Module 1

MODULE 1
THEORY
CONTENTS
Chapter 1 Basic Concepts under Company Law 3
Chapter 2 Memorandum of Association 18
Chapter 3 Membership in a Company 34
Chapter 4 Prospectus 37
Chapter 5 Shares — Meaning and Types 50
Chapter 6 General Meetings 72
Chapter 7 Public Deposits 108
Chapter 8 Debentures 116
Chapter 9 Charge 121
Chapter 10 MCA 128
Chapter 11 Dividend 131
Chapter 12 Account 138
Chapter 13 Auditor 157
Chapter 14 Contract of Agency 170
Chapter 15 Contract of Bailment 178
Chapter 16 Contract of Indemnity 185
Chapter 17 General Clause Act, 1897 193
Chapter 18 Interpretation of Statute 200
Chapter 19 Negotiable Instruments Act, 1881 209
Chapter 1
BASIC CONCEPTS UNDER COMPANY LAW
Synopsis
1.1 Definition of a Company 3
1.2 Private Companies [Section 2(68)] 3
1.3 Public Companies [Section 2(71)] 3
1.4 Use of Words “Limited” or “Private Limited” [Section 4] 4
1.5 Some Other Important Definitions 4
1.6 Some Other Classifications of Company 11
A. Classification on basis of members 11
B. Classification on basis of Liability 13
C. Associate company 14
D. Classification on the basis of access to capital 14
1.7 Incorporation of Company [Section 7] 16
1.8 Effect of Registration [Section 9] 18
1.9 Members Severally Liable in Certain Cases [Section 3A] 18
1.1 DEFINITION OF A COMPANY

Meaning 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”.
Note An existing company means a company formed and registered under any of the
previous Companies Acts
1.2 PRIVATE COMPANIES [Section 2(68)]

Meaning  A private company is one
 which by its Articles of Association, puts the following restrictions
Restriction-AOA 1 Restricts the right to transfer its shares, if any.
2 Limits the maximum number of its members to 200 (excluding the present
or past employees of the company).
3 Prohibits any invitation to the public to subscribe for any securities of the
company.
1.3 PUBLIC COMPANIES [Section 2(71)]

Meaning A public company is one
 Which is not a private company
 It also includes a private company which is subsidiary of a public company
Note In view of Section 2(71) of the Companies Act, 2013 a Private company, which is
subsidiary of a public company shall be deemed to be public company for the
purpose of this Act, even where such subsidiary company continues to be a private
company in its articles.
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1.4 USE OF WORDS “LIMITED” OR “PRIVATE LIMITED” [Section 4]
Meaning  Every public limited company shall use the word 'limited' at the end of its
name.
 Similarly, every private limited company shall use the words 'private limited' at
the end of its name.
Exception  Nothing in this section shall apply to companies incorporated as per Section 8
1.5 SOME OTHER IMPORTANT DEFINITIONS

