Paper 2 - Corporate & Other Laws-Ilovepdf-Compressed PDF

INCORPORATION
2
When Registration required?
According to section 464, Anyny association consisting of not more than 100 persons(Currently,
persons limit is
50 persons),, shall be formed for the purpose of carrying on any business that has for its object the
acquisition of gain unless it is registered as a company under this Act or is formed under any other
law for the time being in force.
Above stated provision shall not apply to –
(a) a Hindu undivided family carrying on any business; or
(b) an association or partnership, if it is formed by professionals who are governed by special
Acts.
Fine
ine which may extend to 1 lakh per member.
Greeberg vs. Cooperstien

A member who has paid any money to the association would be able to recover it from the director
or agents or the association before the money so paid has been applied to an illegal purpose
Kumarswamy Chettiar vs. ITO

Illegality or invalidity in the constitution of an Association,
Association, does not affect its liability to tax or its
chargeability as a unit of assessment.
Formation of a Company- Overview
Promoters Decide which Company to form? Obtain DIN & Digital Sign
Apply for
In form INC 1 with max 6 proposed
name
names
reservation
Draft MOA
& AOA Application for Incorporation
MOA & AOA
Declaration
Prepare Affidavit
Documents Address of Registered Office
Particulars of Subscribers and First Directors
File Docs
with ROC Along with Prescribed Fees
ROC allots Certificate of Incorporation is issued

CIN
INCORPORATION 2.2
Step 1: Name Availability

Reservation of Name
Promoter makes an application to the Registrar of Companies (ROC) regarding the reservation of
name
In e-Form No. INC. 1
Along with the fees of Rs. 1,000/-, as prescribed in the Companies (Registration Offices and Fees)
Rules, 2014.
Maximum of six proposed names can be given in order of preference.
Upon receipt of the application in the Form INC-1 for reservation of name, the Registrar of
Companies, after verification of all the criteria and guidelines prescribed u/s 4 and related Rules,
shall approve any of the proposed names, which shall be valid for a period of sixty days from the
date of intimation by the Registrar/MCA.
If documents for incorporation are not filed with the Registrar within the aforesaid 60 days, the
reservation made by the Registrar shall lapse automatically.
Restrictions
The name shall not –
Be identical with or resemble too nearly to the name of an existing Company registered under
this Act or any previous Company law, or
Be such that its use by the Company –
(a) Will constitute an offence under any law for the time being in force, or
(b) Is undesirable in the opinion of the Central Government.
For Companies u/s 8, the name shall include the words Foundation, Forum, Association,
Federation, Chambers, Confederation, Council, Electoral Trust and the like, etc.
A company shall not be registered with a name which contains any word or expression which is
likely to give the impression that the Company is in any way connected with, or having the
patronage of, the Central Government, any State Government, or any Local Authority,
Corporation or Body constituted by the Central Government or any State Government under any
law.
Clarification
No company should be allowed to be registered with the word ‘National’ as part of its title unless
it is a Govt. Company
No company shall use the word ‘Bank’ unless NOC from SEBI in this regard is produced.
Note: Where a company has changed its name/s during the last two years, it shall paint or affix or
print along with its name, the former name or names so changed during the last two years.
Step 2: Preparation of MOA / AOA

MOA and AOA shall be in the respective forms as specified in Schedule -1 . It should be noted that
the main objects must be matched with the objects shown in e-Form INC.1. These two documents
are basically the charter and internal rules and regulations of the company.
INCORPORATION 2.3
Step 3: Preparation of Other Documents
The following documents and information are required to be prepared for registration
a) Application for Incorporation of Companies: An application for incorporation shall be filed with
ROC within whose jurisdiction the Registered Office of a Company is proposed to be situated in
Form INC-2 in case of One Person Company (INC-7 in case of other companies).
b) Memorandum and Articles of Association: Rule 13 of Companies (Incorporation) Rule, 2014

under the Companies Act, 2013:
Signature on the MOA & AOA: MOA & AOA should be signed by all the subscribers to the
memorandum. In case a subscriber to MCA is illiterate, he can affix his thumb impression in
place of his own signature.
Where a subscriber to the MOA is a company, the MOA & AOA shall be signed by director
officer or employee of a Company duly authorized in this regard by the Board of directors
c) Declaration in Form No. INC. 8. That all the requirements of the Companies Act, 2013 and the
rules made there under have been complied with shall be given by –
An Advocate, a Chartered Accountant, Cost Accountant or Company Secretary in practice,
who is engaged in the formation of the Company, and
By a person named in the AOA as a Director, Manager or Secretary of the Company.
d) Affidavit in Form No. INC.9. given by each of the Subscribers to the MOA, and persons named as
the First Directors, if any, in the AOA stating-
That he is not convicted of any offence in connection with the promotion, formation or
management of any Company,
That he has not been found guilty of any fraud or misfeasance or of any breach of duty to
any Company under this Act or any previous Company Law during the preceding 5 years,
That all the documents filed with the ROC for registration of the Company contain
information that is correct and complete and true to the best of his knowledge and belief.
e) Particulars of Registered Office in Form No. INC. 22.

Company shall submit an address for correspondence till registered office is established. Where
the location of the registered office is finalized prior in Incorporation of a company by the
promoters, the promoters can also file along with the MOA & AOA in Form No. INC. 22.
f) Particulars of subscribers
The subscribers shall submit their details like Name, including surname or family name,
residential address, date of birth, place of birth, nationality and such other particulars along with
proof of identity and residence.
In case of a company, details like name, registered address & E-mail Id of the Company.
g) Particulars of First Directors

If a company by its Articles of Association appoints any person(s) who is to act as a director,
Particulars in Form No. DIR-12 with the Registrar at the time of registration should be filed. The
INCORPORATION 2.4
Name, including surname or family name, residential address, date of birth, place of birth, and
nationality of the 1st Director shall be submitted with ROC in Form No. DIR-12
DIR 12
h) Interests of First Directors along with their Consent in DIR-2.
Step 4: Filing of documents with Registrar of Companies (ROC)

The promoters of a proposed company shall file the above documents prepared within the local
jurisdiction of the Registrar of Companies.
Companies
The documents are to be submitted along with prescribed fee as under-
under
Fees for Incorporation
If Company has Share If Company doesn’t have

Capital Share Capital
Fee based on Authorised Fee based on Number of

Share Capital Members
Certificate of Incorporation [Sec. 7]

ROC shall register all the documents and information and issue a Certificate of Incorporation
I in
Form No. INC.11
ROC shall allot a distinct identity number to the Company called Corporate Identity Number
(CIN).
CIN shall have effect from the date of incorporation mentioned in the Certificate.
Certificate.
Effect of Registration [Sec. 9]:

From the Date of Incorporation mentioned in the Certificate of Incorporation, such Subscribers to
the MOA and all other persons, as may, from time to time, become Members of the Company, shall
be –
(a) A Body Corporate
rate by the Name contained in the MOA,
(b) Capable of exercising all the functions of an incorporated Company under this Act,
(c) Having perpetual succession,
(d) Having
aving a Common Seal, [Note: w.e.f. 29.05.2015, Common Seal is not mandatory.]
(e) Having power –
To acquire, hold and dispose of property, both movable and immovable, tangible and
intangible,
To contract, and
To sue and be sued,
INCORPORATION 2.5
Registered office of a company

Necessary for serving documents & for determining jurisdiction and nationality.
The company shall furnish to the Registrar verification of its registered office within a
period of thirty days of its incorporation.
The registered office of the company shall be changed only by passing of special resolution
by a company.
Every company shall –

a) Paint or affix its name, and the address of its registered office on the outside of every
office or place in which its business is carried on.
b) Get its name, address of its registered office and the Corporate Identity Number along
with telephone number, fax number, if any, e-mail and website addresses, if any,
printed in all its business letters, billheads, letter papers and in all its notices and other
official publications; and
c) Have its name printed on hundies, promissory notes, bills of exchange and such other
documents as may be prescribed.
INCORPORATION 2.6
Change of registered office outside the jurisdiction of registrar
Application to Regional director Confirms such Change
Within 30 days
With the Registrar Company shall file confirmation
Within 60 days
Certify the Registration
Within 30 days
Effect of furnishing False Particulars

If any person furnishes any false or incorrect particulars of any information or suppresses any
material information, of which he is aware in any of the documents filed with the Registrar in
relation to the registration of a company, he shall be liable for action under section 447.
where at any time after the incorporation of a company it is proved that the company has been
incorporated by furnishing any false or incorrect information or representation or by
suppressing any material fact or information in any of the documents or declaration filed or
made for incorporating such company, or by any fraudulent action, the promoters, the persons
named as the first directors of the company and the persons making declaration under this
section shall each be liable for action under section 447.
Tribunal Order
Where a company has been got incorporated by furnishing false or incorrect information or
representation or by suppressing any material fact or information in any of the documents of
declaration filed or made for incorporating such company or by any fraudulent action, the Tribunal
may, on an application made to it and after giving a reasonable opportunity of being heard on being
satisfied that the situation so warrants, -
Pass such orders, as it may think fit, for regulation of the management of the company
including changes, if any, in its memorandum and articles, in public interest or in the interest of
the company and its members and creditors; or
Direct that liability of the members shall be unlimited; or
Direct removal of the name of the company from the register of companies; or
Pass an order for the winding up of the company; or
Pass such other orders as it may deem fit;
INCORPORATION 2.7
Hari Nagar Sugar Mills Ltd. v. SS Jhunjhunwala

It was held that from the date of incorporation, the company becomes a legal person separate from
the incorporators; and there comes into existence a binding contract between the company and its
members as evidence by the MOA & AOA.
Jubilee Cotton Mills Ltd. v. Lewis

It was held that the certificate of incorporation was valid despite the discrepancies in the MoA &
AoA at the time of incorporation
Moosa v. Ebrahim
It was held that the certificate of incorporation is conclusive evidence for all purposes and this
certificate prevents anyone from alleging that the company is not in existence.
Corporation of India vs. Commercial Tax Officer

A legal personality emerges from the moment of registration of a company and from that moment
the persons subscribing to the Memorandum of Association and other persons joining as members
are regarded as a body corporate or a corporation in aggregate and the legal person begins to
function as an entity. A company on registration acquires a separate existence and the law
recognises it as a legal person separate and distinct from its members.
Spencer & Co. Ltd Madras vs. CWT Madras

Merely because a company purchases all shares of another company it will not serve as a means of
putting an end to the corporate character of another company and each company is a separate
juristic entity.
Heavy Electrical Union vs. State of Bihar

The mere fact that the entire share capital has been contributed by the Central Government and all
its shares are held by the President of India does not make a company an agent either of the
President or the Central Government.
Fast Track Process – for Company Registration

The Ministry of Corporate Affairs (MCA) has introduced form INC. 29 – Integrated Incorporation
Form vide the Companies (Incorporation) Amendment Rules, 2015 dated 1st May, 2015.
Form INC-29 Company Registration has merged the process of getting Director Identification
Number (DIN), Name Approval and Incorporation application into one form to incorporate a
company.
INCORPORATION 2.8
Process:
Form INC-29 Deals with the single application for reservation of name, incorporation of a new
company and/or application for allotment of DIN.
This e-Form is accompanied by supporting documents including details of Directors &
subscribers, MoA and AoA etc.
Once the e-Form is processed and found complete, company would be registered.
Note: Maximum 3 directors are allowed to use the integrated form for allotment of DIN while
incorporating a company.
SPICe-Simplified Proforma for Incorporating Company Electronically

Ministry of Corporate Affairs (MCA) has recently introduced SPICe Form INC-32 which is a
Simplified Proforma for Incorporating Company Electronically through Companies
(Incorporation) Fourth Amendment Rules, 2016. SPICe or Form INC-32 can help incorporate a
company with a single application for:
Reservation of name
Incorporation of a new company and/or
Application for allotment of DIN.
The Integrated Form INC-29 has been replaced with SPICs Form INC-32 and as such the Form
INC-29 has been completely removed from the MCA portal. The SPICe Form INC-32 is very
similar to Form INC-29, which also helps with fast track incorporation of a company in India.
Process for incorporation of a company is done through

Form No. INC-32,
E-Memorandum of Association in Form No. INC-33 and
E-Articles of Association in Form No. INC-34.
So, now there are 2 ways to incorporate a company:

INC-7,
DIR-12 & INC-22
Key Features of SPICe

Company can get name approved in INC 1 and still file INC 32.
• The main feature of in INC-32 is, there is an option “Whether Name is already
approved by Registrar of Companies” Company has to select Yes or No in this
Option.
• If you select Yes (Means Company has got name approval in INC-1) then mention the
SRN of such INC-1.
• If you select No, in that case name is not approved by INC-1 then mention the name
and significance as we were applying in INC-29.
Memorandum and Articles of Association need to be filed electronically.
INCORPORATION 2.9
In e-MOA
MOA (Electronic MOA) and e-AOAe AOA (Electronic AOA) has been prescribed by MCA
Instead of Signature of Subscribers, affix the DSC of subscribers.
By affixation of DSC of the subscriber on the INC-33 and INC – 34, date of signing will be
automatically captured by the form.
Maximum 7 (Seven) details of subscribers allowed in SPICe (INC-32).
(INC
Maximum 3 (Three) Directors are allowed for using this integrated form for filing
application
tion of allotment of DIN while incorporating a Company.
The certificate of Incorporation shall be issued in form INC 11
Opportunity of 2 re--submission shall be given.
If SPICe application is rejected, it will be refunded.
Certification by professional is necessary.
n
Section 8 company can also file INC 32
Advantages:
No need to reserve Companies Name prior to Incorporation. Even if companies have applied
for name in INC-1,1, where it has been asked whether approval of name in form INC-1
INC has
been taken, fill NO (this option was not available in INC-29).
INC
E-MOA & E-AOA.
Available for sec 8 Company as well.
Disadvantages:
The biggest disadvantage in SPICE system is that the maximum number of subscribers can be
seven only. In case of more subscribers, normal incorporation procedure has to be followed.
Only one name of the company can be proposed.
It is a bit costlier as DSC
SC of all subscribers and witness is needed.
1. Explain in brief the process of Incorporation of a company.
2. Which documents are required to be filed with the Registrar of Companies at the time of
registration of Companies at the time of registration of a Company under the provisions of
the Companies Act, 2013
ONE PERSON COMPANY
3
The Companies Act, 2013
introduces a new class of
companies which can be
incorporated by a single
person. OPC differs from sole
proprietary concern in an
aspect that OPC is a separate
legal entity with a limited
liability of the member
whereas in the case of sole
proprietary, the liability of owner is not restricted and it extends to the owner’s entire assets
constituting of official and personal.
Eligibility:
1. Only an individual natural person can incorporate One Person Company
2. The Sole member must be an Indian Citizen and Resident in India
(“Resident in India” means a person who has stayed in India for a period of not less than 182
days during the immediately preceding one calendar year)
3. The liability of memberss of OPC is limited.
Nomination for OPC:

The memorandum of OPC shall indicate the name of the other person, who shall, in the event of
the subscriber’s death or his incapacity to contract, become the member of
the company.
The other person whose name is given in the memorandum shall give his
prior
or written consent in prescribed form and the same shall be filed with
Registrar of companies at the time of incorporation.
Such other person may be given the right to withdraw his consent.
The member of OPC may at any time change the name of such other
person by giving notice to the company and the company shall
intimate the same to the Registrar
Any such change in the name of such other person by giving
notice the company and the company shall intimate the same to
the Registrar.
Any such change in the name of the person shall not be deemed to be an alteration of the
memorandum.
No person shall be eligible to incorporate more than a One Person Company or become nominee
in more than one such company.
company
ONE PERSON COMPANY 3.2
Restrictions on OPC
No minor shallll become member or nominee of One Person Company or can hold share with
beneficial interest.
OPC cannot be incorporated or converted into section 8 company
OPC cannot carry out Non-Banking
Non Banking Financial Investment activities including investment in
securities of any body corporate.
No OPC can convert voluntarily into any other types of company unless two years have expired
from the date of incorporation, except threshold limit (paid-up
(paid up share capital)
cap is increased
beyond 50 lakhss or its average annual turnover during the said period exceeds 2 crores.
The words “One Person Company” shall be mentioned in brackets below the name of such
company, wherever its name is printed, affixed or engraved.
Penalty
If One Person Company or any officer of such company contravenes
contr the
provisions, they shall be punishable with fine which may extend to five thousand
rupees and with a further fine which may extend to five hundred rupees for every
day during which such contravention continues.
Relaxations
The following relaxations have been granted to OPC in respect of compliances and procedural
aspects-
OPC is not required to hold Annual General Meeting as like private or public company.
Relaxation with regard to holding board meetings,
Preparation of financial statements
statemen (cash flow exempted),
Signing of annual return etc.
Incorporation procedure is similar to other types of companies with the following forms-
forms
Compliance declaration INC. 8

Affidavit as to no offence INC. 9
Address/ Registered Office INC. 22
Details of First Directors DIR. 12
Interest and Consent of First Directors DIR. 2
Particulars of Nominee INC. 2
Prior Consent of Nominee INC. 3
CONVERSION OF COMPANY
4
Conversion
Private Company Public Company One Person Company
Public OPC Private Private Public

Company Company Company Company
I. Conversion of a Private Company into a Public Company

A private company can be converted into a public company by complying with following
requirements:
Alteration of its articles thereby deleting the three restrictions of a private company, by
passing a Special Resolution as per Section 14; and
Changing its name thereby deleting the word ‘private’ from its name, by passing a Special
Resolution as per Section 13.
Every alteration of the articles and a copy of the order of the Tribunal approving the alteration shall
be filled with the Registrar, together with a printed copy of the altered articles, within a period of
fifteen days in such manner as may be prescribed, who shall register the same.
Any alteration of the articles registered as above shall, subject to the provisions of this Act, be valid
as if it were originally in the articles. The Company becomes public from the date the special
resolution is passed u/s 14. But the change in its name, by deleting the word ‘private’ becomes
effective only on the issue of fresh certificate of incorporation by the Registrar of Companies.
II. Conversion of Private Company into OPC

Rule 7 of Companies (Incorporation) Rules, 2014
Conversion Process
Conditions: when the paid-up share capital of a Private Company is 50 lakhs or less or its
average annual turnover during the relevant period is 2 crores or less, in such condition, a
private company may convert itself as an OPC.
Special Resolution: A Private Company may convert itself into OPC by passing a special
resolution in the general meeting.
CONVERSION OF COMPANY 4.2
No Objection Certificate: Before passing special resolution, the company shall obtain No
objection in writing from its members and creditors.
Filing of MGT -14: 14 Company shall file a copy of the special resolution with the Registrar of
Companies within 30 days from the date of its passing in Form No. MGT -14.
Conversion of a Public Company into a Private Company

A public company having a share capital and membership within the limits imposed upon private
companies can be converted into a private company by passing a special resolution to alter its
articles so as to include therein the restrictions contained in section 2(68) of the Act.
A special resolution passed to convert a public company into a private company is binding on
dissenting shareholders provided it is bona fide, is in the interest of the company as a whole, and is
consistent with the objects in the memorandum of association
Bal Ramba vs. AIR Master Silk Mills AIR 1955
As per Companies Act, 2013 not yet notified:

Under Section 14(1), any alteration made in the articles to convert a public company into a private
company shall take effect only with the approval of the Tribunal which shall make such order as it
deems fit
Conversion of One Person Company (OPC) into a Private or Public Company
Method of Conversion: OPC can be converted into private or public company based on its paid-up
share capital or turnover under compulsory conversion mention and in case voluntary conversion by
passing a special resolution.
Method of Conversion
Compulsory Conversion Optional Conversion
a) Compulsory Conversion: Rules 6 of Companies (Incorporation) Rules 2014
Conversion Process
Conditions: When the paid-up share capital of an OPC exceeds 50 lakhs or its average annual
turnover during the relevant period exceeds 2 crores, in such conditions, OPC ceases to
continue as an OPC.
CONVERSION OF COMPANY 4.3
Timeline for conversion: If an OPC exceeds the above mentioned limits then it has to
convert itself either in private or public company within six months after crossing the above
limits.
Alteration of Memorandum and Articles: The OPC shall alter its MOA & AOA by passing a
resolution to give effect to the conversion and to make necessary changes incidental
thereto.
Notice to Registrar: The OPC shall give notice to ROC within 60 days from the date of
applicability of compulsory conversion in form No. INC -5. Such notice contains information
about the crossing of the limits mentioned above; therefore, it requires to convert itself into
a private company or a public company.
Statutory Requirements on conversion: An OPC can get itself converted into a Private or
Public company after increasing the minimum number of members (Min . 2 for private or 7
for public company) and directors (Min. 2 for private or 3 for public).
Penalty for default: In case of any contravention by the OPC or its officer, the OPC or its
officer shall be punishable with fine not more than 10,000/- and with a further fine which
may extend to 1,000/- per day if contravention continues.
b) Voluntary Conversion: Rule 6 of Companies (Incorporation) Rules, 2014
Passing of Resolution: An OPC may also convert itself into a private or public company by
passing a resolution in the general meeting.
Application for conversion: The OPC shall file an application in Form No. INC – 5 for its
conversion into Private or Public Company within 60 days from the date of passing of the
resolution.
Statutory Requirements on conversion: An OPC can get itself converted into a Private or
Public company after increasing the minimum number of members.
Note: A fresh certificate of incorporation will be issued by the ROC on the submission application for
conversion.
SECTION 8 COMPANY
5
Any person or association of persons (AOP) desirous of
incorporating a company with limited liability and satisfies the
condition u/s 8(1) can obtain a license u/s 8.
Eligible Objects-
Promotion of the following-
(i) Commerce, (v) Education, (ix) Charity,
(ii) Art, (vi) Research, (x) Protection of Environment or,
(iii) Science, (vii) Social Welfare, (xi) Any such other object,
(iv) Sports, (viii) Religion
Company should Intend to apply its Profits (if any), or Other Income in promoting its objects and
prohibit the payment of any dividend to its Members.
Incorporation
Name Availability
Application for Licence
In Form No. INC.12, along with fee & following documents -
• Draft MOA and AOA of the proposed Company
• Declaration in Form No. INC. 14
• Estimate of the future Annual Income and Expenditure
• Declaration in Form No. INC. 15
• Thehe Central Government may grant a licence, to register as a Limited Company.
Documents submission for Registration

• The Registrar shall register such Person or Association of Persons as a Company u/s 8, and issue a
Certificate of Incorporation.
Right of Sec. 8 Company:

• The words “Limited” or “Private Limited” need not be added to the name of Sec.8 Company.
SECTION 8 COMPANY 5.2
• All the privileges and obligations of Limited Companies shall apply for a Sec.8 Company.[Sec.8(2)]
• A Firm may be a Member of such a Company. [Sec. 8(3)]
Restrictions:
• Sec.8 Company can alter the provisions of its MOA or AOA, only with the previous approval of the
Central Government.
• Sec.8 Company may convert into a Company of another kind, only after satisfying specified
conditions.
• Sec.8 Company shall amalgamate only with another Sec. 8 Company having similar objects.
Revocation of Licence
Grounds of Revocation
(a) Contravention with any of the requirements of Sec.8, or
(b) Contravention with any of the conditions subject to which a licence is issued, or
(c) Fraudulent conduct of the affairs of the Company, or
(d) Conduct in a manner violative of the objects of the Company, or
(e) Conduct of affairs in a manner prejudicial to public interest.
On revocation, Central Government may direct it to-
Converts its status and

changes its name
Wind-up
Amalgamate with another

company having similar object
Exceptions:
(i) Can call its general meeting by giving a clear 14 days notice instead of 21 days.
(ii) Requirement of minimum number of directors, independent directors etc. does not apply.
(iii) Need not constitute Nomination and Remuneration Committee and shareholders Relationship
Committee.
SECTION 8 COMPANY 5.3
Summary
Formation
• To promote Charitable objects
Application of profits
• To promote its objectives

• No payment of dividends out of profits
Type of Co.
• Limited Liability
• Without the addition of words “Ltd.” or “Pvt Ltd.”
How status is granted
• The CG can grant such status

• However, CG has delegated the power to grant licence to ROC
Revocation of licence
• If conditions of section 8 are contravened, or

• Affairs of the company are conducted fraudulently, or prejudicial to public interest
Effect of revocation of licence
• Co. has to use words “Ltd.” or “Pvt Ltd.”

MEMORANDUM OF ASSOCIATION
8
Definition [Section 2 (56)]
“Memorandum” means memorandum 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.
Meaning of Memorandum
The memorandum of association is a document, which contains the
fundamental provision of the company’s constitution. It contains the
essential conditions upon which alone the company can be incorporated. In
this respect, it is company’s charter of its existence and operations and is of
supreme importance. It not only shows the objects of formation but also
determines the utmost possible scope of its operations beyond which its
action cannot go.
Purpose of Memorandum
Firstly, the intending shareholder who contemplates the investment of his savings 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 reasonable
doubt whether the contractual relation into which he contemplates entering with the
company is one relating to a matter within its corporate objects.
Contents of Memorandum
Section 4 of the Companies Act provides that the memorandum of association of every company
must contain the following clauses:-
Name
Clause
Capital Situation
Clause Clause
Clauses
Of
Memorandum
Liability Object
Clause Clause
Succession
Clause
(In OPC)
MEMORANDUM OF ASSOCIATION 8.2
1. Name Clause
The name of the company with the last word “Limited” in the case of a public limited company,
or the last words “Private Limited” in the case of a private limited company. This clause is not
applicable on the companies formed under section 8 of the Act.
The name stated in the memorandum must be after consideration of the restrictions discussed
in the Chapter “Incorporation of a Company”.
2. Situation or Registered Office Clause/Domicile 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.
As per Section 12, a company shall, on and from the 15th day of its incorporation, shall have a
registered office. The company shall furnish to the Registrar verification of its registered office
within a period of 30 days of its incorporation.
3. Objects Clause
The object clause of memorandum shall state “the objects for which the company is proposed
to be incorporated and any matter considered necessary in furtherance thereof”.
It indicates the purpose for which the company has been set up and its actual capability,
besides its sphere of activities.
If any company has changed its activities which are not reflected in its name, it shall change its
name in line with its activities within a period of six months from the change of activities after
complying with all the provisions as applicable to change of name.
4. Liability Clause
The liability of members of the company, whether limited or unlimited, and also state that -
In the case of a company limited by shares- The liability of its members is limited to the
amount unpaid, if any, on the shares held by them; and
In the case of a company limited by guarantee, the amount up to which each member
undertakes to contribute –
a) 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 as may have been contracted
before he ceases to be a member, as the case may be; and
b) To the costs, charges and expenses of winding-up and for adjustment of the rights of
the contributories among themselves;
5. Capital Clause (only in the case of a company having a share capital)

The amount of share capital with which the company is to be registered and the division
thereof into shares of a fixed amount.
The number of shares each subscriber to the memorandum intends to take, indicated
opposite his name;
6. Succession Clause (only in the case of OPC): This clause shall state the name of the person who,
in the event of the death or incapacity to contract of the subscriber, shall become the member
of the company.
Form of Memorandum [Section 4]

Section 4 of the Companies Act provides that the memorandum of association of a company should
be in respective Forms specified in Tables A, B, C, D, and E of Schedule I to the Act, as may be
applicable to such company.
Any provision in the memorandum or articles, in the case of a company limited by guarantee and not
having a share capital, shall not give any person a right to participate in the divisible profits of the
company otherwise than as a member. If the contrary is done, it shall be void.
Printing and Signing of Memorandum [Section 3 & 4]

The memorandum of association must be printed, divided into paragraphs, numbered consecutively
and signed by each subscriber in the presence of at least one witness who shall attest the signatures
of the subscribers.
Each subscriber must state his address, 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.
Alteration of Memorandum [Section 13]

A Company may alter the provisions of its memorandum with the approval of the members by a
special resolution.
Alteration to Name clause: Any change in the name of a company shall be effected only with the
approval of the Central Government in writing.
No approval shall be necessary where the
change in the name of the company is only
Approval of Central Govt. in writing
the deletion there from, or addition
thereto, of the word “private”, on the
Registrar shall enter new name conversion of any one class of companies
to another class.
Change not allowed if Company has
Registrar shall issue new certificate
defaulted in-
a) Filing its annual returns/statements
b) Repayment of matured deposits
/debentures / interest
Alteration to Situation clause: Section 12 provides that a company shall, on and from the 15th day of
its incorporation shall have a registered office. The company shall furnish to the Registrar verification
of its registered office within a period of 30 days of its incorporation in Form INC.22.
The alteration of the memorandum relating to the place of the registered office from one State to
another shall not have any effect unless it is approved by the Central Government on an application
in such from and manner as may be prescribed.
Dispose of the application of change of place of the registered office: The Central Government shall
dispose of the application of change of place of the registered office within a period of sixty days.
Before passing of order, Central Government may satisfy itself that-
• The alteration has the consent of the creditors, debenture-holders and other persons
concerned with the company, or
• The sufficient provision has been made by the company either for the due discharge of
all its debts and obligations, or
• Adequate security has been provided for such discharge.
Resolution by Board of Directors
Special resolution in General Meeting
Approval of Central Government
Central Government shall dispose of application within 60 days
Certified copy of Central Govt order is filed with Registrar of each state within
30 days in form INC 28
Alteration to Object Clause A company, which has raised money from public through prospectus
and still has any unutilised amount out of the money so raised, shall not change its objects for which
it raised the money through prospectus unless a special resolution through postal ballot is passed by
the company and –
• The details, in respect of such resolution shall also be punished in the newspapers.
• The dissenting shareholders shall be given an opportunity to exit.
The Registrar shall register any alteration of the memorandum with respect to the objects of the
company and certify the registration within a period of thirty days from the date of filling of the
special resolution.
Only member have a right to participate in the divisible profits of the company: Any alteration of
the memorandum, in the case of a company limited by guarantee and not having a share capital,
intending to give any person a right to participate in the divisible profits of the company otherwise
than as a member, shall be void.
Alteration of Liability Clause
The liability of a member of a company cannot be increased unless the members agree in writing.
MOA clause Members’ External approvals Outcome Applicability

resolution
Name Clause Special Approval of Central New incorporation Not applicable
resolution Government and subject certificate issued by where only word
to Section 16 ROC “Private” is added
or deleted on
company class
conversion
Domicile Special Approval of Central The Central
clause resolution Government required Government shall
only when registered dispose of the
office is changed from application under sub-
one state to another section (4) within a
period of sixty days
and before passing its
order may satisfy itself
that the alteration has
the consent of the
creditors, debenture –
holders and other
persons concerned
with the company or
that the sufficient
provision has been
made by the company
either for the due
discharge of all its
debts and obligations
or that adequate
security has been
provided for such
discharge.
Objects Clause Special A company, which has
resolution raised money from
public through
prospectus and still
has any unutilized
amount out of the
money so raised, shall
not change its objects
for which it raised the
money through
prospectus unless a
special resolution is
passed by the
company and –
(i) the details, as may
be prescribed, in
respect of such
resolution shall also be
published in the
newspapers (one in
English and one in
vernacular language)
which is in circulation
at the place where the
registered office of the
company is situated
and shall also be
placed on the website
of the company, if any,
indicating therein the
justification for such
change;
(ii) the dissenting
shareholders shall be
given an opportunity
to exit by the
promoters and
shareholders having
control in accordance
with regulations to be
specified by the
Securities and
Exchange Board.
Liability/Capit Special - Any alteration of the
al Clause resolution memorandum, in the
case of a company
limited by guarantee
and not having a share
capital, purporting to
give any person a right
to participate in the
divisible profits of the
company otherwise
than as a member,
shall be void.
Forms and schedule related to memorandum: The memorandum of a company shall be in

respective forms specified in Tables A, B, C, C and E in Schedule I as may be applicable to such
company.
The MOA and AOA shall be in respective forms as provided in Schedule I to the Companies Act, 2013:
Table-A
• Memorandum of Association of a company limited by shares
Table-B
• Memorandum of Association of a company limited by guarantee and not having a
share capital
Table-C
• Memorandum of Association of a company limited by guarantee and having share
capital
Table-D
• Memorandum of Association an unlimited company and not having share capital
Table-E
• Memorandum of Association an unlimited company and having share capital
Table-F
• Articles of association of a company limited by shares
Table-G
• Articles of association of a company limited by guarantee and having a share capital
Table-H
• Articles of association of a company limited by guarantee and not having share capital
Table-I
• Articles of association of an unlimited and having a share capital
Table-J
• Articles of association of an unlimited company and not having share capital
ARTICLES OF ASSOCIATION
9
Articles of Association [Section 2(5)]
‘Articles’ means the articles of association of a company as
originally framed or as altered from time to time or applied in
pursuance of any previous company law or of this Act.
Section 5 of the Companies Act, 2013 seeks to provide the

contents and model of articles of association as follows-
Regulations
The articles of a company shall contain the regulations for management of the company.
Inclusion of matters
The articles shall also contain such matters, as are prescribed under the rules. However, a
company may also include additional matters as considered necessary.
Provision for entrenchment

