1.

Company and Corporate Veil

Section 2(20) of the Companies Act, 2013 defines the term company: Company
means a company incorporated under this Act or under any previous company
law.

Solomon Vs Solomon & Co Ltd:

Solomon was a leather merchant who converted his business into a Limited
Company as Solomon and Co. Limited. The company so formed consisted on
Solomon, his wife and five of his children as members. The company purchased the
business of Solomon for issuing shares and debentures.

The company in less than one year ran into difficulties and liquidation proceedings
commenced. The assets of the company were not even sufficient to discharge the
debentures (held entirely by Solomon himself). And nothing was left for unsecured
creditors. The liquidator on behalf of unsecured creditors alleged that the company
was a sham and mere alias or agent for Salomon.

The court ruled in Solomons favour.

Lifting of the Corporate Veil

The following are the cases where company law disregards the principle of corporate
personality or the principle that the company is a legal entity distinct and separate from
its shareholders or members:

Daimler Co. Ltd Vs Continental Tyre and Rubber Co Ltd: A company was formed
in England for the purpose of selling tyres made by a German company. The
German company held almost the entire share capital. All the directors were
German residents.

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 During the first world war, this company lodged legal proceeding against another
English company, to recover its debt.

It was held that, the concept of separate legal entity shall be ignored and the
persons in ultimate control of the company shall be considered. Since the
persons controlling the company were enemies, the suit was not maintainable.

The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar vs.

The Associated Rubber Industries Ltd.: As per bonus act, bonus shall be paid on
the profits earned. A company was earning huge profits. The incorporated a
subsidiary company and transferred some valuable investments to it. The
subsidiary company did not do any business, and has no assets except the
investments transferred to it.

Held that, the only motive for incorporating the subsidiary company is to avoid
payment of bonus and therefore the concept of separate legal entity shall not
apply.

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 2. Classes of Companies

1. On the basis of liability:

a) Company limited by shares:

It implies that for meeting the debts of the company, the shareholder may be called
upon to contribute only to the extent of the amount, which remains unpaid on his
shareholdings. His separate property cannot be used to meet the companys debt.

(b) Company limited by guarantee:

Thus, the liability of the member of a guarantee company is limited upto a stipulated
sum mentioned in the memorandum. Members cannot be called upon to contribute
beyond that stipulated sum.

The point of distinction between these two types of companies is that in the case of
Guarantee Company, the members may be called upon to discharge their liability only
after commencement of the winding up and only subject to certain conditions; but in the
latter case, they may be called upon to do so at any time, either during the companys
life-time or during its winding up.

(c) Unlimited company: Companies Act, 2013 defines such unlimited company as a
company not having any limit on the liability of its members.

2. On the basis of members:

(a) One person company: The Companies Act, 2013 introduces a new class of
companies which can be incorporated by a single person. Section 2(62) of the
Companies Act, 2013 defines one person company (OPC) as a company which has only
one person as a member. One person company has been introduced to encourage
entrepreneurship

(b) Private Company [Section 2(68)]: Means a company having a minimum paid-up

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share capital of one lakh rupees or such higher paid-up share capital as may be
prescribed, and which by its articles,
(i) restricts the right to transfer its shares;
(ii) limits the number of its members to two hundred(except in case of One Person
Company):
(iii) prohibits any invitation to the public to subscribe for any securities of the company

(c) Public company [Section 2(71)]: The Companies Act, 2013, defines public company
as a company which-
is not a private company
has a minimum paid up share capital of 5 lakh rupees or such higher paid up capital
as may be prescribed
Seven or more members are required to form the company.

3. On the basis of control:

(a) Holding and subsidiary companies: A Subsidiary is a company in which the holding
company-

- Controls the composition of board of directors

- Controls more than one half of total share capital.

(b) Associate company: In relation to another company, means a company in which that
other company has a control of at least 20% of total share capital

4. On the basis of access to capital:

(a) Listed company: It is a company which has any of its securities listed on any
recognised stock exchange.

(b) Unlisted company: means company other than listed company

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5. Other companies:

(a) Government company: means any company in which not less than fifty- one per
cent of the paid-up share capital is held by-
(i) the Central Government, or
(ii) by any State Government or Governments, or
(iii) partly by the Central Government and partly by one or more State Governments,
And the section includes a company which is a subsidiary company of such a
Government company;

(b) Foreign Company: means any company or body corporate incorporated outside
India which
(i) has a place of business in India whether by itself or through an agent, physically
or through electronic mode; and
( ii) conducts any business activity in India in any other manner

(c) Formation of companies with charitable objects etc:

Section 8 of the Companies Act, 2013 deals with the formation of companies which are
formed to promote the charitable objects of commerce, art, science, sports, education,
research, social welfare, religion, charity, protection of environment etc. Such company
intends to apply its profit in promoting its objects and prohibiting the payment of any
dividend to its members.

(d) Dormant company: Where a company is formed and registered under this Act and
has no significant accounting transaction, such a company or an inactive company may
make an application to the Registrar in such manner as may be prescribed for obtaining
the status of a dormant company.

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(e) Public financial institutions: By virtue of Section 2(72) of the Companies Act,
2013 the following institutions are to be regarded as public financial institutions.
(i) the Life Insurance Corporation of India, established under the Life Insurance
Corporation Act, 1956;
(ii) the Infrastructure Development Finance Company Limited,
(iii) specified company referred to in the Unit Trust of India (Transfer of Undertaking
and Repeal) Act, 2002;

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 3. Incorporation of a Company
Promotion and Promoter
Promotion: The term Promotion means all those steps that are required to bring a company
into existence and continues until BOD take the charge of the company.

Promoter:

Promoter means a person who generates the idea of incorporating the company and takes all
the effective steps to incorporate it.

Position of Promoter: A Promoter is neither an agent nor a trustee of the company, since the
company has not yet come into existence. However, his position is similar to that of an agent
and trustee.

Duties of Promoter: A promoter should not make any secret profit from the company. Law
does not prohibit making profits, but it prohibits secret profits. So, when a promoter makes any
profit from any transaction, it must be disclosed to the BOD.

Remedies available to company against the promoter: When a promoter makes a secret profit
and afterwards, the company comes to know about the fact, the company will have the
following remedies/options:

Rescission: The Company may rescind the contract. However, rescission must be made
in reasonable time.
Recover Secret Profit: The Company may recover the secret profit made by the
promoters.
Suit: The company may sue the promoters in the court of law

Promoter remuneration or reimbursement:

(a) The Promoters shall have no right to

Receive any remuneration from the company; or
Recover the expenses properly incurred by them for the incorporation of the company

Unless the company after incorporation has contracted the same.