1. Body Corporate Body corporate or Corporation includes a company incorporated outside India,
[Section 2(11)] but does not include—
 a co-operative society registered under any law relating to co-operative
societies; and
 any other body corporate (not being a company as defined in this Act),
which the Central Government may, by notification, specify in this behalf;
2. Books of “Books of account” includes records maintained in respect of—
Accounts (i) all sums of money received and expended by a company and matters in
[Section 2(13) 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
section;
Section 148 of the Companies Act, 2013 authorises Central Government to Specify
Audit of Items of Cost in Respect of Certain Companies.
3. Control Control shall include
[Section 2(27)]  the right to appoint majority of the directors or
 to control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including
by virtue of their shareholding or management rights or shareholders
agreements or voting agreements or in any other manner;
4. Expert Expert includes an engineer, a valuer, a Chartered Accountant, a Company
[Section 2(38)] Secretary, a Cost Accountant and any other person who has the power or authority
to issue a certificate in pursuance of any law for the time being in force;
5. Financial Financial statement in relation to a company, includes—
Statement 1. a balance sheet as at the end of the financial year;
[Section 2(40)
2. 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;
3. cash flow statement for the financial year;
4. a statement of changes in equity, if applicable; and
5. any explanatory note
Provided that the financial statement, with respect to One Person Company, small
company and dormant company, may not include the cash flow statement;
Exemption: For private companies, the proviso to section 2(40) shall be read as
follows:
Chap. 1 Basic Concepts under Company Law 5
“Provided that the financial statement, with respect to one person company, small
company, dormant company and private company (if such private company is a
start-up) may not include the cash flow statement;
Explanation.—For the purposes of this Act, the term “start-up‟ or “start-up
company” means a private company incorporated under the Companies Act, 2013
or the Companies Act, 1956 and recognised as start-up in accordance with the
notification issued by the Department of Industrial Policy and Promotion, Ministry
of Commerce and Industry.”
The exceptions, modifications and adaptations shall be applicable to a private
company which has not committed a default in filing its financial statements under
section 137 of the said Act or annual return under section 92 of the said Act with
the Registrar.
6. Financial Year Financial year, in relation to any company or body corporate, means the period
[Section 2(41) ending on the 31st day of March every year, and
where it has been incorporated on or after the 1st day of January of a year, the
period ending on the 31st day of March of the following year
Provided that where a company or body corporate, which is a holding company or
a subsidiary or associate company of a company incorporated outside India and is
required to follow a different financial year for consolidation of its accounts
outside India, the Central Government may, on an application made by that
company or body corporate in such form and manner as may be prescribed, allow
any period as its financial year, whether or not that period is a year:
7. Free Reserve Free reserves means such reserves which, as per the latest audited balance sheet of
[Section 2(43) a company, are available for distribution as dividend:
Provided that—
(i) any amount representing unrealised gains, notional gains or revaluation of
assets, whether shown as a reserve or otherwise, or
(ii) any change in carrying amount of an asset or of a liability recognized in
equity, including surplus in profit and loss account on measurement of the
asset or the liability at fair value,
shall not be treated as free reserves;
8. Key managerial Key managerial personnel, in relation to a company, means—
Personal (i) the Chief Executive Officer or the managing director or the manager;
[Section 2(51)
(ii) the company secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer;
(v) such other officer, not more than one level below the directors who is in
whole-time employment, designated as key managerial personnel by the
Board; and
(vi) such other officer as may be prescribed;
9. Net worth Net worth means the aggregate value of the paid-up share capital and all reserves
[Section 2(57) created out of the profits, securities premium account and debit or credit balance of
profit and loss account, after deducting the aggregate value of the accumulated
losses, deferred expenditure and miscellaneous expenditure not written off, as per
the audited balance sheet, but does not include reserves created out of revaluation
of assets, write-back of depreciation and amalgamation;
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10. Officer Officer includes any director, manager or key managerial personnel or any person
[Section 2(59) in accordance with whose directions or instructions the Board of Directors or any
one or more of the directors is or are accustomed to act;
11. Officer who is Officer who is in default, for the purpose of any provision in this Act which enacts
in default that an officer of the company who is in default shall be liable to any penalty or
[Section 2(60) punishment by way of imprisonment, fine or otherwise, means any of the
following officers of a company, namely:—
(i) whole-time director (WTD);
(ii) key managerial personnel (KMP);
(iii) where there is no key managerial personnel, such director or directors as
specified by the Board in this behalf and who has or have given his or their
consent in writing to the Board to such specification, or all the directors, if no
director is so specified;
(iv) any person who, under the immediate authority of the Board or any key
managerial personnel, is charged with any responsibility including
maintenance, filing or distribution of accounts or records, authorises, actively
participates in, knowingly permits, or knowingly fails to take active steps to
prevent, any default;
(v) any person in accordance with whose advice, directions or instructions the
Board of Directors of the company is accustomed to act, other than a person
who gives advice to the Board in a professional capacity;
(vi) every director, in respect of a contravention of any of the provisions of this
Act, who is aware of such contravention by virtue of the receipt by him of any
proceedings of the Board or participation in such proceedings without
objecting to the same, or where such contravention had taken place with his
consent or connivance;
(vii) in respect of the issue or transfer of any shares of a company, the share
transfer agents, registrars and merchant bankers to the issue or transfer;
12. Paid-up share Paid-up means such aggregate amount of money credited as paid-up as is
capital or share equivalent to the amount received as paid-up in respect of shares issued and also
capital includes any amount credited as paid-up in respect of shares of the company, but
[Section 2(64] does not include any other amount received in respect of such shares, by whatever
name called;
14. Relative "Relative", with reference to any person, means anyone who is related to another,
[Section 2(77)] 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;
List of Relatives in Terms of Clause (77) of section 2
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: Provided that the term “Father” includes step-father.
(2) Mother: Provided that the term “Mother” includes the step-mother.
(3) Son: Provided that the term “Son” includes the step-son.
(4) Son’s wife.
(5) Daughter.
(6) Daughter’s husband.
(7) Brother: Provided that the term “Brother” includes the step-brother;
(8) Sister: Provided that the term “Sister” includes the step-sister.
15. “Promoter” Means a person—
section 2(69) (a) who has been named as such in a prospectus or is identified by the company in
the annual return referred to in section 92; or
(b) who has control over the affairs of the company, directly or indirectly whether
as a shareholder, director or otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act.
Relative of Ram = Spouse + Members of HUF + Others
Father Mother
including including
step father step mother
Brother Sister
Son including step son Daughter & her husband
Son’s wife
Related Party: 2(76), with reference to a company, means—

(i) a director or his relative;
(ii) key managerial personnel or his relative;
(iii) a firm, in which a director, manager or his relative is a partner;
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Example Decide whether Related party u/s 2(76)
X Limited XY & Company
Transaction
MR is a partner of this firm

MR i.e. Relative of
Manager of X Ltd
Solution
(iv) a private company in which a director or manager or his relative is a member or director;
A Limited X Pvt Limited
Transaction
D = Member of X Pvt Ltd

