstances cannot by themselves suggest an intent to
defraud or fraudulent management. Mere bungling or faulty planning cannot
constitute either misfeasance or misconduct.
It was, therefore, held that there must exist circumstances which in the opinion
of the Authority suggest what has been set out in clauses (i), (ii) or (iii) of
Section 237(b) of the Act. If it is shown that the circumstances do not exist or that
they are such that it is impossible for any one to form an opinion therefrom
suggestive of the aforesaid things, the opinion is challengeable on the ground of non-
application of mind or perversity or on the ground that it was formed on collateral
grounds and was beyond the scope of the statute.
This view has been followed in subsequent cases including Rohtas Industries
Ltd. v. S.D. Agarwal and Another, (1969) 1 Comp. L.J. 350 (S.C.): A.I.R. 1969 S.C.
707, where it was held that the existence of circumstances suggesting that the
companys business was being conducted as laid down in Sub-clause (i) or the
persons mentioned in Sub-clause (ii) of Section 237(b) were guilty of fraud or
misfeasance or other mis-conduct towards the company or towards any of its


members, is a condition precedent for the Central Government to form the required
opinion, and if the existence of those conditions is challenged, the Courts are entitled
to examine whether those circumstances were existing when the order was made. In
other words, the existence of the circumstances in question are open to judicial
review though the opinion formed by the Central Government is not amenable to
review by the Courts. [In Re. Barium Chemicals Ltd. (Supra) and In Re. Rohtas
Industries Ltd. (Supra)].
In a petition filed under section 237 of the Companies Act, 1956, a bank sought
an order directing investigation into the affairs of the company on the ground that the
business of the company was conducted for a fraudulent and unlawful purpose with
intent to defraud the general public and the bank. The bank also sought suppression
of the board of directors of the company and appointment of an administrator and
special officer to take charge of the management as well as its assets and properties.
The company raised an objection that the petition was not maintainable in terms of
the Limitation Act, 1963, and that since inspection of the company had already been
ordered under section 209A of the Act, there was no scope for ordering investigation.
Allowing the petition of the bank, it was held that the petition is not barred by
limitation as the provisions of the Limitation Act, 1963, do not apply to proceedings
before a quasi-judicial authority. Further, an order of investigation is not an end by
itself; it is only a means to find out the full facts of the acts complained of. It is nothing
but an exploratory measure to be proved or disproved with reference to the facts later
on ascertained. The discretionary power of the Company Law Board has to be
exercised in good faith. Unless proper grounds exist for investigation of the affairs of
the company, investigation cannot be ordered. Though inspection under section 209A
of the Companies Act, 1956, had already been ordered in the case of the company,
the scope of inspection was different from the scope of investigation. Further,
investigation alone could reveal the true state of affairs of the company. So, the court
was of the view that as per the facts and circumstances of the case it is a fit case for
ordering investigation under section 237(b) of the Act. - Bank of Rajasthan Ltd. v.
Rajasthan Breweries Ltd & Ors. [(2007) 140 Comp Cas 622 (CLB)].
Some of the significant judicial decisions relevant on the matter are briefly
indicated below:
(1) The expression if in the opinion of the Company Law Board, there are
circumstances suggesting means 'if it appears (to the CLB) that there is
likelihood of the existence of mal-practices envisaged in clauses (i) to (iii). In
forming its prima facie opinion, the CLB must proceed reasonably, must not
be actuated by bad faith or dishonesty, must exclude from consideration
matters which are irrelevant and must act according to law and humour
[New Central Jute Mills Ltd. v. Dy. Secretary, Ministry of Finance (1970) 40
Com. Cases 102, (DB) (Cal.)].
(2) Where as a result of an inspection of accounts by a Government agency, the
Government came to know of embezzlement and other misconduct on the
part of persons in management, it was held that it was not necessary for the
Government to order an investigation of the affairs before making a police
complaint of the offences. [B.M. Bajoria v. Union of India (1972) 42 Com.
Cases, 338 (Del.)].
(3) The nature of power conferred on the Central Government under
Section 237(b) makes it clear that unless proper grounds exist for


investigation of the affairs of company, such investigation will not be lightly
undertaken. An investigation may seriously damage a company and should
not be ordered without proper material gathered in the manner provided in
the Act. The power of investigation has been conferred on the Central
Government on the faith that it will be exercised in a reasonable manner
[Rohtas Industries Ltd. v. S.D. Agarwal, (1969) 39 Com. Cases 781, AIR
1969 SC].
(4) Where the order of the Central Government is challenged, the Central
Government must prove the existence of prima facie circumstances leading
to investigation. Sufficiency or adequacy of the evidence is not questioned at
the stage of ordering the investigation [Sahu Jain Ltd. v. Dy. Secretary,
Ministry of Finance (1966) 36 Comp. Cas. 543 (Cal.)]. The Court will not test
the opinion of the Central Government whether the investigation is
necessary, but may examine the basis of opinion.
(5) Economic workings of the company cant be a matter for investigation. There
must be allegation of illegal acts of malpractices, misfeasance etc. to sustain
an order of investigation [Re. Delhi Flour Mills Company Ltd. (1975) 45
Comp. Case 33].
(6) Where the conclusion of CLB was not sustained by the facts, the Court
quashed the order appointing the inspectors as it had an adverse effect on
the reputation and credibility of the company. [Hariganga Cement Ltd. v.
CLB (1988) 64 Comp. Cas. 603].
19. ONLY INDIVIDUAL TO BE APPOINTED AS INSPECTOR
Section 238 of the Companies Act, 1956 prohibits the appointment of any firm,
body corporate or other association as an inspector under Section 235 or 237 of the
Act. Thus only an individual or individuals may be appointed as Inspector(s) to
conduct the investigation into the affairs of the company and to report thereon in the
prescribed manner.
20. POWERS OF INSPECTORS
The Inspectors, appointed by the Central Government to investigate into the
affairs of the company, have been given wide powers under the Companies
Act,1956. The powers can be described under the following heads:
(i) To carry investigation into the affairs of related companies
According to Section 239(1) of the Companies Act, 1956, an inspector may also
investigate the affairs of following body corporates or persons, if the inspector thinks
that such investigation is necessary for the purpose of his investigation:
(a) any other body corporate which is, or has at any relevant time, been the
companys subsidiary or holding company or a subsidiary of its holding
company or a holding company of its subsidiary;
(b) any other body corporate which is, or has at any relevant time been
managed by any person as managing director or as manager, who is or
was at the relevant time, the managing director or the manager of the
company; or
(c) any other body corporate which is or has at any relevant time been
managed by the company or whose Board of Directors comprises of


nominees of the company or is accustomed to act in accordance with the
directions or instructions of:
(i)the company; or
(ii)any of the directors of the company; or
(iii)any company, any of whose directorships is held by the employees or
nominees of those having control and management of the first
mentioned company; or
(d) any person who is or has at any relevant time been the companys
managing director or manager.
However, as per sub-section (2) of Section 239, the inspector must obtain prior
approval of Central Government before taking up investigation into the affairs of the
body corporate and persons referred to in (b), (c) or (d) above, and before granting
such approval, the Central Government shall give such body corporate or persons, a
reasonable opportunity to show cause why such approval should not be accorded.
(ii) To compel production of documents and obtain information
According to Section 240(1) of the Act, it shall be the duty of all officers and other
employees and agents of the company including all officers and other employees and
agents of such body corporate whose affairs are being investigated under Section 239,
to preserve and to produce to an inspector or any person authorised by him in this
behalf, with the previous approval of Central Government, all books and papers of, or
relating to, the company or, as the case may be, or of relating to other body corporate,
which are in their custody or power, and otherwise to give to the Inspector all
assistance in connection with the investigation which they are reasonably able to give.
Further, as per Section 240(1A), the Inspector may with the previous approval of
the Central Government require any body corporate other than the body corporates
referred in Sub-section (1), to furnish such information to, or produce such books and
papers before him or any person authorised by him in this behalf with previous
approval of the Central Government, as he may consider necessary, if the funishing
of such information or the production of such books and papers is relevant or
necessary for the purpose of conducting his investigation.
(iii) To keep books and papers
According to Section 240(1B) of the Companies Act, 1956 the Inspector may
keep in his custody any books and papers produced before him under sub-section (1)
or sub-section (1A) for six months and thereafter shall return the same to the
company, body corporate, firm or individual by whom or on whose behalf such books
and papers are produced. Further the Inspector may call for the books and papers if
needed again. He shall return those books and papers to the body corporate
concerned if certified copies of the same are furnished to him.
(iv) To examine on oath
According to Section 240(2) of the Act, an Inspector may examine on oath, any
officer, other employees and agents of the company or other body corporate whose
affairs are being investigated under Section 239 and with the previous approval of the
Central Government, any other person, in relation to the affairs of the company or
other body corporate, as the case may be, and may administer on oath accordingly


and for that purpose may require any of those persons to appear before him
personally. Notes of such examination shall be taken down in writing and shall be
read over to or by, and signed by, the person examined, and may thereafter be used
in evidence against him.
(v) To seize the documents
According to Section 240A of the Act where in the course of investigation under
Section 235 or Section 237 or Section 239 or Section 247, the Inspector has
reasonable grounds to believe that books and papers of, or relating to any company
or other body corporate or managing director or manager of such company or other
body corporate may be destroyed, mutilated, altered or falsified or secreted, the
Inspector may make an application to a Magistrate of the First Class or, as the case
may be, the Presidency Magistrate having jurisdiction for an order for seizure of such
books or papers. After considering the application and hearing the Inspector, the
Magistrate may by order authorise an Inspector to enter, with such assistance, as
may be required, the place(s) where such books and papers are kept; to search that
place(s) in the manner specified in the order and to seize the books and papers he
considers necessary, for the purpose of his investigation. The Inspector shall keep in
his custody the books and papers seized by him, for such period not later than the
conclusion of investigation as he considers necessary and thereafter shall return the
same to the company or as the other body corporate or as the case may be, to the
managing director or manager or any other person from whose custody or power
those books were seized. However before returning such books and papers the
Inspector may place identification marks on them or on any part thereof. Every
search or seizure made under this section shall be carried out in accordance with the
provisions of the Code of Criminal Procedure, 1898 relating to search or seizures
made under that code.
21. PENALTY FOR DEFAULT
According to Section 240(3)of the Companies Act, 1956, if any person fails
without reasonable cause or refuses
(a) to produce to an Inspector or any person authorised by him in this behalf
with the previous approval of the Central Government, any book or paper
which it is his duty under Sub-section (1) or (1A) to produce; or
(b) to furnish any information which it is his duty to furnish under sub-section (1A) to
furnish; or
(c) to appear before the Inspector personally when required to do so under sub-
section (2) or to answer any question which is put to him by Inspector in
pursuance of that sub-section; or
(d) to sign the notes of any examination taken down in writing after
investigation,
he shall be punishable with imprisonment for a term which may extend to six months
or with fine which may extend to twenty thousand rupees or with both and also with a
further fine which may extend to two thousand rupees for everyday after the first day
during which the failure or refusal continues.
22. INSPECTORS REPORT
According to Section 241(1) of the Companies Act, 1956, the Inspector may, and


if so directed by the Central Government, shall make interim reports to that
Government and on the conclusion of the investigation, shall make a final report to
the Central Government.
Any such report shall be written or printed as the Central Government may direct.
As per Section 241(2) of the Act, the Central Government :
(a) shall forward a copy of any report other than an interim report made by the
Inspectors to the company at its registered office and also to any body
corporate dealt within the report by virtue of Section 239 of the Act;
(b) may, if it thinks fit, furnish a copy thereof on request and on payment of
prescribed fee to any person who is a member of the company or other body
corporate dealt with in the report by virtue of Section 239 or whose interests
as a creditor of the company, other body corporate aforesaid appear to the
Central Government, to be affected;
(c) shall, where the inspectors are appointed under Section 235(2), furnish at
the request of the applicants for the investigation, a copy of the report to
them;
(d) shall, where the inspectors are appointed under Section 237 in pursuance
of an order of the Court, furnish a copy of the report to the Court;
(e) shall, where inspectors are appointed in pursuance of provisions of
Section 235(2) of the Act, furnish a copy of the report to the Company Law
Board; and
(f) may also cause the report to be published.
23. FOLLOW-UP ACTION ON THE REPORT
On receipt of the report of the Inspectors appointed to investigate the affairs of
Company, the Central Government may take any one or more of the following
actions:
(i) Prosecution for Criminal Offence
As per Section 242 of the Act, if from any report made under Section 241, it
appears to the Central Government that any person has, in relation to the company
or in relation to any other body corporate, whose affairs have been investigated by
virtue of Section 239, been guilty of any offence for which he is criminally liable, the
Central Government may, after taking such legal advice as it thinks fit, prosecute
such person for the offence and it shall be the duty of all officers and other
employees and agents of the company or body corporate, as the case may be (other
than the accused in the proceedings), to give the Central Government all assistance
in connection with the prosecution which they are reasonably able to give.
(ii) Winding up of the Company or Relief by the Court
According to Section 243 of the Act, if any such company or other body corporate
is liable to be wound up under the Act and it appears to the Central Government from
any such report as aforesaid that it is expedient so to do by reason of any of the
circumstances suggesting that:
(i) the business of the company is being conducted with intend to defraud its
creditors, members or any other persons, or otherwise for a fraudulent or
unlawful purpose, or in a manner oppressive of any of its members, or that


the company was formed for any fraudulent or unlawful purpose;
(ii) the persons concerned in the formation of the company or the management
of its affairs have in connection therewith been guilty of fraud, misfeasance
or other misconduct towards the company or towards any of its members,
the Central Government may, unless the company or body corporate, is already
being wound up by the Court, cause to be presented to the Court by any person
authorised by the Central Government in this behalf:
(a) a petition for the winding up of the company or body corporate on the
ground that it is just and equitable that it should be wound up;
(b) an application for an order under Section 397 or 398; or
(c) both the petition and application as aforesaid.
Though the report of the inspector does not have any evidentiary value in the
ordinary sense of the term, but if the company does not challenge the contents of the
report, or does not appear to resist a winding up order, the Court can treat it as
sufficient evidence to order a winding up of the company. In Re. Travel & Holiday
Club Ltd., (1967) 2 All E.R. 606: In Re. S.B.A. Properties Ltd., (1967) 2 All E.R. 610.
The inspectors report can be used to support a contributorys petition for winding
up of the company on the just and equitable ground. In Re. St. Piran Ltd., (1981) 3
All E.R. 270 (Ch.D).
Even if on the report of inspectors appointed under Section 235 or 237, it
appears to the Central Government that it is expedient to apply for winding up on the
ground that it is just and equitable to do so or to apply for an order under Section 397
or 398, the Central Government should not take any steps if the Court is already
seized of proceedings to wind up the company [Mool Chand Gupta v. Jaganath
Gupta & Co. (P) Ltd., A.I.R. 1979 S.C. 1038].
(iii) Recovery of Damages or Property
According to Section 244(1), if from any report of Inspectors, it appears to the
Central Government that proceedings ought, in the public interest, to be brought by
the company or any body corporate whose affairs have been investigated under
clauses (a), (b) and (c) of Section 239:
(a) for the recovery of damages in respect of any fraud, misfeasance or other
misconduct in connection with the promotion or formation or the
management of its affairs, of such company, or body corporate; or
(b) for the recovery of any property of such company, or body corporate, which
has been misapplied or wrongfully retained;
the Central Government may itself bring proceedings for that purpose in the name of
the company or body corporate.
The Central Government shall indemnify such company or body corporate
against any costs or expenses incurred by it in, or in connection with, any
proceedings brought by virtue of Sub-section (1). Whilst Section 242 is related to an
offence, Section 244 pertains to tortuous act and civil action for recovery of damages.
However, for any such action to be successful in prosecution, there must be a clear
proof that the act concerned amounts to fraud, misfeasance or other misconduct in
the management of the affairs of the company. In an English decision, it has been


held that the expression 'or other misconduct should not be interpreted ejusdem
generis with fraud and misfeasance but may be taken to include also misconduct not
involving moral turpitude [Selangor United Rubber Estates Ltd. v. Cradock (1968) 1
Comp. L.J. 26: (1968) 2 All E.R. 1073 (Ch.D.)].
As per Section 246, a copy of any report of any inspector(s) appointed under
Section 235 or 237 authenticated in such manner, if any, as may be prescribed, shall
be admissible in any legal proceeding as evidence of the opinion of the inspector(s)
in relation to any matter contained in the report.
24. EXPENSES OF INVESTIGATION
According to Section 245, the expenses of and incidental to an investigation by
an inspector appointed by the Central Government under Sections 235 or 237 shall
be defrayed in the first instance by the Central Government, but the following persons
shall, to the extent mentioned below, be liable to reimburse the Central Government
in respect of such expenses:
(a) any person who is convicted on a prosecution instituted in pursuance of
Section 242, or who is ordered to pay damages or restore any property in
proceedings brought by virtue of Section 244, may, in the same
proceedings, be ordered to pay the said expenses to such extent as may be
specified by the court convicting such person or ordering him to pay such
damages or restore such property as the case may be;
(b) any company or body corporate in whose name proceedings are brought as
aforesaid shall be liable, to the extent of the amount or value of any sums or
property recovered by it as a result of the proceedings; and
(c) unless, as a result of the investigation, a prosecution is instituted in
pursuance of Section 242:
(i)any company, body corporate, managing director or manager dealt with by
the report of the Inspector shall be liable to reimburse the Central
Government in respect of the whole of the expenses, unless and except
in so far as, the Central Government otherwise directs; and
(ii)the applicants for the investigation, where the inspector was appointed in
pursuance of the provisions of sub-section (2) of Section 235, shall be
liable to such extent, if any, as the Central Government may direct.
The afore-mentioned expenses shall be recoverable from that company, body
corporate, managing director or manager, as an arrear of land revenue. Further any
costs or expenses incurred by the Central Government in or in connection with
proceedings brought by virtue of Section 244 (including expenses incurred by
virtue of Sub-section (2) thereof) shall be treated as expenses of the investigation
giving rise to the proceedings.
25. PREPARATION BY A COMPANY SECRETARY TO FACE INVESTIGATION
Before an inspector commences investigation into the affairs of a company, it is
advisable for the Secretary to prepare a report touching upon various aspects of the
activities of his company particularly those transactions in respect of which fraud or
misfeasance or mismanagement is alleged. This exercise will enable the secretary to
handle the investigation into the affairs of his company with courage and confidence.


The aspects which should be considered by the secretary include:
1. Basic information about the companyName of the company; date of
incorporation; location of the registered office, branches, factories and other
offices; status of the companypublic or private; objects of the company
capital structure; voting rights attached to the shares; shareholding pattern
of the company.
2. Business activitiesNature of existing business, licensed and installed
capacities, expansion programme and sources of finance, whether the
company belongs to a particular group; if so the names of other companies
falling within the same group.
3. Debentures, bank finance and deposits.
4. Foreign collaboration agreements.
5. ManagementBrief history of past management set up; existing
management set up; composition of Board of Directors; whether the terms
and conditions of the appointment of managerial personnel are being
adhered to; details regarding appointment of directors and their relatives to
an office or place of profit.
6. Whether all the statutory registers including minutes books are being
maintained up-to-date?
7. Whether the internal checks and internal control system is being properly
followed?
8. Working results and financial positionGeneral assessment of working of
the company, evaluation of the level of performance and efficiency of the
management, a review of the profits of the company, performance data,
financial position of the company in the context of its working results for the
last three years.
9. Compliance by the company and its officers with the provisions of the
Companies Act, 1956.
10. Compliance with the provisions of other Acts applicable to the company.
11. AccountsThe compliance with Accounting Standards and compliance with
the provisions of Schedule VI of the Act; Whether adequate provisions were
made for provident fund, gratuity, taxes, bonus, dividend etc.; Whether the
system of periodical reporting to the top management on the financial
performance is followed; whether the income-tax assessments are up-to-
date; Whether the provisions of Sections 215, 217, 219 and 220 have been
complied with; whether the cost accounting records are maintained.
12. Whether the loans taken and loans advanced to Directors, the firms in which
they are partners or companies in which they are Directors are in
accordance with the provisions of the Act.
13. The investments made by the company.
14. Sole selling agency agreement.
15. Instance of mismanagement and other irregularities.
16. Acquisition/disposal of substantial assets.
17. A scrutiny of abnormal/heavy expenditure items.


18. Complaints, if any, against the company and its management and steps
taken to redress them.
19. Brief particulars of the litigations against the company and the reasons
thereof.
20. Managements relations with the employees and labour.
21. ShareholdersInstance of oppression of minority shareholders, allegations
of non-receipt of dividend, notices of meetings, accounts, share certificates,
etc.; illegal forfeiture of shares, etc. and steps taken to redress Investors,
complaints.
22. AuditorsName and address of statutory auditors, compliance as per the
provisions of Sections 224, 227 and 229.
23. Qualifications in Auditors Report and Directors Comments thereon under
Section 217. Instances of concealment of income by falsification of
accounts; an mismanagement of the company, transactions entered into
with intent to defraud the creditors, shareholders and government; and
whether these instances have been reported in the Auditors Report.
Follow-up Action
After the above-mentioned information is compiled, the next step should be to list
out the action points and pursue them vigorously. This may rectify many aspects which
would otherwise lead to serious problems to the company and its management.
26. INVESTIGATION OF THE OWNERSHIP OF COMPANY
In the public interest it may become necessary for the Central Government to know
the persons who are financially interested in a company and who control the policy or
materially influence it. For this reason, the Central Government has been empowered
under Section 247(1) of the Companies Act, 1956, to appoint one or more Inspectors to
investigate and report on the membership of any company and other matters relating to
the company, for the purpose of determining the true persons:
(a) who are or have been financially interested in the success or failure, whether
real or apparent, of the company; or
(b) who are or have been able to control or materially to influence the policy of
the company.
As per sub-section (1A) of Section 247, the Central Government shall appoint
one or more inspectors under sub-section (1), if the Company Law Board, in the
course of any proceedings before it, declares by an order that the affairs of the
company ought to be investigated as regards the membership of the company and
other matters relating to the company for the purpose of determining the true persons
who are or have been financially interested in success or failure whether real or
apparent of the company; or who are or have been able to control or materially to
influence the policy of the company.
The Central Government may define the scope of investigation by the Inspector
in respect of matters or the period to which it is to extend or otherwise and may also
limit the investigation to matters connected with particular shares or debentures.
Subject to the terms of an inspectors appointment, the powers of Inspector as
per Section 247(3) of the Act, shall extend to the investigation of any circumstances,


suggesting the existence of any arrangement or understanding which though not
legally binding, is or was observed or is likely to be observed in practice and which is
relevant for the purpose of his investigation.
The provisions of Sections 239, 240 and 241 shall apply mutatis mutandis to the
investigation under Section 247, in relation to all persons (including persons
concerned only on behalf of others) who are or have been or whom the Inspector has
reasonable cause to believe to be or to have been, financially interested in the
success or failure, or the apparent success or failure of the company or of any other
body corporate whose membership or constitution is investigated with that of the
company or able to control or materially influence the policy of such company, body
corporate, as they apply in relation to officers and other employees and agents of the
company, of other body corporate, as the case may be.
On completion of investigation, the Inspector is required to submit his report to
the Central Government. However, the Central Government, is not bound to furnish
the company or any other person with a copy of report, if it is of the opinion that there
is good reason for not divulging the contents of report or part thereof. However, the
Central Government shall cause to be kept by the Registrar, a copy of any such
report or as the case may be, of the parts thereof, as respects which, it is not of that
opinion. The expenses of the Investigation shall be defrayed by the Central
Government out of moneys provided by Parliament unless it directs that the
expenses or any part thereof should be paid by the persons on whose application the
investigation was ordered.
27. RESTRICTIONS ON SHARES AND DEBENTURES
According to Section 250(1) of the Companies Act, 1956 if it appears to the
Company Law Board, whether on a reference made to it by the Central Government
in connection with any investigation under Section 247, or on a complaint made by
any person in this behalf that there is good reason to find out the relevant facts about
any shares (whether issued or to be issued) and the Company Law Board is of the
opinion that such facts cannot be found out unless the restrictions specified in sub-
section (2) are imposed, the Company Law Board may, by order direct, that shares
shall be subject to the restrictions imposed by sub-section (2) for such period not
exceeding three years as may be specified in the order.
The restrictions which may be imposed upon shares and debentures are as
follows:
(i) Any transfer of those shares shall be void;
(ii) Where those shares are to be issued, they shall not be issued and any issue
thereof or any transfer of the right to be issued therewith, shall be void;
(iii) No voting rights shall be exercisable in respect of those shares;
(iv) No further shares shall be issued in right of those shares or in pursuance of
any offer made to the holder thereof and any issue of such shares or any
transfer of the right to be issued therewith, shall be void; and
(v) Except in Liquidation, no payment shall be made of any sums due from the
company on those shares, whether in respect of dividend, capital or


otherwise.
Where a transfer of shares in a company has taken place and as a result thereof
a change in the composition of the Board of directors of the company is likely to take
place and the Company Law Board is of the opinion that any such change would be
prejudicial to the public interest, the Company Law Board may, by order, direct that:
(i) the voting rights in respect of those shares shall not be exercisable for such
period not exceeding three years as may be specified in the order,
(ii) no resolution passed or action taken to effect a change in the composition of
the Board of Directors before the date of the order shall have effect unless
confirmed by the Company Law Board.
Where the Company Law Board has reasonable ground to believe that transfer of
shares is likely to take place where by a change in the composition of the Board of
Directors of the company is likely to take place and the Company Law Board is of the
opinion that any such change would be prejudicial to the public interest, the Company
Law Board may, by order, direct that, any transfer of shares in the company during
such period not exceeding three years, as may be specified in the order, shall be
void.
In the matter of Shaw Wallace Company Ltd. and in the matter of Ajaib Singh and
Others v. R.G. Shaw & Co. Ltd., the Company Law Board vide its Order No. 6/3
C.IX/85 dated 13.10.85 has held that Sub-section (3) of Section 250 can be invoked if
and only if the following three links in a chain are satisfied. What is more important is
that the first link in the chain should give rise to the second and the second to the
third. That is, there must exist a casual relationship in the said chain.
These links are:
(i) There must be a transfer of shares;
(ii) The transfer of shares should be likely to result in change in the composition
of the Board of directors; and
(iii) Such change should be prejudicial to the public interest.
It is clear, therefore, that unless the contemplated chain reaction takes place the
provisions of Section 250(3) cannot be applied. It will be seen from the provisions
extracted above that the stimulation for the reaction has to start from transfer of
shares. Thus, transfer of shares is sine qua non for setting the machinery of Sub-
section (3) in motion.
Sub-sections (9) and (10) of Section 250 prescribe penalties for contravention of
any order passed by the Company Law Board or the restrictions imposed by it under
Sub-section (2). Any person who contravenes the provisions of Sub-sections (2), (3)
and (4) shall be punishable with imprisonment for a term which may extend to six
months or with fine which may extend to fifty thousand rupees or with both. Further, if
shares in any company are issued in contravention of provisions of Sub-section (2), the
company and every officer of the company who is in default shall be punishable with
fine which may extend to fifty thousand rupees. A prosecution shall not be instituted
under this section except, by, or with the consent of, the Central Government.
All the aforementioned provisions of Section 250 shall apply to debentures as
they apply to shares. Provisions in Section 250 have been made to render cornering
of shares by unscrupulous persons more difficult.


28. SAVING FOR DISCLOSURE BY LEGAL ADVISOR OR BANKER
Section 251 grants professional immunity to legal advisors and bankers. It
provides that
Nothing in Sections 234 to 247 and 250 shall require the disclosure to the
Company Law Board or to the Central Government or to the Registrar or to an
Inspector appointed by the Central Government
(a) by a legal adviser, of any privileged communication made to him in that
capacity, except as respect the name and address of his client; or
(b) by the bankers of any company, body corporate or other person referred to
in the sections aforesaid, as such bankers of any information as to the
affairs of their customers other than such company, body corporate or
person.
29. PROTECTION OF THE EMPLOYEES OF COMPANY DURING INVESTIGATION
Under Section 635B of the Act, the employees of the company under
investigation, who make disclosure during the course of investigation, are protected
against dismissal, discharge, removal, etc. The section provides that if during the
course of any investigation of the affairs and other matters of, or relating to the
company, body corporate or persons under Sections 235, 237 or 239; or of the
membership and other matters of or relating to the company, or the ownership of
shares in or debentures of a company or body corporate or the affairs and other
matters of or relating to company, body or person under Sections 247 or during the
pendency of any proceeding against any person concerned in the conduct and
management of the affairs of a company, any such company, or body, or person
proposes to discharge or to punish any employee whether by way of dismissal,
removal or reduction in rank or otherwise, then the company, the body corporate or
the person concerned must send to the Company Law Board a previous intimation in
writing of the action proposed to be taken against the employee. If the Company Law
Board has any objection to the action proposed to be taken, it must send by post a
notice thereof in writing to the company, body or person concerned. The Board is not
bound to hear the company or any other person before issuing the notice of its
objection [Ashoka Marketing Ltd. v. Company Law Board, (1968) 38 Comp. Cas.
519]. If the company, body corporate or the person concerned does not receive any
notice of objection from the Board within thirty days of the sending of the intimation by
it, then and only then, the company, body or person concerned may proceed to take
the proposed action against the employees. If the company, body or person
concerned is dissatisfied with the objection raised by the Company Law Board, it
may, within thirty days of the receipt of notice, prefer appeal to the Court in the
prescribed manner and on payment of prescribed fees. The decision of the Court on
such appeal shall be final and be binding on the Company Law Board and on the
company, body or person concerned.
The aforesaid provisions of Section 635B are without prejudice to the provisions
of any other law for the time being in force.




LESSON ROUND-UP
The Act provides exhaustive powers to the Registrar or Officers authorized by the
Central Government or Securities and Exchange Board of India, as the case
may be, to conduct inspection in order to ascertain that all transactions have
been validly entered into and recorded in appropriate books and that applicable
laws, rules and procedures have been complied with by the company.
Also, the books of account and other books and papers shall be open to
inspection by any director during business hours. The Companies Act does not
give any statutory right of inspection of books of account to a shareholder.
However articles of a company may give such a right to the shareholders.
No previous notice is required to be given for making inspection of the books of
account and other books and papers of a company. The books of account are
required to be kept either at the registered office of the company or at some other
place, after intimation to the Registrar.
The Act requires every director, other officer or employee of the company to give
to the person making inspection under this section, all assistance in connection
with the inspection which the company may be reasonably expected to give.
The Act empowers the person making the inspection to make or cause to be
made copies of books of account and other books and papers or place or cause
to be placed any marks of identification thereon in token of inspection having
been made.
The person making an inspection is required to make a report to the Central
Government after inspection of books of account and other books and papers of
the company.
If a default is made in complying with the provisions of inspection, every officer of
the company, who is in default, shall be punishable with fine and imprisonment.
In respect of inspection, the Company Secretary should take all possible steps to
comply with the provisions of the Act and other laws. When inspection of books
(by the Registrar or an officer of the Central Government or SEBI) is anticipated,
he/she should make sure that the prescribed statutory registers and records are
being maintained up to date by the company.
Investigation within the meaning of the relevant provisions of the Act is a form of
probe; a deeper probe; into the affairs of a company. It is a fact finding exercise.
The main object of investigation is to collect evidence and to see if any illegal
acts or offences are disclosed and then decide the action to be taken.
The Companies Act provides for carrying out investigation of the affairs of the
company whose business is being conducted in fraudulent or unlawful manner or
is a manner oppressive of any member or of the affairs of related companies or of
ownership of the company for the purpose of determining the true persons who
are or have been able to control or materially influence the policy of the company
or who are or have been financially interested in the success or failure, whether
real or apparent of the company.
The Central Government has been empowered to conduct investigation into the
affairs of the company in circumstances s specified under the Act.
Only an individual or individuals may be appointed as Inspector(s) to conduct the
investigation into the affairs of the company and to report thereon in the
prescribed manner. Inspectors have been given wide powers under the
Companies Act.

The inspector may, and if so directed by the Central Government, shall make


interim reports to that Government and on the conclusion of the investigation,
shall make a final report to the Central Government.
On receipt of the report of the Inspector appointed to investigate the affairs of the
Company, the Central Government may undertake prosecution for criminal
offence, winding up of company or relief by the court, recovery of damages or
property.
Before an inspector commences investigation into the affairs of the company, it is
advisable for the Secretary to prepare a report touching upon various aspects of
the activities of his company particularly those transactions in respect of which
fraud or misfeasance or mismanagement is alleged.
In the public interest it may become necessary for the Central Government to
know the persons who are financially interested in a company and who control
the policy or materially influence it. For this reason, the Central Government has
been empowered under the Act to appoint one or more Inspectors to investigate
and report on the membership of any company and other matters relating to the
company.
Under the Act, the employees of the company under investigation, who make
disclosure during the course of investigation, are protected against dismissal,
discharge, removal, etc.
SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answer to these Questions are not to
be submitted for revaluation)
1. Discuss the provisions of Companies Act, 1956 with respect to investigation
of the affairs of company by the Central Government.
2. What are the powers of Inspectors appointed under Section 235 or 237 of
the Companies Act, 1956?
3. As a company secretary what steps would you take in order to face
Investigation.
4. Draft a resolution for the investigation of the affairs of company.
5. Company Law Board may by order direct that the shares of company shall
be subject to certain restrictions. What are those restrictions and when can
they be imposed?
6. Discuss the provisions of Companies Act, 1956 which protects the
employees of company during investigation.
7. Discuss the powers of Registrar to call for information or explanation.

Suggested Readings :
(1) Company Law and PracticeA.K. Majumdar and Dr. G K Kapoor
(2) A Guide to Companies ActA. Ramaiya
(3) Inspection and InvestigationICSI Publication
(4) Circulars and Clarifications on Company LawTaxman Publication.






STUDY XXVII
SHAREHOLDERS DEMOCRACY; MAJORITY POWERS AND
MINORITY RIGHTS; AND PREVENTION OF OPPRESSION
AND MISMANAGEMENT

LEARNING OBJECTIVES
This lesson explains the concept of shareholders democracy, the majority powers
and minority rights. The lesson describes the principle of non-interference in detail
along with its justifications and advantages. It also gives provisions for protection of
minority rights and shareholders remedy. Provisions under the Companies Act for
prevention of oppression and mismanagement have also been discussed herein.
At the end of the lesson, you should be able to understand:
Concept of shareholders democracy.
Powers of majority.
Principle of non-interference or Rule in Foss v. Harbottle along with its
justification and advantages.
Exceptions to the rule-Protection of minority rights and shareholders remedies.
Actions by shareholders in common law.
Statutory remedy under the Companies Act.
Meaning of oppression and its prevention.
Winding up order under just and equitable clause.
Prevention of mismanagement.
Persons entitled to apply.
Powers of the Company Law Board and Central Government to prevent
oppression or mismanagement.
Consequences of termination or modification of agreements.
Powers to prevent changes in Board.
1. SHAREHOLDERS' DEMOCRACY
Introduction
The concept of shareholders democracy in the present day corporate world
denotes the shareholders supremacy in the governance of the business and affairs
of corporate sector either directly or through their elected representatives. The
Government of India, has been endeavouring to disperse the shareholdership as
widely as possible to avoid concentration of ownership in few hands.
Recognising the supreme authority of the shareholders, the Companies Act,
1956 has given authority to the shareholders to appoint directors at the Annual
General Meetings to direct, control, conduct and manage the business and affairs of
the company.
During the past five years there has been unprecedented growth in Indian Capital
Market amidst introduction of variety of economic reforms. As a result the investor
1046


participation in the economic reforms process has accelerated. But a large and
sustained investor participation will depend much on the presence and effectiveness
of regulatory framework which aims to ensure overall fairness to investors and bring
about a high degree of confidence in the market.
It is a widely acclaimed fact that in any corporate enterprise the shareholders are
the owners. But in fact they are seldom able to exercise any ownership rights except
to sometimes cast votes at Annual General Meetings. The members therefore, are
only passive investors rather than active participants in the governance of the
corporate process. Still the directors, as per law, are answerable to the shareholders,
may be at least for two reasons, one the shareholders are directly concerned with the
economic viability of the investee company so to feel sure about the safety of their
investment and secondly being the recognised owners of the company to enforce
their rights to control the company as and when the company enters into contractual
relationship with third persons thereby incurring greater obligation.
Thus the shareholder democracy can play an important role in stimulating the
Board of directors, raising company performance, and ensuring that the community at
large takes a greater interest in industrial progress.
Democracy means the rule of people, by people and for people. In that context
the shareholders democracy means the rule of shareholders, by the shareholders,
and for the shareholders in the corporate enterprise, to which the shareholders
belong. Precisely it is a right to speak, congregate, communicate with co-
shareholders and to learn about what is going on in the company.
Under the Companies Act the powers have been divided between two segments:
one is the Board of Directors and the other is of shareholders. The directors exercise
their powers through meetings of Board of directors and shareholders exercise their
powers through Annual General Meetings/General Meetings. Although
constitutionally all the acts relating to the company can be performed in General
Meetings but most of the powers in regard thereto are delegated to the Board of
directors by virtue of the constitutional documents of the company viz. the
Memorandum of Association and Articles of Association.
Under Section 291 of the Companies Act a general power has been conferred on
the Board of directors. The section provides that Subject to the provisions of this Act,
the Board of directors of a company shall be entitled to exercise all such powers and
to do all such acts and things, as the company is authorised to exercise and do.
Proviso to this section restricts the power of the Board of directors to do things
which are specifically required to be done by shareholders in the General Meetings
under the provisions of Companies Act or Memorandum of Association or the Articles
of Association.
Thus the Companies Act has tried to demarcate the area of control of directors
as well as that of shareholders. Basically all the business to be transacted at the
meetings of shareholders is by means of an ordinary resolution or a special
resolution.


Some of the businesses which can be transacted at meetings of shareholders are:
1. Alteration of Memorandum of Association and Articles of Association.
2. Further issue of share capital.
3. To transfer some portions of uncalled capital to reserve capital to be called
up only in the event of winding up of the company.
4. To reduce the share capital of the company.
5. To shift the registered office of the company outside the state in which the
registered office is situated at present.
6. To decide a place other than the registered office of the company where the
statutory books, required to be maintained under Sections 159 and 160 may
be kept.
7. Payment of interest on paid-up amount of share capital for defraying the
expenses on Construction when plant cannot be commissioned for a longer
period of time.
8. To appoint auditors in case of companies where 25% or more of the paid-up
share capital is held by Central/State Government or public financial
institutions or any of their constituents.
9. To approach Central Government for investigation into the affairs of the
company.
10. Appointment of sole selling agents where paid-up share capital is beyond
Rs. 50 lakhs and confirmation of appointment of sole selling agents in other
cases.
11. To allow a director, partner or his relative to hold office or place of profit.
12. Payment of commission of more than 1% of the net profits of the company to
a managing or a whole-time director or a manager.
13. To make loans, to extend guarantee or provide security to other companies
or make investment beyond the limit specified.
14. To borrow money and to charge out the assets of the company to secure the
borrowed money where the sums to be borrowed along with money already
borrowed exceeds the paid-up capital of the company and its free reserves
i.e. reserves not set apart for any specific purpose.
15. To appoint directors.
16. To increase or reduce the number of directors within the limits laid down in
Articles of Association.
17. To cancel, redeem debentures etc.
18. To make contribution to funds not related to the business of the company.
In view of the rights conferred on shareholders to be exercised at General
Meetings, the Act casts an obligation on the directors to send notices for convening
general meetings or else the meetings shall be declared to be void as also all
proceedings transacted thereat.
Apart from the rights which are vested in the shareholders to be exercised in
relation to the conduct of the business of the company, the directors of the company
have certain obligations towards the shareholders.


The courts have determined two broad duties to be performed by a director:
1. Duties of utmost care and skill in managing the affairs of the company or
else be liable for damages.
2. Fiduciary duties to act bona fide in the interest of the company, not to
exercise powers for collateral benefit and not to earn profit from the position
as a director.
Despite the powerful weapons handed over to the shareholders by the Companies
Act, the shareholders have not been able to use them and most of the provisions
remain dead provisions and have not been used by the shareholders as potential
weapons to correct any wrongful act on the part of the directors or to give them any
directions. Consequently, the Board of directors of a large number of companies are
elected only by a few shareholders who attend the Annual General Meetings and
those who can muster sufficient number of proxies and can demonstrate their voting
power. Government Companies are an exception. In Government Companies all the
directors are appointed on the advice of the Government by the President of India or
the Governor of a State. Hence, theoretically it can perhaps be said that the
shareholders democracy is absolute in such companies.
In other companies however, the shareholders democracy is dependent upon the
voting strength of shareholders and also to a great extent on the availability of
members attending their General Meetings either by themselves or through their
proxy. This again depends on the proximity of Registered Office of the company to
the place of residence of the shareholders. Apart from this most of the shareholders
do not have enough time to spare from their busy schedules to concern themselves
with the affairs of the company in which they have invested. Besides, they are not
always educated enough and experienced enough to be conversant with the working
of the joint stock companies. Although the concept of shareholders democracy has
been enshrined in the Companies Act, 1956, yet, because of the aforementioned
deficiencies and flaws in the general body of shareholders as a whole, it is not
reflected in the constitution of the Boards of directors of many companies in India.
The Companies (Amendment) Act, 2000 had however provided an opportunity to
shareholders to participate in the decision making process by introducing provisions
relating to passing of resolutions in respect of certain matters through postal ballot.
For achieving the shareholders democracy, the shareholders have to unite and
organise themselves on national, state and district levels and get their associations
registered under the Societies Registration Act or any other applicable statute so that
their voice is heard and they can assert themselves and safeguard the interests of
their members. Constitution of such associations should be suitably amended so as
to insist upon all the non-Government companies to allot a minimum number of
shares to such associations of shareholders so that these associations can attend the
Annual General Meetings of all the companies and make sure that the directors
elected to company Boards reflect a fair representation.
2. MAJORITY POWERS AND MINORITY RIGHTS
Powers of Majority
As a company is an artificial person with no physical existence, it functions
through the instrumentality of the Board of directors who is guided by the wishes of


the majority, subject, of course, to the welfare of the company as a whole. It is,
therefore, a cardinal rule of company law that prima facie a majority of members of
a company are entitled to exercise the powers of the company and generally to
control its affairs. Where no special provision is made by the constitution of a
company, all the members of a company are bound by the acts of not only the major
part but also of the major part of those who are present at a regular meeting of the
company irrespective of whether the members present be a majority of all the
members of the company or not. The same rule applies also where any power
of the company is delegated to a smaller body [Attorney General v. Davy, (1741)
2 A K 219; York Tramways v. Willows, (1882) 8 Q.B.D. 685]. According to Section 87
of the Companies Act, 1956, every member of a company, which is limited by shares,
holding any equity shares shall have a right to vote in respect of such capital on every
resolution placed before the company. Members right to vote is recognised as right
of property and the shareholder may exercise it as he thinks fit according to his
choice and interest. This rule is modified by the Act in certain cases. A special
resolution, for instance, requires a majority of 3/4ths of those voting at the meeting
and therefore, where the Act or the articles require a special resolution for any
purpose, a three-fourth majority is necessary and a simple majority is not enough
[Edwards v. Halliwell, (1950) 2 All. E.R. 1064]. The resolution of a majority of
shareholders, passed at a duly convened and held general meeting, upon any
question with which the company is legally competent to deal, is binding upon the
minority and consequently upon the company [North-West Transportation Co. v.
Beatty (1887) L.R. 12 A.C. 589]. Thus, the majority of the members enjoy the
supreme authority to exercise the powers of the company and generally to control its
affairs. But this is subject to two very important limitations. Firstly, the powers of the
majority of members is subject to the provisions of the Companys memorandum and
articles of association. A company cannot legally authorise or ratify any act which
being outside the ambit of the memorandum, is ultra vires of the company [Ashbury
Rly. Carriage and Iron Co. v. Riche, (1875) L.R. 7 H.L. 653]. Also, where the articles
authorise the directors to deal with any matters except those which are outside the
scope of the authority of the directors; or with which the directors, having power, are
unable or unwilling to deal. Secondly, the resolution of a majority must not be in
consistent with the provision of the Act or any other statute, or constitute a fraud on
minority depriving it of its legitimate rights.
The Principle of Non-interference (Rule in Foss v. Harbottle)
The general principle of company law is that every member holds equal rights
with other members of the company in the same class. The scale of rights of
members of the same class must be held evenly for smooth functioning of the
company. In case of difference(s) amongst the members the issue is decided by a
vote of the majority. Since the majority of the members are in an advantageous
position to run the company according to their command, the minorities of
shareholders are often oppressed. The company law provide for adequate protection
for the minority shareholders when their rights are trampled by the majority. But the
protection of the minority is not generally available when the majority does anything in
the exercise of the powers for internal administration of a company. The court will not
usually intervene at the instance of shareholders in matters of internal administration,
and will not interfere with the management of a company by its directors so long they
are acting within the powers conferred on them under the articles of the company. In


other words, the articles are the protective shield for the majority of shareholders who
compose the Board of directors for carrying out their object at the cost of minority of
shareholders. The basic principle of non-interference with the internal management of
company by the court is laid down in a celebrated case of Foss v. Harbottle 67 E.R.
189; (1843) 2 Hare 461. No action can be brought by a member against the directors
in respect of a wrong alleged to be committed to a company. The company itself is
the proper party of such as action.
In Foss v. Harbottle, two shareholders, Foss and Turton brought an action
on behalf of themselves and all other shareholders against the directors and
solicitor of the company alleging that by their concerted and illegal
transactions they had caused the companys property to be lost to the
company. It was also alleged that there was no qualified Board. Foss and
Turton claimed damages to be paid by the defendants to the company. It was
held by the court that the action could not be brought by the minority
shareholders although there was nothing to prevent the company itself, acting
through the majority of its shareholders, bringing action. The wrong done to
the company was not which could be ratified by the majority of members. The
company (i.e. the majority) is the proper plaintiff for wrong done to the
company, so the majority of members are competent to decide whether to
commence proceedings against the directors. The reasons for rule were nicely
stated by Melish L.J. in MacDougall v. Gardiner, (1875) 1 Ch. D. 13 (C.A.) at p.
25 in the following words:
If the thing complained of is a thing which in substance the majority of
company are entitled to do, or if something has been done irregularly which
the majority of the company are entitled to do regularly, or if something has
been done illegally which the majority of the company are entitled to do
legally, there can be no use in having litigation about it, the ultimate end of
which is only that a meeting has to be called, and then ultimately the
majority gets its wishes.
In Rajahmundry Electric Supply Co. v. Nageshwara Rao AIR 1956 SC 213, the
Supreme Court observed that:
The courts will not, in general, intervene at the instance of shareholders in
matters of internal administration, and will not interfere with the management of
the company by its directors so long as they are acting within the powers
conferred on them under articles of the company. Moreover, if the directors are
supported by the majority shareholders in what they do, the minority
shareholders can, in general do nothing about it.
From the above it follows then that a company being a separate legal person
from the members who compose it, the company is the proper person to bring an
action.
The rule, as applied to companies, is as follows. After all, the directors who have
been fraudulent, have injured the company and the members on the whole. Any loss
to the company is loss to the members so why should not member sue as he has
been injured. This is so, because the plaintiff must not only show that injury has been
caused but the injury has been caused by a breach of duty made to him. The
individual shareholders or even the minority shareholders who try to show that the


directors owe a duty to them personally in their management of the companys assets
will definitely fail. The directors owe no duty to the individual members, but only to the
company as a whole. A company is a person and if it suffers injury through breach of
duty owed to it, then the only possible plaintiff is the company itself acting, and it must
always act, through its majority.
This rule laid down in Foss v. Harbottle was also referred to by Lord Davey in
Burland v. Earle, (1902) A.C. 83, in the following terms: It is an elementary principle
of the law relating to joint stock companies that the court will not interfere with the
internal management of companies acting within their powers, and in fact has no
jurisdiction to do so. Again, it is clear law that in order to redress a wrong done to the
company or to recover money or damages alleged to be due to the company it is the
company itself which can act through its majority. These cardinal principles are laid
down in Foss v. Harbottle and in numerous later cases. The principle holds good
even in the case of an act of a company (i.e. of the majority) which has been
attended by some irregularity, provided that irregularity is of such a nature that it is
within the power of the majority to put the matter right.
The majority have a right to determine everything connected with the
management of the company. Where a general meeting could confirm the action
taken by the directors, the minority could not be permitted to bring an action which
might nullify the wishes of the majority of shareholders.
In Pavlides v. J ensen (1956) Ch. 565, a minority shareholder brought an
action for damages against three directors and against the company itself on
the ground that they have been negligent in selling a mine owned by the
company for 82,000, whereas its real value was about 10,00,000. It was held
that the action was not maintainable. The judge observed, It was open to the
company, on the resolution of a majority of the shareholders to sell the mine at
a price decided by the company in that manner, and it was open to the
company by a vote of majority to decide that if the directors by their negligence
or error of judgement has sold the companys mine at an undervalue,
proceedings should not be taken against the directors.
In Edwards v. Halliwell (1950) 2 All. E.R. 1064, Jenkins, L.J. restated the rule in
the following terms: The rule in Foss v. Harbottle comes to no more than this. First,
the proper plaintiff in respect of wrong alleged to be done to company is prima facie
the company itself. Secondly, where the alleged wrong is a transaction which might
be made binding on the company by a simple majority of members, no individual
member is allowed to maintain an action in respect of that matter for the simple
reason that, if a mere majority of the members of the company is in favour of what
has been done, then cadit quaestio... (cannot be questioned). If on the other hand, a
simple majority of members of the company or association is against what has been
done, then there is no valid reason why the company itself should not sue.
In Bamford v. Bamford (1969) 1 All E.R. 969, it was held that if the directors
exercise any of their intra vires powers improperly, their acts may be ratified by an
ordinary resolution after full and frank disclosure by the directors to the shareholders.
Similar view was taken in Hogg v. Cramphorn Ltd., (1967) Ch. 254.


The students are advised to refer to also Jhajharia Bros. v. Sholapur Spinning &
Weaving Co., A.I.R. 1941 Cal. 174; Heyting v. Dupont, (1964) I.W.I.R. 843 and
Normandy v. Ind. Coope & Co., (1908) 1 Ch. 84 where a shareholder was not
allowed to maintain an action against directors increasing their remuneration. He was
told to appeal to the general meeting.
Justification and Advantages of the Rule in Foss v. Harbottle
The justification for the rule laid down in Foss v. Harbottle is that the will of the
majority prevails. On becoming a member of a company, a shareholder agrees to
submit to the will of the majority. The rule really preserves the right of the majority to
decide how the companys affairs shall be conducted. If any wrong is done to the
company, it is only the company itself, acting, as it must always act, through its
majority, that can seek to redress and not an individual shareholder.
Moreover, a company is a person at law, the action is vested in it and cannot be
brought by a single shareholder. Where there is a corporate body capable of filing a
suit for itself to recover property either from its directors or officers or from any other
person then that corporate body is the proper plaintiff and the only proper plaintiff
[Gray v. Lewis, (1873) 8 Ch. Appl. 1035].
The main advantages that flow from the Rule in Foss v. Harbottle are of a purely
practical nature and are as follows:
1. Recognition of the separate legal personality of company: If a company has
suffered some injury, and not the individual members, it is the company itself
that should seek to redress.
2. Need to preserve right of majority to decide: The principle in Foss v.
Harbottle preserves the right of majority to decide how the affairs of the
company shall be conducted. It is fair that the wishes of the majority should
prevail.
3. Multiplicity of futile suits avoided: Clearly, if every individual member were
permitted to sue anyone who had injured the company through a breach of
duty, there could be as many suits as there are shareholders. Legal
proceedings would never cease, and there would be enormous wastage of
time and money.
4. Litigation at suit of a minority futile if majority does not wish it: If the
irregularity complained of is one which can be subsequently ratified by the
majority it is futile to have litigation about it except with the consent of the
majority in a general meeting. In Mac Dougall v. Gardiner, (1875) 1 Ch.
13 (C.A.), the articles empowered the chairman, with the consent of the
meeting, to adjourn a meeting and also provided for taking a poll if
demanded by the shareholders. The adjournment was moved, and
declared by the chairman to be carried; a poll was then demanded and
refused by the chairman. A shareholder brought an action for a
declaration that the chairmans conduct was illegal. Held, the action
could not be brought by the shareholder; if the chairman was wrong,
the company alone could sue.


Exceptions to the Rule in Foss v. Harbottle Protection of Minority Rights and
shareholders remedies
The supremacy of the majority, however, does not prevail in all situations; over a
period of time certain exceptions to the rule have developed. As stated above, the
operative field of the rule in Foss v. Harbottle extends to cases in which the
companies are competent to ratify the managerial sins. For example, where the
directors have acted improperly and are guilty of misfeasance, they may obtain
absolution of their sins, by calling a meeting of the company and by making full and
frank disclosure. If the majority absolves them of their guilt and forgives their sins, the
minority cannot do anything. But there are certain acts which the majority of
shareholders cannot approve or affirm. In such cases, any shareholder may sue to
enforce obligations owed to the company. He brings the action as representative of
the corporate interest.
Application of Foss v. Harbottle Rule in Indian context The Delhi High Court in
ICICI v. Parasrampuria Synthetic Ltd. SSL, July 5, 1998 has held that an automatic
application of Foss v. Harbottle Rule to the Indian corporate realities would be
improper. Here the Indian corporate sector does not involve a large number of small
individual investors but predominantly financial institutions funding atleast 80% of the
finance. It is these financial institutions which provide entire funds for the continuous
existence and corporate activities. Though they hold only a small percentage of
shares, it is these financial institutions which have really provided the finance for the
companys existence and, therefore, to exclude them or to render them voiceless on
an application of the principles of Foss v. Harbottle Rule would be unjust and unfair.
Thus, the rule in Foss v. Harbottle is not absolute but is subject to certain
exceptions. In other words, the rule of supremacy of the majority is subject to certain
exceptions and thus, minority shareholders are not left helpless, but they are
protected by:
(a) the common law; and
(b) the provisions of the Companies Act, 1956.
Actions by Shareholders in Common Law
The cases in which the majority rule does not prevail are commonly known as
exceptions to the rule in Foss v. Harbottle and are available to the minority. In all
these cases an individual member may sue for declaration that the resolution
complained of is void, or for an injunction to restrain the company from passing it.
The said rule will not apply in the following cases;
(1) Ultra Vires Acts
Where the directors representing the majority of shareholders perform an illegal
or ultra vires act for the company, an individual shareholder has right to bring an
action. The majority of shareholders have no right to confirm an illegal or ultra vires
transaction of the company. In such case a shareholder has the right to restrain the
company by an order or injunction of the court from carrying out an ultra vires act.
In Bharat Ins. Ltd. v. Kanhya Lal, A.I.R. 1935 Lah. 792, the plaintiff was a
shareholder of the Bharat Ins. Company. One of the objects of the company


was : To advance money at interest on the security of land, houses,
machinery and other property situated in India... The plaintiff complained that
several investments had been made by the company without adequate
security and contrary to the provisions of the memorandum and therefore,
prayed for perpetual injunction to restrain it from making such investments.
The Court observed:
In all matters of internal management, the company itself is the best judge
of its affairs and the Court should not interfere. But application of assets of
a company is not a matter of internal management. As directors are acting
ultra vires in the application of the funds of the company, a single member
can maintain a suit.
It means that the rule in Foss v. Harbottle will operate in full force only when the
majority of shareholders through their chosen directors act within the extent of the
powers of the company.
(2) Fraud on Minority
Where an act done by the majority amounts to a fraud on the minority, an action
can be brought by an individual shareholder. This principle was laid down as an
exception to the rule in Foss v. Harbottle in a number of cases. In Menier v. Hoopers
Telegraph Works, (1874) L.R. 9 Ch. App. 350, it was observed that it would be a
shocking thing if the majority of shareholders are allowed to put something into their
pockets at the expenses of the minority. In this case, the majority of members of
company 'A' were also members of company 'B', and at a meeting of company 'A'
they passed a resolution to compromise an action against company 'B', in a manner
alleged to be favourable to company 'B', but unfavourable to company 'A'. Held, the
minority shareholders of company 'A' could bring an action to have the compromise
set aside. Similarly in Cock v. Deeks (G.S.), (1916) 1 A.C. 554, the directors were
ordered to account to the company for the profit they made under a contract in their
own names in breach of trust though it was passed by a resolution in the company
that it had no interest in the contract. In this case, three directors of railway
construction company obtained a contract in their own names to construct a railway
line. The directors had used their position as directors to obtain the contract and it
amounted to breach of trust by them who then used their voting powers to pass a
resolution of the company declaring that the company had no interest in the contract.
It was held that the directors must account to the company for the profit they had
made, which was apparently at the expense of minority. On the same principle the
majority shareholders are not allowed to purchase the shares of a minority
compulsorily. Any resolution passed by the majority to that effect is void [Brown
v. British Abrasive Wheel Company, (1919) 1 Ch. 290]. In this case, a large
majority (98%) of the shareholders wished to buy up the minority with a view to
extend their capital. The minority refused to sell, and the majority then passed
special resolution altering the articles so as to enable nine-tenths of the
shareholders to buy out shares of any other shareholders. Held that the
alteration of the articles could be restrained; the majority could not be allowed
to expropriate the interests of minority shareholders. In Sidebottom v. Kershaw
Leese & Co., (1920) 1 Ch. 154, the plaintiffs who were in minority in the defendant
company carried on a competing business. The validity of the resolution was


challenged on the ground that it was not for the benefit of the company as a whole.
The court rejected the contention and held that it was very much for the benefit of the
company to get rid of the members who were in competing business as such
members have the unique opportunity of exploiting the companys business secrets
against its very interest.
Though there is no clear definition of the expression fraud on the minority, but
the court decides a particular case according to the surrounding facts. The general
test which is applied to decide whether a case falls in the category of fraud on the
minority or not is whether a resolution passed by the majority is bona fide for benefit
of the company as a whole [Allen v. Gold Reefs of West Africa, (1900) 1 Ch. 656].
As regards the meaning of the expression bona fide for the benefit of the company
as a whole Evershed M.R. in Greenhalgh Ardeme Cinemas Ltd. (1950) 2 All E.R.
1120 at 1126 has observed thus : "It mean that the shareholder must proceed on
what, in his honest opinion, is for the benefit, of the company as a whole. Secondly,
the phrase the company as a whole does not... mean the company as a commercial
entity as distinct from the corporators. It means the corporators as a general body. In
other words, it can be said that the court ought not to interfere with decision of the
majority in a general meeting if that decision is arrived at fairly and honestly [In Re.
Transval Gold Exploration and Land Co. Ltd. (1885) 1 T.L.R. 604]. and is not an act
of fraud on the minority.
(3) Wrongdoers in Control
If the wrongdoers are in control of the company, the minority shareholders
representative action for fraud on the minority will be entertained by the court [Cf.
Birch v. Sullivan, (1957) 1 W.L.R. 1274]. The reason for it is that if the minority
shareholders are denied the right of action, their grievances in such case would never
reach the court, for the wrongdoers themselves, being in control, will never allow the
company to sue [Par Jenkins L.J. in Edwards v. Halliwell, (1950) 2 All E.R. 1064,
1067].
In Glass v. Atkin (1967) 65 D.L.R. (2d) 501, a company was controlled
equally by the two defendants and the two plaintiff. The plaintiff brought an
action against defendants alleging that they had fraudulently converted the
assets of the company for their own private use. The Court allowed the action
and observed: While the general principle was for the company itself to bring
an action, where it had an interest, since the two defendants controlled the
company in the sense that they would prevent the company from taking
action.
(4) Resolution requiring Special Majority
A shareholder can sue if an act requires a special majority but is passed by a
simple majority. Simple or rigid, formalities are to be observed if the majority wants to
give validity to an act which purports to impede the interest of minority. An individual
shareholder has the right of action to restrain the company from acting on a special
resolution to which the insufficient notice is served [Baillie v. Oriental Telephone and
Electric Co. Ltd., (1915) 1 Ch. 503 (C.A.); refer also Nagappa Chettiar v. Madras
Race Club, 1 M.L.J. 662].