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 (b) Even if the AOA provides that the company shall pay remuneration to the promoters or
reimburse expenses incurred by them, such a provision is not binding on the company.

Mode of payment of remuneration: The Company may pay remuneration to the promoters in
any of the following ways:

Issue of Shares at discount

Right to subscribe for companys shares in future at fixed price.
Purchase of property of promoters at higher price.
Paying any lump sum remuneration

Procedure for Incorporation of Company:

In order to incorporate a company, there must be association of persons with a common
lawful object, desirous of forming a company.

Subscription: The memorandum and articles must be subscribed by at least 7 persons in

case of a public company and at least two persons in case of a private company and 1
person in case of a One-Person company.

Availability of name: An application in Form-1A shall be made to the ROC for ascertaining
the availability of proposed name and if the name is available.

Documents required to be filed with the registrar: After obtaining the approval of name,
the following documents shall be filed with the registrar:

a. Memorandum of association.
b. Articles of Association
c. Form No.1 (Statutory declaration that all requirements of company registration are
met)
d. If a Managing Director, Whole time director or manager is proposed to be
appointed, the agreement entered into by the company with such person.
e. Form 18: Address of registered office of the company.
f. Form 32: Particulars of Directors, manager and secretary

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The ROC shall verify the documents submitted and shall issue a Certificate of Incorporation
(COI).

Mode of formation of One-Person Company:

The memorandum of OPC shall indicate the name of the other person, who shall, in
the event of the subscribers 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
written consent in prescribed form and the same shall be filed with Registrar of
companies at the time of incorporation.

Only a natural person who is an Indian citizen and resident in India (person who has
stayed in India for a period of not less than 182 days during the immediately
preceding one calendar year )-
shall be eligible to incorporate a OPC;
shall be a nominee for the sole member of a OPC.

No person shall be eligible to incorporate more than one OPC or become nominee in
more than one such company.
No minor shall become member or nominee of the OPC or can hold share with
beneficial interest.
Such Company cannot be incorporated or converted into a company under section 8 of
the Act.
Practice Manual Questions
What is the meaning of Certificate of Incorporation under the provisions of the
Companies Act, 2013?

Registrar shall on the basis of documents and information filed for the formation of a
company, shall register the said documents and information and issue a Certificate of
Incorporation.

On and from the date of incorporation mentioned in the certificate of incorporation the
Registrar shall allot to the company a Corporate Identification Number(CIN).

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The company becomes a legal entity from the date mentioned in the certificate of
incorporation and continues to be so till it is wound up.

State the conditions which are applicable for the purpose of commencement of
business by a public company under the Companies Act, 2013.

A declaration is filed, by a director in such form and verified in such manner as may
be prescribed, with the Registrar that every subscriber to the Memorandum has paid
the amount in respect of the paid up value of shares agreed to be taken by him and
that the paid up capital of the company is not less than ` 5 Lakhs in case of a public
company and ` 1 Lakh in case of a private company, as on the date of the
declaration; and
The company has filed with the Registrar a verification of its Registered Office

Though six out of seven signatures to the Memorandum of Association of a

company were forged, the company was registered and the Certificate of
Incorporation was issued. Can the registration of the company be challenged
subsequently on the ground of forged signatures?

Or
The Memorandum of Association of a company was signed by two adult members
and by a guardian of the other five minor members, the guardian signing
separately for each minor member. The Registrar registered the company and
issued under his hand a Certificate of Incorporation. Is the certificate valid?

The facts in the above case are similar to that of the case law,

Moosa Vs Ibrahim

In the above case, the Memorandum of Association was signed by two adults and one
guardian representing five other minor members. The ROC has issued the Certificate of
Incorporation.

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 4. Memorandum and Articles
Memorandum definition by Palmer: Memorandum contains the objects for which
the company is formed and therefore, identifies the possible scope of its operations
beyond which its actions cannot go.

Requirements of a MOA: The memorandum shall-

a) Be printed.
b) Be divided into paragraphs numbered consecutively.
c) Be signed by each subscriber to memorandum
d) Include the name of at least one witness who shall attest the signature of
the subscribers.

Name Clause of Memorandum:

No Company shall be registered by a name which, in the opinion of CG, is

undesirable.
A name is deemed to be undesirable if it is identical with or too nearly
resembles-
a) The name by which company in existence has been previously registered, or
b) A registered trademark; or
c) A trademark which is subject of an application for registration.

Case Law: Ewing who traded under the name Buttercup Diary Company sued to
restrain(stop) a newly registered company called Buttercup Margarine Company Ltd,
which is dealing in the same dairy business, from using the name on the grounds that
the general public might reasonably believe that there was a link between the two
businesses.

HELD: Ewing was successful.

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Guidelines regarding name:

The name should not be such as will deceive or mislead the public.
The name should not be prohibited under the Emblems and Names Act, 1950
The name should not be similar to the name of a famous person.
The name should not contain the word co-operative
The name or surname of a person can be used in the name of the company only
if such person is a promoter or director of the company.

Alteration in Name Clause of Memorandum [May 2012 and 4 times before]:

Change of Name:

The company shall pass a Special Resolution in the General Meeting

The company shall obtain the approval of the CG (ROC).
The approval of CG for change of name is not required to add the word Private
when a Public Company has converted into a Private company, and to remove
the word Private when a Private company is converted into a public company.

Effects of alteration of name:

The ROC shall issue a fresh COI

The MOA shall be altered.
The rights and obligations of the company shall not be affected by the change of
name (existing legal proceedings if any shall continue).

Question: Krishna Dairy Limited is an existing company. Later on, a new company with
name Krishna Dairy Products Limited is formed. What are the remedies available to
Krishna Dairy Limited? [Similar question asked in Nov 2002, May 2003, Nov 2005]

Answer:

1. The new company name too nearly resembles to the existing company.
2. Krishna Dairy Limited shall make an application to the CG, seeking a direction from
CG to Krishna Dairy Products Limited to rectify its name.
3. Krishna Dairy Products Limited shall rectify the name within 3 months from of
receipt of the direction of the CG. 12 | P a g e
 Situation Clause of MOA

Importance of Registered Office of the company : [May 2007, Nov 2011, Nov 2013]:

Books of Account along with relevant vouchers shall be kept at the

registered office.
Minutes book of Meetings shall be kept at Registered Office
Register of Members, Register of Debenture holders shall be maintained
here.
The jurisdiction of the court shall be decided based on the registered
office of the company.
Meetings of the company are generally held at the Registered Office

Shifting of Registered Office from State to another [Nov 2013, Nov 2011 + 5 times..]:

An application for alteration shall be made to the CG.