D=Director of
A Ltd
Solution From View of A Ltd From View of X Pvt Ltd
L Pvt Ltd M Pvt Ltd
Transaction
L is a manager of
M Pvt Ltd
L is a Director of L Pvt Ltd
Solution From view of L Pvt Ltd From View of M Pvt Ltd

(v) a public company in which a director or manager is a director & holds along with his relatives, more
than 2% of its paid-up share capital;
Y Ltd Z Ltd
Transaction
Y is a director of this company

Y i.e. Director of Y Ltd as well and also hold 25% of
paid up share capital of Z Ltd
Solution From view of Y Ltd From View of Z Ltd
Z Ltd A Pvt Ltd
Transaction
“A” is a director and hold 10%

“A” is a director and hold in A Pvt Ltd
5% in Z Ltd
Solution From view of Z Ltd From View of A Pvt Ltd
(vi) any body corporate whose Board of Directors, managing director or manager is accustomed to act in
accordance with the advice, directions or instructions of a director or manager;
A Ltd Z Ltd
Transaction
BOD of Z Ltd is accustomed to

“D” is a Director of A Ltd act as per direction of “D”
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Solution From view of A Ltd From View of Z Ltd
(vii) any person on whose advice, directions or instructions a director or manager of the company is
accustomed to act;
Provided that nothing in sub-clauses (vi) and (vii) shall apply to the advice, directions or instructions given in
a professional capacity;
SRE Ltd SRS
Transaction
SRE acts as per the instructions

of SRS only
Solution
Quest Whether dealing with promoter will amount to dealing with Related Party
Solution
(viii) any body corporate which is—

(A) a holding, subsidiary or an associate company of such company;
(B) a subsidiary of a holding company to which it is also a subsidiary; or
(C) an investing company or the venture of the company;";
Explanation-For the purpose of this clause, “the investing company or the venture of a company”
means a body corporate whose investment in the company would result in the company becoming an
associate company of the body corporate.

Summary
X Ltd C Ltd
(Company) C Ltd has invested 20% in co.
i.e. X Ltd & thus X Ltd become
an Associate of C Ltd
Dealing of X Ltd with
A Ltd S Ltd H Ltd

(Associate Company) (Subsidiary Company (Holding Company)
SH Ltd
(Subs of Holding Company)
(ix) such other person as may be prescribed i.e., director (Excluding Independent Director) or key
managerial personnel of the holding company or his relative
1.6 SOME OTHER CLASSIFICATIONS OF COMPANY
A. Classification on basis of members
1. One Person Section 2(62) of the Companies Act, 2013 defines one person company (OPC) as a
Companies company which has only one person as a member. One person company has been
introduced to encourage entrepreneurship and corporatization of business.
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.
According to section 3(1)(c) of the Companies Act, 2013, OPC is a private limited
company with the minimum paid up share capital of `1 lakh and has at least one
member. Here the member can be the sole member and director.
Meaning “One Person Company” means a company which has only one person as a member;
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Special Law with respect to formation of OPC provides that—
requirements Rule 3
applicable to
 Only a natural person who is an Indian citizen whether resident in India or
formation of OPC
otherwise shall be eligible to incorporate a One Person Company.
i.e. one person
company  shall be a nominee for the sole member of a One Person Company.
 Explanation I: For the purposes of this rule, the term "resident in India" means
a person who has stayed in India for a period of not less than 120 days during
the immediately preceding financial year.
 A natural person shall not be member of more than a One Person Company at
any point of time and the said person shall not be a nominee of more than a One
Person Company.
 Where a natural person, being member in One Person Company in accordance
with this rule becomes a member in another such Company by virtue of his
being a nominee in that One Person Company, such person shall meet the
eligibility criteria within a period of one hundred and eighty days.
 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.
 Such Company cannot carry out Non-Banking Financial Investment activities
including investment in securities of anybody corporate.
Rule 4: Nomination by the Subscriber or Member of One Person Company
For the purposes of first proviso to sub-section (1) of section 3—
(1) The subscriber to the memorandum of a One Person Company shall nominate a
person, after obtaining prior written consent of such person, who shall, in the
event of the subscriber’s death or his incapacity to contract, become the
member of that One Person Company.
(2) The name of the person nominated shall be mentioned in the memorandum of
One Person Company and such nomination along with consent of such nominee
and fee as provided in the Companies (Registration offices and fees) Rules,
2014 shall be filed with the Registrar at the time of incorporation of the
company along with its memorandum and articles.
(3) The person nominated by the subscriber or member of a One Person Company
may, withdraw his consent by giving a notice in writing to such sole member
and to the One Person Company:
Provided that the sole member shall nominate another person as nominee
within fifteen days of the receipt of the notice of withdrawal and shall send an
intimation of such nomination in writing to the Company, along with the
written consent of such other person so nominated
(4) The company shall within thirty days of receipt of the notice of withdrawal of
consent file with the Registrar, a notice of such withdrawal of consent and the
intimation of the name of another person nominated by the sole member along
with fee as provided in the Companies (Registration Offices and Fees) Rules,
2014 and the written consent of such another person so nominated
Rule 6: Conversion of One Person Company into a Public company or a
Private company.
(1) The One Person company shall alter its memorandum and articles by passing a
resolution in accordance with sub-section (3) of section 122 of the Act to give
effect to the conversion and to make necessary changes incidental thereto.
(2) A One Person company may be converted into a Private or Public Company,
other than a company registered under section 8 of the Act, after increasing the
minimum number of members and directors to two or seven members and two
or three directors, as the case may be, and maintaining the minimum paid-up
capital as per the requirements of the Act for such class of company and by
making due compliance of section 18 of the Act for conversion
(3) The company shall file an application in e-Form No. INC-6 for its conversion
into Private or Public Company, other than under section 8 of the Act, along
with fees as provided in the Companies (Registration Offices and Fees) Rules,
2014 by attaching documents, namely:—
(a) Altered MOA and AOA;
(b) copy of resolution;
(c) the list of proposed members and its directors along with consent;
(d) list of creditors; and
(e) the latest audited balance sheet and profit and loss account.
(4) On being satisfied that the requirements stated herein have been complied with,
the Registrar shall approve the form and issue the Certificate.
2. Small Company Small company given under the section 2(85) of the Companies Act, 2013 which
[Section 2(85)] means a company, other than a public company,—
(i) paid-up share capital of which does not exceed 2 Cr rupees or such higher
amount as may be prescribed which shall not be more than ten crore rupees; &
(ii) turnover of which as per profit and loss account for the immediately preceding
financial yearlast profit and loss account does not exceed 20 crore rupees or
such higher amount as may be prescribed which shall not be more than one
hundred crore rupees:
Exceptions: This section shall not apply to:
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;
B. Classification on basis of Liability