The articles may contain provisions for entrenchment to the effect that specified provisions of
the articles may be altered only if condition or procedures as that are more restrictive than
those applicable in the case of a special resolution, are met or complied with.
Manner of inclusion of the entrenchment provision

The provisions for entrenchment shall only be made either on formation of a company, or By an
amendment in the articles -
In the case of a private company- agreed to by all the members of the company
In the case of a public company- By a special resolution
Notice to the registrar of the entrenchment provision

Where the articles contain provisions for entrenchment, whether made on formation or by
amendment, the company shall give notice to the Registrar of such provisions in such form and
manner as may be prescribed.
Forms of articles
The articles of a company shall be in respective forms specified in Tables, F, G, H, I and J in
schedule I as may be applicable to such company.
Model articles
A company may adopt all or any of the regulations contained in the model articles applicable to
such company.
ARTICLES OF ASSOCIATION 9.2
Company registered after the commencement of this Act

In case of any company, which is registered after the commencement of this Act, in so far as the
registered articles of such company do not exclude or modify the regulations contained in the
model articles applicable to such company, those regulations shall, so far as applicable, be the
regulations of that company in the same manner and to the extent as if they were contained in
duly registered articles of the company.
Nothing in this section shall apply to the articles of a company registered under any previous
company law, unless amended under this Act.
Alteration of Articles of Association

Section 14 of the companies Act, 2013, vests companies with power to alter or add to its articles.
The law with respect to alteration of articles is as follows:
Alteration by special resolution: Subject to the provisions of this Act and the conditions
contained in its memorandum if any, a company may, by a special resolution alter its
articles.
Alteration to include conversion of companies: Alteration of articles include alterations

having the effect of conversion of –
(a) A private company into a public company; or
(b) A public company into a private company;
Alteration having the effect of conversion of a public company into a private company, then such
conversion shall not take effect except with the approval of the Tribunal and make such order as it
may deem fit.
Filling of alteration with the registrar: Every alteration of the articles and a copy of the
order of the Tribunal approving the alteration, shall be filed with the Registrar, together with
a printed copy of the altered articles, within a period of fifteen days in such manner as may
be prescribed, who shall register the same.
Any alteration made shall be valid: Any alteration of the articles registered as above shall,
subject to the provisions of this Act, be valid as if it were originally contained in the articles.
Alteration noted in every copy: Every alteration made in articles of a company shall be
noted in every copy of the articles, as the case may be. If a company makes any default in
complying with the stated provisions, the company and every officer who is in default shall
be liable to a penalty of one thousand rupees for every copy of the articles issued without
such alteration.[Section 15]
ARTICLES OF ASSOCIATION 9.3
Effect of Memorandum & Articles of Association [Section 10]
Where the memorandum and Articles when registered shall bind the company and the members
thereof to the same extent as if they respectively had been signed by the company and each
member and an agreement to observe all the provisions of the memorandum and of the articles.
Members bound to Company

The memorandum and articles constitute a contract binding the members to the company.
The company can, therefore, enforce articles against any member.
Bradford Banking Co. vs. Briggs

The articles give the company a lien upon each share for debts due by shareholders to the
company, and where a shareholder mortgages his shares and the mortgagee serves notice
thereof upon the company, the mortgagee would have priority over the company, only if the
shareholder had incurred a liability to the company after the notice of the mortgage was
given to the company. If on the other hand, the shareholder had incurred a liability before
the notice of mortgage was given to the company, the company would have the priority.
Company bound to the Members

Just as the members are bound to the company, so also the company is bound to the members
to observe and follow the articles.
Member bound to Member

As between the members inter-se, each member is bound by the articles to the other members.
Welton vs. Saffary [1897]

In this case, the learned Judge observed that “It is quite true that the articles constitute a
contract between each members of the company but the articles do not, any the less in my
opinion, regulate the right inter se. Such rights can only be enforced by or against a member
through the company or by the liquidator representing the company, but no member has as
between himself and another member any right beyond that which the contract with the
company gives him”.
Company not bound to Outsider

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. The articles do not constitute a contract between a
company and an outsider.
Royal British Bank vs. Turquand [1956]

An outsider is entitled to assume that in respect of contract entered into with him all the
formalities required to be carried out under the articles or memorandum have been duly
complied with
SERVICE OF DOCUMENTS
11
Service of documents [Section 20]
(1) Serving of document to company: A document may be served on a company or an officer
thereof by sending it to the company or the officer at the registered office of the company
by –
♦ Registered post, or
♦ Speed post, or
♦ Courier service, or
♦ Leaving it at its registered office, or
♦ Means of such electronic or other mode as may be prescribed:
However where securities are held with a depository, the records of the beneficial
ownership may be served by such depository on the company by means of electronic or
other mode.
(2) Serving of document to registrar or member: Save as provided in this Act or the rules made
thereunder for filling of documents with the Registrar in electronic mode, a document may
be served on Registrar or any member by sending it to him by –
♦ Post, or
♦ Registered post, or
♦ Speed post, or
♦ Courier, or
♦ By delivering at his office or address, or
♦ By such electronic or other mode as may be prescribed:
In case of delivery by post, 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.
Authentication of documents, proceedings and contracts

As per section 21 of the Companies Act, 2013, a document or proceeding requiring authentication
by a company or contracts made by or on behalf of a company may be signed by –
(i) Any key managerial personnel, or
(ii) An officer of the company duly authorized by the Board in this behalf.
Execution of bills of Exchange, etc. [Section 22]

(1) A bill of exchange, hundior promissory note shall be deemed to have been made, accepted,
drawn or endorsed on behalf of a company if made, accepted, drawn , or endorsed in the
SERVICE OF DOCUMENTS 11.2
name of, or on behalf of or on account of, the company by any person acting under its
authority, express or implied.
(2) A company may, by writing under its common seal, if any, authorize any person, either
generally or in respect of any specified matters, as its attorney to execute other deeds on its
behalf in any place either in or outside India.
However, in case a company does not have a common sea, the above authorization shall be
made by 2 directors or by a director and the Company Secretary, wherever the company has
appointed a Company Secretary
(3) A deed signed by such an attorney on behalf of the company and under his seal shall bind
the company.
Co. having
Common seal
Yes No
*In writing authorize any person Authorization

(generally or in respect of any shall be made
specified matters) as attorney) by
Where the Co.

In India, or 2 directors, or has a Company
Secretary
Outside India A director +

Company
Secretary
MEANING OF PROSPECTUS
12
Definition [Section 2(70)]
Prospectus
(Invitation to make an offer) “Any document described or
issued as a prospectus and includes
a red herring prospectus, shelf
Application for shares prospectus or any notice, circular,
(Making an offer to Company)
advertisement or other document
inviting offers from public for the subscription or purchase of
Allotment any securities of a body corporate”.
(Offer accepted)
Offer to Public for sale of securities
Considered prospectus if- Not considered prospectus if-

if
Extends an invitation to It can be accepted only by

the public to subscribe the person to whom it is
Open to any person made
An oral invitation to subscribe for shares will not be considered as Prospectus.
Issue of Securities (Sec. 23)

Through prospectus; or
Through private placement; or
Through a rights issue or a bonus issue
Public Company
In case of a listed company or a company which intends to get
its securities listed with the provisions of the SEBI Act, 1992 and
its rules and regulations.
By way of rights issue or bonus issue in accordance with the

Private Company
provisions of the Companies Act; or
Through private placement by complying.
MEANING OF PROSPECTUS 12.2
A public company is notot required to issue prospectus-
prospectus
Where securities are offered to existing holders under rightsights Issue or bonus issue in
accordance with the provisions of this Act.
In case of Private Placement through issue of private placement letter
Registration of Prospectus [Section 26]
Signed & Approval by Before ROC

17/08 Publication
Dated Agencies ROC will register if
rsrs conditions
complied &
consent enclosed
Director/Proposed Along with

Director/
irector/ Duly consent &
authorized attorney Declaration
Section 26 of the Companies Act, 2013 provides that the he prospectus issued shall not include
Prospectus should be issued by the company within 90 days of registration with ROC.
a statement purporting to be made by an expert, unless such an expert -
a) Is a person who is not, and has not been, engaged or interested in the formation or
promotion or management, of the company, and
b) Has given his written
ten consent to the issue of prospectus and has not withdrawn such
consent before the delivery of a copy of the prospectus to the Registrar for registration,
and
c) A statement to o that effect shall be included in the prospectus.
Every prospectus issued shall, on the face of it, -

(a) State that a copy has been delivered for registration to the Registrar, and
(b) Specify any documents required to be attached to the copy so delivered or refer to
statement included in the prospectus which specify these documents.
If a prospectus is issued in contravention of the said provisions, the

company shall be punishable-
a) With
ith fine which shall not be less than 50,000/-
50,000 but which
may extend to 3 lakhs and
b) Every
very person who is knowingly a party to the issue of such
prospectus shall be punishable with
Imprisonment (Maximum 3 years); or
Fine 50,000(Minimum), 3 lakhs (Maximum); or
Fine-
Both
Power of Securities and Exchange Board to regulate issue and transfer of securities[Section 24]
(1) The provisions contained in this Chapter III (prospectus and allotment), Chapter IV(share
capital and debenture) and in section 127(punishment for failure to distribute dividends)
shall –
(a) Where the provisions relate to –
(i) Issue and transfer of securities; and
(ii) Non – payment of dividend, by listed companies or those companies which intend to get
their securities listed on any recognized stock exchange in India, be administered by the
securities and Exchange Board by making regulations in this behalf;
(b) In any other case, be administered by the Central Government.
The section further explain that all power relating to all matters with respect to prospectus,
return of allotment, redemption of preference shares and any other matter specifically
provide in this Act, shall be exercised by the Central Government, the Tribunal or the
Registrar, as the case may be.
(2) The Securities and Exchange Board shall, in respect of matters specified above and the
matters delegated to it under proviso of section 458 (1) [provisions relating to the forward
dealing and the Insider trading], exercise the powers conferred upon it by the Securities and
Exchange Board of India Act, 1992.
Contents of Prospectus
Section 26 of the Companies Act, 2013 provides for the following matters to be stated and
the information to be given in the prospectus
Contents of Prospectus
Information Reports Declaration Other Matters
Information
Names & addresses of registered office and the other persons

(Like company secretary, Chief Financial Officer, auditors, legal advisors, bankers, trustees,
underwriters and such other persons as prescribed under the rules).
Dates of the opening and closing of the issue

And declaration made by Board or the committee about the issue of allotment letters and
refunds of the application money within the 15 days from the closure of the issue or such
lesser time as may be specified by SEBI
A statement by the Board of Directors about the separate bank account where all monies
received out of the issue are to be transferred and disclosure of details of all monies
(utilized/un-utilized) out of the previous issue in the prescribed manner
Details (the names, addresses, telephone numbers, fax numbers and e-mail addresses) of
the underwriters and the amount underwritten by them
Consent of directors, auditors, bankers to the issue, expert’s opinion if any, and of such
other persons, as prescribed under the rules
Authority for the issue and the details of the resolution passed therefore
Procedure and time schedule for allotment and issue of securities
Capital structure of the company in the prescribed manner
Main objects of public offer, terms of the present issue and such other particulars as may be
prescribed
Main objects and present business of the company and its location, schedule of
implementation of the project
Other particulars relating to –

a) Management view of risk factors specific to the project;
b) Gestation period of the project;
c) Extent of progress made in the project;
d) Deadlines for completion of the project; and
e) Any litigation or legal action pending or taken by a Government Department or a
statutory body during the last five years immediately preceding the year of the issue of
prospectus against the promoter of the company;
Minimum subscription, amount payable by way of premium, issue of shares otherwise than
on cash
Details of directors including their appointments and remuneration, and such particulars of
the nature and extent of their interests in the company as may be prescribed
Disclosures of the sources of promoter’s contribution in such as may be prescribed
Reports
Reports by the auditors of the company with respect to its profits and losses and assets and
liabilities and such other matters as may be prescribed.
Reports relating to profits and losses for each of the five financial years immediately
preceding the financial year of the issue of prospectus including such reports of its
subsidiaries and in such manner as may be prescribed.
However where a company with respect to which a period of five years have not passed
from the date of incorporation – then such a prospectus shall set out the reports relating
rel to
profits and losses for each of the financial years immediately preceding the financial year of
the issue of prospectus including such
su reports of its subsidiaries
Reports made by the auditors upon the profits and losses of the business of the company
comp for
each of the five financial years immediately preceding issue and assets and liabilities of its
business on the last date to which the accounts of the business were made up, being a date
not more than one hundred and eighty days before the issue of the prospectus:
In
n case of a company with respect to which a period of five years has not passed- passed For all
financial years from the date of its incorporation, and assets and liabilities of its business on
the last date before the issue of prospectus.
prospectus
Declaration
Make a declaration about the compliance of the provisions of this Act and a statement to
the effect that nothing in the prospectus is contrary to the provisions
a) Companies Act, 2013
b) Securities and Exchange Board of India Act, 1992
c) Rules and regulations made there under
Others
Matters related to business purchase/Takeover, Investment in subsidiary, related party
transactions, Auditor’s Qualifications, Material frauds, Terms and conditions of term loans etc.
Variation in Terms of Contracts or Objects as Referred in the Prospectus
If Company has Company shall not vary

unutilised amount out terms of contract/
of money raised Objects except on
through prospectus approval by SR.
Section 27 of the Companies Act, 2013: A company shall vary ry the terms of a contract or objects as
referred to in the prospectus for which the prospectus was issued, subject to the approval via Special
Resolution passed by the shareholders.
In this regard, notice shall be sent to shareholders and shall also
also be published in English and in
vernacular language.
Rule 7 of Companies (Prospectus and Allotment of Securities) Rules, 2014: When the company has
raised money from public through prospectus and has any unutilized amount but of the money so
raised, it shall not vary the terms of contracts referred to in the prospectus or objects for which the
prospectus was issued except by passing a special resolution through postal ballot.
(a) Notice of the proposed special resolution shall contain the following-
Original purpose or object of the Issue
Total money raised
Money
oney utilized for the objects of the company stated in the prospectus
Extent
xtent of achievement of proposed objects (i.e.
(i.e 50%, 70% etc.)
Unutilized amount
Particulars
lars of the proposed variation
Reason and justification for seeking variation
Proposed time limit
Risk
isk factors pertaining to the new objects.
(b) Publication in the Newspaper: The notice shall be sent to the shareholders and shall also be
published in the two newspapers (one in English and one in vernacular
vernacular language).
(c) Publication on the website: The notice shall also be placed on the web-site
web site of the company.
Exit Option to the Dissenting shareholders: The dissenting shareholders who have not agreed to the
proposal to vary the terms of contracts shall be given an exit offer by promoters or controlling
shareholders at exit price as may be specified by the SEBI.
1. Explain the meaning and role of Prospectus.

2. State the conditions where under the issuing of prospectus is not necessary under the
companies Act, 2013.
3. What are the requirements as to issue of Prospectus.
TYPES OF PROSPECTUS
13
Types of Prospectus
Abridged Shelf Prospectus Red Herring Deemed

Prospectus Prospectus Prospectus
Offer of Offer of sale

securities for of shares by
sale Members
Abridged Prospectus
“Abridged Prospectus” means a memorandum containing such salient features of a prospectus as
may be specified by the SEBI by making regulations in this behalf. In other words, abridged
prospectus means a summarized version of a prospectus.
prospectus
n 33 of the Companies Act, 2013 provides that the

Section he form of application for purchase of any of
the securities of a company shall be issued along
alo with an abridged prospectus.
The Objective is to reduce the cost of issue.
Proviso to section 33(1)

Abridged prospectus need not be issued in the following cases-
cases
(a) In relation to bona fide Invitation to a person to enter into an Underwriting Agreement.
Agreement
(b) No offer to Public.
If a company makes any default, it shall be liable to a penalty of 50,000/-

50,000/ for each
default.
Shelf Prospectus
Shelf Prospectus means a prospectus in respect of which the securities or class of
o securities included
therein are issued for subscription in one or more issues over
over a certain period without the issue of a
further prospectus.
The concept of shelf prospectus has been introduced to save expenditure and time of the companies
in issuing a new prospectus every time.
TYPES OF PROSPECTUS 13.2
Conditions for Shelf Prospectus
(a) Eligibility for issue of Shelf Prospectus
Any class of companies, as prescribed by the Securities and Exchange Board may file a shelf
prospectus with the ROC at the stage of the first offer of securities.
(b) Validity period

The shelf prospectus shall not be valid for more than 1 year from the date of opening of the
first offer of securities under the shelf prospectus. Further, in respect of a second or
subsequent offer issued during the period of validity of shelf prospectus, no further
prospectus is required.
(c) No requirement of filling fresh prospectus within 1 year

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 validity period of 1
year from the date of opening of the 1st issue of securities.
(d) Filing of Information memorandum

It shall be prepared in form No. PAS. 2 within 1 month prior to issue of second or subsequent
offer and shall contain the following-
Creation of new charges
changes in the financial position occurred between the first offer of securities or the
previous offer of securities
Such other changes as may be prescribed
(e) Filing with ROC: Any class or classes of companies as may be prescribed by the SEBI, shall file
a shelf prospectus with ROC.
Red-Herring Prospectus
“Red herring prospectus” means a prospectus which does not include complete particulars of the
quantum or price of the securities included therein.
The law relating to the red herring prospectus given under section 32 is as follows:
a) Issue of red herring prospectus prior to prospectus: Company proposing to make an offer of
securities may issue a red herring prospectus prior to the opening of the issue of a
prospectus.
b) Filing with the registrar: A company proposing to issue a red herring prospectus shall file it
with the registrar at least three days prior to the opening of the subscription list and the
offer.
c) Obligation and any variation in the red herring prospectus is same as that of prospectus: A
red herring prospectus shall carry the same obligations as are applicable to a prospectus and
any variation between the red herring prospectus and a prospectus shall be highlighted as
variations in the prospectus.
TYPES OF PROSPECTUS 13.3
d) Prospectus with the details not included in the red herring prospectus: Upon the closing of
the offer of securities under this section, the prospectus stating therein the total capital
raised, whether by way of debt or share capital, and the closing price of the securities and
any other details as are not included in the red herring prospectus
prospectus shall be filed with the
Registrar and the Securities and exchange Board.
Deemed Prospectus
Offer of securities for Sale (Sec 25)

If a company allots or agrees to allot any securities of the company with a view to all or any of those
securities being offered for sale to the public, any document by which the offer for sale to the public
is made shall, for all purposes, be deemed to be a prospectus.
Such a document shall be treated as a prospectus (unless
(unless the contrary is proved) where:
a. An offer of all or any of the securities for sale to the public was made within 6 months after
the allotment or agreement to allot or
b. At the date when the offer for sale to the public was made, the company had not received
receive
the whole consideration in respect of the said shares of debentures.
The following additional information is required to be given in the deemed prospectus:
a. The net amount of the consideration received or to be received b the company in respect of
the shares
res or debentures to which the offer relates;
b. The place and time at which the contract under which the said shares or debentures have
been or are to be allotted may be inspected.
It is sufficient If the prospectus is signed on behalf of the company or firm by 2 directors of the
company or by not less than ½ of the partners in the firm, as the case may be, either themselves or
by their agents authorized in writing.
Offer of Sale of shares by Members(Sec 28)

If members offer shares to public . It shall be in consultation with BOD & in accordance with law. The
offer shall be deemed to be prospectus and all relevant provisions shall apply. Members shall
reimburse company all expenses incurred by it on this matter.
1. What do you mean by Abridged Prospectus? Under what circumstances an abridged prospectus
need not accompany the detailed information regarding prospectus along with application
form.
2. Explain the concept of shelf Prospectus.
3. State the circumstances under which Red herring prospectus is required to be filed with the
Registrar of Companies.
MIS-STATEMENT IN PROSPECTUS
14
The Golden Rule or Golden Legacy
No concealment of material facts or no suppression of facts.
In other words, the company must disclose all the real and correct details and information in the
prospectus for proposed public issue.
What is an Untrue Statement?

An untrue statement means a statement included in a prospectus shall be deemed to be untrue, if
the statement is misleading in the form and context in which it is included.
In other words, an untrue statement or misstatement is one, which is misleading, in the form and
context in which it has been included in the prospectus. Further, where any inclusion or omission of
any matter in a prospectus is likely to mislead, the prospectus shall be deemed, in respect of such
omission, to be a prospectus in which an untrue statement is included.
Liability for Untrue Statement
Civil Liability Criminal Liability
Who will be held Liable?

Every Director at the time of the issue of the prospectus,
Every promoter and
Every person, including an expert,
who has authorized the issue of a prospectus, shall be liable for civil and criminal liabilities.
Criminal liability for mis-statements [Section 34]

Where any prospectus is issued or circulated or distributed, which includes any statement which is
untrue or misleading in form or context in which it is included or where any inclusion or omission of
any matter is likely to mislead, then every person who authorizes the issue of such prospectus shall
be liable for fraud.
Exception: If a person proves that:

(a) Such statement or omission was immaterial, or
(b) He had reasonable grounds to believe, and did up to the time of issue of the prospectus
believe, that the statement was true or the inclusion or omission was necessary.
MIS-STATEMENT
STATEMENT IN PROSPECTUS 14.2
Penalty & Prosecution (Sec. 447): A promoter shall be liable for imprisonment not less
than 6 months but not more
more than 10 years and shall also be liable for fine of not less
than the amount involved in the mis-statement,
mis statement, but not more than 3 times the amount
involved.
If the fraud in question involves public interest, the term of imprisonment shall not be less than 3
years.
statement
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
mis in the
prospectus lies on the allottee. He must prove the following:
(i) The misrepresentation was of a fact;
(ii) It was in respect off a material fact. What is a material statement of fact will depend upon
the circumstances of each case;
(iii) He acted on the misrepresentation; and
(iv) He suffered damages in consequence.
statements
Civil liability for mis-statements
Where any person subscribes for securities on the basis of misleading statements or inclusion or
omission of any matter in the he prospectus resulting in any loss or damages, then the company and
every person who has authorized the issue of such prospectus or a director, promoter and the other,
ot
whosoever is liable shall have to compensate every person who has sustained such loss or damage.
Note: In case, a prospectuss has been issued with intent to defraud the applicants for the securities of
a company, every person involved in such issue shallshall personally responsible without any limitation of
liability for all losses incurred by the subscribers.
When civil liability can be avoided?

No person shall be liable for civil action if he proves that:
(a) When he withdrew his consent before the issue of the prospectus, and such prospectus was
issued without his consent; or
(b) When 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.
Note: An expert may also escape his liability if he proves that he withdrew his consent before
delivery of a copy of prospectus for registration to ROC.
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 securities on the faith of the
prospectus containing untrue statement.
Note: A subsequent purchaser of shares in the open market has no remedy

remedy against the company or
the directors or promoters.(Peek
(Peek vs Gurney)
MIS-STATEMENT IN PROSPECTUS 14.3
Punishment for Fraudulently inducing persons to invest money (Section 36)
Any person who, either knowingly or recklessly makes any statement, promise or forecast which is
false, deceptive or misleading, or deliberately conceals any material facts, to induce 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 securities; or
(b) Any agreement, the purpose or the pretended purpose of which is to secure a profit to any
of the parties from the yield of securities or by reference to fluctuations in the value of
securities; or
(c) Any agreement for, or with a view to obtaining credit facilities from any bank or financial
institution,
- shall be liable for action under section 447.
Action by affected persons [Section 37]

A suit may be filed or any other action may be taken under section 34 or section 35 or section 36 by
any person, group of persons or any association of persons affected by any misleading statement or
the inclusion or omission of any matter in the prospectus.
Class Actions – Gift of Companies Act, 2013

Class action suit is for a group of people filing a suit against a defendant who has caused common
harm to the entire group or class. This is not like a common litigation method where one defendant
files a case against another defendant while both the parties are available in court. In the case of
class action suit, the class or the group or people filing the case need not be present in the court and
can be represented by one petitioner. The benefit of these type of suits is that if several people have
been injured by one defendant, each one of the injured people need not file a case separately but all
of the people can file one single case together against the defendant.
The need for these types of suits was first felt in the context of securities market during the time of
Satyam Scam, where a large group of people were cheated regarding their hard earned money
invested in Stock Market. During that time, it was felt that it was not at all viable regarding cost
effectiveness for a small stakeholder to file a case independently against the defendant. Millions of
cheated investors during that time formed a large group and filed the case against the company, but
since there was no available legal remedy or law which can actually support this type of litigation of
a group filing charges, it became tough for those investors to take a recourse or gain advantage in
the Indian Judicial System by this method. Class action suits in India were so far filed under the guise
of public interest litigations. Courts were free to dismiss these. These shareholders ran pillar to post
right from the National Consumer Disputes Redressal Commission up to the extent of Supreme Court
and had their claims rejected.
Example: M applies for share on the basis of a prospectus which contains mis-statement. The shares
are allotted to him, who afterwards transfers them to N. Can N bring an action for a rescission on the
ground of mis-statement under section 37 of the Companies Act, 2013?
MIS-STATEMENT
STATEMENT IN PROSPECTUS 14.4
Answer: No. N cannot bring an action for rescission of the contract to buy shares from M on the
ground of mis-statement
statement as under 37 of the Companies Act, 2013. A suit may be filed or any other
action may be taken under section 34 or section 35 or section 36 only by any person, group of
persons or any association off persons affected by any misleading statement or the inclusion or
omission of any matter in the prospectus.
Punishment for personation for acquisition of securities

Section 38 of the Companies Act, 2013 lays the laws related to the personation for acquisition
acquis of the
securities
(1) Personation of securities: Any person who –
(a) Makes or abets making of an application in a fictitious name to a company for acquiring, or
subscribing for, its securities; or
(b) Makes or abets making of multiple applications to a company company in different names or in
different combinations of his name or surname for acquiring or subscribing for its securities; or
(c) Otherwise includes directly or indirectly a company to allot, or register any transfer of,
securities to him, or to any other person
pers in a fictitious name,
-then
then such person shall be liable for action under section 447.
(2) Provisions shall be stated in every prospectus and application: This provisions shall be
stated in every prospectus issued by a company and in every form of application for securities.
(3) Order of court on conviction: Where a person has been convicted under this section, the
Court may also order disgorgement of gain, if any, made and seizure and disposal of the securities
in possession of, such person.
(4) Amount to be credited to IEPF: The amount received through disgorgement or disposal of
securities shall be credited to the Investor Education and Protection Fund.
1. With a view to issue shares to the general public a prospectus containing some false
information was issued by a company. Mr X received copy
cop of the prospectus from the company,
but did not apply for allotment of any shares. The allotment of shares to the general
g public was
completed by the company within the stipulated period. A few months later, Mr. X bought 2000
shares through the stock exchange at a higher price which later on fell sharply. X sold these
shares at a heavy loss. Mr. X claims damages from the the company for the loss suffered on the
ground the prospectus issued by the company contained a false statement. Referring to the
provisions of the Companies Act, 2013 examine whether X’s claim for damages is justified.
2. Peek Ltd. Co. issued and published its prospectus to invite the investors to purchase its shares.
The said prospectus contained false statement. Mr. X purchased some partly paid shares of the
MIS-STATEMENT IN PROSPECTUS 14.5
company in good faith on the Stock Exchange. Subsequently, the company was wound up and
the name of Mr. X was in the list of contributors. Decide:
(i) Whether Mr. X is liable to pay the unpaid amount?
(ii) Can Mr. X sue the directors of the company to recover damages?
3. Modern Furnitures Limited was willing to purchase teakwood estate in Chhattisgarh State. Its
prospectus contained some important extracts from an expert report giving the number of
teakwood trees and other relevant information in the estate in Chhattisgarh State. The report
was found inaccurate. Mr. ‘X’ purchased the shares of Modern Furnitures Limited on the basis of
the above statement in the prospectus. Will Mr. ‘X’ have any remedy against the company?
When will an expert not be liable? State the provisions of the Companies Act, 2013 in this
respect.
ALLOTMENT & BUY BACK
15
Allotment of Securities [Section 39]
Allotment means the act of appropriation of issue proceeds by the Board of Directors of the
company. An allotment is the acceptance of an offer to take shares by an applicant, and such
acceptance must be communicated to allottees.
Provisions for Allotment of Securities
Filing of Return of Allotment

Whenever a company having a share capital makes any allotment of securities, it shall file with
the Registrar a return
turn of allotment in Form PAS-3
PAS 3 in such manner as may be prescribed.
Minimum Subscription: No shares shall be allotted to the public until the receipt of minimum
subscription as stated in the prospectus. As per SEBI Guidelines Minimum subscription means
90% of the issue including underwriter subscription.
Minimum Call Money: the amount payable in application on each share shall not be less than
5% of the nominal amount of the share.
ceived within 30 days: if the stated minimum amount has not been
Minimum amount to be received
subscribed and the sum payable on application is not received within a period of thirty days
from the date of issue of the prospectus, or such other period as may be specified by the
Securities
es and exchange Board, the amount received shall be returned within such time and
Deposit the money received in separate bank A/c.
Penalty
In case of default, Company and every officer in default shall be liable to a penalty for each
default of one thousand rupees for each day during which such default continues or 1 lakh
rupees whichever is less.
Securities to be
e dealt with in stock exchanges [Section 40]
ALLOTMENT
TMENT & BUY BACK 15.2
Company Write name of a stock Make application to Make Offer

exchange in prospectus any RSE for Listing
Permission No Even by one Stock

Granted allotment exchange renders
entire allotment void
Allotment No Allotment
Within 15 days,
Apply to SAT
Favourable Unfavourable
Allot Refund Application

Money
If a default is made in complying with the provisions of this section, then both the
company and every officer of the company shall be punishable with a fine / imprisonment
or with both.
(i) Company shall be punishable with not less than five lakh rupees which may extend
to fifty lakh rupees, and
(ii) Every officer of the company who is in default shall be punishable with
imprisonment for a term extending up to one year or with fine not less than fifty
thousand rupees which may extend to three lakh rupees, or with both.
Payment of commission for subscription

The Companies (Prospectus and Allotment of Securities) Rules, 2014 prescribes the conditions for
the payment of commission.
The payment
ayment of such commission shall be authorized in the company’s articles of association;
The commission may be paid out of proceeds of the issue or the profit of the company or both;
There shall not be paid commission to any underwriter on securities which are not offered to the
public for subscription.
Disclosure in Prospectus
The name of the underwriters
The rate and amount of the commission payable to the underwriter; and
The number of securities which is to be underwritten or subscribed by the underwriter
absolutely or conditionally.
ALLOTMENT
TMENT & BUY BACK 15.3
Buy-Back
Fundamental Principle- A Company cannot buy its own shares.
No public company shall give any financial assistance (by mean of a loan, guarantee, by the
provisioning of security or otherwise) for purchase or subscription made or to be made, by any
person of or for any shares in the company or in its holding company.
On contravention of the above,
The
he company shall be punishable with fine (from one lakh rupees to twenty-five
twenty
lakh rupees)
Every
very officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to three years and with fine (from
one lakh rupees to twenty-five
twenty lakh rupees)
Exceptions
The lending of money by a banking company in the ordinary course of its business;
The provision is made by a company for lending of money in accordance with any scheme
approved by company through special resolution with such requirements as may be b
prescribed, for the purchase of, or subscription for, fully paid up shares in the company or its
holding company, if the purchase of, or the subscription for, the shares held by trustees for
the benefit of the employees or shares held by the employee of the company;
The giving of loans by a company to persons in the employment of the company other than
its directors or key managerial personnel , for an amount not exceeding their salary or wages
for a period of six months with a view to enabling them to purchase
purchase or subscribe for fully
paid-up
up shares in the company or its holding company to be held by them by way of
beneficial ownership:
However, disclosures in respect of voting rights not exercised directly by the employees in
respect of shares to which the scheme relates shall be made in the Board’s report in such
manner as may be prescribed. [Section 67].
Nothing in Section 67 shall affect the right of a company to redeem any preference shares
issued under this Act or under any previous Companies law.
Whether a company can ‘buy-back’back’ its own Securities?