Notice shall be served on the ROC who shall have right to state his objections and
suggestions.
CG shall consider the rights and interests of members and creditors.
Filing Requirements: The order of the CG and the altered MOA shall be filed with
the register of each state within 3 months from the date of CG order.
The ROC of the new state shall give a certificate of registration of alteration (just
like an acknowledgement) of registered office, within one month.

Re.Orient Paper Mills Ltd: A company made an application for shifting its registered
office from Orissa to west Bengal. The reason sought by the company is that, it will have
less tax burden due to the change of state. The change was refused by the ROC, on the
ground that Less tax burden is not an appropriate ground/reason for shifting registered
office.

Minerva Mills Ltd Vs Govt of Maharashtra: The Govt cannot refuse the shifting of
registered office merely on the ground that the change will result in loss of revenue to a
state. The question of loss of revenue is to be considered form the point of view of total
revenue of Republic of India, but not for a particular state. 13 | P a g e
Changing Registered Office within local limits of the city:

The company shall pass a Board Resolution.

The company shall give notice to ROC (in form.18) within 30 days.

Change outside local limits but within the same state:

The company shall pass a SR

The company shall give notice to ROC (in form.18) within 30 days.

Alteration of Objects Clause of MOA:

The company shall pass a Special Resolution for approving the change.
A copy of SR and altered MOA shall be filed with the ROC within 1 month
The ROC shall register the alteration within 1 month and issue a certificate of
registration of alteration.
The alteration shall not be effective until it is duly registered by the ROC

Specified Purposes for alteration of objects clause [May 2004, Nov 2006, May 2008]:

A company can change its objects clause only if the change will enable the company-

(a) to carry on its business more economically or more efficiently;

(b) to attain its main purpose by new or improved means;
(c) to enlarge or change the local area of its operations;
(d) to carry on some business which under existing circumstances may
conveniently or advantageously be combined with the business of the company;
(e) to restrict or abandon any of the objects specified in the memorandum;
(f) to sell or dispose of the whole, or any part, of the undertaking, or of any of the
undertakings, of the company; or
(g) to amalgamate with any other company or body of persons.

Alteration of Objects related Case Law:

A company formed with the object of generation of electricity was allowed to carry on
cold storage business [Re.Ambala Electric Supply Co. Ltd]
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Alteration of Liability Clause of the MOA:
General Rules of Liability Clause: The liability of an member cannot be increased --

By requiring to subscribe for additional shares**;

By requiring to pay more than what he has guaranteed.**
Or in any manner whatsoever

[** If the member agrees for that increase in writing , the company can require the
member to pay such additional amount]

Alteration of Capital Clause of the MOA:

Alteration of capital clause will include-

Increase in the Share Capital by issuing new shares.

Consolidate and divide share capital into shares of larger amount**.
Sub-divide shares into shares of smaller amount (##explained below).
Cancel shares which not have been taken by any person [diminishing the share
capital]

**The Share Capital of Company consists of 100,000 shares of Rs. 10 each. Under
consolidation, the company will consolidate (combine) the entire share capital and
divide it into Rs.100 share each. Now the number of shares will come down to
10,000, but the total share capital amount will remain the same.

## The Share Capital of Company consists of 100,00 shares of Rs. 50 each. Here, the
company will sub-divide the entire share capital Rs.25 share each. Now the number
of shares will come down to _______ , and the resulting share capital is _________.

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Requirements for alteration of Share Capital:

The alteration should be allowed by AOA.

Pass an OR
Notice to ROC within 30 days

Articles of Association

Amendment/Alteration in AOA:

A Special Resolution shall be passed for the alteration

CG approval is required, if the alteration is being made while converting a Public
Co into a Private company.
The company will be required to file within fifteen days the altered Articles with the
Registrar along with necessary documents, such as the copy of the special resolution
etc, and in such manner as may be prescribed.
On receipt of all documents the Registrar shall register the same..

The AOA shall be

a) Be printed.
b) Be divided into paragraphs numbered consecutively.
c) Be signed by each subscriber
d) Include the name of at least one witness who shall attest the signature of
the subscribers.

Restrictions/Limitations for Amendment of AOA [May 2014 ] Write any 5 in exam:

The AOA is subordinate to MOA. In case of any contradictions, MOA shall prevail
over AOA

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a) The alteration must not exceed the powers given by the Memorandum of Association
of the company or conflict with the provisions thereof.
b) It must not be inconsistent with any provisions of Companies Act or any other
statute.
c) It must not be illegal or against public policies
d) The alteration must be bona fide for the benefit of the company as a whole.
e) It should not be a fraud on minority, or inflict a hardship on minority without any
corresponding benefits to the company as a whole.
f) The alternation must not be inconsistent with an order of the court. Any subsequent
alteration thereof inconsistent with such an order can be made by the company only
with the leave of the court.
g) The alteration cannot have retrospective effect. It can operate only from the date of
amendment.

Practice Manual Questions

The Articles of a Public Company clearly stated that Mr. A will be the solicitor of
the company. The company in its general meeting of the shareholders resolved
unanimously to appoint B in place of A as the solicitor of the company by
altering the articles of association. Examine, whether the company can do so?
State the reasons clearly.

Procedure for alteration of AOA:

A Special Resolution shall be passed for the alteration

CG approval is required, if the alteration is being made while converting a Public
Co into a Private company.
The company will be required to file within fifteen days the altered Articles with the
Registrar along with necessary documents, such as the copy of the special resolution
etc, and in such manner as may be prescribed.
On receipt of all documents the Registrar shall register the same..

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In the present case, the company has altered the Articles by a unanimous resolution of the
members passed at a general meeting.

Hence, the alteration is valid.

The Directors of a company registered and incorporated in the name Mars

Textile India Ltd. desire to change the name of the company entitled National
Textiles and Industries Ltd. Advise as to what procedure is required to be
followed under the Companies Act, 2013?

Procedure for change of Name:

In the first instance, Mars Textile India Ltd., should ascertain from the Registrar of
Companies whether the proposed name viz. National Textiles and Industries Ltd. is available
or not.

For this purpose, the company should file the prescribed Form No.1A with the Registrar
along with the necessary fees.

In case the name is available, the company has to pass a special resolution approving the
change of name to National Textiles and Industries Ltd.

Thereafter the approval of the Central Government should be obtained.

The change of name shall be complete and effective only on the issue of a fresh certificate
of incorporation by the Registrar.

Change of registered office from the jurisdiction of one Registrar to the other
Registrar within the same State:

A change of registered office from the jurisdiction of one registrar to another does not
involve an alteration to the Memorandum of a company as the location clause in the
Memorandum merely states the name of the state

However, A Special Resolution shall be passed for such change.