1. Meaning of Holding & Subsidiary [Section 2(87)]
Circumstances A holding company is one which has the control over the other company
where this relation Holding Company which exercise control.
can take place
Subsidiary Company A company on which said control is exercised.
As per the law there exist an holding and subsidiary relations between 2 companies
in following circumstances:—
As per the law there exist an holding and subsidiary relations between 2 companies in following
circumstances:—
1. Control over the Where one company controls the composition of the Board of Directors of another
composition of company. In such case former becomes the holding and the latter become a
board of directors : subsidiary company
When a company shall be considered to have control over the composition of
the Board of Directors of another company:-
If said company has the powers to appoint or remove all or majority of the
directors of the other company.
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2. Holding of Where one company exercises or controls more than one-half of the total voting
majority of total power either at its own or together with one or more of its subsidiary companies:
share capital
Proviso Provided that such class or classes of holding companies as may be prescribed
shall not have layers of subsidiaries beyond such numbers as may be prescribed.
Explanation For the purposes of this clause,—
(a) a company shall be deemed to be a subsidiary company of the holding company
even if the control is exercised by another subsidiary company of the holding
company;
(b) the composition of a company’s Board of Directors shall be deemed to be
controlled by another company if that other company by exercise of some
power exercisable by it at its discretion can appoint or remove all or a majority
of the directors;
(c) the expression “company” includes any body corporate;
C. Associate company
Meaning  In relation to another company, means a company in which that other
[Section 2(6)] company has a significant influence,
 but which is not a subsidiary company of the company having such
influence and includes a joint venture company.
Explanation For the purpose of this clause—
(a) the expression "significant influence" means control of at least twenty per cent.
of total voting power, or control of or participation in business decisions under
an agreement;
(b) the expression "joint venture" means a joint arrangement whereby the parties
that have joint control of the arrangement have rights to the net assets of the
arrangement
Vide Circular dated 25/06/2014 it has been clarified that the shares held by a company in another company
in a fiduciary capacity shall not be counted for the purpose of determining the relationship of associate
company.
D. Classification On the basis of access to capital
1. Listed company As per the definition given in the section 2(52) of the Companies Act, 2013, it is a
company which has any of its securities listed on any recognised stock exchange.
Provided that such class of companies, which have listed or intend to list such class
of securities, as may be prescribed in consultation with the Securities and
Exchange Board, shall not be considered as listed companies.
Rule 2A — For the purposes of the proviso to clause (52) of section 2 of the Act, the following
Companies classes of companies shall not be considered as listed companies, namely:-
(Specification of (a) Public companies which have not listed their equity shares on a recognized
definitions details) stock exchange but have listed their—
Rules, 2014
(i) non-convertible debt securities issued on private placement basis in terms
of SEBI (Issue and Listing of Debt Securities) Regulations, 2008; or
(ii) non-convertible redeemable preference shares issued on private placement
basis in terms of SEBI (Issue and Listing of Non-Convertible Redeemable
Preference Shares) Regulations, 2013; or
(iii) both categories of (i) and (ii) above.
(b) Private companies which have listed their non-convertible debt securities on
private placement basis on a recognized stock exchange in terms of SEBI (Issue
and Listing of Debt Securities) Regulations, 2008;
(c) Public companies which have not listed their equity shares on a recognized
stock exchange but whose equity shares are listed on a stock exchange in a
jurisdiction as specified in sub- section (3) of section 23 of the Act.”
2. Unlisted company Means company other than listed company.
E. Other companies:
1. Government Means any company in which not less than fifty-one per cent of the paid-up share
company capital is held by—
[Section 2(45)] (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
Explanation For the purposes of this clause, the "paid up share capital" shall be construed as
"total voting power", where shares with differential voting rights have been
issued
2. Foreign Means any company or body corporate incorporated outside India which—
Company (i) has a place of business in India whether by itself or through an agent,
[Section 2(42)] physically or through electronic mode; and
(ii) conducts any business activity in India in any other manner
F. Formation of companies with charitable objects etc.: [Section 8]