Section 68 of the Companies Act, 2013 provides the power of a company to purchase its own
securities subject to certain conditions
Sources of funds
a) Its free reserves; or
b) The securities premium account;
acco or
c) The proceeds of the issue of any shares or other specified securities.
However, buy-back
back of any of shares or other specified securities cannot be made out of the proceeds
of an earlier issue of the same kind of securities.
The buy-back is authorized
ized by its articles;
ALLOTMENT & BUY BACK 15.4
A special resolution authorizing the buy-back is passed in general meeting of the company;
(except where – (i) the buy-back is, ten percent. Or less of the total paid-up equity capital and
free reserves of the company; and (ii) such buy-back has been authorized by the Board by means
of a resolution passed at its meeting;
The buy-back is 25% or less of the aggregate of paid-up capital and free reserves of the
company;
The ratio of the aggregate debts (secured and unsecured) owed by the company after buy back
is not more than twice the paid up capital and its free reserves;
The expression “free reserves” for the purposes of this section, includes securities premium
account.
All the shares or other specified securities for buy-back are fully paid-up;
The buy-back of the shares or other specified securities listed on any recognized stock exchange
is in accordance with the regulations made by SEBI in this behalf;
The buy-back in respect of shares or other specified securities other than those specified in
clause (f) is in accordance with rules as may be prescribed. [Sections 68(2)]
Procedure before buy-back: The notice of the meeting at which special resolution is proposed to be
passed shall be accompanied by an explanatory statement stating –
(a) A full and complete disclosure of the all material facts;
(b) The necessity for the buy-back;
(c) The class of shares or securities intended to be purchased under the buy back;
(d) The amount to be invested under the buy-back; and
(e) The time limit for completion of buy-back
Time limit for completion of buy-back: Every buy-back shall be completed within twelve months
from the date of passing the special resolution or a resolution passed by the Board at general
meeting authorizing the buy-back.
Buy-Back from whom?

(a) From the existing share holders or security holders on a proportionate basis; or
(b) From the open market; or
(c) By purchasing the securities issued to employees of the company pursuant to a scheme of
stock option or sweet equity
Declaration of solvency: Before making buy-back, company shall file with the Registrar and the SEBI
a declaration of solvency in the form as may be prescribed
Cooling period: Where a company completes a buys-back its own securities, it shall extinguish and
physically destroy the shares or other specified securities under this section, it shall not make further
issue of same kind of shares within a period of six months except by way of bonus issue or in the
discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat
equity or conversion of preference shares or debentures into equity shares.
ALLOTMENT & BUY BACK 15.5
Register of buy Back: Where a company buys-back its shares or other specified securities under this
section, it shall maintain a register of the shares or securities so bought, the consideration paid for
the shares or securities bought- back, the date of cancellation of shares or securities, the date of
extinguishing and physically destroying the shares or securities, and such other particulars as may be
prescribed.
Filing of Buy-back Return: A company shall, after completion of the buy-back under this section, file
with the Registrar and the Securities and Exchange Board of India, a return containing such
particulars relating to the buy-back within thirty days of such completion, as may be prescribed.
Prohibition for Buy-Back [Sec. 70]: A Company should not, 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) During the continuance of default in –
• Repayment of Deposits or Interest thereon, or Buy-Back is not prohibited, if

• Redemption of Debentures / Preference the default is remedied, and
Shares, or a period of 3 years has
• Payment of Dividend, or elapsed after such default
• Repayment of a Term Loan or interest thereon ceased to subsist.
to any Financial Institution or Bank,
(d) Non-compliance with the provisions of the following Sections –
• Sec. 92 – Filing of Annual Return.
• Sec. 123 – Declaration of Dividend.
• Sec. 127 – Distribution of Declared Dividends.
• Sec. 129 – Financial Statement.
GLOBAL DEPOSITORY RECEIPTS
16
Global Depository Receipts [Section 41]
DEPOSITORY
A company may by passing a special resolution in its general meeting issue global depository
receipts to transact business with in a depository mode in any foreign country.
Eligibility to issue depository receipts

A company may issue depository receipts provided it is eligible to do so in terms of the Scheme and
relevant provisions of the Foreign Exchange Management Rules and Regulations.
Conditions for issue of depository receipts. –
Passing of resolution: The Board of Directors of the

company intending to issue depository receipts shall
pass a resolution authorizing the company to do so.
Approval of shareholders: The company shall take prior

approval of its shareholders by a special resolution to be
passed at a general meeting
Depository receipts shall be issued by an overseas

depository bank: The depository receipts shall be issued
by an overseas depository bank appointed by the
company and the underlying shares shall be kept in the
custody of a domestic custodian bank.
Compliance with all the provisions, schemes, regulations etc.: The Company shall ensure that
all the applicable provisions of the schemes and the rules or regulations or guidelines issued by
the Reserve Bank of India are compiled with before and after the issue of depository receipts.
Compliance report to be placed at the meeting: The company shall appoint a merchant banker
or practicing chartered accountant or a practicing company secretary to observe all the
compliances relating to issue of depository receipts and the compliance report taken from such
merchant banker or practicing chartered accountant or practicing cost accountant or practicing
GLOBAL DEPOSITORY RECEIPTS 16.2
company secretary, as the case may be, shall be place at the meeting of the Board of Directors
of the company or of the committee of the Board of directors authorized by the Board in this
regard to be held immediately after closure of all formalities of the issue of depository receipts:
PRIVATE PLACEMENT
17
Private Placement
Private Placement means any offer of securities or invitation to subscribe securities to a select group
of persons by a company (other than by way of public offer) through issue of a private placement
offer letter and which satisfies the conditions specified in section 42.
Private Placement
Sec. 42(2): 50 or Rule 14 (Conditions) Applicable on Private

Higher as prescribed 200 persons And Public Co.
Note: A company may make private placement through issue of a private placement offer letter in
Form PAS-4 to investors.
Rule 14 of Companies (Prospectus and Allotment of Securities) Rules, 2014

Private Placement Offer shall be made to not more than 200 persons in the aggregate in a financial
year. It excludes-
qualified institutional buyers (QIBs) and
employees of the company being offered securities under a scheme of ESOP.
Limitations on making a private placement by company

Previous approval of shareholder by a special resolution is necessary
Such offer or invitation shall be made to not more than two hundred persons in the
aggregate in a financial year
The value of such offer or invitation per person shall be with an investment size of not less
than twenty thousand rupees of face value of the securities
Special Note:
(a) Explanatory Statement: The explanatory statement to the notice is respect of special
resolution for General Meeting must justify the price (including premium) at which the offer
or invitation is being made.
PRIVATE PLACEMENT 17.2
(b) Validity of Special Resolution for Non-convertible:
Non convertible: In case of offer or invitation for non-
non
convertible debentures, it shall be sufficient if the company passes a previous special
resolution only once in a year for all the offers or invitation for such debentures during the
year.
(c) No Fresh Offer: No fresh offer or invitation under this section shall be made unless the
allotments with respect to any offer or invitation made earlier have been completed or that
offer or invitation has been withdrawn or abandoned by the company.
(d) Public offer: Any offer or invitation not in compliance with the provisions of the Companies
Act, 2013 shall be treated as a public offer, and the Securities
Securities Contracts (Regulation) Act,
1956 and the SEBI Act, 1992 shall be required to be complied with.
Other Relevant Points
Mode of payment: All monies payable towards subscription of securities shall be paid through
cheque or demand draft or other banking
banki channels but not by cash.
Time limit for allotment: A company making an offer or invitation shall allot its securities within
60 days from the date of receipt of the application money for such securities.
Refund of subscription money; If the company fails to allot the securities within 60 days, then is
shall repay the application money to the subscribers within 15 days from the date of completion
of 60 days and if the company would not be able to repay the application money within 15 days,
then such company
ompany shall be liable to repay t he subscription money along with interest @ 12%
P.A. after the expiry of 60 days.
Subscription money to be kept in a separate bank account: The monies received as share
application money shall be kept in a separate bank account
account in a scheduled bank and shall not be
utilized for any purpose other than:
(a) For adjustment against allotment of securities; or
(b) For the repayment of monies where the company is unable to allot securities.
If a company makes an offer or accepts monies in contravention then-

then
Persons Liable Penalty
Company May extend to the amount involved in offer or 2 Crore

Promoters whichever is higher.
Directors Company shall also refund all monies to subscribers within
a period of 30 days of the order imposing penalty.
DEPOSITS
18
Introduction
Deposit [Sec. (a) “Deposit” includes any receipt of money by way of Deposit or Loan or in
2(31)] any other form, by a Company.
(b) Deposit does not include categories of amount prescribed in consultation
with RBI.
Exemption
This sub-section with respect to the acceptance of
deposit from public shall not apply to the following
company:
(i) Banking company
(ii) Non-banking financial company as
defined in the Reserve Bank of India Act, 1934.
(iii) A housing finance company registered with the National Housing Bank established
under the National Housing Bank Act, 1987 and
And such other company as the central Government may specify, after consultation with the Reserve
Bank of India.
Conditions for acceptance of Deposits

(a) Issuance of a circular: Issuance of a circular to its members including a statement showing
the financial position of the company, the credit rating obtained, the total number of
depositors and the amount due towards deposits in respect of any previous deposits
accepted by the company.
(b) Filing of Circular to ROC: The filing a copy of the circular along with such statement with the
ROC within thirty days before the date of issue of the circular.
(c) Creation of Deposit Repayment Reserve: The Company has to create a Deposit Repayment
Reserve (DRR) by depositing not less than 15% of total deposits maturing during a financial
year and the financial year next following, and be kept in a scheduled bank in a separate
bank account to be called as deposit repayment reserve account.
(d) Insurance for Deposits: Every company inviting deposits shall enter into a contract for
providing deposit insurance at least 30 days before the issue of circular or advertisement or
at least 30 days before the date of renewal.
(e) The depositor shall be entitled to get the repayment of principal amount of deposits and the
interest thereon by the insurer up to the aggregate monetary ceiling as specified in the
contract.
(f) The amount of insurance premium shall be borne by the company itself and shall not be
recovered from the depositors.
(g) Default by the Company: If any default is made by the company in complying with the terms
and conditions of the deposit insurance contract which makes the insurance cover
ineffective, the company shall either rectify the default immediately or enter into a fresh
contract within 30 days.
DEPOSITS 18.2
Penal Provisions:
The Companies (Amendment) Act, 2015
1. The Company shall be liable to pay in addition to the deposits & its
interest thereon, also liable to pay 1 crore to 10 crores.
2. Every officer of the Company who is in default shall be punishable
with imprisonment which may extend to 7 years or with fine
between 25 lacs and 2 crores or with both.
Maximum Amount of Deposits:

Company Sec. 73(2) Company Eligible Company u/s 76
Depositor Member only Members and Non-Member
Member (Public)
Max. Amount of 35% 5% of the Aggregate of (a) From Members: 10% of the Aggregate of
Deposit that can be Paid up Share Capital and Paid up Share Capital and Free Reserves.
accepted Free Reserves. (b) From Non-Members
Members (Public): 25% of the
Aggregate of Paid up Share Capital and Free
Reserves.
Note: In case of Government Company being eligible u/s 76, the overall ceiling
ceiling limit is 35% (i.e. no
breakup as to 10% and 25%)
Interest and Brokerage:

Normal Rates The Rate of Interest or Brokerage shall not exceed the Maximum Rate of
Interest or Brokerage prescribed by RBI, for acceptance of deposits by Non-
Non
Banking Financial Companies (NBFC’s).
Penal Rate of Every Company shall pay a Penal Rate of Interest of 18% p.a. for the overdue
Interest period in case of Deposits, (whether Secured or Unsecured), matured and
claimed but remaining unpaid.
Brokerage Payable Brokerage can be paid only to a Person –
to (a) Who is authorised, in writing, by a Company to solicit Deposits on its
behalf, and
(b) Through whom Deposits are actually procured.
Note: Payment of Brokerage to any other person for procuring deposits
constitutes violation of Rules.
Ru
SHARE CAPITAL – INTRODUCTION 20
Share is the basic unit into which the Capital of a Company is
divided.
Sec 2(84)- Share means share in share capital of a Company.
Nature of Shares
Movable Property
Transferable
Distinct Number
Certificate
Borland Trustees vs Steel Bors & Co. ltd

A share is not a sum of money; it is rather an interest measured by a sum of money and made up of
various rights contained in the contract including the right to a sum of money of a more or less
amount.
Stock
“Stock” is the aggregate of fully paid-up Shares of a member
merged into one fund of equal value.
Features:
Stock can be divided into fractions of any amount.
Any part of the Fund of Stock can be transferred.
Classification of Share Capital
Authorized/ Issued Subscribed Called-Up Uncalled Paid-Up Unpaid

Registered Capital Capital Capital Capital Capital Capital
Nominal
Capital
Capital as in Capital as the Capital Quantum of Capital Amount That portion

authorized Company which is for Capital which has received as of Called-Up
by the MOA issues from the time which has not yet paid-up in Capital which
of a time to time being been called been called respect of has not yet
Company to for subscribed up up Shares been paid by
be the subscription by the issued the
Maximum Members Shareholders
amoun
SHARES – CAPITAL INTRODUCTION 20.2
Reserve Capital [Sec. 65]
If refers to that portion of Capital which is not called up and will be called up only in the event of and
for the purpose of the Company being wound up.
Kinds of Shares [Sec. 43]

For a Company limited by Shares, Share Capital is classified as under-
Kinds of Shares [Sec. 43]
Preference share Capital Equity Share Capital
PSC (General) Deemed or With Voting Rights With Differential

Participative PSC Rights as to
Dividend, Voting or
otherwise.
Preference Share Capital [PSC]
It carries a Preferential Right as to –
Dividend
Capital
Deemed or Participative Preference Capital- If it has one/both additional rights with respect to
Dividend and Repayment of Capital.
Issue of Redeemable Preference Shares- Section 55 of the Companies Act, 2013 read with
Companies (Share Capital and Debentures) Rules, 2014 provides that a company, if so authorized by
its articles of association, may issue redeemable preference shares, subject to the following
conditions:
A special resolution in the general meeting of the company.
No subsisting default in the redemption of preference share or in payment of dividend.
The company cannot issue preference shares which is redeemable after the expiry of twenty
years from the date of its issue.
Conversion of shares into Stock

By virtue of the powers contained in Section 61 of the Companies Act, 2013 a company limited by
shares if authorized by its articles, may by means of a resolution passed at a general meeting alter
the conditions of its memorandum with a view to converting all or any if its fully paid shares into
stock and also reconvert its stock into shares. However, the company cannot issue stock ab initio. It
must issue shares and after they are fully paid up, convert them into stock.
Notice with the registrar: Where –

A company alters its share capital in any manner specified in section 61(1).
An order made by the Government under section 62 has the effect of increasing authorized
capital of a company; or
SHARES – CAPITAL INTRODUCTION 20.3
A company redeems any redeemable preference shares,
Punishment in contravention of the provision: If a company and any officer of the company who is
in default contravenes the above provision, there the company or the officer shall be punishable
with fine which may extend to 1,000 rupees for each day during which such default continues, or 5
lakh rupees, whichever is less.
Variation of Shareholders Rights
Consent in writing of Holders of not less Sanction by a Special Resolution passed at a

. than 3/4th of Issued Shares of that class Separate Meeting of Holders of Issued
Shares of that class
If there is no such provision in MOA or Provision as to such variation

AOA, such variation should not be should be contained in MOA
prohibited by the terms of issue of that or AOA of the company
class of Shares.
Hindustan General Electric Corporation

Variation which merely affects enjoyment of a right without modifying right itself does not come
within this Section.
Procedure
Holders of not less than 10% of the Issued Shares of that class who had not assented to the variation
may apply to the Tribunal to have the variation cancelled within 21 days from the date of passing
resolution. Tribunal shall hear the applicant and the parties interested therein, and on facts and
merits of the case, either confirm or cancel the variation. Such decision shall be final, and binding on
the Shareholders. The Companies should file a copy of the Tribunal Order with the ROC, within 30
days of date of Order.
Voting Rights of Shareholders are as under

Equity Shareholders [Sec. 47(1)] Preference Shareholders [Sec. 47(2)]
Matters Equity Shareholders have that On Specific Matters only: Every Preference
right to vote on every resolution Shareholder has a right to vote only on the
placed before the Company following resolutions –
(a) Matters which directly affect the rights
attached to Preference Shares,
(b) Winding Up of the Company,
(c) Repayment or Reduction of Share Capital
(Equity or Preference).
Exception: Preference Shareholders are entitled to
vote on every resolution placed before the Meeting
if dividend due to them or any part of it, remains
unpaid for a period of 2 years or more.
One Share Voting Right shall be in proportion Voting Right shall be in proportion to his Share in
One Vote to his Share in Paid-Up Equity Paid-Up Preference Capital.
Capital
ISSUE OF SHARES 21
Issue of Shares at Premium [Sec. 52]
Where a company issues shares at a premium, whether for cash or otherwise, a sum equal to the
aggregate amount of the premium, received on those shares shall be transferred to a “securities
premium”
Premium refers to the excess of the Share Issue Price over its Face Value / Par Value.
Shares can be issued at a Premium which may be received in Cash or in Kind. Sec.52 of the
Act uses the words “at a premium, whether for cash or otherwise”.
[Head Henry & Co. Ltd. vs. Ropner Holding Ltd]

Securities Premium Account can be used only for –
(a) Issuing Fully Paid Bonus Shares to Members.
(b) Writing-off the Preliminary Expenses of the Company.
(c) Writing off the – (i) Expenses Incurred, or (ii) Commission Paid, or (iii) Discount Allowed,
on the Issue of Shares or Debentures of the Company.
(d) Providing for premium payable on redemption of any Redeemable Preference Shares or
Debentures of the Company.
(e) Buy-back of own Shares or Other Securities u/s 68.
Issue of Shares at Discount [Sec.53]

Shares are said to be issued at a discount, when the Issue Price is less than its Face Value / Par Value.
Prohibition of Issue at Discount:

Aspect Description
Prohibition A Company shall not issue Shares at a Discount, except as Sweat Equity Shares u/s 54.
Void Any Share issued by a Company at a discounted price shall be void. (except for Sweat
Equity)
Effect of (a) Company is punishable with Fine of Minimum ` 1,00,000, and Maximum `
default 5,00,000.
(b) Every Officer in default is punishable with –
Imprisonment of Maximum 6 months, or
Fine of Minimum ` 1,00,000,and Maximum ` 5,00,000, or
Both
“Sweat Equity Shares” [Sec. 54]

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 – (a) providing know-how, or (b) making available rights in the nature of Intellectual
Property Rights (IPR), or (c) value additions, by whatever name called.
Companies can issue Sweat Equity Shares u/s 54 subject to the following conditions –
ISSUE OF SHARES 21.2
Aspect Description
Business A Company can issue Sweat Equity Shares only after 1 year from the date on it
commenced business.
Class Sweat Equity Shares must be of a class of Shares already issued by the Company.
Special Issue of Sweat Equity Shares must be authorised by a Special Resolution passed
Resolution by the Company in General Meeting.
Allotment can be within 12 months from the date of passing the Special
Resolution.
Guidelines Sweat Equity Shares should be issued in accordance with –
SEBI Guidelines, in case of Listed Companies,
Companies (Share Capital and Debentures) Rules, 2014, in case of Unlisted
Companies.
Treatment All the limitations, restrictions and provisions relating to Equity Shares is
applicable to Sweat Equity Shares issued by the Company.
Holders of Sweat Equity Shares shall rank pari passu with other Equity
Shareholders.
Here, “Employee” means-
(a) A permanent employee of the company who has been working in India or outside India, for
at least last one year; or
(b) A director of the company, whether a whole time director or not; or
(c) An employee or director as defined in sub-clauses (a) or (b) above of a subsidiary, in India or
outside India, or of a holding company of the company;
Further Issue of Shares [Sec. 62]

If at any time, a Company (whether Private or Public) having a Share Capital proposes to increase its
Subscribed Capital by the issue of further Shares, such Shares shall be offered as under –
Sec.62(1))(a) Sec.62(1))(b) Sec.62(1))(c)

Rights Issue to Existing Equity Shareholders Employees’ Stock Option Preferential Issue
Rights Issue [Sec. 62(1)(a)]

“Right” refers to the entitlement of the existing Shareholders to receive invitation of offer or
subscription to the Shares of a Company in case of further issue of Capital by the Company, before
being offered to other. This is called as the ‘Right of Pre-emption’.
Further Shares shall be offered to existing Equity Shareholders, in proportion to the Capital paid-up
on the Shares held by them.
Letter of Offer / Notice shall be despatched to Existing Shareholders atleast 3 days before opening of
the issue through –
(a) Registered Post, or
(b) Sped Post, or
(c) Electronic Mode.
Employees Stock Option [Sec. 62(1)(b)]

General Issue of ESOS should be approved by Shareholders of the Company by passing a
Condition Special Resolution.
Note: Passing of Ordinary Resolution is sufficient in case of a Private Company.
Conversion of debentures/loan into shares: Where any debentures have been issued, or loan has
been obtained from any Government by a company, and if that Government considers it necessary
in the public interest, it may, by order, direct that such debentures or loans or any part thereof shall
be converted into shares in the company on such terms and conditions as appear to the Government
to be reasonable in the circumstances of the case even if terms of the issue of such debentures or
loans or any part thereof shall be converted into shares in the company on such debentures or the
raising of such loans do not include a term for providing for an option for such conversion.
Term of conversion not acceptable to the company: Where the terms and conditions of such
conversion are not acceptable to the company, it may, within 60 days from the date of
communication of such order, appeal to the Tribunal which shall after hearing the company and the
Government pass such order as it deems fit.
Issue of Bonus Shares

Bonus Share is the Share allotted to the Member by the Company out of its Accumulated Profits /
Distributable Profits.
Amounts that can be used for Bonus Issue:
Issue of fresh Fully-Paid Shares [S.63(1)] Making Partly Paid Shares as Fully Paid [Art.39, Table F]
Free Reserves, or Free Reserves only, i.e. Company’s Reserve Account, or
Securities Premium Account, or the Profit & Loss Account, or otherwise available for
Capital Redemption Reserve Account. distribution.
Conditions for Bonus Issue under Companies Act

No company shall capitalize its profits or reserves for the purpose of issuing fully paid-up
bonus shares unless –
(a) It is authorized by its articles;
(b) It has, on the recommendation of the Board, been authorized in the general meeting of the
company;
(c) It has not defaulted in payment of interest or principal in respect of fixed deposits or debt
securities issued by it;
(d) It has not defaulted in respect of the payment of statutory dues of the employees, such as,
contribution to provident fund, gratuity and bonus;
(e) The partly paid-up shares, if any outstanding on the date of allotment, are made fully paid-
up;
(f) It complies we such conditions as may be prescribed.
Issue of Equity Shares with Differential Rights

Companies can issue Shares with differential rights u/s 43, if the following conditions are satisfied –
Aspect Description
AOA Issue of such Shares must be authorized by the Articles of Association of the
Company.
Ordinary Issue must be approved by Shareholders, by Ordinary Resolution, in a General
Resolution Meeting.
Note: For Listed Companies, approval through Postal Ballot is sufficient.
The Explanatory Statement to the above Meeting / Postal Ballot, should contain
particulars as per Point 3 below.
Maximum 26% Shares with Differential Rights, cannot exceed 26% of Total Post-Issue Paid Up
Equity Share Capital.
Note: This 26% limit is on cumulative basis, i.e. including previously issued
Differential Rights issue.
Profits The Issuing Company must have distributable profits in the 3 financial years
preceding such issue.
Conversion Companies will not be allowed to convert its Equity Capital with Regular Voting
Prohibited Rights into Shares with Differential Voting Rights and vice-versa.
Other Rights Holders of Equity Shares with Differential Rights will be entitled rights such as
Bonus Shares, Rights Shares, etc. subject to the Differential Rights with which the
Shares have been issued.
Register of In case of Differential Issue, the Register of Members, shall contain all particulars
Members of the Shares issued, along with details of the Shareholders.
Underwriting Commission
Underwriting is an Agreement with or without conditions to subscribe to the Securities of a Body
Corporate, when the existing Shareholders of such Body Corporate or the public do not subscribe to
the securities offered to them.
Commission paid or payable should not exceed –
As per Equity Shares Preference Shares Debentures
Companies Act Least of the following – Least of the following –
[Sec 40(6)] 5% of the Issue Price, or 2.5% of Issue Price, or
Amount or Rate authorized by AOA. Amount or Rate authorized
by AOA.
ALTERATION & REDUCTION OF SHARE CAPITAL
22
Alteration of share Capital
According to the provision a limited company having a share capital may, if so authorized by its
articles, alter its memorandum in its general meeting-
Increase its authorized share By such amount as it thinks expedient

capital
Consolidate and divide Share No consolidation and division which results in change
capital into shares of larger in the voting percentage of shareholders shall take
amount. effect unless it is approved by the Tribunal.
Convert all or any of its fully paid- And reconvert that stock into fully paid-up shares of
up shares into stock any denomination
Sub-divide its share into shares of In the sub-division the proportion between the
smaller amount than is fixed by amount paid and the amount, if any, unpaid on each
Memorandum reduced share shall be the same.
Cancel shares which, at the date of And diminish the amount of its share capital by the
the passing of the resolution in amount of the shares so cancelled.
that behalf, have not been taken
Reduction of Share Capital

Capital Reduction refers to reduction of Issued, Subscribed and Paid-Up Capital of the Company. It
applies only to – (a) Company limited by a Shares, or (b) Company limited by Guarantee and having a
Share Capital.
Note: Provisions as to Reduction u/s 66 do not apply to Buy-Back u/s 68. [Sec. 66(6)]
AOA Reduction of Share Capital should be authorized by the Company’s AOA.

No default in The Company should not be in arrears in the repayment of Deposits accepted
Deposits by it, and interest payable thereon.
Special The Company should have passed a Special Resolution at its General Meeting
Resolution for reduction of Share Capital. This is called “Resolution for reducing Share
Capital”.
Confirmation by Reduction of Share Capital shall take effect only when it is confirmed by the
Tribunal Tribunal on an application made by the Company.
24. Alteration & Reduction of Share Capital

Manner of Reduction:
Extinguishment or Reduction of the liability on any of its Shares in respect of Capital not paid
up.
ALTERATION & REDUCTION OF SHARE CAPITAL 22.2
Cancellation of any of the Paid up Share Capital, which is lost, or is not represented by
available assets
Paying any Paid up Share Capital which is in excess of the wants of the Company.
‘Alteration’ vs ‘Reduction’ of Share Capital

Basis Alteration of Share Capital [Sec. 61] Reduction of Share Capital [Sec. 66]
Increase or • It may be an increase or decrease of the It amounts to decrease in the existing
Decrease existing Share Capital of the Company. Share Capital of the Company.
• Alteration does not amount to reduction
of Share Capital
How If Authorized by AOA, may be made by- If Authorised by AOA but subject to
made? • Increasing Capital by issuing new Shares confirmation by NCLT, may be made by
• Consolidating & Dividing –
• Sub-dividing Shares, • Extinguishing or Reducing liability
• Converting fully Paid-up Shares into • Writing off or cancelling any Paid-up
Stock or vice-versa, Capital which is lost
• Cancelling Shares • Paying off excess Paid-up Capital
Resolution Ordinary Resolution in a General Meeting Special Resolution in a General Meeting
NCLT Tribunal Confirmation is not required Tribunal Confirmation is required.
‘Reduction’ vs ‘Diminution’ of Capital

Basis Reduction of Capital Diminution of Capital
Meaning • Reduction involves – (a) writing off past • Diminution denotes cancellation of
losses against Capital, (b) cancellation unsubscribed part of Issued Capital.
of the Uncalled Capital or (c) repayment • Diminution does not constitute a
of Surplus Capital. reduction of capital within the
• It may involve reduction of Subscribed meaning of the Act.
or Paid Up Share Capital
Effect on Reduction may be reduction of either Diminution is the reduction of the Issued
Capital Subscribed or Paid Up Capital, no Capital.
reduction of Issued Capital
Special Special Resolution is mandatory If authorised by AOA, can be effected by
Resolution an Ordinary Resolution also.
NCLT Reduction has to be sanctioned by the Confirmation by NCLT is not required.
Tribunal
Notice to Reduction takes effect only when Order Notice to be given to ROC within 30 days
Register and the Minutes are registered with the from date of cancellation, who shall
ROC. record and make necessary alteration in
the Company’s MOA & AOA.
FORFEITURE & SURRENDER OF SHARES
23
Forfeiture
Forfeiture of Shares refers to deprivation of, or losing of rights as a Shareholder in consequence of
his Failure to pay Calls made by the Company.
(i) Articles of Association must authorize the forfeiture of shares
(ii) Resolution for Forfeiture
(iii) Proper Notice served on member for intimating before forfeiture
(iv) Power of forfeiture must be exercised bona fide and for the benefit of the company

A duly verified declaration in writing stating Shares in the Company has been duly forfeited
on a date stated in the declaration shall be conclusive evidence of the facts therein stated as
against all person claiming to be entitled to the Shares. Such a declaration should be verified
by a Director, Manager or Secretary of the Company.
A person whose Shares have been forfeited, ceases to be a Member in respect of the
Forfeited Shares.
Re-issue of Forfeited Shares is – (a) Optional, if forfeiture is for non-payment of calls, and (b)
Mandatory, if forfeiture is for other reasons.
Forfeiture of shares for non compliance with any other engagement is also valid.
Naresh Chandra Sanyal vs Calcutta Stock Exch. Assn. Ltd.