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 5. Prospectus
Prospectus: Companies Act, 2013 defines prospectus as any document described as
issued as prospectus and includes red herring prospectus or shelf prospectus or any
notice, circular, advertisement or other document inviting offers from the public for
subscription or purchase of any securities.

Issue of Shares/Securities by Public Company:

A public company may issue securities in the following manner:

a) to public through prospectus (herein referred to as "public offer"), or

b) through private placement; or
c) through a rights issue or a bonus issue, and
d) in case of a listed company or a company which intends to get its securities listed
(unlisted companies), with the provisions of the Securities and Exchange Board of
India Act, 1992 and the rules and regulations made there under.

Issue of Share by Private Company:

a) by way of rights issue or bonus issue; or

b) through private placement.

Power of SEBI to regulate issue and transfer of Securities:

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 recognised stock exchange in India be administered by
SEBI.

b) in any other case, be administered by the Central Government.

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Offer or Invitation to public:

Offer or invitation to public includes invitation to any section of public, members or

debenture holders of the company, clients of the person issuing the prospectus or in any
other manner.

[Where the invitation is issued to domestic concern (means, close relatives and friends
not exceeding 50), it is not treated as a public offer].

Rattan Singh Vs Moga Transport Co.:

Rattan Singh is the director of the company and offered shares to his kith and kin. Held
that this is not an offer to public and but is distributed among close circles.

Pramatha Nath Sanya Vs Kali Kumar Dutt:

An advertisement was issued in a newspaper stating that some shares were still
available for subscription. Held the advertisement is ____________________

When prospectus is not required to be issued?

When invitation is made to existing members.
For Shares being traded on a stock exchange.
Where the securities are issued by a Private Company.
Where no offer is made to public.

Legal Rules as to Prospectus [Also asked as Requirements of Prospectus]:

Registration: A Prospectus shall be registered with the registrar before it is issued to the
public.

Signing: It shall be signed by every director and proposed director.

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Time limit for issue of Prospectus: The prospectus shall be issued within 90 days from
the date of registration with ROC.

Effective date: The date of issue of prospectus is the date on which it first appears as an
advertisement on a newspaper.

Expert Statement: Expert includes an engineer, a valuer, a Chartered Accountant,

Company Secretary or Cost Accountant or any other person who has the power or
authority to issue a certificate in pursuance of any law.

The expert must have given his consent for the prospectus.
The expert must not have withdrawn his consent before the delivery of
prospectus to registrar.
The Prospectus must disclose the fact that the expert has given his consent.
The Expert is not and was never interested in the promotion and formation or
management of the company.

Advertisement of Prospectus:
Where an advertisement of prospectus is published in any manner, it should include the
following particulars:

The objects of the company.

The liability of members.
The amount of share capital.
Names of Subscribers to MOA.
Capital Structure of the company.

Types of Prospectus

Abridged Deemed Shelf Red Herring

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Abridged Prospectus:
Abridged Prospectus contains the salient features of a prospectus. No application
forms for shares shall be issued without attaching the Abridged Prospectus.

When abridged prospectus is not required:

Where securities are not offered to public.

Where applications are issued for an underwriting agreement.

Shelf Prospectus and Information Memorandum:

"Shelf prospectus" means a prospectus in respect of which the securities or
class of securities included therein are issued for subscription in one or
more issues over a certain period without the issue of a further prospectus.

The Shelf Prospectus shall indicate a period not exceeding 1 year as the
period of validity of such prospectus.
The period of 1 year shall commence from the date of opening of the
first order of securities under the shelf prospectus.
With respect to second or any subsequent offer of such securities issued
during the period of validity of shelf prospectus, no further prospectus
shall be issued.

Information Memorandum:

Prior to the issue of second or subsequent offer of securities under the shelf
prospectus, the company shall be required to file an information memorandum
with the Registrar.
The information memorandum shall be filed with the registrar within such time
as may be prescribed.
The information memorandum shall contain all material facts relating to new
charges created, changes in the financial position of the company.

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Red Herring Prospectus:
The expression "red herring prospectus" means a prospectus which does not
include complete particulars of the quantum or price of the securities included
therein.

Company proposing to make an offer of securities may issue a red herring

prospectus prior to the issue of a prospectus.
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.
Any variation between the red herring prospectus and a prospectus shall
be highlighted as variations in the prospectus.
Upon the closing of the offer of securities, the prospectus stating therein
the total capital raised, whether by way of debt or share capital and any
other details as are not included in the red herring prospectus shall be
filed with the Registrar and the Securities and Exchange Board.

Contents of a Prospectus:
General information like Name and address of registered office of the company,
the date of opening and closing of the issue etc.
Capital structure of the company
History of the company, its subsidiaries, managers, MD
Pending litigations against the company.
The high and low prices of shares in last 3 years.
Statutory information like amount of minimum subscription, underwriting
commission, particulars of previous issues etc.

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Remedies against the company for mis-statement in prospectus:
An investor has the right to rescind the contract on the basis of any false or untrue
statement in the prospectus.

Conditions for rescission:

There must be false representation of fact.

The fact should be material.
The investor must have relied on prospectus (The false representation must have
induced the investor to purchase shares)
The investor rescinds the contract in a reasonable time.

When the right of rescission is lost?

Lapse of reasonable time.

Investor has adopted the contract (with full knowledge of the mis-statement)
Start of liquidation.

Remedies against Promoters, Directors and Experts [5 Marks Imp]

[also asked in exam as What is the Civil Liability for mis-statement in prospectus]:

This provision will apply when a person has subscribed for companys shares and has
suffered any loss or damage due to misleading prospectus.

Who are liable for mis-statement?

The company
Every person who is a director of the company at the time of issue of prospectus.
Every person who has authorized himself to be named and is named in the
prospectus as a director of the company.
Every person who has agreed to become a director of the company, either
immediately or later some time.
Every person who is a promoter of the company.

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 Every person who has authorized the issue of the prospectus.
Every person who is an expert.

However, any of the above persons (mentioned in the list) is not liable if he proves-

a) The prospectus was issued without his knowledge or consent, and has given a
public notice regarding the same.
b) That, the director has withdrawn his consent before the issue of prospectus.

Punishment for fraud:

If a person makes any statement or promise which is false, misleading or deliberately hides any fact,
such person shall be liable for punishment for fraud.

Fraud involves Any other case

public interest
Minimum imprisonment 3 years 6 months

Maximum imprisonment 10 years 10 years

Minimum fine Amount involved in the Amount involved in the

fraud fraud
Max.Fine 3 times the amount 3 times the amount
involved in the fraud involved in the fraud

Statement in lieu of prospectus:

Statement in lieu of prospectus shall be filed with ROC at least 3 days before the
allotment of shares, if-

a) The company does not issue prospectus; or

b) The company issues a prospectus but does not proceed to allot the shares to the
public.