1. Meaning Companies which are formed not for earning profit rather they are formed for
promoting commerce, art, science, religion, charity or any other useful object.
2. Registration According to section 8 (1) of the Companies Act 2013, the Central Government
may allow person or an association of persons to be registered as a Company under
the Companies Act if it has been set up for promoting commerce, arts, science,
sports, education, research, social welfare religion, charity protection of
environment or any such other useful object and intends to apply its profits or other
income in promotion of its objects. However, such company has to prohibit
payment of any dividend to its members.
3. Procedure An association of persons intending to carry any or all or some of the activities
mentioned in section 8(1) as mentioned above, has to apply to the Central
Government seeking its permission for being set up as a company under the Act.
The central government if satisfied on the above may by the issue of a licence in
such manner as may be prescribed and, on such conditions, as it may deem fit,
allow such association to be registered as a limited company under section 8(1)
without the addition of word “Limited” or words “Private Limited” as the case
may be, to its name.
After the issue of the licence by the Central Government, an application must be
made to the Registrar in the prescribe form after which the Registrar will register
the association of persons as a company under section 8(1).
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Under section 8(2) a company registered under section 8(1) as above, shall enjoy
all the privileges and be subject to all the obligations of a limited company.
4. Power of CG to Central Government may exempt these companies from requirement of conducting
provide some Annual General Meeting subject to such conditions as it may impose
special exemption Such companies are also excluded from adding of a word such as Private Limited
or Limited to their name. Such an exclusion is permitted only when it is authorized
by CG.
5. Revocation of The Central Government may by order revoke the licence of the company if:
licence 1. Company contravenes any of the requirements or the conditions of this sections
subject to which a licence is issued or
2. Where the affairs of the company are conducted fraudulently, or violative of
the objects of the company or prejudicial to public interest
6. Consequences of Registrar shall put ‘Limited’ or ‘Private Limited’ against the company’s name in
Revocation the register. But before such revocation, the Central Government must give it a
written notice of its intention to revoke the license and opportunity to be heard in
the matter.
7. Order of the CG- Where a license is revoked there the Central Government may, in the public interest
Incase of revocation order:—
1. That any such company registered under this section should be amalgamated
with another company having similar objects, to form a single company, or
2. The company be wound up.
8. Penalty If a company makes any default in complying with any of the requirements laid
down in this section, the company shall, be punishable with fine which shall not be
less than ten lakh rupees but which may extend to one crore rupees and the
directors and every officer of the company who is in default shall be punishable
with fine which shall not be less than twenty-five thousand rupees but which may
extend to twenty-five lakh rupees
1.7 INCORPORATION OF COMPANY [Section 7]

Document & (1) There shall be filed with the Registrar within whose jurisdiction the registered
information to be office of a company is proposed to be situated, the following documents and
registered information for registration, namely:—
(i) the memorandum and articles of the company duly signed by all the
subscribers to the memorandum in such manner as may be prescribed;
(ii) a declaration in the prescribed form 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 articles as a director, manager or secretary of the
company, that all the requirements of this Act have been complied with;
(iii) an affidavit from each of the subscribers to the memorandum and
from persons named as the first directors that he is not convicted of
any offence in connection with the promotion, formation or management
of any company
(iv) the address for correspondence till its registered office is established;
(v) the particulars of name, including surname or family name, residential
address, nationality and such other particulars of every subscriber to the
memorandum
(vi) the particulars of the persons mentioned in the articles as the first
directors of the company, their names, including surnames or family
names, the director identification number, residential address, nationality
and such other particulars including proof of identity as may be
prescribed; and
(vii) consent of the persons mentioned in the articles as the first directors of
the company
Further Procedure I. The Registrar on the basis of documents and information filed shall register
all the documents and issue a certificate of incorporation in the prescribed
form
II. On and from the date mentioned in the Certificate of Incorporation, the
Registrar shall allot to the company a corporate identity number
III. The company shall maintain and preserve at its registered office copies of all
documents and information as originally filed while incorporation
IV. If any person furnishes any false or incorrect particulars of any information
or suppresses any material information, he shall be liable for action under
section 447.
V. where, at any time after the incorporation of a company, it is proved that the
company has been got 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 for incorporating,
the promoters, the persons named as the first directors of the company and the
persons making declaration shall each be liable for action under section 447.
Order by Tribunal Where a company has been got incorporated by furnishing any false or incorrect
information or representation or by suppressing any material fact, the Tribunal
may, on an application made to it, on being satisfied that the situation so
warrants,—
(a) 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
(b) direct that liability of the members shall be unlimited; or
(c) direct removal of the name of the company from the register of companies;
or
(d) pass an order for the winding up of the company
(e) pass such other orders as it may deem fit:
Provided that before making any such order, the company shall be given a
reasonable opportunity of being heard
Simplified The Ministry of Corporate Affairs has taken various initiatives for ease of business.
Proforma for In a step towards easy setting up of business, MCA has simplified the process of
Incorporating filing of forms for incorporation of a company through Simplified Proforma for
Company incorporating company electronically.
Electronically
(SPICe)
18 Theory Module 1
1.8 EFFECT OF REGISTRATION [Section 9]
Meaning Certificate of incorporation is one which certifies that the company is incorporated.
It shall contain the  Name of the company,
following  Corporate Identity Number
 Date of its issue, and
 Signature of Registrar along with his seal.
Legal Effect 1 Company comes into existence and. it becomes a legal entity independent from
its members.
2 Company acquires a perpetual succession.
3 Liability of the members of the limited company becomes limited.
4 Private Company and Public company not having share capital becomes
Entitled to commence their business immediately on receipt of said certificate.
1.9 MEMBERS SEVERALLY LIABLE IN CERTAIN CASES [Section 3A]