(5) Personal Actions
Individual membership rights cannot be invaded by the majority of shareholders.
He is entitled to all the rights and privileges appertaining to his status as a member
[Edwards v. Halliwell, (supra)]. An individual shareholder can insist on the strict
compliance with the legal rules, statutory provisions. Provisions in the memorandum
and the articles are mandatory in nature and cannot be waived by a bare majority of
shareholders [Salmon v. Quin and Aztens, (1909) A.C. 442]. In Nagappa Chettiar v.
Madras Race Club, (1949) 1 M.L.J. 662 at 667, it was observed by the Court that An
individual shareholder is entitled to enforce his individual rights against the company,
such as, his right to vote, the right to have his vote recorded, or his right to stand as a
director of a company at an election.
Where the candidature of a shareholder for directorship is rejected by the
Chairman, it is an individual wrong in respect of which a suit is maintainable [Joseph
v. Jos, (1964) 1 Comp. L.J. 105].
(6) Breach of Duty
The minority shareholder may bring an action against the company, where
although there is no fraud, there is a breach of duty by directors and majority
shareholders to the detriment of the company.
In Daniels v. Daniels, (1978) 2 W.L.R. 73, the plaintiff, who were minority
shareholders of a company, brought an action against the two directors of the
company and the company itself. In their statement of the claim they alleged
that the company, on the instruction of the two directors who were majority
shareholders, sold the companys land to one of the directors (who was the
wife of the other) for 4,250 and the directors knew or ought to have known
that the sale was at an under value. Four years after the sale, she sold the same
land for 1,20,000. The directors applied for the statement of claim to be
disclosed on reasonable cause of action or otherwise as an abuse of the
process of the Court.
Held, by the Chancery Division, Templeman, J, the application of director
should be dismissed. The exception to the rule in Foss v. Harbottle enabling a
minority of shareholders to bring an action against a company for fraud where
no other remedy was available should include cases where, although there was
no fraud alleged, there was a breach of duty by directors and majority
shareholders to the detriment of the company and the benefit to the directors;
accordingly, on the facts alleged, the minority shareholders had a cause of
action.
(7) Prevention of Oppression and Mismanagement
The minority shareholders are empowered to bring action with a view to
preventing the majority from oppression and mismanagement. These are the
statutory rights of the minority shareholders and find detailed discussion later in the
study.
In Bennet Coleman & Co. v. Union of India & Ors., (1977) 47 Comp. Cas. 92, the
Division Bench of the Bombay High Court held that Sections 397 and 398 of the


Companies Act, 1956 are intended to avoid winding up of the company if possible
and keep it going while at the same time relieving the minority shareholders from acts
of oppression and mismanagement or preventing its affairs from being conducted in a
manner prejudicial to public interest. Thus, the Court has wide powers to supplant the
entire corporate management by resorting to non-corporate management which may
take the form of appointing an administrator or a special officer or a committee of
advisers etc., who will be in charge of the affairs of the company.
The exceptions to the rule in Foss v. Harbottle are not limited to those covered
above. Further exceptions may be admitted where the rules of justice require that an
exception to the rule should be made.
It should be noted that the ordinary civil courts are not deprived of the jurisdiction
to decide the matters except where the Companies Act expressly excludes it such as
matters relating to winding up [Panipat Woollen & General Mills Co. v. R.L. Kaushik &
others, (1969) 39 Comp. Cas. 249].
Statutory Remedies (under the Companies Act)
Though the shareholders democracy is supreme the Companies Act and the
decided cases suggest that the majority shall not be allowed to act in an unfair,
fraudulent, or oppressive way against the interests of the minority shareholders.
Under Section 38, 167, 388-B, 397, 398, and 399 various powers are given to the
shareholders. Further, under Section 265 a company may adopt principle of
proportional representation. Under Section 408 the Central Government may direct
the company to amend its articles providing for appointment of directors according to
the principle of proportional representation under Section 265 and make fresh
appointment in pursuance of the articles so amended within such time as may be
specified. The Companies Act, 1956, extends protection to minority by granting
various rights to minority shareholders as follows :-
(a) The variation of class rights: The rights attached to the shares of any
class can be varied under Section 106 of the Act with the consent in
writing of the holder of not less than three-fourths of the issued shares of
that class or with the sanction of a special resolution passed at a separate
meeting of the holders of the issued shares of that class. But the holders of
not less than 10% of the shares of that class who had not assented to the
variation may apply to the Court
1
/Tribunal
2
for the cancellation of the
variation under Section 107 of the Act.
(b) Schemes of reconstruction and amalgamation: The minority is accorded
protection in cases where they dissent to the scheme of reconstruction or
amalgamation.
(c) Oppression and mismanagement: The principle of majority rule does not
apply to cases where Sections 397 and 398 are applicable for prevention of
oppression and mismanagement. A member, who complains that the affairs
of the company are being conducted, in a manner oppressive to some of the
members including himself, or against public interest, he may apply to the


Company Law Board
1
/Tribunal
2
by petition under Section 397 of the Act. In
O.P. Gupta v. Shiv General Finance (P) Ltd. [1977] 47 Comp. Cas. 297, the
Delhi High Court held that a members right to move the Court under
Section 397 was a statutory right and cannot be affected by an arbitration
clause in the articles of association of a company.
(d) Alternative remedy to winding up: Any member or members, who complain
that the affairs of the company are being conducted in manner oppressive to
some of the members including themselves, may apply to the Company Law
Board
1
/Tribunal
2
for redressal (Section 397).
(e) Investigation by the Government: Under Section 235 of the Act the Central
Government may appoint one or more competent persons as inspectors to
investigate the affairs of any company and to report thereon in such manner
as the Central Government may direct:
(a)Where in case of a company, on a report by the Registrar, under Sub-section (6)
or (7) of Section 234 read with Sub-section (6) of Section 234.
(b)Where
(i) in the case of a company having a share capital on the application
either of not less than 200 members or of member holding not less
than one-tenth of the voting power thereof; and
(ii) in the case of a company not having a share capital, on the
application of not less than one fifth in number of persons on the
companys register of members.
The Company Law Board
1
/Tribunal
2
, after giving the parties an opportunity of
being heard, declare that the affairs of the company ought to be investigated by an
inspector or inspectors.
3. PREVENTION OF OPPRESSION AND MISMANAGEMENT
As observed in the preceding topic that one of the exceptions to the majority rule
laid down in Foss v. Harbottle is the right of the oppressed minority to get relief
against the wrongful conduct of the majority. This is one of the statutory protections to
the investors and is provided for in Section 397 of the Companies Act, 1956. As the
remedy is provided only in those cases where the Company Law Board
1
/Tribunal
2

regards it just and equitable to wind up the company the relief granted under Section
397 is also known as an alternative remedy i.e. a remedy which is alternative to
winding up. The oppressed minority may, of course, petition the Company Law
Board
1
/Tribunal
2
to wind up the company. The company may be otherwise a sound
and profitable concern. Not only will the petitioners be deprived of whatever dividends
they might have been getting but the value of the assets of the company might be
substantially reduced. As Alfred Palmer rightly said:
The liquidation of the company may result in the sale of its assets at break up
value without regard to the value of the goodwill or know how of the company
and the minority shareholder who urged by the shareholders oppression
petitions for a winding up order may in effect play up his opponents game.

1
Existing.
2
Proposed vide Companies (Second (Amendment) Act, 2002 w.e.f. a date yet to be notified.


The oppressed minority, therefore, are willing in such cases not to end the
company but to mend it. Section 397 of the Companies Act, 1956, is intended to give
a remedy alternative to compulsory winding up in such cases.
Prevention of Oppression (Section 397)
The first remedy in the hands of an oppressed minority is to move the Company
Law Board
1
/Tribunal
2
. Section 397 provides that any member of a company who
complain that the affairs of the company are being conducted in a manner prejudicial
to public interest or in a manner oppressive to any member(s) (including any one or
more of themselves) may make an application to the Company Law Board
1
/Tribunal
2

by way of petition for relief. Following requirements must be satisfied for seeking a
relief under Section 397:
(i) That the affairs of the company are being conducted: (a) in a manner
prejudicial to public interest; or (b) oppressive to any members.
(ii) That the fact justified the compulsory winding up order on the ground that it
is just and equitable that the company should be wound up.
(iii) That to wind up the company would unfairly prejudice the petitioners [Ramji
Lal Baiswala v. Britain Cable Ltd., (1964) 14 Raj. 135].
On being satisfied about the above requirements the Company Law Board
1
/
Tribunal
2
may make the necessary orders for ending the matters complained of. The
first requirement relates to public interest or oppression. First we analyse and
discover the precise connotation of the word oppression with the help of judicial
decisions.
Meaning of Oppression
The words oppression and mismanagement are not defined in the Act. The
meaning of these words for the purpose of Company Law should be used in a broad
generic sense and not in any strict literal sense.
The meaning of the term oppression as explained by Lord Cooper in the
Scottish case of Elder v. Elder & Western Ltd., (1952) Scottish Cases 49, which has
been cited with approval by Wanchoo, J (afterwards C.J.) of the Supreme Court in
Shanti Prasad v. Kalinga Tubes, (1965) 1 Comp. L.J. 193 at 204 is as under :
The essence of the matter seems to be that the conduct complained of should at
the lowest, involve a visible departure from the standards of fair dealing, on which
every shareholder who entrusts his money to the company is entitled to rely.
The complaining shareholder must be under a burden which is unjust or harsh or
tyrannical. [See Lord Simonds in Scottish Co-operative Wholesale Society v. Meyer,
(1959) AC 324 at p., 342] A persistent course of unjust conduct must be shown
[See In Re. H.R. Harmer Ltd., (1958) 3 All ER 689].
The result of application under Section 210 of English Companies Act, 1948, (on
which Section 397 of the Indian Companies Act has been based) in different cases
must depend on the particular facts of each case, the circumstances in which

1
Existing.
2
Proposed.


oppression may arise being infinitely various that it is impossible to define them with
precision.
An attempt to force new and more risky objects upon an unwilling minority
may in circumstances amount to oppression. This was held in Re. Hindustan
Co-operative Insurance Society Ltd., AIR. 1961 Cal. 443 wherein the life
insurance business of a company was acquired in 1956 by the Life Insurance
Corporation of India on payment of compensation. The directors, who had the
majority voting power, refused to distribute this amount among shareholders,
rather they passed a special resolution changing the objects of the company to
utilise the compensation money for the new objects. This was held to be an
Oppression. The court observed: The majority exercised their authority
wrongfully, in a manner burdensome, harsh and wrongful. They attempted to
force the minority shareholders to invest their money in different kind of
business against their will. The minority had invested their money in a life
insurance business with all its safeguards and statutory protections. But they
were being forced to invest where there would be no such protections or
safeguards.
A similar relief was allowed by the House of Lord in Scottish Co-operative
Wholesale Society v. Mayer (1959) AC 324. In this case, the society created a
subsidiary company to enable it to enter in the rayon industry. Subsequently when
the need for the subsidiary ceased to exist, the society adopted a policy of running
down its business which depressed the value of its shares. The two petitioners who
were managing directors and minority shareholders in the company successfully
pleaded oppression. The court ordered the society to purchase the minority shares
at the value at which they stood before the oppressive policy started [This decision
has also been followed in Re. H.R. Harmer Ltd., (1959) 1 WLR 62].
Minor acts of mismanagement, however, are not to be regarded as oppression.
As far as possible shareholders should try to resolve their differences by mutual
readjustment. Moreover, the courts will not allow these special remedies to become a
vexatious source of litigation. For example, in Lalita Rajya Lakshmi v. Indian Motor
Co. A.I.R. 1962 Cal 127, the petitioner alleged that the Board of directors were guilty
of certain acts detrimental to the minority of the shareholders. The allegations were
that the income of the company was deliberately shown less by excessive
expenditure; that passengers travelling without ticket on the companys buses were
not checked; that petrol consumption was not properly checked; that second hand
buses of the company had been disposed of at low price, that dividends were being
declared at too low a figure. It was held that even if each of these allegations were
proved to the satisfaction of the court, there would have been no oppression.
The court further observed that to attempt to get a majority by lawful means is
not fact or circumstance which justifies winding up of the company. If any authority is
needed for that proposition, one need only refer to the Privy Council decision of
Ripon Press and Sugar Mills Co. Ltd. v. Gopal Chetty, AIR 1932 PC 1, where Lord
Blansehurgh made this significant observation: The fact that Venkata Rao had a
preponderating voice in the company by reason of his owing or controlling a large
number of shares was of itself no reason for winding up of the company.


But an unreasonable refusal to accept a transfer or transmission of shares had
been sufficient to warrant an order under the Section. [Mrs. Gajarbai v. Patni
Transport Co., (1965) 2 Comp LJ 234]. The Calcutta High Court in Satish Chandra v.
Bengal Laxmi Cotton Mills Ltd., (1965) I Comp LJ 45, where Mitra, J. observed: That
the fact the directors are accused of an offence or that investigation is being made or
even if there was a conviction on a criminal complaint would be no ground for taking
action under Sections 397 and 398. Those matters are entirely foreign to company
law and administration and beyond the ambit of the jurisdiction of the Company Court
exercise... in the instant case there is no deadlock, the application is not one for
winding up, nor is the company a private company. It is a public company in which
outsiders hold a substantial block of shares and so the principle, that lack of
confidence among the directors in a private company resulting in a deadlock is a
ground for a winding up order on the just and equitable ground, cannot be applied
herein where the special discretionary jurisdiction of the Court under Section 397
and 398 has been invoked.
There must be an unfair abuse of powers and impairment of confidence in the
probity with which the companys affairs are being conducted as distinguished from
mere resentment on the part of minority at being out voted on some issue of domestic
policy. It is not lack of confidence between the shareholders per se that brings the
section into play .... Oppression involves at least an element of lack of probity or fair
dealing to a member in the matter of his proprietary right as a shareholder. Persons
concerned with the management of the companys affairs must in connection therewith
be guilty of fraud, misfeasance or misconduct towards the members. It does not include
mere domestic disputes between directors and members or lack of confidence
between one section of member and another section in the matter of policy of
administration. Much less it covers mere private animosity between members and
directors. [See Kalinga Tubes Ltd. v. Shanti Prasad Jain, (1964) 1 Comp. L.J. 117,
where the above statement of law has been cited by Misra, J., of the Orissa High Court,
from Scottish Co-operative Wholesale Society Ltd. Meyer, 1959 AC 334 and in Re.
H.R. Harmer Ltd., (1958) 3 All ER 689]. The Supreme Court also affirmed the above
statement of law in Shanti Prasad Jain v. Kalinga Tubes Ltd., (1965) 1 Comp. L.J. 193
(S.C.). A mere apprehension that the minority shareholders wil be oppressed in future
is not sufficient to invoke this section. [Nagavarapu Krishna Prasad v. Andhra Bank Ltd.
(1983) 53 Com. Cases 73 (at 98) (AP)].
A member can complain of oppression only in his capacity as a member and not
in his capacity as director or creditor [In Re. Bellador Silk Ltd., (1965) 1 All ER 667].
The legal representatives of a deceased member whose name is still on the
register of members are entitled to file a petition under Sections 397 and 398 of the
Companies Act, 1956, for relief against oppression or mismanagement, Worldwide
Agencies Pvt. Ltd. and Another v. Mrs. Margaret T. Desor and Others, Comp. Cas.
Vol. 67 (1990), 807 (S.C.).
The Legal heirs to be registered on probate or will are also entitled to apply. [K.S.
Mothilal v. K.S. Kasimaris Ceranique (P) Ltd., (2007) 135 Comp Cas 609 CLB].
A shareholder dies and his heirs apply for transmission of shares while their
application for succession certificate was pending before the Civil Court. The legal
heirs alleged illegal allotment of shares by respondent to themselves, reducing the


legal heirs to minority. It has held that the legal heirs are entitled to file a petition
alleging oppression and mismanagement. [Rajkumar Devraj & Aur. v. Jai Mahal
Hotels Pvt. Ltd. & Others (CLB) CA. No. 133 of 2006 in C.P. No. 30 of 2006.
In Re Five Minute Car Wash Service Ltd. (1966) 1 All ER 242, a petition founded
on the ground that the managing director has been unwise, inefficient and careless in
the performance of his duties could not succeed.
It should not, however, be supposed that these special remedies against
oppression or mismanagement are available only to minorities. In an appropriate
case, if the court is satisfied about the act of oppression or mismanagement, relief
can be granted even if the application is made by a majority, who have been
rendered completely ineffective by the wrongful acts of a minority group.
Accordingly, a relief under the section was allowed to a majority group by Mitra, J., of
the Calcutta High Court in In Re. Sindhri Iron Foundry (P) Ltd. (1963) 68 CWN 118.
His Lordship observed that if the court finds that the companys interest is being
seriously prejudiced by the activities of one or the other group of shareholders, that
two different registered offices at two different addresses have been set up, that two
rival Boards are holding meetings, that the companys business, property and assets
have passed to the hands of unauthorised persons who have taken wrongful
possession and who claim to be the shareholders and directors there is no reason
why the court should not make appropriate order to put an end to such matters.
The same situation of facts was presented before a bench of the Calcutta High
Court in Ramshanker Prasad v. Sindhri Iron Foundry (P) Ltd., (1966) 1 Comp. L.J.
310. Referring to the argument that the right to apply under Section 397 or 398 must
be confined to cases where the complaint is by a minority against the majority and
not vice versa Mitter, J. said:-
Section 399 is a code by itself as to the qualification necessary for application
under Section 397 and 398. I see no reason for holding that Section 399 was only
aimed at finding the lower limit of qualification of any shareholder or group of
shareholders complaining of oppression and mismanagement. If the Legislature has
fixed a lower limit but no upper limit and if the subject of the section be to prevent a
mischief, I see no reason why an upper limit should be implied so as to bring the
section in line with the English section. [Section 210 of the (English) Companies Act,
1948, appears under the heading Minorities, but the word minority is nowhere
mentioned in the text of the section. Professor Gowers opinion, as expressly adopted
in some cases, is that the draftsman has rightly recognised that oppression may be
exercised by those in control even though they lack in majority holding and that
section affords protection in such cases. Principles of Modern Company Law, p. 599
(1969) 3
rd
ed.]. It was, therefore, futile to have argued on the basis of the heading of
the English section that relief was intended to be confined to minorities. If the section
is of a remedial nature its proper construction should be to give the words their widest
amplitude.
Referring to the argument that the majority could always call a meeting and put
things in order by passing resolutions, his Lordship said:
The facts in this case show very clearly, that there is no chance of redress in the
domestic forum of the company. If a Board meeting was to be called, one group


would contend that there were five directors, whereas the other group would urge that
there were seven. If a meeting of the shareholders was to be convened, according to
one group there would be only sixteen shareholders, while according to the other the
number would exceed twenty-five ... There would be complete chaos and confusion
... (Ibid., p. 335).
This ingenious remedy has not only permitted redressal of many abuses, but its
mere availability has had a deterrent effect upon management." [George H.
Hornstein: The Future of Corporate Control, (1950) 63 HLR 476].
In was held in the case of Ajit Singh Ahuja v. Saphire (India) (P) Ltd. [(2009) 1
Comp LJ 313 (CLB)] that in a case of oppression, a member has to specifically plead
on five facts (a) what is the alleged act of oppression; (b) who committed the act of
oppression; (c) how it is oppressive; (d) whether it is in the affairs of the company;
and (e) whether the company is party to the commission of the act of oppression.
Oppression must be of a Continuous Nature
Oppression must be a continuous process. This is suggested by the words, 'are
being conducted in a manner... used in Section 397. Hence isolated acts of
oppression or mismanagement will not give rise to an action under Section 397 of the
Act. In Shanti Pd. Jains Case, the court said:... "events have to be considered not in
isolation but as a part of a consecutive story. There must be continuous acts on the
part of the majority shareholders, continuing up-to-date of petition. (Supra).
However in Tea Brokers P. Ltd. v. Hemendra Prosad Barooah (1998) 5 Comp LJ
963 (Cal.) the Division Bench of Calcutta High Court observed that:
This is undoubtedly, a right and privilege which a member enjoys in his capacity as
a member of the company.. such an act may be even a single act done on one
particular occasion if the effect of such an act will be of a continuing nature and the
member concerned is deprived of his rights and privilege for all time to come in future.
In Ramshankar Prasad v. Sindu Iron Foundry (P) Ltd., AIR 1966 Cal 512, it was
held that a petition under Section 397, would be maintainable even if the oppression
was of a short duration and of a singular conduct if its effects persisted indefinitely
[followed in Maharashtra Power Development Corpn. Ltd. v. Dabhol Power Co. Ltd.
(2003) 56 CLA 263 (Bom.)].
In Bhagirath Agarwala v. Tara Properties P. Ltd. (2003) 51 CLA 57 (Cal.), also
the removal of a director and allotment of shares were set aside as they were done at
a meeting which was covered without complying with the requirements of Section 286
and also reflected an oppressive policy. The allotment was made only to one member
without simultaneous offer to others on pro rata basis. A single act of issue of
additional shares can have a continuous effect. It can constitute oppression. A relief
can be had against it. There is no bar of limitation in such a case. [Ashok Kumar
Oswal v. Panchsher Textile Mfg. & Trading Co. Ltd. (2002) 110 Com Cases 800
(CLB-PB)].
Past acts of oppression will not entitle a plaintiff to seek the remedy under
Section 397. The purpose of this section is not so much to take up the past as to
redeem the future. A catalogue of charges of the past alleged misdeeds will not
attract the section [Thakur Prem Singh v. Thakur Hotel (Simla) Co. (P) Ltd., AIR 1963
Punj. 63; Raghunath Swarup Mathur v. Harswarup Mathur, (1970) 1 Comp. LJ 35].


Public Interest
Relief under Section 397 will also be available if the affairs of the company are
being conducted in a way prejudicial to public interest. Public interest is a very broad
term involving the welfare not only of the individual shareholders or of the country
according to the economic and social policies of the State. The concept of Social
profitability is very much akin to public interest.
Though it may appear to be an Elusive abstraction it directs the focus of
administrative policies. As one writer [E. Pendleton Huring : Public Administration and
the Public Interest (1936) p. 23], says: it is the standard that guides the administrator
in executing the law ... The verbal symbol designed to introduce unity, order and
objectivity into administration. The companies may be required to function in such a
way in public interest as to contribute to the success of the five years plans or to give
effect to social objectives laid down in the Directive Principle of State Policy. The
public interest may require the companies to carry out the objectives laid down in the
Industrial Policy Resolutions of 1948 and 1956. Finally public interest also requires
that the interest of the creditors, consumers and employees of the Corporation should
be protected along with those of the shareholders. Public interest is that in which a
class of community have a pecuniary interest or some interest is that in which their
legal rights or liabilities are protected [Per Compbell, C.J. in R. v. Bedfordshire, 24,
L.J. Q.B. 84].
Winding up Order under Just and Equitable Clause
The other requirement is that the facts justify the making of a winding up order
under just and equitable clause. The principle is that if there is persistent violation of
the regulations and statutes and an appeal to general body is not likely to put an end
to the matters complained of by reason of the fact that those responsible for the
violations control the affair of the company, then it will be just and equitable to wind
up the company, [Ramjilal Baisiwala v. Baiton Cables Ltd., (supra.)].
In Re. Bellador Silk Ltd., (supra.) however this requirement proved too harsh.
One of the grounds on which the relief was denied to the petitioner was that the
company being solvent, it was not just and equitable to wind it up. This decision has
been criticised by some authors. According to them it is not necessary that the
company should be insolvent. Reference in Section 210 of the English Companies
Act, 1948 to the requirement to winding up order is purely hypothetical, [Palmers
Company Law, (1976) 618: 68 Cal W.N. 163].
Winding Up would Unfairly Prejudice the Petitioners
Though winding up is justified it would be no remedy for the evil sought to be
remedied. Thus in Albert Ltd., the person in management made an illegal sale of the
share held by the applicant of his voting power. It was held that the company was
liable to be wound up on the ground that it was just and equitable to do so but it
would unfairly prejudice the petitioners. Hence they were entitled to relief under
Section 397.
Some of the recent decisions indicate that the relief may not be given to the
minority even through their case may be considered fit for the winding up of the


company under just and equitable clause. Thus, in West Bourne Galleries Ltd. (1972)
2 All ER 492, no appeal was lodged against the refusal of an order under Section 210
(English Act). The appeal was only against winding up. The order for winding up was
reversed by Court of Appeal, (1971) Chi. 799 but restored by the House of Lords
(1973) AC 360, a private company was operating as a quasi-partnership consisting of
three members who were also the directors. Later they quarreled. One of the directors
was removed by an ordinary resolution. He alleged oppression by the other two
directors, father and son, who according to him were milking the company for their own
benefit. Ploughman, J., held that though there was an isolated act of oppression as to
justify the granting of relief under Section 210. He, however, granted an order for
winding up for the company under just and equitable ground.
Prevention of Mismanagement (Section 398)
Section 398 provides for relief in cases of mismanagement. For a petition under
this section to succeed, it must be established that the affairs of the company are
being conducted in a manner prejudicial to the interest of the company or public
interest, [(Section 398 (1) (A)] or that, by reason of any change in the management or
control of the company, it is likely that the affairs of the company will be conducted in
that manner [(Section 398 (1) (b)]. If the court is so convinced, it may, with a view to
bringing to an end or preventing the matter complained of or apprehended, make
such order as it thinks fit [Section 398 (2)]. A very clear illustration of
mismanagement contemplated by the section is Rajahmundry Electric Supply
Corporation v. A. Nageswara Rao, AIR 1956 SC 213., In this case, a petition was
brought against a company by certain shareholders on the ground of
mismanagement by directors. The court found that the vice chairman grossly
mismanaged the affairs of the company and had drawn considerable amounts
for his personal purpose, that large amounts were owing to the Government for
charges for supply of electricity, that machinery was in a state of disrepair, that
the directorate had become greatly attenuated and a powerful local junta was
ruling the roost, and that the shareholders outside the group of the chairman
were powerless to set matters right. This was held to be sufficient evidence of
mismanagement. The Court accordingly appointed two administrators for the
management of the company for a period of six months vesting in them all the
powers of the directorate.
A similar verdict was provided to a company by the Calcutta High Court in
Richardson and Cruddas Ltd. v. Haridas Mundra, (1959) 29 Comp. Cas. 547.
There should be present and continuing mismanagement. The charges of
mismanagement in the past, even if proved, are not enough to establish an existing
injury to the interest of the company or public interest [R.S. Mathur v. H.S. Mathur,
(1970) 1 Comp. LJ 35].
Relief against mismanagement runs in favour of the company and not to any
particular member or members. (See Mathew J. Kust : Foreign Enterprise in India,
293 (1964). Secondly. It is not necessary for the court to find a case for winding
up in cases of mismanagement in order to grant relief. (Ibid., p. 294). Proof of
prejudice to the public interest or to the company is enough. Thirdly, the section
enables the court to take into consideration outside interest affected by corporate


operation. Thus, the Calcutta High Court refused to order the winding up of a grossly
mismanaged company and appointed a special officer to manage it because the
company was engaged in special industries necessary for the implementation of the
countrys plans. [Richardson & Cruddas Ltd. v. Haridas Mundra, (ibid)]. No filing of
statutory returns and statutory demand was not held as tenable ground for
mismanagement. [Anupamarani Satpal Sharma v. Anand Steel Works (P) Ltd. (2006)
71 SCL (CLB)].
Persons Entitled to Apply
The number of members required to make application under Sections 397 and 398
(i.e., who must sign the application) is given in Section 399. It provides that where the
company has a share capital, the application must be signed by at least 100 members
of the company or by one-tenth of the total number of the members, whichever is less;
or by any member or members holding not less than one-tenth of the issued share
capital of the company. If the company has no share capital, the application has to be
signed by at least one-fifth of the total number of its members. The Central Government
may, however, allow any member or members to apply, if in its opinion, circumstances
exist which make it just and equitable to do so. The contents of such an application
should fulfil the requirements laid down in Rule 13 of the Companies (Central
Government's) General Rules and Forms, 1956. The Central Government may
demand security for costs as a safeguard against vexatious litigation.
Joint holders of any share or shares are counted as one member. To be entitled
to make the application, the members must have paid all the calls and other sums
due on their shares.
It was held in Northern Projects Ltd. v. Blue Coast Hotels and Resorts Ltd.
[(2008) 88 SCL 74 (Bom.)], that in Section 399, the term issued share capital
includes both equity and preference share capital.
Once the consent has been given by the requisite number of members by signing
the application, the application may be made by one or more of them on behalf and
for the benefit of all of them. It has been held by the Supreme Court in Rajahmundry
Electric Supply Co. v. Nageshwara Rao, AIR 1956 SC 213, that if some of the
consenting members have, subsequent to the presentation of the application,
withdrawn their consent, it would not affect the right of the applicant to proceed with
the application.
Obtaining of consent is a condition precedent to the making of the application
and hence a consent obtained subsequent to the application is ineffective. Makhan
Lal Jain v. The Amrit Banaspati Co. Ltd., I.L.R. (1954) I All. 131.
In Kuttanad Rubber Co. Ltd. v. K.T. Ittiyavirah [(1997) 88 Comp. Cas. 438
(Ker.)], it was held that it is not necessary for each of the petitioners to hold
one-tenth of shares for filing petition. If a particular individual or individuals
who proposed to move an application under Sections 397 to 399 held one tenth
of the shares, then no question of any body's consent for such a petition would
arise. They by themselves would be entitled to move the petition and need not
seek for anybody's consent.
In L. Chandramurthy v. K.L. Kapsi (2005) 48 SCL 294 CLB, a person who had
disposed off his shares was not allowed to apply.


In Mohan Lal Mittal and Others v. Universal Wires Ltd., 1983 (53) Comp. Cas. 36,
the Calcutta High Court has held that in case the secretary verifies any petition under
Sections 397 to 398 of the Companies Act, 1956, it must be accompanied by an
affidavit verifying the petition alongwith the statement that he has been duly
authorised by the company and where the articles of association of the company also
contain the definitions of secretary and director, the consent under Section 399 of the
Companies Act, 1956, to present a petition under Sections 397 to 398, the decision to
present it must be taken by the Board or backed by the authority of the Board by a
resolution or by a subsequent ratification by a Board meeting.
The Central Government or any person authorised by it in this behalf has also the
power as per Section 401 to apply for relief under the section.
On the presentation of the petition, the Company Law Board
1
/Tribunal
2
with a
view of bringing to amend to the matters complained of may make such orders as it
thinks fit under this section, If it is of the opinion that
(a) the affairs of the company are being conducted in a manner prejudicial to
public interest or in a manner oppressive to any member or members.
(b) to wind up the company would unfairly prejudice the members who have
lodged a complaint.
(c) but the Company Law Board would be prepared to make a winding up order
on the ground that it is just and equitable that the company should be wound
up.
Both the conditions mentioned at (a) and (b) above must be fulfilled before the
Company Law Board
1
/Tribunal
2
can entertain any petition under Section 397 of the
Act. The petitioner must not only allege that the winding up order is justified but also
allege that an order for winding up should not be made as it will unfairly prejudice the
petitioners and other members [In Re. Bengal Lakshmi Cotton, (1965) 35 Comp. Cas.
187]. The scope of this section was very succinctly enunciated by the Supreme Court
in Shanti Prasad Jain v. Kalinga Tubes Ltd. (supra) where it observed that "It is not
enough to show that there is just and equitable cause for winding up of the company
though that must be shown as a preliminary to the application under Section 397. It
must further be shown that the conduct of majority shareholders was oppressive to
the minority as members and this requires that events have to be considered not in
isolation but as a part of consecutive story. There must be continuous acts on the
part of the majority shareholders continuing to the date of petition, showing that the
affairs of the company were being conducted in a manner oppressive to some
members. The conduct must be burdensome, harsh and wrongful. Mere lack of
confidence between the majority shareholders and the minority shareholders would
not be enough unless lack of confidence springs from oppression of minority by the
majority in the management of the company's affairs and such oppression must
involve at least an element of lack of probity or fair dealing to a member in the matter
of his proprietary right as a shareholder."
"Mere unwise, inefficient or careless conduct of a director in the performance of
his duties may not be ground for relief under this section". [Needle Industries (India)
Ltd. v. Needle Industries Newey (India) Holding Ltd., (1981) 51 Comp. Cas. 743
(S.C.)].


Section 397 confers wide powers on the Company Law Board
1
/Tribunal
2
to deal
with the situation arising out of an oppression in an equitable manner provided the
conditions prescribed therein are satisfied. The conditions for making an application
under Section 397 are that
(i) the company's affairs are being conducted in a manner prejudicial to the
publc interest or in a manner oppressive to any member or members;
(ii) there are just and equitable grounds for making an order for winding up; and
(iii) the winding up of the company could unfairly prejudice the member or
members.
The Company Law Board
1
/Tribunal
2
is required to give notice of every such
application to the Central Government and to take into consideration any
representation made by it.
In Rameshwar Prasad v. Sindri and Foundary Pvt. Ltd., AIR 1966 Cal. 512 the
Calcutta High Court held that the majority shareholders who qualify under Section
399 can apply for relief under Section 397 and rejected the argument that the relief
under Section 397 is available only to minority shareholders. However, the Delhi High
Court in Suresh Kumar Sanghi v. Supreme Motors Ltd. and Others (1983), 54 Comp.
Cas. 235 held that the provisions of Section 397 would be applicable only in cases of
an oppression by majority shareholders on the minority shareholders. According to
the court, unless a shareholder or shareholders filing the petition were in the minority
Section 397 cannot be invoked at all.
4. POWERS OF THE COMPANY LAW BOARD
1
/TRIBUNAL
2
(SECTION 402)
Powers of the Company Law Board
1
/Tribunal
2
under Section 397 and 398 are
fairly wide, In fact, the court may make any order for the regulation of the conduct of
the companys affairs upon such terms and condition as may, in the opinion of the
Court, be just and equitable in all the circumstance of the case (AIR 1956 S.C. 213).
Apparently the only limitation seems to be the over all objective of the sections and,
therefore, the order must be directed to bring to an end the matter complained of.
However, an attempt is made under Section 402 to define the powers of the
CLB
1
/Tribunal
2
. This section provides that without prejudice to the generality of the
powers of the CLB
1
/Tribunal
2
, any order under Section 397 or 398 may provide for:
1. The regulation of the conduct of the companys affairs in future. Thus, for
example, in Richardson & Cruddas Ltd. v. Hardas Mundra, (63 CWN 439;
AIR 1959 Cal 695), the court appointed a special officer with an advisory
board to the total exclusion of the shareholders of a company to function
subject to the terms and condition laid down in the order.
2. The purchase of the shares or interests of any member of the company by
other members or by the company. This relief was provided in Mohan Lal v.
The Punjab Co. Ltd., AIR 1961 Punj. 485.
3. In the case of purchase of its shares by the company, the consequent
reduction of its share capital.
4. The termination, setting aside or modification of and agreement between the
company and managing director, or any other director, and the manager.

1
Existing.
2
Proposed.


5. The termination, setting aside or modification of any agreement with any
person, provided due notice has been given to him and his consent
obtained.
6. Setting aside of any fraudulent preferences made within three months before
the date of the application.
7. Any other matter for which, in the opinion of the court, it is just and equitable
that provision should be made. [See as an illustration, Mrs. Gajarbai v. Patny
Transport (P) Ltd., (1966) 2 Comp LJ 234, a decision of Andhra Pradesh
High Court]. The facts were that one of the directors died leaving behind a
will bequeathing the shares in the company to his second wife and sons who
were already the shareholders of the company and the petitioner. The
directors on account to their private dispute with the petitioners, acting, in a
high-handed manner and unreasonably refused to transfer a part of the
shares bequeathed under the Will while transferring some shares in favour
of themselves as provided under the Will. They made certain improper
transfers also. The petitioners applied under Sections 397 and 398 of the
Companies Act for removal of one of the director from the Board, and for the
appointment of committee of shareholders to manage the affairs of the
company. But the court held that the proper order to make, in the
circumstances, is to direct the directors to transfer the shares to the
petitioners in accordance with the terms of the Will.
If the Company Law Board
1
/Tribunal
2
orders any alteration of the memorandum or
articles of the company, the company shall not be at liberty to introduce any provision
inconsistent with the order [Section 404(1) and see also Sub-sections (2), (3) and (4)].
If the order sets aside or modifies any agreement with any management personnel, it
will not give rise to any claim for damages or compensation for loss of office
[Section 407 (1) (a)]. Further any managerial personnel whose appointment is so set
aside shall not be capable of serving the company in any managerial capacity for the
period of five years except with the leave of the Company Law Board
1
/Tribunal
2

[Section 407 (1) (b)]. The prohibition applies to any person who becomes his associate
[Sub-section (1); See also Sub-section (3)]. Where the CLB
1
/Tribunal
2
, for the purposes
of fulfilling the objects of Section 397, orders the company to purchase the shares of
the outgoing shareholders, the other provisions of the Act, like those of Section 77A,
would not be attracted. The application of other sections may defeat the very purpose
of the provisions of the Act relating to prevention of oppression and mismanagement.
[Gurmit Singh v. Polymer Papers Ltd. (2003) 45 SCL 251 (CLB-ND).
5. CONSEQUENCES OF TERMINATION OR MODIFICATION OF AGREEMENTS
Section 407(1)(b) of the Act states the consequences which follow upon the
termination setting aside or modification of agreements between the company and its
manger, managing director under Section 397 & 398. It provides that where an
agreement has been terminated, set aside or modified by the order in respect of
manager, managing or other directors, such person or persons cannot claim any
compensation or damages against the company for the loss of office or in any other
respect. Further, no manager, managing or other director whose agreement has been

1
Existing.
2
Proposed.


terminated, set aside or modified, shall for a period of 5 year from the date of the
order of the CLB
1
/Tribunal
2
, without the leave of the CLB
1
/Tribunal
2
, be appointed or
act as manager, managing or other director of the company. Before granting the
leave Company Law Board
1
/Tribunal
2
must give an opportunity to the Central
Government of being heard in the matter. If any person acts as manager, managing
director or other director in contravention of this provision, he shall be punishable
with imprisonment up to one year or fine up to Rs. 50,000 or with both.
An application seeking the leave of the Company Law Board
1
/Tribunal
2
under
Section 407 shall be made to the Principal Bench of the CLB
1
/Tribunal
2
, with a fee of
Rs. 2500, and accompanied by a copy of the notice of the intention to apply for leave
given to the Central Government together the following documents:
1. Documentary and/or other evidence in support of the statement made in the
petition, as are reasonably open to the petitioner(s);
2. Documentary evidence in proof of the eligibility and status of the petitioner(s)
with the voting power held by each of them;
3. Where the petition is presented on behalf of members, the consent letters
given by them.
4. Statement of particulars showing names, addresses, number of shares held
and others moneys due on shares have been paid in respect of members
who have given consent to the petition being presented on their behalf;
5. Where the petition is presented by any member or members authorised by
the Central Government under Section 399(4), the order of the Central
Government authorising such member or members to present the petition
shall be similarly annexed to the petition.
6. Affidavit verifying the petition.
7. Bank draft evidencing payment of application fee.
8. Memorandum of appearance with copy of the Board resolution or the
executed vakalatnama, as the case may be.
The petition herein shall also state that notice of the intention to apply for such
leave has been given to Central Government and shall be accompanied by a copy of
such notice.
The petitioner shall be required to serve a copy of the petition upon the
concerned Registrar of Companies [Reg. 14(3)].
6. POWERS OF THE CENTRAL GOVERNMENT TO PREVENT OPPRESSION
OR MISMANAGEMENT
1. The Act not only confers special powers upon the Company Law Board
1
/
Tribunal
2
to prevent oppression or mismanagement, but also confers
extraordinary powers upon the Central Government to attain the same end.
The Central Government may appoint such number of persons specified in
writing to hold office as directors thereof as is necessary to effectively

1
Existing.
2
Proposed.


safeguard the interests of the company, its shareholders or the public
interest, for such period, not exceeding 3 years on any one occasion as it
may think fit, if the Company Law Board
1
/Tribunal
2
considers it necessary to
make the appointment in order to prevent the affairs of the company being
conducted either in a manner which is oppressive to any members of the
company or in a manner which is prejudicial to the interest of the company
or to public interest [Section 408(10)], where
(i)not less than 100 members of the company or of the members holding not
less than 1/10th of the total voting power therein apply to the Company
Law Board in the matter [Section 408(1)]; and
(ii)on receipt of such application or on a reference made to it by the Central
Government make such inquiry as it deems fit to make [Section 408(1)]
and found necessary to such appointment.
2. But instead of passing such an order, the Company Law Board
1
/Tribunal
2

may direct the company to amend its articles to provide for a proportional
representation (according to Section 265) for appointment of directors so
that minority interests may be properly represented and make fresh
appointments of directors in pursuance of the articles so amended, within
such time as may be specified [Section 408(1)].
3. In case the CLB
1
/Tribunal
2
passes on order for amendment of a companys
articles and to make fresh appointment of directors in accordance with it, it
may direct that until new directors are appointed in pursuance of the
Governments order such number of persons of the company specified by
the Company Law Board
1
/Tribunal
2
shall hold office as additional directors of
the company as are necessary to effectively safeguard the interests of the
company, its shareholders or the public interest and on such directions, the
Central Government shall appoint such additional directors [Section 408(2)].
4. Any directors appointed by the Central Government shall not be liable to
retirement by rotation. For the purpose of reckoning two-thirds or any other
proportion of the total number of directors of the company, any director(s) so
appointed by the Central Government shall not be taken into account. The
term of office of such directors will depend upon the order of the Central
Government by which they are appointed [Section 408(3)].
5. A person appointed under Sub-section (1) to hold office as a director or a
person directed under Sub-section (2) to hold office as an additional director,
shall not be required to hold any qualification shares nor his period of office
shall be liable to determination by retirement of directors by rotation; but any
such director or additional director may be removed by the Central
Government from his office at any time and another person may be
appointed by the Government in his place to hold office as director or as, the
case may be, an additional director [Section 408(4)].
6. No change in the Board of directors made after a person is appointed or
directed to hold office as a director or additional or under Section 408 shall,

1
Existing.
2
Proposed.


so long as such director or additional director holds office, have effect unless
confirmed by the Company Law Board
1
/Tribunal
2
[Section 408(5)].
7. Notwithstanding anything contained in this Act or in any other law, where any
person is appointed by Central Government to hold office as director or
additional director of a company in pursuance of Sub-section (1) or Sub-
section (2) of Section 408, the Central Government may issue such directions
to the company as it may consider necessary or appropriate in regard to its
affairs. Such directions may include directions to remove an auditor already
appointed and to appoint another auditor in his place or to alter the articles of
the company and upon such directions being given, the appointment, removal
or alteration as the case may be, shall be deemed to have come into effect as
if the provisions of this Act in this behalf have been complied with without
requiring any further act or thing to be done [Section 408(6)].
8. The Central Government may require the persons appointed as directors or
additional directors in pursuance of Sub-section (1) or Sub-section (2) to
report to the Government from time to time with regard to the affairs of the
company [Section 408(7)].
Sub-sections (6) and (7) were added to Section 408 by the Amendment Act,
1974. The weakness of the section before this amendment was that the
appointment of one or two directors was not effective enough to check
mismanagement. The merit of the new provisions added is that it gives a
power of direct action to interfere and control the management of the
company by controlling the Board of directors itself, by appointing such
number of directors as may be required for the purpose. The power to call
the reports [Sub-section (7)], and the power to give directions [Sub-section
(6)], will play a vital role in disciplining the companys management.
9. Union of India v. Satyam Computers Services Ltd. & Ors. [(2009) 1Comp LJ
308(CLB)] The Respondent Company indulged in grave financial
mismanagement practices due to which its Chairman resigned. The Central
Government applied to the CLB for the removal of the Board of directors and
to appoint its directors to manage the respondent company. Petition of the
Central Government was and it was held that the petitioner has sufficient
grounds to invoke the provisions of section 388B/397/398 and 408 of the
Companies Act, 1956. The written admission of the second respondent,
who is the chairman of the company, establishes beyond any shadow of
doubt that there have been financial impropriety and jugglery of financial
statements, with the view to mislead the stakeholders, employees and the
public in general. It appears that a serious fraud has been perpetrated on
the society as a whole. The manner in which the affairs of the company
have been conducted has shaken the confidence of the public in the
company as is evident from the fall in the share price of the company on
7.1.2009 from Rs.188 to 38.40. As indicated above, the company is the
fourth largest IT Company in India. It has clients in over 60 countries and
also has over 53,000 employees and has nearly 3 lakh shareholders. Their
interests along with the interests of the company have to be protected. The

1
Existing.
2
Proposed.


public interest at large is also at stake. The need of the hour is to be to
create confidence in the minds of all those connected with the company in
any capacity and also to assure that regulatory/judicial mechanism in India is
alive and active to take immediate and positive steps in case of needs. The
present state of affairs of the company is such, that there could not be a
better case, wherein, this Board , in exercise of its powers under sections
388C/403 of the Act, is obligated under the law to regulate the affairs of the
company on an urgent basis. Therefore, in the interests of the members,
employees, customers of the company and also in the larger public interest,
the interim reliefs sought should be granted ex parte. Accordingly, it is
directed/ordered, inter alia, as follows (i) the present board of directors
stands suspended with immediate effect. None of the present directors shall
represent himself to be a director of the company and shall also not exercise
any powers as a director (ii) On the authority of this order, in the name and
on behalf of the Board, the Central Government shall immediately constitute
a fresh board of the company with not more than 10 persons of eminence as
directors. The Central Government may also designate one of them as the
chairman of the board. This board shall be entitled to exercise and
discharge all powers vested in the board by the articles and the Act. The
said constitution shall be notwithstanding anything contrary contained in the
articles, the Act, listing agreement or any other law/regulations relating to the
constitution of the board of a listed company. The said board will continue
till further orders. (iii) The newly constituted board shall meet within seven
days of its constitution and take necessary immediate action to put the
company back on the road.(iv) It shall submit periodical reports to the
Central Government, with a copy to this Board on the state of affairs of the
company. (v) The petitioner is permitted to file additional affidavits that may
become necessary after further investigations/enquiries into the affairs of the
company. (vi) The petitioner will serve a copy of the petition along with a
copy of this order on all the respondents immediately, who shall file their
replies to the petition by 20.2.2009.
7. POWER TO PREVENT CHANGES IN THE BOARD
Section 409 of the Companies Act, 1956 provides as under :
1. Manager, managing director or any other director of a Company is
empowered to complain to the Company Law Board
1
/Tribunal
2
that as a
result of change which has taken place or is likely to take place in the
ownership of any shares held in the company, a change in the Board of
directors is likely to take place which (if allowed) would affect prejudicially
the affairs of the company [Section 409(1)]. A change in the Board of
directors would mean appointment or removal of a director, replacement of
the Board either partly or in full. No change in the designation or powers of
the Board can be considered to be a change within the meaning of Section
409.
2. The Company Law Board
1
/Tribunal
2
may make such enquiry as it deems fit

1
Existing.
2
Proposed.


on the complaint made to it [Section 409(1)].
3. The Company Law Board
1
/Tribunal
2
after such enquiry if satisfied that it is
just and proper so to do, by order, direct that no resolution passed or that
may be passed or no action taken or that may be taken to effect a change in
the Board of directors after the date of the complaint shall have effect unless
confirmed by the Company Law Board
1
/Tribunal
2
. Any such order shall have
effect notwithstanding anything contained contrary in the memorandum or
articles of the company or any agreement made or resolution passed in
general meeting or/by the Board of directors [Section 409(1)].
4. The Company Law Board
1
/Tribunal
2
has the power when any such
complaint is received by it to make interim order before making or
completing the necessary inquiry [Section 409(2)].
5. The powers conferred by Section 409 cannot be exercised in the case of a
private company unless it is a subsidiary of public company [Section 409(3)].

LESSON ROUND-UP
The concept of shareholders democracy in the present day corporate world
denotes the shareholders supremacy in the governance of the business and
affairs of corporate sector either directly or through their elected representatives.
Under the Companies Act the powers have been divided between two segments;
one is the Board of Directors and the other is of shareholders. The directors
exercise their powers through meetings of Board of directors and shareholders
exercise their power through Annual General Meetings/General Meetings.
The general principle of company law is that every member holds equal rights
with other members of the company in the same class. The scale of rights of
members of the same class must be held evenly for smooth functioning of the
company. In case of difference(s) amongst the members, the issue is decided by
a vote of the majority.
Since the majority of the members are in an advantageous position to run the
company according to their command, the minorities of shareholders are often
oppressed. The company law provide for adequate protection for the minority
shareholders when their rights are trampled by the majority.
The court will not usually intervene at the instance of shareholders in matters of
internal administration, and will not interfere with the management of a company
by its directors so long they are acting within the powers conferred on them under
the articles of the company.
The supremacy of the majority, however, does not prevail in all situations. There
are certain acts which the majority of shareholders cannot approve or affirm. In
such cases, any shareholder may sue to enforce obligations owed to the
company. He brings the action as representative of the corporate interest.
Any member of a company who complain that the affairs of the company are
being conducted in a manner prejudicial to public interest or in a manner
oppressive to any member(s) (including any one or more of themselves) may

1
Existing.
2
Proposed.


make an application to the Company Law Board/Tribunal by way of petition for
relief.
Relief under the Act will also be available if the affairs of the company are being
conducted in a manner prejudicial to public interest. Public interest is a very
broad term involving the welfare not only of the individual shareholders or of the
country according to the economic and social policies of the State.
If there is persistent violation of the regulations and statutes and an appeal to
general body is not likely to put an end to the matters complained of by reason of
the fact that those responsible for the violations control the affairs of the
company, then it will be just and equitable to wind up the company.
If the court is so convinced that the affairs of a company are being conducted in a
manner prejudicial to the interest of the company or public interest, or that, by
reason of any change in the management or control of the company, it is likely
that the affairs of the company will be conducted in that manner, it may with a
view to bringing to an end or preventing the matter complained of or
apprehended, make such order as it thinks fit.
Persons who are entitled to apply for above have been specified in the Act.
Company Law Board and Central Government have been empowered under the
Act to prevent oppression and mismanagement.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answer to these questions are not to be
submitted for evaluation)
1. A company is a democratic institution in which the majority have a right to
control the company. Do you support this statement? Give your comments
in the rule laid down in Foss v. Harbottle.
2. Explain clearly the meaning of majority rule as applied in managing a
company registered under the Companies Act 1956. Are there any
exceptions to this rule? If so, explain in the light of the statutory law and
case law.
3. The rule in Foss v. Harbottle presently has lost its importance because of
adequate statutory provisions made in the Companies Act, 1956. Discuss
the adequacy of these provisions.
4. The articles of a company provided for the taking of a poll at a general
meeting of the company if so demanded by five shareholders. At a general
meeting the Chairman, in breach of the articles, declined to take a poll.
One of the shareholders brought an action on behalf of himself and other
shareholders against the directors and company, seeking a declaration
that decisions taken at the meeting were invalid and seeking an injunction
to restrain their implementation. Are the shareholders competent to file the
suit?
5. Majority will have its way but minority must be allowed to have its say.
Discuss the above proposition with reference to prevention of oppression
and mismanagement?
6. Enumerate the powers of the Company Law Board to prevent oppression


and mismanagement. What are the powers of the Central Government to
prevent oppression and mismanagement?
7. Section 397 and 398 are intended to avoid winding up, if possible, and keep
the company going, while at the same time saving the minority shareholders
from oppression and mismanagement. Explain.


Suggested Readings :
1. Guide to Companies Act A. Ramaiya.
2. Company Law and Practice A.K. Majumdar & G.K. Kapoor.
3. Circulars & Clarifications on Company Law Taxman Publication.
4. Law & Practice relating to Oppression and Mismanagements Dr. K.R.
Chandratre

































STUDY XXVIII
COMPROMISES AND ARRANGEMENTS AN OVERVIEW

LEARNING OBJECTIVES
This lesson explains the concept of compromise and arrangement along with the
respective provisions under the Companies Act. The lesson also discusses the
powers of the court in respect of compromises and arrangements.
At the end of the lesson, you should be able to understand:
Meaning of compromise and arrangement.
Sanctioning of schemes.
Sanctioned arrangement binding on all concerned parties.
When courts do not sanction a scheme.
Explanatory statement.
Powers of the court to supervise the implementation of the scheme.
Powers of the court to sanction modification of the terms of a scheme.
Powers of the court to order a winding up while considering a scheme.
Powers of the court to make consequential orders.
Need for reports from Registrar of Companies.

Compromise is a term which implies the existence of a dispute such as relating
to rights. It means settlement or adjustment of claims in dispute by mutual
concessions. If the members have to give up their rights entirely, it will not be a
compromise [NFU Development Trust Ltd., Re (1973) 1 All E.R. 135].
The provisions of the Act regarding a scheme of Compromise or Arrangement
are mainly applicable to those companies which are liable to be wound up under the
Act [Section 390 (a)].
The term arrangement is of very wide import. It includes a reorganization of the
share capital of a company by the consolidation of shares of different classes, or by
the division of shares into shares of different classes or by both these methods
[Section 390(b)]. All modes of reorganizing the share capital, including interference
with preferential and other special rights attached to shares, can properly form part
of an arrangement with members [Investment Corp. of India Ltd., Re (1987) 61
Comp. Cas. 92 (Bom.)]. But a member whose rights are expropriated without any
compensatory advantage is not having his rights re-arranged in any legitimate sense
of that expression [Hindustan Commercial Bank Ltd. v. General Electrical Corp.,
(1960) 30 Comp. Cas. 367 (Cal.)].
There can be no compromise unless there is first a dispute [Guardian
Assurance Co., Re (1917) 1 Ch. 431].
1078


1. SCOPE OF SECTION 391
Section 391(1) of the Companies Act, 1956 provides that where a compromise or
arrangement is proposed between company and its creditors or any class of them or
between company and its members or any class of them, the Court may on the
application of the company or any creditor or member of the company or liquidator
(where company is being wound up), order a meeting of creditors or class of creditors
or members or class of members, as the case may be, to be called, held and
conducted in such manner as it directs. From the above provision of law, it is clear
that there could be a compromise or arrangement between a company on the one
side and its creditors or any class of them on the other side. There could be an
arrangement between a company and its members or any class of them. In such a
scheme of compromise or arrangement, the creditors or members could be the
interested parties. In the case of a company in winding up, the liquidator becomes the
party entitled to present the scheme to the court. All or any one of the interested
parties have to make an application to the court praying for sanctioning the scheme
of compromise or arrangement.
Pertinently, it has been held in several cases that Section 391 is a complete
code or single window clearance system, and that the Court has been given wide
powers under this section, to frame a scheme for the revival of a company. Being a
complete code, the Court can, under this section, sanction a scheme containing all
the alterations required in the structure of the company for the purpose of carrying out
of the scheme.
Section 391 contemplates a compromise or arrangement between a company
and its creditors or any class of them, or its members or any class of them, and
provides machinery whereby such a compromise or arrangement may be binding on
dissentient persons by an order of the Court. [Oceanic Steam Navigation Co. In re.
(1939) 9 Comp. Cas. 229 (Ch.D)].
When an application is made, the Court will naturally consider the merits of the
scheme. The Court will also see whether all interested parties or whether all parties
whose rights are likely to be affected have been put on notice about the scheme. In
other words, Court gives an opportunity to all persons who are concerned or
interested in the scheme. The Court may order a meeting of the creditors and / or the
members. While ordering the convening of a meeting, the Court has the power to
direct the manner in which the meeting should be conducted and how the
proceedings and the result of the meeting should be reported. The Court has the
discretion to sanction the scheme. You may note the use of the word 'may' in Sub-
section (1) of Section 391 of the Act. It clearly implies that the Court has the
discretion to make or not to make the order. As already stated, even before
convening a meeting, the Court should pay attention to the fairness of the proposed
scheme because it would be no use putting before the meeting a scheme, which is
not fair. The Court may also refuse a meeting to be called where the proposals
contained therein are illegal, or in violation of provisions of the Act or incapable of
modification. [Travancore National & Quilon Bank, In Re. (1939) 9 Comp. Cas. 14
(Mad.)]. Thus, the Court does not have to compulsorily call for a meeting, but in its
discretion, dismiss the application at that stage itself [Sakamari Metals & Alloys Limited,
In Re. (1981) 51 Com. Cas. 266 (Bom.)].