It must be signed by every director or proposed director..

25 | P a g e
If the statement in lieu of prospectus is not filed with the ROC in time, the allotment is
voidable at the option of the investor.

Non-applicability:

Private Company
Company having no share capital
Subsequent allotment of shares by public company.

26 | P a g e
 6. Share Capital & Membership
Allotment of Shares

Allotment of shares is the acceptance by the company of the offer to buy shares in
response to an issue of shares.

Prohibition on allotment of securities: No allotment of any securities of a company

offered to the public for subscription shall be made, unless the amount stated in the
prospectus as the minimum amount has been subscribed and the sums payable on
application for the amount so stated have been paid to and received

Minimum amount payable on security: The amount payable on application on every

security shall not be less than five per cent. of the nominal amount of the share.

Minimum amount to be received within 30 days: If the stated minimum amount has
not been subscribed and the sum payable on application is not received within a period
of thirty days from the date of issue of shares, the amount received shall be refunded
to the shareholders.

Filing of return of allotment: A Return of allotment shall be filed with ROC.

Procedure for Private placement of shares:

Issue of private placement offer letter: A company may make private placement
through issue of a private placement offer letter.
Offer/ invitation to number of persons: The offer of securities or invitation to
subscribe shares, shall be made maximum to 50 persons (Excluding Institutional
buyers).
Payment of amount : All monies payable towards subscription of securities under
this section shall be paid through cheque or demand draft or other banking
channels but not by cash.
Time for allotment of securities: A company making an private offer shall allot its
securities within 60 days from the date of receipt of the applications.

27 | P a g e
 Default in allotment of securities: Where the company is not able to allot the
securities within stated period, it shall repay the application money to the
subscribers within 15 days.
Filing with the registrar: Whenever a company makes any allotment of securities,
it shall file with the Registrar a return of allotment.

A public limited company which went in for Public issue of shares had
applied for listing of shares in three recognised Stock Exchanges and
out of it only two had given permission for listing. Can the company
proceed for allotment of shares?

Every company making a public offer shall, before making such offer, make an
application to one or more recognised stock exchange or exchanges and obtain
permission to trade its shares in such stock exchange or exchanges.

A prospectus shall also state the name or names of the stock exchange in which the
shares shall be dealt with.

From the above it is clear that not only has the company to apply for listing of the
securities at a recognized stock exchange but also obtain permission thereof before
making the public offer.

Hence, the company has violated the provisions of Companies Act and therefore
liable to pay prescribed fine.

When is an Allotment of Shares treated as an irregular allotment? State

the effects of an irregular allotment.

The Companies Act, 2013 does not separately provide for the term Irregular Allotment
of securities. Hence, one will have to examine the requirements of a proper issue of
securities and consider the consequences of non fulfilment of those requirements.

28 | P a g e
Types of Shares:
(a) Preference Shares: A Preference share holder will have preferential right in
dividend and also preferential right in the capital of the company in the event of
its winding up.
(b) Equity Shares: Shares other than preference shares are called equity shares.
Equity shares do not enjoy fixed dividend.

Classification of Share Capital:

Authorized Capital / Nominal Capital
Issued Capital
Subscribed Capital
Called up capital
Paid up capital

Redemption of Preference shares:

The term of redeemable preference shares shall not exceed 20 years.

Conditions for redemption:

No authorization is required in articles to redeem preference shares.

The preference shares must be fully paid up.
Redemption can be made out of profit or fresh issue of shares.
If any premium is being paid on redemption, the profits of the company or
securities premium account shall be utilized.
Creation of an account named CRR (Capital Redemption Reserve) is mandatory if
redemption is made out of profits. An amount equal to the nominal amount of
preference shares shall be transferred to CRR.
The CRR shall be utilized only for the purpose of issuing fully paid bonus shares.
A notice shall be given to ROC within 30 days from the date of redemption.

29 | P a g e
Reduction of Share Capital:
Under Reduction of share capital, the company reduces the liability on any of
its shares, in respect of share capital not paid-up.

Khan Construction Pvt Ltd has issued 10,000 shares of Rs.10 each. The company can
reduce the nominal capital of each share to Rs.5. Then, the members need not pay
the remaining Rs.5/-, that is due on their shares.

Reduction of share capital can also be done through Cancellation

Cancellation of share capital example: It is less frequently used method. In this method,
say for example, company has share capital of 100,000 fully paid up. The company also has
accumulated loss of Rs.50,000. The company can write off the loss against share capital
and thereby reducing the nominal value per share to Rs.5 (100,000 50,000)/10,000.

Procedure for reduction of share capital:

AOA shall have a provision regarding reduction of share capital.
A Special Resolution shall be passed by company.
A court approval is required. Court shall take the consent from creditors.
The court may direct the company to add words and reduced at the end of the
companys name.
The SR and courts order shall be registered with ROC.

Issue of Sweat Equity Shares:

A Special Resolution shall be passed at the GM specifying the number of shares,
current market price, consideration if any, and details of directors and employees
to whom they are being issued.
At the date of issue, at least 1 year must have been elapsed since the company
has commenced its business.

30 | P a g e
Issue of Shares at premium:
No provision is required in AOA for issuing shares at premium. Companies Act, does not
prescribe any restriction. The securities premium collected shall be transferred to
separate account called Securities Premium Account.

Utilization of Securities Premium Account

Issuing fully paid bonus shares.
Wirting off the preliminary expenses of the company.
Writing off commission paid on issue of shares or debentures of the company.
Writing off the discount allowed on issue of shares or debentures.
Providing for premium payable on the redemption of any redeemable
preference shares or debentures of the company.
For buy back of shares.

Issue of shares at discount:

According to section 53, a company shall not issue shares at a discount, except in the
case of an issue of sweat equity shares

Any share issued by a company at a discounted price shall be void.

Where a company contravenes the provisions of this section, the company shall be
punishable with fine which shall not be less than one lakh rupees but which may extend
to five lakh rupees.

Every officer who is in default shall be punishable with imprisonment for a term which
may extend to six months or with fine which shall not be less than one lakh rupees but
which may extend to five lakh rupees, or with both.

31 | P a g e
Issue of Bonus shares:
AOA shall authorize the bonus issue.
Bonus shares shall be issued from:
Undistributed profits available for dividend.
Securities Premium account.
Capital Redemption Reserve.
An OR shall be passed in the meeting.
Bonus shares shall be fully paid-up.
Bonus shares can be issued to only existing share holders.

Share Certificate:
Issue of share certificate is mandatory for every company having share capital, whether
public or private.