Situation of several If at any time the number of members of a company is reduced, in the case of a
liability public company, below seven, in the case of a private company, below two, and the
company carries on business for more than six months while the number of
members is so reduced, every person who is a member of the company during the
time that it so carries on business after those six months and is cognizant of the fact
that it is carrying on business with less than seven members or two members, as the
case may be, shall be severally liable for the payment of the whole debts of the
company contracted during that time, and may be severally sued therefor.
Chapter 2
MEMORANDUM OF ASSOCIATION
Synopsis
2.1 Memorandum of Association [Section 2(56)] 19
2.2 Clauses of Memorandum of Association [Section 4] 19
2.3 Alteration in Name Clause of Memorandum 21
2.4 Registered Office Clause [Section 4(1)(b)] 22
2.5 Alteration of Registered Office Clause [Section 12] 23
2.6 Objects Clause [Section 4(1)(c)] 24
2.7 Alteration of Object Clause-Procedure 24
2.8 Liability Clause [Section 4(1)(d)] 25
2.9 Capital Clause [Section 4(1)(e)] 25
2.10 Alteration of Capital Clause [Section 61] — Procedure 25
2.11 Doctrine of Ultra-Vires 26
2.12 Binding Force of Memorandum and Articles of Association [Section 10] 27
2.13 Constructive Notice of Memorandum and Articles of Association 28
2.14 Doctrine of 'Indoor Management' 28
2.15 Exceptions to the Doctrine of Indoor Management 29
2.16 Article of Association 29
2.17 Act to Override Memorandum, Articles, etc. [Section 6] 31
2.18 Copies Of Memorandum, Articles, etc., to be given to Members [Section 17] 31
2.19 Commencement of Business etc. [Section 10A] 32
2.20 Conversion of Companies Already Registered [Section 18] 32
2.21 Holding and Subsidiary Companies Transaction [Section 19] 33
2.22 Service of Documents [Section 20] 33
A. To the Company 33
B. To the ROC/Members 33
2.23 Authentication of Documents, Proceedings and Contracts [Section 21] 34
2.24 Execution of Bills of Exchange, etc. [Section 22] 34
2.1 MEMORANDUM OF ASSOCIATION [Section 2(56)]
Basic  It is the first step in formation of company