The Court is duty bound to ascertain the bona fides of the scheme and whether
the scheme is prima facie feasible. The Court will not act merely as a rubber stamp
while sanctioning a scheme. The Court must consider the application on merits.
[N.A.P. Alagiri Raja & Company v. N. Guruswamy (1989) 65 Comp. Cas. 758 (Mad.)].
The Court should examine the nuts and bolts of the scheme and should not hesitate
to reject the scheme or ask for additional material or even point to creditors,
members, etc. of pitfalls in the scheme and the Court's role under Section 391(1) is
equally useful, vital and pragmatic as under Section 391(2) [Sakamari Metals & Alloy
Limited In Re. (1981) 51 Comp. Cas. 266 (Bom.)]. Where a large number of creditors
opposed the scheme, it was obvious that there was no possibility of its being
implemented [Krishnakumar Mills Co. Ltd. In Re. (1975) 45 Comp. Cas. 248 (Guj.)].
It was held in the case of Mekaster Valves and Engineering Services P. Ltd., In
re. [(2009) 149 Comp Cas 593 (Guj)] that when the court sanctions a scheme of
arrangement or compromise, the scheme is sanctioned as a whole with all its clauses
and proposals. The certified copy of the order sanctioning the scheme filed with the
Registrar of Companies shall be treated as intimation to the Registrar of Companies
and he shall take note of all the changes proposed and sanctioned by the court.
Since all the changes were proposed to be effected as an integral part of the scheme,
the approval granted by the shareholders at the meeting to the scheme as a whole
amounted to approval granted to all such incidental proposals and no separate
procedure was required to be followed as envisaged by sections 17, 31, 94, 97,
81(1A), 100 and 149(2A), respectively. Therefore, there was no need to comply with
the provisions of the Act. The scheme of amalgamation being in the interest of the
companies and their members and creditors, the scheme was to be sanctioned.
2. SANCTIONED ARRANGEMENT BINDING ON ALL CONCERNED PARTIES
According to sub-section (2) of Section 391, if a majority in number representing
three-fourths in value of the creditors, or class of creditors, or members, or class of
members, as the case may be, present and voting, agree to any compromise or
arrangement, the compromise or arrangement shall, if sanctioned by the court, be
binding on all the creditors, or all the creditors of the class, all the members, or all the
members of the class, as the case may be, and also on the company, or, in the case of
company which is being wound up, on the liquidator and contributories of the company.
3. NEED FOR REPORTS FROM REGISTRAR OF COMPANIES
In a scheme of compromise or arrangement, the Court is bound to seek a report
of the Registrar of Companies representing the Ministry of Corporate Affairs in order
to ensure that the affairs of the company have not been conducted in a prejudicial
manner. The Registrar of Companies makes a report to the Regional Director in the
Ministry of Corporate Afairs. On receipt of the report of the Registrar of Companies,
the Regional Director submits his report to the Court through the standing counsel of
the Central Government in the form of an affidavit. Thus the Court receives the report
of the government and only after considering the same, passes necessary orders
sanctioning or rejecting the scheme.
4. WHEN COURTS DO NOT SANCTION A SCHEME?
If a compromise or arrangement is not bona fide but intended to cover misdeeds
of delinquent directors, the Court shall not sanction the scheme [Pioneer Dyeing


House Limited v. Dr. Shanker Vishnu Marathe (1967) 2 Comp. LJ 16]. If the object of
the scheme is to prevent investigation or there is failure in the management of affairs
of the company or disregard of law or withholding of material information from the
meeting or the scheme is against public policy, the Court will not sanction the scheme
[J.S. Davar v. Dr. S.V. Marathe, AIR 1967 Bom. 456 (DB)]. If it can be shown that the
petition is made mala fide and motivated primarily to defeat the claims of certain
creditors who had obtained decrees against the company, there was inordinate delay
in making the application for sanctioning the scheme and certain information was
withheld from the Company Court, the petition for sanctioning the scheme though
approved by the creditors and shareholders was rejected [Richa Jain v. Registrar of
Companies (1990) 69 Comp. Cas. 248 (Raj.)].
Thus, the following salient aspects emerge in every proposal containing a
scheme of compromise or arrangement:
Any scheme of compromise or arrangement that falls within the provisions of
Sections 391 to 393 of the Act should receive sanction from the Court in
order to become effective and binding.
The scheme of compromise or arrangement should be prepared as a written
document.
It should be presented to the Court.
Court will direct the convening of meetings of creditors or a class of them.
Court will direct the convening of meetings of members or a class of them.
Court gives opportunity to all concerned.
Under Section 391(1) of the Act, the Court gives directions with regard to
conducting of meetings.
The Court also fixes the time and place of such meeting, and appoint a
chairman of the meeting.
The Court fixes the quorum and lays down the procedure to be followed at
the meeting, including voting by proxy; determines the value of creditors or
members and the persons to whom notice is to be given.
The Court also gives directions to the chairman to report to the Court the
result of the meeting within a given period.
In Webneuron Services Ltd., In re. [(2009) 149 Comp Cas 61(Del)], the transferor
company sought approval to a scheme of amalgamation with the transferee
company. Employee of Transferor Company opposed the petition on the ground of
non payment of dues of Rs. 4,48,040. Objection of the employee was overruled and
the scheme was sanctioned. The reason given was that the transferor company had,
in accordance, with the direction of the court, deposited an amount of Rs.4,48,040
with the Registrar General of the court and in case the ex employee was found
entitled to the amount, he could get it with interest. The terms and conditions of
service of the employees of the transferor company were not affected and there was
no legal impediment in sanctioning the proposed scheme of amalgamation. The
scheme was to be sanctioned and the transferor company was to be wound up
without formal winding up.


5. EXPLANATORY STATEMENT
Apart from the directions of the Court, the provisions of Section 393 of the Act,
regarding furnishing of adequate information about the scheme to creditors and
members, should also be complied with. Accordingly, with every notice calling the
meeting, sent to the creditor or member, a statement setting forth, the terms of
compromise or arrangement specifically stating any material interests of director(s)
or, managing director(s) or manager of the company in whatsoever capacity, in the
scheme and the effect of their interest as in contradiction to the interests of other
persons, should be included.
Also, where a notice calling the meeting is given by advertisement, there shall be
included either the statement as aforesaid or notification of the place where and the
manner in which, the creditors or members entitled to attend the meeting may obtain
the copies of such statement. In case, the compromise or arrangement affects the
rights of debenture holders, the statement shall accordingly give like information in
such respect. Every such copy should be made available to the members or creditors
entitled to attend the meeting, in the manner specified and free of charge.
If default is made in complying with the above provisions regarding the notice and
the statement, every officer (including liquidator of the company, if any, and every
trustee of debenture-holders) in default and the company shall be punishable with
fine, which may extend to Rs. 50,000. But if it can be shown that the default in
sending the aforesaid notice and the statement was due to refusal of any such
person, who is required under law to supply the necessary particulars as to his
material interest, the company and its officers shall not be so punishable.
Every officer (director, managing director or manager and every trustee of
debenture-holders) of the company, is required to give notice to the company for
such matters relating to himself as may be necessary for the purpose of the
compromise or arrangement, and if he fails to do so, he shall be punishable with fine
which may extend to Rs. 5,000.
At the meeting the scheme is to be passed with the support of majority in number
and three-fourths in value of those present and voting. The creditors or members who
are present at the meeting but remain neutral or abstain from voting, will not be
counted in ascertaining the majority in number or value [Hindustan General Electric
Corporation, In Re., AIR 1959, (Cal.) 679].
The Chairman appointed by Court to preside over the meeting has to file his
report within 7 days of the conclusion of the meeting where the scheme was
considered and voted upon by the creditors or members. Subsequently, the petitioner
makes the application for confirmation of the scheme within 7 days of filing of the
report of the chairman.
The Court, while sanctioning the scheme, must be satisfied that there is full and
fair disclosure of information by the petitioner about the state of affairs of the
company and its latest financial position. The Court should also be satisfied that
statutory majority are acting bona fide and the compromise or arrangement is such
that an as may be reasonably approved. [Dorman Long & Co. Limited (1933) All ER
Rep. 460]. Therefore the Court would like to be satisfied basically on three points:
Firstly that the provisions of the statute have been complied with. Secondly, that the


class was fairly represented by those who attended the meeting and that the statutory
majority are acting bona fide and are not coercing the minority in order to promote
interests adverse to those of the class, they purport to represent and; thirdly that the
arrangement is such, as a man of business, would reasonably approve [Anglo
Continental Supply Co., Re. (1922) 2 Ch. 723]. The scheme, if sanctioned by the
Court, with or without modifications, if any, to make it operational, is binding on all the
creditors including government, creditors and liquidator, contributories, all the
members or classes thereof, as the case may be, and also on the company. It takes
effect not from the date of sanction of the Court, but from the date it was arrived at.
Sub-section (3) of Section 391 provides that the order of the Court becomes
effective only after a certified copy thereof is filed with the Registrar of Companies.
Sub-section (4) of Section 391 provides that a copy of every such order of the
Court has to be attached to every copy of the Memorandum of Association of the
Company.
According to Sub-section (5) of Section 391 if default is made in complying with
Sub-section (4), the company, and every officer of the company who is in default,
shall be punishable with fine.
As per Sub-Section (6) of Section 391 the Court may, at any time after an
application has been made, stay the commencement or continuation of any suit or
proceedings against the company on such terms as it may think fit, until the
application is finally disposed of.
Sub-section (7) of Section 391 provides that an appeal from the order of the
Court can be made to the higher Court so empowered.
6. POWERS OF THE COURT TO SUPERVISE THE IMPLEMENTATION OF THE
SCHEME
Section 392 of the Companies Act, 1956 confers the powers on the High Court
sanctioning a compromise or arrangement in respect of a company, to supervise the
carrying out of a compromise or arrangement and give any directions or making
modifications in the scheme, as it considers necessary, either at the time of
sanctioning it or any time thereafter. Under this Section, the Court cannot issue
directions which do not relate either to the sanctioned scheme itself or its working in
relation to the company which the scheme seeks to reconstruct. [Mysore Electro
Chemical Works Ltd. v. ITO, (1982) 52 Comp. Cases 32 (Ker.)]. The Court has
powers to give directions even to third parties to the compromise or arrangement
provided such direction is necessary for the proper working of compromise or
arrangement.
7. POWERS OF THE COURT TO SANCTION MODIFICATION OF THE TERMS
OF A SCHEME
As regards the modification of a scheme, application thereof can be made by any
person interested. 'Any person interested' should not be confined to creditor or
liquidator of the company whereby any person who has obtained a transfer of shares
in the company but has not yet been registered as a member is also to be included
therein [K.K. Gupta v. K.P. Jain (1979) 49 Comp. Cases 342: AIR 1979 SC 734]. In
Saroj G. Poddar (Smt.), in Re., (1996) 22 Corpt LA 200 at 216 (Bom.); T. Mathew v.


Saroj Poddar (1996) 22 Corpt LA 200 at 216 (Bom.) the following main points
emerged:
(a) The scheme can be modified by the Court either at the time of or after its
sanction.
(b) Such modification can include the substitution of sponsorer of the scheme.
(c) Modification of scheme or substitution of sponsor should be necessary for
proper, efficient and smooth working of the scheme.
(d) Modification can be made at the instance of any person who is interested in
the affairs of the company and the court can also introduce modification suo
motu.
(e) The Court should examine the bona fides of the person applying to be
substituted as a sponsor, his capability and his interest in the company.
8. POWERS OF THE COURT TO ORDER A WINDING UP WHILE CONSIDERING
A SCHEME
If the Court is satisfied that a compromise or arrangement sanctioned under
Section 391 cannot be carried out satisfactorily with or without modifications, it may
vide Section 392(2) of the Act, either on its own motion or on the application of any
person interested in the affairs of the company, make an order for winding up which
shall be deemed to be the same as under Section 433 of the Act.
9. POWERS OF THE COURT TO MAKE CONSEQUENTIAL ORDERS
Where an application is made to the Court under Section 391 for the sanctioning
of a compromise or arrangement proposed between a company and any such
persons as mentioned therein, and the Court is satisfied that the scheme relates to
the reconstruction or amalgamation of any two or more companies, it will make
consequential orders as provided in Section 394 of the Act.

LESSON ROUND-UP
A compromise means settlement or adjustment of claims in dispute by mutual
concessions.
Arrangement includes a reorganization of share capital of company by
consolidation of shares of different classes or division of shares into shares of
different classes or by both these methods.
The Act provides that where a compromise or arrangement is proposed between
company and its creditors or any class of them or between company and its
members or any class of them, the court may, on the application of the company
or of any creditor or member of the company, or in the case of a company which
is being wound up, of the liquidator, order a meeting of the creditors or class of
creditors, or of the members or class of members, as the case may be, to be
called, held and conducted in such manner as the court directs.
The sanctioned scheme would be binding on all the concerned parties. However,
in certain circumstances, the court shall not sanction a scheme of compromise or
arrangement.
In a scheme of compromise or arrangement, the court is bound to seek a report
of the Registrar of Companies in order to ensure that the affairs of the company
have not been conducted in a prejudicial manner.


An explanatory statement, as provided for in the Act, would be attached to every
notice calling the meeting.
In case of default in complying with these provisions, every officer in default and
the company shall be punishable.
The court has the powers to supervise the implementation of the scheme and to
sanction modification of the terms of the scheme. While sanctioning the scheme,
the court also has the power to order winding up.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these are not to be
submitted for evaluation).
1. What is an arrangement in respect of a company? How may it be effected
and by whom?
2. Explain clearly the meaning of compromise. What procedure must a
company adopt to give effect to a compromise, when such a company is a
going concern?
3. What are the powers of the High Court with regard to enforcement of its
order sanctioning a compromise or arrangement?


Suggested Readings:
1. A Guide to Companies Act A. Ramaiya.
2. Company Law & Practice A.K. Majumdar & Dr. G.K. Kapoor
3. Company Law Avtar Singh.




















STUDY XXIX
LAW RELATING TO CO-OPERATIVES, SOCIETIES AND TRUSTS
LEARNING OBJECTIVES
This lesson discusses various issues relating to Co-operative Societies and
Trusts. The lesson is divided into two parts. At the inception of the lesson
students will get acquainted with the conceptual knowledge about Co-operative
Societies. Apart from statutory provisions, the students will get to know various
kinds of societies operating in our country and their respective objectives. Also it
discusses about the management aspect of such societies and powers/functions
of the Board. In the next half matters relating trust have been discussed
elaborately.
All issues relating to formation, types and other matters relating to trusts are
discussed. Also discussed are doctrines, note of beneficiaries, trustees, etc.

1. LAW RELATING TO CO-OPERATIVE SOCIETIES
Introduction
The word "Co-operative" is derived from the Latin word "Co-operari". This word
has two parts 'Co' and 'Operari' which means 'with' and 'to work' respectively.
Hence, the word "Co-operative" indicates an organisation which is set up for working
together with others i.e. in Co-operation with others. The concept of co-operation
came up in 1844 when Rochdale Pioneers established a Co-operative Society of
Weavers. Its ideals were widely accepted around the world and are known as
principles of co-operatives. The 23rd congress of the International Co-operative
Association accepted and reformulated the "Principles of Co-operative". They are
(1) Voluntary and open membership;
(2) Democrative control;
(3) Limited interest of share capital;
(4) Distribution of surplus to members;
(5) Promotion of Co-operative education and training;
(6) Co-operation among Co-operatives.
The main object of setting up of a co-operative is to ensure upliftment of weaker
individuals, financially through employing their resources in useful manner to enable
them collectively compete with financially strong ones. The first legislation was Co-
operative Credit Society Act 1904 for forming Credit Societies for economic and
social betterment of people. Further improvements were made in the Co-operative
Societies Act 1912 and the concept of limited and unlimited liability was introduced. In
1919, the co-operative was made provincial subject and Bombay Province enacted
its Co-operative Societies Act 1925 which replaced the Act of 1912. Subsequently,
other states enacted their co-operative laws which are based on the above principles
but they are different in their operations and procedure widely. A Co-operative society
which limits its operation in one State only, is governed by the co-operative law of
that State only.
1086


Delhi Co-operative Societies Act 1972 and Rules 1973 were enacted for the
Union Territory of Delhi for Co-operative societies operating in Delhi. For societies
functioning in more than one State, the Multi-unit Co-operative Society Act 1942 was
replaced by the Multi State Co-operative Societies Act 1984. It is a comprehensive
legislation. At present, there are number of Multi-State Co-operative Societies and
National Co-operative Societies such as National Co-operative Union of India Ltd.,
New Delhi, Indian Farmers' Fertilizer Co-operative Ltd. New Delhi, Krishak Bharti
Co-operative Ltd., New Delhi, All India Federation of Co-operative Spinning Mills Ltd.,
Bombay, All India Industrial Co-operative Banks' Federation Ltd., Bangalore and
others.
Types of Societies
Many types of societies can be registered. They differ according to their
objectives such as, Credit, Non-credit, Marketing, Joint farming, Tenants,
Transporters etc. A Co-operative society has several privileges. They are
(1) A Co-operative society is a legal entity. It is a body corporate. It has a
perpetual succession and a common seal. It can own property, enter into
contract, institute and defend suits and do all acts to achieve its objects.
(2) It has first charge upon the assets, goods and produces belonging to it.
(3) It can create charge on its assets to secure loans to be borrowed.
(4) It can set-off any sum credited or payable to a member or past member or
the estate of its members in or towards payment of any debt.
(5) The share or contribution or interest of a member in the capital of a Co-
operative society is not liable to attachment or sale under any decree or
order of any Court.
(6) It provides exemption from compulsory registration of instruments relating to
shares, debentures and others under Indian Registration Act, 1908.
(7) It has certain exemptions from taxes, fees and duties under respective Acts.
(8) It can make deduction from salary of its employees in satisfaction of any
debt or demand payable to it.
(9) It may obtain financial assistance in various ways from the Central and State
Government.
(10) No one can file a suit against a Co-operative society unless notice of three
months is given to the Registrar of Co-operative Societies.
(11) The provisions of the Companies Act, 1956 and MRTP Act, 1969* are not
applicable to the working and functioning of Co-operative societies.
Laws for Co-operative Societies in India
With respect to working and administration of Co-operative societies, various
provisions of the concerned Co-operative Society Act and other legislations are
required to be complied with. The Chief Officer of a Co-operative Society is a
principal officer responsible thereto. A Company Secretary can play an important role
in functioning of Co-operative Societies which are presently numbered in several
lacs. With this end in view, the provisions contained in the Multi-State Co-operative
Societies Act, 2002 (the Act); the Multi-State Co-operative Societies (Registration,


Membership, Direction and Management, Settlement of Disputes, Appeal and
Revision) Rules 2002 (the Rules) and the Multi-State Co-operative Societies
(Privileges, Properties and Funds, Accounts, Audit, Winding up and Execution of
decrees, orders and Decisions) Rules 1985 (the Audit Rules) are examined briefly.
This Act came into force on 19th August, 2002 by repealing the Act of 1984. It is
applicable to the whole of India.
Definition
A Multi-State Co-operative Society has been defined under Section 3(p) of the
Act, so as to mean a society registered or deemed to be registered under this Act and
includes a National Co-operative Society and a Federal Co-operative. "Societies
deemed to be registered under this Act" means those societies which were
incorporated before commencement of this Act or under any Co-operative Societies
Act and registration of which has not been cancelled before the commencement of
this Act. "National Co-operative Societies" mean Multi-State Co-operative Societies
which have been listed in the Second Schedule (See Annexure I) of the Act.
Societies that can be registered
Under this Act only such societies can be formed and registered in which the
liability of members, as per the bye-laws of the society, is limited to the amount, if
any, unpaid on the shares respectively held by them or to such amount as they may
undertake to contribute to the assets of the society in the event of its being wound up.
Cooperative Principles
In terms of Schedule I to the Act, the Cooperative Principles of a multi-state
cooperative society are as under:
1. Voluntary and Open Membership: Co-operatives are voluntary
organisations, open to all persons capable of using their services and willing
to accept the responsibilities of membership, without discrimination on bases
of gender, social inequality, racial, political ideologies or religious
consideration.
2. Democratic Member Control: Co-operatives are democratic organisations
controlled by their members, who actively participate in setting their policies
and decision-making. Elected representatives of these co-operatives are
responsible and accountable to their members.
3. Members Economic Participation: Members contribute equitably and control
the capital of their co-operative democratically. At least a part of the surplus
arising out of the economic results would be the common property of the co-
operatives. The remaining surplus could be utilised for benefitting the
members in proportion to their share in the Co-operative.
4. Autonomous and Independent Co-operatives: Co-operatives are
autonomous, self-help organisations controlled by their members. If co-
operatives enter into agreement with other organisations including
Government or raise capital from external sources, they do so on terms that
ensure their democratic control by members and maintenance of co-
operative autonomy.


5. Education, Training and Information: Co-operatives provide education and
training to their members, elected representatives and employees so that
they can contribute effectively to the development of their co-operatives.
They also make the general public, particularly young people and leaders,
aware of the nature and benefit of co-operation.
6. Co-operation among Co-operatives: Co-operatives serve their members
most effectively and strengthen the co-operative movement, by working
together through available local, regional, national and international
structures.
7. Concern for Community: While focusing on the needs of their members, co-
operatives work for the sustainable development of communities through
policies accepted by their members.
Objects of Multi-State Co-operative Societies
A Multi-State Co-operative Society is registered under this Act to serve the
interest of the members in more than one State with the object to promote the
economic and social betterment of its members through mutual aid and in
accordance with the Co-operative principles, such as
(1) Membership is voluntary and open without any social, political or religion
discrimination to all persons, utilising its services.
(2) All members, institutional or individual, enjoy equal right of voting i.e. one
member one vote.
(3) Surplus of savings, if any, arising from the operations of the society belongs
to the society as a whole and no individual member has a claim to the
surplus.
(4) Surplus should be utilised for:
(a)Providing for development of the business of the society;
(b)Providing services for the common enjoyment of members;
(c)Distribution among the members in proportion to their transactions with the
society.
(5) Actively co-operate with other Co-operative Societies at local, national or
international levels.
(6) Undertake education of its members, office bearers and employees and the
general public regarding the principles and practice of co-operation.
(7) The share capital of Societies shall receive strictly limited rate of interest (i.e.
to say dividend).
(8) Administration is based on democratically expressed will of the members.
(9) The management of the society is accountable to its own members.
The Multi-State Co-operative Societies may also be formed with the object of
facilitating the operations of other such Societies or of Co-operative Societies or of
both.
Application for Registration
An application for registration of a Multi-State Co-operative Society is to be made


to the Central Registrar in Form I prescribed in the Rules issued in 1985.
The application should be signed in the case of
(1) A society of which all the members are individuals by atleast 50 persons
from each of the State concerned.
(2) A Society of which the members are co-operative societies by duly
authorised representatives usually the chairperson or chief executive, on
behalf of atleast five such societies as are not registered in the same State.
(3) Where any member of Multi-State Co-operative Society to be registered is a
Government company, a Corporate body, or a Society registered under the
Societies Registration Act, 1860, any authorised person can sign the
application on its behalf.
(4) A soceity of which another multi-state cooperative society and other
cooperative societies are members by duly authorised representatives of
each of such societies. However, not less than two of the cooperative
societies shall be such as are not registered in the same state.
(5) A society of which the members are cooperative societies or multi-state
cooperative societies and individuals, then, the application may be signed
by:
(a)fifty individual persons from each of the two states or more; and
(b)one cooperative society each from two states or more or one multi-state
cooperative society.
Enclosures to Application
(1) Four copies of the proposed bye-laws of the society duly signed by each of
the persons who sign the application for registration.
(2) A certificate from the banks stating the credit balance in favour of the
proposed Multi-State Co-operative society.
(3) A list of persons who have contributed to the share capital together with the
amount contributed by each of them and the entry fee paid by them.
(4) A scheme showing the details explaining how the working of the Multi-State
Co-operative Society will be economically sound and the registration of such
society will be beneficial for social and economic betterment of its members
through self-help and mutual aid in accordance with the cooperative
principles.
Certified copies of the resolution of the promoters specifying the name and
address of one of the applicants to whom the Central Registrar may address
correspondence under the Rules before registration and dispatch and/or
hand over the registration document.
(5) Copy of the resolution authorising the Chairman or, as the case may be,
Chief Executive etc. of Multi-State Co-operative Society to sign the
application and the bye-laws on behalf of the society wherever applicable.
(6) Copy of the resolution giving authority to any person to sign the application
for registration and the bye-laws on behalf of the Government company, a


corporate body or Co-operative Societies or a society registered under the
Societies Registration Act, 1860 wherever applicable.
(7) A copy of resolution indicating the name of one or more applicants who are
authorised to make alterations or additions to the proposed bye-laws
submitted with the application.
(8) The application in Form I shall be sent by registered Post or may be
delivered by hand to the office of the Central Registrar.
Whom to Apply
The application for registration of Multi-State Co-operative Society should be
addressed to the Central Registrar of Co-operative Societies, Krishi Bhawan, New
Delhi.
Members of the Co-operative Society
Following persons may be admitted as members of the Multi-State Co-operative
Society:
(1) An individual competent to contract under Section 11 of the Indian Contract
Act (which means the individual should be a major and of sound mind and is
not disqualified for contracting according to the law to which he is subject).
(2) Any Multi-State Co-operative Society or any Co-operative Society.
(3) The Central Government.
(4) The State Government.
(5) The National Co-operative Development Corporation.
(6) Any other Corporation owned or controlled by the Government.
(7) Any Government company as defined in Section 617 of the Companies Act,
1956.
(8) Such class or classes of persons or association of persons as may be
permitted by the Central Registrar having regard to the nature and activities
of a multi-state co-operative society.
Registration of the Society
The application so received in the office of the Registrar is given a serial number
and a receipt in acknowledgement thereof is issued. The Central Registrar if he is
satisfied that the provisions of the Act and the Rules have been complied with and
that the objects of the society are to serve the interest of members in more than one
State and that the proposed bye-laws are not contrary to the provisions of the Act and
the Rules, shall register the society. The Central Registrar while disposing of the
application may also be governed by the fact that there is no other Multi-State Co-
operative Society having similar area of operation and identical objects, the proposed
society has reasonable chances of becoming a viable unit and that its bye-laws
provide for social and economic betterment of its members through self-help and
mutual aid in accordance with co-operative principles. On registration a Certificate of
Registration signed by the Registrar bearing his official seal and containing the


registration number and date of registration is issued by the Central Registrar. A
certified copy of the bye-laws as approved and registered is also sent to society. The
application for registration has to be disposed off within a period of four months from
the date of its receipt.
Refusal to Register
The Registrar shall communicate within a period of 4 months of the date of
registration of application, to the person authorised on behalf of the proposed co-
operative society, the order for refusal to register the society alongwith his reasons
for doing so, but after giving a reasonable opportunities of being heard. The person
aggrieved by order of refusal of the Central Registrar may file an appeal with the
prescribed authority within 60 days of the date of such decision or order and the
decision of the Appellate Authority will be final.
Deemed Registration
If the application for registration is not disposed off within a period of 4 months or
the Central Registrar fails to communicate the order of refusal within that period, the
application shall be deemed to have been accepted for registration and the Central
Registrar shall issue the registration certificate in accordance with the provisions of
these Act and the rules made thereunder.
Registration Certificate
After registration, the Central Registrar shall issue a certificate of registration duly
signed by him, which shall be conclusive evidence that the society mentioned therein
is duly registered under this Act.
After registration, it shall be a body corporate having perpetual succession and a
common seal and with powers to acquire, hold and dispose of properties, to enter
into contracts, to institute or defend suits etc.
Subject Matter of Bye-Laws
Every multi-state co-operative society may make its bye-laws which shall be
consistent with the provisions of this Act and shall be as under:
(a) the name, address and area of operation of the society;
(b) the objects of the society;
(c) the services to be provided to its members;
(d) the eligibility for obtaining membership;
(e) the procedure for obtaining membership;
(f) the conditions for continuing as member;
(g) the procedure for withdrawal of membership;
(h) the transfer of membership;
(i) the procedure for expulsion from membership;
(j) the rights and duties of the members;
(k) the nature and amount of capital of the society;
(l) the manner in which the maximum capital to which a single member can


subscribe;
(m) the sources from which the funds may be raised by the society;
(n) the purpose for which the funds may be applied;
(o) the manner of allocation or disbursement of net profits of the society;
(p) the constitution of various reserves;
(q) the manner of convening general meetings and quorum thereof other than
those provided under this Act;
(r) the procedure for notice and manner of voting, in general and other
meetings;
(s) the procedure for amending the bye-laws;
(t) the number of members of the Board not exceeding twenty-one;
(u) the tenure of directors, chairperson and other office-bearers of the society,
not exceeding five years;
(v) the procedure for removal of members of the Board and for filling up of
vacancies;
(w) the manner of convening Board meetings, its quorum, number of such
meetings in a year and venue of such meetings;
(x) the frequency of Board meetings;
(y) the powers and functions of the Chief Executive in addition to those
provided under Section 52;
(z) the manner of imposing the penalty;
(za) the appointment, rights and duties of auditors and procedure for conduct of
audit.
(zb) the authorisation of officers to sign documents and to institute and defend
suits and other legal proceedings on behalf of the society;
(zc) the terms on which a society may deal with persons other than members;
(zd) the terms on which a society may associate with other co-operative
societies;
(ze) the terms on which a society may deal with organisation, other than co-
operative societies;
(zf) the rights, if any, which the society may confer on any other multi-state co-
operative society or Federal Co-operative and the circumstances under
which such rights may be exercised by the Federal Co-operative;
(zg) the procedure and manner for transfer of shares and interest in the name of
a nominee in case of death of a member;
(zh) the educational and training programmes to be conducted by the society;
(zi) the principal place and other places of business of society;
(zj) the minimum level of services to be used by its members; and
(zk) any other matter which may be prescribed.
Optional Inclusive Matters
(i) Procedure and manner of redemption of shares.


(ii) The provision of office bearers of the society, the terms and conditions, their
functions and responsibilities other than those specified in the Act.
(iii) Constitution of various funds as required under the Act and Rules.
(iv) Rate of dividend subject to maximum of the rates specified in the bye-laws.
(v) The procedure for the association and representation of employees of the
society.
(vi) Constitution of the committees of the Board.
(vii) The procedure of election or selection for constitution of smaller body of
delegates.
(viii) The method of recruitment, the conditions of service and the authority
competent to fix, revise or regulate the scales of pay and allowance to be
paid to the officers and other employees of the society and the procedure to
be followed in the disposal of disciplinary cases.
(ix) The constitution and powers of the representative general body and the
restrictions subject to which this body may exercise its powers.
Amendment in Name and Bye-Laws
Any amendment of any bye-law of a multi-state cooperative society shall not be
valid, unless such amendment has been registered under this Act. Following steps
are to be taken to effect a change in name, address or bye-laws of a Multi-State Co-
operative Society.
(1) Pass a resolution at the meeting of the Executive Committee, finalise the
draft amendment to be made in the bye-laws and also for issuing a notice of
the proposed amendment to the members in accordance with the bye-laws;
(2) Issue a 15 days prior notice to the members of the society for a proposed
annual or special meeting to consider the proposed amendment;
(3) Pass the resolution for amendment by a two-third majority of the members
present and voting;
(4) Apply to the Central Registrar for registration of the amendment within 60
days from the date of the general meeting at which amendment was passed.
The application for registration of the amendment should be accompanied by
(i) Copy of the resolution.
(ii) Particulars of the date of the general meeting, length of notice given to
convene the general meeting, total number of members of the society on the
date of meeting, number of members forming the quorum, number of
members present at the meeting and number of members exercising the
right of voting and number of members voting for the amendment.
(iii) Copy of the existing bye-laws with amendment proposed to be made
together with reasons justifying such amendments.
(iv) Copy of the notice given to members for convening the general meeting.
(v) Four copies of the text of bye-laws as they will stand after the amendment
signed by the officers duly authorised by the Board of the society.
(vi) Certificate signed by the presiding authority of the general meeting stating


that the resolution was passed by the two-third majority and that valid notice
was given for convening the meeting to consider the amendment.
(vii) The society should send the original registration certificate to the Central
Registrar for amendment who will return the same after changing the name,
if any. The Central Registrar, if he is satisfied, will register the amendments
and issue a certified copy of the amended bye-laws. He may also refuse the
registration of amendments and this order of refusal is appealable with the
prescribed authority within 60 days from the date of the order. The amended
bye-laws shall come into force from the date they are registered or from any
other day on which they are expressed to come into operation.
The change in name does not affect any right or obligation of the society or any
of its members or past members and any legal proceedings that might have
continued or commenced by or against the society by its former name. The name
should not refer to any caste or religion domination and should not be inconsistent
with the objects of the society.
A multi-State Co-operative Society may change the address of principal place of
business with the previous approval of the Central Registrar.
Admission as a Member
Every eligible person may be admitted as a member of the Co-operative Society
on his application. The application for admission is to be disposed off by the society
within 4 months of the date of its receipt and the decision of the society should be
communicated to the applicant within 15 days from the date of such decision. If the
decision is not taken within 4 months or the decision if taken is not communicated
within 15 days, it shall be deemed to have been refused by the society. The order of
refusal is appellable with the Central Registrar.
The rules lay down the conditions to be complied with for admission for
membership which are as follows :
(1) No person shall be admitted as a member of a Multi-State Co-operative
Society unless,
(a)he has applied in writing in the form, if any, laid down by the Multi-State Co-
operative Society or in the form specified by the Central Registrar, if
any, for membership;
(b)his application is approved by the Board of the Multi-State Co-operative
Society;
(c)he has purchased the minimum number of shares and paid the value thereof
in full or in part in such calls as may be laid down in the bye-laws of the
Multi-State Co-operative Society;
(d)he has fulfilled all other conditions laid down in the Act, the rules and the bye-
laws;
(e)in the case of a Multi-State Co-operative Society or a Co-operative Society or
the National Co-operative Society or any other corporation owned or
controlled by the Government or any Government company or body of
persons whether incorporated or not, the application for membership
shall be accompanied by a resolution authorising it to apply for such
membership.


(2) No person shall be eligible for admission as a member of a Multi-State Co-
operative Society if he
(a)has been adjudged by a competent Court to be insolvent or of unsound mind;
(b)is concerned or participates in the profits of any contract with the society;
(c)has been convicted for an offence involving moral turpitude;
(d)holds any office or place of profit under the society; [However, this
disqualification shall not apply to the chief executive or an employee of a
society nominated on the Board.]
(e)has been a member of the society for less than twelve months immediately
preceding the date of such election or appointment;
(f)has interest in any business of the kind carried on by the society of which he
is a member;
(g)has taken loan or goods on credit from the society of which he is a member,
or is otherwise indebted to such society and after the receipt of a notice
of default issued to him by such society, has defaulted:
(i) in repayment of such loan or debt or in payment of the price of the
goods taken on credit, as the case may be, within the date fixed for
such repayment or payment or where such date is extended, which
in no case shall exceed six months, within the date so extended; or
(ii) when such loan or debt or the price of goods taken on credit is to be
paid in instalments, in payment of any instalment, and the amount in
default or any part thereof has remained unpaid on the expiry of six
months from the date of such defualt.
A member of the Board who has ceased to hold office as such under this
clause shall not be eligible, for a period of one year, from the date on
which he ceased to hold office, for re-election as a member of the Board
of the multi-state co-operative society of which he was a member or for
the election to the Board of any other multi-state co-operative society.
(h)is a person against whom any amount due under a decree, decision or order
is pending recovery under this Act;
(i)is retained or employed as a legal practitioner on behalf of or against the
multi-state co-operative society, or on behalf of or against any other
multi-state co-operative society which is a member of the former society;
(j)has been convicted for any offence under this Act;
(k)is disqualified for being a member under Section 29;
(l)has been expelled as a member under Section 30;
(m)absents himself from three consecutive Board meetings and such absence
has not been condoned by the Board; and
(n)absents himself from three consecutive general body meetings and such
absence has not been condoned by the members in the general body.
Further, a person shall not be eligible for being elected as member of Board of a
multi-state co-operative society for a period of five years if the Board of such multi-
state co-operative society fails:


(a) to conduct elections of the Board under Section 45; or
(b) to call the annual general meeting under Section 39; or
(c) to prepare the financial statement and present the same in the annual
general meeting.
It may be noted that no members of a Multi-State Co-operative Society shall
exercise the rights of a member unless he has made such payments to the society in
respect of membership or has acquired such interest in the society.
Expulsion of Members
A member of a society can only be expelled for detrimental acts after he has
been given a reasonable opportunity of making representation and the resolution for
his expulsion has been passed at the general body meeting by not less than two-third
of the members present and voting. A member cannot exercise his rights such as
right to vote etc. unless he has made payments to the society in respect of
membership or has acquired such interest in the society as may be specified in the
bye-laws. An expelled member shall not be eligible for re-admission as a member of
the society for a period of one year from the date of such expulsion.
To expel a member, the general body of the society, may consider any one or all
the following:
1. If his business is in conflict or competition with business of the society;
2. If he has used for a period of 2 consecutive years, the services below the
minimum level specified in the bye-laws; or
3. If he has not attended three consecutive general meetings of the society
which were not condoned by the general meeting.
4. If he has made a default in payment of any amount to be paid to the society.
Management
General Meeting
The ultimate authority of a Co-operative Society vests in the general body of the
members. However, any officer or the Board of the society may exercise such powers
as may be conferred on the officer or the Board by the Act, rules or bye-laws. The
general body consists of all the members of the society. Sometimes there is a
provision for constitution of a smaller body consisting of the delegates of members of
the society elected or selected in accordance with the bye-laws and such smaller
body known as the representative general body exercises powers of the general body
as may be prescribed or specified in the bye-laws of the society. The general body
should meet atleast once in a year at the annual general meeting. The annual
general meeting is called after the close of the co-operative year but not later than six
months after the close of the corresponding years, for the consideration of
(i) Audited Accounts;
(ii) Audit Compliance Report;
(iii) Audit Report and Annual Report;


(iv) Interest Payable on loans and deposits;
(v) Audit fees;
(vi) Working expenses including repairs;
(vii) Rent;
(viii) Taxes and depreciation;
(ix) Bonus payable to employees and equalisation fund for such bonus;
(x) Provision for income tax;
(xi) Making donations approved under the Income Tax Act, 1961;
(xii) Development Rebate;
(xiii) Provisions for the following:
development fund,
bad debts fund,
dividend equalisation fund,
price fluctuation fund,
share capital reduction fund,
investment fluctuation fund;
(xiv) Provision for retirement benefit of employees;
(xv) Writing off bad debts and losses not adjusted against any fund created out
of profits or provisions therefor;
(xvi) Disposal of Net Profits;
(xvii) Approval of Annual Budgets;
(xviii) Approval of Amendments to Memorandum;
(xix) Expulsion of members;
(xx) review of operational deficit, if any;
(xxi) review of actual utilisation of reserve & other funds;
(xxii) approval of long-term perspective plan & the annual operational plan;
(xxiii) review of annual report and accounts of subsidiary institution, if any;
(xxiv) list of employees who are relatives of members of board or of the Chief
Executive;
(xxv) Amendment of bye-laws, if any;
(xxvi) formulation of code of conduct for members of board and officers;
(xxvii) Election of members of board, if any.
Certain powers of the society are also exercised at the special general meeting of
the society. The special general meeting is called by the Chief Executive of the
society within one month after the receipt of a requisition in writing from the Central
Registrar or from such member or members as may be prescribed.
According to the Rules, the Annual General Meeting has to be held within six
months from the close of the Co-operative year. The rules also provide that the
Annual General Meeting may be called by giving not less than fourteen days notice in
writing. The notice shall be accompanied by a copy of the audited balance sheet,


profit and loss account together with the Auditor's report thereon relating to the
preceding year and the report of the Board.
According to the Rules unless otherwise provided in the bye-laws, the quorum for
a General Meeting shall be one-fifth of the total number of members. No business
can be transacted unless there is quorum at the time when the business of the
meeting is due to commence. If within half an hour from the appointed time for the
meeting a quorum is not present, the meeting shall stand adjourned. Where a
meeting has been called on requistion of the members and quorum is not present,
the meeting shall be dissolved.
If at any time during the meeting sufficient member or members are not present
to form the quorum, the Chairman or member presiding over the meeting on his own,
or on his attention been drawn to this fact, shall adjourn the meeting and the business
that remains to be transacted at the meeting, if any, shall be disposed of in the usual
manner at the adjourned meeting.
Where a meeting is adjourned, the adjourned meeting shall be held either on the
same day or on such date, time and place as may be decided by the Chairman or the
member presiding over the meeting. Further, it may be noted that no business shall
be transacted at the adjourned meeting other than the business on the agenda of the
adjourned meeting. No quorum shall be necessary in respect of an adjourned
General Meeting.
Section 39 empowers the Central Registrar or the person authorised by him in
this behalf to convene such annual general meeting within a period of ninety days
from the date of expiry of the prescribed period if the society fails to convene the
annual general meeting within such period. The expenditure incurred on such
meeting shall be borne by the society.
The Chief Executive may at any time on the direction of the Board call a Special
General Meeting of the Society. He is required to call such meeting within one month
after the receipt of requisition in writing from the Central Registrar or from such
member or members or a proportion of the total number of members as may be
provided in the bye-laws. Where a Special General Meeting is not called in
accordance with the requisition, the Central Registrar may order such meeting to be
called which shall be deemed to be a meeting called by the Chief Executive in
accordance with the provisions of the Act and that the expenditure incurred in calling
such meeting shall be paid out of the funds of the society or recovered from such
person or persons who in the opinion of the Central Registrar was or were
responsible for the refusal or failure to convene the Special General Meeting.
Board of Directors
For day-to-day functions and supervision of the activities of the society, there is a
Board of directors of every Multi-State Co-operative Society. The applicants for
registration select the first Board of directors, which is interim Board. The members
elect the first regular Board of directors at the first general meeting held within six
months of the date of registration and subsequently at such intervals as the bye-laws
may provide. However, the maximum number of directors shall not exceed twenty


one. Normally the term of elected members of the Board cannot exceed five years
from the date of election. The term of office bearers is, therefore, governed by the
provisions made in the bye-laws. The election of the members of the Board of
directors is conducted in the manner prescribed in the Multi-State Co-operative
Rules, 2002.
An elected member of the Board can be removed after a resolution to this effect
has been passed by the General Body at its meeting by a majority of not less than
two-third of the members present and voting at the meeting.
A person cannot hold office of president or vice president, or chairman or vice-
chairman in two societies simultaneously and for more than two consecutive terms in
the same society. Section 99 empowers the Government to exempt a Co-operative
Society from the provisions of the Act. It has been held that intention of Section 99 is
to grant exemption to society and not to individuals from the provisions of the Act.
Chief Executive
Amongst themselves the members of the Board of directors appoint the Chief
Executive who is a full-time employee of the society and shall be a member of the
Board and of the executive committee. The chief executive, under the general
superintendence, direction and control of the Board, shall exercise the powers and
discharge the functions as have been specified under Section 52 of the Act.
Powers and Functions of the Board of Directors
The Board exercises all such powers as may be necessary or expedient for the
purpose of carrying out its functions under the Act. Such powers include:
(1) To admit members.
(2) To interpret the organisational objectives and set up specific goals to be
achieved towards these objectives.
(3) To make periodic appraisal of operations.
(4) To appoint and remove Chief Executive and such other employees of the
society.
(5) To make provisions for regulating the appointment of employees, their pay
and their conditions of service.
(6) To approve annual and supplementary budget.
(7) To acquire or dispose off immovable property.
(8) To raise funds.
(9) To sanction loans to the members.
(10) To place before the general body the annual report, annual financial
statements, annual plan and the audit report.
(11) To recommend the distribution of profits to the general body.
(12) To take decision on matters relating to withdrawal, transfer, retirement,
refund or forfeiture of shares.


(13) To lay down criteria for determining defaults by members.
(14) To determine the terms and conditions of collaboration with Co-operative
societies and others.
(15) To sanction contracts of any value unless otherwise specified in the bye-laws.
(16) To appoint trustees, attorney, agents for the business of the society.
(17) To accept or reject resignation from the members of the Board.
(18) To consider audit and compliance report and to place the same before the
general body.
(19) To take such other measures or to do such other acts as may be prescribed
or required under this Act or the bye-laws of the society or as may be
directed or delegated by the general body.
Meetings of the Board
Board has to meet once in every quarter provided that ordinarily the meetings of
the Board shall not exceed the number as per its bye-laws. Venue of the meeting of
the society shall be as per its bye-laws, and that the meetings of the Board shall be
convened by the Chief Executive.
Investment of Funds
The co-operative principles require that funds of the society should be used
ultimately to serve the interest of the members and for their economic and social
betterment. The manner of utilising the funds of the society has, therefore, been
restricted/regulated by various provisions under the Act and Multi-State Co-operative
Society (Privileges, Properties and Funds, Accounts, Audits, Winding up and
Execution of Decrees and Orders and Decisions) Rules, 2002. It is specifically
provided that only net profits of a society can be divided by way of bonus or dividend
amongst the members and in no case the capital or the reserve fund shall be
distributed as dividend.
A multi-state cooperative society, however, may invest its funds in any of the
following ways:
1. in a cooperative bank, state cooperative bank, cooperative land
development bank or central cooperative bank;
2. in any of the securities specified under Section 20 of the Indian Trust Act,
1882;
3. in the shares or other securities of any other multi-state cooperative society
or any other cooperative society;
4. in the shares/securities or assets of a subsidiary institution or other
institution;
5. in any other bank;
6. in such other way as may be provided in its bye-laws.
Net Profits
The society may add to its net profits for the year, interest, if any, accrued in the


preceding years, but which actually has been recovered during the year in question.
If the society does not have share capital, then the surplus of income over
expenditure shall not be treated as net profits and such surplus shall be dealt with, in
accordance with its bye-laws.
The net profits of the society for a particular period are calculated by deducting
from the gross profit the following items:
(i) All interest accrued and accruing in relation to amount which are overdue.
(ii) Establishment charges.
(iii) Interest payable on loans and deposits.
(iv) Audit fees.
(v) Working expenses including repairs.
(vi) Rent.
(vii) Taxes and depreciation.
(viii) Bonus payable to employees under the Payment of Bonus Act and
Equalisation fund for such bonus.
(ix) Provision for payment of income-tax and approved donations under Income-
tax Act, 1961.
(x) Development rebate.
(xi) Provision for Development fund, bad debt fund, dividend equalization fund,
price fluctuation fund, share capital reduction fund, investment fluctuation
fund.
(xii) Provision for retirement benefit of employees.
(xiii) Provision for writing off bad debts and losses not adjusted against any fund
created out of profits.
The funds of the Multi-State Co-operative Society are to be utilised or invested in
specific manner as provided in the Act and the Rules.
Disposal of Net Profits
A. Appropriations
Out of its net profit for each year, the Multi-State Co-operative Society shall make
appropriations as under:
1. Transfer to a reserve fund, an amount which shall not be less than 25%;
2. Credit 1% to cooperative education fund;
3. Transfer to a reserve fund for meeting unforeseen losses, an amount which
shall not be less than 10%.
B. Distribution
1. Dividend at a rate not exceeding the prescribed limit.
2. Constitution of or contribution to such special fund, including education fund,
as may be specified in the bye laws.


3. Donating an amount exceeding 5% of its net profits for the development of
corporate movement or charitable purpose.
4. Payment of ex-gratia to its employees to the extent and in the manner
specified in its bye-laws.
Settlement of Disputes
The Central Registrar appoints the arbitrator for deciding the disputes touching
the constitution, management or business of a Multi-State Co-operative Society
which arise among the members, past members or between members and the
society or liquidator or between the society and the past officers of the society or
between the society and any other Multi-State Co-operative Society. No court shall
have jurisdiction to entertain any suit or proceedings in respect of such disputes.
If any question arises as to a dispute referred to arbitration is or is not a dispute
touching the constitution, management or business of a multi-state cooperative
society, the decision thereon of the arbitrator shall be final and shall not be called in
question in any court.
Limitation
The period of limitation in the case of any dispute, except those mentioned in the
Act, which are required to be referred to arbitration shall be regulated by the
provisions of the Limitation Act, 1963.
Appeals and Review
An appeal against any appealable decision or order as provided in Section 99(1)
shall be made within 60 days from the date of such decision order to the prescribed
appellate authority.
The appellate authority may, if satisfied, admit the appeal within such further
period as it may deem fit. The decision or order of the appellate authority on appeal
shall be final.
The appellate authority may, on the application of any party with a sufficient
reason, review its own order in any case and pass in reference thereto such order as
it thinks fit, provided a notice and reasonable opportunity of being heard is given to all
interested parties.
Amalgamation of Co-operative Societies
Any two or more Multi-State Co-operative Societies may amalgamate themselves
after each society has passed a resolution by majority of not less than two-third of
members present and voting. The resolution should contain all particulars of
amalgamation. In the case of a Co-operative Bank the approval for amalgamation
shall not be accorded by the Central Registrar without previous sanction of the
Reserve Bank of India.
Transfer of Assets or Division of Assets
A Multi-State Co-operative Society may, pass a resolution by a majority of not
less than two-third of the members present and voting at a general meeting held for
this purpose:


(i) transfer the assets and liabilities in whole or in part to any other Multi-State
Co-operative Society or a Co-operative Society.
(ii) divide itself into two or more Multi-State Co-operative Societies.
(iii) divide itself into two or more Co-operative Societies.
Conversion
The Co-operative Society incorporated under any of the State Co-operative Acts
by amendment in the bye-laws extend its jurisdiction and convert itself into a Multi-
State Co-operative Society. However, the amended bye-laws are required to be
registered with the Central Registrar. From the date the amended bye-laws are
registered by the Central Registrar, the Co-operative Society shall become a Multi-
State Co-operative Society and the Central Registrar shall forward to the Co-
operative Society a certificate to the effect that such society has been registered as a
Multi-State Co-operative Society under the Act.
Winding up of a Co-operative Society
The Central Registrar on being satisfied, may by order direct a society to be
wound up in the following circumstances:
(i) if after an audit under Section 70 or special audit under Section 77 or on
enquiry under Section 78 or on inspection under Section 79, the Central
Registrar is satisfied that the winding up is imminent; or
(ii) if the society, by a resolution passed by two-third majority of members
present and voting in a general meeting decides for winding up of that
society.
However, reasonable opportunity should be given to the society to make any
representation before the order for winding up is made.
The Central Registrar may also order winding up of the society after giving the
society reasonable opportunity to represent in the following circumstances:
(i) where the number of members of the society has been reduced to less than
50; or
(ii) where the society has not commenced work within a period of six months
from the date of its registration or such extended period as may be allowed;
or
(iii) the society has ceased to function in accordance with the co-operative
principles.
However, a Multi-State Co-operative Bank cannot be wound up except with the
previous sanction of the Reserve Bank of India.
The Central Registrar may appoint Liquidator for completing the process of
winding up.
2. LAW RELATING TO SOCIETIES
Introduction
Generally a need is felt to set up an institution of non-commercial nature for


promotion of numerous charitable activities like education, art, religion, culture,
music, social welfare, sports etc. Associations, clubs or societies are formed to help
these purposes as they work on non-profit basis. To legalise such organisations, the
Societies Registration Act, 1860 was enacted. For identical purposes, a non-profit
association can be registered under Section 25 of the Companies Act, 1956.
However, the registration, operation and management of an association registered
under the former Act is easier and simpler comparatively.
Status
After the Constitution of India came into force, the Societies Registration Act
1860, (the main Act) has continued to be in force in all the States by virtue of Article
372 of the Constitution. A registered society is a legal entity but it is not a body
corporate (Board of Trustees v. State of Delhi AIR 1962 SC 458). It is separate from
its members. It can own properties. It is capable of suing or being sued. The position
of a society is comparable with an incorporated company under the Companies Act
1956. Hence, a Company Secretary has an important role to play in registration and
management of a registered society.
The main Act has been continuing to be applicable in all the States with some
amendments made by almost all the States in operation, administration and
management of societies within the respective States.
Registration
A society can be registered by minimum seven individuals which may include
foreigners, or registered society for the promotion of literature, science or fine arts or
diffusion of useful knowledge and political education or charitable purposes, as
specified in Section 20 of the main Act as under:-
(i) Grant of charitable assistance.
(ii) Creation of military orphan funds.
(iii) Societies established at the several Presidencies of India.
(iv) Promotion of
Science
Literature
Fine Arts
Instructions or diffusion of useful knowledge
Diffusion of political education
Foundation or maintenance of libraries or reading rooms
Public museum and galleries of paintings
Works of art
Collections of natural history
Mechanical and philosophical investments
Instruments
Designs


Various States have added other objects like social welfare, sports & games,
environment, compassion of living creatures, recreation, athletics, cultural activities,
research work, welfare of physically handicapped etc.
A "charitable purpose" is a purpose which has some element of general public
benefit; it does not embraces purposes which are religious or predominantly religious
(Md. Yunus v. The Inspector General of Registration AIR 1980 Pat. 138). A charitable
purpose includes religious purpose (Hindu Public and another v. Rajdhani Puja
Samithee and others AIR 1999 SC 964). The guidelines for registration of a society
under the main Act as applicable to NCT of Delhi are given in Annexure II at the end
of this study.
Procedure for Registration
The following documents are required to be filed with the Registrar of Societies
(titles of the registering authorities in different states are given in Annexure III at the
end of this study) for registration of a society under the main Act or corresponding
Acts of various State Governments:-
1. Covering letter requesting for registration stating various documents
annexed to it addressed to the registering authority and signed by all the
subscribers to the Memorandum or by a person authorised by all of the
them.
2. Memorandum of Association (in duplicate) containing (a) name of the
society; (b) the objects of the society; (c) the names, addresses and
occupation of the members of the governing body; (d) the place of registered
office of the Society, and (e) the names, addresses and full signatures of the
seven or more persons subscribing their names to the memorandum of
Association. Their signatures should be witnessed.
3. Rules & Regulations/Bye-laws (in duplicate) duly signed by atleast three
members of the governing body.
4. Affidavit on non-judicial stamp paper of requisite value (please refer
Annexure III at the end of this study) by the President or secretary of the
society duly attested by Oath Commissioner or Notary Public or Magistrate
of first class.
5. Documentary proof such as rent receipt or property tax receipt in respect of
the Registered office of the Society or no-objection of the owner of the
premises.
6. Registration fee in cash or by demand draft.
The formalities and requirements may differ from State to State. Hence, it is
advised that the applicant should contact the registering authority of the State in
advance.
The Registering authority shall satisfy himself/herself about the compliance of the
provisions of the Act and correctness of the documents and only thereafter certify in
his/her hand that the Society is registered under the main Act or the corresponding
Act of the State. On registration, the society becomes a legal entity or a judicial
person apart from its members (K.C. Thomas v. R.L. Gadeock AIR 1970 Pat.


160/163). Its Rules & Regulations bound its members. It must confine its activities to
the sphere embraced by its objects (Ram Kumar v. State of West Bengal AIR 1953
Cal 534). Any inconsistent object with the provisions of the applicable Act shall be
inoperative even after registration (Radhaswami Satsang Sabha Dayal Bag Vs. Hans
Kumar Kishan Chand AIR 1959 MP 174). A non-registered society may exist in fact
but not in law. A unregistered society cannot claim benefits under the Income tax Act,
1961.
Rules & Regulations
The Rules & Regulations help and guide the members and management of the
society in carrying out its objects. They also bind members of the society. The Rules
that are inconsistent with the provisions of the Act are inoperative although registered
with the Registrar of Societies. The Rules & Regulations of a society may provide
for
(i) the conditions of admissions of members,
(ii) the liability of members for fines, forfeitures under certain circumstances,
(iii) the consequence of non-payment of any subscription or fine registration and
expulsion of members,
(iv) the appointment and removal of trustees and their powers,
(v) the manner of appointing and removing the governing body,
(vi) the manner in which the notice of meetings may be given,
(vii) the quorum necessary for the transactions of business at meetings of the
society,
(viii) the manner of making, altering and rescinding regulations,
(ix) the investment of funds, keeping of accounts and for annual or periodical
audit of account,
(x) the manner of dissolving the society,
(xi) the determination upon the dissolution that the property be utilised by the
Government or others in particular manner,
(xii) matters to be provided in bye-laws and the manner in which they shall be
made,
(xiii) such other matters as may be thought expedient having reference to the
nature and objects of the society.
Society may make bye-laws
A society can make its bye-laws in accordance with the Rules and Regulations of
the society. If the rules do not provide for the making of bye-laws, bye-laws can be
made at a general meeting of the society at which concurrent votes of three-fifths of
the members present shall be necessary. If any penalty is imposed for the breach of
any rule or bye-law of the society, such penalty can be recovered through the Court.
The bye-laws of a society may provide for:
(a) The business hours of the society;
(b) The objects of the society;


(c) The activities of the society in furtherance of its objects;
(d) The name of the person or officer, if any, authorised to sue or to be sued on
behalf of the society;
(e) The name of other person or officer who is empowered to give directions in
regard to the business of the society;
(f) Enrolment of members
(i)Qualifications for membership, classification, restrictions and conditions, if
any, therefor,
(ii)The entrance and other fee, or subscription, if any, to be collected from
members,
(iii)The dates prescribed for payment of the amount specified in sub-clause (ii)
above and levy of penalties or fine, if any, imposed on defaulting
members.
(g) Removal of members, the circumstances under which members could be
removed from the rolls and the procedure for such removal and appeal, if
any, against such removal;
(h) Rights, applications, privileges of members;
(i) The manner in which the society shall transact its business;
(j) The constitution of the Committee and qualifications of the members of the
Committee, their term of office and the procedure for their appointment and
reappointment;
(k) The preparation and filing with the concerned Registrar, of records, annual
lists or other statements;
(l) Audit of accounts and the balance-sheet for the financial year;
(m) The supply of copies of bye-laws, the receipt and expenditure account and
of the balance sheet to the members on application and the fee payable for
the same;
(n) Imposition of fine, if any, for breach of the provisions of the bye-laws by any
member or officer;
(o) The mode of custody, application and investment of the funds of the society
and the extent and conditions of such investment;
(p) Funds earmarked specifically for the purpose of making provisions for
dependent of a deceased or disabled member and the quantum of payment
to be made thereof;
(q) Arrangements for transactions of day-to-day business of the society, the
expenditure to be incurred therefor, the staff to be employed and condition
of services of such employees;
(r) (i)Conduct of annual general meetings and procedure therefor,
(ii)Conduct of extraordinary general meetings and procedure therefor and the
number of members required for making a requisition in writing, calling
for such a meeting,
(s) Exhibition of the Register of Members, the books containing minutes and the
books of accounts at the registered office of the society during business
hours for inspection by its members free of charge.