A share certificate is issued under the common seal of the company and shall have the
details like Name of the Company, Date of Issue of share certificate, Name of the
member, Number of shares held, Amount paid-up. It shall be signed by 2 directors and a
secretary.

Time limit for delivery of share certificate:

3 months from the date of allotment.

2 months from the date of receipt of transfer deed.

Issue of duplicate share certificate:

A duplicate share certificate shall be issued if it is proven that it is lost or destroyed.

A prior Board approval shall be obtained.
A company may charge fee, but not more than Rs.2/-
The words Duplicate shall be stamped on it.
The company shall maintain a register of such duplicate certificates issued.

32 | P a g e
 Membership in a Company

How to become a member in a company [Modes of acquiring membership]:

By Subscribing to Memorandum: The people who have subscribed to shares in

MOA will, by default become members in a company and no special allotment is
required.
By allotment of shares: Where company makes share allotment, the applicant of
shares becomes share holder. He becomes a Member only when the name is
entered in the Register of Members.
By transmission: A person entitled to shares of a member, as a consequence of
transmission, when he gives a notice of transmission to the company and
company enters his name in register of Members.
Other common modes are by Transfer, by beneficial ownership.

Capacity to become a Member:

Minor: Where a company allots shares to a minor, the consequences are,

The minor shall not be The guardian shall The minor shall The company shall
liable to pay any calls not be compelled to repudiate the repudiate the
remaining unpaid on pay amount due on contract and shall contract and pay
shares held by him. shares get the money back back the money.

After attaining majority, the minor does not become automatically become a member,
unless he accepts the membership.
A minor can hold fully paid-up shares: There is no legal bar on minor becoming a
member of a company, provided minor acquires the shares by way of transfer and
the shares are fully paid-up and no further obligations are attached to the shares
[S.L.Bagree VS Britannia Industries Ltd]

33 | P a g e
Condition for the issue of equity shares with differential rights:

No company limited by shares shall issue equity shares with differential rights as to
dividend, voting or otherwise, unless it complies with the following conditions, namely:
the articles of association of the company authorizes the issue of shares with
differential rights
the issue of shares is authorized by an ordinary resolution passed at a general
meeting of the shareholders.
the shares with differential rights shall not exceed 26 percent of the total post-
issue paid up equity share capital
the company having consistent track record of distributable profits for the last
three years
the company has not defaulted in filing financial statements and annual returns
for three financial years immediately preceding the financial year in which it is
decided to issue such shares

34 | P a g e
 9. Meetings & proceedings
Every company (other than a One Person Company) must hold in each year a general
meeting in addition to any other meetings as its annual general meeting (AGM).

First Annual General Meeting: In case of the first annual general meeting, it shall be
held within a period of nine months from the date of closing of the first financial year of
the company

Provided further that if a company holds its first annual general meeting as aforesaid , it
shall not be necessary for the company to hold any annual general meeting in the year
of its incorporation.

Holding of subsequent AGM:

AGM is to be held in each calendar year.

AGM is to be held within 15 months of last AGM.
AGM is to be held within 6 months of close of financial year.

ROC has power to give a 3 month extentsion.

The AGM, including the adjournment if any, shall be completed within the
statutory time limit specified above. In other words, an AGM cannot be
adjourned to that date, that falls beyond the statutory time limit.

[Bejoy Kumar Karnani Vs Assistant ROC]

Date, time and place of AGM: Every annual general meeting shall be called during
business hours, that is, between 9 a.m. and 6 p.m. on any day that is not a National
Holiday

35 | P a g e
Calling of extraordinary general meeting:

The Board may, whenever it deems fit, call an extraordinary general meeting of the
company.

(2) Board on requisition of members: The Board shall, at the requisition made by,
(a) in the case of a company having a share capital, such number of members who
hold atleast 10% paid-up capital or voting power in the company;
(b) in the case of a company not having a share capital, such number of members
who have atleast 10% voting power

-can call an extraordinary general meeting of the company

Time period for calling the meeting: The Board is required to proceed to call a meeting
within 21 days from the date of receipt of requisition, to convene a meeting which
should be held within 45 days of such deposit of the requisition with the company.

Requisitionists to call the meeting on the failure of the Board: If the Board fails to call
the EGM in the time period provided then the requisitionists may call an EGM
themselves within 3 months from the date of requisition.

Requisites of a Valid General Meeting:

The meeting must be called by a proper authority.
Proper notice must be served in a prescribed manner.
Proper quorum must be present in the general meeting.
Proper chairman must preside the meeting.
The business must be validly transacted.
Proper minutes of meeting must be prepared.

36 | P a g e
Proper Authority to call meeting:
BOD has power to call for a GM.
An individual director or secretary has no power to call a GM.

Length of Notice for calling GM:

A GM can be called by giving at least 21 clear days notice in writing, excluding the
date of issue of notice.
Where a notice is sent through post, it shall be deemed that the shareholder has
received the notice 2 days after the posting.
Therefore, notice must be dispatched 24 days before the date of meeting.
For any shorter notice, the unanimous approval (100%) of members shall be
obtained in writing for a AGM. For any other General Meeting, 95% approval
shall be obtained.

The consent of members, in case of shorter notice can be obtained in writing wither
before, or during or after the meeting.

Date of dispatch of Date of GM No of clear days Valid notice or not

notice
01-10-2014 20-09-2014 16 Invalid
01-09-2014 25-09-2014 21 Valid
07-05-2014 21 Valid
15-02-2014 21 Valid

The notice shall state the Place, Day and Hour of the meeting and the agenda.
Notice shall be served to every member, legal representatives of deceased
member, official assignees of insolvent member, Auditor.

37 | P a g e
Ordinary Business to be transacted at GM:
At an AGM, following businesses shall be ordinary businesses:

Consideration of financial statements, Boards Report, Auditors Report.

Declaration of Dividend.
Retirement and appointment of new directors.
Retirement of Auditors and appoint of new auditors.

Special Business to be transacted at GM:

All business except the ordinary business shall be deemed special business. Where a
special business is to be transacted a general meeting, an explanatory statement
containing the facts relating to such special business shall be attached to Notice for
general meeting.

Quorum for General Meeting:

Quorum means the minimum number of members who must be present in order to
constitute a valid meeting.

Quorum for a private company is 2 members personally present.

In case of a Public Company;

Number of Members in the company as Required quorum

on the date of Meeting
Upto 1,000 5 members personally present

More than 1,000 but upto 5,000 15 members personally present

Exceeds 5,000 30 members personally present

Quorum is the minimum number prescribed by the statute. Therefore, Articles of a

company can prescribe for a higher quorum.

38 | P a g e
Lack of quorum:
The meeting shall adjourn to such day, time and place as may be determined by
the Board.
If BOD havent decided, the meeting shall adjourn to same day, time and place
next week.