When such Shares are issued at a Discount, the Discount on Re-issue should not exceed the
amount forfeited on those Shares.
When Shares are re-issued at a price more than Face Value, it constitutes Premium and
should be transferred to Securities Premium Account.
Surrender of Shares
Surrender of Shares means voluntary return of Shares by a Shareholder to the Company for
cancellation. There is no provision for surrender of Shares either in the Companies Act or in Table F.
Surrender of Shares cannot be accepted without sanction of the Tribunal, as this would amount to a
reduction of Capital.
Surrender of partly-paid Shares is possible only when Forfeiture is justified.
Bellerly, Rawland & Marwoods Steamship Co

Surrendered Shares can be re-issued in the same way as Forfeited Shares. When re-issued, there is
no reduction in Capital. No consideration can be paid by Company in exchange of Surrendered
Shares as it would amount to purchase of its own Shares, which is specifically prohibited u/s 67.
Surrender is effect with the assent of the Shareholder, whereas Forfeiture is a proceeding against a
reluctant Shareholder.
Trevor vs Whitework
TRANSFER & TRANSMISSION OF SHARES
24
Transfer of Securities
The shares or debentures or other interest of any member in a company shall be movable property,
transferable in any manner as given by the articles of the company.
(a) The securities or other interest of any member in a public company shall be freely transferable.
(b) Any contract or arrangement between 2 or more persons in respect of transfer of securities
shall be enforceable as a contract.
(c) A private company is required to restrict the right to transfer its shares by its articles.
A company shall not register a transfer of securities unless a proper instrument of transfer duly
stamped, dated and executed by or on behalf of the transferor and the transferee has been
delivered to the company by the transferor or transferee within 60 days from the date of execution
of transfer along with the certificate relating to the securities.
Transfer Rules: Section 56 & Rule 11 of Companies (Shares Capital and Debentures) Rules, 2014
(a) Execution of Transfer Instrument: An instrument of transfer of securities held in physical form
shall be in Form No. SH.4 (Earlier the transfer deed Form-7B under the Companies Act, 1956)
and every instrument of transfer shall be delivered to the company within 60 days from the
date of such execution.
(b) Registration of Partly paid-up shares: A company shall not register a transfer of partly paid
shares, unless the company has given a notice in Form No. SH. 5 to the transferee and the
transferee has given no objection to such transfer within 2 weeks from the date of receipt of
notice.
(c) Delivery of shares certificate: Every Company has to deliver the share certificate in respect of
allotment, transfer & transmission of securities within 1 month from the date of receipt by the
company.
Transfer of Shares by Legal Representative: A transfer of the shares in a company of a deceased

member shall be completed by his legal representative although the legal representative is not
himself a member of the Company.
Transfer Instrument lost/not delivered: Where the transfer instrument has been lost or has not
been reached to the Company for transfer then the Company may register the transfer on the basis
of submission of Indemnity Bond by the transferee. The company may also ask for submission of
affidavits (as proof for loss of share certificate) from the transferor or transferee before registering
the transfer.
Note: Indemnity Bond is a legal document which is to be furnished for protecting unforeseen losses
to other parties. Indemnity means undertake to compensate others.
TRANSFER & TRANSMISSION OF SHARES 24.2
Intimation to depository: Where the securities are dealt with in a depository, the company shall
intimate the details of allotment of securities to depository immediately on allotment of such
securities.
Company delivering the certificate:

Different conditions Period of the delivering the certificates
In the case of subscribes to the memorandum; Within 2 months from the date of incorporation
In the case of any allotment of any of its shares
Within a period of two months from the date of
allotment
In the case of a transfer or transmission of Within a period of one month from the date of
securities receipt by the company of the instrument of
transfer or the intimation of transmission
In the case of any allotment of debenture Within a period of six months from the date of
allotment
Power of company to register: Power of company to register shall not be effected by above
provision (given under sub-section 1) on receipt of an intimation of transmission of any right to
securities by operation of law from any person to whom such right has been transmitted.
Transmission of securities on an application of transferor alone: Where an application is made by

the transferor alone and relates to partly paid shares, the transfer shall not be registered, unless the
company gives the notice of the application, in such manner as may be prescribed, to the transferee
and the transferee gives no objection to the transfer within two weeks from the receipt of notice.
Transfer of security of the deceased: The transfer of any security or other interest of a deceased
person in a company made by his legal representative shall, even if the legal representative is not a
holder thereof, be valid as if he had been the holder at the time of the execution of the instrument
of transfer.
Refusal to Register Transfer and Appeal against Refusal

Section 58 of the Companies Act, 2013, deals with process of the company to be followed by on
refusal to register the transfer of securities.
(i) If a private company limited by shares refuses, to register the transfer of, or the transmission
of the right to any securities or interest of a member in the company, then the company shall
send notice of the refusal to the transferor and the transferee or to the person giving
intimation of such transmission, within a period of thirty days from the date on which the
instrument of transfer, or the intimation of such transmission, was delivered to the company.
The securities or other interest of any member in a public company are freely transferable,
subject to the contract/arrangement.
(ii) The transferee may appeal to the Tribunal against the refusal within a period of thirty days
from the date of receipt of the notice or in case no notice has been sent by the company, within
a period of sixty days from the date on which the instrument of transfer or the intimation of
transmission was delivered to the company.
(iii) If a public company without sufficient cause refuses to register the transfer of securities
within a period of thirty days from the date on which the instrument of transfer or the
intimation of transmission, is delivered to the company, the transferee may, within a period of
sixty days of such refusal or where no intimation has been received from the company within
nine days of the delivery of the instrument of transfer or intimation of transmission, appeal to
the Tribunal.
(iv) The Tribunal, while dealing with an appeal may, after hearing the parties, either dismiss the
appeal, or by order –
(a) Direct that the transfer or transmission shall be registered by the company and the
company shall comply with such order within a period of ten days of the receipt of the
order; or
(b) Direct rectification of the register and also direct the company to pay damages, if any,
sustained by any partly aggrieved.
(v) If a person contravenes the order of the Tribunal he shall be punishable with imprisonment for
a term not less than one year but may extend to three years and with fine not less than one
lakh rupees which may extend to five lakh rupees.
Transmission of Securities
The transmission of shares take place because of death or lunacy of the registered shareholders or
on his being adjudged as insolvent. A company shall have power to register on receipt of an
intimation of transmission of any right to securities by operation of law from any person to whom
such right has been transmitted.
Operation of Law Who is entitled to the shares?
Due to death/Lunacy Legal representative or nominee
Due to insolvency Official Assignee or Receiver
Due to merger or amalgamation (Companies) The resultant company
Distinction between Transfer and Transmission

Transfer of shares Transmission of shares
• Transfer takes place by a voluntary act of the • Transmission is the result of the operation of
transferor law i.w. death or insolvency
• Transfer deed is required • No instrument of transfer is required
• Transfer is a normal course of transferring • Transmission takes place on death or
property insolvency of a shareholder
• Generally made for some consideration • No consideration payable
• Stamp duty is payable by a member. • No stamp duty is payable
Blank Transfer
It refers when a shareholder signs 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.
In other words, Blank transfer means purchase and sale of shares by mere delivery of share
certificate along with transfer deed without mentioning the name of transferee in the transfer deed.
Generally, the practice of blank transfer is prevalent for the following purposes:
(a) Avoidance of transfer stamps
(b) Concealment of the indemnity of the real beneficial owners
(c) Evasion of taxes by suppression of profits
Note: 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.
Forged Transfer
An instrument on which the signature of the transferor is forged is called a forged transfer which is
null and void. A forged instrument of transfer is presented to the company for registration. In order
to avoid the consequences because of a forged transfer, companies normally write to the transferor
about the lodgement of the transfer instrument so that he can object if he wishes.
Consequences of a forged transfer:

(i) Transfer null and void: A forged transfer is a nullity and, therefore, the original owner of the
shares continues to be with the shareholder and the company is bound to restore his name on
the register of members.
(ii) No denial of transfer of shares sold to innocent purchaser: If company issues a share certificate
to 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.
(iii) Indemnify the losses: 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.
SHARE CERTIFICATE 25
Share Certificate is the document issued by a Company to its Shareholders, declaring the interest of
that person, in the Capital of the Company.”Prima Facie evidence of title of Shares”
Common Seal or
signed by 2 directors Distinctive Number
or By Director & CS
Share
Certificate
Details like –
(i) Member’s Name,
Form No. SH.1 (ii) Number of
Shares held by him,
(iii) Amount paid on
such Shares.
Conditions for Issue of Share Certificate

Share Certificate can be issued only –
1. After passing a Board Resolution in this regard, and
2. On surrender of Letter of Allotment, or Fractional Coupons of requisite value, to the Company
Time Limit for Issue [Sec. 56(4)]
Subscribers to MOA Within 2 months from the Date of Incorporation
On Allotment of Shares Within 2 months from the date of allotment of Shares
Transfer / Transmission Within 1 month from the date of receipt of Instrument of

of Securities Transfer or Intimation of Transmission.
Allotment of Debentures Within 6 months from the date of allotment of Debentures

SHARE CERTIFICATE 25.2
Implications of a Share Certificate
The Share Certificate issued by a Company is prima facie evidence of the title of the Member to such
Shares.
Estoppel Effect of Share Certificate:

Estoppel as to Title: The Company cannot deny In case of a Forged Share Certificate issued by an
the truth of the Certificate as against a person Officer of the Company, who has no authority to
who has relied upon the Share Certificate and issue Share Certificates, there is no estoppels as
who, in consequence, has suffered in a to Title. [Ruben vs Great Fingal Consolidated]
detriment in this regard.
Estoppel as to Payment: If the Company states If the person relying upon the Certificate knew
that Shares are fully paid up, it cannot later that the Shares were not in fact fully paid up,
contend that they were not. then the principle of estoppels as to payment
does not apply. [Bloomenthal vs Ford]
The Buyer of a Share will have good title as to Shares fully paid if –
(a) The bonafide holder of Share Certificate had no notice that the Shares were not actually fully
paid up,
(b) Such person sold those Shares away as fully paid to the Buyer who knew that they were not
fully paid.
Because the Buyer derived title from the Transferor, who had a good title. [Gulabdas’ Case
1982 Bom.]
Duplicate Share Certificates [Sec. 46(2)]

A duplicate certificate of shares may be issued, if such certificate –
(a) Is proved to have been lost or destroyed; or

(b) Has been defaced, mutilated or torn and is surrendered to the company.
Calls on Shares
Board of
Directors
Resolution Any time Call Notice to Share Holders Specify Amt

& Time, 14
days’ Notice
During Winding Paid within Not
Life time Up time Paid
Uniform With interest May be waived

basis @ 10% by board
Not exceeding 1/4th Otherwise

of Nominal Value forfeited
SHARE CERTIFICATE 25.3
Calls in Advance [Sec. 50]
AOA should authorise the Company to accept money remaining unpaid on the Shares, in
respect of calls not made by the Company.
The Company can accept the whole or a part of the amount remaining unpaid on any Shares
held by a Member, even if no calls are made.
The Company can pay interest at a rate agreed upon between the Board and Members
paying the sum. Table F provides for a maximum rate of 12% p.a.
Calls made in advance does not confer any extra or special voting right on the member. His
rights will be restricted to extent of calls made due.
If the AOA authorizes, the Company can pay dividends on advance moneys received on calls.
The amount received in advance of calls is not refundable.
In the event of winding up the Shareholder ranks after the Creditors, but Calls in Advance
must be paid along with the interest, if any before, the other Shareholders are paid off.
The power to receive the Calls-in-Advance, must be exercised in the general interest and for
the benefit of the Company.
DEBENTURES
26
Meaning
Section 2 (30) of the Companies Act, 2013 defines a debenture as:
“Debenture includes debenture stock, bonds or any other
instrument of a company evidencing a debt, whether constituting
a charge on the assets of the company or not”.
In simple terms, a debenture may be defined as an instrument
acknowledging a debt by a company to some person or persons.
Features of Debentures
Payment of Interest at a specified fixed rate
Debentures are issued for a specified period of time, after which they mature or have to be
redeemed by the Company.
Debentures are generally secured by way of a charge on the assets.
Debentures are movable property
Debenture Holders do not have any right as to voting in meetings.
A contract with a Company to take up and pay for any Debentures of the Company, may be
enforced by a decree of specific performance.
Debenture Certificate shall be issued within 6 months from the date of allotment of
Debentures.
Debentures issued with option to convert shall be approved by special resolution at General
meeting
Types of Debentures
On the basis of
Priority Negotiability Redeemability Security Convertibility
First Second Redeemable Perpetual Convertible Non-

Debentures Debentures Debentures Debentures Debentures convertible
Debentures
Bearer Registered Secured Unsecured

Debentures Debentures Debentures Debentures
DEBENTURES 26.2
Shares vs Debentures
Basis Shares Debentures
1. Meaning A Share is the share in the share A Debenture is the acknowledgment of
Capital of the Company. Debt.
2. Holders Shareholders are the Owners of the Debenture holders are the Creditors.
Company
3. Voting Shareholders generally enjoy voting Debentures do not have any voting
rights. rights.
4. Return Dividend is paid only out of the profits Interest on Debentures is paid even if
of the Company. there are no profits.
5. Nature of Dividend is an appropriation of Profits Interest on Debentures is a “charge”
Payment of the Company. Hence, it is not on the profits of the Company. Interest
deductible as an “expense” for tax payment gives tax savings to the
purposes. Company.
6. Charge on Shares do not carry any charge on Debentures generally have a charge on
Assets Assets. the Assets of the Company.
7. Variation in Dividend on Equity Shares may vary Rate of Interest on Debentures is fixed.
return from year to year.
8. Priority of Upon winding-up, they are paid after They are paid before Shareholders,
repayment Debenture holders are settled since they are the Creditors of the
Company.
9. Risk Higher Risk than Debenture holders. Lower Risk than Equity Shareholders.
10.Control Higher degree of control over the No control.
Company.
“Pari Passu” Clause in a Debenture
Pari Passu clause signifies that equal priority should be given to the various charge Holders, i.e. none
of the charge Holders shall be preferred over other(s).
A Pari Passu clause in a Debenture shall entitle the Debenture Holder, the right to Share and the
security proportionately with the other charge Holders, if any.
Bar on New Series Debentures: A Company cannot create a new series of Debentures to rank pari
passu with an old series, unless the power to do so is expressly reserved and contained in the
Debentures of the prior series.
Lister vs Henry Lister & Sons
Remedies to Debenture Holders [Section 71]

DEBENTURES 26.3
Anticipated Default – Sec. 71(9) Actual Default – Sec. 71(10)
If the Debenture Trustee considers that the Company fails to –
Company’s Assets are insufficient or are likely to (a) Redeem the Debentures on the date of their
become insufficient to discharge the principal maturity, or
amount when it becomes due. (b) Pay interest on the Debentures when it is
due.
Petition to Tribunal by Debenture Trustee. Application to Tribunal by –
(a) All or any of the Debenture holders, or
(b) Debenture Trustee
Debenture Redemption Reserve (DRR)

It must be created u/s 71(4), and as per Rules given below-
1. Creation of DRR: DRR shall be created out of the profits of the Company available for payment of
Dividend.
2. Use: The amount credited to DRR shall be utilized by the Company only for the redemption of
Debentures.
3. DRR Exempted: No DRR is required for Debentures issued by All India Financial Institutions (AIFIs)
regulated by RBI and Banking Companies for both public as well as privately placed Debentures.
4. Every company required to create Debenture Redemption Reserve shall on or before the 30th day
of April in each year, invest or deposit, as the case may be, a sum which shall not be less than
fifteen percent, of the amount of its debentures maturing during the year ending on the 31st day
of March of the next year in anyone or more of the following methods, namely:-
(i) In deposits with any scheduled bank, free from charge or lien;
(ii) In unencumbered securities of the Central Government or of any State Government;
(iii) In unencumbered securities mentioned in sub-clauses (a) to (d) and (ee) of section 20 of
Indian Trusts Act, 1882;
(iv) In unencumbered bonds issued by any other company which is notified under sub-clause
(f) of section 20 of the Indian Trusts Act, 1882;
(v) The amount invested or deposited as above shall not be used for any purpose other than
for redemption of debentures maturing during the year referred above
Note: For other Fin. Institutions (FIs) as defined u/s 2(72), DRR will be as applicable to NBFCs
registered with RBI.
Debentures with voting rights not permissible

No company can issue any debentures with voting rights at any meeting of the company whether
generally or in respect of any classes of business. The idea behind prohibition is to ensure that
debenture holders are not placed in a much more advantageous position than the holders of equity
shares & are not in a position to influence the policy of the company in a manner detrimental to the
interest of the general body of shareholders
DEBENTURES 26.4
Debenture Trustee
Appointment of Debenture Trustee is mandatory in case of –
Issue of Secured Debentures,
Issue of Other Debentures, if the Prospectus / Letter of Offer is issued /made to Public /
Members exceeding 500.

Before their appointment, a written consent shall be obtained from the Proposed Trustee(s)
A Statement of above consent should appear in the Letter of Offer issued for subscription of
Debentures
Debenture Trust Deed shall be executed in Form No. SH. 12, within 60 days of allotment of
Debentures.
The Names of Debenture Trustees shall be stated in –
a) Letter of Offer inviting subscription for Debentures, and
b) All the subsequent notices or other communications sent to the Debenture holders.
Disqualifications
The following person cannot be appointed as Debenture Trustee(s) –
Person beneficially holding Shares in the Company,
Promoter, Director or Key Managerial Personnel (KMP) or any Other Officer or an Employee
of the Company or its Holding, Subsidiary or Associate Company,
Person beneficially entitled to moneys which are to be paid by the Company to the
Debenture Trustee otherwise than as Remuneration,
Person indebted to – (a) the Company, or (b) its Subsidiary, or (c) its Holding Company, or (d)
its Associate Company, or (e) a Subsidiary of such Holding Company,
Person who has furnished any guarantee in respect of the principal Debts secured by the
Debentures or Interest thereon,
Person who has any pecuniary relationship with the Company amounting to 2% or more of
its Gross Turnover or Total Income or ` 50 Lakhs or a higher prescribed amount, whichever is
lower, during the two immediately preceding Financial Years or during the Current Financial
Years,
Relative of any Promoter or any person who is in the Employment of the Company as a
Director or KMP.
Duties of Debenture Trustee(s)

The basic duties of Debenture Trustee(s) are –
(a) to protect the interest of Debenture holders, and
(b) to redress their grievances.
Failure in Redemption of Debentures

Where a company fails to redeem the debentures on the date of their maturity of fails to pay
interest on the debentures when it is due, the Tribunal may, on the application of any or all of the
DEBENTURES 26.5
debenture-holders,
holders, or debenture-trustee
debenture trustee and, after hearing the parties concerned, direct, by order,
the company to redeem the debentures forthwith on payment of principal and interest due thereon.
If any default is made in complying with the order of the Tribunal under this section, every officer of
the company who is in default shall be punishable with imprisonment for for a term which may extend
to three years or with fine which shall not be less than two lakh rupees but which may extend to five
lakh rupees, or with both.
1. Explain briefly whether the following statements are True (T) or False (F)
Issue of Debentures with Voting Rights is not permissible.
Debentures with Voting Rights can be issued only if permitted by the AOA
2. Can the following persons be appointed as a Debenture Trustee?
A, a Shareholder, who has no beneficial interest.
A Creditor whom the Company owes ` 499 only.
A person who has given a guarantee for repayment of amount of Debentures issued by the
Company.
CHARGES
27
Charge
A charge is a security given for securing loans or debentures by way of a mortgage on the assets of
the company. Generally, the debentures and borrowings of the company are secured by a charge on
the assets of the company.
Section 2(16)
Charge means an interest or lien created on the property or assets of a company or any of its
undertakings or both as security and includes a mortgage.
Types of Charges
Fixed Charge Floating Charge
Charge created on specific An equitable Charge which

property is created on a constantly
i.e. assets which are ascertained changing property
and definite, or are capable of i.e. Stock in Trade,
being ascertained and defined at Debtors, etc.
the time of creating charge
Crystallization of Floating Charge: A floating charge attaches to the company’s property generally
and remains dormant till it crystallizes or becomes fixed. The company has a right to carry which
determines this right.
A floating charge crystallizes and the security becomes fixed in the following cases:
(i) When the company goes into liquidation;
(ii) When the company ceases to carry on the business;
(iii) 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;
(iv) On the happening of the event specified in the deed.
CHARGES 27.2
In the aforesaid circumstances, the floating charge is said to become fixed or to have crystallized.
Until the charge crystallizes or attaches or becomes fixed the company can deal with the property so
charged in any manner it likes.
Registration [Sec. 77(1)]
Form CHG-1
(for other than Debentures)
Company Within 30 days ROC
Form CHG-9
(for Debentures) Issue CHG-2/
CHG-3
Registration is also applicable for – [Sec.79]
(a) Acquisition of any property, subject to a charge within the meaning of Sec. 77, or
(b) Any modification In –
(i) The terms or conditions, or
(ii) The extent / operation of any charge registered u/s 77
Time Limit for Registration

Registration Formalities Fees
Within 30 days of creation General Compliance only Normal
Beyond 30 days but within 300 ROC may condone the delay With Additional Fees
days of creation
Beyond 300 days of creation Central Government’s As per conditions in Central
condonation is required u/s 87 Government Order
Register of charges to be kept by Registrar [ Section 81]

A register containing particulars of the charges registered shall be maintained by the Registrar open
to inspection by any person on payment of such fees as may be prescribed for each inspection.
Satisfaction of Charge
On Intimation by Company [Sec. 82]
Intimation by A Company shall give intimation to ROC, of the payment or satisfaction in full
Company of any charge registered under Chapter VI of the Act.
Intimation shall be given in Form No. CHG-4
Intimation shall be given within 30 days from the date of such payment or
satisfaction.
Notice by ROC (a) On receipt of intimation, the ROC shall send a notice to the Charge-holder, to
to show cause within 14 days, as to why payment or satisfaction in full should
Chargeholder not be recorded as intimated.
(b) Notice is not be required to be sent, if the intimation to the ROC in this regard
is in the specified form and signed by the holder of charge.
CHARGES 27.3
Response by If any cause is shown, the ROC shall record a note to that effect in the Register of
Chargeholder Charges, and inform the Company.
No Response If no cause is shown, the ROC shall –
by (a) Order that a Memorandum of Satisfaction shall be entered in the Register of
Chargeholder Charges kept by him u/s 81, and
(b) Inform the Company through
through a Certificate of Registration of Satisfaction of
Charge in Form No. CHG-5.
CHG
Without Intimation by Company [Sec. 83]

Power of ROC ROC is entitled to make an entry in the Register of Charges u/s 83 or otherwise than
on receipt of intimation from the Company.
Co
Facts proven Evidence may be given to ROC’s satisfaction with respect to any registered charge,
to ROC that –
(a) The Debt for which the charge was given has been paid or satisfied in whole or
in part, or
(b) Part of the Property or Undertaking charged has been released from the charge,
or has ceased to form part of the Company’s Property or Undertaking,
Entries by Even if no intimation has been received by him from the Company, the ROC may
ROC enter in the Register of Charges –
(a) A Memorandum of Satisfaction
Satisfactio in whole or in part, or
(b) The fact that part of the Property or Undertaking has been released from the
charge or has ceased to form part of the Company’s Property or Undertaking.
Information (a) ROC shall inform the affected parties within 30 days of making the entry in the
Register of Charges.
(b) ROC shall issue a Certificate of Registration of Satisfaction of Charge in Form No.
CHG-5.
Consequences of Non-Registration
Registration of Charges
1. Void: The charge not registered with ROC as per Sec. 77, will be void as against the Liquidator
and against the Creditors. Hence, during liquidation proceedings, the Charge Holder assumes
the status of an Unsecured Creditor against the liquidator and Creditors.
2. Immediate Payment: When a charge becomes void because of non registration the t money
secured thereby shall immediately become payable. Hence, it shall not prejudice any contract
or obligation for the repayment of the money secured by the charge.
3. No Remedies: Without a registered Charge, a person cannot enforce such a charge nor has ha he
any remedy against the Company.
4. No Lien on Title Deeds: The Holder of an Equitable Charge has no lien on the title deeds of
documents deposited with him. This is because the charge is void on the ground of non- non
registration and the lien is only ancillary
ancilla to the void charge.
5.
Penalty [Sec.86]
86]
The following penalties shall apply-
CHARGES 27.4
Default If any Company contravenes any provisions relating to Registration of Charges
Punishment • Company is liable for Fine of Minimum ` 1 Lakh, Maximum ` 10 Lakhs.
• Every Officer of the Company who is in default shall be punishable with –
(a) Imprisonment (Maximum 6 months), or
(b) Fine Minimum ` 25,000, Maximum ` 1 Lakh, or
(c) Both.
Rectification by Central Government in Register of Charges [Section 87]

I. Rectification by Central Government in register of charges: Section 87 of the register of
charges. According to the provision-
provision
(1) The Central Government on being satisfied that-that
(i) (a) The omission to file with the Registrar the particulars of any charge created by a
company or any charge subject to which any property has been acquired by a
company or any modification of such charge; or
(b) The omission to register any charge within the time required under this Chapter
or the o mission to give intimation to the Registrar of the payment or the
satisfaction of a charge, within the time required under this Chapter; or
(c) The omission or mis-statement
mis of any particular with respect to any such charge
or modification or with respect to any memorandum of satisfaction or other entry
made in pursuance of section 82 or section 83,
- was accidental or due to inadvertence or some other sufficient cause or it is not of a
nature to prejudice the position of creditors or shareholders of the company; or
(ii) On any other grounds, It is just and equitable to grant relief,
- it may on the application of the company or any person interested and on such terms
and conditions as it may seem to the Central Government just and expedient, direct
that the time for the filling of the particulars or for the registration of the charge or for
the giving of intimation of payment or satisfaction shall be extended or, as the case
may require, that the omission or mis-statement
mis shall be rectified.
(2) Where the Central Government extends the time for the registration of a charge, the order
shall not prejudice any rights acquired in respect of the property concerned before the
charge is actually registered.
1. Explain briefly whether the following statements are True (T) or False (F)
Floating
loating Charge is always created on the fixed assets of the Company.
If a Registerable Charge is not registered, the debt is not recoverable.
recoverable
CHARGES 27.5
nd th
2. ABC Ltd realised on 2 May that the particulars of Charge created on 12 March in favour of
a Bank were not filed with the ROC for registration. What procedure should the Company
follow to get the charge registered with the ROC? Would the procedure be different if the
charge was created on 12th Feb instead of 12th March?
3. A Company Secretary forgot to file the particulars relating to registration of charges with the
ROC within the stipulated time as he was busy in the work relating to the Company’s AGM. Is
there any remedy for the failure on his part to register the charges within the prescribed
time period?
4. A charge requiring registration with Registrar of Companies was created on 1st February by
XYZ Limited. The Secretary of the Company realized on 15th March that the charge was not
filed with the Registrar. State the steps to be taken by the Secretary to get the charge
registered with the Registrar.
GENERAL MEETINGS
28
A meeting may be generally defined as a
gathering or assembly or getting together of a number of persons
for transacting any lawful business.
Types of Company Meetings
Meetings of Meetings of Meetings of Meetings of

Shareholders Debenture Creditors Directors
Holders
AGM EGM Class Board Committee

Meeting Meeting Meeting
Creditors & Creditors

Contributories otherwise than
in winding up in winding up
General Meetings
Shareholder’s meeting is also termed as General Meetings.
Types of General Meeting
Annual General Meeting
Extra-Ordinary Meeting
Class Meeting
Annual General Meeting (Section 96)

It is an annual meet of the body of members of a company.
Applicability
Every Company other than OPC is required to hold an AGM
Central Government is empowered to exempt any class of companies from holding of AGM.
GENERAL MEETINGS 28.2
Day, Time and Place of AGM
DAY TIME PLACE

Any day other Business Hours Any place where
than National (9 a.m. to 6 p.m.) registered office
Holiday is situated
Time Limit for Annual General Meeting
First AGM
A Company should convene its first AGM within 9 months from the end of its 1st Financial Year.
Example:
20.4.2016 31.03.2017 31.12.2017

(Incorporation) (End of FY) (Due date of AGM)
2nd & Subsequent AGM

One AGM in each Calendar year.
AGM to be held within 6 months from the end of the financial year.
Gap between 2 AGM’s should not be more than 15 months.
Note: Financial Year means an year starting from 1st April and ending on 31st March of each year.
Calendar Year means an year starting from 1st Jan and ending on 31st Dec each year.
Example:
12.09.2015 31.03.2016 30.09.2016

(Date of Previous (End of Current (Due date of 2nd
AGM) FY) AGM)
Extension of time
In case it is not possible to hold 2nd & subsequent AGM within the prescribed time, ROC may grant
extension of time for a maximum period of 3 months.
An AGM of a company must consider the following ordinary businesses:

(a) Annual Accounts;
(b) Declaration of dividend;
(c) Appointment of directors (retire by rotation); and
(d) Appointment and fixing of remuneration of the auditors.
Default in Holding Annual General Meeting
If still not held

Penalty
AGM Not Company to hold

Held AGM
May move an may order

Any person Application to NCLT
Penalty
The Company and every officer of the Company who is in default shall be punishable with fine which
may extend to 1,00,000/- and in case of continuous
continuous default with a further fine which may extend to
5,000/- for every day during which such default continues.
Extraordinary General Meeting (Section 100)

An extraordinary general meeting (EGM) is any general meeting of a company other than the annual
general meeting. A company convenes an EGM to transact all urgent matter for which it cannot wait
till next annual general meeting. An EGM may call to transact any business other than the ordinary
business for fixed Annual General Meeting.
Who may call an EGM?
BOD suo- BOD on

motu requisition by Requisitionists Tribunal
members
Notice with details as to the place, date etc.: The notice shall specify the place, date, day and
hour of the meeting and shall contain the business to be transacted at the meeting.
Notice to be signed: The notice shall be signed by all the requistionists or by a requistionists
duty authorized in writing
ng by all other requistionists on their behalf or by sending an electronic
request attaching therewith a scanned copy of such duly signed requisition.
No explanatory statement annexed to the notice: No explanatory statement as required under
section 102 need
eed be annexed to the office of an extraordinary general meeting convened by the
requistionists may disclose the reasons for the resolution(s) which they purpose to move at the
meeting.
Serving of notice of the meeting: The notice of the meeting shall be given to those members
whose names appear in the Register of members of the company within three days on which the
requistionists deposit with the Company a valid requisition for calling an extraordinary general
meeting.
No meeting convened: Where the meeting is not convened, the requistionists shall have a right
to receive list of members together with their registered address and number of shares held and
the company concerned is bound to give a list of members together with their registered
address made as on twenty first day from the date of receipt of valid requisition together with
such changes, if any, before the expiry of the forty-five days from the date of receipt of a valid
requisition.
Mode of giving notice: The notice of the meeting shall be given by speed post or registered post
or through electronic mode. Any accidental omission to give notice to, or the non-receipt of such
notice by, any member shall not invalidate the proceedings of the meeting.
General Meeting for One Person Company (OPC)

There is no need to convene an Annual General Meeting or Extra-Ordinary General Meeting for
transacting ordinary or special business. For passing any special or ordinary business, it shall be
sufficient if the resolution is communicated by the member to the company and entered in the
minutes book required to be maintained and signed and dated by the members.
Class Meetings:
Class meetings are those meetings which are held by holders of a particular class of securities, e.g.
preference shares and debentures. Need for such meetings arise when it is proposed to vary the
rights of a particular class of shares.
Meetings of Debenture holders:

It is a meeting of debenture holders to protect their interest relating to redemption of debentures
and interest thereon. As per the SEBI regulation, when a company issues debentures it provides in
the trust deed executed for securing the issue for the holding of meetings of debenture holders and
also gives power to them to vary the terms of security or to alter their rights in certain
circumstances.
Report on Annual General Meeting (Sec 121)