 One of the most important documents to be filled with ROC.
 It contains those fundamental conditions on which company is to be
incorporated
2.2 CLAUSES OF MEMORANDUM OF ASSOCIATION [Section 4]
Name Clause [Section 4(1)(a)]
Points to be Name of the company shall end with the last word “Limited” in the case of a
ensured public limited company, or the last words “Private Limited” in the case of a private
limited company.
20 Theory Module 1
This clause is not applicable on the companies formed under section 8 of the Act.
For the Companies under section 8 of the Act, the name shall include the words
foundation, Forum, Association, Federation, Chambers, Confederation, council,
Electoral trust and the like etc.
As per rule 8 of The following words and combinations thereof shall not be used in the name of a
Companies company unless the previous approval of the Central Government has been obtained
(Incorporation) for the use of any such word or expression-
Rules, 2014 Board; Commission; Authority; Undertaking; National; Union; Central;
Federal; Republic; President etc.
If the proposed name include words such as ‘Insurance’, ‘Bank’, ‘Stock Exchange’,
‘Venture Capital’, ‘Asset Management’, ‘Nidhi’, ‘Mutual fund’ etc., unless a
declaration is submitted by the applicant that the requirements mandated by the
respective regulator, such as IRDA, RBI, SEBI, MCA etc. have been complied with
by the applicant;
Reservation of A person may make an application, in prescribed manner to the Registrar for the
name: reservation of a name as—
(i) the name of the proposed company; or
(ii) the name to which the company proposes to change its name.
Reserving the name:
Upon receipt of an application, the Registrar may, on the basis of information and
documents furnished along with the application, reserve the name for a period of
twenty days from the date of approval or such other period as may be prescribed:
Provided that in case of an application for reservation of name or for change of its
name by an existing company, the Registrar may reserve the name for a period of
sixty days from the date of approval.
Cancelling name: Where after reservation of name, it is found that name was applied by furnishing
wrong or incorrect information, then—
(i) if the company has not been incorporated, the reserved name shall be cancelled
and the person who has made the application shall be liable to a penalty which
may extend to one lakh rupees;
(ii) if the company has been incorporated, the Registrar may, after giving the
company an opportunity of being heard—
(1) either direct the company to change its name within a period of 3 months,
after passing an ordinary resolution;
(2) take action for striking off the name of the company from the register of
companies; or
(3) make a petition for winding up of the company.
Circular: As per the General Circular No.29/2014, dated 11th of July, 2014,
Government directed that while allotting names to Companies/Limited Liability
Partnerships, the Registrar of Companies concerned should exercise due care to
ensure that the names are not in contravention of the provisions of the Emblems
and Names (Prevention of Improper Use) Act, 1950.
Chap. 2 Memorandum of Association 21
Points to be The name stated in the memorandum shall not be—

considered (a) Identical with or resemble too nearly to the name of an existing company
registered under this Act or any previous company law; or
(b) be such that its use by the company—
♦ will constitute an offence under any law for the time being in force; or
♦ is undesirable in the opinion of the Central Government.
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 for the time being in force
Example Mr. Anil Desai, has applied for reservation of company name with a prefix
“Sanwariya”. He claimed that the Prefix “Sanwariya” is registered trademark in his
name. Later on, it is found that the said prefix is not registered with Mr. Anil Desai,
however, he has formed company by giving incorrect documents/information while
applying the name of the company.
Solution In such case, The Registrar shall take action as per the provisions of the act after
giving opportunity of being heard.
Circular As per the General Circular No. 29/2014, dated 11th of July, 2014, Government
directed that while allotting names to Companies/Limited Liability Partnerships, the
Registrar of Companies concerned should exercise due care to ensure that the
names are not in contravention of the provisions of the Emblems and Names
(Prevention of Improper Use) Act, 1950. It is necessary that Registrars are fully
familiar with the provisions of the said Act.
2.3 ALTERATION IN NAME CLAUSE OF MEMORANDUM
1. For Change of A company can change its name at any time by adopting the following
Name Clause procedures:—
[Section 13]
 By passing a special resolution; and
 By obtaining the approval of Central Government in writing.
2. Conditions for The change of name shall not be allowed to a company which has defaulted in
such alteration filing its
 Annual returns or
 Financial statements or
 Any document due for filing with the Registrar or
 which has defaulted in repayment of matured deposits or debentures or
interest on deposits or debentures.
3. Steps by ROC On any change in the name of a company, the Registrar shall enter the new name in
the register of companies in place of the old name and issue a fresh certificate of
incorporation with the new name and the change in the name shall be complete and
effective only on the issue of such a certificate.
22 Theory Module 1
However, the approval of Central Government is not required when the change merely involve addition or
deletion of the word 'Private' on the conversion of a public company into company or vice versa.
2. For Rectification Sometime through inadvertence or otherwise, company is registered with a name
of Name Clause which is identical with or too nearly resembles the name by which a company in
[Section 16]  existence had been previously registered, or the name is identical with or too nearly
resembling to a registered trade mark.
In this case, Central Government may issue a direction for rectification of
name to company and Company may rectify its name by adopting the following
procedure:—
 By passing an ordinary resolution, and
 By obtaining the previous approval of the Central Government in writing
Time limit for  A registered trademark owner has to file an application for rectification of
Rectification name, which is similar to name of its trademark, within 3 years of
incorporation of company or change of name.
 In case of rectification of name due to similarity with registered trademark,
rectification shall be done within 6 months
Other Points  Within 15 days of passing of resolution, a copy thereof shall be filled with
ROC along with copy of order by CG
 A copy of order of Central Government shall also be filled within 3 month of

order.
 On such communication, ROC will issue a fresh certificate of incorporation

with necessary alterations. The change of name becomes effective on the issue
of said certificate only.
2.4 REGISTERED OFFICE CLAUSE [Section 4(1)(b)]
Details to be It must contain the name of the State in which the registered Office of the
mentioned in this company is to be situated.
clause
Importance of this Section 12 of the Companies Act, 2013 seeks to provide for the registered office of
office the companies for the communication and serving of necessary documents, notices
letters etc.
The domicile and the nationality of a company is determined by the place of its
registered officer.
This is also important for determining the jurisdiction of the court.
Other things to be A company shall, within thirty days of its incorporation and at all times
ensured thereafter, have a registered office capable of receiving and acknowledging all
communications and notices as may be addressed to it.
Verification The company shall furnish to the Registrar verification of its registered office
within a period of thirty days of its incorporation.
Labeling of Every company shall—

company:  paint or affix its name, and the address of its registered office, and keep the
same painted or affixed, on the outside of every office or place in which its
business is carried on, in a conspicuous position, in legible letters, and if the
characters employed are not those of the language/s in general use in that
locality, then also in the characters of that language/s.
 have its name engraved in legible characters on its seal, if any;
 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
 have its name printed on hundies, promissory notes, bills of exchange and
such other documents as may be prescribed:
2.5 ALTERATION OF REGISTERED OFFICE CLAUSE [Section 12]
(A) Change within 1. A resolution of the Board of Directors is required to be passed.