The bye-laws may also deal with such other matters incidential to the
organisation and working of the society and the management of its business as may
be deemed necessary.
Members Their Rights and Liabilities
A member means a person who has
(a) been admitted to the society according to its rules and regulations;
(b) paid subscription provided in the rules;
(c) signed the roll or list of members of the society, and
(d) not resigned or ceased from the membership of the society.
Any arrear of subscription amount for a period of exceeding three months is
disqualification for continuing to be a member and vote.
No one can claim admission to a society as a matter of right on payment of the
prescribed subscription. The discretion of the governing body is final concerning grant
or refusal of admission to a person [Abhoy Pado Bose v. Queen's Anglo Sanskrit
School, Lucknow 34.1.C.263 (Oudh)].
When members treated as strangers?
A member of the society is liable to be sued as stranger in the following cases:
(i) When he is in arrear of a subscription which he is bound to pay according to
the rules, or
(ii) When he has detained any property of the society, or
(iii) When he has destroyed any property of the society.
In above cases the member may be sued for such, arrears and damages. But he
can recover the costs if he is successful in the suit (Section 10).
A member is subject to prosecution and punishment as stranger for committing
the following offences:
If he (i) steals, or purloins, or embezzles any money or other property or (ii)
willfully and maliciously destroy or injures any property of the Society or (iii) forges
any deed, bond, security for money, receipt or other instrument whereby the funds of
the Society may be recovered when accrued in any Court having jurisdiction where
the defendant resides or the Society is situated, as is deemed expedient by the
governing body (Section 11).
Members guilty of offences are punishable as strangers. A member of the society
may be prosecuted for wilful and malicious destruction or injury to the property of the
society or for forgery, exposing the funds of the society to loss.
The members of a society have rights to
receive notice of all special and annual general meetings;
vote at all meetings.
resolve all disputes among members and society or inter se;


receive copies of the rules and regulations and bye-laws.
Their liabilities are
A member may be sued as a stranger by the society.
Member, guilty of an offence to the society, is punishable as a stranger;
Member causing breach of any rule or regulation or bye-law of the society is
liable to pay penalty under the Bye-Laws.
Member who is guilty of misfeasance or breach of trust or misapplication of
funds in relation to the society shall be accountable to make good the loss
so caused to the society.
Property of Society: Where it vests?
Section 5 of the Act lays down the provisions for vesting of property of the
Society. It is presumed that the property, both movable and immovable, belonging to
the Society, vests in trustees. But if it is not vested in trustees, Section 6 provides that
then it shall be deemed to be vested in the governing body of such Society for the
time being. In all civil or criminal proceedings the property may be described as the
property of the governing body of such society by their proper title.
The Act does not create in the members of the registered Society any interest
other than that of the bare trustees. A property, which has vested in the trustees
before registration of the Society, becomes as from, the registration of the Society, a
property belonging to the Society and must be deemed to be the property of the
Society. As a matter of fact there is no transfer of ownership that which belonged to a
registered Society continues after the change in status of that Society on being
registered, as belonging to the registered Society (AIR 1953 Cal. 140).
In the case of Board of Trustee, Ayurvedic and Unani Tibbia College v. State of
Delhi, A.I.R. 1962, SC 458, the Board of Trustees of Tibbia College was dissolved by
the Tibbia College in 1952 and the property which had vested in the Board of
Trustees, passed to the newly constituted Board.
Working and Management of Society
As the society is a legal person having no physical existence, its governing body
is its brain. Its activities are managed, executed and supervised by the governing
body. It has to work within the objects of the society in accordance with the rules,
regulations and bye-laws and to carry out the statutory duties under the main Act or
the corresponding State Act. The governing body shall also be constituted in
accordance with the rules and regulations of the society. The property of the society
vests in the governing body and not in the members. The filing and defending the
suits by the society shall continue in the original form and the changes in the
governing body shall not affect.
There should be minimum three members of the governing body. Its members
are either elected or nominated as per the rules and regulations of the society. The
term of office of members is three years and members can enjoy two terms.
However, the term, retirement, expulsion are governed by the rules and regulations of
the society.
The members of the governing body are the trustees of the properties of the


society. They have to look after and manage the properties of the society. Here,
property means both movable and immovable property. The properties of the society
vest in the trustees and when there is no trustee, in the governing body. A trustee is a
man who is the owner of the property and deals with it as principal owner and master
subject only to an equitable obligation to account to some person to whom he stands
in relation of trust and who is cestric que trust.
The members of governing body is collectively responsible and accountable to
comply with the statutory provisions of the Act for carrying out the functions of the
society to achieve its objective(s) for which it is set up. The duties are detailed
hereunder:-
1. To hold annual general meeting as per the rules and regulations of the
society for laying before such meeting the statement of activities, Income &
Expenditure Account and other information as provided in the rules and
regulations for the purpose;
2. A list of the names, addresses and occupations of the governors, council,
directors, committee or other governing body to which the management of
the society is entrusted, is to be filed with the Registrar or such authority as
prescribed once in a year either within 14 days of the date of holding such
meeting or in the month of January every year.
3. To hold extra-ordinary general meeting to transact some special business,
which cannot be waited or delayed, till the holding of the annual general
meeting. The purposes of such meeting may be to amend, alter or change in
name or address or extensions of operation etc.
4. To report changes or alterations made in the managing, governing body or
in the rules of the society to the Registrar.
5. To file notice of situation of the registered office of the society and of any
change therein with the Registrar.
6. To register amendment in Memorandum of Association or Bye-laws with the
Registrar by way of an application with a copy of the special resolution of the
amendment with filing fee.
7. To supply copies of the Bye-laws, the Receipts/Incomes & Expenditure
Account and Balance Sheet to the members of the society on their
application with the fees, if any, prescribed by the society.
8. To invest and apply the funds and properties of the society in a manner as a
prudent man will apply his own funds.
9. To keep and maintain a register of members of the society in accordance
with the rules and regulations of the society.
10. To display the name of the society prominently at its registered office and
other places of business.
11. To produce or submit periodical statement of Receipts Incomes &
Expenditure A/c, Assets & Liabilities of the society.
12. To file a certified copy of every special resolution duly signed by an


authorised officer of the society with the Registrar within the prescribed time.
13. To keep and maintain minutes of the meetings of the governing body and
general body correctly and truly at the registered office of the society.
14. To retain all the important documents permanently.
15. To prepare periodical Accounts of the society and get them audited and to
file Income-Tax Return, and
16. To attend all other duties as may be provided in the rules and regulations of
the society.
Amendment or Alteration
The objects of a society are its constitution and the society has to act within the
framework of its objects. Any act done by the society beyond the objects clause shall
be ultra vires. Under Section 12 of the main Act, the following steps are required for
alteration, extension or abridgment of the objects of a society
1. Submission of the proposal by the governing body to the members of the
society;
2. Ten days notice to members about holding of a special general meeting;
3. Convening a special meeting for consideration and passing of the proposal
by 3/5th of the members;
4. Convening second special general meeting after a month; and
5. Confirmation to the proposal by 3/5th of the members present at the second
special meeting.
The above procedure is also required to be followed for alteration or amendment
of the Rules and Regulations or Bye-laws, change of name, and change in the
registered office. Every change is required to be registered with the Registrar or the
authority as prescribed as per the rules and regulations of the society.
Suits by and against Society
A Society registered under the Act is a legal entity. It is capable of suing and be
sued in the name of the president, chairman or principal, secretary or trustees as
determined by the rules and regulations. If there is no such prescribed determination
then in the name of such person as appointed by the governing body for the
occasion. If no such person is nominated by the governing body on an application
made to it, then a person having a claim against society may sue the president or
chairman or secretary or trustee.
No suit or proceeding in any Civil Court shall abate or discontinue if the person in
whose name the suit has been brought has died or ceased to fill the character. Such
suit shall be continued in the name of or against the successor of such person.
The section is merely an enabling provision and does not take away the right of
society to sue or be sued in its own name (Govind Prasad v. Laxminarain 1960 MPLJ
145).
The provisions contained in Sections 6 and 7 are not mandatory. The words 'for


the occasion' in Section 6 of the Act are significant whereas under the rules and
regulations of a Society, a general authority can be conferred on the chairman,
secretary or trustee for suing or being sued on behalf of the Society. But an authority
given by the governing body has to be limited to the 'occasion' concerned. The object
is that registered Societies should not embark upon needless and endless litigations.
They must at each distinct stage of the litigation (e.g. to file a suit, to file an appeal)
decide whether to persue the matter further or not etc.
In Sonar Bangla Bank v. Calcutta Engineering College (1960) Cal. 409, it was
held that the provisions of Section 6 are not mandatory but permissive.
Enforcement of Judgement Against Society
It is the property of the Society against whom the judgment is enforced although
the judgment is named against the person or officer on behalf of the society. It will not
be enforced against the person or officer or his property. The application for
execution shall setforth the fact of the party against whom it shall have been
recovered. Judgements recovered against the nominees of a society are enforceable
against the property of the society and not against the property or bodies of those
nominees.
Amalgamation or Division of the Society
Under Section 12 of the main Act, a society may be amalgamated with any other
society, either wholly or partially by the governing bodies of the societies for the
better utilisation of the properties, resources or any other purpose. The procedure is
mandatory (Prasanna Venkatesa Ra v. K. Srinivasa Ra 59 MLJ 770). The following
actions are to be complied with
1. Submission of the proposal of amalgamation by the governing body to the
members of the society by a printed report;
2. Holding special general meeting by giving ten days notice to the members
for consideration and passing resolution for the proposed amalgamation by
3/5th majority of the members, present thereat;
3. Convening another special general meeting after a month for confirmation to
the first resolution passed at the first special general meeting by 3/5th
majority of the members present thereat.
The majority of a body cannot alter the fundamental principles of the body unless
such power is specially reserved. The Government may order division or
amalgamation of a society after giving the society an opportunity to represent against
such proposal.
Dissolution of Society
Under Section 13 of the main Act, a society can be dissolved. Dissolution of a
society becomes necessary where the objects for which it is formed, has been
fulfilled or where the purposes for which it is formed, have become irrelevant, invalid
or inoperative or by passing of a resolution by 3/5th majority of the members present
at a meeting to dissolve the society for utilisation of its assets for some other better


uses. A society may be dissolved forthwith or within the agreed time. The following
steps are to be taken:
1. Decision of the governing body;
2. Convene a special general meeting of the members by giving a requisite
notice for consideration and passing resolution by 3/5th majority of the
members present thereat;
3. Decision as to dissolve it forthwith or at a later time agreed upon by them.
4. Decision for the actions to be taken for disposal of properties and settlement
of claims and liabilities as per the rules and regulations of the society; and
5. Delegate authority to the person(s) of the governing body to comply with the
decisions accordingly.
Where any Government is a member of the society or has contributed the funds
to the society or is otherwise interested therein, the society shall have to obtain prior
consent of such Government for the purpose.
Where any dispute arises on dissolution of a society relating to adjustment of its
affairs, it should be referred to the principle Court of the original civil jurisdiction of the
District where the chief building of the society is situated. The District Civil Court has
the jurisdiction to decide the dispute of a society.
The main Act does not provide for dissolution of societies by the Registrar.
Various States, of course, have made provisions for dissolution by the Registrar
under the following circumstances
(1) Where the office of the society has ceased to be in the State of registration,
or
(2) Where the society has shifted its office from the State of registration to some
other State, or
(3) Where the activities of the society are considered subversive, or
(4) Where it is carrying on any unlawful activity, or
(5) Where it has allowed any unlawful activity to be carried on within any
premises under its control,
(6) Where the registered society has contravened any of the provisions of the
Act or the rules made thereunder, or
(7) Where the registered society is insolvent or must necessarily become so, or
(8) Where the business of such registered society is conducted fraudulently or
not in accordance with the bye-laws or the objects specified in the
memorandum of the society, or
(9) Where the society contravened any provision of any other law for the time
being in force, or


(10) Where the number of members of the society is reduced below seven, or
(11) Where the society has ceased to function for more than three years, or
(12) Where the society is unable to pay its debts or meet its liability, or
(13) Where the registration of the society has been cancelled on the ground that
its activities or proposed activities have been or will be opposed to public
policy.
The Registrar normally inquires or investigates into the activities of the society
and calls upon the society to show cause why it should not be dissolved. The
Registrar may move the Court for making an order for dissolution of the society, if the
cause shown by the society is not satisfactory.
Similarly, the main Act does not provide for dissolution by the Court. But in some
States, the Court may order for dissolution of a society on application by 10% of its
members or the Registrar on having been satisfied that any one or more of the
following circumstances exist:
(1) If there is any contravention by the society of the provisions of the Act, or
(2) If the number of members is less than seven, or
(3) If the society has ceased to function for more than three years, or
(4) If the society is unable to pay its debts or meet its liabilities, or
(5) If it is proper that the society has to be cancelled on the ground of its
activities or
(6) If proposed activities have been or will be opposed to the public policy.
(7) If the activities of the society constitute a public nuisance,
(8) If the activities of the society are otherwise opposed to public policy.
The Government may by written order containing detailed reasons, dissolve a
society. Before passing such order an opportunity has to be given to the society for
representation against dissolution. Any order of withdrawal of registration without
notice or opportunity to the society for representation in the matter shall be against
the rule of natural justice.
Consequences of Dissolution
Dissolution of a society results in cessation of its activities. Its liabilities are to be
settled suitably and its surplus assets are to be given to another society or the
Government in terms of its rules and regulations. If the rules do not provide in the
matter, the governing body of the society shall take appropriate steps with requisite
majority vote or as directed by the Registrar or the Court. But in no circumstances,
the surplus assets of the dissolved society can be paid or distributed amongst its
members or any of them.
Registrar of Societies Powers & Duties
The main Act makes an indirect reference to the powers of the Registrar under
Sections 1,2,3,4,17,18 and 19. Under the corresponding Acts of various States
different powers and duties are given to the Registrar. These are


1. Allow inspection of documents by any person and provide certified copy
thereof on payment of fees as prescribed,
2. Call information, explanation or returns from the societies relating to the
affairs, employees, documents filed, accounts etc,
3. Hold inquiries and settle disputes suo moto or at the request of the members
of the governing body or other members,
4. Investigate into the affairs of the society,
5. Cancel registration on happening of certain events,
6. Refuse registration, if the name is undesirable or identical or the objects are
contrary to any other law etc,
7. Order amendment of Memorandum of Association, rules and regulations,
bye-laws of society,
8. Seize and take possession of the books and records, funds and property of
the society,
9. Summon and enforce attendance of witness including the parties interested
for giving evidence and producing documents,
10. Order for auditing of the accounts of the society,
11. Compounding offences on application with fee,
12. Settle disputes regarding election of the office bearers,
13. Restoration of the property or money of the society,
14. Removal of the defunct society from the register of societies,
15. Condonation of delay in filing of documents,
16. Appointing liquidator.
Offences and Penalties
The main Act does not provide for any offences and penalties for breach or
contravention of its provisions. However, various State Governments have amended
the main Act to provide for offences and penalties for non-compliance. No Court
inferior to that of a Magistrate of the first class shall try any offence punishable under
the main Act. No Court shall take cognizance of any offence except upon complaint
made by the Registrar of Societies or any authorised person by him.
Taxable Income (Computation)
1. First ascertain income under different heads of income.
2. Income of other persons may be included in the income of Co-operative
Society under Section 60 and 61.
3. Current and Brought Forward Losses to be adjusted according to Sections
70 and 80 of the Income Tax Act.
4. Total income so computed under different heads is Gross Total Income


(GTI)
Section 80-P deals with deduction available to a Co-operative Society.
3. LAW RELATING TO TRUSTS
Introduction
The concept of 'trust' relates to the ancient times. When the properties were
dedicated for charitable, pious, religious, social welfare, educational, medical
purposes. Now a days, it has gained a greater significance for various tax exemptions
made available to a trust which is treated as a separate legal entity.
A 'trust' is an obligation annexed to the ownership of property and arising out of a
confidence reposed in and accepted by the owner, or declared and accepted by him,
for the benefit of another or of another and the owner.
The following are the essential elements of a trust :-
1. the author or the settler of the trust;
2. the trustee;
3. the beneficiary;
4. the trust property or the subject-matter of trust
5. the object of the trust;
6. the instrument of trust.
Trust Laws in India
The Trust laws came to India via English Trust law which stipulate dual
ownership of trust property i.e. legal title vests with the trustee while equitable title
vests with the beneficiary. On this basis, Indian Trusts Act 1882 was enacted. It
governs Private or Family Trusts and excludes Wakfs and public or private charitable
or religious endowments [Advocate General of Bombay v. Yusuf Ali AIR 1921 Bom
328].
Hindu charitable or religious trusts are mainly governed by the provisions of
Hindu Laws which have been passed by several States under Article 25 (2) of the
Constitution of India, like, The Bombay Public Trust Act, 1950, Rajasthan Public Trust
Act, 1959, Madras Hindu Religious and Charitable Endowment Act, 1959 etc.
The Charitable and Religious Trust Act 1920 is only a Central Legislation which
applies to all religious and charitable trusts but it does not provide any effective
control over public charitable and religious trusts and endowments.
The Wakf Act 1995 regulates muslim Wakfs for public benefit. There are also
several States laws for regulating the proper administration of Wakfs in India.
There are other trust laws like, Sikh Gurdwara Act, 1925 governing Sikh
Gurdwaras; Indian Trustees Act, 1866 relating to conveyance and Transfer of
property vested in trustees and mortgagees; Religious Endowments Act 1863
enabling the Government to divest itself of the management of religious endowments;


Trustees and Mortgagees Powers Act, 1866 relating settlements, mortgages and
Wills; Societies Registration Act, 1860 for registration as societies; the Companies
Act, 1956 for trust registered as companies under Section 25 thereof.
Indian Trust Act
In view of a plethora of Trust laws, Indian Trust Act 1882 has been considered
desirable to be discussed hereunder and for brevity it is referred hereinafter as "The
Trust Act".
The Act is divided into the following parts:
(i) preliminary;
(ii) the creation of trusts;
(iii) the duties and liabilities of trustees;
(iv) their rights and powers;
(v) their disabilities;
(vi) the rights and liabilities of the beneficiary;
(vii) vacating the office of trustee;
(viii) the extinction of trusts; and
(ix) certain obligations in the nature of trusts.
Scope
As is clear from the preamble, the Act has no application to public or private,
religious or charitable endowment.
The Indian Trusts Act is exhaustive in respect of any matter specifically provided
for in it, but it is not exhaustive of all matters relating to private trusts. Therefore, in
cases covered by the Act, its provisions must be applied but if a case is not covered
by it, the Court is entitled to apply rules of English law, as laid down by judicial
decisions in that country and which are not inconsistent with the Act, as the rules of
justice, equity and good conscience.
Definition of Trust
The Act defines the term 'trust' in Section 3 as (i) an obligation annexed to the
ownership of property and (ii) arising out of confidence reposed in and (iii) accepted
by the owner or declared and accepted by him, (iv) for the benefit of another or of
another and the owner.
The person who reposes or declares the confidence is called the 'author of the
trusts', the person who accepts the confidence is called the 'trustee', the person for
whose benefit the confidence is accepted is called the 'beneficiary'; the subject matter
of the trust is called 'trust property' or 'trusts money'; the 'beneficial interest' is
beneficiary's right against the trustee as owner of the trust property; and the
instrument declaring the trust is called the 'instrument of trust'.


The word 'trust' in its legal sense has a technical and definite meaning which is
very much different from the sense in which this word is used in daily parlance. Trust
connotes a legal concept or relationship similarly as other relationships created by
law, e.g., Contract, Agency.
Trust and Contract
Trust in its origin was a form of contract distinctively enforced in equity. A
contract creates a trust where it has brought into existence an obligation annexed to
the ownership of property for the benefit of a person other than the owner. No
technical words are required to create a trust.
There is always a fiduciary relationship between trustee and beneficiary, but not
between the parties to a contract.
Difference Between Trust and Bailment, Trust and Agency
The definition of Bailment is given in Section 148 of the Indian Contract Act,
1872. The following is the difference between a trust and a bailment.
(i) A trustee becomes the full owner of trust property. A bailee acquires special
property only.
(ii) The obligation of the bailee is legal, whereas that of a trustee is equitable.
(iii) A bailment may be created for movable property only. A trust may be
created for both movable and immovable properties.
Difference between Trust and Agency
(i) An agent has no title to the property. A trustee is the full owner of the trust
property.
(ii) An agent acts on behalf of his principal and is subject to his control. A
trustee acts in his own right.
(iii) An agent is generally not personally liable, a trustee is.
Classification of Trusts
Trusts are divisible into several classes according to the mode of their creation.
Some of the important classes are as follows:
Simple and Special Trusts
Where the trustee is merely to hold the estate without having any active duties to
perform it is called a simple trust. Where, however, the trust has been created for a
particular object or purpose there is a special trust. Thus, in a simple trust, the trustee
is merely to hold the property for the benefit of the beneficiary and in a special trust,
the trustee has duties to perform.
Oral and Written Trusts
A trust may be declared either orally or through an instrument in writing.
However, a trust in relation of movable property can be declared orally by transferring
the possession of the property with a direction that the property be held in trust. In
regard to a private trust for immovable properties, a written trust deed is pre-requisite.


Charitable or Religious Trust
In order to determine whether a deed of trust is a valid public or charitable trust, it
is necessary to see what is the dominant intention of the testator, namely, who are
the real objects of his bequest and secondly whether the class indicated as the object
of charity forms at least a section of the public. Where the main and paramount
intention of the settler was to benefit the members of his family and thereafter the
members of his caste who might need assistance from such funds there could be no
public or charitable trust created.
It is one of the cardinal rules governing execution of charitable trusts that the
intention of the donor must be observed. This principle has been evolved as an
auxilliary to this rule and is never allowed to defeat it. If the charity can be
administered according to the directions of the founder, the law requires that it should
be so administered. The Courts will not allow any departure from them on the
grounds of expediency.
Cy pres means near to it. The doctrine of Cy pres applies only to charitable
trusts. The reason is that a public charity is perpetual and the rule against perpetuity
does not apply to it. It can never die though its nature may be changed. In Halsbury's
Law of England, in 3rd Edn. Vol. 4, P. 317, it is stated:
"Where a clear charitable intention is expressed, it will not be permitted to fail
because the mode, if specified, cannot be executed, but the law will substitute
another mode Cy pres, that is, as near as possible to the mode specified by the
'donor'.
However, the above doctrine is subject to the doctrine of severability, i.e., the
doctrine of Cy pres, applies if the nature of the charitable object is general and not
specific.
Express and Implied Trusts
Express trusts are created by the act of parties either in words or in writing. While
an implied trust is one which is deduced from the conduct of the parties and the
circumstances of the transactions.
Public and Private Trusts
The criterion for deciding whether a particular trust is or is not of a private nature,
is whether the said trust is or is not for the benefit of individuals. Where the intention
of the founder, as shown by the recitals in his Will, was that the property was to be
dedicated for the benefit of idols, the trust is undoubtedly of a public nature and not
for the benefit of the individual members of family.
The essential difference between a private and a public trust is that in the former
the beneficiaries are definite and ascertained individuals or individuals who within
definite time can be definitely ascertained but in the latter the beneficial interest must
be vested in an uncertain and fluctuating body of persons either the public at large or
some considerable portion of it answering a particular description.
Revocable and Irrevocable Trusts


A revocable trust is one which is revocable when it is created by a non-
testamentary instrument or orally and a power of revocation has been expressly
reserved by the settler. A trust may be revoked by the consent of all the beneficiaries
who are competent to contract (Section 78).
All other trusts are irrevocable. Besides if a trust is created for charitable or
religious purposes, such a trust cannot be revoked.
Public-cum-Private Trust
A Public-cum-Private Trust is one in which a religious trust is created for the
immovable property like a Temple, Durgah etc. in the nature of a public trust but there
is a direction for use of income through offerings or otherwise for public purposes and
also a part thereof to person(s) in charge of the Temple, Durgah etc. A public-cum-
private trust may become a fully public trust when the private beneficiary(ies)
renounces his/their rights to which they are entitled.
Constructive Trust
A constructive trust is one which is not created by the express or implied act of
the settler, but which is deemed by operation of law or arises by construction of law.
A constructive trust is a relationship with respect to a property subjecting the person
by whom the title to the property is held by an equitable duty to convey it to another
on the ground that his acquisition or retention of the property would be wrongful and
that he would be unjustly enriched if he were permitted to retain the property.
Resulting Trust
A resulting trust is one, which is implied in favour of the settler or his
representative. It comes into existence where the property is incompletely conveyed
or where on a conveyance, the beneficial interest in the property is not completely
disposed of and the property or the undisposed beneficial interest in it reverts back to
the settler. When a trust is bad as a charitable trust, a resulting trust comes into
existence in favour of the settler. [Dwarkadas Bhimji v. CIT (1948) 16/TR 160 Bom.].
Executed and Executory Trust
An executed trust is one in which the limitation of the estate and the beneficiaries
are prescribed by the settler in the trust deed itself and no further instrument is
required.
An executory trust is not complete in itself and its execution is left to the
judgement of the trustees. Here, the settler instead of expressing exactly what he
means, tells the trustees to do their best to carry out his intentions.
Creation of Trusts
(i) Creation of Trusts for lawful purposes only
The Act allows creation of a trust for any lawful purposes. What is lawful can be
gathered from the provisions of Section 4 of the Act which provides that purpose of a
trust is lawful unless it is
(a) forbidden by law, or


(b) is of such a nature which will defeat the provisions of any law, or
(c) is fraudulent, or
(d) involves or implies injury to the person or property of another, or
(e) the Court regards it as immoral or opposed to public policy.
Thus a trust which does not fall in any of the above prohibitions, is deemed to be
for lawful purpose. A trust for an unlawful purpose is void. Where a trust is created for
two purposes one lawful and another unlawful, and the purposes are inseparable
from one another, the whole trust is void. On the other hand if one of the objects of a
trust is lawful and the expenses on it are fixed, and that object is not dependent upon
and is separate from the other objects, the trust to that extent will be valid.
The expression 'law' includes the law of a foreign country in which immovable
property of a trust is situated.
(ii) Trust of immovable property
Section 5 of the Act lays down the formalities which are to be observed for
creation of a trust. It provides that a trust of immovable property can be created by an
instrument in writing and registered, signed by the author of the trust or by Will.
Trust of movable property requires no writing or registration. The mere transfer of
possession coupled with the intention of the parties that such delivery of possession
should vest the property in the trustee is sufficient to create a trust.
(iii) Creation of a trust
Section 6 lays down provisions for creating a trust. It provides that subject to the
provisions of Section 5 a trust is created when the author of the trust indicates with
reasonable certainty by any words or acts: (a) an intention on his part to create
thereby a trust; (b) the purpose of the trust; (c) the beneficiary, and (d) the trust
property; transfer the trust property to the trustee except where a trust is declared by
Will or the author of the trust is himself to be the trustee. If a trust is to be valid and
enforceable, it is material to ascertain the author of the trust. Next the intention to
create a trust, the purpose of the trust, the trust-property and the beneficiaries must
be indicated and in such a way that the trust could be administered by the Court if the
occasion arose.
Certainties of a Trust
For creating a trust the author of the trust should indicate with reasonable
certainty the following:
(1) Certainty in words: The words used to create a trust must be clear and
certain so as to explain a clear intention to create a trust. Recommendatory
words like "I hope" "I wish" are not sufficient.
(2) Certainty in the object of the trust : The beneficiary, for whose benefit the
trust is created, must be shown clearly.
(3) Certainty in the subject-matter of the trust : The subject matter of the trust
must be clear, i.e., the property, in respect of which a trust is created, must
be shown clearly. Purpose of the trust should be certain.


If the trust instrument is lacking in first and third certainties, no trust is created but
if the second certainty is absent, resulting trust will be created in favour of the author
of the trust.
Illustrations:
(a) A bequeaths certain property to B, "having the fullest confidence that he will
dispose of it for the benefit of C". This creates a trust so far as regards A
and C. B is not bound as a trustee.
(b) A bequeaths certain property to B, "hoping he will continue it in the family".
This does not create a trust as the beneficiary is not indicated with
reasonable certainty.
(c) A bequeaths certain property to B, requesting him to distribute it amongst
such members of C's family as B should think most deserving. This does not
create a trust, for the beneficiaries are not indicated with reasonable
certainty.
(d) A bequeaths certain property to B desiring him to divide the bulk of it among
C's children. This does not create a trust, for the trust property is not
indicated with sufficient certainty.
(e) A bequeaths a shop and stock-in-trade to B on condition that he pays A's
debts and a legacy to C. This is condition, not a trust for A's creditors and C.
Who can create a Trust
A trust may be created (i) by every person competent to contract, and (ii) with the
permission of a Principal Civil Court of original jurisdiction, by or on behalf of a minor
(Section 7). Thus, generally any person competent to contract and competent to deal
with the property can create a trust.
Who may be a Trustee
Every person capable of holding property may be a trustee. But if the trust
involves the exercise of discretion, he cannot execute it unless he is competent to
contract (Section 10).
No one is bound to accept a trust. Acceptance of the trust by a trustee may be
express or implied.
Illustrations:
(a) A bequeaths certain property to B and C, his executors as trustees for D. B
and C prove A's will. This is in itself an acceptance of the trust, and B and C
hold the property in trust for D.
(b) A transfers certain property to B in trust to sell it, and to pay out of the
proceeds, A's debts. B accepts the trust and sell the property. So far as
regards B, a trust proceed is created for A's creditors.
(c) A bequeaths, a lakh of rupees to B upon certain trusts, and appoints him his
executor. B serves the lakh of rupees from the general assets, and
appropriates it to the specific purpose.
This is an acceptance of the trust.


Duties of Trustee
Sections 11 to 22 of the Act deal with the duties of trustee. They are as under:
(1) The Trustee should execute the trust and obey the directions given in the
instrument of the trust. He can make any alteration in those directions only
with the consent of beneficiaries who are competent to contract. If a
beneficiary is incompetent to enter into a contract, the Principal Civil Court of
original jurisdiction may give consent on behalf of the minor.
Illustrations:
(a)A, a trustee, is simply authorised to sell certain land by public auction. He
cannot sell the land by private contract.
(b)A, a trustee of certain land for X, Y and Z, is authorized to sell the land to B for
a specified sum. X, Y and Z, competent to contract, consent that A may
sell the land to C for a lesser sum. A may sell the land accordingly.
(c)A, a trustee, for B and her children, is directed by the author of the trust to
lend, on B's request, trust property to B's husband, C on the security of
his bond. C becomes insolvent and B requests A to make the loan. A
may refuse to make it.
(2) It is a duty of a trustee to acquaint himself with the nature of the trust
property.
(3) The trustee must protect and preserve the trust property.
Illustration:
The trust property is immovable property which has been given to the author
of the trust by an unregistered instrument. The trustee's duty is to cause the
instrument to be registered.
(4) The trustee must not set up a title to the trust property, which is adverse to
the interest of the beneficiary. Nor should he allow any person to do so.
(5) He must deal with the trust property in such a manner as a man of ordinary
prudence would deal with such property as if it were his own.
Illustration:
(a)A, a trustee for B, in execution of trust sells trust property but for want of due
diligence on his part, fails to receive part of the purchase money. A is
bound to make good the loss.
(b)A, trustee for B, allows the trust to be executed solely by his co-trustee C. C
misapplies the trust property. A is personally answerable for the loss
resulting to B.
(6) If a trust is created in favour of several persons in succession and the trust
property is of washing nature or consists of a future or reversionary interest,
the trustee is bound to convert it into property of permanent nature.
However, this is subject to any contrary intention which could be inferred
from the trust instrument.


Illustration:
A bequeaths to B all his property on trust for C during his life, and on his
death for D, on D's death for E. A's property consists of three leasehold
houses and there is nothing in A's will to show that he intended the houses
to be enjoyed in specie. B should sell the houses and invest the proceed in
trust securities as per Section 20.
(7) The trustee must act impartially where there are more than one beneficiary.
(8) Where the trust is created for the benefit of several persons in succession
and one of them is in possession of the trust property, if that person commits
any act destructive or injurious to the trust property, the trustee must take
the steps to prevent it.
(9) The trustee must keep an accurate account of the trust property. At the
request of the beneficiary he must furnish him the account and the state of
trust property.
(10) The trustee must invest the trust property and funds in the securities
mentioned in Section 20 of the Act. This is subject to any contrary directions
in the trust instrument.
(11) The trustee must sell the trust property within the specified or extended time
without prejudice to the beneficiary or as authorized by the Court.
Liabilities of Trustees
1. Liability for a breach of Trust : If a trustee commits a breach of the trust, he
is liable to make good the loss which the trust property of the beneficiary has
suffered. However, in two cases he is not liable for such a loss. (i) Where the
breach of the trust has resulted due to any fraud committed by the
beneficiary; and (ii) Where the beneficiary, being competent to contract, has
given his consent for that breach without any coercion or undue influence or
subsequently acquiesced therein, with full knowledge of the facts (Section
23).
Illustration:
(a)A trustee improperly leaves trust property outstanding, and if it is
consequently lost he is liable to make good the property lost, but he is
not liable to pay interest thereon.
(b)A trustee is guilty of unreasonable delay in investing trust money in
accordance with Section 20, or in paying it to the beneficiary. The
trustee is liable to pay interest thereon for the period of the delay.
(c)The instrument of trust directs the trustee to invest trust money either in any of
such securities or on mortgage of immovable property. The trustee does
neither. He is liable for the principal money and interest.
(d)The trust property consists of land. The trustee sells the land to a purchaser
for a consideration without notice of the trust. The trustee is liable at the
option of the beneficiary, to purchase other land of equal value to be
settled upon the like trust, or to be charged with the proceeds of the sale


with interest.
2. No right of set-off: A trustee who is liable for a loss because of a breach of
trust committed by him in respect of one portion of the trust property is not
allowed to set-off against his liability, a gain which he has accrued to another
portion of the trust property through another and distinct breach of the trust
property (Section 24).
3. A trustee is not liable for the acts and defaults of his predecessor.
4. Generally a trustee is not liable for a breach of the trust committed by his co-
trustee. However, such a trustee will be liable in the following cases:
(i)Where he delivers his trust property to his co-trustee without seeing to its
proper application;
(ii)Where he allows his co-trustee to receive the trust property and fails to make
due inquiries about his co-trustee's dealing therewith; and
(iii)Where after he comes to know of the breach of the trust committed by his co-
trustee, he either actively conceals it or does not take proper steps to
protect the interest of the beneficiary.
However, a co-trustee who joins in signing a receipt for the trust property for
sake of conformity without actually receiving it shall not be liable merely by
reason of his signature only.
A trustee is liable for money and property actually received by him.
5. Nature of liability of a co-trustee : When co-trustees jointly commit a breach
of trust, and when one of them, by his negligence, enables another trustee
to commit a breach of trust, each trustee is liable to the beneficiary for the
whole loss sustained by the beneficiary.
6. Under Section 23 of the Act, in certain circumstances, a trustee is liable to
pay simple or compound interest to the beneficiary.
Rights, Powers and Disabilities of Trustees
The rights, powers and disabilities of a trustee are discussed in Chapter IV of the
Act. The important rights are as under:
1. The right to have the possession of the instrument of trust and the title-deed
relating to the trust property.
2. The right to reimburse himself of all costs, expenses and liabilities incurred
in administration of the trust.
3. In case of a breach of the trust, the person who derives any benefit out of
such a breach, must indemnify, the trustee to the extent of the amount
actually received by him.
4. A trustee has a right to take opinion, advice or direction from the Court on
questions relating to the management and administration of the trust.
5. When a trustee, properly completes his duties, he is entitled to get a
discharge to the effect in writing.
6. A trustee has a general right to do all necessary acts (i) for preservation and
protection of the trust property, and (ii) to protect the interest of a beneficiary
who is not competent to contract but he cannot give on lease any trust


property for more than twenty-one years without the permission of a Court.
Powers of Trustee
1. He can sell the trust property where instrument of the trust so empowers
him.
2. A trustee has a power to vary investments.
3. A trustee has a power to apply the trust property for the maintenance of
property as provided in the instrument of trust.
4. A trustee can compromise claims unless a contrary intention appears from
the instrument of the trust.
5. A trustee can give receipt for the money received on account of the trust.
6. In case of death of one of the trustees, the other trustees have a right to act,
unless contrary intention appears from the instrument of the trust.
Disabilities of Trustees (Chapter V)
1. A trustee who once accepted the trust, cannot renounce it except:
(i)with the permission of the Court,
(ii)with the consent of the beneficiaries who are competent to contract,
(iii)by virtue of a special power in the instrument of the trust.
2. A trustee cannot delegate his office or any of his duties either to a co-trustee
or to a stranger, except in the following cases:
(1)When the instrument of the trust so provides,
(2)When such a delegation is in the regular course of business,
(3)When such a delegation is necessary, and
(4)The beneficiary, being competent to contract, consents to such a delegation.
Illustrations:
(a)A bequeaths certain property to B and C on certain trust to be executed by
them or the survivor of them or the assigns of such survivor, B dies. C
may bequeath the trust property to D and E upon the trusts of A's will.
(b)A is a trustee of certain property with power to sell the same. A may employ
an auctioneer to effect the sale.
(c)A bequeaths to B fifty houses let at monthly rents in trust to collect the rents
and pay them to C. B may employ a proper person to collect these
rents.
3. Where there are more trustees than one, all must join in the execution of the
trust unless the trust instrument or any law for the time being in force
provides otherwise.
4. The trustees cannot exercise their discretionary powers arbitrarily.
5. In the absence of express direction to the contrary contained in the
instrument of trust or of a contract entered into with the beneficiary or of the
sanction of the Court, the trustee has no right to remuneration.
6. A trustee may not use or deal with the trust property for his own use.
7. No trustee whose duty is to sell the trust property may directly or indirectly


buy the trust property.
8. No trustee and no person who has recently ceased to be a trustee may,
without the permission of the Court, buy, or become mortgagee or lessee of
the trust property.
9. The trustee and the co-trustee may not lend the trust amount to themselves.
Vacating the office of trusteeship
The office of a trustee is vacated on his death or by his discharge. He may be
discharged from his office by the extinction of the trust or by the completion of his
duties or by new appointee etc.
Meaning of a Beneficiary
The person or persons for whose benefit, a trust has been created, is called the
beneficiary or beneficiaries. While the trustees hold the legal title in trust property, the
beneficiary holds the beneficial interest in that property.
Who may be a beneficiary
A beneficiary may be any person, so specified by the author of the trust, a
beneficiary may be a near or distant relative of the author or a person not related to
the author at all or general public or a class thereof. A minor, woman and even an
unborn person can be a beneficiary. In case of a charitable or religious trust, there
need not be a specific beneficiary; the beneficiary thereunder is the object or the
purpose of the trust.
If the beneficiaries under a trust are not specified and they are not capable of
being ascertained, no trust can come into existence [Allahabad Bank v. CIT AIR 1953
476].
A beneficiary may renounce his interest under the trust by (i) a disclaimer
addressed to the trustee or (ii) by setting up a claim inconsistent with the trust. On the
disclaimer by a beneficiary and the trust deed does not provide for such disclaimer,
the trust would revert to the author or settler as a resulting trust.
Doctrine of Cypres
Where the object of the charitable trust, specified by the settler, is or
subsequently becomes impossible or impracticable or unlawful, the trust will not
necessarily fail, but the Court has power to apply the trust to some other charitable
object as nearly as possible resembling the intention of the author. This power of the
Court is known as "doctrine of cypres". When a particular mode of charity indicated
by the author is not capable of being carried out, yet a general intention of charity, is
indicated by the author of the trust, the Court would execute it 'cypres' i.e. in a way as
nearly as possible to that which testator specified.
Rights and Liabilities of Beneficiaries (Chapter VI)
Important rights of the beneficiary of the trust are:
1. Right to rents and profits of the trust-property;
2. Right to the specific execution of the trust;


3. Right to inspect and take copies of the instrument of trust;
4. Right to transfer the beneficial interest, if he is competent to contract;
5. Right to sue for execution of trust;
6. Right to proper trustees; and proper number of trustees;
7. A beneficiary has a right to follow the trust property in the hands of a third
person. Even where a trustee disposes of the trust property and acquires
some other property with the help of the disposal money, the beneficiary is
entitled to have the latter property, the same rights or as nearly as possible
the same rights, he had over the trust property.
Illustrations :
(a)A, a trustee for B wrongfully invests Rs. 10,000 in the purchase of certain
land, B is entitled to the land.
(b)A, a trustee, wrongfully purchases land in his own name, partly with his own
money, partly with money subject to a trust for B. B is entitled to a
charge on the land for the amount of the trust money so misemployed.
8. Right to compel to any act of duty.
Liabilities :
If a beneficiary commits a breach of trust or obtains any advantage, the other
beneficiaries may attach the interest of such a beneficiary until the loss caused by the
breach has been compensated.
Extinction of a Trust (Section 77)
A trust is extinguished:
(a) When its purpose is completely fulfilled; or
(b) When its purpose becomes unlawful; or
(c) When the fulfillment of its purpose becomes impossible by destruction of the
trust property or otherwise; or
(d) When the trust being revocable, is revoked.
Revocation of a Trust (Section 78)
If a trust is created by a Will, it may be revoked by the revocation of the Will. A
trust which has been created otherwise, by an instrument other than a Will or orally,
can be revoked only:
(a) with the consent of all the beneficiaries competent to contract;
(b) by the exercise of power of revocation expressly reserved by the author of
the trust (in cases of trusts declared orally or by non-testamentary
instruments); or
(c) where the trust is created for the payment of debts of the author of the trust,
and has not been communicated to the creditors, at the pleasure of the
author of the trust.
A conveys property to B in trust to sell the same, and pays out of the proceeds
the claims of A's creditors. A reserves no power of revocation. If no communication


has been made to the creditor. A may revoke the trust. But if the creditors are parties
to the agreement, the trust cannot be revoked without their consent.
A trust is generally irrevocable unless a power of revocation is expressly reserved.
Certain Obligations in the Nature of Trust
Chapter IX of the Act deals with resulting and constructive trust under the
heading "Of certain obligations in the nature of a trust". Here the intention to create a
trust is not expressed but is implied and presumed. Following are the instances of
such resulting and constructive trusts:
(i) Transfers not intended to dispose of Beneficial Interest
Where the owner of the property transfers or bequeaths it and it cannot be
inferred consistently with the attended circumstances that he intended to dispose of
beneficial interest therein, the transferee or legatee, must hold the property for the
benefits of the owner or his legal representative (Section 81) [Note : However this
Section has been omitted by the Benami Transactions (Prohibitions) Act, 1988 w.e.f.
19.5.1988].
Illustrations:
(a) A transfers certain property to B without consideration and he does not
make any declaration of a trust about it. The attending circumstances do not
warrant an intention to transfer. Here B must hold the property in trust for A.
(b) A conveys to B two fields Y and Z and declares a trust of Y, but says nothing
about Z. It cannot, consistently with the circumstances under which the
transfer is made, be inferred that A intended to transfer the beneficial
interest in Z. B holds Z for the benefit of A.
(c) A makes a gift of certain land to his wife B. She takes the beneficial interest
in the land free from any trust in favour of A for it may be inferred from the
circumstances that the gift was for B's benefit.
(ii) Purchases in the Name of Third Persons
Where property is transferred to one person for a consideration paid or provided
by another person, and it appears that such person did not intend to pay or provide
such consideration for the benefit of the transferee, the transferee must hold the
property for the benefit of the person paying or providing consideration (Section 82).
[Note : However this Section has been omitted by the Benami Transactions
(Prohibition) Act, 1988 w.e.f. 19.5.1988].
(iii) Imperfect Dispositions
Where a trust is incapable of being executed or where it has been executed
without exhausting the whole of the trust property, the trustee must hold the trust
property or the remaining trust property for the benefit of the author of the trust or his
legal representatives. This is subject to contrary direction in the trust instrument.
(iv) Transfer for Illegal Purposes


Where a property is transferred for an illegal purpose and that purpose is not
carried out or the transferor is not as guilty as the transferee or the effect of permitting
the transferee to retain the property would be to defeat the provision of any law, the
transferee must hold the property for the benefit of the transferor (Section 84).
Section 85 lays down a similar provision in respect of bequests for illegal
purpose.
Under Section 86, if a property is transferred in pursuance of a rescindable
contract, the transferee must hold the property for the benefit of the transferor, on
receiving the notice to that effect.
(v) Constructive Trusts
According to Section 88, if a person obtains advantage because of his fiduciary
character, like a trustee, executor, partner, agent, director of a company, he must
hold that advantage for the benefit of the person, at whose expenses such an
advantage has been obtained. There is a similar provision in respect of an advantage
gained by the exercise of undue influence.
If a trustee, uses the trust property in his own business and derives any profit out
of it, he must hold that profit in trust for the beneficiary.
(vi) Advantage Gained by Exercise of undue Influence
Whereby the exercise of undue influence, any advantage is gained in derogation
of the interest of another, the person gaining such advantage without consideration,
or with notice that such influence has been exercised, must hold the advantage for
the benefit of the person whose interest have been prejudiced.
(vii) Advantage obtained by a Qualified Owner
Where a qualified owner of the property like a tenant for life, co-owner or
mortgagee, obtains an advantage in derogation of the rights of other persons
interested in the property, he must hold the advantage so gained for the benefit of all
the persons so interested.
In case of land belonging to a Joint Hindu family, if one of the co-parcners by
paying the Government revenue, procures his name entered as the owner of that
land, he must hold that land for the benefit of the Joint Hindu family.
Properties acquired with notice of existing contract:
Where a person acquires property with notice of the contract existing in favour of
another person, which is specifically enforceable, the former must hold the property
for the benefit of latter to give effect to the contract.
Illustrations:
(a) A enters into a contract in favour of land with B, C with notice of the contract
in favour of A, purchases that property. C must hold it for the benefit of A to
give effect to the contract.
If one of the compounding creditors obtains an undue advantage for himself


he must hold it for the benefit of his co-creditors.
However, it must be noted that these obligations in the nature of a trust do
not impair or effect the rights of a bona fide purchaser for value without
notice.
(b) A, the tenant for life of leasehold property, renews the lease in his own name
and for his own benefit. A holds the renewed lease for the benefit of all
those interested in the old lease.
(c) A mortgages land to B, who enters into possession. B allows the
Government revenue to fall into arrear with a view to the land being put up
for sale and his becoming himself the purchaser of it. The land is accordingly
sold to B. Subject to the repayment of the amount due on the mortgage and
of his expenses properly incurred as mortgagee. B holds the land for the
benefit of A.
Express and Constructive Trusts
For the purposes of the Act, the trust is confined to trusts created by act of
parties in accordance with the provisions of Sections 5 and 6. It may be by express
words or by inference from the conduct of parties and the circumstances of a
particular case. But, where no trust has been created by an author of the trust either
by express terms or by implications but the facts and circumstances are such that the
law infers that there is a trust, which is called the Constructive Trust. The Act
contemplates two categories:
(a) trust strictly so called falling within the definition in Section 3 whether arising
by express intention or arising by implication of fact,
(b) obligations which are not strictly trusts but in the nature of a trust arising by
operation of law which fall within the provisions of Chapter IX of the Act.
The trust arising by operation of law:
(a) Resulting Trusts : These are inferred by the Court and rest upon the
presumed intention of the parties, for example: a owner transfers the
property without intending to dispose of the beneficial interest. A transfers
his property to B without any consideration. At that time A is pressed by
creditors. A satisfies his creditors afterwards and asks P to re-transfer the
property to him. It may be reasonably inferred that A wanted B merely to
hold the property for A's own benefit. So resulting trust arises in favour of A.
(b) Constructive Trusts : This is a trust imposed by the law without having
regard to the intention of the parties, for example, when a trustee, agent,
executor, partner, director of a company, legal adviser or other person
bound in a fiduciary character to protect the interests of another, gains some
pecuniary advantage for himself by availing himself of that character, he
should hold the advantage so gained for the benefit of such other person. A,
a partner, negotiating a transaction on behalf of the firm, clandestinely
stipulates with the party with whom he is negotiating for payment to himself
of a lakh of rupees. He should hold the amount for the benefit of the
partnership. Suppose A, a trustee, is holding a leasehold interest on behalf
of the beneficiary. The lease expires. The lessor refuses to renew the lease.
The trustee offers to take lease in his own individual capacity. Then the


lease is executed in favour of A. The leasehold interest endures to the
benefit of the beneficiary. A continues only to be a trustee.
Tax Treatment of Trust
Trust can be divided into four categories for the purpose of tax treatment under
Income Tax Act, 1961.
(A) Public Charitable/Religious Trust:
These trusts which are not exempt under Section 11 or 12 is chargeable to tax as
if it is the income of an Association of Persons (AOP) for:
(i) Income from property held under trust wholly for charitable or religious
purpose;
(ii) Voluntary contributions without any direction that they shall form the corpus
of the trust.
(iii) Profits and gains of business which is incidental to attainment of objectives
of trust and separate books are to be maintained.
However, of trusts created after March 31, 1962 has anyway compromised its
objectives for financial benefits has to pay maximum marginal rate (MMR) of tax as
per the rates fixed by the Finance Act from time to time.
(B) Private Discretionary Trust:
Income of Private Discretionary Trust are taxable: (a) where shares of the
beneficiaries are determinate (Section 161(b) where shares of the beneficiaries are
indeterminate or unknown (Section 164). The MMR of Tax will be at the rates fixed
by the Finance Act from time to time.
(c) Income (MMR) from property held under trust partly for religious and partly for
other purpose [Section 164(3)] is also taxable @ MMR 33.94% from the Assessment
Year 2008-09.
(D) The Finance Act 1981 made income of Oral Trusts taxable under Sections
160(1)(v) and 164A of the Income Tax Act.
ANNEXURES
ANNEXURE I
SCHEDULE II
[Section 3(r) and 116]
LIST OF NATIONAL CO-OPERATIVE SOCIETIES
1. National Co-operative Land Development Banks Federation Limited,
Mumbai.
2. National Federation of State Co-operative Banks Limited, Mumbai.
3. National Co-operative Union of India Limited, New Delhi.


4. National Agricultural Co-operative Marketing Federation of India Limited,
New Delhi.
5. National Co-operative Consumers Federation of India Limited, New Delhi.
6. National Federation of Co-operative Sugar Factories Limited, New Delhi.
7. National Federation of Industrial Co-operatives Limited, New Delhi.
8. National Co-operative Housing Federation Limited, New Delhi.
9. Indian Farmers Fertilizer Co-operative Limited, New Delhi.
10. All India Federation of Co-operative Spinning Mills Limited, Mumbai.
11. All India Industrial Co-operative Banks Federation Limited, Bangalore.
12. National Co-operative Dairy Federation of India Limited, Anand.
13. Petrofils Co-operative Limited, Vadodara.
14. National Heavy Engineering Co-operative Limited, Pune.
15. All India Handloom Fabrics Marketing Co-operative Society Limited, New
Delhi.
16. National Federation of Urban Co-operative Banks and Credit Societies
Limited, New Delhi.
17. Krishak Bharati Co-operative Limited, New Delhi.
18. National Federation of Fishermens Co-operative Limited, New Delhi.
19. National Federation of Labour Co-operative Limited, New Delhi.
20. National Co-operative Tobacco Growers Federation, Anand.
21. Tribal Co-operative Marketing Development Federation of India Limited,
New Delhi.
ANNEXURE II
Guidelines for Registration of a Society under Societies Registration
Act, 1860, as applicable to N.C.T. of Delhi
The Societies Registration Act, 1860, as its preamble states, has been enacted
to make provisions for improving the legal position of societies established for the
purposes given under Section 1 to 20 of the Act. A Society registered under this Act,
acquires the legal status and is also capable to sue and be sued under Section 6 of
the Act.
1. The purposes given under Section 20 of the Act are : charitable societies,
military, orphan funds or societies established for the promotion of science,
literature or fine arts, for instruction, diffusion of useful knowledge, the
foundation or maintenance of libraries or reading rooms for general use
among the members or open public museum and galleries of paintings and
other works of art, collection of natural history, collections of instructions or
designs, promotion of social welfare, sports, games, activities conducted to
the protection and improvement of natural environment (including forest,
lakes, rivers, wild life and compassion for living creatures).
2. Only the societies formed for the purposes laid down under Sections 1 to 20
of the Act and having those purposes as their aims and objects may be
registered under the Act.


3. Name of the society should be such as does not attract the provisions of
'Names and Emblems (Prevention of Improper Use) Act, 1950.' The name
proposed should not suggest or be calculated to suggest, the patronage of
the Government of India or the Government of State or connection with any
legal authority under any law for the time being in force.
4. The Names and Emblems (Prevention of Improper Use) Act, 1950 prohibits
the use of any name, emblems, official seals, colourable imitation thereof as
specified in the Act, without previous permission of competent authority. It
also prohibits the use of name of National Heroes and other names etc.
mentioned in the Act. The societies are therefore advised to consult this Act
also before proposing the name etc. for registration.
5. 'Further if the proposed name is identical with that by which any other
society has been registered or nearly resembles such name as to likely to
deceive the public or the members of the society such names may not be
registered.
6. Two main documents are required to be filed under Section 2 of the
Societies Registration Act, 1860 for registration of a society which are listed
below and those should be necessarily filed in duplicate:
(i)Memorandum of Society, and
(ii)Rules and Regulations.
7. Memorandum of the society defines the permitted range of its enterprises.
The aims and objects for which the society is formed have to be
incorporated in the Memorandum.
8. The Society should carefully understand the aims and objects incorporated
in the Memorandum.
9. The persons subscribing their names to the Memorandum should not be (in
any case) less than seven. If it is proposed to give All India character to the
society there must be minimum of eight different persons from different
States of Indian Union to the Memorandum.
ANNEXURE III
Titles of Authorities Equivalent to Registrar of Societies in Various States

State Title Act Reference

Andhra Pradesh Inspector General of AP Act 6/56 and 10.54
Registration
Assam Registrar of Societies Assam Act 7/57
Bihar Inspector General of Bihar Act 19/56 and 4/57
Registration

State Title Act Reference

Chandigarh Registrar Punjab Act 31/57

Delhi Registrar Punjab Act 31/57

Goa, Daman & Diu Inspector General Goa Act 6/79



Gujarat Registrar Bom. Act 11/60

Haryana Registrar Punjab Act 31/57

Himachal Pradesh Registrar HP Act 23/73

Karnataka Registrar Kar. Act 17/60

Kerala Inspector General of Madras Act 24/54
Registration

Madhya Pradesh Registrar of Societies MP Act 44/73

Maharashtra Registrar Bom. Act 11/56 and
76/58Manipur Registrar of Societies Assam Act 7/57

Nagaland Registrar of Societies Nagaland Act 14 of 1969

Orissa Registrar of Societies Orissa Act 21/58

Punjab Registrar Punjab Act 31/57

Pondicherry Registrar of Companies Act 9 of 1969

Rajasthan Registrar Act 29 of 1958

Tamilnadu Registrar (Inspector TN Act 27/75
General of Registration)

Travancore Cochin Registrar Act 12/55

Tripura Registrar of Societies Assam Act 7/57

Uttar Pradesh Registrar UP Act 25/58

Note : In all other States the registering authorities for societies are addressed as
'Registrar of Joint Stock Companies' (Act 21/1860).

LESSON ROUND-UP
The lesson broadly contains following issues and matters relating to societies and
Trusts:
Law relating to Co-operative Societies.
Principles and objectives of Co-operative Societies.
Registration aspects of Co-operative Societies.
Functions and Role of members in the Co-operative Societies.
Management of Co-operative Societies.
Amalgamation and Dissolution of society.
Registrar of Societies.
Trust Laws in India.
Trust and its classifications.
Role and Duties of Trustees/Beneficiaries.
Doctrine of Cypress.
Certain obligations in the nature of trust.



SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to be
submitted for evaluation.)
Law Relating to Co-operative Societies
1. Who can become member of a Multi-State Co-operative Society?
2. What are the matters which are to be discussed in the Annual General
Meeting of a Multi-State Co-operative society?
3. Explain the procedure relating to election of Board members.
4. Under what circumstances a Multi-State Co-operative Society may be
wound-up?
5. What are powers and functions of Board of directors?
Law Relating to Societies
1. Discuss the status of a Society registered under the Act.
2. What are the Societies, which may be registered under the Act.
3. Briefly explain the procedure for formation and registration of Societies.
4. Who is a member of society?
5. What are the powers of a Society? How its' property vests?
6. Discuss briefly the dissolution of a Society.
7. Discuss the powers of a Society to alter its purposes.
Law Relating to Trusts
1. Define a 'trust'. Distinguish a trust from a contract.
2. How a trust is created and by whom it is created?
3. Briefly discuss the provisions relating to rights and duties of trustees.
4. Who is a beneficiary? What are his rights and liabilities?
5. Write short notes on
(i)Extinction of a trust
(ii)Revocation of a trust
(iii)Constructive trust
(iv)Doctrine of Cy Pres.
6. Discuss the certainties of a trust.


Suggested Readings:
(1) General and Commercial Laws Taxmann.
(2) Multi-State Cooperative Societies Act, 2002.
(3) Indian Trust Act, 1882.




STUDY XXX
PRODUCER COMPANIES

LEARNING OBJECTIVES
This lesson explains the concept of Producer Companies introduced by the
Companies (Amendment) Act, 2002. The newly inserted provision not only provides
an opportunity to the co-operative sector to corporatise itself but also opens up new
avenues for them. The lesson also describes the provisions which enable the
conversion of an existing co-operative society into a company as also the
incorporation of a Producer Company. It also gives the provisions relating to
membership, management, meetings, share capital etc. of Producer Companies.
At the end of the lesson, you should be able to understand in respect of the Producer
Company:
Its concept along with its objects, formation and registration.
Membership and voting rights of members.
Memorandum of Association, Articles of Association and their content.
Conversion of inter-state co-operative society into Producer Company.
Appointment of directors, vacation of office, liability of directors, their committee.
Powers and functions of the board, meetings of the board and quorum.
Chief executive and his functions.
Secretary of Producer Company.
Annual general meetings.
Share capital, transferability of shares and surrender, issue of bonus shares.
Amalgamation, merger or division to form new Producer Companies.
Disputes and striking off name.
Expected benefits to Producer Companies.
Difference between a Producer Company and a Private Company.