Reporting by Every Listed Company: Every listed public company is required to prepare a report on
each annual general meeting including the confirmation to the effect that the meeting was
convened, held and conducted as per the provisions of the Act and the rules made thereunder.
Filling with ROC: A copy of the report is to be filed with the ROC in Form No. MGT-15 within 30 days
of the conclusion of annual general meeting along with the prescribed fee.
VOTING
29
Methods of Exercising Voting Rights
By show of By poll By Postal Ballot By e-voting

hands (Counting (Counting of (voting rights (voting rights
of the hands votes exercised exercised by exercised by
raised) in the secret Post) Electronic
polling) Mode)
Voting by show of hands

In 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, irrespectivee of his shareholding, or voting right, has one vote.
Voting by poll
Poll means counting of heads. In this method, the poll is taken if the
Chairman or a prescribed number of members are dissatisfied with the
result of voting by show of hands. In a poll,
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, 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.
The Chairman appoints two scrutinisers to scrutinize these poll papers and submit the report to him,
hi
who declares the result of the poll.
VOTING 29.2
Voting by postal ballot
Postal Ballot (Section 110)
Company
Notice & Draft Resolution

Via
Registered
Post
Shareholder
Assent by Postal Ballot In writing
“Postal Ballot” means voting by shareholders by post or electronic mode instead of voting personally
by presenting for transacting businesses in general meeting of the company.
According to Sub section(1), a company –

(a) Shall, in respect of such items of business as the Central Government may, by notification,
declare to be transacted only by means of postal ballot; and
(b) May, in respect of any item of business, other than ordinary business and any business in
respect of which directors or auditors have a right to be heard at any meeting,
Transact by means of postal ballot, in such manner as may be prescribed, instead of

transacting such business at a general meeting.
Detailed Procedure
The companies (Management and administration) Rules, 2014 lay the procedure to be followed for
conducting business through postal ballot-
1
Send a notice to all the shareholders, along with a draft resolution
Notice to all explaining the reasons therefore and requesting them to send their
shareholders assent or dissent in writing on a postal ballot i.e. Within 30 days from
dispatch of Notice.
Notice to be sent by
Registered Post or speed post, or
Through electronic means like registered e-mail id or
Through courier service
VOTING 29.3
2
Vernacular Newspaper- Published at least once in the vernacular
Publishing of language of the district in which the registered office is situated
Advertisement English Newspaper- Published at least once in English language in
newspaper having a wide circulation in that district
Advertisement shall state that that Ballot papers have been dispatched and shall contain the
following-
A statement to the effect that the business is to be transacted by postal ballot which
includes voting by electronic means;
The date of completion of dispatch of notices;
The date of commencement of voting;
The date of end of voting;
The statement that any postal ballot received from the member beyond the said date will
not be valid and voting whether by post or by electronic means shall not be allowed beyond
the said date;
A statement to the effect that members, who have not received postal ballot forms may
apply to the company and obtain a duplicate thereof; and
Contact details of the person responsible to address the grievances connected with the
voting by postal ballot including voting by electronic means.
3
The notice shall also be placed on the website of the company
Notice on forthwith after the notice is sent to the members and such notice
Website shall remain on such website till the last date for receipt of the postal
ballots from the members.
4
The Board of directors shall appoint one scrutinizer, who is not in
Appointment employment of the company and who, in the opinion of the board
of Scrutinizer can conduct the postal ballot voting process in a fair and transparent
manner.
5
If a resolution is assented to by the requisite majority of the
Requisite shareholders by means of postal ballot including voting by electronic
Majority means, it shall be deemed to have been duly passed at a general
meeting convened in that behalf.
6
Postal ballot received from the shareholders shall be kept in the safe
Safe Custody custody of the scrutinizer and after the receipt of assent or dissent of
the shareholder in writing on a postal ballot, no person shall destroy
the ballot paper or declare the identity of the shareholder.
VOTING 29.4
7
The scrutinizer shall submit his report as soon as possible after the
Submission of last date of receipt of postal ballots but not later than seven days
Report thereof.
8
The Scrutinizer shall maintain a register either manually or
Maintenance electronically to record assent received with particulars of
of Register shareholders,details of postal ballots which are received in multilated
form and postal ballot forms which are invalid.
9 The postal ballot and all related papers including voting by electronic
means, shall be under the safe custody of the scrutinizer till the
Presentation chairman considers, approves and signs the minutes and thereafter,
of postal the scrutinizer shall return the ballot papers and other related papers
ballots or register to the company who shall preserve such ballot papers and
other related papers or register safely.
10
The assent or dissent received after thirty days from the date of issue
Reply from of notice shall be treated as if reply from the member has not been
Members received.
11
Results are placed on website of the company.
Declaration of
Result
Mandatory Requirement of Postal Ballot

According to section 110(1)(a), the following items of business shall be transacted only by means of
voting through a postal ballot –
Alteration of the objects clause of the memorandum and in the case of the company in
existence immediately before the commencement of the Act, alteration of the main objects
of the memorandum;
Alteration of articles of association in relation to certain or removal of provisions which,
under sub-section (68) of section 2, are required to be included in the articles of a company
in order to constitute it a private company;
Change in place of registered office outside the local limits of any city, town or village as
specified in sub-section (5) of section 12;
VOTING 29.5
Change in objects for which a company has raised money from public through prospectus
and still has any unutilized amount out of the money so raised under sub-section (8) of
section 13;
Issue of shares with differential rights as to voting or dividend or otherwise under sub-clause
(ii) of clause (a) of section 43;
Variation in the rights attached to a class of shares or debentures or other securities as
specified under section 48;
Buy-back of shares by a company under sub-section (1) of section 68;
Election of a director under section 151 of the Act;
Sale of the whole or substantially the whole of an undertaking of a company as specified
under sub-clause (a) of sub-section (1) of section 180;
Giving loans of extending guarantee or providing security in excess of the limit specified
under sub-section (3) of section 186;
Exception: Provided that One Person Company and other companies having members upto two
hundred are not required to transact any business through postal ballot.
Voting by Electronic Mode

Every listed company or a company
having one thousand or more
shareholders may provide to its
members facility to exercise their right
to vote at general meetings by electronic
means. A member may exercise his right
to vote at any general meeting by
electronic means and company may pass
any resolution by electronic voting
system.
Voting by electronic or Electronic voting system means a ‘secured system’ based process of display
of electronic ballots, recording of votes of the members and the number of votes polled in favour or
against, such that the entire voting exercised by way of electronic means gets registered and
counted in an electronic registry in a centralized server with adequate ‘cyber security’.
The board of directors shall appoint one scrutinizer, who may be chartered Accountant in practice,
or an advocate, but not in employment of the company and who, in the opinion of the Board can
scrutinize the e-voting process in a fair and transparent manner. The scrutinizer shall, within a period
of not exceeding three working days from the date of conclusion of e-voting period. Unblock the
votes in the presence of at least two witness not in the employment of the company and ,make a
scrutinizer’s report of the votes cast in favor or against, if any, forthwith to the chairman. The
scrutinizer shall maintain a register either manually or electronically to record the assent or dissent,
received, mentioning the particulars of name, address, folio number or client ID of the shareholders,
number of shares held by them, nominal value of such shares and whether the shares have
differential voting rights. The register and all other papers relating to electronic voting shall in the
VOTING 29.6
safe custody of the scrutinizers until the chairman considers, approves and signs the minutes and
thereafter, the Scrutinizer shall return the
the register and other related papers to the company.
1. As a Corporate Professional, advise your client company whether the following matters can
be transacted by getting a resolution passed through Postal Ballots-
Ballots
a) Issue of shares with differential voting rights
b) Sale of whole of the Undertaking of the Company
c) Buy-Back
Back of own shares by the Company
NOTICE OF A MEETING
30
General meeting -Not ot less than clear 21 days’ notice either in writing or through electronic mode.
Adjourned Meeting- Att least 3 days notice to the members either individually or by publishing an
advertisement in the newspapers.
newspapers
Notice shall specify the place, date, day and the hour of the meeting and shall contain a statement of
the business to be transacted at such meeting.
The notice of every meeting of the
th company shall be given to:
(a) Every member of the company, legal representative of any deceased member or the
assignee of an insolvent member;
(b) The auditor or auditors of the company; and
(c) Every director of the company
The non-receipt
receipt of notice or accidental omission to given notice to any member shall not invalidate
the proceedings in the meetings
Omission to serve notice of meeting on a member on the mistaken ground that he is not a
shareholder cannot be said to be an accidental omission.
Musselwhite Vs. C.H..H. Musselwhite & Sons Ltd.(1962)

According to the Companies (Management And Administration) rules, 2014, the company may serve
the notice in electronic mode in following manner.
A notice may be sent through e-mail
e as text or as an attachment to e-mail
mail or as a notification
providing electronic link or Uniform Resource Locator for accessing such notice.
The email shall be addressed to the person entitled to receive such e-mail.
e mail.
The subject line e-mail
mail shall state the name of the company, notice of the type of meeting,
place and the date on which the meeting is scheduled.
If notice is sent in the form of a non-editable
non attachment to e-mail,
mail, such attachment shall be
in the portable Document format or in a non-editable
non editable format together with a ‘link or
instruction’ for recipient for downloading relevant version f the software.
When notice are sent by e-mail,
e mail, the company should ensure “proof of sending”.
The company’s obligation shall be satisfied when it transmits the e-mail.
Company
ompany shall not be in default for not delivering notice
notic via e-mail iff a member entailed to
receive notice fails to provide or update relevant e-mail
e address.
The notice made available on Uniform Resource Locator has to be readable.
readable
The notice of the general meeting of the company shall be simultaneously placed on the
website of the company.
1. ABC Ltd. called its annual general meeting on 7th September 2005. The notice of AGM was
posted on 16th August, 2005. One member
member holding 20 shares wishes to challenge the
resolutions passed at the AGM on the ground that the notice was not valid. What advice
would you give to him?
QUORUM
31
Quorum
Quorum means presence of minimum number of members in a meeting.
Quorum is required for transaction of business.
Section 103 of the Companies Act, 2013 provides that where the articles of
the company do not provide for a larger number, there the quorum shall
depend on number of members as on date of a meeting.
Quorum
Quorum shall be as per articles or the following limit whichever is higher.
Public Company Private Company
2 members
≤ 1000 5 Personally present.
>1000 & ≤ 5000 15
>5000 30
Consequences of no quorum: Unless otherwise provided in the Articles, if the quorum is not present
within half-an-hour
hour from the time appointed for holding a meeting:
If meeting is called upon requisition of Members Meeting shall stand cancelled.
Other Case Meeting shall stand adjourned to-
to
the same day in the next week at the
same time and place, or
such other date and such other time and
place as fixed by the Board
Adjourned Meeting Members present shall be the quorum

Proxies shall not be counted.
Joint holders shall be counted as single member if both joint holders are personally present.
The representative of Governor of any State or President of India or Company shall be
counted as member for the purpose of quorum.
If all the members are present, it is immaterial that the quorum required is more than the
total number of members
QUORUM 31.2
If no quorum is present, then there
there is no meeting and the proceedings are invalid. However,
acts done creating rights in favor of third parties at a meeting without a quorum being
present would not affect the rights of such third parties, provided they had no notice of the
irregularity.
Exceptions
Class Meeting where all the shares of a particular class are held by one person
Creditor/Debenture holder Meeting
Tribunal Directions
1. The AOA of X ltd requires the personal presence of 6 members to constitute Quorum of
General Meetings. The following persons were present at the time of commencement of an
EGM to consider the appointment of Managing Director-
Director
a) G, the representative of Governor of Gujarat
b) A and B, holders of preference shares
c) L, representing M ltd, N ltd and O ltd
d) P,Q,R and S who were proxies of shareholders.
Can it be said that quorum was present at the meeting? Discuss. Would your answer be
different if A and B also hold Equity shares of the Company?
2. The articles of X & Co. Ld provide that in the event of the quorum being not present within
half-an-hour-from
from the time scheduled for the annual general meeting, the meeting shall
stand dissolved. At the AGM of X & Y Ltd the quorum is not formed within half-an-hour
half from
the time fixed thereof.
Give the answers of the following –
(a) In the above circumstance, what further steps are necessary to hold the annual general
meeting?
(b) If it is to be convened afresh, will a fresh resolution of the Board be needed?
(c) What will be the position of retiring directors-will
directors will they cease to be directors from
fr the
date on which the general meeting could not be held for want of quorum and
consequently stood dissolved as per the articles as aforesaid or will they remain
directors till the date of the fresh annual general meeting which was convened
subsequent to the first one?
3. A general meeting of a public company was adjourned by the chairman for want of quorum
Fresh notice was not served for the adjourned meeting. Do you feel that notice is required
for the adjourned meeting? To the provision of the Companies Act, 2013 state the minimum
number of members required to be present in the adjourned meeting.
QUORUM 31.3
4. Whether the following persons can be counted for the purposes of quorum in a general
meeting of a public company (a) person representing three member companies; (b) both the
joint of shares or present at the meeting; (c) a single member present at the meeting.
PROXY
32
Proxies (Section 105)
A proxy is an instrument in writing executed by a shareholder authorizing another person to attend a
meeting and to vote thereat on n his behalf and his in absence. The term is also applied to the person
so appointed.
Section 105 of the Companies Act, 2013 provides that a member, who is entitled to attend to vote,
can appoint another person as a proxy to attend and vote at the meeting on his behalf.
Restrictions on Proxy’s Right

No right to speak at the meeting
Not entitled to vote except on a poll.
No-member
member cannot be appointed as proxy for a section 8 company
Person appointed as proxy shall act on behalf of Members not exceeding 50 and holding in
aggregate not more than 10% of the total share capital of the company carrying voting rights
Procedure of appointment of proxy –

In every notice calling a meeting of company which has a share capital, or the articles of
which provide for voting by proxy at the meeting, there shall appear, a statement that a
member is entitled to attend
attend and vote instead of himself, and that a proxy need not be a
member.
If default is made in complying calling of meeting, every officer of the company who is in
default shall be punishable with fine which may extend to five thousand rupees.
Any provision
sion contained in the articles of a company which specifies or requires a longer
period than forty-eight
eight hours before a meeting of the company, for depositing with the
company or any other person any instrument appointing of the proxy or any other
documentt necessary to show the validity or otherwise relating to the appointment of a
proxy in order that the appointment may be effective at such meeting, shall have effect as if
a period of forty-eight
eight hours had been specified in or required by such provision for
f such
deposit.
If for the purpose of any meeting of a company, invitations to appoint as proxy a person or
one of a number of persons specified in the invitations are issued at the company’s expense
to any number of persons specified in the invitations are issued at the company’s expense to
any member entitled to have notice of the meeting sent to him and to vote thereat by proxy,
PROXY 32.2
every officer of the company who Knowingly issues the invitations as aforesaid or willfully
authorizes or permits their issue shall be punishable with fine which may extend to one lakh
rupees.
However, an officer shall not be punishable by reason only of the issue to a member at his
request in writing of a form of appointment naming the proxy, or of a list of persons willing
to act as proxies, if the form or list is available on request in writing to every member
entitled to vote at the meeting by proxy.
The instrument appointing a proxy shall –
(a) Be in writing; and
(b) Be signed by the appointer or his attorney duly authorized in writing or, if the appointer
is a body corporate, be under its seal or be signed by an officer or an attorney duly
authorized by it.
An instrument appointing a proxy, if in the form as may be prescribed,
prescribed, shall not be
questioned on the ground that it fails to comply with any special requirements specified for
such instrument by the articles of a company.
Every member entitled to vote at a meeting of the company or on any resolution to be
moved thereat,
hereat, shall be entitled during the period beginning twenty-fours
twenty fours before the time
fixed for the commencement of the proxies lodged, at any time during the business hours of
the company, provided not less than three days’ notice in writing of the intention so to
inspect is given to the company.
Representation of the President and Governors in meeting of Companies to which they are
members:
Section 112 of the Companies Act, 2013 provides that the president of India or the Governor of a
State, If he is a member
ember of a company, may appoint such person as he thinks fit to act as his
representative at any meeting and shall be entitled to exercise the same rights and powers including
the right to vote by proxy and postal ballot, as the President or, as the case may
m be, the Governor
could exercise as a member of the company.
1. M/s Happy Homes Ltd. had sent notices to all its members about the holding of the 5th Annual
General Meeting to be held on 15th October, 2005 at 4.00 P.M. As per the notice the members
who are re unable to attend the meeting in person can appoint a proxy and the proxy forms duly
filled should be sent so as to reach at least 48 hours before the meeting. Mr. A, a member of
the company appoints Mr. P as his proxy and the proxy form dated 10.10.2005 was deposited
by Mr. P with the company at its Registered Office on 11.10.2005. However, Mr. A changes his
mind and on 12.10.2005 gives another member Mr. Q as his proxy on 12.10.20005. B also gives
two o separate proxies to two individuals named Mr. R and S. In the case of Mr. R, the proxy form
was deposited on same day and in favour of Mr. S was deposited on 14.10.2005. All the proxies
viz., P, Q, R and S were present before the meeting. In the light of the relevant provisions of the
PROXY 32.3
Companies Act, who would be the persons allowed to represent at proxies for members A and
B respectively?
2. Annual General Meeting of a Public Company was scheduled to be held on 15.12.2003. Mr.
A, a shareholder, issued two Proxies in respect of the shares held by him, one in favour of
Mr. ‘X’ and the second in favour of Mr. T. The proxy in favour of ‘T’ was lodged on
12.12.2003 and the one in favour of Mr. X was lodged on 15.12.2003. The company rejected
the proxy in favour of Mr. X as the proxy in favour of Mr. T was of dated 12.12.2003 and the
one in favour of Mr. X was of dated 13.12.2003. is the rejection by company in order?
3. What is the concept of proxy in relation to the meetings of a Company? Decide the
appointment and rights of a proxy, under the Companies Act, 2013 in the following cases:
(i) When a body corporate is a member in the company.
(ii) When a foreign company is a member in the company.
4. Annual General Meeting of MGR Limited is convened on 28th December, 2008. Mr. J, who is
a member of the company, approaches the company on 28th December, 2008 and demands
inspection of proxies lodged with the company. Explain the legal position as stated under the
Companies Act, 2013 in this regard.
5. ‘S’, a shareholder, after duly appointing P as his proxy for a meeting, himself attended the
meeting and voted on a resolution. P thereafter claimed to exercise his vote. Examine his
claim.
6. A General Meeting to be held on 15th April, 2010 at 4.00 P.M. As per the notice the members
who are unable to attend the meeting in person can appoint a proxy and the proxy forms
duly filled should be sent so as to reach at least 48 hours before the meeting. Mr. A, a
member of the company appoints Mr. P as his proxy and the proxy form dated 10.4.2010
was deposited by Mr. P with the company at its Registered Office on 11.04.2010. However,
Mr. A changes his mind and on 12.04.2010 gives another proxy to Mr. Q and it was
deposited on the same day with the company. Similarly another member Mr. B also gives to
separate proxies to two individuals named Mr. R and Mr. S. In the case of Mr. R, the proxy
dated 12.04.2010 was deposited with the company on the same day and the proxy form in
favour of Mr. S was deposited on 14.04.2010. All the proxies viz. P, Q, R and S were present
before the meeting.
In the light of the relevant provisions of the Companies Act, who would be the persons
allowed to represent at proxies for members A and B respectively?
7. K, a member of MNO Limited, appoints L as his proxy to attend the general meeting of the
company. Later he (K) also attends the meeting. Both K (the member) and L (the proxy)
voted on a particular resolution in the meeting. K’s vote was declared invalid by the
chairman stating that since he has appointed the proxy and L’s vote has been considered as
PROXY 32.4
valid. K objects to the decision of the Chairman. Decide, under the provisions of the
Companies Act, 2013, whether K’s objection shall be taxable.
RESOLUTIONS
33
Resolutions
The purpose of a meeting is to arrive at decisions and the sense of a meeting is ascertained by voting
upon proposals put to the meeting. A formal proposal put to the meeting is resolution. A company
expresses its will by the means of resolutions.
There are only two kinds of resolutions under the Act, ordinary and special, and they are defined in
section 114 of the Companies Act, 2013. Some classify resolutions into three types-
Resolutions
Ordinary Resolution Special Resolution Resolution requiring

Special Notice
Ordinary Resolution: This is a motion passed by a simple majority of those present in person or
proxy where proxies are allowed and voting upon the resolution at a general meeting. Members not
portioning in voting are not taken into account as distinguished from a simple majority which is a
majority of all those entitled to vote whether they attend or not.
When Ordinary resolution is sufficient
An ordinary resolution is sufficient, for conducting any of the following businesses:

Change in name of the company under section 4(5)(ii)(b)(i) at the direction of the Registrar in
case of reservation of wrong or incorrect name
Rectification of the name of the company under section 16 (1) after being directed by the
Central Government to do so
To appoint auditors in an annual general meeting
To appoint directors in an annual general meeting
Consideration and adoption of the financial statements and the report of the directors and the
auditors in an annual general meeting
To declare dividends at an annual general meeting
To appoint any person as an auditor other than the retiring auditor under section 140 (4)
Under section 142 (1) the remuneration of an auditor shall be fixed in general meeting by an
ordinary resolution
Appointment of any person as director in case of vacancy created due to removal [section 169
(2)]
Remuneration of cost accountant under section 148 (3) shall be fixed by an ordinary resolution.
RESOLUTIONS 33.2
Special Resolution: Apart from ordinary resolutions, various sections of the Act provide that certain
things can be done by a company with the authority of a special resolution passed at a duly
constituted general meeting. A special resolution is an artificial conception of the Act, requiring a
larger majority than an ordinary resolution. It has been defined by section 114(2) as follows:
A resolution shall be a special resolution when –
The intention to propose the resolution as a special resolution has been duly specified in the
notice calling the general meeting or other intimation given to the members of the
resolution:
The notice required under this Act has been duly given; and
The votes cast in favor of the resolution, whether on a show of hands; or electronically or on a poll,
as the case may be, by members who, being entitled so to do, vote in person or by proxy or by postal
ballot, are required to be not less than three times the number of the votes, if any, cast against the
resolution by members so entitled and voting.
Following matters have to be resolved by the company, by a special resolution:

(1) To alter any provision contained in the memorandum, [Section 13(1)];
(2) To alter the articles of association [Section 14 (1)]:
(3) Variation in the terms of contract or objects in the prospectus [section 27 (1)]:
(4) Issue of Sweat Equity [Section 54 (1) (a)]
(5) To purchase its own shares or specified securities [Section 68 (2)];
(6) To reduce the share capital as per section 100 of the Companies Act, 1956 [i.e., Section 66 (1) of
the Companies Act, 2013, not yet notified];
(7) To move the registered office of an existing company outside the local limits of any city, town
or village where such office is situated at the commencement of this Act [Section 12 (5)(a)]
(8) To move the registered office of any other company outside the local limits of any city, town or
village where such office is first situated [Section 12 (5)(b)]
(9) Giving of any loan or guarantee or providing any security in excess of specified limits [Section
186 (3)];
(10) To issue debentures with an option of conversion into shares [Section 71 (1)].
Resolution requiring special notice: According to section 115 of the companies Act, 2013, where, by
any provision contained in this Act or in the articles of a company, special notice is required of any
resolution-
Notice of the intention to move such resolution shall be given to the company by such number of
members holding not less than one percent of total voting power or holding shares on which such
aggregate sum not exceeding five lakh rupees, as may be prescribed, has been paid-up and the
company shall give its members notice of the resolution in such manner as may be prescribed.
For example the matters in respect of which special notice is required are:
For appointment a person as auditor at the annual general meeting other than the retiring
auditor for providing expressly that the retiring auditor shall not be re-appointed.
For removing a director before the expiry of the period of his office and appointing someone
in the place of the director so removed
RESOLUTIONS 33.3
According to the companies (Management and Administration) Rules, 2014
Eligibility for sending Special Notice; A special notice required to be given to the company shall
be signed, either individually or collectively by such number of members holding not less than
one percent of total voting power or holding shares on which an aggregate sum of not less than
5,00,000/- has been paid-upup on the date of the notice.
Notice Period: Such notice shall be sent by members to the company not earlier than three
months but at least 14 days before the date of the meeting at which the resolution is to be
moved, exclusive of the day on which the notice is given and the day of the meeting.
Notice for holding meeting: The company shall immediately after receipt of the notice, give its
members notice of the resolution at least seven days before the meeting, exclusive of the day
of dispatch of notice and day of the meeting, in the same manner as it gives notice of any
general meetings.
Newspapers Iff it is not practicable to give the notice of any general

Publication in the Newspapers:
meetings, the notice shall be published
published in English language in English newspaper and in
vernacular language in a vernacular newspaper, both having wide circulation in the State where
the registered office of the Company is situated. Such notice shall be published at least 7 days
before the meeting, exclusive of the day of publication of the notice and day of the meeting.
Resolutions passed at adjourned meeting

Where a resolution is passed at an adjourned meeting then the resolution shall be treated as having
been passed on the date it was actually
a passed, and not on any earlier date.
1. State with reason, whether for following statement is correct or incorrect, according to the
Companies Act, 2013.
A special resolution is one to pass, where the votes cast in favors must be twice the votes cast
against it.
2. Which one of the following required ordinary resolution?

a) To change the name of the company
b) To alter the articles of association
c) To reduce the share capital
d) To declare dividends.
3. Outline eight matters for which an ordinary resolution would suffice.

MINUTES OF MEETINGS
34
Minutes of Proceedings of Meetings (Section 118)
The minutes represent a written record of business transacted
at a meeting. It is obligatory for every company to cause
minutes of all proceedings of-
General meeting
Meeting of Board of Directors and;
Other meeting and resolutions passed by postal ballot.
The minutes of each meeting contain a fair and correct
summary of the proceedings.
According to the provision –

Preparation of minutes of the proceedings of meetings: Every company shall cause minutes
of the proceedings of every general meeting of any class of shareholders or creditors, and
every resolution passed by postal ballot and every meeting of its Board of Directors or every
committee of the Board, to be prepared and signed in such manner as may be prescribed and
kept within thirty days of the conclusion of every such meeting concerned, or passing of
resolution by postal ballot in books kept for that purpose with their pages
consecutively numbered.
Contain fair and correct summary: The minutes of each meeting
shall contain a fair and correct summary of the proceedings
thereat.
Appointments to be included in the minutes: All
appointments
ointments made at any of the meetings aforesaid shall
be included in the minutes of the meeting.
Other details: In the case of a meeting of the Board of
Directors 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 with the resolution.
118(5)] There shall not be
Exemptions to matters from inclusion in the minutes [Section 118(5)]:
included in the minutes, any matter which, in the opinion of the chairman of the meeting, -
(a) Is or could reasonably be regarded as defamatory of any person; or
(b) Is irrelevant or immaterial to the proceedings; or
(c) Is detrimental to the interests of the company.
Signing of Minutes
Each page of Minutes Book must be initialled or signed. The last page of the record of proceedings of
each Meeting in the Minutes Book should be dated and signed as under –
MINUTES OF MEETINGS 34.2
For Board or Committee Meeting – Chairman of the same or next succeeding Meeting, and
For general Meeting (including Resolution through Postal Ballot) – Chairman of the same
meeting or in the event or death or inability of t he Chairman, by a Director duly authorised
by the Board for the purpose.
Inspection
tion of Minutes Book of Meeting by Members [Sec. 119]
Inspection: Minutes
inutes of proceedings of a General Meeting will be open for inspection by any
member without charge. The Company, can however, by its AOA or General Meeting,
impose reasonable restrictions, such that atleast two hours in each day are allowed for
inspection.
Hard Copies: Members are entitled to a copy of any minutes of General Meeting
M which they
can obtain within 7 days from the date of request. They may be required to pay the sum as
specified in AOA, but not exceeding `10 per page or part of any page.
Soft Copy: A Member who has made a request for provisions of soft copy in respect resp of
minutes of any previous General Meeting held during immediately preceding 3 Financial
Years shall be entitled to be furnished with the same free of cost.
Penalty: Refusal to permit inspection of Minutes or non-furnishing

non furnishing of copies within the
time specified, attracts a fine upto-
upto
`25,000
25,000 for Company and
`5,000
5,000 for every Officer in default, for each refusal/default.
Direction by Tribunal: In case of any refusal or default, the Tribunal may, by order –
(a) direct an immediate inspection of Minutes Book, or
(b) direct that copy required shall forthwith be sent to person requiring it.
1. XYZ Limited held its AGM on 15th September. The Meeting was presided over by Mr. V, the
Chairman of the Company’s Board of Directors. On 17th September, Mr. V. V the Chairman,
without signing the minutes of the Meeting, left India to look after his father who fell sick in
London. State the manner in which the minutes of the above Meeting are to be signed in the
absence of Mr. V and by whom?
ng was conducted by the Chairman on 12th August. Thereafter, on 19th
2. The last General Meeting
August, Chairman died, before the minutes of the said meeting could be signed. In such an
eventuality, how is the Minutes book to be dated and signed? Discuss in terms of the
provisions off the Companies Act.
MISCELLANEOUS
35
Maintenance of registers and returns
The Companies Act, 2013 requires that a company shall keep certain books known as statutory
books and copies of certain documents and deeds at its registered office.
Registers of members: Section 88 of the Companies Act, 2013 provides that register for holder of all
types of securities issued by the Company has to be maintained.
1. Duty of company to maintain registers: Every company shall keep and maintain the
following registers in such form and in such manner as may be prescribed, namely –
(a) Register of members indicating separately for each class of equity and preference
shares held by each member residing in or outside India;
(b) Register of debenture – holders or other security Holders
Thus, the Register of members shall separately indicate the equity shareholders and preference
shareholders residing in India and outside India.
2. Index of names: Every such register maintained shall include an index of the names
included therein.
3. Foreign register
4. Failure to maintain the registers: If a company does not maintain a register of members or
debenture-holders or other security holders or fails to maintain them in accordance with the
provisions of sub-section (1) or sub-section (2) of section 88, the company and every officer
of the company who is in default shall be punishable with fine which shall not be less than
fifty thousand rupees but which may extend to three lakh rupees and where the failure is a
continuing one, with a further fine which may extend to one thousand rupees for every day,
after the first during which the failure continues.
Powers of Company Law Board/Tribunal

Guidance of Judicial Rulings: The main principles that should guide the Tribunal as regards ordering
meeting to be called were indicated in re, Ruttonjee & Co. Ltd. (1968) 2 Comp. LJ 155 (1970) 40 Com.
Cases 491 (Cal.)
(i) The CLB/Tribunal would not ordinarily interfere with the domestic management of a
company which should be conducted in accordance with Articles.
(ii) The discretion granted under Section 186 should be used sparingly with caution so that
the CLB/Tribunal does not become either a shareholder or director of the company
trying to participate in the internal squabbles of the company.
(iii) The word ‘impracticable’ means impracticable from a reasonable point of view.
(iv) The CLB/Tribunal should take a common sense view of the matter and must act as a
prudent man of business.
(v) A prudent man of business has not a sensitive officious view of intervention in case of
every rivalry between two groups of directors; prudence demands that the CLB/Tribunal
MISCELLANEOUS 35.2
should ordinarily keep itself aloof from participating in quarrels of rival groups of
directors of shareholders.
(vi) But where the meeting can be called only by the directors and there are serious doubts
and controversy as to who are directors or where there is a possibility that one or other
or both the meetings called by the rival groups of directors may be invalid, the
CLB/Tribunal ought not to expose the shareholders to uncertainties and should hold a
position that has arisen which makes it “impracticable: to convene a meeting in any
manner in which meeting of the company may be called.
(vii) Before the CLB/ Tribunal exercise its discretion under section 186, the CLB/Tribunal must
be satisfied when a director or a member moves an application, that it has been made
bona fide in the larger interests of the company for removing a deadlock otherwise
irremovable”.
In Smt. Jain Vs. Delhi Flour Mills Company Ltd. and others (1974) 44 comp. Cas. 228 (Delhi), it was
held that an application under section 186 need not to on behalf of the company for the very
language of that Section even permits the Company Law Board suo moto to call meeting of the
company if it has become impracticable to call a meeting other than an annual general meeting. An
action need not be in the name of the company for actions concerning injuries personal to the
petitioner.
Chairman
The Chairman plays a crucial role in a company meeting and is usually appointed by the articles. The
members present in person at a meeting shall elect on a show of hands one of their members to be
the chairman.
Unless the articles of the 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.
If a poll is demanded on the election of the Chairman, it shall be taken forthwith in accordance with
the provisions of this Act and the Chairman elected on a show of hands shall continue to be the
Chairman of the meeting until some other person is elected as Chairman as a result of the poll, and
such other person shall be the Chairman for the rest of the meeting.
Annual Return (Sec 92)