Quorum needs to be present only at the commencement of meeting. That means, the
Chairman of GM: is not necessary for passing each and every resolution.
quorum requirement

The members personally present at the meeting shall elect one of themselves to
be the chairman, on show of hands.
If demanded, the Chairman shall also be elected by Poll.
A Chairman shall have a casting vote, which is a second vote, which he can
exercise in case of equality of votes.

Chairman will have voting rights just like the normal share holder. Casting vote will
come into scene only during OR, because, the problem of equality of votes does not
arise for SR.

Proxy:
A member of a company can appoint a person as his proxy to attend and vote in
the meeting instead of himself.
The notice of meeting shall contain a statement that a member is entitled to
appoint a proxy.
A proxy form shall be in writing and signed by the Member.

Yes Nos
A proxy can vote on a Poll A proxy cannot vote on a show of hands

A Proxy can demand a poll A proxy has no right to speak at the

meeting
---- A proxy is not counted for the purpose of
quorum
39 | P a g e
 +If both Member and Proxy attend the meeting, whose vote will be counted?

-The proxy gets cancelled automatically and Members vote will be considered.

Any member can inspect proxies deposited with the company, from 24 hrs before
commencement of meeting, until conclusion of meeting.
Inspection can be made only if 3 days notice is given to the company.

Representative: If the President of India, Governor of a State or a Company is a

member, then a representative can be appointed. The Representative shall have same
powers as that of a Member.

May 2006: Whether Quorum is present where 4 proxies, 3 representatives are

present and articles require quorum of 7 members?

Answer: Representatives will be treated as members personally present.

Preference shareholders do not have voting right and cannot be counted for
quorum. Proxies cannot be included in quorum.

The quorum is not present in this case since only 3 members are personally
present, but required quorum is 7.

Manner of Voting in a GM
Voting by Poll:
A poll may be ordered by the chairman suo moto, which means on his own motion.
Also, the chairman shall order a poll if a demand is made by

Public Company having Private company having

share capital share capital Any other Company

40 | P a g e

Any Member or proxy
holding:
1/10th of total voting
power; or
Paid up capital of
Rs.50,000 or more.
1 Member or proxy
if, number of Any Member or proxy
members present in holding 1/10th of total
the meeting is less voting power
than 7
2 members or proxy,
if the number is
more than 7

If the Poll is demanded for adjournment of meeting or Appointment of new chairman,

the poll shall be taken forthwith/immediately.

In any other case, the poll shall be taken at such time as directed by the chairman, but
within 48 hrs. on voting rights of members:
Restrictions
Calls on shares has been unpaid.
The company has exercised any right of lien on shares.

To restrict voting rights, there should be an express provision in the Articles.

The company cannot restrict the voting rights, except in the above two cases.

Ordinary Resolution:
In OR, the votes cast in favour of the resolution are required to exceed the votes cast
against the resolution. [In simple terms, number of YESs should be more than NOs].

Special Resolution:
In a SR, The votes cast in favour of the resolution are required to be not less than 3
times the votes cast against the resolution.

41 | P a g e
Minutes:
Minutes shall contain a summary of the proceedings of a meeting.
Minutes shall be prepared within 30 days from the date of conclusion of GM.
Chairman of the same meeting shall sign the Minutes book. In case the chairman
is unable (dead or out of country) to sign, a director authorized by BOD shall sign
the Minutes.
Chairman may not include certain matters in the Minutes book if he is of the
opinion that;
It is defamatory of any person; or
It is irrelevant or immaterial; or
It is detrimental to the interests of the company.

Passing of Resolution by Postal Ballot:

Postal ballot means voting through post. Company can send the documents for postal
ballot either through Registered Post or e-mail.

Voting though Postal Ballot mandatory in certain cases {5 Marks Imp}:

Alteration in the objects clause of MOA.

Buy-back of shares
Issue of shares with differential voting rights.
Change in place of registered office outside local limits.
Conversion of Public Company to Private Company.

Annual General Meeting:

Holding of First AGM:

AGM to be held within 18 months of incorporation. In such case, there is no need

to hold AGM in the year of incorporation or following year.
AGM is to be held within 9 months of close of financial year.

42 | P a g e
 The AGM, including the adjournment if any, shall be completed within the
statutory time limit specified above. In other words, an AGM cannot be
adjourned to that date, that falls beyond the statutory time limit.

[Bejoy Kumar Karnani Vs Assistant ROC]

Time, Place and Day of AGM:

AGM shall be held during business hours.
AGM shall be held on a day that is not public holiday.
AGM shall be held at the registered office of the company, or some other place
within the same city.

Cases in which AGM can be held on a public holiday:

The date of general meeting is declared a public holiday, after the notice is given
to shareholders.
Where an AGM is adjourned for lack of quorum, such meeting shall be held at
same day next week, even though it is a public holiday.
A Section 25 company can hold its meeting on a public holiday.
Where a company has fixed dates for all its subsequent meetings and the day
happens to be a public holiday, still AGM can be held.

What if AGM is held beyond the due date specified in the Act?

An AGM held beyond the due date is not void and all the resolutions passed at such
AGM are valid. The only effect is that it involves penalty.

Hungerford Investment and Trust Ltd Vs Turner Morrison and Co Ltd

43 | P a g e
Voting through electronic means:
Every listed company or a company having not less than one thousand shareholders,
shall 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

(i) the notices of the meeting shall be sent to all the members, auditors of the
company, or directors either -
(a) by registered post or speed post ; or
(b) through electronic means like registered e-mail id;
(c) through courier service;

(ii) the notice of the meeting shall clearly mention that the business may be transacted
through electronic voting system and the company is providing facility for voting by
electronic means;

(iii) the e-voting shall remain open for not less than one day and not more than three
days:

(iv) such voting period shall be completed three days prior to the date of the general
meeting;

(v) the Board of directors shall appoint one scrutinizer, who may be chartered
Accountant in practice, Cost Accountant in practice, or Company Secretary 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:

44 | P a g e
 8. Misc Topics
Acceptance of Deposits from members:
The company shall Issue a circular to its members including therein a statement
showing the financial position of the company, the credit rating obtained, the total
number of depositors and the amount due towards deposits.

A copy of the circular along with such statement shall be filed with the Registrar, before
it is issued to the shareholders.

A sum not less than fifteen per cent of the amount of its deposits maturing during a
financial year and the financial year next following shall be kept in a scheduled bank in a
separate bank account.

Acceptance of deposits from public by certain companies: A public company, having

such net worth of not less than one hundred crore rupees or turnover of not less than
five hundred crore rupees, may accept deposits from persons other than its members.