1. GENESIS
The Companies (Amendment) Act, 2002 vide Notification No. S.O. 135(E) dated
5.02.02 has inserted Part IX-A to the Companies Act, 1956 and introduced the
concept of Producer Companies. Rural producers have been at a potential
disadvantage given their generally limited assets, resources, education and access to
advanced technology. In the present scenario, there is an emerging need of changing
the terms of trade between rural and urban, labour and industry, finance and
commerce. Therefore, if cooperative enterprises are to continue to serve rural
producers, they require an alternative to the institutional form presently available
under law. The Companies (Amendment) Act, 2002 is a step in this direction.
The newly inserted provision, by virtue of Companies (Amendment) Act, 2002 not
only provides an opportunity to the co-operative sector to corporatise itself but also
opens up new avenues for them. The conversion to producer companies will enable
1140


them to invite greater investments and modernize themselves. They can take
advantage of the provisions to reinvent themselves, and function more efficiently.
Accordingly, it is specified that a producer shall mean any person engaged in any
activity connected with or relatable to any primary produce. The amendment also
seeks to provide a comprehensive meaning to primary produce which shall
encompass produce of farmers, arising from agriculture (including animal husbandry,
horticulture, etc.) produce of persons engaged in handloom, handicraft, any product
resulting from any of the above activities or from an ancillary activity and any activity
which is intended to increase the production or quality of anything referred above.
The Amendment Act also includes the insertion of the provisions which enables
the conversion of an existing co-operative society into a company as also the
incorporation of a Producer Company. This part contains specific provisions relating
to incorporation, management, meetings, share capital etc. of Producer Companies.
2. OBJECTS OF PRODUCER COMPANY
A Producer company means a body corporate, having objects or activities
specified in Section 581B and registered as Producer Company. Hence, the
objectives for which Producer Companies may be formed are laid down in Section
581B. These include inter alia, production, marketing, export of primary produce of
members, processing, packaging of produce of its members; manufacture, sale of
machinery etc. mainly to its members, generation and distribution of power, insurance
of producers/primary produce, rendering technical/ consultancy services, promoting
mutual assistance, welfare measures and any other activity for the benefit of
members.
However, in terms of Section 581B of the Companies Act, 1956, the objects of
the Producer company shall relate to all or any of the following matters, namely:
(a) production, harvesting, procurement, grading, pooling, handling, marketing,
selling, export of primary produce of the Members or import of goods or
services for their benefit:
Provided that the Producer company may carry on any of the activities
specified in this clause either by itself or through other institution;
(b) processing including preserving, drying, distilling, brewing, vinting canning
and packaging of produce of its Members;
(c) manufacture, sale or supply of machinery, equipment or consumables
mainly to its Members;
(d) providing education on the mutual assistance principles to its Members and
others;
(e) rendering technical services, consultancy services, training, research and
development and all other activities for the promotion of the interests of its
Members;
(f) generation, transmission and distribution of power, revitalisation of land and
water resources, their use, conservation and communications relatable to
primary produce;
(g) insurance of producers or their primary produce;
1050


(h) promoting techniques of mutuality and mutual assistance;
(i) welfare measures or facilities for the benefit of Members as may be decided
by the Board;
(j) any other activity, ancillary or incidental to any of the activities referred to in
Clauses (a) to (i) or other activities which may promote the principles of
mutuality and mutual assistance amongst the Members in any other manner;
(k) financing of procurement, processing, marketing or other activities specified
in Clauses (a) to (j) which include extending of credit facilities or any other
financial services to its Members.
Every Producer Company shall deal primarily with the produce of its active
members for carrying out any of its specified objects. This means there is an
obligation on the producer company to deal primarily with the active members in
conducting its activities. The expression active member has been defined in Clause
(a) of Section 581A to mean a member who fulfils the quantum and period of
patronage of the producer company as may be required by the articles of the
producer company. The patronage means the use of services offered by the
Producer Company to its members by participation in its business activities.
3. FORMATION OF PRODUCER COMPANY AND ITS REGISTRATION
Section 581C of the Act provides that, any ten or more individuals, each of them
being a producer or two or more producer institutions or a combination of ten or more
individuals and producer institutions, desirous of forming a producer company may
form an incorporated company as such having its objects, specified in Section 581B
as producer company under this Act after complying with the requirements and the
provisions of the Act in respect of registration. Producer institution means a
Producer Company or any other institution having only producer or producers or
Producer Company or Producer Companies as its member whether incorporated or
not, having any of the objects referred to in Section 581B and which agrees to make
use of the services of the Producer Company or Producer Companies as provided in
its articles.
The Registrar on being satisfied that all requirements relating to registration and
incidental matters have been complied with, shall register the memorandum, articles
and other documents and issue a certificate of incorporation within 30 days of the
receipt of the documents for registration. On registration, the Producer Company
shall be deemed to be a private company limited by shares without any limit on the
number of members.
The direct costs associated with the promotion and registration of the company
may be reimbursed by the Producer Company.
4. MEMBERSHIP AND VOTING RIGHTS OF MEMBERS OF PRODUCER
COMPANY
Section 581D of the Act provides that unless the membership of the Producer
Company consists of a Producer institution only, every member shall have a single
vote irrespective of the number of shares held. In case, where the membership
consists solely of Producer Institutions, the voting rights of such Producer institutions


shall be determined on their previous years participation in the business of the
company. However, during the first year of its regulation, the voting rights in a
Producer Company shall be determined on the basis of shareholding by producer
institutions.
Where the membership of Producer Company consists of a combination of
individuals and Producer Institutions, every member shall exercise a single vote. The
Articles may however, authorize the Producer Company to restrict the voting rights to
active members only.
No person, who has any business interest which conflicts with the business of
Producer Company, shall become a member of that Producer Company and if
subsequently a member acquires any business interest which is in conflict with the
business of the Producer Company, he shall cease to be a member.
5. BENEFITS TO MEMBERS
Section 581E states that, initially every member shall receive only such value of
the produce or products pooled and supplied as is determined by the Board of
Producer Company and the withheld price may be disbursed later in cash or in kind
or by allotment of equity shares. Every such member shall be entitled to receive a
limited return and may be allotted bonus shares. Withheld price for this purpose
means part of the price due and payable for goods supplied by any member to the
Producer Company, and as withheld by the Producer Company for payment on a
subsequent date.
Patronage bonus may be disbursed proportionately, if any, surplus remains after
making provision for limited return and reserves. Patronage bonus refers to the
payment by Producer Company out of its surplus income to the members in
proportion to their respective patronage.
The approval of Board of directors is necessary for disbursing withheld price
whereas for disbursing the patronage bonus, either in cash or by way of allotment of
equity shares or both, the approval of members at the general meeting is required.
6. MEMORANDUM OF ASSOCIATION, ARTICLES OF ASSOCIATION
The Memorandum of Association and the Articles of Association of the Producer
Company, duly signed by the subscribers are required to be presented to the
Registrar of the state where the Companys registered office is proposed to be set up.
The Memorandum and Articles shall contain the disclosures as provided under
the provisions of Sections 581F and 581G respectively and are as under:
Contents of Memorandum of Producer Company
In terms of the provisions of Section 581F, the Memorandum of Association of
every Producer Company shall state the following:
(a) the name of the company with Producer Company Limited as the last
words of the name of such Company;
(b) the State in which the registered office of the Producer Company is to


situate;
(c) the main objects of the Producer Company shall be one or more of the
objects specified in Section 581B;
(d) the names and addresses of the persons who have subscribed to the
memorandum;
(e) the amount of share capital with which the Producer Company is to be
registered and division thereof into shares of a fixed amount;
(f) the names, addresses and occupations of the subscribers being producers,
who shall act as the first directors in accordance with Sub-section (2) of
Section 581J;
(g) that the liability of its members is limited;
(h) opposite to the subscribers name the number of shares each subscriber
takes:
Provided that no subscriber shall take less than one share;
(i) in case the objects of the Producer Company are not confined to one State,
the States to whose territories the objects extend.
Contents of Articles of Association of Producer Company
The contents, as per Section 581G, of the Articles of a Producer Company shall
contain Mutual Assistance Principles and other provisions, which are as under:
Mutual Assistance Principles
The articles shall contain the following mutual assistance principles, namely:
(a) the membership shall be voluntary and available to all eligible persons who,
can participate or avail of the facilities or services of the Producer Company,
and are willing to accept the duties of membership;
(b) each Member shall, save as otherwise provided in Part IX of the Act, have
only a single vote irrespective of the shareholding;
(c) the Producer Company shall be administered by a Board consisting of
persons elected or appointed as directors in the manner consistent with the
provisions of this Part and the Board shall be accountable to the Members;
(d) save as provided in this Part, there shall be limited return on share capital;
(e) the surplus arising out of the operations of the Producer Company shall be
distributed in an equitable manner by:
(i)providing for the development of the business of the Producer Company;
(ii)providing for common facilities; and
(iii)distributing amongst the Members, as may be admissible in proportion to their
respective participation in the business;
(f) provision shall be made for the education of Members, employees and
others, on the principles of mutuality and techniques of mutual assistance;


(g) the Producer Company shall actively co-operate with other Producer
Companies (and other organisations following similar principles) at local,
national or international level so as to best serve the interest of their
Members and the communities it purports to serve.
Other Provisions or Contents
The Articles shall also contain the following provisions, namely:
(a) the qualifications for membership, the conditions for continuance or
cancellation of membership and the terms, conditions and procedure for
transfer of shares;
(b) the manner of ascertaining the patronage and voting right based on patronage;
(c) subject to the provisions contained in Sub-section (1) of Section 581N, the
manner of constitution of the Board, its powers and duties, the minimum and
maximum number of directors, manner of election and appointment of
directors and retirement by rotation, qualifications for being elected or
continuance as such and the terms of office of the said directors, their
powers and duties, conditions for election or co-option of directors, method
of removal of directors and the filling up of vacancies on the Board, and the
manner and the terms of appointment of the Chief Executive;
(d) the election of the Chairman, term of office of directors and the Chairman,
manner of voting at the general or special meetings of Members, procedure
for voting by directors at meetings of the Board, powers of the Chairman and
the circumstances under which the Chairman may exercise a casting vote;
(e) the circumstances under which, and the manner in which, the withheld price
is to be determined and distributed;
(f) the manner of disbursement of patronage bonus in cash or by issue of
equity shares, or both;
(g) the contribution to be shared and related matters referred to in
Section 581Z(I)(2);
(h) the matters relating to issue of bonus shares out of general reserves as set
out in Section 581ZJ;
(i) the basis and manner of allotment of equity shares of the Producer
Company in lieu of the whole or part of the sale proceeds of produce or
products supplied by the Members;
(j) the amount of reserves, sources from which funds may be raised, limitation
on raising of funds, restriction on the use of such funds and the extent of
debt that may be contracted and the conditions thereof;
(k) the credit, loans or advances which may be granted to a Member and the
conditions for the grant of the same;
(l) the right of any Member to obtain information relating to general business of
the company;
(m) the basis and manner of distribution and disposal of funds available after
meeting liabilities in the event of dissolution or liquidation of the Producer
Company;


(n) the authorisation for division, amalgamation, merger, creation of subsidiaries
and the entering into joint ventures and other matters connected therewith;
(o) laying of the memorandum and articles of the Producer Company before a
special general meeting to be held within ninety days of its registration;
(p) any other provision, which the Members may, by special resolution
recommend to be included in articles.
Amendment to Memorandum and Articles
Amendment in the provisions/clauses of the Memorandum can be done by way
of passing a Special Resolution as per Section 581H, whereas, the amendment in the
Articles is required to be proposed by not less than two-third of the elected directors
or by not less than one-third of the members and adopted by passing a Special
Resolution in the general meeting under Section 581-I.
A copy of the amended Memorandum or Articles along with a duly certified copy
of Special Resolution thereof are to be filed with the Registrar of Companies within
thirty days from the date of its adoption at the general meeting.
7. OPTION TO INTER-STATE CO-OPERATIVE SOCIETIES TO BECOME
PRODUCER COMPANIES
An Inter-State Co-operative Society means a Multi-State Co-operative Society
as defined in Section 3(p) of Multi-State Co-operative Societies Act, 2002 and
includes any co-operative society registered under any other law in force and which
has after its formation, extended any of its objects to more than one State.
Section 581J provides that any Inter-State Co-operative Society whose objects
are not confined to one state may submit an application together with the prescribed
documents to the Registrar for registration as Producer Company. The Registrar on
being satisfied, that all the requirements relating to registration have been complied
with, shall within 30 days of receipt of the application, issue a certificate of
incorporation and the words Producer Company Limited shall form part of its name
to explain its identity.
Any Inter-State Cooperative Society willing to register itself as a Producer
Company shall submit an application to ROC alongwith following enclosures and
documents:
1. a copy of the Special Resolution passed with 2/3rd majority of the members;
2. a statement showing names, addresses and occupation of the directors and
the chief executive;
3. a list of the members;
4. a statement indicating that the Inter-State Cooperative Society is engaged in
any one or more of the objects specified in Section 581-B;
5. a declaration by two or more directors certifying that the particulars given
as per Para (1) to (4) above are correct.
Upon registration as a producer company, the ROCs who registers the company
shall immediately intimate the Registrar with whom the Inter-State Cooperative
Society was earlier registered, for appropriate deletion of the society from its register.


The Inter-State Co-operative Society shall, upon registration stand transformed
into a Producer Company, and shall be governed by the provisions of Part IX-A of the
Companies Act, 1956.
8. VESTING OF UNDERTAKING IN PRODUCER COMPANY
Section 581L provides that all properties, assets, movable or immovable, and all
rights, debts, liabilities, interests, privileges and obligations of the Inter-State Co-
operative Society shall vest in the Producer Company with effect from the
transformation/registration date.
Similarly all sums of money due to Inter-State Co-operative Society immediately
before the transformation date, shall be deemed to be the dues due to the Producer
Company. Every organisation managed by the erstwhile co-operative society, shall
henceforth, be managed by the so incorporated Producer Company.
Every organisation getting financial, managerial or technical assistance from the
Inter-State Co-operative Society before the transformation date, may continue to get
such assistance by the Producer Company.
Any pending suit, arbitration, appeal or other legal proceeding, of whatever
nature, by or against, the Inter-State Co-operative Society on transformation date
may be continued, prosecuted and enforced by or against the Producer Company.
9. CONCESSION, ETC. TO BE DEEMED TO HAVE BEEN GRANTED TO
PRODUCER COMPANY
All fiscal and other concessions, licences, benefits, privileges and exemptions
granted to the Inter-State Co-operative Society in connection with its affairs and
business of the Inter-State Cooperative Society under any law for the time being in
force shall be deemed to have been granted from transformation date to the Producer
Company. [Section 581M]
10. PROVISIONS IN RESPECT OF OFFICERS AND OTHER EMPLOYEES
OF INTER-STATE CO-OPERATIVE SOCIETY
As per Section 581N all directors in the Inter-State Co-operative Society before
its incorporation as Producer Company, shall continue to be in office for a period of
one year from the date of transformation.
Every other officer or employee of such a society (other than a director, chairman
or managing director) shall continue to hold office in the so formed Producer
Company for the same tenure, at the same remuneration, terms and conditions as he
would have held in the Inter-State Co-operative Society.
Any officer or employee of the earlier society opting not to remain in the
employment of the newly formed Producer Company, shall be deemed to have
resigned.
Officers and employees who have been so transferred from their services shall
not be provided any compensation. Similarly no compensation shall be provided to
any director, chairman or managing director of the society on account of premature
termination of their contract with the society.


Retired officers and employees of the co-operative society shall continue to
receive the same benefits, rights or privileges from the Producer Company.
11. NUMBER OF DIRECTORS
Section 581-O provides that, every Producer Company shall have minimum five
and not more than fifteen directors. Provided that in the case of an Inter-State Co-
operative Society as a Producer Company, such company may have more than
fifteen directors for a period of one year from the date of its incorporation as a
Producer Company.
12. APPOINTMENT OF DIRECTORS
The subscribers of the Memorandum and Articles may designate or nominate
therein, the Board of directors consisting of not less than five, who shall govern the
affairs of Producer Company until directors are elected in accordance with the
provisions of Section 581P(2). However, such designation shall remain effective for a
period of 90 days only.
The election of directors shall be conducted within a period of ninety days of
registration of Producer Company. However, in the case of an Inter-State Co-
operative Society, which has been registered as a Producer Company, election of
directors should be conducted within a period of three hundred and sixty-five days.
A director shall hold office as such for not less than one year but not exceeding
five years and every director who retires shall be eligible for re-appointment. The
tenure of such directors shall not exceed such period as may be specified in the
Articles.
13. VACATION OF OFFICE BY DIRECTORS
The office of director of a Producer Company shall become vacant under the
following circumstances as have been provided in Section 581Q of the Act viz.:
(a) if he is convicted by a court of any offence involving moral turpitude and
sentenced in respect thereto with imprisonment for not less than six months;
(b) if the Producer Company, in which he is a director, has made a default in
repayment of any advances or loans taken from any company or institution
or any other person and such default continues for ninety days;
(c) if he has made a default in repayment of any advances or loans taken from
the Producer Company in which he is a director;
(d) if the Producer Company, in which he is a director:
(i)has not filed the annual accounts and annual return for any continuous three
financial years commencing on or after the 1
st
day of April, 2002; or
(ii)has failed to, repay its deposit or withheld price or patronage bonus or interest
thereon on due date, or pay dividend and such failure continues for one
year or more;
(e) if default is made in holding election for the office of director, in the Producer
company in which he is a director, in accordance with the provisions of the
Companies Act and its Articles;


(f) if the annual general meeting or extraordinary general meeting of the
Producer Company, in which he is a director, is not called in accordance
with the provisions of the Act except due to natural calamity or such other
reasons.
The above provisions of vacation of the office of a director, shall also, apply to
the director of that Producer Institution, which is a member of such Producer
Company.
14. POWERS AND FUNCTIONS OF BOARD
The Board of directors of a Producer Company shall exercise all such powers
and do all such acts and things, as a Producer Company is authorized so to do.
[Section 581R(1)]
However, in terms of the provisions of Section 581R(2), the directors may
exercise the following powers without prejudice to the generality of the foregoing
powers:
(a) determination of the dividend payable;
(b) determination of the quantum of withheld price and recommend patronage to
be approved at general meeting;
(c) admission of new Members;
(d) pursue and formulate the organisational policy, objectives, establish specific
long-term and annual objectives, and approve corporate strategies and
financial plans;
(e) appointment of a Chief Executive and such other officers of the Producer
Company, as may be specified in the Articles;
(f) exercise superintendence, direction and control over Chief Executive and
other officers appointed by it;
(g) cause proper books of account to be maintained; prepare annual accounts
to be placed before the annual general meeting with the auditors report and
the replies on qualifications, if any, made by the auditors;
(h) acquisition or disposal of property of the Producer Company in its ordinary
course of business;
(i) investment of the funds of the Producer Company in the ordinary course of
its business;
(j) sanction any loan or advance, in connection with the business activities of
the Producer Company to any Member, not being a director or his relative;
(k) take such other measures or do such other acts as may be required in the
discharge of its functions or exercise of its powers.
All the above powers can be exercised only by means of a resolution passed by
the Board at its meeting on behalf of the Producer Company.
15. MATTERS TO BE TRANSACTED AT THE GENERAL MEETING
Section 581S states that the following powers shall be exercised by the Board of
directors on behalf of the company only by means of passing of resolutions at the


annual general meeting of the company:
(a) approval of budget and adoption of annual accounts;
(b) approval of patronage bonus;
(c) issue of bonus shares;
(d) declaration of limited return and decision on the distribution of patronage;
(e) specify the conditions and limits of loans that may be given by the Board to
any director; and
(f) approval of any transaction of the nature as is to be reserved in the Articles
for approval by the Members.
16. LIABILITY OF DIRECTORS
Section 581T, provides that anything done by the directors, whether by way of
voting on a resolution or approving by any other means, anything, in contravention of
the provisions of this Act or any other law for the time being in force, or its Articles,
shall make them jointly and severally liable towards the Producer Company to make
good the loss or damage suffered by such company.
Where as a result of the above, such director has made any profit, the Producer
Company shall have the right to recover an amount equal to said profits from such
director.
The liability so imposed shall be in addition to and not in derogation of a liability
imposed under this Act or any other law for the time being in force.
17. COMMITTEE OF DIRECTORS
Section 581U states that the Board may constitute such number of committees
as it may deem fit for the purposes of assisting the Board in efficient discharge of its
functions. However, the Board of directors shall not delegate any of its powers or
assign the powers of the Chief Executive, to any committee of directors.
The committee of the Board may, with the approval of the Board, co-opt such
number of persons, as it deems fit, as the members of the committee. Provided that
the Chief Executive appointed under Section 581W or a director of Producer
Committee shall be a member of such committee. [Section 581U(2)]
Every such committee shall function under general superintendence, direction
and control of the Board as may be specified. Further the fees and allowances to be
paid to the members of the committee and the tenure of the committee shall be such
as may be determined by the Board. The minutes of every Committee meeting shall
be placed before the next Board meeting.
18. MEETINGS OF THE BOARD AND QUORUM
As per Section 581V the Board meeting of a Producer Company shall be held at
least once in every three months and at least four such meetings shall be held in
every year. The Chief Executive shall give notice to every director for the time being
in India, and at his usual address in India to every other director at least seven days
prior to the date of meeting. However, a Board meeting may also be called at a
shorter notice after recording reasons thereof in writing.


The quorum for the meeting shall be one-third of the total strength of directors,
subject to a minimum of three.
Unless otherwise provided in the Articles, such sitting fees and allowances may
be paid to the directors attending the meetings, as decided by the members.
19. CHIEF EXECUTIVE AND HIS FUNCTIONS
As per Section 581W, a full time Chief Executive shall be appointed by the Board
by whatever name called who, shall not be a member of the company. He shall be
the ex-officio director, and shall not retire by rotation. The qualifications, experience
and the terms and conditions shall be such as may be determined by the Board. The
chief executive, who shall be entrusted with substantial powers of the management,
shall manage the affairs of the Producer Company but subject to the
superintendence, direction and control of the Board and shall be accountable to the
Board for the performance of the Producer Company.
The various functions that may be discharged by a chief executive may inter alia
include managing the day to day affairs of the company, maintaining proper books of
accounts, furnishing members with periodic information, assisting the Board with
respect to legal and regulatory matters making appointments and discharge of such
other functions as may be delegated by the Board.
20. SECRETARY OF PRODUCER COMPANY
Section 581X of the Act provides that every Producer Company having an
average annual turnover exceeding five crore rupees in each of three financial years
shall appoint a member of the Institute of Company Secretaries of India as a whole-
time Secretary of the company.
If a Producer Company fails to appoint Company Secretary, the company and
every officer of the company who is in default, shall be punishable with fine which
may extend to five hundred rupees for every day during which the default continues.
However, in any proceedings against a person in respect of an offence for failure to
appoint a Company Secretary, it shall be a defence to prove that all reasonable
efforts were taken to comply with the provisions or that the financial position of the
company was such that it was beyond its capacity to appoint a whole time secretary.
21. QUORUM OF THE GENERAL MEETING
Section 581Y of the Act provides that unless Articles of Association require a
larger number, one-fourth of the total membership shall constitute the quorum at a
general meeting.
22. VOTING RIGHTS
Section 581Z states that except as provided in Section 581D(1) (regarding voting
rights of individual members and Producer Institutions), and 581D(3) (regarding
voting rights to active members), every member of the Producer Company shall have
one vote irrespective of the number of shares hold by him. In the case of equality of
votes, the Chairman or the person presiding over the meeting shall have a casting
vote, except in the matter of election of the Chairman.


23. ANNUAL GENERAL MEETINGS [SECTION 581ZA]
Every Producer Company shall hold its first Annual General Meeting (AGM)
within a period of ninety days from the date of its incorporation.
Not more than fifteen months shall elapse between the date of one AGM (the
AGM held after the first AGM) and that of the next AGM. The Registrar may, for any
special reason, permit the extension of time for holding of an AGM (not being the first
AGM) by a period not exceeding three months. Notice in writing indicating date, time
and place of the meeting shall be given at least fourteen days before the meeting and
shall also be accompanied by the following documents which shall be sent to every
member and auditor of the company:
(a) agenda of the meeting;
(b) minutes of the previous annual general meeting or extraordinary general
meeting;
(c) names and qualifications of candidates for election of directors;
(d) audited balance sheet, profit and loss account and Boards report of the
company in respect of specified disclosures and its subsidiaries, if any;
(e) draft resolution for appointment of auditors;
(f) draft resolution for proposed amendment, if any, in memorandum or articles.
The Annual General Meeting shall be held during business hours, on a day not
being a public holiday at the registered office of the company or at any other place
within the city, town or village where the registered office of the company is situated.
Unless the Articles provide for a larger number, the quorum of the general
meeting shall be one-fourth of the total number of members.
Within sixty days from the date of the annual general meeting, the company is
required to file the proceedings of the meeting, the audited balance sheet, the profit
and loss account and the Directors report together with the filing fees with the
Registrar.
On the requisition made in writing and duly signed by not less than one-third of
the members, the Board of directors shall call an EGM in accordance with the
provisions of Section 169 and Section 186 of this Act.
Where a Producer Company is formed by Producer Institutions then such
Institutions shall be represented in the general body through the Chairman or the
Chief Executive thereof who shall be competent to act on its behalf, except in case of
default under Section 581Q(1).
24. SHARE CAPITAL
As per Section 581ZB of the Act, a Producer Companys share capital shall
consist of equity shares only and the shares held by members shall be in proportion
to the patronage of that company.
However, in terms of Section 581ZC, the Producers who are active members
may, if so provided in the articles, have special rights and the Producer Company
may issue appropriate instruments to them in respect of such special rights.


Transferability of shares and attendant rights
A member of the Producer Company may, transfer whole or part of his shares
along with any special rights, to an active member at par value only but after
obtaining the previous approval of the Board under Section 581ZD. Special rights for
this purpose means any rights relating to supply of additional produce by the active
member or any other rights relating to his produce conferred on him by the Board.
Within three months from the date of his becoming a member, such person shall
nominate his nominee, to whom the shares shall vest in the event of his death.
Surrender of shares
If the Board of a Producer Company is satisfied that any member has ceased to
be a primary member, or he has failed to retain his qualifications, necessary to
enable him to remain the member of the Producer Company, then Board may direct
him to surrender his shares to the company together with Special Rights, if any,
attached therewith, at the value determined by the Board. Alternatively, the Board
may direct the issuance of a notice to such member. [Section 581ZD(5)]
25. BOOKS OF ACCOUNT
Every producer company shall keep at its registered office proper books of
account with respect to matters specified under Section 581ZE of the Act. The
balance sheet and profit and loss account of the Producer Company shall be
prepared in accordance with Section 211.
The matters specified under Section 581ZD are as under:
1. Sums of money received and expended.
2. Sales and Purchase of goods.
3. Instruments of liability executed on behalf of the company.
4. Assets and liabilities.
5. Utilisation of materials or labour or other items of cost.
26. INTERNAL AUDIT
As per Section 581ZF of the Act, every Producer Company shall have internal
audit of its accounts as may be specified in its Articles, by a chartered accountant.
27. DONATIONS OR SUBSCRIPTION BY PRODUCER COMPANY
Section 581ZH provides that a Producer Company, by passing a special
resolution, may make donation for promoting social and economic welfare and mutual
assistance principles in a financial year to the extent of three percent of the net profit
of the company in the preceding financial year. However, a Producer Company is
strictly prohibited from making donation for political purposes.
28. GENERAL AND OTHER RESERVES
In addition to other reserves, the Producer Company shall maintain general
reserve in every financial year as stipulated by Section 581ZI.


The Department of Company Affairs has issued Producer Companies (General
Reserve) Rules, 2003 vide F.No. 1/1/2003-CL.V dated 7.8.2003, which shall be
applicable to the companies formed and registered under Section 581C of the
Companies Act, 1956.
These Rules have defined a co-operative society to mean a society registered
or deemed to be registered under any law relating to co-operative societies for the
time being in force in any State.
A Producer Company shall make investments from and out of its general
reserves in the following manner, maintained by it in terms of the provisions of
Section 581ZI of the Act:
(a) in approved securities, fixed deposits, units and bonds issued by the Central
or State Governments or Cooperative Societies or scheduled bank, or
(b) in a cooperative bank, State Cooperative Bank, Cooperative land
development bank or Central cooperative bank, or
(c) with any other scheduled bank, or
(d) in any of the securities specified in Section 20 of the Indian Trust Act, 1882, or
(e) in the shares or securities of any other multi-state cooperative society or any
cooperative society, or
(f) in the shares, securities or assets of a public financial institutions specified
under Section 4A of the Companies Act, 1956.
Ministry of Company Affairs has vide Notification No. GSR 146(E) dated
9.03.2006 amended the Procedure Companies (General Reserves) Rules, 2003 to
provide that investments may be made in any one or in combination of the above.
29. ISSUE OF BONUS SHARES
A Producer company may, after
the recommendation of the Board, and
passing of a resolution in General Meeting,
issue bonus shares to its members in proportion to the shares held by them, on
the date of the issuance of such shares, by capitalising the amounts from its general
reserves. [Section 581ZJ].
30. LOAN, ETC., TO MEMBERS [SECTION 581ZK]
The Board may, subject to provisions made in the Articles of the company, provide
financial assistance to the members. However, any loan or advance to any director or
his relative shall be granted only after the approval of members by a resolution.
31. INVESTMENT IN OTHER COMPANIES, FORMATION OF SUBSIDIARIES ETC.
[SECTION 581ZL]
The Producer Company may invest its general reserves in approved securities,
fixed deposit, units, bonds issued by the government or a cooperative or scheduled
bank or in such other mode as may be prescribed. It may, for the promotion of its


objectives also acquire shares of other Producer Companies. However, special
resolution is required to be passed for acquisition of shares of any other Producer
Company or entering into agreement for the formation of subsidiaries or joint venture.
Investment in shares of any other company other than Producer Company
cannot exceed thirty per cent of the aggregate of its paid-up capital and free
reserves, except where a special resolution has been passed and the prior approval
of the Central Government has been obtained. However, such investments should be
in consistence with the objects of the Producer Company. For disposal of any
investments, special resolution shall be passed. A register containing prescribed
particulars of all investment shall be kept in the registered office and shall be open to
the members of the company for inspection and taking extracts therefrom.
32. AMALGAMATION, MERGER OR DIVISION, ETC., TO FORM NEW
PRODUCER COMPANIES
Section 581ZN provides comprehensive provisions for the schemes of
amalgamation, merger or division etc. of Producer Company.
A Producer Company may, by a resolution passed at its general meeting:
(a) transfer its assets and liabilities, wholly or partly, to any other Producer
Company, for any of the objectives specified in Section 581B if other
Producer Company so agrees by passing a resolution at its general meeting;
(b) divide itself into two or more Producer Companies;
Also, two or more Producer Companies may, by a resolution passed at general
or special meetings of its members, decide to:
(a) amalgamate and form a new Producer Company; or
(b) merge one Producer Company with another Producer Company.
The resolutions referred to above shall be passed by not less than two-thirds of
its members present. However, prior to such resolution a copy of proposed resolution
shall be forwarded to all the members and creditors for their consent.
Section 581ZN(5) makes provisions to satisfy the claims of dissenting members
and creditors of such amalgamating Producer Companies.
33. DISPUTES
As per Section 581ZO, any dispute relating to the formation, management or
business of a Producer Company shall be settled by conciliation or by arbitration.
34. STRIKING OFF NAME OF PRODUCER COMPANY
Section 581ZP states that the Registrar can after making an inquiry strike off the
name of a company where the company:
(i) has failed to commence its business within one year of its registration;
(ii) ceases to transact business;
(iii) is no longer carrying on its objectives;
(iv) is not following the mutual assistance principles.


The Registrar shall, before passing the order issue a show cause notice to the
company with a copy to the directors and give a reasonable opportunity of being
heard. Any member of the Producer Company aggrieved by an order may appeal to
CLB
1
/NCLT
2
within sixty days of passing an order.
35. RE-CONVERSION OF PRODUCER COMPANY TO INTER-STATE CO-
OPERATIVE SOCIETY
Any Producer Company may make an application, after a resolution has been
passed in the general meeting by not less than two-third of its members present and
voting or on request by its creditors representing three-fourth of its value of creditors,
to the High Court for its re-conversion to Inter-State Co-operative Society, and follow
the procedure as laid down in Section 581ZS of the Act.
36. EXPECTED BENEFITS TO PRODUCER COMPANIES
The effectiveness and efficacy of the institution of Producer Companies shall be
seen in the years to come. However, the following advantages are anticipated:
the formation and registration of producer companies which include the
mutual assistance and co-operative principles within the more liberal
regulatory framework afforded by the company law with suitable
adaptations.
an opportunity to co-operative societies to voluntarily transform themselves
into the new form of producer companies duly registered under the
provisions of the Companies Act, 1956.
as members equity of Producer Companies may not be publicly traded, but
may only be transferred with the approval of the Board of Directors of the
producer companies. The Producer Companies would not be susceptible to
takeover bids by multinational or other companies.
37. DIFFERENCE BETWEEN A PRODUCER COMPANY AND A PRIVATE
COMPANY
Conceptually, various differences, between the two are as under:
A. Incorporation
Points of difference Producer Company Private Company
1. No. of
members
Any ten or more individual
producers or two or more
producer institutions or their
combination can form a
producer company.
Any two or more individuals
or companies can form a
private limited company.
2. Objects A producer company can be
established for objects
specified in Section 581B of
A private limited company
can be set up for any lawful
object.

1 Existing.
2 Proposed.


the Act.
3. Liability The liability of members is
limited by the Memorandum
and Articles of Association,
to the amount if any unpaid
on shares, held by them.
The liability of members may
be limited or unlimited,
depending upon the type of
company, i.e., company
limited by shares or
guarantee or unlimited
company.

4. Name The word producer company
limited would form part of its
name.
The word private limited
would form part of its name.
5. Time limit for
issue of
certificate
The Registrar of Companies,
if satisfied that all the
requirements are complied
with, will issue a certificate of
incorporation within 30 days.
No time limit has been
prescribed as such.
However, it can be registered
in less than 30 days.
B. Membership and voting rights
Points of difference Producer Company Private Company
1. Voting rights (a) In case of individual
members, voting right
shall be based on
single vote for every
member irrespective of
his/their shareholding.
(b) In case of producer
institution, voting rights
shall be determined on
the basis of
participation in
business.
Voting rights of members are
governed by Articles of
Association of the company.
(c) Where individuals of
producer institution both
are members. Voting
right shall be single
vote for all members.

2. Cessation of
membership
A person ceases to be a
member of producer
company, if:
he ceases to be a
primary producer;
he has any business
interest which is in
conflict with the business
No such provisions are made
for private companies.


Points of difference Producer Company Private Company
of producer company.
C. Difference as regards Memorandum and Articles of Association and its
alteration
Points of difference Producer Company Private Company
1. Objects clause Objects clause need not be
segregated into main objects,
objects incidental or ancillary
to the attainment of main
objects and other objects.
Objects clause needs to be
segregated in the main
objects, objects incidental or
ancillary to the attainment of
main object and other
objects.
2. States to which
object extends
If the objects of producer
company are not confined to
one State, the States to
which the objects extend
need to be mentioned.
No such mention is required
for private companies.
3. Restrictions in
articles
The Articles of Association of
Producer company need not
have articles restricting the
rights of members to transfer
shares, limiting the number
of members, prohibiting any
invitation to public for
subscription of shares or
debentures and prohibiting of
deposit from persons other
than their directors, members
or their relatives.
The Articles of Association
should contain the
restrictions as specified in
Section 3(1)(iii) of the Act,
relating to members,
transfers, accepting
subscription from public for
shares or debentures
accepting deposits from
person other than directors,
members or their relatives.
4. Mandatory
provisions
An Articles of Association of
producer company should
contain the provisions as are
specified in Section 581G.
A private company may
adopt its own Articles of
Association or it may adopt
Table A, if it is limited by
shares. Other companies
may adopt Table C, D or E of
Schedule 1 of the
Companies Act, 1956.
5. Alteration of
Memorandum
of Association
The Memorandum of
Association of a Producer
Company can be amended
by passing special resolution
in general meeting. After
carrying out such
amendment a certified true
The Memorandum of
Association of a private
company can be amended
by special resolution in its
general meeting and in some
cases with the approval of
Registrar or Company Law


Points of difference Producer Company Private Company
copy of resolution, duly
certified by two directors
shall be filed with the
Registrar within a period of
30 days. However, no form is
prescribed for this.
Board, as the case may be.
Special resolution or order of
Central Government as the
case may be, should be filled
in prescribed form with the
Registrar.
6. Alteration in
Articles of
Association of
Company
The Articles of Association
may be amended only if such
amendment is proposed by
not less than two thirds of the
elected directors or by not
less than one third of the
members of the producer
company and adopted in a
special resolution by the
members of the company.

A copy of special resolution
duly certified by two directors
shall be filed with the
Registrar within 30 days of
such adoption.
An alteration in the Articles of
Association requires only the
approval of members by
special resolution except in
cases where approval of
Central Government is
required. A certified true copy
of special resolution together
with explanatory statement in
Form 23 is required to be
filed with the Registrar within
30 days of passing of special
resolution.
D. Management of Producer Companies
Points of difference Producer Company Private Company
1. Number of
Directors
Every Producer Company
shall have at least five and
not more than fifteen
directors.
Every Private Limited
Company shall have at least
two and not more than twelve
directors. However, this
maximum limit of twelve has
been proposed to be raised
to fifteen in the Companies
(Amendment) Bill, 2003.
2. First Directors The subscribers to the
Memorandum and Articles of
Association may name the
first directors therein or they
themselves shall govern the
affairs of the company until
the directors are elected in a
general meeting to be held
The subscribers to the
Memorandum and Articles of
Association may name the
first directors therein, who
shall be permanent directors,
unless if the articles provide
for retirement of all directors
at the first Annual General


within 90 days of
incorporation of company.
Meeting or retirement of
directors by rotation.
Points of difference Producer Company Private Company
3. Directors
tenure
Every director shall hold
office for a period of not less
than one year but not
exceeding five years as may
be specified in the article.
No such minimum or
maximum period is specified
for private companies.
4. Number of
Additional or
expert directors
The total number of
additional or expert directors,
should not exceed one-fifth
of the total strength of the
number of directors on the
Board.
No such limit is prescribed
for appointment of additional
or expert directors. However,
the total number of directors
including additional directors
shall not exceed the
maximum strength fixed for
the Board by its Articles.
5. Vacation of
office of
directors
The directors shall vacate the
office on the grounds
specified in Section 581Q of
the Act.
The directors shall vacate the
office on the grounds
specified in Section 283 of
the Act.

E. Powers and functions of Board
Points of difference Producer Company Private Company
Powers of Board The Board of Directors of
producer company shall
exercise all such powers and
do all such things, which the
company is authorised to do
by means of resolution to be
passed either at Board or
General Meetings, as the
case may be.
The Board of Directors of a
Private Company are also
authorised to exercise all
such powers and to do all
such things as the company
is authorised to do by means
of resolution to be passed
either at Board or General
Meeting, as the case may be.
F. Liability of directors
Points of difference Producer Company Private Company


Liability of directors The directors of the producer
company shall be jointly and
severally liable, to make
good the loss or damage
suffered by the producer
company, for doing anything
which is in contravention of
the provisions of the Act or
any other law or articles and
to return the amount of profit
to the company.
No additional liability has
been specifically provided
under the Act for the
directors of private company.
G. Board Meetings and Quorum
Points of difference Producer Company Private Company
1. Length of
Notice
Notice of every Board
meeting shall be given in
writing to every director in
India, not less than seven
days prior to the date of
meeting.
No period of giving notice to
directors is specified.
However, in the Companies
(Amendment) Bill, 2003
amendment in Section 286
was proposed which
specified the length of notice
for Board meeting as 7 days.
2. Quorum Quorum for the Board
meeting shall be one fourth
of the total strength of
directors subject to a
minimum of three directors.
Quorum for the Board
meeting shall be one third of
the total strength of directors
subject to a minimum of two
directors.
H. Officer
Points of difference Producer Company Private Company
1. Appointment of
Chief Executive
Officer
Every producer company
shall have to appoint a Chief
Executive, who shall be ex-
officio director of the
company not liable to retire
by rotation.
A private company is not
required to appoint a
managing/whole time director
unless it is a subsidiary of
public company.
2. Appointment of
whole-time
secretary
Every producer company
having an annual average
turnover exceeding five crore
rupees in three consecutive
financial years has to appoint
a whole-time secretary.
Appointment of whole-time
secretary is mandatory for
companies having paid-up
share capital of Rs. two
crores or more.
I. General meetings
Points of difference Producer Company Private Company
1. First Annual
General
The first annual general
meeting of the company
First Annual General Meeting
should be held within


Points of difference Producer Company Private Company
Meeting should be held within a
period of ninety days from
the date of incorporation of
company.
eighteen months from the
date of incorporation of
company.
2. Length of
notice
A general meeting of
producer company shall be
called by giving notice of not
less fourteen days in writing.
Unless the articles otherwise
provide for a general meeting
of private company can be
called by giving, not less than
twenty one days notice in
writing.

3. Quorum for
general
meeting
Unless the articles otherwise
provide for, one fourth of the
total number of members
shall be the quorum for
general meeting.
Unless the articles otherwise
provide for, two members
personally present shall form
the quorum for general
meeting.
4. Documents
accompanying
notice
Notice calling Annual
General Meeting of the
company shall be
accompanied with following
documents: Agenda, minutes
of previous general meeting
audited annual accounts,
names of candidates for
election as directors, text of
draft resolution for
appointment of auditors and
for alteration in Memorandum
or Articles of Association of
the company.
Notice calling annual general
meeting of the company shall
detail the names of directors
and auditors to the appointed
and shall be accompanied by
the audited accounts.
5. Time limit for
filing annual
accounts and
annual return
Annual accounts together
with annual return of the
company should be filed
within sixty days from the
date of annual general
meeting of the producer
company.
Annual accounts should be
filed within thirty days and
annual return should be filed
within sixty days from the
date of annual general
meeting of the company.
6. Requisitioned
extraordinary
general
meeting
The Board of Directors shall,
on the requisition of one third
of the members entitled to
vote in any general meeting,
proceed to call an
extraordinary general
meeting.
The Board of Directors shall
on the requisition of
shareholders holding not less
than one tenth of the paid up
share capital or voting right
therein shall call an
extraordinary general
meeting.


J. Share capital and members rights
Points of difference Producer Company Private Company
1. Shares The share capital of producer
company is divided into
equity shares only.
The share capital of private
company may be divided into
equity or preference
share(s).
2. Proportion of
shares
The members of producer
company will hold the shares
in proportion to the
patronage of that company.
For private companies there
is no such provision.
Points of difference Producer Company Private Company
3. Special user
rights
Active members of producer
companies are given special
rights and the producer
company may give
instruments in respect of
such special rights.
For private companies, there
is no such provision.
4. Transferability
of shares
The shares of producer
companies are not freely
transferable.
Unless otherwise provided in
the Articles of Association, the
shares of private company are
freely transferable.
5. Nomination Nomination shall be
mandatorily done within three
months of becoming member
in producer company.
Nomination is optional in
case of private company.
K. Finance Accounts and audit
Points of difference Producer Company Private Company
1. Books of
accounts
Every producer company shall
be required to keep books of
accounts as specified in
Section 581ZE(1) of the Act.
A private company shall be
required to keep books of
accounts as specified in
Section 209(1).
2. Internal audit Every producer company
shall get internal audit of
accounts done by Chartered
Accountant.
Internal audit of accounts is
not mandatory for private
companies.
3. Auditors report In addition to the matters
specified under Section 227
of the Act the auditor of the
producer company should
also report on additional
matters specified under
Section 581ZG of the Act.
Auditors of private company
have to report on the matters
specified under Section 227
of the Act.
4. Issue of bonus
shares
A producer company can
issue bonus shares out of
A private company can issue
bonus shares out of capital


general reserves only. redemption reserve, share
premium account or general
reserve.
L. Loans and Investment
Points of difference Producer Company Private Company
1. Loans to
members
A producer company may, in
accordance with the Articles
of Association, grant financial
assistance or loans to its
members.
A private company can freely
give loans to its members,
however, in the case of
private companies which are
subsidiaries of public
company, approval of Central
Government is required for
giving any loans to its
members.
2. Investment A producer company can
invest in the manner and to
the extent as specified in
Section 581ZL of the Act.
A private company is free to
invest without any limits in
any form and manner.

LESSON ROUND-UP
The Companies (Amendment) Act has inserted Part IX-A to the Companies Act,
1956 and introduced the concept of Producer Companies.
A producer shall mean any person engaged in any activity connected with or
relatable to any primary produce. The amendment also seeks to provide a
comprehensive meaning to primary produce which shall encompass produce of
farmers, arising from agriculture (including animal husbandry, horticulture, etc.)
produce of persons engaged in handloom, handicraft, any product resulting from
any of the above activities or from an ancillary activity and any activity which is
intended to increase the production or quality of anything referred above.
Objectives for which Producer Companies may be formed include inter alia,
production, marketing, export of primary produce of members, processing,
packaging of produce of its members; manufacture, sale of machinery etc. mainly
to its members, generation and distribution of power, insurance of
producers/primary produce, rendering technical/consultancy services, promoting
mutual assistance, welfare measures and any other activity for the benefit of
members.
The Act provides that, any ten or more individuals, each of them being a producer
or two or more producer institutions or a combination of ten or more individuals
and producer institutions, desirous of forming a producer company may form an
incorporated company, as such having its objects specified under this Act after
complying with the requirements and the provisions of the Act in respect of
registration.
Unless the membership of the Producer Company consists of a Producer
institution only, every member shall have a single vote irrespective of the number
of shares held. Further, every such member shall be entitled to receive a limited


return and may be allotted bonus shares.
The Memorandum of Association and Articles of Association of the Producer
Company, containing the disclosures as required under the Act and duly signed
by the subscribers are required to be presented to the Registrar of the state
where the Companys registered office is proposed to be set up.
Any Inter-State Cooperative Society willing to register itself as a Producer
Company shall submit an application to ROC alongwith enclosures and
documents as required under the Act.
The Act gives provisions regarding concessions deemed to have been granted to
Producer Company and in respect of officers and other employees.
The subscribers of the Memorandum and Articles may designate or nominate
therein, the Board of directors who shall govern the affairs of Producer Company
until directors are elected in accordance with the provisions of the Act. Minimum
and maximum number of directors has been given under the Act as also their
powers and the circumstances under which the office of director of a Producer
Company shall become vacant. Provisions for meeting of the board and quorum
are also given therein.
The Board may constitute such number of committees s it may deem fit for the
purpose of assisting the Board in efficient discharge of its functions.
A full time Chief Executive shall be appointed by the Board by whatever name
called who shall not be a member of the company.
Every Producer Company having an average annual turnover as prescribed shall
appoint a whole-time Secretary of the company.
Provisions for conducting an Annual General Meeting along with notice contents
have also been provided under the Companies Act.
A Producer Companys share capital shall consist of equity shares only and the
shares held by members shall be in proportion to the patronage of that company.
A member of the Producer Company may, transfer whole or part of his shares
along with any special rights, to an active member at par value only but after
obtaining the previous approval of the Board. The board may direct a member to
surrender his shares to the company if he ceases to be a primary member or fails
to retain his qualifications essential for being a member.
Every Producer Company shall keep proper books of account with respect to
matters specified in the Act and shall have internal audit of its account as may be
specified in its Articles, by a chartered accountant.
In addition to other reserves, the Producer Company shall maintain general
reserve in every financial year as stipulated by the Companies Act. A Producer
Company may issue bonus shares to its members by capitalizing the amount
from its general reserves. It may also invest in other companies or in formation of
subsidies in accordance with the Act.
The Board may, subject to provisions made in the Articles of the company,
provide financial assistance to the members.
The Act provides comprehensive provisions for the schemes of amalgamation,
merger or division etc. of Producer Company.
Any dispute relating to the formation, management or business of a Producer
Company shall be settled by conciliation or by arbitration. Further, the Registrar


can after making an inquiry strike off the name of a company under conditions
given in the Act.
Any Producer Company may make an application for its re-conversion to Inter-
State Co-operative Society, following the procedure laid down in the Act.
A producer Company and a private company can be distinguished on the basis of
incorporation, membership, Memorandum and Articles of Association,
management, powers and functions of board, liability of directors, board meetings
and quorum, officers, general meetings, share capital, accounts and audit, loans
and investments etc.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation)
1. The objectives of Producer Company must satisfy the requirements laid
down in Section 581B of the Companies Act, 1956. Discuss.
2. Discuss the membership and voting rights of member of Producer Company.
3. State the contents of Memorandum of Association of Producer Company.
4. What powers can be exercised by directors of Producer Company?
5. State the matters to be transacted at the general meeting of the Producer
Company.















STUDY XXXI
LIMITED LIABILITY PARTNERSHIPS

LEARNING OBJECTIVES
Limited Liability Partnership is a new form of legal entity which is viewed as an
alternative corporate business vehicle which provides the benefits of limited liability as
well as allows its partners to be flexible in organising the internal structure.
At the end of this lesson you should be able to understand:
The features of Limited Liability Partnerships
The important terms as per the Limited Liability Partnership Act, 2008
The important requirements for formation of a Limited Liability Partnership
Members and Designated Members
Limited Liability Partnership (LLP) Agreement.

1. INTRODUCTION
Limited Liability Partnership (LLP) is an incorporated partnership formed and
registered under the Limited Liability Partnership Act 2008 with limited liability and
perpetual succession. The Act came into force, for most part, on 31st March 2009
followed by its Rules on 1st April 2009 and the registration of the first LLP on 2nd
April 2009.
The arrival of the much-desired and long-awaited LLP on the Indian business and
professional scene marks yet another significant step in our decade-old journey
towards globalization of the Indian Economy. It also marks the culmination of the
efforts of several expert committees which recommended its introduction starting with
the Bhatt Committee of 1972 through Naik Committee of 1992, Abid Hussain
Committee of 1997, Gupta Committee of 2001, Naresh Chandra Committee of 2003
and the JJ Irani Committee of 2005.
This new form of legal entity is viewed as an alternative corporate business
vehicle that provides the benefits of limited liability but allows its partners the flexibility
of organizing their internal structure as a partnership based on a mutually arrived
agreement.
The LLP form would enable entrepreneurs, professionals and enterprises
providing services of any kind or engaged in scientific and technical disciplines, to
form commercially efficient vehicles suited to their requirements. Owing to flexibility in
its structure and operation, the LLP would also be a suitable vehicle for small and
medium enterprises and for investment by venture capitalists.
2. SALIENT FEATURES
The salient features of the Limited Liability Partnership are as follows:
(i) The LLP is a body corporate and a legal entity separate from its partners.
Any two or more persons, associated for carrying on a lawful business with a
1167


view to profit, may by subscribing their names to an incorporation document
and filing the same with the Registrar, form a Limited Liability Partnership. The
LLP has a perpetual succession;
(ii) The mutual rights and duties of partners of an LLP inter se and those of the
LLP and its partners shall be governed by an agreement between partners
or between the LLP and the partners subject to the provisions of the
proposed legislation. There would be flexibility to devise the agreement as
per their choice. In the absence of any such agreement, the mutual rights
and duties shall be governed by the provisions of the proposed legislation;
(iii) A LLP is a separate legal entity, liable to the full extent of its assets, with the
liability of the partners being limited to their agreed contribution in the LLP
which may be tangible or intangible in nature or both tangible and intangible
in nature. No partner would be liable on account of the independent or un-
authorized acts of other partners or their misconduct;
(iv) Every LLP shall have at least two partners and shall also have at least two
individuals as Designated Partners, of whom at least one shall be resident in
India.
(v) A LLP shall maintain annual accounts reflecting true and fair view of its state of
affairs. A statement of accounts and solvency shall be filed by every LLP with
the Registrar every year. The accounts of LLPs shall also be audited,
subject to any class of LLPs being exempted from this requirement by the
Central Government;
(vi) The Central Government has power to investigate the affairs of an LLP, if
required, by appointment of competent inspector for the purpose;
(vii) The Indian Partnership Act, 1932 shall not be applicable to LLPs. A
partnership firm, a private company and an unlisted public company may
convert themselves to LLP in accordance with provisions of the proposed
legislation;
(viii) The Central Government has made rules for carrying out the provisions of
the LLP Act.
Distinction between LLP and Partnership
The principle points of difference between a company and a partnership are as
follows:
1. LLP is a separate legal entity and therefore, can be sued or it can sue others
without involving the partners. A partnership firm is not distinct from the
several persons who compose it.
2. The partners of a LLP would have limited liability i.e. they would not be liable
beyond the money contributed by them. Whereas, partners of a firm would
have unlimited liability.
3. The retirement or death of a partner would not dissolve the LLP. On the
other hand, the death or retirement of a partner would dissolve the
partnership firm.


4. In a partnership, the property of the firm is the property of the individuals
comprising it. In a LLP, it belongs to the LLP and not to the individuals
comprising it.
5. Whereas a partnership can be formed either orally or by a deed of
agreement whether registered or not, LLP is formed by an incorporation
document and an LLP agreement, thus, giving it a legality.
6. Whereas a registered or unregistered partnership cannot have more than 20
partners, LLP can have more than that number since no upper limit has
been laid down by the Act.
7. A LLP has perpetual succession, i.e. the death or insolvency of a
shareholder or all of them does not affect the life of the LLP, whereas the
death or insolvency of a partner dissolves the firm, unless otherwise
provided.
8. Whereas an individual partner would not be able to conduct business
transaction with the partnership firm of which he is a partner, a partner of
LLP in his separate capacity as a legal person can do business with the LLP
since the LLP is a separate legal entity by itself.
Distinction between LLP and Company
1. In case of LLP, the need for classifying the object clauses into main,
ancillary and other objects as well as framing the Share Capital clause in the
Memorandum for incorporating a Company is reduced into a simple
procedure of filling of the prescribed information in the Incorporation
document and statement in Form No. 2.
2. In case of LLP, a limited liability partnership agreement (LLPA) is prepared
which is a variant of the articles of association of a company.
3. Whereas the memorandum of a Company is required to name the State in
which it is required to be incorporated, there is no such obligation in the case
of LLP. Consequently, the detail procedure involved in changing the
registered office from the state of Incorporation to another state is not
required to be followed in case of a LLP.
4. In the LLP Act, there is no such stipulation for meeting of partners either
periodically or compulsory at the year end as stipulated for directors and
shareholders meetings in the Companies Act.
5. There is no separation between management of the company and the
ownership as is observed in a company since all the partners, unlike all the
directors, can take part in the day to day affairs of the LLP.
6. In case of a company no individual director can conduct the business of the
company but in an LLP, each partner has the authority to do so unless
expressly prohibited by the partnership terms.
7. Whereas, the Companies Act contemplates regulating the remuneration
payable to directors, there are no corresponding provisions in the LLP Act
for remuneration payable to designated partners. The same could be as per
the LLP Agreement.


8. In the case of LLP, unlike in the case of companies, there are no restrictions
on the borrowing powers.
9. The LLP can choose to keep the accounts on cash basis whereas under the
Companies Act, accrual method is compulsory.
10. Audit of a company is compulsory. Conversely, the audit of LLP is not
compulsory if the capital contributed does not exceed Rs. 25 lakh or if the
turnover does not exceed Rs. 40 lakhs.
11. Cost audit as contemplated in section 233B of the Companies Act, 1956 has
not been prescribed for LLPs.
12. The appointment of Company Secretaries as is required under section 383A
of the Companies Act, 1956 is not provided in the LLP Act. However, the
annual return of a LLP in form 11 is to be certified as true and correct by a
Company Secretary in practice.
Contribution of Capital
The contribution of a partner to LLP may consist of tangible, movable or
immovable or intangible property or other benefit to the LLP including money,
promissory notes, other agreements to contribute cash or property and contracts for
services performed or to be performed as enumerated in section 32 of the Act. While
this imparts great deal of flexibility in the matter of capital contribution, there is need
to evaluate non-cash contribution to the capital of LLP. The Rules in this regard
prescribe valuation of non-cash contribution to LLP by a Chartered Accountant or
Cost Accountant or by a panel of Valuers maintained by the Government.
Statement of Solvency and Accounts
Every LLP is required to prepare and file with the Registrar, the Statement of
Account and solvency within six months from the close of the financial year in such
form as may be prescribed. These documents relate to the financial position of LLP
as on the last day of the financial year and they are available for public inspection.
3. LIMITED LIABILITY
Section 27 of the LLP Act, 2008 provides that an obligation of the limited
liability partnership whether arising in contract or otherwise, is solely the obligation
of the limited liability partnership. A partner is not personally liable, directly or
indirectly for an obligation of the LLP solely by reason of being a partner of the LLP.
A partner shall be personally liable for his own wrongful act or omission, but he
shall not be personally liable for the wrongful act or omission of any other partner of
the limited liability partnership.
Further, as per Section 27(1) of the Act, a limited liability partnership is not
bound by anything done by a partner in dealing with a person if
(a) the partner in fact has no authority to act for the limited liability partnership in
doing a particular act; and
(b) the person knows that he has no authority or does not now or believe him to
be a partner of the limited liability partnership.


The obligation of a partner to contribute money or other property or other
benefit or to perform services for a limited liability partnership shall be as per the
limited liability partnership agreement.
In the event of an act carried out by a limited liability partnership, or any of its
partners, with intent to defraud creditors of the limited liability partnership or any other
person, or for any fraudulent purpose, the liability of the limited liability partnership and
partners who acted with intent to defraud creditors or for any fraudulent purpose shall
be unlimited for all or any of the debts or other liabilities of the limited liability
partnership. Provided that in case any such act is carried out by a partner, the limited
liability partnership is liable to the same extent as the partner unless it is established
by the LLP that such act was without the knowledge or the authority of the LLP.
[Section 30(1)]
Where any business is carried on with such intent or for such purpose as
mentioned in Section 30(1), every person who was knowingly a party to the carrying
on of the business in the manner aforesaid shall be punishable with imprisonment for
a term which may extend to two years and with fine which shall not be less than fifty
thousand rupees but which may extend to five lakh rupees.
4. MEMBERS AND DESIGNATED MEMBERS
There are no shareholders in a Limited Liability Partnership. Instead there are
partners.
As already discussed, any individual or body corporate may be a partner in a
limited liability partnership.
Section 7 provides that every limited liability partnership shall have at least two
designated partners who are individuals and at least one of them shall be a resident in
India. Provided that in case of a limited liability partnership in which all the partners are
body corporates, at least two partners shall nominate their respective individuals who
are to act as "designated partners" and one of the nominees shall be a resident of
India.
Every designated partner of a limited liability partnership shall obtain a Designated
Partner Identification Number (PIN) from the Central Government and the provisions
of Sections 266A to 266G (both inclusive) of the Companies Act, 1956 shall apply
mutatis mutandis for the said purpose.
According to Section 8, a designated partner shall be
(a) answerable for all acts, matters and things as are required to be done by the
limited liability partnership in respect of compliance of the provisions of this
Act including filing of any document, return, statement and the like report
pursuant to the provisions of this Act and as may be specified in the limited
liability partnership agreement; and
(b) liable to all penalties imposed on the limited liability partnership for any
contravention of those provisions.
Rule 9 of the Limited Liability Partnership Rules, 2009 provides that a person
cannot be appointed as a designated partner if he
(a) Has at any time within the preceding five years been adjudged insolvent; or


(b) Suspends, or has at any time within the preceding five years suspended
payment to his creditors and has not at any time within the preceding five
years made, a composition with them;
(c) has been convicted by a Court for any offence involving moral turpitude and
sentenced in respect thereof to imprisonment for not less than six months; or
(d) has been convicted by a Court for an offence involving section 30 of the Act.
(Section 30 deals with punishment for carrying out acts by the LLP or its partners
with intent to defraud its creditors or for a fraudulent purpose).
5. ROLES AND RESPONSIBILITIES OF DESIGNATED PARTNERS
Amongst the designated partners, atleast one must be an Indian Resident which
means that a non-resident partner could also be appointed as Designated Partner.
The various obligations laid down in the LLP Act has to be fulfilled solely by the
Designated Partners by filing the required information through the relevant forms
prescribed by the Limited Partnership Rules, 2009.
The designated partner would be responsible for filing the following information in
the prescribed Forms mentioned against each
(i) Incorporation document and statement in Form No. 2 (under Rule 2).
(ii) Information with regard to Limited Partnership Agreement and changes, if
any, made therein in Form 3 (under Rule 21).
(iii) Notice of Appointment of Partners/designated partner and changes among
them, intimation of DPIN by LLP to Registrar and consent of Partner to
become partner/Designated Partner in Form No. 4 [under Rules 8, 10(8),
22(2) and 22(3)].
(iv) Notice of change of name of LLP in Form No. 5 [under Rule 20(2)].
(v) Application for allotment of Designated Partner Identification Number in
Form 7 (under Rule 10).
(vi) Statement of Account & Solvency in Form 8 (under Rule 24).
(vii) Consent to act as Designated Partners in Form No. 9 [under Rule 7 and
10(8)].
(viii) Intimation of changes in particulars of Designated Partners in Form No. 10
[under Rule 10(9)].
(ix) Annual Return of Limited Liability Partnership in Form 11 [under Rule 25(1)].
(x) For intimating other address for service of documents in Form 12 [under
rule 16(3)].
(xi) Application to the Registrar for striking off name [under Rule 37(1)(b)].
(xii) Application for compounding of an office under the Act in Form 31 [under
Rule 41(1)].