Every company shall prepare its Annual Return in form MGT-7 which shall be signed by a
Director and a CS.
A listed company or a company having Paid-up Share Capital ≥ 10 crores or Turnover ≥ 50
crores is required to obtain certification from Company Secretary.
A copy of Annual Return shall be filed with the ROC, as under:
a) If AGM held: Within 60 days from date of AGM
b) If AGM not held: Within 60 days from the date on which AGM should have been held.
MISCELLANEOUS 35.3
Return in case of Stake Change (Sec 93)

Every Listed company has to file MGT-10
MGT 10 with ROC, within 15 days of change if it is related to-
to
Increase or decrease of 2% or more in the shareholding pattern of-
of
a) Each of the Promoter
b) Each of the Top 10 shareholders of the company.
Beneficial Interest/Ownership of Shares(sec

Shares 89)
Registered owner and beneficial owner shall have to file declaration in MGT-4 MGT and MGT-5
respectively within 30 days from the date on which name is entered or interest is acquired.
Investigation (Sec 90)
If it appears to CG that there are reasons to do so, It may appoint one or more competent persons to
investigate and report as to beneficial ownership with regard to any share or class of shares
1. At a General meeting of a company, a matter was to be passed by a special resolution. Out

of 40 members present, 20 voted in favour of the resolution, 5 voted against it and 5 votes
were found invalid. The remaining 10 members abstained from voting. The Chairman of the
meeting declared the resolution as passed. With reference to the provisions of the
Companies Act, 2013, examine the validity of the Chairman’s declaration.
DECLARATION AND PAYMENT OF DIVIDEND
37
Introduction to Dividend [Sec. 2(35) of the Companies Act, 2013]
Definition of • Dividend includes any interim dividend [Sec. 2(35) of the Companies Act, 2013].
dividend • The term ‘interim dividend’ means the dividend declared between two AGMs.
Procedure for Final dividend • Firstly, dividend is recommended by the Board (Sec. 134 of
declaration of the Companies Act, 2013).
dividend • The members in the AGM may declare the dividend by
passing OR. Declaration of dividend at an AGM is an item of
ordinary business (Sec. 102 of the Companies Act, 2013).
• The members may reduce the rate or amount
recommended by the Board, but they cannot increase it
(Regulation 80 of Table F).
Interim dividend Interim dividend is declared by the Board.
Sec. 123 Declaration of Dividend

Gist Details
Sources out of Dividend shall be declared or paid by a company for any financial year only –
which Dividend can (a) Out of the Current Year Profits of the company arrived at after providing
be paid for depreciation, or
(b) Out of the Previous Years Profits of the company arrived at after
providing for depreciation, or
(c) Out of both; or
(d) Out of money provided by the Central Government or a state
Government for the payment of dividend by the company in pursuance
of a guarantee given by that Government.
Transfer to A company may, before the declaration of any dividend in any financial year,
Reserves transfer such percentage of its profits for that financial year as it may consider
appropriate to the reserves of the company.
Declaration of Where, owing to inadequacy or absence of profits in any financial year, any
dividend out of company proposes to declare dividend out of the accumulated profits earned
past reserves by it in previous years and transferred by the company to the reserves, such
declaration of dividend shall not be made except in accordance with such
rules as may be prescribed in this behalf. (See Below Rule 3)
Dividend only out Provided also that no dividend shall be declared or paid by a company from its
of free reserves reserves other than free reserves.
Brought Forward Provided also that no company shall declare dividend unless carried over
Losses & previous losses and depreciation not provided in previous year or years are set
Unabsorbed off against profit of the company for the current year.
depreciation to be
set-off [Added via
Amendment Act,
DECLARATION AND PAYMENT OF DIVIDEND 37.2
2015]
Computation of For the purposes of computation of profits and deduction of depreciation as
Depreciation above, depreciation shall be provided in accordance with the provisions of
Schedule II.
Rule 3
Provisions contained in Rule 3 of the Companies (Declaration and Payment of Dividend) Rules,
2014.
Rate
Rate of Average rate of dividend
dividend ≤ declared in preceding 3 FYs
Condition w.r.t. rate of if No dividend was declared in

dividend shall not apply each of preceding 3 FYs
Amount
Amount drawn from 10% of
drawn ≤
reserves (Paid up capital + Free reserves)
Use of
Amount drawn from First utilized to set off
amount
reserves losses of current FY
drawn
Balance of
Balance of reserves
reserves ≥ 15% of paid up capital
(After withdrawal)
Legal requirement:
• Comply with Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014
• Compliance of Rule 3 is not required by a Government Company in which the entire paid up
share capital is held by CG, or by SG(s), or by CG and SG(s) [Notification No. G.S.R. 463(E) dated
5th June, 2015].
Prohibition on No dividend on equity shares

declaration of
dividend Failure to comply with Failure
Sec. 73 or Sec. 74 continues
• Sec. 73: Prohibition on acceptance of deposits from public and conditions

for acceptance of deposits from the members
• Sec. 74: Repayment of deposits, etc. accepted before commencement of
this Act.
Gist Details
Interim Dividend The Board of Directors of a company may declare interim dividend during any
financial year out of the surplus in the profit and loss account and out of
profits of the financial year in which such interim dividend is sought to be
declared.
Provided that in case the company has incurred loss during the current
financial year up to the end of the quarter immediately preceding the date of
declaration of interim dividend, such interim dividend shall not be declared at
a rate higher than the average dividends declared by the company during the
immediately preceding 3 financial years.
General Rule Dividend is proposed by the Board of Directors and declared by the
shareholders in the AGM.
However, interim Dividend is both proposed as well as declared by the Board
of Directors.
Mode of payment No dividend shall be paid by a company in respect of any share therein except
of dividend to the registered shareholder of such share or to his order or to his banker
and shall not be payable except in cash.
Provided further that any dividend payable in cash may be paid by cheque or
warrant or in any electronic mode to the shareholder entitled to the payment
of the dividend.
Can Bonus shares No dividend shall be payable except in cash.
be issued in lieu of After declaration of dividend at an AGM, cash has to be paid. A company
declared dividend? cannot issue bonus shares in lieu of this cash for dividend.
However a Company may choose not to declare dividend at all. Instead it may
opt for issuing Bonus shares. This is permissible.
Prohibition on Max. 5 days
declaration of
dividend Declaration Deposit of dividend in separate
Of dividend bank account in a scheduled bank
Not applicable to a Government Company in which the entire paid up share

capital is held by CG, or by SG(s), or by CG and SG(s) or by one or more
Government Company [Notification No. G.S.R. 463(E) dated 5th June, 2015].
Unpaid Dividend and Investor Education and Protection Fund (Sec. 124 & 125 of Companies Act,
2013)
Dividend declared • Any dividend declared but remaining unpaid or unclaimed for 30 days from
but remaining the date of its declaration shall be transferred to unpaid dividend account.
unpaid • The transfer shall be made within 7 days to a special account in any
scheduled bank to be called ‘Unpaid Dividend Account of… Company
Limited/Company (Private) Limited’.
• Interest @ 12% p.a. is payable by the company for delay in making the
above transfer.
Dividend Transfer to Any money transferred to the unpaid dividend account of a
remaining unpaid Fund company which remains unpaid for 7 years from the date of
in ‘unpaid dividend such transfer shall be transferred by the company to
account’ – ‘Investor Education and Protection Fund (hereinafter called
Consequences as the ‘Fund’).
Furnishing of When making a transfer to the Fund, the company shall
details furnish to the authority appointed by CG, the following
details:
• All sums included in such transfer;]
• Nature of the sums;
• Names and last known addressees of the persons entitled
to receive the sum;
• Names and last known addresses of the persons entitled
to receive the sum;
• The amount to which each person is entitled;
• Such other particulars as may be prescribed.
‘Investor Credits to the Following sums shall be credited to the Fund:
Education and Fund • Following sums remaining unpaid for 7 years from the
Protection Fund’ due date:
(a) Amounts in the unpaid dividend accounts
(b) Application moneys received and due for refund
(c) Deposits matured but remaining unpaid
(d) Debentures matured but remaining unpaid
• Interest accrued on the amounts referred to in clauses (a)
to (d)
• Grants and donations by CG or SG or any other
institutions
• Interest or other income received out of the investments.
Utilization of • For promotion of investor awareness; and
Fund • For protection of the interest of investors.
Administration The authority appointed by CG shall administer the Fund and
of Fund shall be competent to spend moneys for carrying out the
objects.
No payment from (a) No person shall be entitled to any money transferred to the Fund.
the Fund (b) No claim shall lie against the company in respect of any amount
transferred to the Fund.
Dividend etc. to be Held in Abeyance (Sec. 126 of the Companies Act, 2013)
Right to dividend Transfer of shares not registered
pending transfer of
shares Transfer deed delivered Dividend declared
To the company
• Dividend shall be transferred to unpaid dividend account
• Unless the registered shareholder has authorized the
company to pay such dividend to the transferee
Right to bonus and Transfer of shares not registered
right shares
Transfer deed delivered Offer of right shares / bonus shares
To the company
Keep in abeyance
Failure to Distribute Dividends within 30 Days (Sec. 127 of the Companies Act, 2013)
Time limit for The dividend shall be paid (i.e. dividend warrant shall be posted) within 30
payment of days from the date of declaration.
dividend
Punishment for (a) Punishment for every director, who is knowingly a party to the default:
default (i) Imprisonment: Maximum 2 years; and
(ii) Fine: Minimum: ` 1,000 per day for each day of default.
(b) Punishment for the company: Pay simple interest at the rate of 18% per
annum.
Exceptions (No (a) Where dividend could not be paid by reason of the operation of any law.
default) (b) Where a shareholder has given directions to the company regarding
payment of dividend, but those directions cannot be complied with, and
the same has been communicated to the shareholder.
(c) Where dividend is lawfully adjusted by the company against any sum due
to it from the shareholder.
(d) Where there is a dispute regarding the right to receive the dividend.
(e) Where the non-payment of dividend is not due to any default of the
company.
Revocation of Dividends
Revocation of Dividend permissible under catastrophic conditions
Where a dividend has been illegally declared, or where, due to events intervening – after the
declaration, such as fire destroying the company’s property, or the outbreak of a war, or the
imposition of new heavy tax burden or other causes diminishing the assets of the company makes it
advisable to conserve the remaining assets, the Board of Directors will be justified in revoking the
declaration of dividend.
ACCOUNTS OF COMPANIES
38
Introduction
The shareholders would like to know as to how the funds available with the company have been
utilized during a particular period and whether the company has made profit or suffered loss in that
period. That is why, the Companies Act makes it obligatory for companies to maintain books of
account and to make available to their members essential information contained therein in the
annual accounts, i.e., the balance sheet and profit and loss account.
Point 1 – Books at the Registered Office of the company

Every company shall prepare and keep at its registered office
1. Books of account and
2. Other relevant books and papers and
3. Financial statement for every financial year
Which
1. Give a true and fair view of the state of the affairs of the company, including that of its branch
office or offices, if any, and explains the transactions effected both at the registered office and
its branches and such books shall be kept
2. On accrual basis and according to the
3. Double entry system of accounting
Few Important Definitions related to this chapter on Accounts

Name Definition
Books of Account “books of account” includes records maintained in respect of –
Section 2(13) (i) All sums of money received and expended by a company and matters in
relation to which the receipts and expenditure take place;
(ii) All sales and purchases of goods and services by the company;
(iii) The assets and liabilities of the company; and
(iv) The items of cost as may be prescribed under section 148 in the case of a
company which belongs to any class of companies specified under that
sections;
Financial “financial statement” in relation to a company, includes –
Statement Section (i) A balance sheet as at the end of the financial year;
2(40) (ii) A profit and loss account, or in the case of a company carrying on any
activity not for profit, an income and expenditure account for the financial
year;
(iii) Cash flow statement for the financial year;
(iv) A statement of changes in equity, if applicable, and
(v) Any explanatory note annexed to, or forming part of, any document
referred to in sub-clause (i) to sub-clause (iv):
Provided that the financial statement, with respect to One Person Company,
ACCOUNTS OF COMPANIES 38.2
small company and dormant company, may not include the cash flow
statement;
Financial year “financial year”, in relation to any company or body corporate, means
Section 2(41) • The period ending on the 31st day of March every year
Foreign Holding/subsidiary having different Financial year –

On an application made by a company, which is a holding company or a
subsidiary of a company incorporated outside India and is required to follow a
different financial year for consolidation of its accounts outside India, the
Tribunal may, if it is satisfied, allow any period as its financial year, whether or
not that period is a year.
Transitory provision –
A company, existing on the commencement of this Act, shall, within a period of
2 years from such commencement, align its financial year as per the provisions
of this clause.
Point 2 – Can the Books be kept at Any Other Place in India?

Yes. 2 conditions need to be satisfied:-
1. Board Resolution needs to be passed
2. The company shall, within 7 days of BR file with the Registrar a notice in writing giving the full
address of that other place.
Point 3 – Can the Books be kept in Electronic Mode?

The company may keep such books of account or other relevant papers in electronic made in such
Point 4 – Can the Branch Books be maintained at the Branch itself?

Yes, 2 conditions need to be satisfied:-
1. If proper books of account relating to the transactions effected at the branch office are kept at
that office and
2. Proper summarized returns periodically are sent by the branch office to the company at its
registered office or such other place where the books are kept as given in Point 2.
Point 5 – Inspection of Books of Account

(a) Director: A director can inspect the books of account and relevant papers during business
hours of a Company. A director may also appoint his agent or representative to inspect the
books of accounts of the company during business.
Note: The right of inspection can be refused if it is found that the inspection is being sought
to pass on the information to a rival business of the company.
(b) Inspection by the ROC/Officers of SEBI: The ROC and any other officer authorized by the
Central Government to carry out inspection of books of account. The books of account can
also be inspected by officers of the SEBI.
(c) Member’s right of inspection of accounting records: Members of a company do not have a
right of inspection of its accounting records except as authorized by the Board or the
company in general meeting. The right of inspection of documents and books of a company
is not limited to the Board of Directors
(d) Auditor’s right of inspection of accounts: An auditor has the right to access at all time to the
company’s accounts, whether kept at the head office of the company or elsewhere.
Point 6 – How long the books of accounts need to be preserved?

The books of account of every company relating to a period of not less than 8 financial years
immediately preceding a financial year.
Longer period if the company is under investigation by CG or Serious Fraud investigation Office
(SFIO) –
Where an investigation has been ordered in respect of the company under Chapter XIV, the Central
Government may direct that the books of account may be kept for such longer period as it may
deem fit.
Point 7 – Who shall be responsible for maintenance of books of accounts and punishment in case
of non-compliance?
Following persons shall be responsible:-
1. Managing Director,
2. Whole-time Director in charge of Finance,
3. Chief Financial Officer or
4. Any other person of a company charged by the Board
Punishment for non-compliance shall be as follows:-

Punishment u/s 128
Imprisonment ≤ 1 year
OR
` 50,000 ≤ Fine ≤ ` 5 lacs
OR
Both
Section 129 Financial Statement

Point 1 – Financial Statements to comply with AS and Schedule III
The financial statements shall
1. Give a true and fair view of the state of affairs of the company or companies,
2. Comply with the accounting standards notified under section 133 and
3. Shall be in the form provided for different class or classes of companies in Schedule III (erstwhile
Revised Schedule VI)
Deviation from Accounting Standards

Where the financial statements of a company do not comply with the accounting standards, the
company shall disclose in its financial statements –
a) The deviation from the accounting standards,
b) The reasons for such deviation and
c) The financial effects, if any, arising out of such deviation.
Exemption to certain class of companies by CG in the public interest

The Central Government may, on its own or on an application by a class or classes of companies, by
notification, exempt any class or classes of companies from complying with any of the requirements
of this section or the rules made thereunder, if it is considered necessary to grant such exemption in
the public interest and any such exemption may be granted either unconditionally or subject to such
conditions as may be specified in the notification.
Point 2 – Exemption to certain class of companies

Class of Company Act to be followed
Insurance Company Insurance Act, 1938, or IRDA Act, 1999
Banking Company Banking Regulation Act, 1949
Electricity Company Electricity Act, 2003
Any other class of Company Governed by special statute.
Note: The financial statements of these Companies shall not be treated as not disclosing a true and
fair view of the state of affairs of the company, merely by reason of the fact that they do not disclose
any matters which are not required to be disclosed by the special statute as applicable on them as
shown above.
Point 3 – Laying down financial statements in AGM

At every AGM of a company, the Board of Directors of the company shall lay before such meeting
financial statements for the financial year.
Time limit for holding AGM is given in Sec 96 of Companies Act 2013
Criterion First AGM Subsequent AGM
Time limit 1 ----------------- The meeting must be held in each
year.
Time limit 2 The AGM must be held within 18 months The AGM must be held within 15
of incorporation of the company. months of last AGM.
Time limit 3 The AGM must be held within 9 months of The AGM must be held within 6
the close of the first FY. months of the close of the FY.
Extension by ROC Cannot be extended Can be extended by 3 months.
Earliest of the 3 time limits to be followed.
Point 4 – Preparation of Consolidated Financial Statements – Section 129(3)

Section 129(3)
Where a company has one or more subsidiaries, it shall, in addition to financial statements, prepare
a consolidated financial statement of the company and of all the subsidiaries in the same form and
manner as that of its own which shall also be laid before the Annual General Meeting.
First Proviso – Provided that the company shall also attach along with its financial statement, a
separate statement containing the salient features of the financial statement of its subsidiary or
subsidiaries in Form AOC – 1
Second Proviso – Provided further that the Central Government may provide for the consolidation
of accounts of companies in the manner detailed below:-
Manner of consolidation of accounts – The consolidation of financial statements of the company

shall be made in accordance with the provisions of Schedule III of the Act and the applicable
Accounting Standards (AS – 21, 23 & 27)
Explanation – For the purposes of this sub-section, the word “subsidiary” shall include associate
company and joint venture.
Point 5 – Application of Accounts & Audit provisions on Consolidated FS

The provisions of this Act applicable to the preparation, adoption and audit of the financial
statements of a holding company shall, mutatis mutandis, apply to the consolidated financial
statements.
Point 6 –Who shall be responsible for compliance of Section 129 and punishment in case of non-
compliance?
Following persons shall be responsible:-
1. Managing Director,
2. Whole-time Director in charge of Finance,
3. Chief Financial Officer or
4. Any other person of a company charged by the Board

Punishment u/s 129
Imprisonment ≤ 1 year
OR
` 50,000 ≤ Fine ≤ ` 5 lacs
OR
Both
Section 133 Central Government to prescribe accounting standards
The Central Government may prescribe the standards of accounting or any addendum thereto, as
recommended by the Institute of Chartered Accountants of India (ICAI), in consultation with and
after examination of the recommendations made by the National Financial Reporting Authority
(NFRA).
Section 134 Financial Statement, Boards report, etc.

Point 1 – signing of the financial statements
The financial statements, including consolidated financial statement, if any, shall be approved by the
Board of Directors before they are signed on behalf of the Board at least by
1. The chairperson of the company where he is authorized by the Board or by 2 directors out of
which one shall be MD/CEO (if CEO is a Director in the company),
2. The Chief Financial Officer and
3. The company secretary of the company wherever they are appointed.
Signing in case of a One Person Company – only by 1 director, for submission to the auditor for his
report thereon.
Point 2 Board Report

Contents Contents of the Board Report in detail
a. Annual Return The extract of the annual return as provided under Section 92(3) –
Form No. MGT-9 (Extract of Annual Return)
Form No. MGT-7, 8 (Annual Return and CS Certificate)
b. Number of BM Number of meetings of the Board
c. DRS Directors’ Responsibility Statement
ca. Fraud Reporting Details in respect of frauds reported by auditors under Section 143
(Added via (12) other than those which are reportable to the Central
Amendment Act, Government.
2015]
d. Independence A statement on declaration given by independent directors under
Declaration Section 149(6)
e. Nomination & In case of a company covered under section 178(1), company’s policy
Remuneration on directors’ appointment and remuneration including criteria for
Committee and determining qualifications, positive attributes, independence of a
Stakeholders director and other matters provided under section 178(3)
Relationship
Committee
f. Explanation on Explanations or comments by the Board on every qualification,
Auditor’s reservation or adverse remark or disclaimer made –
Qualification (i) By the auditor in his report; and
(ii) By the company secretary in practice in his secretarial audit
report
g. Inter corporate Loans Particulars of loans, guarantees or investments under section 186
and Investments
h. Related party Particulars of contracts or arrangements with related parties referred
Transactions to in section 188(1) in the Form AOC – 2
i. Company’s Affairs The state of the company’s affairs
j. Transfer to Reserves The amounts, if any, which it proposes to carry to any reserves
k. Dividends The amount, if any, which it recommends should be paid by way of
dividend
l. Events occurring after Material changes and commitments, if any, affecting the financial
Balance Sheet Date position of the company which have occurred between the end of
the financial year of the company to which the financial statements
relate and the date of the report
m. Every, Technology, The conservation of energy, technology absorption, foreign exchange
FOREX earnings and outgo.
n. Risk Management A statement indicating development and implementation of a Risk
Policy Management Policy for the company including identification therein
of elements of risk, if any ,which in the opinion of the Board may
threaten the existence of the company
o. CSR The details about the policy developed and implemented by the
company on corporate social responsibility initiatives taken during
the year.
p. Performance In case of a listed company and every other public company having
Evaluation of BOD & such paid-up share capital of ` 25 crores or more as at the end of
directors preceding F.Y., a statement indicating the manner in which formal
annual evaluation has been made by the Board of its own
performance and that of its committees and individual directors
q. Residuary Such other matters as may be prescribed (See below)
Other Prescribed matters under Point (q) are as follows:-

1. The financial summary or highlights;
2. The change in the nature of business, if any;
3. The details of directors or key managerial personnel who were appointed or have resigned
during the year;
4. The names of companies which have become or ceased to be its Subsidiaries, joint ventures of
associate companies during the year;
5. The details relating to deposits, covered under Chapter V (Acceptance of Deposits by
Companies) of the Act, -
a. Accepted during the year;
b. Remained unpaid or unclaimed as at the end of the year;
c. Whether there has been any default in repayment of deposits or payment of interest
thereon during the year and if so, number of such cases and the total amount involved –
(i) At the beginning of the year;
(ii) Maximum during the year;
(iii) At the end of the year;
6. The details of deposits which are not in compliance with the requirements of Chapter V of the
Act;
7. The details of significant and material orders passed by the regulators or courts or tribunals
impacting the going concern status and company’s operations in future;
8. The details in respect of adequacy of internal financial controls with reference to the Financial
Statements.
Note:- Board Report in case of a One Person Company means a report containing explanations or
comments by the Board on every qualification, reservation or adverse remark or disclaimer made by
the auditor in his report.
Point 3 – Directors’ Responsibility Statement

Contents Contents of the DRS in detail
a. Accounting In the preparation of the annual accounts, the applicable accounting
Standards standards had been followed along with proper explanation relating to
material departures
b. Accounting The directors had selected such accounting policies and applied them
Policies consistently and made judgments 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 and loss of the
company for that period
c. Proper and The directors had taken proper and sufficient care for the
sufficient care 1. Maintenance of adequate accounting records in accordance with the
for 3 things provisions of this Act.
2. For safeguarding the assets of the company and
3. For preventing and detecting fraud and other irregularities.
d. Going Concern The directors had prepared the annual accounts on a going concern basis
Basis
e. Internal The directors, in the case of a listed company, had laid down internal
Financial financial controls to be followed by the company and that such internal
Controls financial controls are adequate and were operating effectively
Explanation, - For the purposes of this clause, the term “internal financial
controls” means the policies and procedures adopted by the company for
ensuring the orderly and efficient conduct of its business, Including
adherence to company’s policies, the safeguarding of its assets, the
prevention and detection of frauds and errors, the accuracy and
completeness of the accounting records, and the timely preparation of
reliable financial information
f. Compliance The directors had devised proper systems to ensure compliance with the
with all Laws provisions of all applicable laws and that such systems were adequate and
operating effectively.
Point 4 – Signing of Board Report
The Board’s report shall be signed by
a) Its chairperson of the company if he is authorized by the Board and
b) Where he is not so authorized, shall be signed by at least two directors, one of whom shall be a
managing directors, or
c) By the director where there is only one director.
Point 5 – Attachments and Annexures

S signed copy of every financial statement, including consolidated financial statement, if any, shall be
issued, circulated or published along with a copy each of –
(a) Any notes annexed to or forming part of such financial statement;
(b) The auditor’s report; and
(c) The Board’s report.
Point 6 – Punishment in case of non-compliance

On Company ` 50,000 ≤ Fine ≤ ` 25 lacs
On Officer in default Imprisonment ≤ 3 years OR
` 50,000 ≤ ` 5 lacs OR
Both
Section 136 Right of Member to copies of Audited Financial Statement

Point 1 – Circulation of copy of Financial Statements and Attachments / Annexures 21 days before
AGM to members and debenture trustees.
A copy of the financial statements (including consolidated financial statements, if any, auditor’s
report and every other document required by law to be annexed or attached to the financial
statements), which are to laid before a company in its general meeting, shall be sent to every
member of the company, to every trustee for the debenture-holder of any debentures issued by the
company, and to all persons other than such member or trustee, being the person so entitled, not
less than 21 days before the date of the meeting.
Exemption Notification – Section 8 (Not for Profit) Companies:

In case of “Not for Profit” companies u/s 8 CG has shortened the time limit for circulating Notice u/s
101 and Financial statements u/s 136 from 21 days to 14 days.
Point 2 – Abridged Financial Statements

In the case of a listed company, the provisions of Section 136 shall be deemed to be complied with, if
the copies of the documents are made available for inspection at its registered office during working
hours for a period of 21 days before the date of the meeting and a statement containing the salient
features of such documents in the Form AOC – 3 “Form of Abridged Financial Statements” is sent to
every member of the company and to every trustee for the holders of any debentures issued by the
company not less than 21 days before the date of the meeting unless the shareholders ask for full
financial statements.
Point 3 – Manner of Circulation

The Central Government has prescribed the manner (to be dictated in class) of circulation of
financial statements of
(a) All listed companies and
(b) Public companies which have a net worth of more than ` 1 crore and
(c) Public companies which have a turnover of more ` 10 ten crore.
Point 4 – Putting FS on Website

Provided also that a listed company shall also place its financial statements including consolidated
financial statements, if any, and all other documents required to be attached thereto, on its website,
which is maintained by or on behalf of the company.
Point 5 – Putting FS of subsidiaries on Website

Provided also that every company having a subsidiary or subsidiaries shall, -
(a) Place separate audited accounts in respect of each of its subsidiary on its website, if any;
(b) Provide a copy of separate audited financial statements in respect of each of its subsidiary, to
any shareholder of the company who asks for it.
Point 6 – Allowing inspection to members/debenture trustee

A company shall allow every member or trustee of the holder of any debentures issued by the
company to inspect the documents stated above at its registered office during business hours.
Point 7 – Punishment in case of non-compliance

On Company Fine ≤ ` 25,000
On Officer in default Fine ≤ ` 5,000
Annual Compliances of Financial Statement Section 137 of the Companies Act, 2013
For Private or Public Company:
(a) Adoption of Financial Statement in AGM: Every company is required to file the financial
statements (including consolidated financial statement) in Form AOC – 4 with the ROC
within 30 days from the day on which the AGM held and adopted the financial statements.
(b) Non-Adoption of Financial Statement in AGM: If the financial statements are not adopted
at the AGM or adjourned AGM, such unadopted financial statements along with the
required documents to be filed with the ROC within 30 days of the date of AGM.
Note: The ROC shall take on record the unadopted financial statement as provisional compliances till
the adoption such financial statement at AGM.
For One Person Company: An OPC shall file the copy of financial statements duly adopted by its
members within 180 days from the closure of financial year.
Note: The Company shall also attach the financial statements of its subsidiaries incorporated outside
India.
Question 1
The Board of directors of Bharat Ltd. has a practical problem. The registered office of the company is
situated in a classified backward area of Maharashtra. The Board wants to keep its books of account
at its corporate office in Mumbai which is conveniently located. The Board seeks your advice about
the feasibility of maintaining the accounting records at a place other than the registered office of the
company. Advise.
Answer
According to section 128(1) of the Companies Act, 2013, every company is required to prepare and
keep the books of accounts and other relevant books and papers and financial statement for every
financial year which give a true and fair view of the state of the affairs of the company, including that
of its branch office or offices, if any, and explain the transactions effected both at the registered
office and its branches and such books shall be kept on accrual basis and according to the double
entry system of accounting.
The proviso to section 128(1) further provides that all or any of the books of account aforesaid and
other relevant papers may be kept at such other place in India as the Board of Directors may decide
and where such a decision is taken, the company shall, within seven days thereof, file with the
Registrar a notice in writing giving the full address of that other place. Further company may keep
such books of accounts or other relevant papers in electronic mode as per the Rule 3 of the
Companies (Accounts) Rules, 2014.
Therefore, the Board of Bharat Ltd. is empowered to keep its books of account at its corporate office
in Mumbai by following the above procedure.
Question 2
Mr. White is working as Chief Accountant in White Metal Limited. The Board of Directors of the said
company propose to charge him with the duty of ensuring compliance with the provisions of the
Companies Act, 2013 so that books of account can be properly maintained and Balance Sheet and
Profit and Loss Account can be prepared as per the provision of law. Draft a “Board Resolution” for
the said purpose. Also point out the consequences in case of default; when such a resolution is
passed.
Answer
Board Resolution for charging Mr. White, Chief Accountant with the duty of Compliance with the
requirements of Sections 128 and 129 of the Companies Act, 2013.
“Resolved that Mr. White, Chief Accountant of the company be and is hereby charged with the duty
of seeing that the requirements of Sections 128 and 129 of the Companies Act, 2013 are duly and
fully complied with.
AUDIT
39
Introduction
A company carries on business with capital furnished by person who are not in control of the use of
the money supplied by them. They would, therefore, like to see that their investments are safe. For
this purpose, the accounts of the company are checked and audited by duly qualified persons known
as auditors.
It involves the intelligent scrutiny of the books of accounts of a company with reference to
documents, vouchers and other relevant records. 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.
Auditors
Qualification of Auditors
Section 141(1) & (2) states that only a Chartered Accountant (individual) or a Firm, where majority of
partners practicing in India are Chartered Accountants, can be appointed as auditor of any company,
whether public or private.
Where a firm including a limited liability partnership (LLP) is appointed as an auditor of a company,
only the partners who are chartered accountants shall be authorized to act and sign on behalf of the
firm
Disqualification of Auditors
As per Section 141(3), none of the following persons shall be qualified for appointment as auditor of
a company:-
a) A body corporate, except LLP;
b) An officer or employee of the company;
c) Any partner/employee of officer or employee of company;
d) A person who himself or his partner is holding any security or interest in the company, or any
company which is its holding, subsidiary, associate;
e) A person whose relative is holding security or interest exceeding ` One Lac face value of
securities. In case this limit exceeds, the corrective action to maintain the limit (` one lac) shall be
taken by the auditor within 60 days of such acquisition or interest;
f) A person who or whose relative or partner is indebted to the company or its subsidiary or its
holding or associate company or a subsidiary of such holding company, in excess of rupees five
lakh shall not be eligible for appointment;
g) A person who or whose relative or partner has given a guarantee or provided any security in
connection with the indebtedness of any third person to the company, or its subsidiary, or its
holding or associate company or a subsidiary of such holding company, in excess of one lakh
rupees shall not be eligible for appointment;
h) A person or a firm who, whether directly or indirectly, has “business relationship” with the
company, or its subsidiary, or its holding or associate company;
AUDIT 39.2
i) A person whose relative is a director or is in the employment of the company as a director or key
managerial personnel;
j) A person who is in full time employment elsewhere;
k) Person who is auditor of more than 20 companies, other than One Person Companies (OPC),
Small Companies, Dormant Companies and Private Companies having paid-up-share capital less
than 100 crore rupees;
l) A person who has been convicted by a court of an offence involving fraud and a period of ten
years has not elapsed from the date of such conviction.
m) Any person whose subsidiary or associate company or any other form of entity, is engaged as on
the date of appointment in consulting and specialized services as provided in section 144.
Further, an internal auditor cannot act as statutory 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 and such vacation shall be deemed to be a casual
vacancy in the office of the auditor. [Sec. 141(4)]
Definition of ‘relative’ [Sec. 2(77) of the Companies Act, 2013]