Exceptions (following categories of amount may not be considered as deposits):

Any amount received from the Central Government or a state Government or

foreign governments
any amount received as a loan or facility from any banking company
any amount received by a company from any other company
any amount received from an employee of the company
any amount received in the course of, or for the purposes of, the business of the
company
any non-interest bearing amount received or held in trust

Global Depository Receipts:

Section 41 of the Companies Act, 2013 is a newly added provision according to which
company may issue global depository receipts.
45 | P a g e
A company may issue depository receipts provided it follows the provision of FEMA
Rules and Regulations.

The company shall take prior approval of its shareholders by passing a Special
Resolution at the General Meeting.

The company shall appoint a merchant banker or a practising chartered accountant or a

practising cost accountant or a practising company secretary to oversee all the
compliances relating to issue of the Global depository receipts.

The proceeds of issues of depository receipts shall either be remitted to a bank account
in India or deposited in an Indian bank operating abroad.

Restrictions on giving of loans by company for purchase of its shares:

A fundamental principle of Company Law was that a Company cannot buy its own
shares. No public company shall give any financial assistance (by mean of a loan,
guarantee etc) for purchase of any shares in the company.

Exception:

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 shares.

Calls on Shares
A call may be defined as a demand made by a company on its shareholders to pay the
whole or a part of the balance, remaining unpaid on each share.

The Board of Directors alone is empowered to make a call. The power cannot be
delegated to a director or any other person.

A call on the shares falling under the same class must be made on a uniform basis.

46 | P a g e
Payment of calls in advance: A company may, if so authorised by the articles, accept
from any member the whole or a part of the amount remaining unpaid of any shares by
him although no part of that amount has been called up.

The shareholder is entitled to claim interest on the amount of the call to the extent
payable according to articles of association. If there are no profits, it must be paid out of
capital, because shareholder becomes the creditor of the company in respect of this
amount.

The amount received in advance of calls is not refundable.

In the event of winding up the shareholder ranks after the creditors, but must be paid
his amount with interest, if any before the other shareholders are paid off.

Forfeiture and Surrender of Shares:

Forfeiture is the remedy for non-payment of calls or instalments of call or other sums as
premiums due in respect of shares. Such a power can be exercised only if the articles
expressly so provide.

Forfeiture of shares for any other reason other than non-payment of calls is valid,
provided it is allowed by AOA [Naresh Chandra Sanyal Vs Culcutta Stock Exchange Ltd].

Although surrender and forfeiture have almost the same effect, yet they differ from
each other. Surrender is effected with the assent of the shareholder, whereas forfeiture
is against the will of the shareholder.

Debentures:
Issue of debentures with an option to convert: A company may issue debentures with
an option to convert such debentures into shares. Provided that the issue of debentures
with an option to convert such debentures into shares shall be approved by a special
resolution passed at a general meeting.

No company can issue any debentures carrying voting rights.

47 | P a g e
Creation of debenture redemption reserve (DRR) account:

The Act requires companies to create debenture redemption reserve (DRR) equivalent to
at least fifty per cent of the amount raised through the debenture issue.

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 any one or more of the
following methods, namely:-

in deposits with any scheduled bank

in securities of the Central Government or of any State Government
In Govt bonds

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.

A debenture trustee shall be appointed by the company.

The debenture trustee shall take steps to protect the interests of the debenture- holders
and redress their grievances.

Distinction between debenture and share:

(i) Shares are a part of the capital of a company whereas debentures constitute a loan.
(ii) The shareholders are the owners of the company whereas debenture holders
are creditors.

(iii) Shareholders generally enjoy voting right whereas debenture holders do not have
any voting right.
(iv) Interest on debenture is payable even if there are no profits. But dividends can be
paid to shareholders only out of the profits of the company.

(vi) The rate of interest is fixed in the case of debentures whereas on equity shares the
dividend may vary from year to year.

48 | P a g e
Registration of a Charge:
According to the Companies Act, 2013 charge has been defined as a lien created on
the property or assets of a company.

Registration by the registrar: The Registrar may, on an application by the

company in 30 days, allow such registration to be made after payment of such
fee as may be prescribed.
Date of notice of charge: Where any charge on any property or assets of a
company are registered with ROC, any person acquiring such property, assets
shall be deemed to have notice of the charge from the date of such registration.
Register of charges to be kept by Registrar: the Registrar shall, in respect of
every company, keep a register containing particulars of the charges registered
under him.
Companys register of charges: every company shall keep at its registered office
a register of charges. Entries in the register shall be authenticated by a director or
the secretary of the company or any other person authorised by the Board for
the purpose.
Inspection of the register of charges: The register of charges shall be open for
inspection during business hours for any member or creditor of the company, or
any person on payment of certain fee.

Underwriting of Shares:
Explain clearly the meaning of the term Underwriting and Underwriting
Commission. In what way, does the Companies Act, 2013 regulate payment of
such Commission? Explain.
(Or)
In what way does the Companies Act, 2013 regulate the payment of
underwriting commission? Explain the provisions of the Act, state the
conditions to be complied with before payment of such commission can be
made to underwriters of the company.

49 | P a g e
Underwriting is a contract entered into between the company and certain parties
(called underwriters) whereby the underwriters guarantee to purchase or get investors
to purchase the whole or an agreed portion of the securities that are not applied for by
the public for subscription. In consideration of this guarantee the company pays a
commission to the underwriters as a percentage of the value of the shares offered.

The consideration payable to the underwriters for underwriting the issue of

shares or debentures of a company is called underwriting commission.
the payment of such commission shall be authorized in the companys articles of
association
the rate of commission paid or agreed to be paid shall not exceed 5% in case of
shares and 2.5% in case of debentures. The rates of commission given above are
maximum rates. The company is free to negotiate lower rates with underwriters.
the prospectus of the company shall disclose the name of the underwriters, the
rate and amount of the commission payable to the underwriter etc.

Pluto limited held shares in Jupiter limited. Later on, Pluto ltd became a subsidiary of
Jupiter ltd. Decide whether it is necessary for Pluto ltd to surrender the shares of
Jupiter Ltd?

A Subsidiary company cannot hold shares in its holding company and any allotment of
shares by the holding company to its subsidiary is invalid. However, in the following
cases, the subsidiary can hold shares in its holding company:

i. Where the subsidiary is acting as a legal representative of a deceased member of

the holding company.
ii. Where the shares are being held as a trustee.
iii. Where the Subsidiary company is holding shares in the Holding company, even
before it has become the subsidiary.

In the given case, the third exception applies and Pluto ltd is holding shares in Jupiter
ltd, before it has become a subsidiary. So, there is no need of surrendering of shares.

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