The Designated Partner, unless otherwise expressly provided in the Act, shall
be
(1) Responsible for the doing of all acts, matters and things as are required to
be done by the LLP in respect of compliance of the provisions of the Act
including filing of any document, return, statement and the like report
pursuant to the provisions of the Act and as may be specified in the Limited
liability partnership agreement,
(2) liable to all penalties imposed on the LLP for the contravention of the
provisions of the Act and in the LLP agreement.
In conformity with the duty designated above, a designated partner of an LLP is
also required to sign the following :
Annual Accounts of the LLP (section 34)
Annual Return of the LLP (section 35)
Form 3 Information with regard to Limited Partnership Agreement and
changes, if any, made therein.
Form 4 Notice of Appointment of Partners/designated partner and changes
among them, intimation of DPIN by the LLP to the Registrar and consent of
partner to become a partner/designated partner.
Form 5 Notice of change of name.
Form 8 Statement of Account and Solvency.
Form 11 Annual Return of LLP.
Form 12 Intimating other address for service of documents.
Form 18 Application and statement for conversion of a private limited
company/unlimited public company into LLP.
Moreover, it would be seen from what has been stated above that as per the Act
the designated partner would be liable to all penalties imposed on the LLP for the
contravention of the provisions of the Act and as such the designated partner would
be required to pay all the monetary fines imposed on the LLP. There is no provision
in the Act providing for the reimbursement of such monetary penalties to him by the
LLP. Further in the following instances apart from the LLP, the designated partner
would also be imposed monetary penalties under the Act:-
For non-compliance with the directions of the Central Government for
change of name under Section 17 of the Act,
For non-maintenance of books of accounts, non-filing of accounts, duly
audited where such an audit is mandatory under Section 34 of the Act,
For non-filing of the annual return of the LLP with the Registrar under
Section 35 of the Act.
6. PARTNERS OBLIGATIONS
All partners, not just the designated partners, are agents of the LLP, but not of
other partners. As such, all partners owe the duties of an agent to the LLP. The LLP


shall not be bound by anything done by a partner in dealing with a person if that
partner has no authority to act for LLP in doing a particular act and the person with
whom he is dealing also knows that the partner has no authority for such act and to
provide that an obligation of LLP, whether arising out of contract or otherwise will
solely be the obligation of LLP. It is also provided that liabilities of LLP are to be met
from the property of LLP. Further the LLP shall be liable for a wrongful act or omission
by a partner in the course of the business of the LLP or with its authority. The
obligation of a LLP shall not affect the personal liability of a partner for his own
wrongful act or omission but a partner shall not be personally liable for wrongful act or
omission of any other partner. No partner is personally liable directly or indirectly for
an obligation of LLP solely by reason of his being a partner of the LLP.
7. LLP AGREEMENT
No provision has been made for directors or a board structure on the lines of
Company Law. The LLP agreement determines the mutual rights and duties of the
partners and their rights and duties in relation to limited liability partnership. This LLP
agreement is required to be filed with the Registrar.
In has been provided under Section 23 Save as otherwise provided by this Act,
the mutual rights and duties of the partners of a limited liability partnership, and the
mutual rights and duties of a limited liability partnership and its partners, shall be
governed by the limited liability partnership agreement between the partners, or
between the limited liability partnership and its partners.
Limited liability partnership agreement should be filed with the Registrar within 30
days of incorporation. A person becomes a Partner by virtue of LLP agreement. This
means that the LLP agreement is a must and it serves as a basic document and , to a
certain extent, takes the place of MOA and AOA applicable in the case of a company
registered under the Companies Act, 1956. Any change in the LLP agreement is also
required to be notified to the Registrar of Companies. The importance of the said
document lies in the fact that it is a public document and it is open to public
inspection being on the records of the Registrar.
In the absence of agreement as to any matter, the mutual rights and duties of the
partners and the mutual rights and duties of the limited liability partnership and the
partners shall be determined by the provisions relating to that matter as are set out in
the First Schedule.
8. LLP FOR THE PROFESSIONALS
LLPs are eminently suited to the professionals like Company Secretaries and
others. They will get the benefit of limited liability and insulate them from third party
claims against professional negligence or deficiency. A cross section of the
professionals may come together under the banner of LLP to carry on the
professional work in their respective field of specialisation, with the respective
statutes according sanction for such a dispensation. Such an arrangement will bring
the professionals closer and this will benefit the corporate and other clients, as they
may be able to get solutions to their problems under one roof. This will also create a
strong organisation of professionals and acts as a bulwark against keen competition
expected to happen from the professionals abroad, with the opening of legal field
under the WTO dispensation.


9. MAKING A CHOICE
The advantages of a LLP include:
Separate legal entity: A limited liability partnership is a body corporate
formed and incorporated under this Act and is a legal entity separate from
that of its partners.
Perpetual Succession: A limited liability partnership shall have perpetual
succession. In other words, partners may come and partners may go but a
LLP will go on till the winding up of its affairs.
Limited Liability: reduced risk to personal wealth from creditors claims;
Internal flexibility: allows for participation in management and maintenance
of ethos of partnership.
The disadvantages include:
Lack of privacy: Disclosure of financial information required under
Section 34.
Requirement of a LLP agreement: A LLP agreement is a necessity so as to
avoid the application of default provisions (First Schedule) and to provide for
matters not covered in the default provisions.
Legal uncertainty: This being a newly introduced concept in the corporate
world, it is yet to prove itself as a commercial entity.
10. WINDING UP AND DISSOLUTION
The winding up of a limited liability partnership may be either voluntary or by the
Tribunal and limited liability partnership, so wound up may be dissolved.
Circumstances in which limited liability partnership may be wound up by
Tribunal
A limited liability partnership may be wound up by the Tribunal,
(a) if the limited liability partnership decides that limited liability partnership be
wound up by the Tribunal;
(b) if, for a period of more than six months, the number of partners of the limited
liability partnership is reduced below two;
(c) if the limited liability partnership is unable to pay its debts;
(d) if the limited liability partnership has acted against the interests of the
sovereignty and integrity of India, the security of the State or public order;
(e) if the limited liability partnership has made a default in filing with the
Registrar the Statement of Account and Solvency or annual return for any
five consecutive financial years; or
(f) if the Tribunal is of the opinion that it is just and equitable that the limited
liability partnership be wound up.
11. COMPARISON OF LLP WITH PRIVATE LIMITED COMPANY
A comparison of a LLP with a Private Limited Company reveals that such
companies have:
Limited Liability: Similar to LLP.


Internal flexibility: The Company Law requires a formal board structure and
decision making at validly constituted meetings, passing of resolutions and
maintenance of minutes of meetings.
Privacy: Similar to LLP.
Requirement of a LLP agreement: The Memorandum and Articles of
Association are the default standard provisions doing away with the need for
a separate agreement similar to a LLP agreement.
Legal uncertainty: Private Limited companies have long been in existence
and being tried and tested vehicles of business entities, there is no legal
uncertainty which is not true in case of a LLP.
The LLP structure seems most suited for partnership concerns set up by
professionals such as company secretaries and chartered accountants in practice, by
offering them the benefits of limited liability on one hand and the flexibility in internal
management that is akin to partnerships on the other. Venture capitalists might also
be attracted to the LLP structure owing to the ability of the partners to participate in
management without the risk of losing limited liability, the absence of capital
maintenance rules and the likely advantageous tax position. The laws of U.S.A., U.K.,
Singapore and Australia permit formation of LLPs.

LESSON ROUND-UP
Any two or more persons associated for carrying on a lawful business with a view
to earn profit may form a limited liability partnership by subscribing their names to
an incorporation document and registration with the registrar of companies.
Salient features of the Limited Liability Partnership
o Body corporate with a separate legal entity.
o Mutual rights and duties of partners of an Limited Liability Partnership inter se
and those of the Limited Liability Partnership and its partners shall be governed
by an agreement between the partners.
o Limited liability of the partners.
o Every Limited Liability Partnership shall have atleast two partners.
o The Indian Partnership Act, 1932 shall not be applicable to LLPs.
Every Limited Liability Partnership shall have at least two designated partners
who are individuals and atleast one of them shall be a resident of India.
The mutual rights and duties of the partners of limited liability partnership, and the
mutual rights and duties of a limited liability partnership and its partners, shall be
governed by the limited liability partnership agreement between the partners, or
between the limited liability partnership and its partners.
SELF-TEST QUESTIONS
1. What do you mean by Limited Liability Partnership. State the salient features
of Limited Liability Partnerships.
2. Who is a designated partner? Give the relevant provisions of the LLP Act
2008 with regard to designated partners.




STUDY XXXII
APPLICATION OF COMPANY LAW TO DIFFERENT SECTORS

LEARNING OBJECTIVES
This study covers the application of company law to banking and insurance sector.
At the end of this study you should be able to:
Define a banking company, list out the requirements for setting up a banking
business in India.
State the regulatory provisions in regard to setting up an insurance business in
India.

1. BANKING
As per the Banking Regulations Act, 1949, banking means accepting for the
purpose of lending or investment of deposits of money from public repayable on
demand or otherwise and withdrawable by cheque, drafts order or otherwise (Sec. 5
(i) (b)). Similarly, a banking company means any company which transacts the
business of banking (Sec. 5(i)(c)) A banking company may be engaged in like
borrowing, lockers, letter of credit, traveller cheques, mortgages etc. Banking
companies carrying on banking business in India are required to use at least one
word bank, banking, banking company in their name.
In India, banks may be set up in either of the following ways:
(a) as a company incorporated under a special act of the Parliament;
(b) as a company incorporated under the Companies Act, 1956.
The State Bank of India (constituted under the State Bank of India Act, 1955) and
the Industrial Development Bank of India
1
are examples of banks constituted under
special Acts of the Parliament.
The Bank of Punjab, Bank of Rajasthan, Catholic Syrian Bank, Centurion Bank,
City Union Bank, Dhanalakshmi Bank, Development Credit Bank, Federal Bank,
HDFC Bank, ICICI Bank, IDBI Bank, IndusInd Bank, ING Vysya Bank, Jammu &
Kashmir Bank, Karnataka Bank, Karur Vysya Bank, Laxmi Vilas Bank, South Indian
Bank, United Western Bank, AXIS Bank are all examples of private sector banks
incorporated as a company under the provisions of the Companies Act, 1956.
Private Sector Banks are fast emerging as an important segment of Indian
financial system. They perform financial intermediation in a variety of ways, like

1
With Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003, IDBI attained the
status of a limited company viz. "Industrial Development Bank of India Limited"


accepting deposits, making loans and advances, leasing, hire purchase, etc. They
raise funds from the public, directly or indirectly, and lend them to ultimate spenders.
They advance loans to the various wholesale and retail traders, small-scale industries
and self-employed persons. Thus, they have broadened and diversified the range of
products and services offered by a financial sector. Gradually, they are being
recognised as complementary to the banking sector due to their customer-oriented
services; simplified procedures; attractive rates of return on deposits; flexibility and
timeliness in meeting the credit needs of specified sectors; etc.
The working and operations of banks are regulated by the Reserve Bank of India
(RBI) within the framework of the Reserve Bank of India Act, 1934 and the directions
issued by it under the Act.
As per the RBI Act, it is mandatory for a bank to get itself registered with the RBI.
This registration authorizes it to conduct its business as a bank. For the registration
with the RBI, a company incorporated under the Companies Act, 1956 and desirous
of commencing business of banking, should have a initial minimum paid-up capital of
Rs. 200 crore which is to be raised to Rs. 300 crore within three years of
commencement of business. The promoters contribution shall be a minimum of 40%
of the paid-up capital of the bank at any point of time. This promoters contribution of
40% of the initial capital shall be locked in for a period of five years from the date of
licensing of the bank.
NRI participation in the primary equity of a new bank shall be to the maximum
extent of 40%. In the case of a foreign banking company or finance company as a
technical collaborator or a co-promoter, equity participation shall be restricted to 20%
within the above ceiling of 40%.
The new bank should not be promoted by a large industrial house. However,
individual companies, directly or indirectly connected with large industrial houses may
be permitted to participate in the equity of a new private sector bank up to a
maximum of 10 per cent but will not have controlling interest in the bank.
Procedure for Applications
In terms of Rule 11 of the Banking Regulation (Companies) Rules, 1949
applications shall be submitted in the prescribed form (Form III). In addition, the
applications should furnish a project report covering business potential and viability of
the proposed bank, the business focus, the product lines, proposed regional or
locational spread, level of information technology capability and any other information
that they consider relevant. The project report should give as much concrete details
as feasible, based on adequate ground level information and avoid unrealistic or
unduly ambitious projections. Applications should also be supported by detailed
information on the background of promoters, their expertise, track record of business
and financial worth, details of promoters direct and indirect interests in various


companies/industries, details of credit/other facilities availed by the promoters/
promoter company(ies)/other Group company(ies) with banks/financial institutions,
and details of proposed participation by foreign banks/NRI/OCBs.
Private banking in India was practiced since the beginning of banking system in
India. The first private bank in India to be set up in Private Sector in India was
IndusInd Bank. It is one of the fastest growing Bank in Private Sector in India. IDBI
ranks the tenth largest development bank in the world as Private Banks in India and
has promoted a world class institution in India.
The first Private Bank in India to receive an in principle approval from the
Reserve Bank of India was Housing Development Finance Corporation Limited, to set
up a bank in the private sector as part of the RBI's liberalization of the Indian Banking
Industry. It was incorporated in August 1994 as HDFC Bank Limited with registered
office in Mumbai and commenced operations as Scheduled Commercial Bank in
January 1995.
2. INSURANCE
The development and growth of the insurance industry in India has gone through
three distinct stages.
1. Formation of the Insurance Industry in India
2. Nationalization of the Insurance Business in India
3. Entry of Private Players
In India, insurance business may be set up in either of the following ways:
(a) as a company incorporated under a special act of the Parliament;
(b) as a company incorporated under the Companies Act, 1956.
The Life Insurance Corporation formed in September 1956 by the Life Insurance
Corporation Act, 1956 and the General Insurance Corporation formed under the
General Insurance Business (Nationalisation) Act, 1972 may be quoted as examples
of insurance companies formed under special Acts of the Parliament.
Bajaj Allianz Life Insurance Co. Ltd., Amp Sanmar Assurance Co. Ltd., Birla Sun
Life Insurance Co. Ltd., Dabur CGU Life Insurance Company Pvt. Ltd., HDFC
Standard Life Insurance Co. Ltd., ICICI Prudential Life Insurance Co. Ltd., ING Vysya
Life Insurance Co. Pvt. Ltd., Max New York Life Insurance Co. Ltd., Metlife India
Insurance Co. Pvt. Ltd., Om Kotak Mahindra Life Insurance Co. Ltd., SBI Life
Insurance Co. Ltd., Tata AIG Life Insurance Co. Ltd., Bajaj Allianz General Insurance
Co. Ltd., ICICI Lombard General Insurance Co. Ltd., IFFCO Tokyo General
Insurance Co. Ltd., Reliance General Insurance Co. Ltd., Royal Sundaram Alliance
Insurance Co. Ltd., are all examples of private sector insurance companies
incorporated as a company under the provisions of the Companies Act, 1956.


Insurance Regulatory and Development Authority (IRDA)
The IRD Act has established the Insurance Regulatory and Development
Authority (IRDA or Authority) as a statutory regulator to regulate and promote the
insurance industry in India and to protect the interests of holders of insurance
policies. The IRD Act also carried out a series of amendments to the Act of 1938 and
conferred the powers of the Controller of Insurance on the IRDA.
The members of the IRDA are appointed by the Central Government from
amongst persons of ability, integrity and standing who have knowledge or experience
in life insurance, general insurance, actuarial science, finance, economics, law,
accountancy, administration etc. The Authority consists of a chairperson, not more
than five whole-time members and not more than four part-time members.
Powers, Duties and Functions of the Authority
The Authority has been entrusted with the duty to regulate, promote and ensure
the orderly growth of the insurance and re-insurance business in India. In furtherance
of this responsibility, it has been conferred with numerous powers and functions
which include prescribing regulations on the investments of funds by insurance
companies, regulating maintenance of the margin of solvency, adjudication of
disputes between insurers and intermediaries, supervising the functioning of the Tariff
Advisory Committee, specifying t he percentage of premium income of the insurer to
finance schemes for promoting and regulating professional organizations and
specifying the percentage of life insurance business and general insurance business
to be undertaken by the insurer in the rural or social sector.
Registration of an Insurance Company
Every insurer seeking to carry out the business of insurance in India is required
to obtain a certificate of registration from the IRDA prior to commencement of
business. The pre-conditions for applying for such registration have been set out
under the Act of 1938, the IRD Act and the various regulations prescribed by the
Authority.
The following are some of the important general registration requirements that an
applicant would need to fulfill:
(a) The applicant should be a company registered under the provisions of the
Companies Act, 1956. Consequently, any person intending to carry on
insurance business in India should set up a separate entity in India.
(b) The aggregate equity participation of a foreign company (either by itself or
through its subsidiary companies or its nominees) in the applicant company
cannot not exceed twenty six per cent of the paid up capital of the insurance
company. However, the Insurance Act and the regulations there under
provide for the manner of computation of such twenty-six per cent.


(c) The applicant can carry on any one of life insurance business, general
insurance business or reinsurance business. Separate companies are
needed if the intent were to conduct more than one business.
(d) The name of the applicant needs to contain the words insurance company
or assurance company.
The applicant would need to meet with the following capital structure
requirements:
(a) A minimum paid up equity capital of rupees one billion in case of an
applicant which seeks to carry on the business of life insurance or general
insurance.
(b) A minimum paid-up equity capital of rupees two billion, in case of a person
carrying on exclusively the business of reinsurance.
In determining the aforesaid capital requirement, the deposits to be made and
any preliminary expenses incurred in the formation and registration of the company
would be included.
A promoter of the company is not permitted to hold, at any time, more than
twenty-six per cent of the paid-up capital in any Indian insurance company. However,
as an interim measure has been provided that percentages higher than twenty six
percent are permitted if the promoters divest, in a phased manner, over a period of
ten years from the date of commencement of business, the share capital held by
them in excess of twenty six per cent.
An applicant desiring to carry on insurance business in India is required to make
a requisition for a registration application to the IRDA in a prescribed format along
with all the relevant documents.
The applicant is required to make a separate requisition for registration for each
class of business i.e. life insurance business consisting of linked business, non-linked
business or both, or general insurance business including health insurance business.
The IRDA may accept the requisition on being satisfied of the bona fides of the
applicant, the completeness of the application and that the applicant will carry on all
the functions in respect of the insurance business including management of
investments etc. In the event that the aforesaid requirements are not met with, the
Authority may after giving the applicant a reasonable opportunity of being heard,
reject the requisition. Thereafter, the applicant may apply to the Authority within thirty
days of such rejection for re-consideration of its decision. Additionally, an applicant
whose requisition for registration has been rejected, may approach the Authority with
a fresh request for registration application after a period of two years from the date of
rejection, with a new set of promoters and for a class of insurance business different
than the one originally applied for.


In the event that the Authority accepts the requisition for registration application,
it shall direct supply of the application for registration to the applicant. An applicant,
whose requisition has been accepted, may make an application along with the
relevant documents evidencing deposit, capital and other requirements in the
prescribed form for grant of a certificate of registration. If, when considering an
application, it appears to the Authority that the assured rates, advantages, terms and
conditions offered or to be offered in connection with life insurance business are in
any respect not workable or sound, he may require that a statement thereof to be
submitted to an actuary appointed by the insurer and the Authority shall order the
insurer to make such modifications as reported by the actuary.
After consideration of the matters inter alia capital structure, record of
performance of each promoters and directors and planned infrastructure of the
company, the Authority may grant the certificate of registration. The Authority would,
however, give preference in grant of certificate of registration to those applicants who
propose to carry on the business of providing health covers to individuals or groups of
individuals. An applicant granted a certificate of registration may commence the
insurance business within twelve months from the date of registration.
In the event that the Authority rejects the application for registration, the applicant
aggrieved by the decision of the Authority may within a period of thirty days from the
date of communication of such rejection, appeal to the Central Government for
reconsideration of the decision and the decision of the Central Government in this
regard would be final.
An insurer who has been granted a certificate of registration should renew the
registration before the 31 day of December each year, and such application should
be accompanied by evidence of fees that should be the higher of
fifty thousand rupees for each class of insurance business, and
one fifth of one per cent of total gross premium written direct by an insurer in
India during the financial year preceding the year in which the application for
renewal of certificate is required to be made, or the application for renewal of
certificate is required to be made, or rupees fifty million whichever is less; (and
in case of an insurer carrying on solely re-insurance business, instead of the
total gross premium written direct in India, the total premium in respect of
facultative re-insurance accepted by him in India shall be taken into account).
This fee may vary according to the total gross premium written direct in India,
during the year preceding the year in which the application is required to be made by
the insurer in the class of insurance business to which the registration relates but
shall not exceed one-fourth of one percent of such premium income or rupees fifty
million, whichever is less, or be less, in any case than fifty thousand rupees for each
class of insurance business. However, in the case of an insurer carrying on solely re-


insurance business, the total premiums in respect of facultative re-insurance
accepted by him in India shall be taken into account.
The registration of an Indian insurance company or insurer may be suspended
for a class or classes of insurance business, in addition to any penalty that may be
imposed or any action that may be taken, for such period as may be specified by the
Authority, in the following cases:
conducts its business in a manner prejudicial to the interests of the policy-
holders;
fails to furnish any information as required by the Authority relating to its
insurance business;
does not submit periodical returns as required under the Act or by the
Authority;
does not co-operate in any inquiry conducted by the Authority;
indulges in manipulating the insurance business;
fails to make investment in the infrastructure or social sector as specified
under the Insurance Act.
SETTING UP AN INSURANCE BUSINESS
Registration of an Insurance Company
Every insurer seeking to carry out the business of insurance in India is required
to obtain a certificate of registration from the IRDA prior to commencement of
business.
The following are some of the important general registration requirements that an
applicant would need to fulfill:
(a) The applicant should be a company registered under the Companies Act,
1956.
(b) The aggregate equity participation of a foreign company cannot not exceed
twenty six per cent of the paid up capital of the insurance company.
(c) The applicant can carry on any one of life insurance business, general
insurance business or reinsurance business. Separate companies are
needed if the intent were to conduct more than one business.
(d) The name of the applicant needs to contain the words insurance company
or assurance company.
The applicant would need to meet with the following capital structure
requirements:
(a) A minimum paid up equity capital of rupees one billion in case of an
applicant which seeks to carry on the business of life insurance or general
insurance.
(b) A minimum paid-up equity capital of rupees two billion, in case of a person
carrying on exclusively the business of reinsurance.



LESSON ROUND-UP
Banking means accepting for the purpose of lending or investment of deposits of
money from public repayable on demand or otherwise and withdrawable by
cheque, drafts order or otherwise.
Banking company means any company which transacts the business of banking
In India, banks may be set up either as a company incorporated under a special
act of the Parliament; or as a company incorporated under the Companies Act,
1956.
The working and operations of banks are regulated by the Reserve Bank of India
(RBI) within the framework of the Reserve Bank of India Act, 1934 and the
directions issued by it under the Act.
As per the RBI Act, it is mandatory for a bank to get itself registered with the RBI.
For the registration with the RBI, a company incorporated under the Companies
Act, 1956 and desirous of commencing business of banking:
(a)should have a initial minimum paid-up capital of Rs. 200 crore which is to be
raised to Rs. 300 crore within three years of commencement of business.
(b)The promoters contribution shall be a minimum of 40% of the paid-up capital of
the bank at any point of time.

SELF-TEST QUESTIONS
1. Define a banking company and list out the requirements for setting up a
banking business in India.
2. Briefly explain the role of Insurance Regulatory Development Authority.













STUDY XXXIII
OFFENCES AND PENALTIES AN OVERVIEW
LEARNING OBJECTIVES
Contravention of the provisions of the Companies Act are considered as offences.
After going through this chapter, you will be able to understand what are the various
sections under the Companies Act which impose penalty, the nature of offence and
the amount of penalty imposed under those sections under the Act. The topics
covered are:
Introduction
List of sections imposing penalty (as an Annexure)

1. INTRODUCTION
Defaults, breaches, violations, failures, contraventions or non-compliances under
the Companies Act are called offences which give rise to a penal liability. The
Companies Act prescribes punishments for offences committed by the companies
under the Act. There are four different types of punishments prescribed under the
Act. These are:
(a) fine of a maximum fixed amount;
(b) fine of a specified amount for each day during which the offence continues;
(c) fine of a maximum fixed amount with an additional fine for each day during
which the offence continues;
(d) imprisonment of a stated term with or without fine.
The persons who may be made liable for the offences and punished under the
Act are:
(a) the company;
(b) directors and officers of the company; and
(c) any person committing an offence.
2. OFFICER IN DEFAULT
In various provisions, the term used for fixing liability of offence is officers who
are in default. The term officer which is defined in Section 2(30) of the Act, includes
directors. The expression officer in default is defined in Section 5 of the Act to
include all the following officers of the company, namely
(a) managing director(s);
(b) whole-time director(s);
(c) the manager;
(d) the secretary;
(e) any person is accordance with whose directions or instructions the Board of
company is accustomed to act;
1185


(f) any person charged by the Board with responsibility of complying with the
provision:
Provided that the person so charged has given his consent in this behalf to
the Board;
(g) where any company does not have any of the officers specified in clause (a)
to (c), any director/directors who may be specified by the Board in this behalf
or where no director is so specified, all the directors:
Provided that where the Board exercises any power under clause (f) or clause
(g), it shall, within thirty days of the exercise of such powers, file with the Registrar a
return in e-form 1AA and e-form 1AB of General rules and forms.
Ordinarily, in offences under the Companies Act, the Complainant has either to
be the Registrar or a shareholder of the company or the Central Government through
some authorized person (Section 621)
The CLB* is empowered u/s 621A to compound the offence wherein the default
is punishable with fine. In the context of provisions of Section 621A, to compound
means to settle by mutual agreement or to condone a liability or offence in exchange
for money; to forbear from prosecuting; to forbear prosecution of offence for a
consideration.
*

The Compounding of an offence will act as a bar to the prosecution where
compounding was done before the institution of the prosecution. Where composition
of any offence is made after institution of any prosecution, the company or officer in
default is required to bring that fact to the notice of the court in which the prosecution
is pending. Thus, the prosecution in such a case would not be maintainable.
List of Sections imposing penalty is given as Annexure I.
ANNEXURE I
The offences for violation of the provisions of the Companies Act, 1956 can only
be tried in the court which is not inferior to that of a Presidency Magistrate or a
Magistrate of the First Class. The court shall take cognizance of the offence which is
alleged to have been committed by company or any officer thereof only on a
complaint in writing made by the Registrar of Companies or Securities and Exchange
Board of India (in respect of matters covered by section 55A) or a shareholder of the
company or by a person authorized in this behalf by the Central Government. Every
offence against the Act shall be deemed to be non-cognizable, except offences
connected with, or arising out of acceptance of deposits under sections 58A and
58AA. In case of prosecution by a shareholder arising out of false and frivolous or
vexatious accusation, the complainant shareholder may be required to pay
compensation as may be directed by the Magistrate, while discharging the accused
company and its officers. List of penalty alongwith Sections and nature of offence is
as follows:
Section Nature of offence Penalty

*
Central Government, as amended by Companies (Second Amendment) Act, 2002 w.e.f. a date yet to
be notified.


Section Nature of offence Penalty
11(5) Being a member of a company,
association or partnership formed
exceeding certain numbers
Fine upto Rs. 10,000/-
22(2) Failure to comply with any direction
given by Central Govt. to change the
name of an existing company
Fine up to Rs. 1,000/- for
every day during which
default continues
25(10) Failure to remove name of chambers of
commerce consequent upon revocation
of licence
Fine upto Rs. 5,000 for
every day during default
continues
31(2A) Non-filing with the Registrar altered copy
of articles of association which has the
effect of converting public company into
private company with the approval of the
Central Government.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
each day of default
[Section 629A].
39(2) Failure to send copied of memorandum,
Articles or agreement to members on
demand
Fine upto Rs. 500/-
40(2) Issue of altered copy of memorandum,
articles, resolutions or agreements
Fine upto Rs. 100/- each
copy
44(3) Failure to file the prospectus or
statement in lieu of prospectus
Fine upto Rs. 5,000 per
day
49(9) Failure to comply with the provisions of
sub-section (1) to (8) relating to
investments.
Fine up to Rs. 50,000
56(3) Issue of application form without salient
features of prospectus or non-supply of
copy of prospectus on demand
Fine upto Rs. 50,000
58A(5)(a) Failure by a company to make
repayment in terms of sub-section
(3)(c)(4)
Fine not less than twice
the amount of deposit not
repaid
58A(5)(a)(i) Acceptance of deposits in excess of
prescribed limits and contrary to rules
Fine not less than the
amount of deposits
58A(5)(a)(ii) Invitation of deposits in excess of
prescribed limits and contrary to rules
Fine upto Rs. 10,00,000
but not less than
Rs.50,000
58A(5)(b) Failure of repay deposit in accordance
with the provisions of section 3(c)(4)
Imprisonment upto 5
years and also fine
58A(6)(b) Invitation or acceptance of deposit in
excess of the prescribed limits and
contrary rules
Imprisonment upto 5
years and also fine


Section Nature of offence Penalty
58A(10) Failure to comply with the order of
[CLB]* granting extension of time for
making repayment of deposit
*

Imprisonment upto 3
years ad fine for not less
than Rs. 500 per day
58AA(9) Failure to comply with the provisions of
this section and order of [CLB]*
Imprisonment upto 3
years and fine for not
less than Rs. 500 for
each day of non-
compliance
59(1) Issue of prospectus in contravention of
section 57 or 58
Fine upto Rs. 50,000
60(5) Issue of prospectus without the copy
thereof being filed with the Registrar
Fine upto Rs. 50,000
63(1) Prospectus issued includes any untrue
statement
Imprisonment upto two
years or fine upto
Rs. 50,000 or with both
68 Fraudulently inducing persons to invest
money.
Imprisonment upto five
years or fine upto
Rs. 1,00,000 or with both.
68A(1) Application made for subscription of
shares in a fictitious name
Imprisonment upto 5
years
69(4) Failure to keep application moneys in
Scheduled Bank
Fine upto Rs. 50,000
70(4) Failure to file statement in lieu of
prospectus
Fine upto Rs. 10,000
70(5) Statement in lieu of prospectus delivered
to the Registrar includes any untrue
statement.
Imprisonment upto two
years of fine upto
Rs. 50,000 or with both
72(3) Prohibition for allotment of shares unless
the conditions as specified in the section
are fulfilled.
Fine upto Rs. 50,000
73(2B) (i) Default in repayment of application
moneys and interest
(ii) Failure to comply with the provisions
of sub-section (2A) where the payment
is not made within 6 months from the
expiry of the eighth day
Fine upto Rs. 50,000

Fine upto Rs. 50,000 and
also imprisonment upto
one year

*
Substituted for National Company Law Tribunal by the Companies (Second Amendment) Act, 2002 and
shall take effect from the date of enforcement.


Section Nature of offence Penalty
73(3) Failure to keep application moneys in
Scheduled Bank
Fine upto Rs. 50,000
75(4) Failure to comply with the provisions of
Section 75 relating to return of allotment
Fine upto Rs. 5,000 per
day
76(5) Failure to comply with the provision
relating to commission and discount
Fine upto Rs. 5,000
77(4) Contravening provisions on purchase by
company or loans by company for
purchase of its own or its holding
companys shares
Fine upto Rs. 10,000
77A(11) Contravention of provisions of
section 77A or any rules made
thereunder, or any regulations made
under clause (f) of sub-section (2).
Imprisonment upto two
years or with fine upto
Rs. 5,00,000 or with both
77B Non-compliance with the provisions of
the section.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A].
78(1)(2) Failure to transfer premium amount
received on shares to share premium
account on utilization of share premium
account for purposes other than those
specified in sub-section (2)
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A].
79(4) Omitting to include in prospectus certain
particulars relating to the issue of shares
at a discount contained in sub-
section (4)
Fine upto Rs. 500
80(6) Non-compliance with the provisions of
the section relating to issue of
redeemable preference shares
Fine upto Rs. 10,000
80A(3)(a) Failure to comply with the provisions of
section 80A regarding Redemption of
irredeemable preference shares
Fine upto Rs. 10,000 per
day
80A(3)(b) Failure to comply with the provisions of
section 80A regarding Redemption of
irredeemable preference shares by
officers of the company in default.
Imprisonment upto three
years and also fine
81(1) Issue of further shares in violation of the
provisions of sub-section (1)
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A].


Section Nature of offence Penalty
83 Issue of shares certificate without
distinctive numbers in case of a
company having a share capital.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A].
84(3) Fraudulently renewing or issuing of
duplicate share certificates by a
company
Fine upto Rs. 1,00,000
88 Issue of shares with disproportionate
rights
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A].
89(3) Non-compliance with the provisions of
the sub-section relating to termination of
disproportionately excessive voting
rights in existing companies
Fine upto Rs. 10,000
91 Calls on shares of same class not made
on uniform basis
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A].
95(3) Failure to give to the Registrar notice of
consolidation, etc., of share capital in
accordance with section 95(1)
Fine upto Rs. 500 per
day
97(3) Failure to file with the Registrar notice of
increase of capital or of members within
thirty days of passing of resolution.
Fine upto Rs. 500 per
day
102(2) Non-compliance of [courts]* direction
confirming reduction of capital
*

Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
103(3) Non-compliance of [courts]* direction
regarding publication of notice of
registration.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
105 Concealing name of creditors, etc. Imprisonment upto one
year, fine or with both
106 Variation of shareholders rights in
contravention of the provisions of this
section.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]

*
Substituted for National Company Law Tribunal by the Companies (Second Amendment) Act, 2002 and
shall take effect from the date of enforcement.


Section Nature of offence Penalty
107(5) Failing to forward to the Registrar a
copy of order of the [court]* in regard to
variation of shareholders rights
*

Fine upto Rs. 500
108(1) Registration of transfer of shares or
debentures without compliance of
section 108
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
110(2) Registration of transfer of partly paid
shares without giving notice to the
transferee
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
111(9) Non-compliance with the order of
[Company Law Board]** relating to
registration of transfer
**

Fine upto Rs. 10,000 and
Rs. 1,000 per day
111(12) Default in complying with the provisions
of section 111
Fine upto Rs. 500 per
day
113(2) Failure to complete and having ready for
delivery share or debenture certificate
within two months of allotment, etc.
Fine upto Rs. 5,000 per
day
115(6) Non-compliance with the requirements
of section 115 relating to entries in the
register in respect of share warrants
Fine upto Rs. 500 per
day
116 Deceitfully personating as an owner of
any shares or interest in a company
Imprisonment upto three
years and also fine
117 Issue of debentures with voting rights Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]`
117A(3) Debenture trust deed Fine upto Rs. 500/- for
every day
117C(5) Liability of company to create security
and debenture redemption reserve
Imprisonment upto three
years and fine upto Rs.
500/- for every day
118(2) Failure to forward a copy of debenture
trust deed to members or debenture
holders within seven days at their
request
Fine upto Rs. 500 and
further fine upto Rs. 200
per day

*
Substituted for National Company Law Tribunal by the Companies (Second Amendment) Act, 2002 and
shall take effect from the date of enforcement.
**
Power transferred to Central Government by the Companies (Second Amendment) Act, 2002 with effect
from date yet to be notified.


Section Nature of offence Penalty
127(2) Failure to deliver to the Registrar for
registration particulars of charges on
company acquiring property subject to
charge
Fine upto Rs. 5,000
133(2) Delivering debenture or certificate of
debenture stock without endorsing on it
certificates of registration
Fine upto Rs. 10,000
137(3) Default in complying with the provisions
of section 137 regarding appointment of
receiver or manager
Fine upto Rs. 500
142(1) Failure to file with the Registrar for
registration particulars of any charge etc.
Fine upto Rs. 5,000 per
day
142(2) Not complying with any of the
requirements of the Act as to registration
with the Registrar of any charge etc.
Fine upto Rs. 10,000
143(2) Failure to make entry in register of
charges
Fine upto Rs. 5,000
144(3) Refusing to allow inspection of copies of
instruments creating charges and
companys register of charges
Fine upto Rs. 500 and
further fine upto Rs. 200
per day
146(4) Non-compliance with the requirements
of section 146 in regard to registered
office
Fine upto Rs. 500 per
day
147(2) Non-compliance with the provisions of
section 147(1)(a) or in regard to painting
or affixing its name and address of
registered office outside office or place
of business
Fine upto Rs. 500 per
day
147(3) Non-compliance with the provisions of
section 147(1)(b) or (c) in regard to
engraving name on seal and mentioning
name and registered office in business
letters, etc.
Fine upto Rs. 5,000
147(4) Misuse of seal, letterhead etc. by an
Officer
Fine upto Rs. 5,000
148(2) Non-compliance with the requirements
of section 148(1) regarding publication
of authorized as well as subscribed and
paid-up capital
Fine upto Rs. 10,000
149(2A) Commencement of any new business in
contravention of this sub-section

Fine upto Rs. 5,000 per
day


Section Nature of offence Penalty
149(6) Commencement of business or
exercising borrowing powers in
contravention of section 149
Fine upto Rs. 5,000 per
day
150(2) Failure to maintain register of members Fine upto Rs. 500 per
day
151(4) Committing default in complying with the
provisions of sub-sections (1) to (3)
relating to index of members
Fine upto Rs. 500
152(3) Committing default in complying with the
requirements of sub-sections (1) and (2)
regarding register and index of
debenture-holders
Fine upto Rs. 500
153 Notice of trust entered on the register of
members or debenture holders
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]`
154(2) Closing register of members or
debenture holders otherwise than in
compliance with the provisions of
section 154(1)
Fine upto Rs. 5,000 per
day
157(3) Failure of file with Registrar notice of
situation of office where foreign register
is kept
Fine upto Rs. 500 per
day
158(2) Foreign register kept not in accordance
with the principal register under this Act
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
158(9) Not transmitting to registered office in
India copies of entries in foreign register
and not keeping at registered office in
India duplicate of foreign register
Fine upto Rs. 500
162(1) Non-compliance with the provisions of
section 150, 160 or 161 regarding
annual return
Fine upto Rs. 500 per
day
163(1) Register of members, etc. kept, at a
place other than the registered office of
the company, without shareholders
approval
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
163(5) Refusing inspection, making of any
extract or sending any copy within
specified time, of registers, returns, etc.

Fine upto Rs. 500 per
day


Section Nature of offence Penalty
165(9) Non-compliance with the provisions
relating to statutory meeting
Fine upto Rs. 5,000
168 Failing to hold annual general meeting in
accordance with section 166 or to
comply with any directions of Central
Government under section 167(1)
Fine upto Rs. 50,000 and
further fine upto Rs.
2,500 per day
171(1) Failure to give not less than 21 days
notice in writing in case of a general
meeting
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
171(1) &(2) Contents and manner of service of
notice in contravention of the provisions
of this Act
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
173(2) Explanatory statement not attached to
an item of special business in the notice
calling general meeting
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
176(2) Omitting to state in notice of meeting
that a member is entitled to appoint
proxy and that proxy need not be a
member
Fine upto Rs. 5,000
176(4) Invitation to appoint proxy specified in
the invitation issued at Companys
expense
Fine upto Rs. 10,000
176(7) Inspection of proxies by any member
without giving three days notice in
writing before the commencement of
general meeting
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
179(1) Demand for poll by chairman in
contravention of the provisions of this
section
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
182 Restricting a member from exercising
voting right on any ground except a
ground set out in section 181
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
184(1) Failure to appoint scrutineers by
chairman, where a poll is to be taken
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]


Section Nature of offence Penalty
187C(5)(a)* Failure to file declaration not holding
beneficial interest in any share
*

Fine upto Rs. 10,000 per
day
187C(5)(b)* Failure to file return by the company Fine upto Rs. 1,000 per
day
188(8) Non-compliance with the provisions of
section 188 regarding circulation of
members resolutions
Fine upto Rs. 50,000
190(2) Failure to give notice of an intention to
move a resolution requiring special
notice to members of the company.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
192A(6) Default in compliance of sub-section (1)
to (4)
Fine upto Rs. 5,000
192(5) Failure to file with the Registrar certain
resolutions or agreements in accordance
with section 192(1)
Fine upto Rs. 200 per
day
192(6) Failure to annex copies of certain
resolutions or agreements to articles or
not forwarding to members on request
copy of certain resolutions or
agreements
Fine upto Rs. 100
193(6) Non-compliance with the provisions of
section 193 regarding minutes of
proceedings of general meetings and of
board and other meetings
Fine upto Rs. 500
196(1)(a) Minutes book of general meeting kept at
a place other than the registered office
of the company
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
196(3) Refusing inspection of minutes book of
general meetings or not furnishing to
member on request a copy of minutes
within specified time
Fine upto Rs. 5,000 for
each default
197A Managing Director and manager
appointed or employed at the same
time
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
197(2) Circulating or advertising proceedings of
general meetings without including
certain particulars
Fine upto Rs. 5,000

*
Provisions made inapplicable from the commencement of the Companies Amendment Act, 2000 w.e.f.
13.12.2000.


Section Nature of offence Penalty
198(1) Managerial remuneration payable to
directors and its manager in excess of
the limit set out in this section.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
200(1) Payment of remuneration free of tax to
any officer or employee of the company.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
202(1) An undischarged insolvent discharges
any of the functions of a director,
manager or takes part in the promotion,
formation or management of any
company
Imprisonment upto 2
years or with fine upto
Rs. 50,000 or with both
203(7) Acting as director in contravention of an
order of the court
Imprisonment upto 2
years or with fine upto
Rs. 50,000 or with both
204(1) Appointment of firm or body corporate to
office or place of profit under a company
in contravention of the provisions of this
section.
Fine upto 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
205(1) Payment or declaration of dividend
otherwise than out of profit
Fine upto 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
205A(8) Failure to transfer the amount of
accumulated profits to unpaid dividend
account and other provisions of section
205A
Fine upto Rs. 5,000 per
day
206(1) Default in paying dividend payable to
persons other than the registered
shareholders or to his order or to its
bankers or to the bearer of share
warrant
Fine upto 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
207 Failure to distribute dividend within thirty
days
Imprisonment upto 3
years and fine of Rs.
1000 for each day of
default and to comply
with liability to pay simple
interest @ 18 p.a.
208(3) Payment of interest out of capital without
the previous sanction of Central
Government
Fine upto 5,000 and
further fine upto Rs. 500
for each day of default
[section 629A]


Section Nature of offence Penalty
209(5)/(7) Failure to keep proper books of account Imprisonment upto 6
months or fine upto
Rs.10,000 or with both
209A(8) Failure to produce books and papers,
furnish information or explanation, etc.,
relating to inspection
Fine not less than Rs.
5,000 and also
imprisonment upto one
year.
210(5)/(6) Default in laying of annual accounts at
the annual general meeting.
Imprisonment upto 6
months or fine upto
Rs.10,000 or with both
211(7)/(8) Failure to prepare balance sheet and
profit and loss account in the form and
contents specified in the section.
Imprisonment upto 6
months or fine upto
Rs.10,000 or with both
212(9)/(10) Non-inclusion of certain particulars of
subsidiary in the balance sheet of
holding company.
Imprisonment upto 6
months or fine upto
Rs.10,000 or with both
214(1) Failure to allow representative of holding
company to inspect the books of
account of a subsidiary.
Fine upto 50,000 and
further fine upto Rs. 500
for each day of default
[section 629A]
217(5)/(6) Default in complying with the provisions
of sub-sections (1) to (3) regarding
Boards report.
Imprisonment upto 6
months or fine upto
Rs. 20,000 or with both.
218 Improper issue, circulation or publication
of balance sheet or profit and loss
account.
Fine upto Rs. 5,000
219(3) Failure to send to members, etc., copies
of balance sheet, auditors report, etc.,
twenty one days before date of meeting
Fine upto Rs. 5,000
219(4) Default in complying with certain
demands for copies of balance-sheet,
etc., within seven days of such demand
Fine upto Rs. 5,000
220(3) Failure to file with the Registrar copies of
balance sheet, etc.
Fine upto Rs. 500 per
day
221(4) Failure to make disclosure of payments,
etc., to the company
Imprisonment upto 6
months or fine upto
Rs. 50,000 or with both
223(4) Non-compliance by certain companies
with the provisions of section 223
regarding publication of half-yearly
statement in the specified form
Fine upto Rs. 500 per
day


Section Nature of offence Penalty
224(1) Appointment of auditors without giving
intimation of appointment as auditor
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
224(4) Failure to give notice to the Central
Government within seven days where no
auditors are appointed at an annual
general meeting.
Fine upto Rs. 5,000
224(8) Fixation of auditors remuneration by
authorization other than those who have
appointed him as the auditor
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
232 Failure to company to comply with the
provisions of sections 225 to 231 in
regard to auditors
Fine upto Rs. 5,000.
233 Non-compliance by auditor with section
227 and 229
Fine upto Rs. 10,000
233A(5) Failure to furnish information to special
auditor in connection with special audit
Fine upto Rs. 5,000
233B(11) Failure to comply with the provisions of
section 233B regarding audit of cost
accounts by the company
Fine upto Rs. 50,000 for
company; imprisonment
upto 3 years or fine upto
Rs. 50,000 or both for
every officer in default.
234(4) Failure to furnish information or
explanation or production of books and
papers
Fine upto Rs. 5,000 and
further fine of Rs. 500
per day
240(3) Failure to produce documents or furnish
any information, etc., before the
inspector
Imprisonment upto 6
months or fine upto
Rs. 20,000 or with both
and further fine upto
Rs. 2,000 per day.
242(1) Failure to provide assistance to Central
Government in connection with the
prosecution launched against a person
on the basis of inspectors report
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
250(9) Exercise of right in respect of shares
and debentures in violation of restriction
imposed upon shares and debentures
by [Company Law Board]*.
*


Imprisonment upto 6
months or fine upto
Rs. 50,000 or with both.

*
Substituted by National Company Law Tribunal by the Companies (Second Amendment) Act, 2002 and
shall take effect from the date of enforcement.


Section Nature of offence Penalty
250(10) Otherwise contravening the restrictions
imposed by the Central Government
during investigation of ownership of
shares and debentures
Fine upto Rs. 50,000
252 Minimum number of directors in
contravention of the provisions of this
section
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
257(1A) Failure to inform members of the
candidature of a person for the office of
director.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
259 Increase in number of director beyond
twelve in number without Central
Governments sanction.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
263(1) Directors appointed by enbloc resolution Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
264(1) & (2) Failure to file consent of candidate for
directorship with the company and
consent to act as director with the
Registrar
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
267 Appointment of managing director in
contravention of the provision of this
section.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
269(6) Failure to vacate the office by managing
director/whole time director/manager in
the event of their appointment being
disapproved by the Central Government
Fine upto Rs. 5,000 for
each day of default.
269(10) Order of [CLB]* declaring that
contravention of requirement of
Schedule XIII has taken place
*

Fine upto Rs.50,000
against the company and
fine of Rs. 1,00,000
against the officers in
default
Fine upto Rs. 1,00,000
for person so appointed
269(11) Contravention of the provisions of sub-
section (10) or any direction given by the
[Company Law Board]*
Imprisonment upto 3
years and also fine upto
Rs. 500 per day

*
Substituted by National Company Law Tribunal by the Companies (Second Amendment) Act, 2002 and
shall take effect from the date of enforcement.


Section Nature of offence Penalty
272 Acting as director without holding
qualification shares
Fine upto Rs. 500 per
day
274 Appointment of director in contravention
of the provision of this section
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
279 Acting as a director of more than 20
companies
Fine upto Rs. 50,000
283(2A) Functioning as a director after vacation
of office
Fine upto Rs. 5,000 per
day
286(2) Default in giving notice of Board
Meetings
Fine upto Rs. 1,000
291 Exercise of certain power by the Board
of directors, which is to be exercised by
the company in general meeting.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
292 Exercise of certain power by the Board
of directors, otherwise at a Board
meeting.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
292A Default in complying the requirements
relating to constitution etc. of Audit
Committee.
Imprisonment upto 1 year
or fine upto Rs. 50,000 or
both.
293 Exercise of Boards power without the
consent of the company in general
meeting.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
293A(5)(a) Political contribution made in
contravention of the section
Fine upto three times of
the contribution
293A(5)(b) Political contribution made in
contravention of the provisions of the
section.
Imprisonment upto 3
years and also fine
294(8) Neglecting or refusing to furnish
information required by Central
Government or to produce any books
and papers, etc.
Fine upto Rs. 50,000 and
further fine not less than
Rs. 500 per day
295(4) Contravention of sub-section (1) or (3)
regarding loans to directors, without
Central Governments approval
Fine upto Rs. 50,000 or
imprisonment upto 6
months.
297(1) Entering into certain contract with the
company in which particular directors
are interested without Boards sanction
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default


Section Nature of offence Penalty
and where paid-up capital is not less
than rupees one crore, without the
previous approval of the Central
Government.
[629A].
299(4) Failure to disclose interest in a contract
by the Director
Fine upto Rs. 50,000
300(4) Participation in Board meeting by
interested director
Fine upto Rs. 50,000
301(4) Non-compliance with the provisions of
section 301(1), (2) and (3) in regard to
register of contracts, companies and
firms in which directors are interested.
Fine upto Rs. 5,000
301(5)/163(5) Failure to maintain register of contracts Fine upto Rs. 500 per
day
302(5) Failure to disclose the members
directors interest in contract appointing
manager/managing director
Fine upto Rs. 10,000
303(3) Failure to keep register of directors or to
file with the Registrar return of directors,
managing director, manager and
secretary
Fine upto Rs. 500 per
day
304(2) Refusing inspection to any member of
register kept under section 303
Fine upto Rs. 500
305(1) Failure by a director to inform change of
his particulars
Fine upto Rs. 5,000
307(7) Failure to produce at annual general
meeting register of directors
shareholding
Fine upto Rs. 5,000
307(8) Failure to comply with the provisions of
sections 307(1) and (2) in regard to
register of directors shareholdings
Fine upto Rs. 50,000 and
further fine upto Rs. 200
per day
308(3) Failure to make disclosure of
shareholding by directors and persons
deemed to be directors.
Imprisonment upto 2
years or fine upto Rs.
50,000 or with both
309 Remuneration payable to director
including managing or whole time
directors in excess of the limits,
specified in the section.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
314 Holding office or place of profit in
contravention of the provision of this
section.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].


Section Nature of offence Penalty
316(1) Appointment of managing director, if he
is managing director or manager in any
other company except as specified in
the section.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
318 Compensation for loss of office to
managing or whole-time directors or to
directors who are managers in
contravention of the provisions of this
section.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
320(3) Failure to secure particulars regarding
payment to directors stipulated in sub-
section (1)
Fine upto Rs. 2,500
322(3) Default in giving notice under this
section
Fine upto Rs. 10,000 and
damages
370(1E)* Failure to maintain a register showing the
names of companies under the same
management and particulars of loans to
them and failure to enter the particulars
within three days of the making of the loan
(offence upto 31.10.1998)
Fine upto Rs. 500 and
further fine upto Rs. 50
per day.
371(1) Contravention of section 370 (offences
upto 31-10-1998)
Fine upto Rs. 5,000 or
simple imprisonment upto
6 months
372(8)* Failure to maintain register of
investments (offence upto 31-10-1998)
*

Fine upto Rs. 500 and
further fine of Rs. 50 per
day.
372A(9) Default in complying with the provisions
of this section regarding inter-corporate
loans and investments, other than the
provision of sub-section (5).
Fine upto Rs. 50,000 or
imprisonment upto 2
years.
372A(10) Default in keeping register of investment
or loan made, guarantee given or
security provided.
Fine upto Rs. 5,000 with
a further fine of Rs.500
per day.
374 Contravening section 372 (excluding
sub-sections (6) and (7) or 373 in regard
to investments made in shares and
debentures of companies in the same
group (offence upto 31-10-1998)
Fine upto Rs. 5,000.
383A(1A) Failure to appoint whole-time secretary
or filing of certificate of company from a
practicing company secretary.
Fine upto Rs. 500 per
day.

*
Provisions made inapplicable by the Companies (Amendment) Act, 1999 w.e.f. 31.10.1998.


Section Nature of offence Penalty
384 Firm or body corporate appointed as
manager
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
385(1) Appointment of manager in
contravention of the provisions of this
section.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
386(1) Appointment of manager, if he is a
manager or managing director in any
other company except as specified in
the section.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
387 Payment of remuneration to manager in
excess of 5 per cent of net profit
without the approval of Central
Government.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
391(5) Failing to annex to the copy of
memorandum certified copy of [courts]*
order sanctioning any compromise or
arrangement with creditors and
members.
*

Fine upto Rs. 100 for
each copy
393(4) Failure to comply with the requirements of
section 393 in regard to compromises or
arrangements with creditors and members.
Fine upto Rs. 50,000
393(5) Failure to give information by directors
relating to compromise or arrangements
with creditors and members.
Fine upto Rs. 5,000
394(3) Failure to file with the Registrar a
certified copy of the order of the [court]*
on application for sanctioning of a
compromise of arrangement
Fine upto Rs. 500
395(4A)(b) Issue of circular containing or
recommending acceptance of offer for
transfer of shares which has not been
registered.
Fine upto Rs. 5,000
404(4) Failure to file with the Registrar a
certified copy of the altered
memorandum of articles.
Fine upto Rs. 50,000
407(2) Acting as managing or other director or
manager, whose agreement has been
terminated or set aside.
Imprisonment upto one
year or fine upto Rs.
50,000 or with both

*
Power transferred to NCLT by Companies (Second Amendment) Act, 2002 and shall take effect from
the date of enforcement.


Section Nature of offence Penalty
416(3)(b) Non-compliance with the requirements
of section 416 in regard to contract by
agents of company in which company is
undisclosed principal
Fine upto Rs. 2,000
420 Contravention of sections 417, 418 and
419 regarding failure to collect provident
fund and payment of contribution to the
trust.
Imprisonment upto
6months or fine upto Rs.
10,000.
423 Non-compliance with the requirements of
sections 421 and 422 in regard to receivers
Fine upto Rs. 2,000
424L(1)
1
Violation of provisions of Part VIA or
any scheme or order of the Tribunal or
the Appellate Tribunal or makes a false
statement or give false evidence to the
Tribunal or the Appellate Tribunal.
Imprisonment upto 3
years or fine upto Rs. 10
lakhs.
445(1) Failure to file a copy of winding up order
with the Registrar by the petitioner and
the company.
Fine upto Rs. 1,000 for
each day of default
481(3) Default in forwarding a copy of [court]*
order of dissolution of the company by
the liquidator to the Registrar.
*

Fine upto Rs. 500 for
each day of default.
485(2) Default in publication of resolution to
wind up voluntarily by the company.
Fine upto Rs. 500 for
each day of default.
488(3) Any director of a company making a
declaration under this section without
having reasonable grounds for the
opinion that the company will be able to
pay its debts within specified period.
Imprisonment upto 6
months or fine upto Rs.
50,000 or with both.
493(3) Default in giving the notice of
appointment of liquidators by the
company to the Registrar.
Fine upto Rs. 1,000 for
each day of default.
495(2) Failure to call creditors meeting in case
of insolvency by the liquidator.
Fine upto Rs. 5,000

496(2) Failure in calling the general meeting at
the end of each year by the liquidator.
Fine upto Rs. 1,000 in
respect of each failure.
497(3) Default in sending a return of the holding
of the meeting and a copy of account by
the liquidator to the Registrar and to the
official liquidator.
Fine upto Rs. 500 for
each day of default.

1
Inserted by Companies (Second Amendment) Act, 2002 and shall take effect from the date of
enforcement.
*
Power transferred to NCLT by Companies (Second Amendment) Act, 2002 and shall take effect from
the date of enforcement.


Section Nature of offence Penalty
497(7) Failure to call a general meeting of the
company by the liquidator
Fine upto Rs. 5,000
500(6) Default in calling the meeting of the
creditors; to advertise the notice in the
Official Gazette and newspapers and to
prepare a statement of the position of
the companys affairs alongwith a list of
creditors.
Fine upto Rs. 10,000
501(2) Failure to give notice of resolution
passed by the creditors meeting by the
company to the Registrar.
Fine upto Rs. 500 for
each day of default.
508(2) Failure to call meetings of the company
of creditors at the end of each year by
the liquidator.
Fine upto Rs. 1,000 in
respect of each failure.
509(3) Default in sending a return of the holding
of meeting and a copy of account by the
liquidator to the Registrar and to the
official liquidator.
Fine upto Rs. 500 for
each day of default.
509(7) Failure to call a general meeting of the
company or a meeting of the creditors
by the liquidator as required by the
section.
Fine upto Rs. 5,000 in
respect of each such
failure.
513(3) Appointment of a body corporate as
liquidator of a company in a voluntary
winding up.
Fine upto Rs. 10,000
514 Corrupt inducement affecting
appointment as liquidator.
Fine upto Rs. 10,000
516(2) Failure to publish his appointment in the
Official Gazette and to deliver to the
Registrar for registration a notice of his
appointment by the liquidator.
Fine upto Rs. 500 for
each day of default.
539 Destroying, mutilating, altering, falsifying
or secreting any books, papers or
securities, to defraud any person of the
company which is being wound up.
Imprisonment upto 7
years and also with fine.
541(1) Failure to keep proper books of account
by the company throughout the period of
two years immediately preceding the
commencement of winding up or the
period between incorporation of the
company and commencement of
winding up, whichever is shorter.
Imprisonment upto one
year.