‘Relative’, with reference to any person, means any one who is related to another, if –
(i) They are members of a Hindu Undivided Family;
(ii) They are husband and wife; or
(iii) One person is related to the other in such manner as may be prescribed.
As per Rule 4 of the Companies (Specification of definitions details) Rules, 2014, a person shall be
deemed to be the relative of another, if he or she is related to another in the following manner,
namely:
(1) Father (including step-father)
(2) Mother (including step-mother)
(3) Son (including step-son)
(4) Song’s wife
(5) Daughter
(6) Daughter’s husband
(7) Brother (including step-brother)
(8) Sister (includes step-sister)
Appointment of First Auditor [Sec. 139(6) and 139(7) of the Companies Act, 2013]
1. Manner of Case I [Sec. 139(7)]: Case II [Sec. 139(6)]:
appointment of The company is a Government company The company is any other
first auditor or any other company owned or company:
controlled, directly or indirectly, by CG,
or by one or more State Government, or
partly by CG and partly by one or more
State Government:
AUDIT 39.3
(i) The first auditor shall be appointed (i) The first auditor shall be
by CAG within 60 days of registration appointed by the Board of
of the company. directors within 30 days of
(ii) In case, CAG does not appoint the registration of the company.
first auditor within the said period of
60 days, the Board shall appoint the
first auditor within next 30 days.
(iii) In case of failure of the Board to (ii) If the Board fails to appoint
appoint the first auditor within the the first auditor within 30
said period of 30 days, the Board days of registration of the
shall inform the members of the company, the Board shall
company who shall appoint the first inform the members of the
auditor within 60 days at an EGM. company who shall appoint
the first auditor within 90
days at an EGM.
2. Tenure of first The first auditor shall hold office till the conclusion of the first AGM [Sec.
auditor 139(6) and 139(7)].
3. Definition of • ‘Government company’ means any company in which not less than 51%
‘government of the paid-up, share capital is held by –
company’ [Sec. (a) CG; or
2(45) of the (b) SG(s); or
Companies Act, (c) Partly by CG and partly by SG(s).
2013] • ‘Government company’ includes a company which is a subsidiary
company of a Government company.
Appointment of Subsequent Auditor in Case of a Government Company [Sec. 139(5) of the

Companies Act, 2013]
1. Appointment or In case of aforementioned companies,
reappointment CAG shall, in respect of a FY, appoint the auditor,
of auditor Within 180 days from the commencement of the FY.
2. Tenure The auditor shall hold office till the conclusion of the AGM.
Filling of Casual Vacancy in the Office of Auditors [Sec. 139(8) of the Companies Act, 2013]
1. Manner of filling Case I Case II
casual vacancy The casual vacancy arises in a The casual vacancy arises in any other
company whose accounts are company.
subject to audit by an auditor
appointed by CAG.
(i) Such casual vacancy shall be (i) Such casual vacancy shall be filled
filled within 30 days by CAG. within 30 days by the Board of
(ii) In case, CAG does not fill the directors.
casual vacancy within 30 days, (ii) In case the casual vacancy arose
AUDIT 39.4
the Board shall fill the casual due to the resignation of auditor,
vacancy within next 30 days. it shall be filled within 30 days by
the Board of directors, and the
appointment made by the Board
shall be approved in a general
meeting convened within 3
months of the recommendation
of the Board.
2. Tenure of office Any auditor appointed to fill a casual vacancy shall hold office till the
conclusion of the next AGM.
Certificate and Consent by Auditor, and Notice of Appointment by Company (Sec. 139 of the
Companies Act, 2013)
1. Certificate and Before any appointment of auditor is made, the auditor shall furnish to the
Consent to be company –
given by the (a) His written consent for such appointment; and
Auditor (b) A certificate that –
(i) The appointment, if made, shall be in accordance with the
conditions as may be prescribed; and
(ii) The auditor satisfies the criteria provided in Sec. 141.
Conditions prescribed for appointment and notice to Registrar (Rule 4)
The auditor proposed to be appointed shall submit a certificate that –
(a) The individual or the firm is eligible for appointment and is not
disqualified for appointment under the Act, the Chartered Accountants
Act, 1949 and the rules or regulations made thereunder;
(b) The proposed appointment is as per the term provided under the Act;
(c) The proposed appointment is within the limits laid down by or under the
authority of the Act;
(d) The list of proceedings against the auditor or audit firm or any partner of
the audit firm pending with respect to professional matters of conduct,
as disclosed in the certificate, is true and correct.
2. Notice of The company shall –
Appointment to (a) Inform the auditor concerned of his or its appointment; and
be given by the (b) File a notice of such appointment with the Registrar
company Within 15 days of the meeting in which the auditor is appointed.
Appointment of Auditors at AGM (First AGM and Subsequent AGMs) [Sec. 139(1) of the
Companies Act, 2013]
1. Applicability The provisions of Sec. 139(1) are applicable to all companies (whether public
or private, whether having a share capital or not, whether listed or unlisted,
and irrespective of its paid up share capital, borrowings, etc.).
2. Appointment (a) At the 1st AGM, every company shall appoint an individual or a firm as an
AUDIT 39.5
and auditor. The auditor so appointed shall hold office from the conclusion
reappointment of 1st AGM till the conclusion of 6th AGM.
of auditors till (b) At every AGM (viz. 2nd, 3rd, 4th and 5th AGM), the appointment of auditor
sixth AGM shall be ratified by the members.
(c) If at any AGM, the appointment of auditor is not ratified by the
members, the Board of directors shall appoint another individual or firm
as its auditor(s) after following the procedure laid down under the Act
[Explanation to Rule 3(7)]. Simply speaking, if the appointment is not
ratified at any AGM, the auditor shall have to vacate his office, and such
vacancy shall amount to casual vacancy. The Board shall fill such casual
vacancy in accordance with sub-section (8) of Sec. 139.
3. Manner and The manner and procedure of selection of auditors by the members of the
procedure of company at any AGM shall be such as may be prescribed.
selection of Rule 3 of the Companies (Audit and Auditors) Rules, 2014 prescribes the
auditors (Rule 3) following procedure:
1. The qualifications and experience of the individual or the firm proposed
to be appointed as auditor shall be considered by –
(a) The Board; or
(b) The Audit committee, in case the company is required to constitute
an Audit Committee.
2. While considering the appointment, the Board / Audit Committee shall
have due regard to –
(a) Any order of professional misconduct passed against the proposed
auditor; and
(b) Any proceedings of professional misconduct pending against the
proposed auditor.
3. The Board/Audit Committee may call for such other information from
the proposed auditor as it may deem fit.
4. In case the company is not required to constitute the Audit Committee,
the Board shall consider and recommend an individual or a firm as
auditor to the members in the AGM for appointment.
5. In case the company is required to constitute the Audit Committee,
following procedure shall be adopted:
(a) The Audit committee shall recommend the name of an individual or
a firm as auditor to the Board for consideration.
(b) If the Board agrees with the recommendation of the Audit
Committee, it shall further recommend such individual or such firm
as auditor to the member in the AGM for appointment.
(c) If the Board disagrees with the recommendation of the Audit
Committee, it shall refer back the recommendation to the Audit
committee for reconsideration citing reasons for such disagreement.
(d) If the Audit Committee, after considering the reasons given by the
AUDIT 39.6
Board, decides not to reconsider its original recommendation, and
the Board continues to disagree with the recommendations of the
Audit Committee, the Board shall-
(i) Record reasons for its disagreement with the committee;
(ii) Send its own recommendation for consideration of the
members in the AGM.
(e) If the Audit Committee, after considering the reasons given by the
Board, decides not to reconsider its original recommendation, and
the Board agrees with the recommendations of the Audit
Committee, the Board shall recommend the name of the individual
or the firm as recommended by the Audit Committee to the
member in the AGM for appointment.
Reappointment of Retiring Auditor [Sec. 139(9) & 139(10) of the Companies Act, 2013]
1. Reappointment A retiring auditor may be re-appointed at an AGM, if –
of retiring (a) He is not disqualified for re-appointment;
auditor (b) He has not given to the company a notice in writing of his unwillingness
to be reappointed; and
(c) A special resolution has not been passed at the AGM appointing some
other auditor or providing expressly that he shall not be re-appointed.
2. No auditor is Where at any AGM,
appointed or No auditor is appointed or re-appointed
reappointed at The existing auditor shall continue to be the auditor of the company.
AGM –
Consequences
Rotation of Auditors [Sec. 139(2) and 139(4) of the Companies Act, 2013]
1. Applicability of (a) The concept of rotation of auditors is applicable to –
concept of (i) Listed companies; and
rotation of (ii) All companies belonging to such class or classes of companies as
auditors [Sec. may be prescribed.
139(2)] (b) Following classes of companies have been prescribed for the purpose of
rotation of auditors [Rule 5 of the Companies (Audit and Auditors) Rules,
2014]:
(i) All unlisted public companies having paid up share capital of ` 10
crore or more;
(ii) All private limited companies having paid up share capital of ` 20
crore or more;
(iii) All companies having paid up share capital below the limits
mentioned in (a) and (b) above, but having public borrowings from
financial institutions, banks or public deposits of ` 50 crore or
above.
AUDIT 39.7
(c) The concept of rotation of auditors shall not apply to One Person
Companies or Small Companies.
2. Manner of In case, the (i) No individual shall be appointed or reappointed as
rotation of auditor is an auditor for more than 1 term of 5 consecutive years.
auditors individual (ii) An individual auditor who has completed his term of
5 consecutive years, shall not be eligible for re-
appointment as auditor in the same company for 5
years from the completion of his term.
In case, the (i) No audit firm shall be appointed or reappointed as
auditor is a firm auditor for more than 2 terms of 5 consecutive years.
(ii) An audit firm which has completed its 2 terms of 5
consecutive years, shall not be eligible for re-
appointment as auditor in the same company for 5
years from the completion of such terms.
3. Restriction on An audit firm having one or more common partner to the other audit firm,
other audit whose tenure has expired, shall not be appointed as the auditor of the same
firm(s) having company for a period of 5 years.
common In other words, if two or more audit firms have common partner(s), and one
partner(s) of these firms has completed its 2 terms of 5 consecutive years, none of
such audit firms shall be eligible for reappointment as auditor in the same
company for 5 years.
4. Time period for Every company, existing on the commencement of this Act,
compliance for Which is required to comply with provisions relating to rotation of
existing auditors,
companies Shall comply with these requirements
Within 3 years from the date of commencement of this Act.
5. Right of removal (a) The right of the company to remove an auditor before expiry of one/two
or resignation term(s) of 5 consecutive years shall not be affected due to any provision
not affected contained in Sec. 139(2).
(b) The right of the auditor to resign from the office of auditor before expiry
of one/two term(s) of 5 consecutive years shall not be affected due to
any provision contained in Sec. 139(2).
6. Strict provisions Members of a company may resolve to provide that –
w.r.t. rotation (a) In the audit firm appointed by it, the auditing partner and his team shall
may be imposed be rotated at such intervals as may be resolved by members; or
by members (b) The audit shall be conducted by more than one auditor.
7. Rules for CG may, by rules, prescribe the manner of rotation of auditors.
rotation of Manner of rotation of auditors by the companies on expiry of their term
auditors (Rule 6)
1. The Audit Committee is required to constitute an Audit Committee, the
procedure shall be as follows:
(a) The Audit Committee shall recommend to the Board, the name of an
AUDIT 39.8
individual auditor or of an audit firm who may replace the
incumbent auditor on expiry of the term of such incumbent.
(b) The Board shall consider the recommendation of the Audit
Committee.
(c) The Board shall make its own recommendation for appointment of
the next auditor by the members in the AGM.
2. In case the company is not required to constitute an Audit Committee,
the procedure shall be as follows:
(a) The Board shall itself consider the matter of rotation of auditors.
(b) The Board shall make its own recommendation for appointment of
the next auditor by the members in the AGM.
3. In case of an auditor (whether an individual or audit firm), the period for
which the individual or the firm has held office as auditor prior to the
commencement of the Act shall be taken into account for calculating
the period of 5 consecutive years or 10 consecutive years, as the case
may be.
4. The incoming auditor or audit firm shall not be eligible if such auditor or
audit firm is associated with the outgoing auditor or audit firm under the
same network of audit firms.
‘Same network’ includes the firms operating or functioning, under the
same brand name, trade name or common control.
5. A break in the term for a continuous period of 5 years shall be
considered as fulfilling the requirement of rotation.
6. If a partner, who is in charge of an audit firm and also certifies the
financial statements of the company, retires from the said firm and joins
another firm of chartered accountants, such other firm shall also be
ineligible to be appointed for a period of 5 years.
Illustration explaining rotation in case of individual auditor
Column-I Column-II Column-III
Number of consecutive years Maximum number of Aggregate period which the
for which an individual auditor consecutive years for which he auditor would complete in the
has been functioning as may be appointed in the same same company in view of
auditor in the same company company (including transitional column I and II
[in the first AGM held after the period)
commencement of provisions
of Sec. 139(2)]
5 years (or more than 5 years) 3 years 8 years or more
4 years 3 years 7 years
1 year 4 years 5 years
AUDIT 39.9
Note 1: Individual auditor shall include other individuals or firms whose name or trade mark or
brand is used by such individual, if any.
Note 2: Consecutive years shall mean all the preceding FYs for which the individual auditor has
been the auditor until there has been a break by five years or more.
Illustration explaining rotation in case of audit firm

Column-I Column-II Column-III
Number of consecutive years Maximum number of Aggregate period which the
for which an audit firm has consecutive years for which the firm would complete in the
been functioning as auditor in firm may be appointed in the same company in view of
the same company [in the first same company (including column I and II
AGM held after the transitional period)
commencement of provisions
of Sec. 139(2)]
10 years (or more than 10 3 years 13 years or more
years)
1 year 9 years 10 years
Note 1: Audit Firm shall include other firms whose name or trade mark or brand is used by the
firm or nay of its partners.
Note 2: Consecutive years shall mean all the preceding FYs for which the firm has been the auditor
until there has been a break by five years or more.
Section 140 Removal of Auditor before the expiry of term BR + CG + SB

The auditor may be removed from his office before the expiry of his term only by a SR [Special
Resolution] of the company, after obtaining the previous approval of the CG [Central Government].
(1) The application to the Central Government for removal of auditor shall be made in Form ADT-2
(2) The application shall be made to the Central Government within 30 days of the resolution
passed by the Board.
(3) The company shall hold the general meeting within 60 days of receipt of approval of the Central
Government for passing the special resolution.
Provided that before taking any action under this sub-section, the auditor concerned shall be given a
reasonable opportunity of being heard.
Section 140 Resignation by the Auditor

AUDIT 39.10
The auditor who has resigned from the company shall file Form ADT – 3 with the company and the
ROC within a period of 30 days from the date of resignation, indicating the reasons and other facts
as may be relevant with regard to his resignation.
In case of resignation by the Auditor in a Government Company, Auditor shall file Form ADT – 3 with
the C & AG, company and the ROC within a period of 30 days from the date of resignation.
Penalty for non-filing of Form ADT – 3:- If the auditor does not comply above, he or it shall be
punishable with ` 50,000 ≤ Fine ≤ ` 5,00,000.
Section 140 Removal of Auditor after Expiry of Term i.e. Non-Reappointment of Retiring Auditor
Step 1: Requirement of a Special Notice to be received by the Company
Special notice shall be required for a resolution at an annual general meeting
(1) Appointing as auditor a person other than a retiring auditor, or
(2) Providing expressly that a retiring auditor shall not be re-appointed, except where the retiring
auditor has completed a consecutive tenure of 5 years or 10 years, as provided u/s 139.
Step 2: Copy of Special Notice to the retiring auditor

On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the
retiring auditor.
Step 3: Retiring Auditor’s right of Representation

Where notice is given of such a resolution and the retiring auditor makes a representation in writing
to the company and requests its notification to members of the company, the company shall –
(a) In any notice of the resolution given to members of the company, state the fact of the
representation having been made; and
(b) Send a copy of the representation to every member of the company to whom notice of the
meeting sent, or if it is received late, then the auditor may require that the representation shall
be read out at the meeting.
Provided that if a copy of representation is not sent as aforesaid, a copy thereof shall be filed with
the Registrar:
Provided further that if the Tribunal is satisfied on an application either of the company or of any
other aggrieved person that the rights conferred are being abused by the auditor, then, the copy of
the representation may not be sent and the representation need not be read out at the meeting.
Section 140 Fraud by the Auditor and Removal of the Auditor by Tribunal
The Tribunal either suo motu or on an application made to it by the Central Government or by any
person concerned, if it is satisfied that the auditor of a company has, whether directly or indirectly,
acted in a fraudulent manner or abetted or colluded in any fraud by, or in relation to, the company
or its directors or officers, it may, by order, direct the company to change its auditors:
If the application is made by the Central Government and the Tribunal is satisfied that any change of
the auditor is required, it shall within 15 days of receipt of such application, make an order that he
shall not function as an auditor and the Central Government may appoint another auditor in his
place:
AUDIT 39.11
Golbal Ban for 5 years on such Auditor
An auditor, whether individual or firm, against whom final order has been passed by the Tribunal
under this section shall not be eligible to be appointed as an auditor of ANY company for a period of
5 years from the date of passing of the order and the auditor shall also be liable for action under
section 447.
Punishment u/s 447
6 months ≤ imprisonment ≤ 10 years
AND
Amount involved in the Fraud ≤ Penalty ≤ 3 times Amount involved in the Fraud
Liability to devolve on concerned partner only

In case of criminal liability of any audit firm, the liability other than fine shall devolve only on the
concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be,
colluded in any fraud.
Section 142 Remuneration of the Auditor

The remuneration of the auditor of a company shall be fixed in its general meeting or in such
manner as may be determined therein.
Remuneration of the first auditor may be fixed by the BOD.
Explanation: Auditor’s remuneration includes “Out of Pocket Expenses” but does not include any
remuneration paid to him for any other service rendered by him at the request of the company.
Duties of auditors – The New companies act 2013

Section 143(1) Scope of Enquiry
The auditor shall enquire:
(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) Whether 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 company within the meaning of section 372 or a
banking company, whether, so much of the assets of the company, as consist 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 account;
(f) Where it is stated in the books and papers of the company that any shares have been allotted
for cash, whether cash has actually been received in respect of such allotment, and if no cash
has actually been so received, whether the position as stated in the account books and the
balance sheet is correct, regular and not misleading”.
AUDIT 39.12
“The auditor is not required to report on these matters unless he has any special comments to make
on any of the items referred to therein. If he is satisfied as a result of the inquiries, he has no further
duty to report that he is so satisfied. In such a case, the content of the Auditor’s Report will remain
exactly the same”.
Section 143(2) Language of the Opinion Paragraph

Section 143(2) specifically requires that the auditor should report:
The auditor shall make a report to the members of the company on the accounts examined by him
and on every financial statements which are required by or under this Act to be laid before the
company in general meeting and the report shall after taking into account the provisions of this Act,
the accounting and auditing standards and matters which are required to be included in the audit
report under the provisions of this Act or any rules made thereunder or under any order made under
sub-section (11) and to the best of his information and knowledge, the said accounts, financial
statements give a true and fair view of the state of the company’s affairs as at the end of its financial
year and profit or loss and cash flow for the year and such other matters as may be prescribed.
Section 143(3) 10 matters on which Auditor should comment in his main Audit Report
The auditor’s report shall also state –
(a) Whether he has sought and obtained all the information and explanations which to the best of
his knowledge and belief were necessary for the purpose of his audit and if not, the details
thereof and the effect of such information on the financial statements;
(b) Whether, in his opinion, proper books of accounts as required by law have been kept by the
company so far as appears from his examination of those books and proper returns adequate
for the purposes of his audit have been received from branches not visited by him;
(c) Whether the report on the accounts of any branch office of the company audited by the branch
auditor has been sent to him and the manner in which he has dealt with it in preparing his
report;
(d) Whether the company’s balance sheet and profit and loss account dealt with in the report are
in agreement with the books of account and returns;
(e) Whether, in his opinion, the financial statements comply with the Accounting Standards;
(f) The observations or comments of the auditors on financial transactions or matters which have
any adverse effect on the functioning of the company;
(g) Whether any director is disqualified from being appointed as a director under sub-section (2) of
section 164;
(h) Any qualification, reservation or adverse remark relating to the maintenance of accounts and
other matters connected therewith;
(i) Whether the company has adequate internal financial controls system in place and the
operating effectiveness of such controls;
(j) Following matters which have been prescribed under the Rules:
(a) Whether the company has disclosed the impact, if any, of pending litigations on its financial
position in its financial statement;
AUDIT 39.13
(b) Whether the company has made provision, as required under any law or accounting
standards, for material foreseeable losses, if any, on long term contracts including
derivative contracts;
(c) Whether there has been any delay in transferring amounts, required to be transferred, to
the investor Education and Protection Fund by the company.
Note: - Where any of the matters required to be included in the audit report under this section is
answered in the negative or with a qualification, the report shall state the reasons therefor.
Section 143 Audit of Government Company

The auditor appointed by C & AG shall submit a copy of the audit report to the Comptroller and
Auditor-General of India which shall include the directions, if any, issued by the Comptroller and
Auditor-General of India, the action taken thereon and its impact on the accounts and financial
statement of the company.
The C & AG shall within 60 days from the date of receipt of the audit report have a right to, -
(a) Conduct a supplementary audit of the financial statement of the company by such person or
persons as he may authorize in this behalf; and
(b) Comment upon or supplement such audit report:
Provided that any comments given by the C & AG upon, or supplement to, the audit report shall be
sent by the company to every person entitled to copies of audited financial statements and also be
placed before the annual general meeting of the company at the same time and in the same manner
as the audit report.
Section 143 Duty of the Auditor to follow Auditing Standards

Every auditor shall comply with the auditing standards.
The Central Government may prescribe the standards of auditing, as recommended by the institute
of Chartered Accountants of India in consultation with and after examination of the
recommendations made by the National Financial Reporting Authority.
Until any auditing standards are notified, any standard or standards of auditing specified by the
Institute of Chartered Accountants of India shall be deemed to be the auditing standards.
Section 143(11) Duty of the Auditor to Report in Annexure to the Auditors Report
The Central Government may, in consultation with the National Financial Reporting Authority, by
genera or special order, direct, in respect of such class or description of companies, as may be
specified in the order, that the auditor’s report shall also include a statement on such matters as
may be specified therein.
Section 143(12) Duty of the Auditor to report fraud to CG

Reporting of frauds by auditor. – FORM ADT – 4
(1) In case the auditor has sufficient reason to believe that an offence involving fraud, is being or
has been committed against the company by officers or employees of the company, he shall
report the matter to the Central Government immediately but not later than 60 days of his
knowledge and after following the procedure indicated herein below:
AUDIT 39.14
(i) Auditor shall forward his report to the Board or the Audit Committee, as the case may be,
immediately after he comes to knowledge of the fraud, seeking their reply or observations
within 45 days;
(ii) On receipt of such reply or observations the auditor shall forward his report and the reply
or observations of the Board or the Audit Committee alongwith his comments (on such
reply or observations of the Board or the Audit Committee) to the Central Government
within 15 days of receipt of such reply or observations;
(iii) In case the auditor fails to get any reply or observations from the Board or the Audit
Committee within the stipulated period of 45 days, he shall forward his report to the
Central Government alongwith a note containing the details of his report that was earlier
forwarded to the Board or the Audit Committee for which he failed to receive any reply or
observations within the stipulated time.
(2) The report shall be sent to the Secretary, Ministry of Corporate Affairs in a sealed cover by
Registered Post with Acknowledgement Due or by Speed post followed by an e-mail in
confirmation of the same.
(3) The report shall be on the letter-head of the auditor containing postal address, e-mail address
and contract number and be signed by the auditor with his seal and shall indicate his
Membership Number.
(4) The report shall be in the form of a statement as specified in Form ADT-4.
The provisions of this section shall mutatis mutandis apply to –
(a) The cost accountant in practice conducting cost audit under section 148; or
(b) The company secretary in practice conducting secretarial audit under section 204.
Penalty for non-reporting of FRAUD:-

If any auditor, cost accountant or company secretary in practice do not comply with the above
provisions, he shall be punishable with ` 1,00,000 ≤ Fine ≤ ` 25,00,000.
Section 144 Auditor not to render certain services

An auditor appointed under this Act shall provide to the company only such other services as are
approved by the Board of Directors or the audit committee, but which shall not include any of the
following services (whether such services are rendered directly or indirectly to the company or its
holding company or subsidiary company, namely:-
(a) Accounting and book keeping services;
(b) Internal audit;
(c) Design and implementation of any financial information system;
(d) Actuarial services;
(e) Investment advisory services;
(f) Investment banking services;
(g) Rendering of outsourced financial services;
(h) Management services; and
(i) Any other kind of services as may be prescribed:
AUDIT 39.15
Provided that an auditor or audit firm who or which has been performing any non-audit services on
or before the commencement of this Act shall comply with the provisions of this section before the
closure of the first financial year after the date of such commencement.
Explanation. – For the purposes of this sub-section, the term “directly or indirectly” shall include
rendering of services by the auditor, -
(a) In case of auditor being an individual, either himself or through his relative or any other person
connected or associated with such individual or through any other entity, whatsoever, in which
such individual has significant influence or control, or whose name or trade mark or brand is
used by such individual;
(b) In case of auditor being a firm, either itself or through any of its partners or through its parent,
subsidiary or associate entity or through any other entity, whatsoever, in which the firm or any
partner of the firm has significant influence or control, or whose name or trade mark or brand is
used by the firm or any of its partners.
Section 145 Qualifications to be read in the General Meeting

The person appointed as an auditor of the company shall sign the auditor’s report or sign or certify
any other document of the company, and the qualifications, observations or comments on financial
transactions or matters, which have any adverse effect on the functioning of the company
mentioned in the auditor’s report shall be read before the company in general meeting and shall be
open to inspection by any member of the company.
Section 146 Auditor shall attend General meetings

All notices of, and other communications relating to, any general meeting shall be forwarded to the
auditor of the company, and the auditor shall, unless otherwise exempted by the company, attend
either by himself or through his authorized representative, who shall also be qualified to be an
auditor, any general meeting and shall have right to be heard at such meeting on any part of the
business which concerns him as the auditor.
Section 147 Penal Provisions
Section 147 – Penalty under NEW

Companies Act 2013 for non-compliance
of provisions related to Audit
On Company On Officer in default
Fine of ` 25000 to ` 5 lacs Imprisonment for 1 year or

Fine of ` 10000 to ` 1 lac.
AUDIT 39.16
Section 147 – Penalty under NEW

Companies Act 2013 for non-compliance
of provisions related to Audit
On Auditor
Fine of ` 25000 to ` 5 lacs If willful then Imprisonment Refund the remuneration

for 1 year of Fine of ` 1 lac and Pay Damages
to ` 25 lacs
Note:- Where, in case of audit of a company being conducted by an audit firm, it is proved that the
partner or partners of the audit firm has or have acted in a fraudulent manner or abetted or
colluded in any fraud by, or in relation to or by, the company or its directors or officers, the liability,
whether civil or criminal as provided in this Act or in any other law for the time being in force, for
such act shall be of the partner or partners concerned of the audit firm and of the firm jointly and
severally.
Section 135 Corporate Social Responsibility

Point 1 – Notification by Ministry
The Ministry of Corporate Affairs has notified the Companies (Corporate Social Responsibility Policy)
Rules, 2014, commonly referred to as the CSR Rules with effect from 1st April 2014. Accordingly,
section 135 of the New Companies Act, 2013 is also notified from the above date.
Point 2 – Which company is covered under Section 135

As per section 135, Every Company having
(a) Net Worth of ` 500 Crores or more, or
(b) Turnover of ` 1000 Crores or more, or
(c) A net profit of ` 5 Crore or more during any financial year
Shall constitute a Corporate Social Responsibility Committee of the Board consisting of 3 or
more directors, out of which at least 1 director shall be an independent director.
Note 1: An unlisted public company or a Private Limited Company which is not required to appoint
an independent director shall have its CSR Committee without such director.
Note 2: A private limited company having only 2 directors on its Board shall constitute its CSR
Committee with its 2 such directors.
Note 3: Every company which ceases to fulfill the above conditions for 3 consecutive financial years
shall not be required to follow the requirements of this Section 135 till such time it meets the
specified criteria.
AUDIT 39.17
Point 3 – Role of CSR Committee
The Corporate Social Responsibility Committee shall, -
(a) Formulate and recommend to the Board, a Corporate Social Responsibility Policy which shall
indicate the activities to be undertaken by the company as specified in Schedule VII;
(b) Recommend the amount of expenditure to be incurred on the activities referred to in clause
(a); and
(c) Monitor the Corporate Social Responsibility Policy of the company from time to time.
Point 4 – Activities mentioned in Schedule VII

The activities mentioned in Schedule VII include
(i) Eradicating extreme hunger and poverty,
(ii) Promotion of education,
(iii) Promoting gender equality and empowering women,
(iv) Reducing child mortality and improving maternal health,
(v) Combating human immune-deficiency virus, AIDS, malaria and other diseases,
(vi) Ensuring environmental sustainability,
(vii) Employment enhancing vocational skills,
(viii) Social business projects, and
(ix) Contribution to the Prime Minister’s National Relief Fund or any other fund set up the Central
Government or the State Governments for socio-economic development and relief and funds
for the welfare of the SC/ST/OBC, minorities and women.
Point 5 – Amount to be spent on CSR