Section Nature of offence Penalty
547(2) Failure to notify that the company is in
liquidation in every invoice, order for
goods or business letters issued etc., by
or on behalf of the company.
Fine upto Rs. 5,000
550(4) Default in disposal of books and papers
of the company as per Rule 15 of the
Companies (Central Governments)
General Rules and Forms, 1956.
Imprisonment upto 6
months or fine upto Rs.
50,000 or with both.
551(5) Default in filing a statement of account in
the prescribed form containing the
prescribed particulars duly audited, by
the liquidator with the Registrar.
Fine upto Rs. 5,000 for
each day of default.
551(5)
Proviso
If the liquidator makes willful default in
causing the statement of account to be
audited by a person qualified to act as
auditor of the company.
Imprisonment upto 6
months or fine upto Rs.
10,000 or with both.
555(1) & (2) Failure to pay unclaimed dividends and
undistributed assets by the liquidator
into companies liquidation account.
Fine upto Rs. 5,000 and
further fine upto Rs. 500
for each day of default
[629A].
559(2) Default in filing a certified copy of the
order declaring dissolution of the
company void by the person on whose
application the order was made.
Fine upto Rs. 500 for
each day of default.
581ZM(1) Any person other than a Producer
Company carries on business under any
name which contains the words
Producer Company Limited.
Fine upto Rs. 10,000/- for
every day.
581ZM(2) Director or officer of a Producer
Company willfully fails to furnish
information.
Imprisonment upto 6
months and fine 5% of
turnover of preceding
financial year.
581ZM(3)
1
Director or officer of a Producer
Company making default in handing
over the books of account and other
documents to the said company or fails
to convene annual general meeting or
other general meeting.
Fine upto Rs. 1 lakh and
additional fine of upto Rs.
10,000/- for every day.
581ZS(6)
1
Failure to file with Registrar of
companies certified copy of the order of
Fine upto Rs. 100/- per
copy.

1
Inserted by Companies (Amendment) Act, 2002.


Section Nature of offence Penalty
court for re-conversion of Producer
Company to Inter-state Co-operative
Society.
598 Failure by any foreign company to
comply with requirements of Part XI of
the Act.
Fine upto Rs. 10,000 and
further fine upto Rs.
1,000 for each day of
default.
606 Contravention of the provisions of
section 603, 604 and 605 relating to
prospectus of foreign companies.
Imprisonment upto 6
month or fine upto Rs.
50,000 or with both
614A(2) Failure to file document with the
Registrar as directed by the court.
Imprisonment upto 6
months or fine or with both
615(6) Failure to furnish information of
statistics, etc. required by the Central
Government.
Imprisonment upto 3
months or fine upto Rs.
10,000 or with both.
621A(6) Failure to comply with the order of
[Company Law Board or Regional
Director]* for filing any documents,
return, etc.
*

Imprisonment upto 6
months or fine upto Rs.
50,000 or with both.
625(4) Failure on the part of a shareholder to
pay compensation.
Imprisonment upto 2
months.
628 False statement made in any return,
balance-sheet, prospectus.
Imprisonment upto 2
years and also fine
629 False evidence given on oath or in any
affidavit.
Imprisonment upto 7
years and also fine.
629A Penalty for offences, for which no
punishment provided elsewhere
Fine upto Rs. 5,000 and
further fine of Rs. 500 per
day.
630 Wrongful withholding of property of the
company by an officer
Fine upto Rs. 10,000
630(2) Default in delivering or refunding within a
time fixed by court, any property
wrongfully withheld or knowingly
misapplied by an officer or employee
upon trial under this section.
Imprisonment upto two
months.
631 Improper use of the words limited and
private limited
Fine upto Rs. 500 per
day

*
Power transferred to Central Government by Companies (Second Amendment) Act, 2002 w.e.f. a date
yet to be notified.



LESSON ROUND-UP
Companies Act provides punishments for offences in the form of imprisonment
and/or fine in the various sections of the Act.
Section 5 of the Act defines the term officer who is in default.
Under section 621A of the Act, the offences, the penalty for which is fine only
may be compounded by the Central Government.
List of amount of penalty along wit sections and nature of offence (as an
annexure)

SELF-TEST QUESTIONS
1. Explain the term officer in default. State the types of punishments
prescribed under the Act.
2. What do you mean by Compounding of offences?






















STUDY XXXIV
STRIKING OFF NAMES OF COMPANIES
LEARNING OBJECTIVES
Section 560 prescribes the procedure for striking off the name of defunct companies
which are not carrying on any business, from the register of companies maintained by
the Registrar. This is an alternative to winding up of a company subject to statutory
criterion specified under the section. The powers under this section shall become
transferred to the tribunal to be exercised by it in place of the court w.e.f a date yet to
be notified for enforcement of companies (second amendment) Act, 2002. The
chapter covers the following topics:
Meaning of striking off.
When a company is still in operation.
Rights of person aggrieved by company having been struck off.
Effect of restoration order.
Who can apply?
Supreme Court rules.
Circulars.
Procedure for striking off a company.

1. MEANING OF STRIKING OFF
A company comes into existence by registration in the office of the Registrar of
Companies. Section 34(1) of the Act provides that on the registration of the
memorandum of a company, the Registrar shall certify under his hand that the
company is incorporated and, in the case of a limited company, that the company is
limited.
On registration of a company, the Registrar issues a certificate called Certificate
of Incorporation, which certifies that the company is incorporated. The validity of the
incorporation cannot thereafter be challenged.
According to Section 34(2) of the Companies Act, from the date of incorporation
mentioned in the certificate of incorporation, such of the subscribers of the
memorandum and other persons, as may from time to time be members of the
company, shall be a body corporate by the name contained in the memorandum,
capable forthwith of exercising all the functions of an incorporated company, and
having perpetual succession and a common seal, but with such liability on the part of
the members to contribute to the assets of the company in the event of its being
wound up as is mentioned in the Act.
Regulation 21 of the Companies Regulations, 1956 provides that in the office of
each Registrar, there shall be maintained a Register of Companies in form III in
which the names of the companies shall be entered in the order in which they are
registered. Every company so registered shall be assigned a number in one
consecutive series. (Corporate Identification Number)
1209


A company registered under the Act cannot be removed from the Register of
companies maintained by the Registrar nor can the Certificate of Incorporation be
cancelled unless the company is dissolved by the process of law, either as a result of
its winding-up or its amalgamation with another company. However, the Companies
Act provides a short-cut to the dissolution, namely striking it off the Register of
Companies by the Registrar of Companies under Section 560, in case the company
is a defunct company. Section 560 of the Act contains provisions for striking defunct
companies off the register, which is an alternative to winding-up of a company. It is a
mode of dissolution of a company without winding up, the only statutory criterion
being that there should be a reasonable cause to believe that the company is not
carrying on business or is not in operation. The section prescribes the procedure the
Registrar is required to follow in striking off any company.
Striking-off implies removal. The expression defunct company for the purposes
of Section 560, means a company which is no longer in effect or use; not operating or
functioning; not carrying on any business or is not in operation.
Where the Registrar has reasonable cause to believe that a company is not
carrying on business or in operation, the Registrar can, on his own, exercise the
power conferred upon him by Section 560 and remove the company from his
Register of Companies by following the procedure laid down in that section.
Despite the striking-off, the liability, if any, of every director, manager or other
officer who was exercising any power of management, and of every member of the
company, shall continue and may be enforced as if the company had not been
dissolved.
2. WHEN A COMPANY IS STILL IN OPERATION
A company which is in the course of being wound-up voluntarily is still in
operation within the meaning of the section [Langlagate Proprietary Co. (1912) 28
TLR 529]. A company, although not carrying on business, may be in operation.
[Central India Mining Co. v. Society Coloniale (1920) 1 KB 753] A company if it is
operating as a company for doing something in relation to its past obligations or to
avoid future pecuniary liability, it will be deemed to be in operation.
3. THE RIGHTS OF PERSON AGGRIEVED BY THE COMPANY HAVING BEEN
STRUCK OFF THE REGISTER [SECTION 560(6)]
The company having been struck off the register or any member or creditor of
such company may make an application to the Court if the company or the member
or creditor feels aggrieved by the company having been struck off, for the restoration
of the company to the register. Such an application must be made before the expiry
of 20 years from the publication in the official gazette of the notice of the striking-off.
The Court may order the name of the company to be restored to the register, if it
is satisfied that-
the company was, at the time of the striking off, carrying on business or in
operation; or
that it is just that the company be restored to the register.


One of the reasons for exercising the Courts direction in favour of restoring a
company must be that after restoration the company will be in a position to carry on
the business of the company. Court would not exercise discretion when there is no
evidence of substantial benefit to member or creditors.
In such a case the court may, by the order, give such directions and make such
provision as seem just for placing the company and all other persons in the same
position as nearly as may be as if the name of the company had not been struck off.
The company must file electronically with the Registrar a certified true copy of the
order passed by the Court, along with e-form No. 21. Upon a certified copy of the
order under sub-section (6) being delivered to the Registrar for registration, the
company shall be deemed to have continued in existence as if its name had not been
struck off.
4. EFFECT
Where the Court orders for restoration of name of company, the effect of an order
is to place the company whose name was struck off by the Registrar in the same
position as if the name of the company had never been struck off during the
interregnum. If a court of competent jurisdiction directs restoration of the name of the
company, it shall be deemed to have continued throughout.
The effect of the provision in sub-section (6) that the company should be
deemed to have continued in existence as if its name had not been struck off was
not only that the corporate existence of the company was preserved, but was also
retrospective, so that at the date of the hearing of the application the company was to
be regarded as never having been dissolved. Another consequence was that the
rights of all parties of all parties would be as though there had been no cessation or
interruption in the existence of the company on account of the striking off and
subsequent restoration.
Company Law Board has no power to restore the company in terms of
Section 560(6), as the powers under that section were vested in the High Court.
5. MODE OF SENDING LETTER/NOTICE
A letter or notice to be sent under this section to a company may be addressed
by the Registrar in any of the modes mentioned below:
(a) to the company at its registered office; or
(b) if no office has been registered, to the care of some director, manager or
other officer of the company; or
(c) if there is no director, manager or officer of the company whose name and
address are known to the Registrar, to each of the persons who subscribed
the memorandum, addressed to him at the address mentioned in the
memorandum.
6. WHO CAN APPLY?
An application for restoration can only be made by the company, member or
creditor. It must be shown that at the date when the company was dissolved the


petitioner was a member or creditor thereof, and anyone, whether in ignorance of the
dissolution or not, who purported to become a member or creditor afterwards, was
not so qualified. One who acquires shares or a debt of a company whose name has
been struck off the register, and who at the time of acquisition has knowledge of that
fact, is not a person aggrieved within this sub-section.
A third party unless he is a creditor has no locus standi to apply. The expressions
member or creditor used in sub-section (6) of Section 560 includes the personal
representatives of a deceased member or creditor.
When a suit is actually pending against a company and is being contested by it at
the time of removal of its name from the register, it is proper to direct the restoration
of the name of the company, particularly when the directors were aware of the fact of
the contested litigation and were actually taking part in it.
The Registrar is not bound to remove a company from the register, even though
an application be made for the purpose, on discovering that the company is not
functioning or that its members have been reduced to less than seven. Where the
object of the application to the Registrar under this section is to avoid liability on a suit
pending against the company, the application must be rejected.
7. SUPREME COURT RULES
For Rules made under sub-section (6) of this section, Rules 92 to 94 of the
Companies (Court) Rules, 1959 are applicable.
8. MINISTRY OF CORPORATE AFFAIRS CIRCULARS
Policy followed with regard to weeding out defunct companiesThe policy which
is followed with regard to weeding out the defunct companies is that where it appears
from the latest available balance sheet of a defunct company that it has adequate
realisable assets, steps are taken to take the company into compulsory liquidation.
But where the latest available balance sheet shows that the company has no assets
or has such assets as would not be sufficient to meet the costs of liquidation, steps
are taken to strike their names off the register under Section 560. The striking off the
name of a company does not materially affect the creditors of the company, because
such creditors may:
(i) enforce their claims against every director, secretaries and treasures,
manager or any other officer of the company and against every member of
the company as if the name of the company had not been struck off; or
(ii) apply to the court for the winding-up of the company whose name has been
struck off; or
(iii) apply to the court, at any time within 20 years from the date of publication of
the notice intimating that the name of the company has been struck off, for
the restoration of the name of the company to the Register of Companies
and on such application being made, court may order the name of the
company to be restored to the register.


9. PROCEDURE FOR STRIKING OFF A COMPANY
The striking off a company may be effected by following two ways:
(A) Striking-off by Registrar of his own motion
Where the Registrar has reasonable cause to believe that a company is not
carrying on business or in operation, he shall send to the company by post a letter
inquiring whether the company is carrying on business or in operation.Then follow the
procedure to strike off the name of company from its register and publish notice in
official gazette.
(B) Striking-off on companys application
The Registrar can exercise the power conferred on him by Section 560, when an
application is received by him from the company for striking it off on the ground that it
is a defunct company, i.e. it is not carrying on business or in operation. On following
procedure, the Registrar may strike its name off the register, and shall publish notice
thereof in the Official Gazette.

LESSON ROUND-UP
A company which is not carrying on any business or in operation, is a defunct
company may be struck off register of companies under Section 560 of
Companies Act, 1956.
Company or member or creditor may make application to court for restoration of
company to the register, if they feel aggrieved by such decision of striking off.
The effect of order of restoration of the name of company is to place the company
in same position as if the name had never been struck off.
Rule 92 to 94 of Companies (Court) Rules, 1959 are applicable.
The Registrar may on its own motion proceed to strike off a company, if it has
reasonable cause to believe that a company is not carrying on business.
The Registrar can exercise the power to strike off on receiving an application for
the same under Section 560

SELF-TEST QUESTIONS
1. What do you mean by striking off? Who can apply for striking off name of
Company under Section 560?
2. Striking off name of company under Section 560 is an alternative to winding
up of a company subject to a statutory criterion specified under the section.
Explain the statutory criterion.





STUDY XXXV
WINDING UP OF COMPANIES

LEARNING OBJECTIVE
Winding up of a company is the stage, whereby the company takes its last breath. It is
a process by which business of the company is wound up, and the company ceases
to exist anymore. All the assets of the company are sold, and the proceedings
collected are used to discharge the liabilities on a priority basis. This chapter deals
with concept and various modes of winding up. The topics covered are:
Introduction
Winding up and Dissolution
Modes of winding up
Winding up by the Court
Voluntary winding up
Winding up subject to supervision of Court
Distinction between voluntary winding up and winding up under the supervision of
Court
Commencement of winding up
Winding up of unregistered companies
NOTE: Wherever the term Court is being used in the chapter, that will be substituted
by Tribunal in accordance with vide Companies (Second Amendment) Act, 2002
w.e.f. a date yet to be notified.

1. INTRODUCTION
Corporate Collapse implies business failure of the company, which may occur
due to inadequate capital, fraudulent business practices, management inexperience
and incompetence, failure to respond to change, recession, obsolescence, excessive
gearing etc. The Companies Act, 1956, provides various remedies to deal with such
business failures such as arrangement, reconstruction, amalgamation, winding-up.
Winding-up of a company is a process of putting an end to the life of a company. It is
a proceeding by means of which a company is dissolved and in the course of such
dissolution its assets are collected, its debts are paid off out of the assets of the
company or from contributions by its members, if necessary. If any surplus is left, it is
distributed among the members in accordance with their rights. In the words of Prof.
L.C.B. Gower, Winding-up of a company is the process whereby its life is ended and
its property administered for the benefit of its creditors and members. An liquidator is
appointed and he takes control of the company, collects its debts and finally
distributes any surplus among the members in accordance with their rights. Thus
Winding-up is the process by which management of a companys affairs is taken out
of its directors hands, its assets are realized by a liquidator and its debts are realized
and liabilities are discharged out of proceeds of realization and any surplus of assets
remaining is returned to its members or shareholders. At the end of the winding up
the company will have no assets or liabilities and it will, therefore, be simply a formal
step for it to be dissolved, that is, for its legal personality as a corporation to be
brought to an end.
1214


The main purpose of winding up of a company is to realize the assets and pay
the debts of the company expeditiously and fairly in accordance with the law.
However, the purpose must not be exploited for the benefit or advantage of any class
or person entitled to submit petition for winding up of a company. It may be noted
that on winding up, the company does not cease to exist as such except when it is
dissolved. The administrative machinery of the company gets changed as the
administration is transferred in the hands of the liquidator. Even after
commencement of the winding-up, the property and assets of the company belong to
the company until dissolution takes place. On dissolution the company ceases to
exist as a separate entity and becomes incapable of keeping property, suing or being
sued. Thus in between the winding up and dissolution, the legal status of the
company continues and it can be sued in the court of law.
Company cannot be Adjudged Insolvent
The winding up of a company is not the same thing as the insolvency of a
company, for the general rule in regard to winding up is that if the members of a
company desire that the company should be dissolved or if it becomes insolvent or is
otherwise unable to pay its debts, or if for any reason it seems desirable that it should
cease to exist, it is wound up. It is obvious that a company may be wound up even
when it is perfectly solvent, e.g. for purpose of reconstruction. Furthermore, a
company can never be declared bankrupt although it is unable to pay its debts. It can
only be wound up, of course, some provisions of insolvency laws are made
applicable to companies in liquidation (See Sections 442, 446, 477, 528 to 531 and
534 to 537 of the Companies Act). Thus, we may put the proposition that in so far as
inability to pay debts is concerned, a bankruptcy of an individual under the insolvency
law is the same thing as a winding up of a company under the company law but a
company can also be wound up for reasons other than mere inability to pay its debts.
Following are some of the differences between the effects of insolvency of an
individual or a firm and winding up of a company:
1. In the case of insolvency, the whole of the insolvents property is taken out
of his hands and rests in the Court (under the Provincial Insolvency Act,
1920) or the Official Assignee (Under the Presidency towns Insolvency Act,
1909). In winding up, on the other hand, the property remains vested in the
company, subject to its being administered for the purposes of winding up as
the company retains its complete existence. Its legal death comes only
when it is formally dissolved.
2. In insolvency, an insolvent individual can obtain his discharge and continue
living and working free from the burden of his debts. A company in liquidation
cannot obtain its discharge and continue free from the burden of its debts.
The liquidator winds up its affairs and then terminates it through dissolution.
3. Although in the administration of the assets of an insolvent company the
insolvency rules apply, they are, however, not identical with those of
insolvency. For example, the reputed ownership clause of insolvency law
has no application in the case of a company in liquidation.
4. In the case of an individual, the administration of his property by the Official
Assignee or the Official Receiver occurs only if he is declared an insolvent


by the Court. But the assumption of the directors powers by the liquidator,
occurs even if the company is fully solvent. Liquidation or winding up, even
of an solvent company can be proceeded with the aid of the court, as in
voluntary winding up.
2. WINDING UP AND DISSOLUTION
The terms Winding up and Dissolution are sometimes erroneously used to
mean the same thing. But according to the Companies Act, 1956, the legal
implications of these two terms are quite different and there are fundamental
differences between them as regards the legal procedure involved. The main points
of distinction are given below:
1. The entire procedure for bringing about a lawful end to the life of a company
is divided into two stages winding up and dissolution. Winding up is the
first stage in the process whereby assets are realised, liabilities are paid off
and the surplus, if any, distributed among its members. Dissolution is the
final stage whereby the existence of the company is withdrawn by the law.
2. The liquidator appointed by the company or the Court carries out the winding
up proceedings but the order for dissolution can be passed by the Court only.
3. According to the Companies Act the liquidator can represent the company in
the process of winding up. This can be done till the order of dissolution is
passed by the Court. Once the Court passes dissolution orders the
liquidator can no longer represent the company.
4. Creditors can prove their debts in the winding up but not on the dissolution
of the company.
5. Winding up in all cases does not culminate in dissolution. Even after paying
all the creditors there may still be a surplus; company may earn profits
during the course of beneficial winding up; there may be a scheme of
compromise with creditors while company is in winding up and in all such
events the company will in all probability come out of winding up and hand
over back to shareholders/old management. Dissolution is an act which
puts an end to the life of the company.
As such winding up is only a process while the dissolution puts an end to the
existence of the company. Unless and until it has been set aside under Section 559
of the Act, it prevents any proceedings being taken against promoters, directors or
officers of the company to recover money or property due or belonging to the
company or to prove a debt due from the company. When the company is dissolved,
the statutory duty of the liquidator towards the creditors and contributories is gone,
but if he has committed without complying with the requirements of the Act, he is
liable to damages to the creditors.
3. MODES OF WINDING UP
A company registered under the Companies Act, 1956 may be wound up in any
of the following modes:
1. By the Court i.e. compulsory winding up;


2. Voluntary winding up, which may be either:
(a)Members voluntary winding up; or
(b)Creditors voluntary winding up;
3. Winding up subject to the supervision of the Court.
Section 425 of the Companies Act, 1956 lays down the above three modes of
winding up and provides that the provisions of the Act with respect to winding up shall
apply, unless the contrary appears, to the winding up of a company in any of these
three modes.
In every winding up, a liquidator or liquidators is or are appointed to administer
the property of the company and he or they must apply the assets of the company,
first, in the payment of the creditors in their proper order, and then, in distributing the
residue among the members according to their rights.
4. WINDING UP BY THE COURT
1
/TRIBUNAL
2

Winding up by the Court or compulsory winding up is initiated by an application
by way of petition to the appropriate Court for a winding up order. A winding up
petition has to be resorted to only when other means of healing an ailing company
are of absolutely no avail. Remedies are provided by the statute on matters
concerning the management and running of company. The extreme and irretrievable
step of winding up must be resorted to only in very compelling circumstances. [Daulat
Makanmal Luthrid v. Solatire Hotels (1993) 76 Comp. Cas. 215 (Bom. HCD)]. It is
primarily the High Court which has the jurisdiction to wind up companies under
Section 10 of the Companies Act, 1956 in relation to the place at which registered
office of the company concerned is situated except to the extent to which jurisdiction
has been conferred on any District or District Courts subordinate to the High Court.
The Central Government may empower any District Court to exercise that jurisdiction,
presumably to reduce the burden of the High Court, only in respect of small
companies with the paid-up capital of not more than one lakh of rupees and having
their registered office within the District, with a view to achieving expeditious and
efficient disposal of winding up proceedings. The Act, therefore, under Sections 435
to 438*,
*
confers wide powers upon the High Court to regulate the conduct of such
proceedings. Accordingly the High Court which is the winding up Court may direct a
District Court to retain and continue winding up proceedings which should not really
have been commenced in that Court (Section 437). It may also withdraw any winding
up which is in progress in a District Court from that Court and proceed with the
winding up itself, or transfer it to another District Court (Section 436), and with
respect to all proceedings subsequent to its own order of winding up, direct them to
be had in a District Court or with the consent of any other High Court, in such High
Court or in a District Court subordinate to that High Court, whereupon the Court in
respect of which such direction is given shall be deemed to be the Court with all
powers and jurisdiction of the High Court under the Act (Section 435). Lastly, the
High Court can pass orders under any of the foregoing sections at any time and at
any stage, whether or not an application in that behalf is made by any of the parties
to the proceedings (Section 438). There must be strong reasons to order winding up

1
Existing
2
Proposed, date of implementation not yet notified [Companies (Second Amendment) Act, 2002].
*
Omitted by Companies (Second Amendment) Act, 2002


as it is a last resort to be adopted. Temporary difficulty cannot be ground for
liquidating company when company is on path of revival. D. Ashokan v. S.T. Reddiar
& Sons (2002) 40 SCL (Ker. HC DB).
Grounds on which a Company may be wound up by the Court
A company under Section 433 may be wound up by the Court if (a) the company
has passed a special resolution of its being wound up by the Court; or (b) default is
made in delivering the statutory report to the Registrar or in holding the statutory
meeting; or (c) it does not commence business within a year from its incorporation or
suspends business for a whole year; or (d) the number of its members in the case of
a public company is reduced below seven and in the case of a private company,
below two; or (e) it is unable to pay its debts; or (f) the Court is of the opinion that it is
just and equitable that it should be wound up. (g) if the company has made a default
in filing with the registrar its balance sheet and profit and loss account or annual
returns for any five consecutive years. (h) if the company has acted against the
interests of the sovereignty and integrity of India, the security of the State, friendly
relations with foreign States, public order, decency or morality, and (i) if the tribunal
is of the opinion that the company should be wound up under the circumstances
specified in Section 424G provided that the tribunal shall make order for winding up
of a company under clause (h) on application made by the Central Government or a
State Government.
The winding up petition is not a legitimate means of seeking to enforce payment
of debt, which is bonafide disputed by the company.
In Shakti Agencies v. Manshuk Bhai Industries Ltd. [(2007), 74 SCL 332
(RAJ), decided on 14.8.2006, Petitioner firm filed a winding up petition against
the respondent company for the recovery of a debt which was disputed by the
respondent company. The Petition was dismissed.
The instant case was of bona fide disputed debt. Even from the petition for
winding up, it was evident that for the payment of Rs. 10,50,000, the petitioner
firm agreed to purchase shares of the respondent company.
The principles, on which the Court should act is disposing of winding up
petition, may be deduced thus: (i) if the debt is not disputed on some
substantial ground, the Court may make the order, (ii) if the debt is bona fide
dispatched, there cannot be neglect to pay within the meaning of section
433(i)(a) and petition for winding up is not maintainable, (iii) dispute with regard
to payment of interest is not a bona fide dispute, (iv) the defence of respondent
company should be in good faith, one of substance and likely to succeed in
point of law.
In the additional affidavit filed the respondent company, it was stated that
application form was signed by the proprietor of petitioner with a sole view to
settle the outstanding account pursuant to which the respondent proceeded to
allot 70,000 shares to the petitioner and the certificates were dispatched, which
were received by the representative of petitioner. The respondent disputed the
debt and it could not be held that it neglected to pay the debt within the
meaning of section 433(1)(a). The winding up petition is not a legitimate means
of seeking to enforce payment of debt, which is bona fide disputed by the
company.


Who may Petition for the Winding up
An application for the winding up of a company has to be made by way of petition
to the Court. A petition may be presented under Section 439 by any of the following
persons:
(a) the company; or
(b) any creditor or creditors, including any contingent or prospective creditor or
creditors; or
(c) any contributory or contributories; or
(d) all or any of the parties specified above in clauses (a), (b), (c) whether
together or separately; or
(e) the Registrar; or
(f) any person authorised by the Central Government in the case falling under
Section 243, i.e., following upon a report of inspectors.
*(g) by the Central government or state Govt., in a case falling under clause (h)
of Section 433.
*

The Official Liquidator or any of the persons mentioned above as being entitled to
present a petition under Section 439, will have a right to present a winding-up petition
when a company is already being wound up voluntarily or subject to the supervision
of the Court, and such voluntary winding up cannot be continued with due regard to
the interests of the creditors or contributories or both (Section 440). In Mumbai
Labour Union v. Indo French Time Industries (2002) 38 SCL 924, it was held that a
trade union can not file winding up petition for unpaid wages of workmen/employees.
They are disentitled as other legitimate and efficacious remedy under labour laws is
available. In such case, filing winding up petition is abuse of law.
Jurisdiction of Court for entertaining Winding up Petition
In terms of the provisions of Section 10 of the Companies Act, 1956, the
jurisdiction for entertaining winding up petition vests either in the High Court having
jurisdiction in relation to the place where the registered office of the company is
situate or the District Court of the area subordinate to the High Court, in which the
jurisdiction has been vested either by the Act or by the Central Government by
notification in the Official Gazette. In GTC Industries Ltd. v. Parasrampuria Trading
(1999) 34 CLA 380 (All HC), it was held that only High Court where the registered
office is situated has jurisdiction in winding up, even if there was agreement between
parties that dispute between parties will be resolved before High Court where
registered office is not situated. Regardless of where agreement is executed,
Company Court having jurisdiction over the place where the registered office is
situated, will have the jurisdiction to entertain a petition for winding up. LKP Merchant
Financing v. Arwin Liquid Gases (2001) 103 Comp. Cas. 211 (Guj.).
For the purposes of jurisdiction to wind up companies, the expression Registered
Office means the place which has longest been the registered office of the company
during the six months immediately preceeding the presentation of the petition for

*
Vide Companies (Second Amendment) Act, 2002 w.e.f. a date yet to be notified.


winding up. In Kalpana Trading v. N.C.L. Industries Ltd. [(1996) 1 Comp. LJ 152], the
Orissa High Court refused to entertain the petition for winding up as the Company
had its place of Registered Office at Hyderabad.
5. VOLUNTARY WINDING UP
The companies are usually wound up voluntarily as it is an easier process of
winding up. It is altogether different from a compulsory winding up. In voluntary
winding up the company and its creditors are left to settle their affairs without going to
a Court, although they may apply to the Court for directions or orders, as and when
necessary. One or more liquidators are to be appointed by the company in general
meeting for the purpose of winding up the affairs and distributing the assets of the
company. The remuneration of the liquidators is also required to be fixed by the
company in general meeting. Unless the remuneration as aforesaid is fixed the
liquidators shall not take charge of his/their offices (Section 490). The circumstances
in which a company may be wound up voluntarily are:
(a) when the period fixed for the duration of the company as mentioned in its
articles has expired; or
(b) the event, on the happening of which the articles provide that the company
is to be dissolved has occurred; and
(c) the company passes a special resolution that the company be wound up
voluntarily [Section 484 (1)].
Thus, a company may be wound up voluntarily on the expiry of the term fixed for
duration of the company or on the occurance of the event as provided in its articles.
In these two cases only an ordinary resolution may be passed in the general meeting
of the company. Apart from these two cases, a company may be voluntarily wound
up for any other reason as well for which a company has to pass a special resolution.
A proper notice required for the respective meetings must be given to all the
members and in the latter case the text of the special resolution to be passed
together with the reason to wind up voluntarily must be mentioned therein.
The resolution (whether ordinary or special), when passed, must be advertised
within 14 days of the passing of the resolution in the Official Gazette and also in
some newspaper circulating in the district where the registered office of the company
is situated. A default in complying with the above requirements renders the company
and every officer of the company, who is in default, liable to a penalty which may
extend to five hundred rupees for every day during which the default continues. A
liquidator of the company is deemed to an officer of the company for the purposes of
the above requirements (Section 485).
A voluntary winding up commences from the date of the passing of the resolution
for voluntary winding up. This is so even when after passing a resolution for
voluntary winding up, a petition is presented for winding up by the Court.
The effect of the voluntary winding up is that the company ceases to carry on its
business except so for as may be required for the beneficial winding up thereof. The
corporate status and the powers of the company, however, continue until it is
dissolved [Section 487].


Kinds of Voluntary Winding Up
Section 488(5) divides voluntary winding up into two kinds:
(i) Members voluntary winding up; and
(ii) Creditors voluntary winding up.
Members Voluntary Winding Up
When the company is solvent and is able to pay its liabilities in full, it need not
consult the creditors or call their meeting. Its directors, or where they are more than
two, the majority of its directors may, at a meeting of the Board, make a declaration of
solvency verified by an affidavit stating that they have made full enquiry into the
affairs of the company and that having done so they have formed an opinion that the
company has no debts or that it will be able to pay its debts in full within such period
not exceeding three years from the commencement of the winding up as may be
specified in the declaration. In Shri Raja Mohan Manucha v. Lakshminath Saigal
(1963) 33 Comp. Cas. 719, it was held that where the declaration of solvency is not
made in accordance with the law, the resolution for winding up and all subsequent
proceedings will be null and void. Such a declaration must be made within five weeks
immediately preceding the date of the passing of the resolution for winding up the
company and be delivered to the Registrar for registration before that date. The
declaration must embody a statement of the companys assets and liabilities as at the
latest practicable date before the making of the declaration. Any director making a
declaration without having reasonable grounds for the aforesaid opinion, shall be
punishable with imprisonment extending up to six months or with fine extending up to
Rs. 50,000 or with both [Section 488].
A winding up in the case of which such a declaration has been made and delivered
in accordance with Section 488 is referred to as a members voluntary winding up. A
winding up in the case of which such a declaration has not been so made and delivered
is referred to as a creditors voluntary winding up [Section 488(5)].
Creditors Voluntary Winding Up
As discussed earlier, where a declaration of solvency of the company is not
made and delivered to the Registrar in a voluntary winding up it is a case of
creditors voluntary winding up.
Distinction between Members and Creditors Voluntary Winding Up
The main differences between the two are as follows:
1. A members voluntary winding up results where, before convening the general
meeting of the company at which the resolution of winding up is to be passed, the
majority of the directors file with the Registrar a statutory declaration of solvency. A
creditors voluntary winding up is one where no such declaration is filed.
2. In a members voluntary winding up, the creditors do not participate directly in
the control of the liquidation, as the company is deemed to be solvent; but in a
creditors voluntary winding up, the company is deemed to be insolvent and,
therefore, the control of liquidation remains in the hands of the creditors.


3. There is no meeting of creditors in a members voluntary winding up and the
liquidator appointed by the company acts in the liquidation of its affairs; whereas in a
creditors voluntary winding up, meetings of creditors have to be called at the
beginning and subsequently the liquidator is appointed by the creditors.
4. In a members voluntary winding up the liquidator can exercise some of his
powers with the sanction of a special resolution of the company; but in a creditors
voluntary winding up he can do so with the sanction of the Court or the Committee of
Inspection or of a meeting of creditors.
Powers of the Court to Intervene in Voluntary Winding Up
In voluntary winding up it is left to the company, the contributories and the
creditors to settle their affairs without intervention of the Court as far as possible.
However, the Companies Act, 1956, contains certain provisions which provide a
means of acces to the Court with a view to speed up the liquidation proceedings and
to overcome the difficulties that may arise in the course of liquidation. The Court will
intervene in the voluntary winding up whenever it is satisfied that such an intervention
will be just and beneficial. In appropriate cases the Court can be approached for
compulsory winding up (Section 440) or winding up being conducted under the
supervision of the Court (Section 522).
The Court is vested with the following powers in voluntary winding up:
(i) To appoint the Official Liquidator or any other person as liquidator where no
liquidator is acting [Section 515(1)].
(ii) To remove the liquidator and appoint the Official Liquidator or any other
person as liquidator on justifiable cause being shown [Section 515(2)].
(iii) To determine the remunerations of liquidator when the Official Liquidator is
appointed as a liquidator [Section 515(3)].
(iv) To amend, vary, confirm or set aside the arrangement entered into between
a company and its creditors on an appeal being made by any creditor or
contributory within 3 weeks of the completion of the arrangement
(Section 517).
(v) On an application of the Liquidator or contributory or creditor:
(a)to determine any question arising in the winding up of a company [Section
518(1)(a)];
(b)to exercise, as respects the enforcing of calls, the staying of suits or other
legal proceedings or any other matter, all or any of the powers which the
Court might exercise if the company were being wound up by the Court
[Section 518(1)(b)].
(vi) To set aside any attachment, distress or execution started against the estate
or effects of the company after the commencement of the winding up on
such terms as it thinks fit on an application made by the liquidator, creditor
or contributory if the Court is satisfied that it is just and beneficial to do so
[Section 518(3) and (4)].
(vii) To order public examination of any person connected with promotion or
formation of a company or any officer connected with the affairs of the


company in regard to matters of promotion or formation or conduct of the
business of the company or as to his conduct or dealing as officer thereof.
Such an examination can be ordered on a report of the liquidator where he is
of the opinion that a fraud has been committed by the persons aforesaid in the
formation or promotion of the company or in the conduct of its affairs
[Section 519(1)].
6. WINDING UP SUBJECT TO THE SUPERVISION OF COURT*
*

When a company has by special or ordinary resolution resolved to wind up
voluntarily, the Court may make an order that the voluntary winding up shall continue,
but subject to such supervision of the Court and with such liberty for creditors,
contributories or others to apply to the Court and generally on such terms and
conditions, as the Court thinks just (Section 522).
The application for such intervention of the Court is made by a creditor,
contributory or the voluntary liquidator, when there are irregularities or frauds in the
voluntary winding up. The Court may have regard to the wishes of creditors and
contributories, while making such an order. A petition for the continuance of a
voluntary winding up subject to the supervision of the Court shall, for the purpose of
giving jurisdiction to the Court over suits and legal proceedings, be deemed to be a
petition for winding up by the Court (Section 523).
The object of the supervision order is to safeguard the interest of the company,
shareholders and creditors. When an order is made for a winding up subject to
supervision, the Court may, by that or any subsequent order, appoint an additional
liquidator or liquidators. Generally, the old liquidator is permitted to continue by the
Court if there is no complaint against him. The Court is also empowered to remove
any liquidator so appointed or any liquidator continued by the removal or by death or
resignation of the liquidator. The Court has also been empowered under the
Companies (Amendment) Act, 1960 to appoint Official Liquidator as a Liquidator or to
fill any vacancy caused by the removal, death or resignation of the previously
appointed liquidator. The Court may also appoint or remove a liquidator on an
application of the Registrar in this behalf (Section 524).
Effect of Supervision Order
(i) In supervisory winding up, the liquidator may, subject to any restrictions
imposed by the Court, exercise all his powers, without the sanction or intervention of
the Court, in the same manner as if the company were being wound up altogether
voluntarily [Section 526(1)].
(ii) The effect of a petition for winding up subject to supervision is, that the Court
Implications obtains jurisdiction over suits and legal proceedings as in the case of a
petition for compulsory winding up [Section 526(2)].
(iii) The supervision order also confers full authority on the Court to make calls or
to enforce calls made by the liquidators, and to exercise all other powers which it

*
Omitted by Companies (Second Amendment) Act, 2002, w.e.f. a date yet to be notified.
Since the amendment is yet to be notified, powers continue to vest in the Court. Winding up subject to
the supervision of Court will continue to be operative till such time.


might have exercised if an order had been made for winding up the company
altogether by the Court [Section 526(2)].
(iv) When an order has been made for winding up a company subject to
supervision, and an order is afterwards made for winding up by the Court, the Court
has power to appoint any person or persons who are then liquidators either
provisionally or permanently, to be liquidator or liquidators in the winding up by the
Court in addition to, and subject to the control of the Official Liquidator [Section 527].
(v) Since the supervision order has the same effect as an order for compulsory
winding up, the company cannot be dissolved except by the order of the Court as in
the case of compulsory winding up.
7. DISTINCTION BETWEEN VOLUNTARY WINDING UP AND WINDING UP
UNDER THE SUPERVISION OF THE COURT
The points of distinction between the two modes are summarised below, as
brought out by Section 524 of the Act:
1. In pure voluntary winding up, the liquidator is appointed by the members in
general meeting in the case of members voluntary winding up and by the
creditors in the case of creditors voluntary winding up. In a voluntary
winding up subject to supervision, the Court may appoint an additional
liquidator, or liquidators who may be the Official Liquidator. The Court may
remove the liquidator appointed by it or any liquidator continued under
supervision order and fill any vacancy caused by such removal, death or
resignations.
2. By virtue of Section 536, transfers of shares or any alteration in the status of
the Members of the Company or any disposition of property (including
actionable claim) of the company made after the commencement of winding
up are void unless the Court orders otherwise in a winding up under the
supervision of the Court. In a pure voluntary winding up such transfers can
be agreed to by the voluntary liquidator.
3. Any attachment, distress or execution against the company after the
commencement of winding up subject to supervision, without the leave of
the Court, is void. The provisions of Section 527 does not apply to pure
voluntary winding up.
4. By virtue of Section 545, if it appears to the Court either in compulsory
winding up or subject to Courts supervision, that any past or present officer,
or any member, of the company has been guilty of any offence in relation to
the company the Court may, either on the application of any person
interested in the winding up or of its own motion direct the liquidator to
prosecute the offender or to refer the matter to the Registrar. But in the
case of a pure voluntary winding up, the liquidator only makes a report to the
Court in this regard, as stated in Section 519.
5. For exercising certain powers conferred by Section 546, the liquidator has to
get the sanction of the Court in a winding up subject to supervision whereas
in a pure voluntary winding up the liquidator gets the sanction by special
resolution passed in a general meeting of the company.


8. COMMENCEMENT OF WINDING UP
Section 441 of the Companies Act provides for the provisions relevant to
commencement of winding up. The winding up of a company by the Court is deemed
to commence at the time of the presentation of the petition for winding up. But
where, before the presentation of the petition a resolution has been passed by the
company, for voluntary winding up, the winding up shall be deemed to have
commenced at the time of the passing of the resolution. Any proceedings taken in
voluntary winding up will be deemed to have been validly taken unless the Court
directs otherwise on account of fraud or mistake.
In all other cases, the winding up of a company must be deemed to have
commended at the time of the presentation of the petition for the winding up
[Section 441]. Where an order is made by the Court on more than one petition the
commencement of the winding up dates from the earliest petition. [See Kent v.
Freehold Land Co., (1868) 3 Ch. App. 493]. It may be noted here that voluntary
winding up shall be deemed to commence at the time when resolution for voluntary
winding up is passed (Section 486).
In Rishabh Agro Industries Ltd. v. PNB Capital Services Ltd. (2000) AIR SCW
1753, it was held that shall be deemed to commence clearly show the intention of
legislature that although the winding up of a company does not in fact commence at
the time of presentation itself, but it shall be presumed to commence from that stage.
The word deemed used in Section 441 would thus mean suspended, considered,
construed, thought, taken to be or presumed.
9. WINDING UP OF UNREGISTERED COMPANIES
Section 582 of the Act specifies unregistered companies, which may be wound
up by the order of the Court under the provisions of Part X of the Act. By virtue of that
section, an unregistered company does not include the following:
(a) a railway company incorporated by any Act of Parliament or other Indian
Law or any Act of Parliament of the United Kingdom;
(b) a company registered under the Companies Act, 1956; or
(c) a company registered under any previous companies law and not being a
company the registered office whereof was in Burma, Aden or Pakistan
immediately before the separation of that country from India.
Except as aforesaid, any partnership, association or company consisting of more
than seven members at the time when the petition for winding up the partnership,
association or company, as the case may be, is presented before the Court, will be
deemed to be an unregistered company and may be wound up by the order of the
Court. It should be noted that if the number of members is not more than seven, the
Court has no jurisdiction to wind up such a company.




LESSON ROUND-UP
Winding up of a Company is defined as a process by which the life of a company
is brought to an end and its property administered for the benefit of its members
and creditors. An administrator called the liquidator is appointed and he takes
control of the company, collects its assets, pays debts and finally distributes any
surplus among the members in accordance with their rights. At the end of winding
up, the company will have no assets or liabilities. When the affairs of a Company
are completely wound up, the dissolution of the company takes place. On
dissolution, the companys name is struck off the register of companies and its
legal personality as a corporation comes to an end.
Winding up is only a process while the dissolution puts an end to the existence of
the company.
There are three modes of winding up: winding up by Court (Tribunal) i.e.
compulsory winding up, voluntary winding up and winding up subject to
supervision of the Court.
Section 433 lays down the grounds on which a company may be wound up, in
compulsory winding up
Section 439 specifies the persons by whom a petition for winding up of a
company may be presented to the Court (tribunal) in compulsory winding up.
When a company is wound up by the members or the creditors without the
intervention of Court (tribunal), it is called as voluntary winding up.
Section 484 specifies the circumstances in which a company may be wound up
voluntarily. Section 488 divides voluntary winding up into two kinds i.e. Members
voluntary winding up and creditors voluntary winding up.
When a company has by special or ordinary resolution resolved to wind up
voluntarily, the Court may make an order that the voluntary winding up shall
continue but subject to such supervision of the Court and with such liberty for
creditors, contributories or others to apply to the Court and generally on such
terms and conditions as the Court thinks fit.
Section 583 specifies that subject to Part X of the Act unregistered companies
may be wound up and all provisions with respect to winding up shall apply to an
unregistered company, with the exceptions and additions as specified under the
section.

SELF-TEST QUESTIONS
(These are meant for recapitulation only. Answers to these questions are not to
be submitted for evaluation)
1. What are the various modes of winding up ?
2. What is compulsory winding up ? Who are entitled to make a petition to the
Court ?
3. Define an unregistered company and point out how and when such a
company can be wound up?


4. Distinguish between winding up and dissolution.
5. Distinguish between Members and Creditors voluntary winding up.


Suggested Readings:
(1) Guide to Companies ActA. Ramaiya
(2) Company Law and PracticeA.K. Majumdar and G.K. Kapoor
(3) Company Law ProceduresK.V. Shanbhogue
(4) Circulars and Clarification on Company Law and SEBITaxmann
Publication
























STUDY XXXVI
AN INTRODUCTION TO E-GOVERNANCE

LEARNING OBJECTIVES
The concept of physical filing has become past in the wake of electronic governance.
Now, the filing of forms with the Registrar of Companies is done in electronic manner
with the help of internet on the computer through MCA portal. This study deals with an
introduction to the e-governance. It will give the basic information required after
introduction of electronic governance.
After going through this chapter, you should be able to understand:
Introduction
Organisation of ROC offices under MCA-21
Important features
Other features
Categories of e-forms
Pre-certification of e-forms
Terms used while e-filing the e-forms
Key benefits of MCA 21 Project
General structure of an eform and e-filing process.

1. INTRODUCTION
MCA-21 stands for e-governance initiative of Ministry of Company Affairs (MCA)
of the 21st Century. The project is named MCA-21 as it aims at repositioning MCA as
an organization capable of fulfilling the aspirations of its stakeholders in the 21st
Century. It is based on the Governments vision of National e-governance in the
country. E-governance or Electronic Governance is the application of Information
Technology to the Government functioning in order to bring about Simple, Moral,
Accountable, Responsive and Transparent (SMART) Governance. This project of
MCA aims at moving from paper based to nearly paperless environment.
Filing and registration of documents is a statutory requirement under the
Companies Act, 1956. Prior to the launch of this project, the documents/forms were
filed manually at the ROC offices. The Central Government has amended the
Companies (Central Governments) General Rules and Forms 1956 vide Notification
No. GSR 56(E) dated 10th February, 2006 and notified e-forms to enable electronic
filing of documents. Rule 3 of Companies (Central Governments) General Rules and
Forms (Amendment) Rules, 2006 provides that the forms prescribed in Annexure A of
the Rules may be filed through electronic media or through any other computer
readable media as referred under Section 610A of the Companies Act, 1956.
The scope of MCA-21 project covers only the offices of ROCs, Regional
Directors, and the Headquarters at New Delhi at present. It does not include other
offices of MCA like Official Liquidators, Company Law Board/Tribunal and Courts.
1228


An e-form is only a re-engineered conventional form notified and represents a
document in electronic format for filing with MCA authorities through the Internet. This
may be either a form filed for compliance or information purpose or an application
seeking approval from the MCA*.
*

2. ORGANISATION OF ROC OFFICES UNDER MCA-21
The major components involved in this comprehensive e-governance project are
front office and back office.
Front Office
Front Office represents the interface of the corporate and public users with the
MCA-21 system. This comprises of Virtual Front Office and Registrars Front Office.
Virtual front office
Virtual front office is one of the various channels available to stakeholders
(companies and the professionals) to enable them to do the statutory filing with ROC
Offices across the country. It merely represents a computer facility for filing of digitally
signed e-forms by accessing the MCA portal through internet (www.mca.gov.in). It
also presupposes availability of related facilities to convert documents into PDF
format and scanning of documents wherever required.
Registrars Front Office
To facilitate the change over from Physical Document Filing to Digital Document
Filing, the Ministry started offices known as the Registrar Front Office. It is one of the
various channels available to stakeholders to enable them to do the statutory filing
with ROC Offices across the country. Registrars Front Offices are managed and
operated by the operator. Till date these are 53 in number all over India. RFO has all
facilities which will be required for online filing like trained manpower, broadband
connectivity, scanner, printer and related computer accessories. This office manned
by MCA and TCS officials provides free of cost service in all aspects of MCA 21 e-
governance projects.
Back Office
Back Office represents the offices of Registrar of Companies, Regional Directors
and Headquarters and takes care of internal processing of the forms filed by the
corporate user as per MCA norms and guidelines. The e-forms are routed
dynamically to the concerned authority for processing depending upon the assigned
role. All the e-forms along with attachments are stored in the electronic depository,
which the staff of MCA can view depending upon the access rights.
3. IMPORTANT FEATURES
Director Identification Number (DIN)
All existing and any person intending to be appointed as a director are required to
obtain the Director Identification Number (DIN). DIN is also mandatory for directors of

*
The e-forms are being constantly revised to be compatible with the technical requirements. The updated
forms are available at the website of MCA (www.mca.gov.in).


Indian Companies who are not citizens of India. However, DIN is not mandatory for
directors of foreign company having branch offices in India. Only a single DIN is
required for an Individual irrespective of number of directorships held by him.
DIN is a unique identification number and once obtained is valid for life time of a
director.
Ministry of Company Affairs (MCA) has notified Companies (Director
Identification Number) Rules, 2006 vide notification no. G.S.R 648 (E) dated
19.10.2006. The detailed procedure for getting director identification number is
provided in Chapter V of the Study.
Corporate Identity Number (CIN)
Every company has been allocated a Corporate Identity Number (CIN). CIN can
be found from the MCA 21 portal through search based on:
ROC Registration No.
Existing Company Name
Old Name of Company (in case of change of name, user is required to enter
old name and the system displays corresponding current name).
Inactive CIN [In case of change of CIN, the user is required to enter previous
(inactive) CIN Number].
Global Location Number (GLN)
Every foreign company has been allocated a Global Location Number (GLN).
Digital Signature Certificate
The e-forms are required to be authenticated by the authorized signatories using
digital signatures as defined under the Information Technology Act, 2000. A digital
signature is the electronic signature duly issued by a certifying authority that shows
the authority of the person signing the same. It is an electronic analogue of a written
signature. Every user who is required to sign an e-form for submission with MCA is
required to obtain a Digital Signature Certificate. For MCA-21, the following four types
of users are identified as users of Digital Signatures and are required to obtain digital
signature certificate:
1. MCA (Government) Employees.
2. Professionals (Company Secretaries, Chartered Accountants, Cost
Accountants and Lawyers) who interact with MCA and companies in the
context of Companies Act.
3. Authorized signatories of the Company including Managing Director,
Directors, Manager or Secretary.
4. Representatives of Banks and Financial Institutions.
A person requiring a Digital Signature Certificate can approach any of the
Certifying authorities identified by the MCA for issuance of Digital Signature
Certificate.


4. OTHER FEATURES
Certified Filing Centre (CFC)
CFC is an extended arm of the Ministry which is be manned by professionals
from three core areas i.e., Company Secretaries, Chartered Accountants and Cost
Accountants. It is one of the various channels available to the stakeholders to enable
them to do the statutory filing with ROC Offices across the country. These are
managed and operated by professionals on user charge basis. There are 550 plus
centres approved all over India at 85 cities. With the recognition of CFCs, the
services of MCA-21 are being provided in small forms and cities.
Infrastructure for e-filing
The Minimum system requirements for e-filing are:
P-4 computer with printer.
Windows 2000/Windows XP.
Internet Explorer 6.0 version and above.
Above Acrobat Reader 7.0.5 version.
Scanner; and
Java Runtime Environment (JRE) 1.4.2. version.
Mode of payment
MCA-21 system provides for the facility of payment of statutory fees through
multiple modes i.e. (i) Off-line payment through a challan generated by the system
and payment of fees at the counter of the notified bank branches through DDs/ Cash;
(ii) on-line payments through Internet Banking and Credit Cards [Master Card/ VISA].
In case a stakeholder chooses to pay through the off-line method (i.e. over the
counter in a bank branch), it takes about two to three days time for the bank to
intimate the realisation of payment to the MCA-21 system and the transaction gets
passed on to the back office for processing only after payment is recognised by the
banking system. On the other hand, the on-line payment through Internet banking/
Credit Card is instantaneous.
Service Request Number (SRN)
Each transaction under e-filing is uniquely identified by a Service Request
Number (SRN). On filing of an e-form, the system will generate and provide a Service
Request Number (SRN). A user can check the status of the document/ transaction,
by entering the SRN.
Payment of Stamp Duty
Stamp duty is a state subject. It is payable on Memorandum and Articles of
Association of every Company. In some states, duty is also payable on the
authorized capital mentioned in the Memorandum of Association of the Company.
Some states have authorized MCA to collect the stamp duty on their behalf and to
remit the same to them.


Physical submission of Certain Documents
In view of practical constraints, certain documents requiring stamp paper or
Stamp fees like stamped memorandum of association, declaration on stamp paper,
order of Company Law Board/Court are required to be sent by the Companies in the
physical form to the ROCs. The user will be providing SRN while sending these
forms/documents to MCA. This would ensure the authenticity and reliability of such
key documents and enable the MCA authorities to further act upon the same.
5. CATEGORIES OF E-FORMS
For the purpose of standardization and better understanding, the proposed e-
Forms have been grouped under the following broad categories:
I. Company Registration
All the forms required for the purpose of incorporating companies in India are
encompassed herein e.g. Form 1A, 1, 18, 32, 19, 20, 20A etc.
II. Compliance Related Filing
All the statutory filing of e-Forms, whether annually or event based is grouped
under compliance related filing services. The filing requirements include the following:
Annual returns by companies having share capital; Annual returns by companies
not having share capital; Balance Sheet and Profit & Loss Account; Return of
allotment including details of shares issued for consideration other than cash; Return
of buy back of securities, Return of deposits by the company which has accepted
public deposits during the year; Return of appointment of Managing Director, whole
time Director; Notice of appointment of auditor; Statutory report; Cost audit report.
Forms in this category are: 2, 3, 4, 4C, 20B, 21A, 22, 23, 23AC etc.
III. Change Services
Change services cover matters in respect of Indian companies, especially those
pertaining to any change in the capital structure, increase in authorized capital,
increase in the number of members, the change of situation of registered office of the
company and change of Directors, Manager and Secretary. Foreign companies are
required to intimate the ROC about the changes in the charter statutes or any
instrument governing the company, changes in the registered office, principal place of
business or the persons appointed as Director, Secretaries and authorized
representatives. Forms in this category include 1A, 32, 5, 18, 1B etc.
IV. Charge management
Companies are required to file particulars for registration of charge created or
modified with the concerned ROC.
In the case of satisfaction of charge also, an e-Form has to be filed with the ROC.
It also includes filing of e-Forms for appointment and cessation of receiver and
filing of accounts by receiver. Forms in this category include 8, 17, 10 etc.


V. Investor Services
A separate e-Form has been prescribed for complaints with respect to each
company. No digital signature is needed for filing this e-Form. Also, no filing fee is
required for submitting the e-Form for complaints.
The nature of complaint may relate to any of the following aspects:
Share/Dividend; Debenture/Bond; Fixed Deposits non-receipt of amount;
Miscellaneous non-receipt
The form in this category is Investor Complaint form.
VI. Provisions Relating to Managerial Personnel
This includes applications pertaining to the following:
(a) Increase in the number of Directors
(b) Appointment or reappointment of Managing Director (MD)/Whole time
Director (WTD)/Manager
(c) Fixing/increasing the remuneration or waiving off excess/overpayment to the
concerned managing authority
(d) Payment of commission to Directors
(e) Modification of the terms and conditions for the appointment of Managing
Directors, Whole-time Directors and Non Rotational Director
(f) Removing disqualification of directors.
Forms in this category are 24, 25A, 25B and DD-C.
VII. Approval Services Head Quarters
Approval from MCA (Headquarters) is inter alia required in the following cases:
(a) Exemption from attaching annual accounts of subsidiary(s),
(b) Exemption or extension time for repayment of deposits,
(c) Recognition as a Nidhi company,
(d) Appointment of sole selling agent
(e) Appointment of sole buying agent
(f) Declaration of dividend out of reserves
(g) Exemption from providing depreciation
(h) Consent for holding office or place of profit
(i) Providing loan or guarantee or security in connection with the loan to or by
specified category of persons
(j) Modification of the form and content of Balance Sheet and Profit and Loss
Account
(k) Appointment of Cost Auditor


Forms in this category include 23AAA, 65, 63, 24B, 24AB, 23C, 23AAB, DD-C
etc.
VIII. Approval Services Regional Director
The approval of the Regional Director is required in respect of the following
matters:
(a) Issue of licence under Section 25 to an existing company
(b) Issue of licence under Section 25 to a new association
(c) Approval of contract under Section 297
(d) Rectification of name of company
(e) Appointment/Removal of auditor
(f) Shifting of registered office of the company from the jurisdiction of one ROC
to another within the same State
(g) Opening of new branches by a Nidhi Company
Forms in this category include 1AD, 64 and 24A.
IX. Approval Services ROCs
ROCS are empowered to accord approval, or to give any direction in relation to
the matters pertaining to the change of name of an existing company and the
conversion of a public company to private company. In addition, ROC approval is
required in following cases:
(a) Extension of time period for holding AGM
(b) Holding AGM at place other than registered address
(c) Declaring of company as defunct
(d) Extension of the period of annual accounts
(e) Amalgamation of companies
(f) Compounding of offences
Forms in this category include 1B and 61.
X. Informational Services
Informational services cover those forms, which are to be filed with ROC for
informational purposes, in compliance with the provisions of the Companies Act. In
following cases, forms relating to following informational services are required to be
filed:
(a) Consent and withdrawal of consent of persons charged as officers in default
(b) Declaration of solvency in case company decides to buy back its shares
(c) Resolutions and agreements
(d) Notice of address of place where books of accounts are kept


(e) Information in relation to transfer of shares by a company to another
company
(f) Order received from Court or Company Law Board
Forms in this category include 1AA, 23, 23AA, 35A 21 and 22B
Annual filing
As a part of annual filing, companies incorporated under the Companies Act,
1956 are required to file the following documents along with the e-forms with the
Registrar of Companies:
S.No. Document E-form
1. Balance Sheet Form 23AC to be filed by all companies.
2. Profit and Loss Account Form 23ACA to be filed by all companies.
3. Annual Return Form 20B to be filed by companies having
share capital.
4. Annual Return Form 21A to be filed by companies without
share capital.
5. Compliance Certificate Form 66 to be filed by companies with paid
up capital between Rs.10 lacs to Rs.2 crores.