At least 2% of the average net profits of the Company made during the 3 immediately preceding
financial years commencing from 1st April 2014.
Provided further that if the company fails to spend such amount, the Board shall, in its Board Report,
specify the reasons for not spending the amount.
Note 1: Any amount contributed to any political party shall not constitute CSR Activity
Note 2: The CSR activities should not include any activity undertaken by the Company during the
normal course of its business.
Note 3: Any project / program which benefit the employees or their families shall not be considered
as CSR Activities.
Point 6 – Method of doing CSR

The CSR Activities can be undertaken by the Company or through its registered trust, society or
company u/s.8 of the Act.
Point 7 – Disclosure of CSR activities on website

The contents of the CSR Policy and its activities shall be displayed by the Company in its website.
Point 8 – CSR Reporting

AUDIT 39.18
The Board’s Report of a company covered under these rules pertaining to a financial year
commencing on or after 1st April, 2014 shall include an annual report on CSR containing particulars
specified in the CSR Rules.
“Net profit” means the net profit of a company as per its financial statement prepared in accordance
with the applicable Provisions of the Act, but shall not include the following, namely:-
(i) Any profit arising from any overseas branch or branches of the company’ whether operated as
a separate company or otherwise; and
(ii) Any dividend received from other companies in India, which are covered under and complying
with the Provisions of section 135 of the Act.
Provided further that in case of a foreign company covered under these rules, net profit means the
net profit of such company as per profit and loss account prepared in terms of Section 381(1)(a) read
with section 198 of the Act.
Explanation. – For the purposes of this section “average net profit” shall be calculated in accordance
with the provisions of section 198.
Section 138 Internal Audit

The following class of companies shall be required to appoint an internal auditor, who shall either be
a chartered accountant or a cost accountant, or such other professional as may be decided by the
Board of Directors to conduct internal audit of the functions and activities of the company.
The following class of companies shall be required to appoint an internal auditor or a firm of internal
auditors, namely:-
(a) Every listed company;
(b) Every unlisted public company having –
(i) Paid up share capital of ` 50 crore or more during the preceding financial year; or
(ii) Turnover of ` 200 crore or more during the preceding financial year; or
(iii) Outstanding loans or borrowings from banks or public financial institutions exceeding ` 100
crore or more at any point of time during the preceding financial year; or
(iv) Outstanding deposits of ` 25 crore or more at any point of time during the preceding
financial year; and
(c) Every private company having –
(i) Turnover of ` 200 crore or more during the preceding financial year; or
(ii) Outstanding loans or borrowings from banks or public financial institutions exceeding ` 100
crore or more at any point of time during the preceding financial year:
Transitory Provision – Provided that an existing company covered under any of the above criteria
shall comply with the requirements of section 138 and this rule within 6 months of commencement
of such section.
Explanation. – For the purposes of this rule –

(i) The internal auditor may or may not be an employee of the company;
(ii) The term “Chartered Accountant” shall mean a Chartered Accountant whether engaged in
practice or not.
AUDIT 39.19
Role of Audit Committee/BOD
The Audit Committee of the company or the Board shall, in consultation with the Internal Auditor,
formulate the scope, functioning, periodicity and methodology for conducting the internal audit.
Section 148 Cost Audit

Title Details
Applicability of Central Government may, by order, in respect of such class of companies
Cost Audit engaged in the production of such goods or providing such services as may be
prescribed, direct that particulars relating to the utilization of material or
labour or to other items of cost as may be prescribed shall also be included in
the books of account kept by that class of companies.
Size Threshold CG has notified the class of companies having a certain threshold or turnover
prescribed by CG to get its cost records audited by a CWA (CMA) under the Companies (Cost
Records and Audit) Rules, 2014.
Appointment of Cost Audit shall be conducted by a Cost Accountant in practice who shall be
Cost Auditor appointed by the Board.
The manner of appointment of cost Auditor is given separately in the chapter
Cost Audit in this material
Provided that a statutory auditor (CA) of the company shall Not be appointed
for conducting the audit of cost records.
Provided further that the auditor conducting the cost audit shall comply with
the cost auditing standards.
Rights & Duties of The qualifications, disqualifications, rights, duties and obligations applicable to
Cost Auditor Cost Auditors shall be same as that of a Statutory Auditor (CA)
Provided that the report on the audit of cost records shall be submitted by the
cost accountant in practice to the Board of Directors of the company.
Explanation by A company shall within 30 days from the date of receipt of a copy of the cost
BOD on audit report furnish the Central Government with such report along with full
Qualifications information and explanation on every reservation or qualification contained
therein.
Action by CG If, after considering the cost audit report and the explanation furnished by the
company, the Central Government is of the opinion that any further
information or explanation is necessary, it may call for such further
information and explanation and the company shall furnish the same within
such time as may be specified by that Government.
Penalty If any default is made in complying with the provisions of this section.-
(a) The company and every officer of the company who is in default shall be
punishable in the manner as provided in section 147;
(b) The cost auditor of the company who is in default shall be punishable in
the manner as provided in section 147.
Note: Details on Cost Audit Rules have been given in the chapter Cost Audit in the Audit Book.
THE INDIAN CONTRACT ACT, 1872
40
Special Contracts
Indemnity
Guarantee
Bailment
Pledge
Agency
Contract of Indemnity (Section 124)
Indemnity means to make good the loss suffered by a party.

A contract by which one party promises to save the other from loss
caused to him by-
a) the conduct of the promisor himself
b) or the conduct of any person
is called a “contract of indemnity”.
This is also known as typical form of contingent contract.
Indemnifier- The party who promises to save the other party from loss.
Parties
Indemnified- The party who is promised to be saved against the loss.
Other Features
A contract of Indemnity may be express or implied.
All essentials of a valid contract must be present.
Loss of promisee is essential.
The Indemnity holder is entitled to recover damages, costs of suit.
Gajanan Moreshwar vs Moreshwar Madan- The law relating to indemnity is by no means

exhaustive and hence courts in India shall follow the English Law in this regard. In English law,
Indemnity is defined as a ‘promise to save another harmless from the loss caused as a result of a
transaction entered into at the instance of the promisor.
THE INDIAN CONTRACT ACT, 1872 40.2
Contract of Guarantee (Section 126)

A contract of guarantee is a contract to perform
the promise made or discharge liability incurred
by a third person in case of his default.
Surety- Person who gives the guarantee

Parties Principle debtor-Person in respect of whose default the guarantee is given
Creditor- person to whom the guarantee is given
Features of a Valid Contract of Guarantee

The contract must be conditional
The principal debtor must be primarily liable.
Must have all the essentials of a valid contract
No misrepresentation
The guarantee by a surety is not valid if a condition is imposed by a surety that some other
person must also join as a co-surety; but such other person does not join as a co-surety.
A contract of guarantee may be either oral or written.
Types of
Guarantee
On Money On Person
Fidelity
Nature of Effective Guarantee
Payment Time of
Payment
Simple Continuing
Guarantee Guarantee
Prospective Retrospective
Guarantee Guarantee
Continuing Guarantee (Section 129)
A guarantee which extends to a series of transaction is called a ‘continuing guarantee’

Example: Where ‘A’ promises ‘B’ to be responsible, so long ‘B’ employs only ‘C’ to collect his rentals
from tenants for an amount of ` 5000/-, there is a continuing guarantee by A to B so long ‘C’ is
employed as rent collector. In other words A stands a guarantor to ‘B’ for rent collected by ‘C’.
In the continuing guarantee, the liability of surety continues till the performance or the discharge of
all the transactions entered into or the guarantee is withdrawn.
Important aspects regarding the revocation of continuing guarantee:

The continuing guarantee may at any time be revoked by surety as to future transactions by
notice to creditors. However no revocation is possible where a continuing relationship is
established.
For instance where ‘A’ becomes surety of ‘C’ for B’s conduct as manager in C’s bank and ‘B’
is appointed on the faith of this guarantee, ‘A’ is precluded from annulling the guarantee so
long as B acts as manager in C’s bank.
Upon the death of surety, the continuing guarantee is revoked for all future transactions in
the absence of any contract to the country.
Rights of Surety against the Principal Debtor and Creditor

I. Against the principal debtor
(a) Right of subrogation: where a guaranteed debt has become due or default of the
principal debtor to perform a guaranteed duty has taken place, the surety upon
payment or performance of all he that he is liable for, is vested with all the rights which
the creditor had against the principal debtor.
(b) Right to securities: The surety is entitled to the benefit of all securities made available to
the creditor by the principal debtor whether the surety was aware of its existence or
not.
(c) Right to recover the amount paid/right to indemnity: the surety is entitled to recover
from the principal debtor whatever sums he has rightfully paid.
II. Against the creditor:

(a) Right of subrogation: The surety gets the right of subrogation for all payments and
performances he is liable. This right would accrue only when the surety has paid the
amount of liability in full.
For example, where a creditor had the right to stop the goods or sellers lien, surety
would enjoy the same right after he has paid the amount.
[Imperial Bank vs. Sl kathereine Docks 1877 ]

(b) Right to securities: Surety is entitled for all securities which the debtor has provided to
creditor whether surety is aware of it or not. Where a creditor loses any of the security
by default or negligence the liability of the surety abates proportionately. If a creditor
does not hand over the securities to surety he can be compelled to do so.
(c) Right to sue: Surety has a right to require the creditor to sue for and recover the
guaranteed debt. This right of surety is known as right to file a ‘Quia timet action’
against the debtor. There is of course an inherent risk of having to indemnify the
creditor for delay and expense.
(d) Right to dismiss: Surety has a right to call upon the creditor to dismiss the person from
service if the person whose fidelity is guaranteed by surety is persistently dishonest.
(e) Right to claim set-off: Surety has a right of set off against the principal debtor exactly as
a creditor would have.
(f) Right of option on the claim of the funds: Surety also can compel the creditor where he
has claim on two funds, to resort to that fund first on which surety has no claim.
(g) Right to claim: Surety can claim that he is not liable on the guarantee to the creditor. If it
can be proved that principal debtor was incapable of entering into a contract, say
because he was a minor.
Discharge of a Surety
Revocation of Contract Invalidation of Contract of Conduct of Creditor

of Guarantee Guarantee
1.
a) By Revocation of Contract of Guarantee:

Notice by Surety- Surety may anytime revoke a continuing guarantee by giving a
notice to the Creditor.
Death of Surety- Estate of Surety shall be liable for all transactions entered into
between creditor and principal debtor prior to death but not after his death.
Novation- Original contract comes to an end and new contract is formed.
b) By Invalidation of Contract of Guarantee:

Misrepresentation
Concealment
Failure of co-surety to join a surety
Failure of consideration
c) By Conduct of Creditor:
Variance in terms of Contract- Any variance made in terms of contract without
consent of surety will discharge surety.
Discharge of principal debtor-
By a contract Any act By any omission, the result of which

discharges principal debtor
Compounding with Principal Debtor- Surety is discharged if
i) Creditor makes composition with Principal debtor
ii) Creditor agrees to give time to Principal debtor
iii) Creditor agrees not to sue the Principal debtor
Impairment of Surety’s eventual remedy- The surety would be discharged if the
creditor does anything or acts in a manner which-
a) Is inconsistent with the rights of surety and
b) Impairs the eventual remedy of the surety.
Exceptions (Where Surety not discharged)

a) A mere forbearance on the part of a creditor to sue the debtor or to enforce any other
remedy would not discharge the surety in the absence of any specific provision.
b) Even where the claim is barred by limitation, surety is still responsible.
CASE LAWS
Krishto kishore vs. Radha romun -The plaintiff sued the principal debtor and the surety for
arrears of rent. The plaintiff also made the legal representatives of the principal debtor a
party after knowing about the death of the principal debtor to avoid the debt being barred by
limitation. It was held that even if debt is barred by limitation on account of death of
principal debtor, the surety is still liable.
Mahant Singh vs U Ba yi- The same view was confirmed by privy Council where it was held
that omission of the creditor to sue within the period of limitation does not discharge the
surety.
Bailment and Pledge
Bailment:
As per Section 148 of the Act, Bailment is an act-

whereby goods are delivered
by one person to another for some purpose,
on a contract, that the goods shall,
when the purpose is accomplished, be returned or otherwise disposed off
according to the directions of the person delivering them.
Bailor- The person who delivers the goods.

Parties
Bailee- The person to whom the goods are delivered.
Essentials of Bailment:
Bailment is based upon a contract. Sometimes it could be implied by law as it happens in the
case of finder of lost goods.
Bailment is only for moveable goods and never for immovable goods or money.
In bailment possession of goods changes. Change of possession can happen by physical
delivery or by any action which has the effect of placing the goods in the possession of
bailee.
In bailment, bailor continues to be the owner of goods as there is no change of ownership.
Bailee is obliged to return the goods physically to the bailor. The bailee cannot deliver some
goods, even not those of higher value.
Bailment
Based on Benefit Based on Reward
Exclusive Exclusive Mutual Gratuitous Non-

benefit of benefit of Benefit of Bailment Gratuitous
Bailor Bailee Both Bailment
Possession and custody do not however mean physical delivery of goods.

Constructive delivery could also create a bailor and bailee relationship. This arises in
situations where the bailee is already in possession of goods but agrees to be a bailee
through a contract.
Deposit of money in a bank is not bailment since the money returned by the bank would not
be identical currency notes.
Similarly depositing ornaments in a bank locker is not bailment, because ornaments are kept
in a locker whose key are still with the owner and not with the bank. The ornaments are in
possession of the owner through kept in a locker at the bank.
Bailor’s Rights and Duties

Rights of Bailor
Bailor has a right to enforce the duties of the bailee such as-
Right to claim damages for loss caused by an unauthorized use of the goods bailed;
Right to claim compensation for loss caused by an unauthorized use of the goods bailed;
Right to claim damages arising out of mixing the goods of the bailor with his own goods.
Bailor has a right to terminate the contract if the bailee does anything which is inconsistent
with the conditions of bailment.
Example ‘A’ lets on hire his horse to ‘B’ for his own riding but ‘B’ uses the horse for driving
his carriage. ‘A’ has a right to terminate the contract of bailment.
Bailor has a right to claim the increase or profit from the goods bailed which may have
occurred from the goods value. For example where ‘A’ bails his cow to ‘B’ and if the cow
gives birth to a calf, ‘B’ is bound to return the cow and the calf to ‘A’.
Duties of Bailor
Disclose faults in goods.
Bear Expenses.
Indemnify Bailee
Receipt of goods back on termination of bailment.
Rights of Bailee
To claim compensation for any loss arising from non-disclosure of known defects in the
goods.
To claim indemnification for any loss or damage as a result of defective title.
To deliver back the goods to joint bailor according to the agreement or directions
To deliver the goods back to the bailor whether or not the bailor has the right to the goods.
To exercise his ‘right of lien’. This right of lien is a right to retain the goods and is exercisable
where charges due in respect of goods retained have not been paid. The right of lien is a
particular lien for the reason that the bailee can retain only these goods for which the bailee
has to receive his fees/remuneration.
To take action against third parties if that party wrongfully denies the bailee of his right to
use the goods.
Duties of a Bailee
To take care of goods.
Not to make unauthorized use of goods
Compensation for damage to goods
Return of the goods bailed
Compensation for failure to return
To return any accretion to goods
Delivery of goods to joint bailers
Rights of Lien of Bailee

Lien means to withhold the property of another until lawful charges are paid.
Two types of lien are:
a) General Lien
b) Particular Lien
General Lien
A general lien is the right to retain the property of another for a general of Balance of Account. In
contract the particular lien is the right to retain the particular goods bailed for non-payment
non of
charges/remuneration.
For instance a banker
anker enjoys the right of general lien on cash, cheques, bills of exchange and
securities deposited with him for any amounts due to him.
Particular lien
In accordance with the purpose of bailment if the bailee by his skill or labour improves the goods
bailed,
iled, he is entitled for remuneration for such services. Towards
T wards such remuneration, the bailee can
retain the goods bailed if the bailor refuses to pay the remuneration. Such a right to retain the goods
bailed is right of particular lien. He however does not
n have the right to sue.
Where the bailee delivers the goods without receiving his remuneration, he has a right to sue the
bailor. In such a case the particular lien may be waived. The particular lien is also lost if the bailee
does not complete the work within the time agreed.
Difference between general lien and particular lien

The difference between the two can be summarized as follows:
General lien Particular lien
It is right to detain/retain any goods of the bailor It is right exercisable
rcisable only on such goods in
for general balance of account outstanding respect of which charges are due.
A general lien is not automatic but is recognized It is automatic
through on agreement. It is exercised by the
bailee only by name
It can be exercised against goods even without It comes into play only when some labour or skill
involvement of labour or skill. is involved
Bankers, factors, wharfingers,
fingers, policy brokers etc. Bailee, finder of goods, pledgee,
pledgee unpaid seller,
are entitled to general lien agent, partner etc are entitled to particular lien
Pledge
Pledge is a variety or specie of bailment. It is bailment of goods as security for payment of debt
de or
performance of a promise. There
here is no change in ownership of the property pledged.
Pledgor/Pawner The person who pledges the goods.

Pledgor/Pawner-
Parties
Pledgee/Pawnee The person to whom the goods are
Pledgee/Pawnee-
pledged.
Rights of Pawnee
(a) Right of retainer: Pawnee has right to retain the goods pledged not only for payment of
debt or performance of a promise but also for recovery of debts and all expenses incurred
for preservation of goods pledged. Where ‘M’ pledges stock of goods for certain loan from a
bank, the bank has a right to retain the stock not only for adjustment of the loan but also for
payment of interest.
(b) Right to retention to subsequent debts: Pawnee has a right to retain the goods pledged
towards subsequent advances as well, however subject to such right being specifically
contemplated in the contract.
(c) Right to seek reimbursement of extraordinary expenses: Pawnee has a right to seek
reimbursement of extraordinary expenses incurred. However his right to retain the goods
shall not extend to such extraordinary expenses but is restricted to ordinary expenses.
(d) Right to sue: In the event of pawnor failing to redeem the debt or perform the promise, the
pawnee has a right to sue the goods which he has retained. Under certain circumstances,
sell the goods after giving a reasonable notice, to the pledgor the two rights namely the right
to sue and the right to sell are alternative rights and not cumulative rights.
Rights of Pawnor
(a) Right to redeem: Pawnor has a basic right to redeem the goods pledged by performing his
promise.
(b) Right to sue: Pawnor has a right to sue, but within a period of 3 years in view of provision of
limitation Act only in the event of pawnee refusing to return the goods even after payment
of debt etc.
(c) Right to take care of goods: Pawnor has a right to demand a pawnee to take all reasonable
care and preservation of the goods pledged.
(d) Right to receive increase or profit from the goods: Pawnor is entitled to receive the increase
or profit from the goods if there is any increase/profit relating to it during the pledged
period.
Morvi Mercantile Bank Ltd vs UOI- The owner of the goods can create a valid pledge by transferring
the documents of title relating to goods, to the creditor.
Distinction between Bailment and Pledge

Following are broad distinctions between bailment and pledge:
(a) As to purpose: Pledge is a variety of bailment. Under pledge goods are bailed as a security
for a loan or a performance of a promise. In regular bailment the goods are bailed for other
purpose than the two referred above. The bailee takes them for repairs, safe custody.
(b) As to right of sale: The pledge enjoys the right to sell only on default by the pledgor to repay
the debt or perform his promise, that too only after giving due notice. In bailment the bailee,
generally, cannot sell the goods. He can either retain or sue for non-payment of dues.
(c) As to right of using goods: Pledgee has a right to use goods. A bailee can, if the terms so
provide, use the goods.
(d) Consideration: In pledge there is always a consideration whereas in a bailment there may or
may not be consideration.
(e) Discharge of contract: Pledge is discharged on the payment of debt or performance of

promise.
Agency
The Indian Contract Act, 1872 does not define the word ‘Agency’.
However the word ‘Agent’ is defined as “a person employed to do
any act for another or to represent another in dealings with third
persons”. The third person for whom the act is done or is so
represented is called “Principal”.
(Section 182)
Salient features of Agency

Following are the four salient features of agency
Basis: The basic essence of ‘agency’ is that the principal is bound by the acts of the agent
and is answerable to third parties.
Consideration not necessary: Unlike other regular contracts, a contract of agency does not
need consideration. In other words the relationship between the ‘principal’ and ‘agent’ need
not be supported by consideration.
Capacity to employ an agent: A person who is competent to Contract alone can employ an
agent. In other words, a person in order to act as principal must be a major and of sound
mind.
Capacity to be an agent: A person in order to be an agent must also be competent to

contract. In other words, he must also be a person who has attained majority and is of sound
mind
Modes of Creation of Agency
Creation of
Agency
By operation By express By Implied By

of Law Agreement Agreement Ratification
Estoppel Holding Necessity

Out
(a) Agency by Operation of Law: When the relationship arises between the persons as per
provisions of the present applicable laws, it is said to be an agency by operation of law.
Example- Partners are considered as agents of each other and also of the firm.
(b) Agency by express agreement: A contract of agency can be express or implied. Whether it is
express or implied, it can be by words spoken or written. While the express contract is often
expressed in clear terms, implied contracts are created by circumstances.
(c) Agency by ratification: Agency is also created by subsequent ratification or approach. The
subsequent ratification becomes necessary because the agent acts without the knowledge
or the approval of the principal.
Rules of ratification-
Ratification can be made only by a person was in existence at the time of act.
Ratification must be by a person for whom the act was done, professing him to be a
principal. This implies competency on the part of the person ratifying the act.
Ratification would date back to the date of the act, and validate it.
Ratification may either be express or even implied by the conduct of the person on
whose behalf the act was done.
Ratification must be of the whole act and just for a part of the act.
Ratification [by the purported principal] of the acts of an agent cannot be such as to
create any liability to third parties or cause any injury or damage to third parties.
Ratification cannot be done if the person ratifying is in knowledge of facts which are
materially defective.
Illegal acts cannot be ratified.
Acts which are void ab initio cannot be ratified.
Ratification would be restricted to certain limitations to which original acts are limited
and ratification can be to that portion of exceeded authority by the agent.
(d) Agency by ostensible authority/Agency by Implied Agreement: Where the authority of the
principal is inferred by the conduct of the principal, there the agency through ostensible
authority is born.
Agency by estoppel: If a person permits or represents another to act on his behalf, so that a
reasonable person would infer that the relationship of principal and agent had been created
then he will be stopped from denying his agent’s authority and getting himself relieved from
his obligations to a third party by proving that no such relationship infact existed.
‘A’ informs ‘B’ in the presence and within hearing of ‘P’ that ‘P’ is his agent, Later ‘B’ enters
into contract with ‘P’ thinking that ‘P’ is the agent of ‘A’. in a situation like this neither ‘P’ nor
‘A’ can refuse the obligations under the contract. ‘P’ had become the agent of ‘A’ by
estoppels. ‘P’ will be treated as agent of ‘A’ even if he was not an agent at all.
Agency by Holding out: Under the principle of holding out, one who holds himself out as an
agent of another, then a relationship of agent and principal gets in place. The process of
holding out happens through willful conduct done to create a deliberate impression. In such
a case person concerned is stopped from denying that he is the agent of a principal. The
doctrine of holding out is also applicable in case of partnerships.
Agency by necessity: Sometimes circumstances would compel and a relation of agency
would fall in place. This is often out of necessity.
For example a captain of a ship can borrow money at other ports where are
no agent to act on behalf of the owner, to carryout repairs. He becomes an
agent by necessity.
When Husband and wife are living together, and the husband does not
provide for her necessities, the wife has an implied authority as an agent to
pledge her husband’s credit for bare necessaries.
Extent of Agent’s Authority
a) Agent’s authority in normal circumstances: An agent has the power and authority to do all
acts lawful and necessary in the normal circumstances in discharge of his functions.
For instance, where ‘A’ who lives in Andaman employs ‘B’ as his agent to collect his debts in
kanyakumari, ‘B’ has all the authority including the authority to pursue legal proceedings.
Similarly ‘B’ can also give valid discharge.
[Terguson vs. Uma Chand Bold (1905) 33 Cal. 343]

b) Agent’s authority in emergency: An agent has the authority in an emergency to do all such
acts a man of ordinary prudence would, for protecting his principal from losses under similar
circumstances.
A typical case is where the ‘agent’ who handles perishable goods like ‘mangoes’ can decide
the time, date and place of sale, not necessarily as per instructions of the principal but with
the intention of protecting the principal from losses. Here the agent acts in an emergency
and acts as a man of ordinary prudence.
Duties and Obligations of an Agent

The agent should conduct the business of the principal as per directions of the principal or in
the absence of any directions as per the custom prevalent in the business.
The agent is liable to the principal for any loss if he deviates from the above duty/obligation
where he did not act according to instructions of the principal.
Agent must act always as a person with diligence and skill normally exercised in the trade.
He would otherwise be responsible to compensate the principal for any loss suffered by the
principal for want of his skill.
The agent has to maintain and render proper accounts to principal whenever demanded. He
is bound to pay the principal all sums received. He is bound to maintain accounts even if the
contract is illegal or void.
The agent must in order to obtain instruction, communicate and contact the principal as a
man of ordinary diligence.
Rights of an Agent
An agent is entitled to retain the goods, properties and books for any remuneration,
commission etc due to him.
The principal is bound to indemnify the agent against all consequences of lawful acts done in
exercise of his authority.
Where the agent acts in good faith on the instruction of principal, agent is entitled fro
indemnification of any loss or damage from the principal.
The agent can retain, out of the sums received from the principal, such amounts towards
reimbursement of expenditure, remuneration and advances paid by him on account towards
the business and render accounts only for the balance.
The agent in the normal course is entitled for remuneration as per the contract. In the
absence of any agreed amount of remuneration, he is entitled for usual remuneration which
is customary in the business. However he is not entitled for any remuneration for acts done
through misconduct/negligence.
Personal Liability of the Agent

Where the contract expressly provides for personal liability of the agent
Where the agent signs the negotiable instrument without indicating that he is signing it for
the principal
Where the agent works for a foreign principal
Where the agent acts for a principal who cannot be sued viz Ambassador of a country etc.
Where a Govt. servant enters into a contract on behalf of Union of India in disregard of
Article 299(1)
Where according to usage in trade in certain kinds of business agents are personally liable.
Where the agency is coupled with interest. An agency will be treated as such where the
agent himself has interest in the subject matter. The ‘interest’ of the agent to come under
this category should not be an ordinary ‘interest’ like towards remuneration etc., but should
be a special interest.
Principal’s Liability for Agent’s Act to Third parties

The liability of the principal to third parties would fall under following categories
When agent acts within the scope of his authority: The principal is liable for the acts of the
agent done within the scope of his actual or apparent authority. Where there are specific
restrictions on the authority of the agent, then the principal is not bound by it.
Principal is bound by notice given to agent: The principal is bound by the notice given to the
agent. Knowledge of the agent is knowledge of the principal. Knowledge of a bank manager
is knowledge of the bank. Therefore the principal is bound except where the agent does acts
that are fraudulent.
Termination of Agency
Revocation of authority by the principal
Renunciation of agency by the agent
Completion of business of agency
Death or insanity of principal or agent and
Insolvency of the principal
Irrevocable Agency
Where the agency cannot be terminated, it is called irrevocable agency.
Where agency is coupled with interest then it is a case where the agent has interest in the
subject matter of agency. In this case, agency cannot be terminated except where there is an
express provision, to cause prejudice to the interest of the agent. For the agency coupled
with interest does not come to an end on the death, insanity, or the insolvency of the
principal.
Where the agent has incurred personal liability, principal cannot revoke the agency leaving
the agent. Eg: ‘B’ purchases as per orders of ‘A’ some rice in his personal name. A cannot
revoke the authority.
Where the agent has partly exercised the authority, the authority cannot be revoked, where
‘A’ appoints ‘B’ as his agent to procure 10 bags of rice and ‘B’ procures in the name of ‘A’
then ‘A’ cannot revoke his authority.
Sub-Agent
Sub agency refers to case where an agent appoints another agent.
The appointment of sub agent is not lawful. Because the agent is a
delegate and a delegate cannot further delegate.
Where the sub-agent
agent is properly appointed: where a sub agent is
properly appointed,
ppointed, the principal is bound by his acts and is
therefore responsible to third parties as if he were an agent
originally appointed by the principal.
Substituted Agent
Where an agent, holding authority to name another person, has named another person accordingly,
such person is known as substituted agent. Such agent works under the control and directions of
principal. Privity of contract exists between principal and substituted agent and he is directly liable
to principal for his acts. Such agent
agent can directly claim remuneration from principal.
Multiple Choice Questions
1. A contract of indemnity is a
(a) Contingent Contract
(b) Wagering contract
(c) Quasi Contract
(d) Void agreement
2. A contracts to save B against the consequences of any proceedings, which C may
ma take against B
in respect of a certain sum of 500 rupees. This is a:
(a) Contract of guarantees
(b) Quasi contract
(c) Contract of indemnity
(d) Void contract
3. In a Contract of Guarantee there is/are:

(a) One contract
(b) Two contracts
(c) Three contracts
(d) Four contracts.

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INCORPORATION

Greeberg vs. Cooperstien

Kumarswamy Chettiar vs. ITO

Formation of a Company- Overview

ROC allots Certificate of Incorporation is issued

Step 1: Name Availability

Step 2: Preparation of MOA / AOA

b) Memorandum and Articles of Association: Rule 13 of Companies (Incorporation) Rule, 2014

e) Particulars of Registered Office in Form No. INC. 22.

g) Particulars of First Directors

h) Interests of First Directors along with their Consent in DIR-2.

Step 4: Filing of documents with Registrar of Companies (ROC)

Fees for Incorporation

If Company has Share If Company doesn’t have

Fee based on Authorised Fee based on Number of

Certificate of Incorporation [Sec. 7]

Effect of Registration [Sec. 9]:

Registered office of a company

Every company shall –

Change of registered office outside the jurisdiction of registrar

Application to Regional director Confirms such Change

With the Registrar Company shall file confirmation

Certify the Registration

Effect of furnishing False Particulars

Hari Nagar Sugar Mills Ltd. v. SS Jhunjhunwala

Jubilee Cotton Mills Ltd. v. Lewis

Corporation of India vs. Commercial Tax Officer

Spencer & Co. Ltd Madras vs. CWT Madras

Heavy Electrical Union vs. State of Bihar

Fast Track Process – for Company Registration

SPICe-Simplified Proforma for Incorporating Company Electronically

Process for incorporation of a company is done through

So, now there are 2 ways to incorporate a company:

Key Features of SPICe

1. Explain in brief the process of Incorporation of a company.

Nomination for OPC:

Compliance declaration INC. 8

Private Company Public Company One Person Company

Public OPC Private Private Public

I. Conversion of a Private Company into a Public Company

II. Conversion of Private Company into OPC

Conversion of a Public Company into a Private Company

Bal Ramba vs. AIR Master Silk Mills AIR 1955

As per Companies Act, 2013 not yet notified:

Conversion of One Person Company (OPC) into a Private or Public Company

Compulsory Conversion Optional Conversion

a) Compulsory Conversion: Rules 6 of Companies (Incorporation) Rules 2014

b) Voluntary Conversion: Rule 6 of Companies (Incorporation) Rules, 2014

Documents submission for Registration

Right of Sec. 8 Company:

On revocation, Central Government may direct it to-

Converts its status and

Amalgamate with another

• To promote Charitable objects

• To promote its objectives

How status is granted

• The CG can grant such status

• If conditions of section 8 are contravened, or

Effect of revocation of licence

• Co. has to use words “Ltd.” or “Pvt Ltd.”

2. Situation or Registered Office Clause/Domicile Clause

5. Capital Clause (only in the case of a company having a share capital)

Form of Memorandum [Section 4]