Important points to Remember
1. Balance sheet and Profit and Loss Accounts are to be filed as two separate
documents with different e-forms.
2. Annual Return, Balance Sheet and Profit and Loss Account are filed as
attachments because scanned images considerably increases the size of
document besides being more expensive.
6. PRE-CERTIFICATION OF E-FORMS
Apart from authentication of e-forms by authorized signatories using digital
signatures, some e-forms are also required to be pre-certified by practising
professionals. Pre-certification means certification of correctness of any document by
a professional before the same is filed with the Registrar.
This pre-certification is to be carried out by inter-alia, Company Secretaries,
Chartered Accountants, Cost and Work Accountants, in whole-time practice. At
present, the under mentioned forms are required to be pre-certified:
A. Under Companies (Central Governments) General Rules and Forms
(Amendment) Rules, 2006:
1.Form No.2
2.Form No.3


3.Form No.5
4.Form No.10
5.Form No.17
6.Form No.18
7.Form No.23
8.Form No.24AB
9.Form No.25C
10.Form No.32
B. Under Companies (Declaration of Dividend out of Reserves) Amendment
Rules, 2006:
11.e-Form for application for approval for declaration of dividend out of reserves
pursuant to Section 205A(3).
C. Under Investor Education and Protection Fund (Awareness and Protection
of Investor) Rules, 2001 (Rule 3):
12.Form No.1 relating to statement of amounts credited to Investor Education
and Protection Fund.
7. TERMS USED WHILE E-FILING THE E-FORMS
Pre-fill
Pre-fill is functionality in an e-Form that is used for filling automatically, the
requisite data from the system without repeatedly entering the same. For example, by
entering the CIN of the company, the name and registered office address of the
company shall automatically be pre-filled by the system without any fresh entry.
Attachment
An attachment refers to a document that is sent as an enclosure with an e-Form
by means of an attached file. The objective of the attachment is to provide details
relevant to the e-Form for processing. While some attachments are optional some are
mandatory in nature.
The attachments to an e-Form will be only in Adobe PDF format and MyMCA
portal will have a facility to convert any document format to PDF format. MyMCA
portal shall not be accepting big attachment and the user is advised to keep the
attachment size to minimum.
Check Form
By clicking Check Form, the user will be in a position to find out whether the
mandatory fields in an e-Form are duly filled-in. For example, if the user enters
alphabets in Date of Appointment of Director field, he/she will be asked to correct
the entered information.
If the size of e-Form including attachment is of bigger size then the attachment
may be filed through an addendum. If the size of attachment in isolation is of


bigger size then the details may be submitted in a floppy or compact disc at the ROC
office.
Pre-Scrutiny
Pre-scrutiny is a functionality that is used for checking whether certain core
aspects are properly filled in the e-Form. The user has to make the necessary
attachments in PDF format before submitting the e-Form for pre-scrutiny.
Modify
Once the user has done Check Form, the form gets locked and it cannot be
edited. If the user wishes to make any alterations, the form can be overwritten by
clicking Modify button if the user wants to modify the form after prescrutiny failure,
the user can get the e-form and whichever fields have to be changed only those may
be modified by using the Modify button.
Addendum to e-Form
The user may have to submit some additional supporting documents that are not
submitted during the e-Form (application) filing but are required for the processing of
the e-Form. MCA may also ask the applicant to provide some additional documents
in support of the e-Form already filed so as to expedite the processing of the same.
The user can initiate this on their own by checking the track transaction status on
MyMCA portal or on being notified by MCA through email. Payment of fees is not
required for filing an addendum.
The supporting documents that the applicant uploads, as an addendum, gets
duly associated with the e-Form hat was submitted earlier with the given SRN.
The normal process of filing an addendum is presented below:
(a) The applicant enters SRN for which document needs to be attached.
(b) The applicant attaches relevant document and clicks Submit.
(c) The system verifies that the status of entered SRN is In Progress and the
submitted document gets accepted.
Online Inspection of Documents
The documents filed online, once taken on record by ROC Offices shall be
available for public viewing on payment of requisite fees. These documents, which
shall be in the domain of public documents, include documents relating to
incorporation, charges, annual returns and balance sheets and change in directors. A
certified copy of the documents can also be obtained by anyone so interested.
8. INTRODUCTION OF E-STAMPING FACILITY BY MCA
Registrars of Companies have to ensure that proper stamp duty is paid on the
instruments registered with their office. As of now, physical submission of documents
is mandatory where stamp duty is levied in order to ascertain that applicable stamp
duty has been paid. In the present scenario, even though the e-Form is submitted


instantly, the RCC office has to wait for receipt of physical stamp papers to initiate
necessary processing. It results in service delivery time getting longer. Hence, in
furtherance of e-governance initiatives, provisions regarding stamp duty applicable on
filing of e-forms have been amended and stakeholders shall have facility to pay
stamp duty in electronic manner also. As of now, this process shall cover Form
1(including Memorandum of Association, Articles of Association), Form 5 and Form
44 only. Accordingly, revised e-forms are being introduced w.e.f. 12.09.2009. These
provisions shall be applicable to the e-forms filed subsequent to this amendment. In
case e-forms filed earlier are 'Resubmitted' after implementation of this change, e-
stamp shall not be applicable.
Keeping in view the requirement of stakeholders awareness, process of e-stamp
has not been made mandatory, meaning thereby, stakeholders have option to pay
stamp duty in electronic manner through MCA21 system or in physical form as per
the existing procedure. Further, this process shall be applicable only to such
States/Union Territories which have agreed to the request of Ministry of Corporate
Affairs for collection of e-stamp duty on their behalf.
List of e-Forms to which e-Stamping will be applicable
Form 1, (including Memorandum of Association, Articles of Association)
Form 5
Form 44
Form 67
As mentioned above, payment of stamp duty through MCA 21 system is optional
till 31/12/2009. User may pay stamp duty either through MCA21 system or in the
same manner as was prevailing till now. But w.e.f. 1st January, 2010, stamp duty
shall have to be paid only through electronic mode for the states which have agreed
for e-stamping. Please read notification SO S.O. 2276 (E) issued by Ministry of
Corporate Affairs in this regard.
Further, payment of stamp duty can be made through the MCA 21 system
either off-line or on-line. In case of off line mode, there shall be separate
SRN/Challan for stamp duty, in addition to SRN/Challan for MCA 21 services.
Challan generated for stamp duty is to be paid in the same manner as challan for
MCA 21 services fees is deposited in an authorized bank. Also, it is not necessary to
pay these two challans simultaneously but these should be paid within the validity
period mentioned on the challan. However, it is recommended to make payment of
both the challans simultaneously as processing of the eForm shall not start unless
both i.e. the MCA21 Service fees and stamp duty is paid and payment is confirmed.
Online payment of stamp duty can be made through credit card in the same way as
fees are paid in case of MCA 21 services. (Source: www.mca.gov.in)
9. KEY BENEFITS OF MCA 21 PROJECT
MCA 21 seeks to fulfill the requirements of the various stakeholders including the
Corporates, Professionals, Public Financial Institutions and Banks, Government and
the MCA employees. The key benefits of MCA 21 project are as follows:
1. On-line incorporation of companies.


2. Simplified and easy mode of filing of Forms/Returns
3. Registration as well as verification of charges anytime and from anywhere.
4. Inspection of public documents of companies anytime from any where
5. Corporate-centric approach
6. Building up a centralized database repository of corporates operating in
India.
7. Enhanced service level fulfillment and customer relationship building.
8. Total transparency through e-Governance.
9. Timely redressal of investor grievances.
10. Availability of more time for MCA employees for qualitative analysis of
corporate information.
10. CLARIFICATIONS ISSUED BY MCA FROM TIME TO TIME
1. The filing will be done only through the portal MCA 21 and not through e-
mail.
2. The transaction will be deemed as completed only after clearance of the
payment by the bank.
3. The system will hold the application for five days till the payment is made.
4. Stamp duty will be paper based. It is proposed that the payment of stamp
duty will also be made online in phases through banks in near future. 15
states have already authorized the Central Government in this regard (as
stamp duty is a State subject) and authorization from the remaining states is
expected.
5. Pre-certification of certain e-forms by CS/CA/CWA (in whole-time in practice
is a mandatory requirement.
6. Digital Signature Certificate (DSC) is required for filing all the e-forms.
Therefore, the Directors and Company Secretary of the Company who are
the authorized signatories for e-filing purpose, should obtain DSC.
7. Data in e-forms is required to be given as per the format. However,
additional information, if any, which is not formatted can be given by way of
an attachment to the form.
8. The forms may be filed online or offline after downloading. MCA
recommends that the forms be filled offline and then submitted on the portal.
11. GENERAL STRUCTURE OF AN E-FORM AND E-FILING PROCESS
An e-Form contains certain standardized features. Each e-Form contains the
form reference and the description as well as the particular section of the Companies
Act or the relevant rules or regulations under which it is required to be submitted. It
starts with the Corporate Identity Number (CIN), which works as a unique identifier of
a company, in the case of an Indian Company and the Foreign Company Registration
Number in the case of a Foreign Company that is required to be filled up. By entering


the number, the company details to the extent these are available in static form in the
database, are automatically filled in by using the pre-fill functionality.
The e-Form contains a number of mandatory fields which are required to be
filled-in. Certain other fields are non-mandatory in nature which may be
filled-in as may be relevant in any particular case.
An e-Form contains tool tips for context-sensitive help.
An instruction kit is available for each e-Form, which contains details of the
instructions for properly filling the e-Form.
An e-Form may be filled in either online or offline. Online filling implies that
the e-Form is filled while being still connected to MyMCA portal through the
Internet. Offline filling denotes that the e-Form is downloaded into the users
computer and filled later without being connected to the Internet.
An e-Form may require certain mandatory attachments to be filed along with
it. Optional attachments may also be filed with an e-Form. The list of such
attachments is displayed in the e-Form.
Next to attachment, there is a declaration that is sought from the person
filing the e-Form to the effect that the information given in the e-Form and
the attachments is correct and complete.
Most of the e-Forms require the digital signature of the Managing Director or
Director, Manager or Secretary of the company for successful filing/
submission.
Further, the digital signature of a third party may also be required in certain
cases. In the case of an e-Form for creation or modification of charges, such
digital signature is also required from the Bank or Financial Institution.
In certain cases, a certificate from the Chartered Accountant or Cost
Accountant or Company Secretary in whole-time practice is also required to
authenticate the particulars contained in the e-Form. For example, this
requirement is mandatory in the case of an e-Form for creation or
modification of charges.
There are built-in facilities to check the filled-in e-Form for requisite
validations, to do pre-scrutiny and to modify the e-Form when the same is
required to be re-submitted.
When the Submitted button is pressed, the e-Form gets uploaded into the
MCA central document repository.
Thereafter, the requisite fees as applicable for the e-Form should be paid
either on-line or off-line.
Once the e-Form has been accepted and payment of fees has been
acknowledged, a work item is created and assigned to the appropriate MCA
employee based on pre-defined assignment rules as part of MCA back office
workflow automation.
In the case of an e-Form, the authorized officer affixes his/her digital
signature for registering/approving/rejecting the same.
After the processing of the e-Form is completed, an acknowledgement email
is sent to the user regarding its approval/rejection.


Flowchart of eFiling
Filing eForm


MCA Website Select eForm
Fill eForm


Login


Make attachment


to eForm





Sign eForm and


Submit it





Digital Signature Field/Form Additional Rules

Validation Data Validation


Automated
Prescrutiny





Select
Payment Method




Online Payment


Challan Payment

User

System

Send eForm for Approval eForm stored


securely until
Bank


confirms
receipt


Each Transaction uniquely identified by a Service Request Number (SRN)


12. E-FORMS NOTIFIED
MCA has, vide Notification No. GSR 56(E) dated 10th February 2006, issued the
Companies (Central Governments) General Rules and Forms (Amendment) Rules,
2006 containing new e-Forms. As such, all filings had to be in these new
e-forms w.e.f. 28.2.2006. These new e-forms have been evolved to suit e-filing. As e-
filing is possible only with use of digital signatures and keeping in view that it may
take some time for the authorized representatives/professionals to obtain digital
signature certificates and in order to avoid inconvenience to the stakeholders, the
MCA had decided to accept these forms filled in physical form and signed physically
(in phases) till 15th September, 2006 as a special measure. E-filing with digital
signature certificates has been made mandatory w.e.f. 16th September 2006. The
relevant e-forms have been reproduced at the end of various chapters of the study.

LESSON ROUND-UP
An e-form is a re-engineered conventional form, represents a document in
electronic format.
Director Identification Number (DIN), Corporate Identification Number (CIN) and
Digital Signature Certificate (DSC) are the important features under e-
governance mode (MCA-21).
There is a provision of on-line payment method which is purely a safe method.
A user can check the status of transactions by entering the Service Request
Number (SRN).
The e-forms are being constantly revised. The updated e-forms are available at
the website of MCA (www.mca.gov.in).



SELF-TEST QUESTIONS
1. Explain the terms CIN and GLN.
2. What are the key benefits of MCA-21 project?
3. Write short note on Digital Signature Certificate.


Suggested Readings:
(1) Guide to filing e-companyTaxmann forms
(2) E-filing of Forms and ReturnsD.K. Jain
(3) Referencer on MCA-21Institutes Publication
























STUDY XXXVII
SECRETARIAL STANDARDS
Better Corporate Governance through Secretarial Standards

LEARNING OBJECTIVE
The objective of introducing Secretarial Standards is to integrate, harmonise and
standardize the diverse secretarial practices for good corporate governance. The
Institute of Company Secretaries of India has taken a big step towards the
introduction of Secretarial Standards. This chapter will give a brief outline of the
various Secretarial Standards issued by the Institute till now.
SECRETARIAL STANDARDS - ISSUED FOR THE FIRST TIME IN ANY
COUNTRY- A UNIQUE AND PIONEERING EFFORT
The formulation of Secretarial Standards by the Secretarial Standards Board
(SSB) of the Institute of Company Secretaries of India(ICSI) is a unique and
pioneering step towards standardisation of diverse secretarial practices prevalent in
the corporate sector.
The Secretarial Standards Board formulates Secretarial Standards taking into
consideration the applicable laws, business environment and the best secretarial
practices prevalent. Secretarial Standards are developed:
in a transparent manner;
after extensive deliberations, analysis, research; and
after taking views of corporates, regulators and the public at large.
SSB was constituted in the year 2000. The SSB comprises of eminent members
of the profession holding responsible positions in well-known companies and as
senior members in practice, as well as representatives of regulatory authorities such
as the Ministry of Corporate Affairs, the Securities and Exchange Board of India and
the sister professional bodies viz. the Institute of Chartered Accountants of India and
the Institute of Cost and Works Accountants of India. The ICSI-CCRT (Centre for
Corporate Research and Training) provides technical support to SSB.
The adoption of the Secretarial Standards by the corporate sector will have a
substantial impact on the quality of secretarial practices being followed by
companies, making them comparable with the best practices in the world.
Many companies today are voluntarily adopting the Secretarial Standards in their
functioning. The annual reports of several companies released during the last few
years include a disclosure with regard to the compliance of the Secretarial Standards.
The Institute has so far issued the following Secretarial Standards:
SS-1 : SECRETARIAL STANDARD ON MEETINGS OF THE BOARD OF
DIRECTORS
The Board of Directors of a company holds a fiduciary position and hence it is
essential that the decisions of the Board are taken conscientiously and that, for this
1243


purpose, Meetings of the Board are held frequently, convened and constituted
properly and that all important matters are discussed thereat. The Secretarial
Standard on Meetings of the Board of Directors lays down a set of principles which
companies are expected to adopt in the convening and conduct of meetings of the
Board of Directors and committees thereof. These principles relate to frequency of
meetings, quorum, attendance, resolutions, recording and preservation of minutes
etc. Illustrative lists of items to be considered at different meetings of the Board are
enunciated in the Standard. Further, the Standard seeks to enhance stakeholders
confidence by focussing on the principles relating to responsibilities of the Chairman
of the Board, maintenance of attendance registers, preservation of minutes,
disclosures in Annual Report etc.
SS-2 : SECRETARIAL STANDARD ON GENERAL MEETINGS
The members of a company exercise their decision-making powers through the
forum of General Meetings and hence it is essential that standard and best practices
are followed by companies in this regard which will also strengthen shareholders
confidence. The Secretarial Standard on General Meetings prescribes a set of
principles which companies are expected to observe in the convening and conduct of
General Meetings and matters related thereto. Principles have been laid down with
respect to requirements of quorum, voting, proxies, conduct of poll,
withdrawal/rescinding/modification of resolutions, adjournment of meetings, recording in
and preservation of minutes as well as the duties of the Chairman and the disclosures
to be made in the Annual Reports of companies. Further, explicit principles have been
laid down on the related critical aspects such as distribution of gifts, presence and
duties of Company Secretary/Auditors in the meetings, preservation of minutes.
Besides, it intends to integrate and standardize the diverse secretarial practices
prevalent in the corporate sector for conducting General meetings.
SS-3 : SECRETARIAL STANDARD ON DIVIDEND
Declaration and distribution of dividends is a complicated task involving both
financial and non-financial considerations.
Recognizing the relevance of the topic, SSB formulated the Secretarial Standard
on Dividend. The Secretarial Standard lays down a set of principles in relation to the
declaration and payment of dividend, interim dividend, treatment of unpaid Dividend,
revocation of dividend as well as the preservation of dividend warrants, maintenance
of dividend registers, disclosure requirements and matters incidental thereto. The
Standard, by stipulating requirements in regard to all allied and significant matters
such as intimation to members before transferring unpaid dividend to Investor
Education and Protection Fund, preservation of dividend Registers, validity of
dividend warrants etc. attempts to give the right direction to the corporate sector,
promote uniformity of practices and ensure effective corporate governance.
SS-4 : SECRETARIAL STANDARD ON REGISTERS AND RECORDS
A company is required to maintain certain registers and records. There are some
registers and records, the maintenance of which is not statutorily required but is
essential for the smooth, efficient and systematic functioning of the company. Some
of the registers and records are required to be kept open by a company for inspection


by directors and members of the company and by other persons, including creditors
of the company. The right to inspect such registers and records is an enforceable
right. Companies are also required to allow extracts to be made from certain
documents, registers and records and to furnish copies thereof.
This Secretarial Standard seeks to prescribe a set of principles in relation to
various registers and records including the maintenance and inspection thereof.
The Standards have been laid down in respect of maintenance, authentication,
inspection and preservation of registers so as to give a right direction to the
companies to establish and maintain systems that comply with all statutory provisions
and meet the needs of the stakeholders.
SS-5 : SECRETARIAL STANDARD ON MINUTES
Every company is required to keep minutes of all proceedings of the meetings
conducted during its existence. Minutes kept in accordance with the provisions of the
Act, evidence that the meeting has been duly convened and held; all proceedings
thereat have taken place and all appointments made thereat are valid.
The Minutes should contain a fair and correct summary of the discussions and
decisions taken at the meeting so as to enable absentee directors/ committee
members / shareholders to form an idea of what transpired at these meetings.
The Standard prescribes a set of principles for maintaining, recording, signing,
dating, inspecting and preserving the minutes so as to ensure that the minutes record
the true proceedings of the meetings and are accessible for future reference.
SS-6 : SECRETARIAL STANDARD ON TRANSMISSION
Realizing the divergent practices involved in the transmission of shares and the
difficulties faced by both the companies and the investors, the Secretarial Standards
Board has formulated the Secretarial Standard on Transmission. This Standard
intends to lay down principles in relation to the documentation and for verification of
legal claimants in case of physically and electronically held shares for smooth
functioning of the process. The Standard inter alia deals with situations where shares
are singly or jointly held, nominee has been appointed, shareholder has died intestate
etc.
GUIDANCE NOTES
To facilitate the corporate sector to comply with the Secretarial Standards, the
SSB also formulates Guidance Notes. The Institute has issued Guidance Notes on:
Meetings of the Board of Directors
General Meetings
Passing of the Resolutions by Postal Ballot
Dividend
Buy-Back of Securities
Boards Report
Corporate Governance Certificate


PROCEDURE FOR ISSUING SECRETARIAL STANDARDS
The procedure being adopted by SSB for formulating and issuing Secretarial
Standards is briefly explained below:
SSB, in consultation with the Council of the Institute, determines the areas in
which Secretarial Standards need to be formulated. The SSB then either constitutes
Working Groups or requests the Secretariat of the Institute to formulate a preliminary
draft of the proposed Standard. The preliminary draft is discussed by SSB and then
circulated to various persons/authorities such as members of the Council, Chairmen
of Regional Councils / Chapters of ICSI; various professional bodies; Chambers of
Commerce; Regulatory authorities such as MCA, DEA, SEBI, RBI, DPE and such
other bodies/organizations as may be decided by SSB for ascertaining their views,
specifying a time-frame within which such views, comments and suggestions are to
be received. Based on the suggestions received, an Exposure Draft is prepared by
SSB and published in the Chartered Secretary, the monthly journal of ICSI, and also
put on the website of ICSI to elicit comments from members and the public at large.
After taking into consideration the comments received, the draft of the proposed
Secretarial Standard is finalised by SSB and submitted to the Council which finalises
the same in consultation with SSB. The Secretarial Standard on the relevant subject
is then issued under the authority of the Council.
By following the Secretarial Standards in true letter and spirit, companies will be
able to ensure adoption of uniform, consistent and best secretarial practices in the
corporate sector. Such uniformity of best practices, consistently applied, will result in
furthering the shareholders democracy by laying down principles for better corporate
disclosures thus adding value to the general endevour to strive for good governance.
SECRETARIAL STANDARD ON PASSING OF RESOLUTIONS BY CIRCULATION
(SS-7)
Section 289 of the Companies Act enables the Board of Directors to pass
resolutions by circulation. However, it merely provides that the resolution is to be
circulated to all members of the Board or Committee and is to be passed by the
requisite majority. As the law is silent on who is to propose the resolution, matters
which need to be passed through circulation, the mode of circulation, timing of
approval of the resolution etc., a need for the Secretarial Standard was felt.
The standard purports to lay down a set of principles and the best practices to be
followed for passing of resolutions by circulation. These principles relate to authority,
procedure, approval, recording and validity etc. Illustrative matters to be passed at a
duly convened Board Meeting and which cannot be passed by circulation are also
enunciated in the Standard. This is to ensure that the important items of business
which require deliberations by the Board are passed only after necessary debate and
discussion at Board room.
SECRETARIAL STANDARD ON AFFIXING OF COMMON SEAL (SS-8)
The Companies Act provides for a Company to have a common seal from the
date of incorporation of a company. Since substantive law is mainly silent on fixation
of common seal, the standard aims at clarifying documents which need to be


common sealed and procedure thereof. The unique feature of the proposed standard
is that it also proposes to introduce the concept of Official Seal. This would substitute
the common seal in case affixation of common seal is not possible physically.
Further the standard provides for adoption of common seal, its form and content,
mode of affixation, register of documents executed under it, official seal and its
custody. This standard seeks to strengthen the process and compliances of the law
in respect of affixation of Common Seal.
SECRETARIAL STANDARD ON FORFEITURE OF SHARES (SS-9)
There is no section in the Companies Act, 1956 regarding forfeiture of shares.
Regulations 29 to 35 of Table A of Schedule I contain regulations regarding forfeiture
of shares. The Act being silent on forfeiture gave rise to the need for issuing the
secretarial standard. SS-9 proposes to ensure that the forfeiture is carried out bona
fide and in the interests of the shareholders. It shall act as a safeguard against
collusive forfeiture, made by the directors for the purpose of enabling a favoured
member to escape from his liability. It shall also protect against abuse of power and
fraud on some of the shareholders.
This standard seeks to lay down a set of principals for forfeiture both for equity
and preference shares arising from non-payment of calls. Initiation of forfeiture
process, effect of forfeiture, re-issue of forfeited shares, pricing of reissue of forfeited
shares, annulment of forfeiture of shares are the major aspects which are being dealt
under SS-9.
THE INSTITUTE HAS RECENTLY ISSUED THE SECRETARIAL STANDARD ON
BOARDS REPORT (SS-10)
It was felt that the Boards Report is an important means of communication by the
Board of Directors of a company with its stakeholders and it should disseminate all
material information relating to state of companys affairs as well as any changes
which occur during the year and also during the period between closing of financial
year and the reporting date. It covers wide spectrum of information that stakeholders
need to understand about the prospectus of a company, its business and quality of its
management. Moreover, in case of listed companies, it includes a statement on
compliance of corporate governance and also a report covering Management
Discussion and Analysis (MDAR).
The SS-10 seeks to lay down best practices in respect of preparation and
presentation of such Boards Report. The Standard is segregated into 13 chapters.
Under Disclosure, it covers reporting on the state of affairs of the company and
also major changes and commitment, if any, affecting the financial position of the
company. It also includes Boards proposition about quantum of reserve, dividend,
material events occurring after balance sheet date, details on conservation of energy,
technology absorption and foreign exchange. Interestingly, many a new features are
proposed under Disclosure. For example in case of material changes occurring after
the balance sheet date, the Standard expects to mention the causes for such material
events and the remedial measures in the report. As per Standard, any changes in the
companys nature of business, its subsidiaries and class of business in which the
company has an interest, are to be reported. It has been desired to provide information


relating to joint ventures and acquisition also. In respect of employees remuneration
beyond prescribed limits, the Standard proposes to provide more details by including a
statement showing name of the employees who get higher remuneration in excess of
the managing director or whole-time director of a company.
The Standard also proposes to give more emphasis on Directors Responsibility
Statement and suggest to make it a part of the Boards Report and not as an annexure
thereto. Further, in the event of sickness of the company, the Standard suggest to
include the factors leading to such sickness and the steps proposed to remove
sickness. Under Disclosure, many important aspects are proposed to be covered,
namely, issue of sweat equity shares, buy-back process and failure to complete buy-
back, if any, failure to make preferential allotment, if any, failure to pay
interest/redemption of debentures/preference shares on due date and remedial
measures thereon, etc. In addition, any changes in the Board of Directors, composition
of the Audit Committee and reasons for not accepting recommendations of the Audit
Committee, if any, are proposed to be included in Boards Report. The Standard
suggests that report should give information as required by the Listing Agreement and
includes a compliance report on corporate governance also. The Boards Report should
also disclose details of Employee Stock Option Scheme (ESOS) and inter alia diluted
earning per share pursuant to issuance of shares under ESOS.
One of the unique feature of the Standard is the additional disclosure
recommended for producer company and also pursuant to direction of Reserve Bank
of India in respect of Non-Banking Financial Companies (NBFC) and miscellaneous
Non-Banking Companies as well as residuary companies. The Standard also
proposes disclosure in respect of National Housing Bank directions.
Corporate compliance has been given significant weightage under this Standard
which expects that there should be explanation in the Boards Report in response to
queries raised by a Practising Company Secretary.
The Report is expected to contain information and explanation on every
reservation, qualification or adverse remarks contained in the Auditors Report.
The Standard proposes that in case Auditors Report is available at the time of
approving the Boards Report, the Board Report may bear the same date as that of
Auditors Report.
Considering the importance, the Standard expect that report should be
considered and approved at a duly convened meeting of the Board and not by
circulation. As a good board level practice, report shall be the collective responsibility
of the directors and any dissent of any director on any point, shall be reflected in the
minutes of the meeting and not in the Report. The Standard expects the Boards
Report to be consistent and self-explanatory. In the Standard, a Checklist for Boards
Report is also included so that content and coverage on Boards Report are
standardized.





EXECUTIVE PROGRAMME
COMPANY LAW
EP-CL/2010
TEST PAPERS

This Test Paper set contains five test papers. Test Paper 1/2010, 2/2010, 3/2010,
4/2010 and 5/2010. The maximum time allowed to attempt each test paper is 3 hours.
Students are advised to attempt atleast one Test Paper from Test Papers
3/2010, 4/2010 and 5/2010 i.e. either Test Paper 3/2010 or Test Paper 4/2010 or
Test Paper 5/2010 and send the response sheet for evaluation to make him/her
eligible for Coaching Completion Certificate. However, students may, if they so
desire, are encouraged to send more response sheets including Test Paper 1/2010
and 2/2010 for evaluation.
While writing answers, students should take care not to copy from the study
material, text books or other publications. Instances of deliberate copying from any
source, will be viewed very seriously.
















W A R N I N G
Time and again, it is brought to our notice by the examiners evaluating
response sheets that some students use unfair means in completing postal
coaching by way of copying the answers of students who have successfully
completed the postal coaching or from the suggested answers/study material
supplied by the Institute. A few cases of impersonation by handwriting while
answering the response sheets have also been brought to the Institutes notice.
The Training and Educational Facilities Committee has viewed seriously such
instances of using unfair means to complete postal coaching. The students are,
therefore, strongly advised to write response sheets personally in their own
hand-writing without copying from any original source. It is also brought to the
notice of all students that use of any malpractice in undergoing postal or oral
coaching is a misconduct as provided in the explanation to Regulation 27 and
accordingly the studentship registration of such students is liable to be
cancelled or terminated. The text of regulation 27 is reproduced below for
information :
27. Suspension and cancellation of examination results or registration
In the event of any misconduct by a registered student or a candidate
enrolled for any examination conducted by the Institute, the Council or the
Committee concerned may suo motu or on receipt of a complaint, if it is
satisfied that, the misconduct is proved after such investigation as it may deem
necessary and after giving such student or candidate an opportunity to state his
case, suspend or debar the person from appearing in any one or more
examinations, cancel his examination result, or studentship registration, or
debar him from future registration as a student, as the case may be.
Explanation - Misconduct for the purpose of this regulation shall mean and
include behaviour in a disorderly manner in relation to the Institute or in or near
an Examination premises/centre, breach of any regulation, condition, guideline
or direction laid down by the Institute, malpractices with regard to postal or oral
tuition or resorting to or attempting to resort to unfair means in connection with
the writing of any examination conducted by the Institute".

WHILE WRITING THE RESPONSE SHEETS TO THE TEST PAPERS GIVEN AT
THE END OF THIS STUDY MATERIAL, THE STUDENTS SHOULD KEEP IN VIEW
THE FOLLOWING WARNING AND DESIST FROM COPYING.




























EXECUTIVE PROGRAMME
COMPANY LAW
TEST PAPER 1/2010
(Based on study lessons 1 to 18)
Time allowed: 3 hours Maximum marks: 100
NOTE: Answer All Questions.
1. Comment on any four of the following:
(i)It is essential to maintain a Debenture Redemption Reserve.
(ii)The power to borrow implies a power to secure the borrowings by mortgage or
a charge on the companys assets.
(iii)Where the corporate veil has been used for commission of fraud or improper
conduct, Courts have lifted the veil and looked at the realities of the
situation.
(iv)The employees of a Government Company are not the employees of the
Central or State Government.
(v)A promoter has legal right to claim promotional expenses for his services
unless there is a valid contract. (5 marks each)
2. (a)Members of a Limited Company may nevertheless have unlimited liability.
Comment. (5 marks)
(b)What are the remedies available to the company against the promoter?
(5 marks)
(c)Can contracts before incorporation be enforced against the company?
(6 marks)
3. (a)A limited company is formed with its Articles stating that one Mr. Saxena shall
be the solicitor for the company, and that he shall not be removed
except on the ground of misconduct. Can the company remove
Mr. Saxena from the position even though he is not guilty of
misconduct?
(5 marks)
(b)An allottee of shares in the company has brought an action against the
Director in the company in respect of false statements in the prospectus.
The director has contended that the statements were prepared by
promoters and he had relied on them. Is the director liable under the
circumstances? (5 marks)
(c)Can a company issue shares with differential voting rights? If so, how?
(6 marks)
4. (a)Bonus shares cannot be issued out of revaluation reserves. Comment.
(6 marks)
(b)A, B and C hold jointly 100 shares in a company. They want the order of


names changed in the share certificate as B, A and C and make an
application for change and lodge the original share certificate. The
company directed them to execute a proper instrument of transfer to
effect the change. Is the company justified? (6 marks)
(c)Write a short note on Joint member (4 marks)
5. (a)What is the difference between Reserve Capital and Capital Reserve?
(5 marks)
(b)What do you mean by striking off the name of the company? How is it different
from winding up of companies? (5 marks)
(c)What are the remedies for misrepresentation in prospectus? (6 marks)
6. (a)In certain cases prospectus need not be issued. Comment (4 marks)
(b)Explain Employee Stock Option Scheme (ESOS).(4 marks)
(c)The doctrine of ultra vires is a protection to the shareholders. Discuss.
(8 marks)





EP-CL 1252 T.P.-1/2010



TEST PAPER 2/2010
(Based on study lessons 19 to 36)
Time allowed: 3 hours Maximum marks: 100
NOTE: Answer All Questions.
1. Comment on any four of the following:
(i)The power to invest funds of the company is the prerogative of the Board of
Directors.
(ii)The provisions of the Companies Act relating to prospectus shall apply to the
advertisement also.
(iii)The Registrar and any other officer authorized by the Central Government can
inspect the books of accounts of a company.
(iv)Final dividend is recommended by the Board of Directors in its report to the
shareholders.
(v)The term appointment in relation to sole selling agent and sole buying or
purchasing agent includes re-appointment. (5 marks each)
2. (a)Explain the provisions for signing and dating of Boards Report. (8 marks)
(b)Write the provisions of maintenance, preservation and signing of the following
registers:
(i) Registers of Directors
(ii) Minute Book (4 marks each)
3. (a)The rule in Foss v Harbottle presently has lost its importance because of
adequate statutory provisions of the Companies Act, 1956 in this regard.
(8 marks)
(b)Section 397 and 398 are intended to avoid winding up, if possible, and keep
the company going, while at the same time saving the minority
shareholders from oppression and mismanagement. Explain. (8
marks)
4. (a)In order to enable an amalgamation to take place, the objects clause of
transferor and the transferee company should be similar. Comment.
(5 marks)
(b)X, a duly qualified cost auditor, consented to the company for his appointment
as cost auditor, and accordingly, government approval for his
appointment was obtained. The cost auditor, later on, did not accept the
offer. Advise the company how to proceed in the matter. (5 marks)
(c)Under what circumstances a Multi-State Cooperative Society may be wound
up? (6 marks)
5. (a)Who is a designated partner? Give the relevant provisions of the LLP Act,
2008 with regard to designated partners (8 marks)
(b)Briefly explain the role of Insurance Regulatory Development Authority.


(8 marks)
6. (a)What do you mean by compounding of offences? (5 marks)
(b)What do you mean by striking off name of Company under Section 560?
(5 marks)
(c)Define an unregistered company and point out how and when such a
company can be wound up? (6 marks)





EP-CL 1254 T.P.-2/2010



TEST PAPER 3/2010
(Based on entire study lessons)
Time allowed: 3 hours Maximum marks: 100
NOTE: Answer All Questions.
1. Comment on any four of the following:
(i)The experience of a shareholder can be regarded as experience of a
company.
(ii)Ultra vires borrowings cannot even be ratified by a resolution passed by the
company in general meeting.
(iii)A forged transfer can pass no title and is a nullity.
(iv)In some exceptional cases, the general body of shareholders is competent to
act even in matters delegated to the Board.
(v)No approval of the Central Government is required to remove a person from
managing directorship (5 marks each)
2. (a)Members of a limited company may never have unlimited liability.
(5 marks)
(b)What is the difference between Reserve Capital and Capital Reserve?
(5 marks)
(c)Choose the most appropriate answer from the given options in respect of the
following:
(i) Which type of capital is stated in the memorandum of association of
a company limited by shares?
(a) Nominal
Capital (b) Issued
Capital
(c) Subscribed
Capital (d) Paid-up Capital
(ii) Section 2(36) of the Companies Act, 1956 defines
(a) Public
deposits (b) Prospectus
(c) Share
Capital (d) Equity
Shares
(iii) Section 149(1) of the Companies Act provides that in case of a public
company, borrowing powers are not exercisable until the company is
entitled to
(a) Commence
business (b) Incorporate Business


(c) Start
Business (d) None of the
above
(iv) Section 117A of the Companies Act, 1956 related to debenture trust
deed had been inserted by
(a)
Companies (Amendment) Act, 2000
(b)
Companies (Amendment) Act, 2006
(c)
Companies (Amendment) Act, 1999
(d)
Companies (Amendment) Act, 1988
(v) A floating charge crystallizes and the security becomes fixed in the
following cases:
(a)
When the company shift its business
(b)
When the company ceases to carry on the business
(c)
When the company is bankrupt
(d)
All of the above.
(vi) According to Section 41 of the Companies Act by which mode a
person may acquire membership of a company-
(a)
by an oral agreement
(b)
by agreeing in writing to become a member
(c)
by subscribing to the memorandum
(d)
both (b) and (c)
(1 marks each)
3. (a)Re-write the following sentences after filling in the blanks spaces with
appropriate word(s)/figures(s):
(i) Section 260 of the Companies Act, 1956 provides for the
appointment of ...
(ii) At any general meeting all resolutions are decided in the first
instance by a
(iii) A Government Company can accept deposits from shareholders and


others upto____ of aggregate of its paid up capital and free reserves.
(iv) The books of accounts should be kept on ____basis
(v) --------------- and companies which have been in existence for less
than three financial years cannot make any contribution to political
party or for political purpose to any person
(vi) Under e-filing system of MCA, companies are required to file
Compliance Certificate on line in (1 marks each)
(b)What conditions are required to be satisfied by a company issuing equity
shares with differential rights as to dividend, voting or otherwise?
(5 marks)
(c)The power to borrow includes the power to give security. Comment.
(5 marks)
4. (a)State, with reasons in brief, whether the following statements are correct or
incorrect :
(i) It is the duty of those who issue the prospectus to be truthful in all
respects.
(ii) No company can appoint a whole time director for a term exceeding
five years at a time.
(iii) Participant is an agent of a depository and is registered as such
under the Companies Act, 1956 to render depository services.
(iv) A Trade Union registered under the Trade Union Act, cannot be
registered as a member and cannot hold shares in a company in its
own corporate name.
(v) No valid allotment can be made on an oral request. (2 marks
each)
(b)Discuss the duty of a director to disclose his interest in contracts to be entered
into by the company. What are the consequences of non-disclosure?
(8 marks)
5. (a)What do you mean by Pari Passu? Can a company issue debentures with
pari passu clause? (6 marks)
(b)What do you mean by striking off the name of the company? How is it different
from winding up of companies? (6 marks)
(c)What are the remedies for misrepresentation in prospectus? (4 marks)
6. (a)What are the particulars to be included in an advertisement inviting deposits
by a company?
(b)What are the key benefits of MCA21 project?
(c)ABC Ltd. committed default by failing to file Balance Sheet and Profit and
Loss Account. Proceedings have been initiated against a non-executive
director. However, he contended that he has resigned before the date of
default. Whether the contention of the ex-director be taken into account?
(d)A demerger scheme was approved by the shareholders, secured and

EP-CL 1257 T.P.-3/2010


unsecured creditors. The scheme was neither in violation of any law nor
against public interest. However, Accounting Standard 14 was not
adopted. Whether the scheme can be sanctioned? (4 marks each)








TEST PAPER 4/2010
(Based on entire study lessons)
Time allowed: 3 hours Maximum marks: 100
NOTE: Answer All Questions.
1. Comment on any four of the following:
(a)The allotment should be made by proper authority.
(b)Section 209 requires every company to keep the books of account at its
registered office.
(c)The alteration of articles of association must not constitute a fraud on the
minority by a majority.
(d)Transmission by operation of law is not a transfer.
(e)If the directors are unable or unwilling to act, on account of deadlock, the
shareholders have the inherent power to act. (5 marks each)
2. (a)Choose the most appropriate answer from the given options in respect of the
following:
(i) Every member of a Producer Company shall have ________
(a) Votes in proportion to the paid up share capital of the
company.
(b) a single vote
(c) two votes
(d) three votes
(ii) Every designated partner of a limited liability partnership shall obtain
a ______from the Central Government.
(a) Partner Identification Number
(b) Designated Partner Identification Number
(c) Partner Investigation Number
(d) Designated Partner Investigation Number
(iii) Which among the following is the statutory regulator to regulate and
promote the insurance industry in India and to protect the interests of
holders of insurance policies
(a) Insurance Regulatory Authority
(b) Insurance Development Authority
(c) Insurance Regulatory and Development Authority
(d) None of the above.
(iv) In the context of provisions of Section 621A, to compound means
(a) to settle by mutual agreement
(b) condone an offence in exchange for money
(c) condone a liability in exchange for money


(d) all of the above
(v) A declaration of solvency is required to be given in
(a) members voluntary winding up
(b) creditors voluntary winding
(c) winding up subject to supervision of Court
(d) none of the above
(vi) Voluntary winding up shall be deemed to commence at the time____
(a) at the time of presentation of petition for winding up
(b) when the resolution for winding up is passed
(c) when the Court order is passed
(d) none of the above (1 marks each)
(b)Re-write the following sentences after filling in the blanks spaces with
appropriate word(s)/figures(s):
(i) Under the Companies Act, 1956, the _____of the company under
investigation, who make disclosure during the course of investigation,
are protected against dismissal, discharge, removal etc.
(ii) Net Profit for the purposes of calculating managerial remuneration is
to be computed in accordance with the provisions of section
. of the Companies Act, 1956.
(iii) A company may held its first annual general meeting
within_______from the date of its incorporation.
(iv) a director must obtain his qualification shares within .. months.
(v) Power to make calls on shareholders in respect of money un-paid on
their shares shall be exercised at .
(vi) The restrictions contained in section 81 of the Companies Act, 1956
regarding issue of further shares do not apply to a
company (1 marks each)
(c)Who are responsible for keeping the books of account of a company?
(4 marks)
3. (a)Can an Inter-State Co-operative Society become a producer company? If so,
then what is the procedure? (6 marks)
(b)What is the justification and advantages of the Rule in Foss v. Harbottle?
(5 marks)
(c)Once a duplicate certificate is issued the original certificate becomes extinct.
Comment (5 marks)
4. (a)A floating charge attaches to the companys property generally and remains
dormant till it crystallizes or becomes fixed. Discuss this statement. (6
marks)
EP-CL 1259 T.P.-4/2010



(b)Can an offer to ones kith and kin be considered to be an invitation to public?
Explain this statement with the help of a case law. (5 marks)
(c)Certain directors cannot be removed before the expiry of the period of his
office. Who are they? (5 marks)
5. (a)Examine the following and say whether they are correct or wrong:
(1) A company being an artificial person cannot own property and
cannot sue or be sued.
(2) Members are the owners of the companys undertaking.
(3) The term body corporate connotes a wider meaning than the term
company.
(4) Every member of an illegal association shall be personally liable for
all liabilities incurred in carrying on the business.
(5) A company is a juristic legal person. (2 marks each)
(b)Discuss in brief the law relating to statutory corporations? (6 marks)
6. Attempt the following with the help of decided case laws:
(i)A company for the financial year 2008-09, declared the dividend on 19th
September, 2009 and failed to distribute the same within the prescribed
period. A non-executive director, who was resigned on July, 2009 was
also implicated in a court of law alongwith the company and other
directors. The question is whether a resigned non-executive director can
be vicariously liable for the failure on the part of the company to declare
dividend?
(ii)A house is allotted to the managing director (MD) of the company. After the
death of the MD, the house was occupied by his legal heirs. The
company demanded the house from the legal heirs of MD. Whether the
company will be successful?
(iii)A registered office was shifted from one state to another. A labour litigation
was pending before the court. So, the employees object to transfer.
Whether the objection of the employees is sustainable?
(iv)A director of the company along with another director were prosecuted under
section 220 for their failure to file return, annual accounts and audited
balance sheet required to be laid before the annual general meeting.
The question is whether any failure to file such documents would
constitute a continuing offence. Whether the period of limitation
applicable in this case? (4 marks each)




EP-CL 1260 T.P.-4/2010



TEST PAPER 5/2010
(Based on entire study lessons)
Time allowed: 3 hours Maximum marks: 100
NOTE: Answer All Questions.
1. Comment on any four of the following:
(i)A company cannot ratify a pre-incorporation contract though it is open to it to
enter into fresh contract.
(ii)An allotment is acceptance of an offer to take shares by an applicant and like
any other acceptance it must be communicated.
(iii)Consent of the Board of Directors is required for certain contracts in which
particular directors are interested.
(iv)When voting takes place by show of hands, the Chairmans declaration as to
the result of voting is a conclusive evidence of the resolution being
passed or not.
(v)Preference shares similar to debentures and its differences with shares are
many (5 marks each)
2. (a)How can the small shareholders director be appointed? (5 marks)
(b)Can a Managing Director be paid compensation for loss of office?
(5 marks)
(c)A shareholder having given proxy personally attends and votes at the
meeting. Comment on this statement, illustrating a case law. (6
marks)
3. (a)Choose the most appropriate answer from the given options in respect of the
following:
(i) Section 2(36) of the Companies Act, 1956 defines
(a)
Public deposits (b) Prospectus
(c)
Share Capital (d) Equity
Shares
(ii) A floating charge crystallizes and the security becomes fixed in the
following cases:
(a) When the company shift its business
(b) When the company ceases to carry on the business
(c) When the company is bankrupt
(d) All of the above.
(iii) The general body of shareholders may exercise the powers vested in
the Board when the Board is -
(a) Incompetent to act


(b) Competent to act
(c) Directors are not qualified
(d) None of the above
(iv) According to Section 41 of the Companies Act by which mode a
person may acquire membership of a company-
(a) by an oral agreement
(b) by agreeing in writing to become a member
(c) by subscribing to the memorandum
(d) both (b) and (c) (1 marks each)
(v) Section 317 permits a company to appoint or re-appoint a manager
for a period not exceeding
(a) Five years at a time
(b) Ten years at a time
(c) Three years at a time
(d) None of the above
(vi) Where a Chairman is not authorized to sign a Boards Report, it shall
be signed by not less than
(a) three directors of the company
(b) four directors of the company
(c) all directors of the company
(d) two directors of the company (1 mark each)
(b)Re-write the following sentences after filling in the blanks spaces with
appropriate word(s)/figures(s):
(i) A company may held its first annual general meeting within _______
from the date of its incorporation.
(ii) Net Profit for the purposes of calculating managerial remuneration is
to be computed in accordance with the provisions of section
. of the Companies Act, 1956.
(iii) Every designated partner of a limited liability partnership shall obtain
a ______from the Central Government.
(iv) A declaration of solvency is required to be given in winding
up.
(v) Voluntary winding up shall be deemed to commence at the
time..
(vi) Every member of a Producer Company shall have ________
(1 mark each)
(c)Distinguish between Managing Director and Manager. (4 marks)
4. (a)State the areas of practice specified under for a company secretary in


practice under section 2(2) of the Company Secretaries Act, 1980.
(8 marks)
(b)Discuss the procedure for issue of further shares to existing shareholders
under section 81 (1) of the Companies Act (8 marks)
5. (a)State, with reasons in brief, whether the following statements are correct or
incorrect:
(i) A company may issue shares at a price less than the nominal value
of shares.
(ii) In certain cases, diminution of share capital is not to be treated as
reduction of capital.
(iii) The burden of proof in a suit by an allottee that he has been misled
by the mis-statement in the prospectus lies on the person who allots
the shares.
(iv) Commercial paper refers to unsecured promissory notes issued by
credit worthy companies to borrow funds on a long term basis.
(v) For intimating satisfaction of charge, e-form 10 is required to be filed.
(2 marks each)
(b)What are the consequences of non-registration of charges? (6 marks)
6. Attempt the following with the help of decided case laws:
(i)The transferee purchased 2700 shares of the company and lodged the
transfer deed along with the original share certificate to the Registrar
and Share Transfer Agent (RSTA) of the company. The company did
not register the shares in the name of the transferee inspite of the
transferor taking up the matter with the company. The transferee,
therefore, filed a petition under section 111/111A of the Companies Act,
1956. The company is seeking shelter under SICA. Whether protection
under SICA available in this case? Whether shares to be transferred?
(ii) Validity of the AGMs held by the company was pending in a civil suit.
Applicants sought the CLB to issue directions to the company to hold
AGM. Whether it is possible for the CLB to do so?
(iii)Whether equity shares already issued can be converted into redeemable
preference shares? Discuss with the help of a case law.
(iv)An order passed by the single judge for winding up the company had been
appealed against and had been affirmed in the appeal. However, in a
recall application, the appellant contended that he was not aware of the
winding up proceedings and that he was prepared to discharge the
liability of the company and therefore sought to set aside the winding up
order. Whether recall is permissible? (4 marks each)






EXECUTIVE PROGRAMME
COMPANY LAW

QUESTION PAPERS OF PREVIOUS SESSIONS
Question papers of immediate past two examinations of
Company Law paper are appended to this study material for
reference of the students to familiarize with the pattern and
its structure. Students may please note that answers to
these questions should not be sent to the Institute for
evaluation.

JUNE 2010
Time allowed : 3 hours Maximum marks : 100
NOTE: 1. Answer SIX questions including Question No.1 which is COMPULSORY.
2.All references to sections relate to the Companies Act, 1956 unless stated
otherwise.
1. Comment on any four of the following :
(i)A company has a statutory right to alter its articles of association.
(ii)Red-herring prospectus means a prospectus which has complete particulars
on the price of the securities offered and the quantum of securities
offered.
(iii)The power of directors to approve the annual accounts can be delegated to a
committee of directors or some of the directors.
(iv)There are no shareholders in a limited liability partnership, instead there are
partners.
(v)In case of a company, the terms winding-up and dissolution convey the
same meaning. (5 marks each)
2. (a)Choose the most appropriate answer from the given options in respect of the
following :
(i)Where the auditor of a company resigns, the vacancy arising therefrom can
be filled by the company only at
(a) General meeting
(b) Board meeting
(c) Audit committee meeting
(d) None of the above.
(ii)The invitation and acceptance of deposits by non-banking non-financial


companies in India is regulated by
(a) The Reserve Bank of India Act, 1934
(b) The Securities and Exchange Board of India Act, 1992
(c) The Companies Act, 1956
(d) None of the above.
(iii)The Companies Act, 1956 allows a company to re-convert its stock into
(a) Fully paid-up equity shares
(b) Partly paid-up equity shares
(c) Unpaid equity shares
(d) Uncalled shares.
(iv)In the case of incorporation of an Asset Management Company (AMC), the
memorandum of association and articles of association are required to
be vetted by which of the following authority before these documents are
registered by the Registrar of Companies
(a) ROC
(b) SEBI
(c) RBI
(d) NSDL.
(v)Which of the following is correct in respect of a public limited company in India

(a) Business can be commenced immediately on incorporation
(b) No need to have more than two directors
(c) There is no restriction on remuneration payable to directors
(d) The number of members is unlimited. (1 mark each)
(b)Re-write the following sentences after filling-in the blank spaces with
appropriate word(s)/figure(s) :
(i) A private company, which is a subsidiary of a company which is not a
private company, is a __________ company.
(ii) All contracts which are purported to be made on behalf of a company
before its incorporation are known as __________ contracts.
(iii) The issue of ESOPs or Employees Stock Option Scheme shall be
subject to approval of shareholders through a __________
resolution.
(iv) Sweat equity shares issued to employees or directors shall be
locked-in for a period of __________ from the date of allotment.
(v) When a company makes buy-back of shares or securities, the buy-
back operations shall be completed within __________ from the date
of passing of the special resolution or a resolution passed by the
Board. (1 mark each)
(c)Discuss the various methods by which sense of a meeting is ascertained.
(6 marks)
3. (a)Discuss the requirements for keeping the minutes book of general meetings.


(4 marks)
(b)Discuss briefly the voting rights of a proxy. (4 marks)
(c)State whether a Board meeting of a company can be held at any place.
(4 marks)
(d)What is the effect of crystallisation of a floating charge ? (4 marks)
4. (a)In the case where the shares of a company are held in joint-names of two
persons Arpit and Rakshit and one of these joint-holders requests the
company to split the shares equally between them by issuing fresh
share certificates, what should the company do ? (4 marks)
(b)Layman is a holder of a share warrant in Ontime Fliers Ltd., a public limited
company. Unfortunately, Layman is unaware of any of the formalities to
be complied with for transferring the said share warrant. Advise him
about the formalities to be completed in this regard. (4 marks)
(c)Four types of persons, viz., a section 25 company, an insolvent individual, a
trade union and a pawnee, apply for membership in your public limited
company. Will you accept them as members of your company ? Why ?
(4 marks)
(d)A company has forfeited shares of a defaulting shareholder for non-payment
of call money. However, the defaulting shareholder approaches the
Board after forfeiture of shares to cancel the said forfeiture. What should
the Board do ? Give your advice. (4 marks)
5. (a)Abhay is director in two companies Goodluck India Pvt. Ltd. and Lucky
Winners India Pvt. Ltd. Abhay attended Board meetings of these two
companies on 22nd August, 2009 in the same building Welcome
House at 2 p.m. and 4 p.m. respectively.
(i) Can Abhay draw travelling allowance from both the companies ?
(ii) Is he entitled to receive sitting fees fully from both the companies ?
(6 marks)
(b)Rani is a wealthy lady enjoying large dividend and interest income. She has
formed three private companies and agreed with each of them to hold a
block of investment as an agent for it. Income received was credited in
the accounts of the company but the company handed back the amount
to her as a pretended loan. This way, she divided her income in three
parts in a bid to reduce her tax liability. Discuss the legality of the
purpose for which the three companies were formed. (5 marks)
(c)Carefree is an officer of Cosy Cosy Ltd., who is authorised to sign on behalf of
the company any contract, bill of exchange, hundi, promissory note,
cheque, or order for money or goods. In these circumstances, Carefree
signs a cheque on behalf of the company without mentioning the name
of the company. Who is liable to the holder in such a case?
(5 marks)
6. Distinguish between any four of the following :
(i)Company and corporation.
(ii)Nominal capital and subscribed capital.


(iii)Shares and stock.
(iv)Whole-time chairman and part-time chairman.
(v)Insolvency of an individual/firm and winding-up of a company.
(4 marks each)
7. State, with reasons in brief, whether the following statements are correct or
incorrect :
(i)The members of an unlimited company are liable directly to the creditors of
the company.
(ii)A promoter has legal right to claim promotional expenses for his services.
(iii)Preference shares are non-cumulative unless expressly stated to be
cumulative.
(iv)A charge created orally shall also require registration.
(v)A return of allotment in e-form 2 is required to be filed with the Registrar of
Companies even if a single share is allotted by a company.
(vi)The prospectus must be dated.
(vii)A company is required to obtain approval of the debenture trustees for any
distribution of dividend.
(viii)Additional directors can be appointed only by public companies.
(2 marks each)
8. Write notes on any four of the following :
(i)Disadvantages of corporate form of enterprise
(ii)Remuneration of promoters
(iii)Alternate directors
(iv)Passing of resolution by postal ballot
(v)Independent directors. (4 marks each)





DECEMBER 2010
Time allowed : 3 hours Maximum marks : 100
NOTE : 1. Answer SIX questions including Question No. 1 which is COMPULSORY.
2. All references to sections relate to the Companies Act, 1956 unless
stated otherwise.
1. Comment on any four of the following :
(i)It is not necessary to have the minutes of the meeting confirmed in the next
meeting.
(ii)Postal ballot mechanism improves shareholders participation in corporate
decision-making.
(iii)Redeemable preference shares are not preference shares.
(iv)Directors ought not misuse the trust entrusted on them.
(v)The terms winding-up and dissolution are not one and the same thing.
(5 marks each)
2. (a)Choose the most appropriate answer from the given options in respect of the
following :
(i) The amount of dividend declared will have to be deposited in a
separate bank account within
(a) 5 Days from the date of declaration of dividend
(b) 7 Days from the date of declaration of dividend
(c) 15 Days from the date of declaration of dividend
(d) 21 Days from the date of declaration of dividend.
(ii) No person can hold office of a director in more than
(a) 10 Public companies at a time
(b) 15 Public companies at a time
(c) 20 Public companies at a time
(d) 50 Public companies at a time.
(iii) DIN will be allotted by the Central Government within
(a) 1 Month from the receipt of application for the same
(b) 3 Months from the receipt of application for the same
(c) 6 Months from the receipt of application for the same
(d) 12 Months from the receipt of application for the same.
(iv) After completion of buy-back operation, the securities must be
extinguished and physically destroyed within
(a) 30 Days
(b) 15 Days


(c) 7 Days
(d) 21 Days.
(v) Under Section 224(1), an auditor is appointed for a particular
period
(a) From the date of appointment till another auditor is
appointed
(b) From the conclusion of one AGM until the conclusion of next
AGM
(c) From the date of appointment till the auditor resigns
(d) None of the above.
(vi) Under Section 75, whenever a company having a share capital
makes any allotment of shares, it must file a return of allotment with
the Registrar of Companies within
(a) 7 Days
(b) 15 Days
(c) 30 Days
(d) 60 Days.
(vii) Certified copy of the special resolutions passed in the meeting will
have to be filed with the Registrar of Companies within
(a) 30 Days
(b) 60 Days
(c) 15 Days
(d) 7 Days.
(viii) Section 149(1) provides that in case of a public company, borrowing
powers are not exercisable until the company is entitled to
(a) Commence business
(b) Incorporate business
(c) Start business
(d) None of the above. (1 mark each)
(b)Re-write the following sentences after filling-in the blank spaces with
appropriate word(s)/figure(s) :
(i) Small deposit holders are those who have deposited in a financial
year a sum not exceeding Rs. __________ in a public company.
(ii) If the proposed dividend exceeds 15% but does not exceed 20% of
the paid-up capital, the amount to be transferred to reserves will not
be less than __________ % of the current profit.
(iii) Resignation of a director is effective from the date it
was___________.


(iv) Under section 285, there should be at least ____________ meetings
of the Board of directors in a year.
(v) An audit firm having 3 partners not in full time employment anywhere
may* be appointed as auditor in maximum _________ public
companies.
(vi) Section 260 provides for the appointment of _____________.
(vii) A director of 10 companies will require ___________ number(s) of
DIN.
(viii) In terms of Section 383A, it is necessary to appoint a Whole-time
Secretary in a company having a paid-up capital of
Rs.____________. (1 mark each)
3. (a)Explain when a person ceases to be a member of the company.
(8 marks)
(b)Enumerate the disqualifications of a director mentioned in Section 274.
(8 marks)
4. Write notes on any four of the following :
(i)Liability clause in memorandum of association
(ii)Cases in which prospectus is not required to be issued
(iii)Investor education and protection fund
(iv)Procedure for striking off the name of a company
(v)Digital signature certificate. (4 marks each)
5. (a)What are the consequences of non-registration of a charge which requires
registration under Section 125? (5 marks)
(b)The power to borrow includes the power to give security. Comment.
(5 marks)
(c)What are the rights, powers and disabilities of debenture trustees?
(6 marks)
6. (a)What are the important rules relating to forfeiture of shares? (8 marks)
(b)What are the benefits of depository system? (8 marks)
7. (a)Money Ltd. desires to reduce its paid-up capital by purchasing from some
select shareholders holding shares constituting 20% of its paid-up
capital. Can it do so? Discuss. (8 marks)
(b)Abhay Ltd. committed default by failing to file balance sheet and profit and
loss account. Proceedings have been initiated against a non-executive
director. However, he contended that he had resigned before the date of
default. Whether the contention of the ex-director can be taken into
account? Give reasons. (4 marks)
(c)A demerger scheme was approved by the shareholders, secured and
unsecured creditors. The scheme was neither in violation of any law nor
against public interest. However, Accounting Standard-14 was not
adopted. Whether the scheme can be sanctioned? Explain. (4 marks)
8. Distinguish between any four of the following :


(i)Subsidiary company and holding company.
(ii)Rights issue and bonus issue.
(iii)Sweat equity and employees stock purchase scheme.
(iv)Trust and agency.
(v)Producer company and limited liability partnership. (4 marks each)