the same city, town
or village 2. Notice of new location must be given to the Registrar within 15 days of the
[Section 12] Change
(B) Change from 1. Special resolution is required to be passed at a general meeting of the
one CTV (City, shareholders.
town or village) to
another within the 3. Notice of New Location Notice of the new location must be given to the
same ROC and Registrar within 15 days of change
same State
[Section 12] 4. A resolution of the Board of Directors is required to be passed.
(C) Change from 1. Special resolution is required to be passed at a general meeting of the
the jurisdiction of shareholders.
one ROC to the
jurisdiction of 2. Confirmation of Regional Director to be obtained by submitting an application
another ROC in Form INC-23.
within the same The Regional Director must convey his confirmation within 30 Days from the date
State. [Section 12] of receipt of application for such change.
4. Certified copy of the confirmation by Regional director to be filled with ROC
within 30 days from the date of confirmation.
5. A resolution of the Board of Directors is required to be passed.
6. ROC is required to registered the same within 30 days from filing of such
confirmation
(D)Change from 1. A special resolution is required to be passed by the company at its general
one state to another meeting.
[Section 13]
2. 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 form and manner as may be
prescribed. (Form No. INC-23)
24 Theory Module 1
3. A company shall, in relation to any alteration of its memorandum, file with the
Registrar—
♦ the special resolution passed by the company under sub-section (1);
♦ the approval of the Central Government under sub-section (2), if the alteration
involves any change in the name of the company.
Dispose of the The Central Government shall dispose of the application of change of place of
application of the registered office within a period of sixty days.
change of place of Before passing of order, Central Government may satisfy itself that-
the registered office
♦ 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.
2.6 OBJECTS CLAUSE [Section 4(1)(c)]
Content  This clause will state the main objects of the company for which company has
come into existence.
 In addition it also contains the objects which are incidental or ancillary to
attainment of main objects.
2.7 ALTERATION OF OBJECT CLAUSE-PROCEDURE
1 Passing of a special resolution. [Section 13]
2 Alteration of object by a company which has not issued a prospectus- Any change in its
object clause shall be as per the provisions specified under Article of company
Alteration of object by a company which has issued prospectus- A company, which has
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 through postal ballot is passed by the company and—
♦ the details, 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;
♦ 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.
3 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 filing of the
special resolution
4 No alteration made under this section shall have any effect until it has been registered in
accordance with the provisions of this section.
2.7 ALTERATION OF OBJECT CLAUSE-PROCEDURE
5 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.
2.8 LIABILITY CLAUSE [Section 4(1)(d)]

It contains the liability of members of the company, whether limited or unlimited, and also state,—
In case of Liability clause must state that the liability of the members shall be limited by
companies limited shares.
by shares
In case of Amount up to which each member undertakes to contribute
companies limited  To the assets of the company in the event of its being wound-up while he
by guarantee: is a member or within one year after he ceases to be a member, for payment
of the debts and liabilities of the company
and
 To the costs, charges and expenses of winding-up and for adjustment of
the rights of the contributories among themselves
2.9 CAPITAL CLAUSE [Section 4(1)(e)]
Incase of Amount of share capital with which the company is to be registered and the
Companies having division thereof into shares of a fixed amount and the number of shares which the
share capital subscribers to the memorandum agree to subscribe which shall not be less than one
share; and
The number of shares each subscriber to the memorandum intends to take,
indicated opposite his name;
2.10 ALTERATION OF CAPITAL CLAUSE [Section 61] — PROCEDURE
1. Authorization by A company may alter the capital clause only if it is authorized by its articles.
AOA
2. Alteration can be 1 Increase of its share capital by issue of new shares;

for any of the
following purposes 2 Consolidation of existing shares into shares of larger amount
Provided that no consolidation and division which results in changes in the voting
percentage of shareholders shall take effect unless it is approved by the Tribunal on
an application made in the prescribed manner
3 Conversion of fully paid shares into stock or vice versa;
4 Sub-dividing the existing shares into shares of smaller amount
5 Cancellation of unissued shares.

26 Theory Module 1
3. Requirement of An ordinary resolution is required to be passed.

Resolution
4. Intimation to Notice specifying alteration made must be given to ROC within 30 days.
ROC
2.11 DOCTRINE OF ULTRA-VIRES
1. Meaning- The term 'ultra' means beyond and the term 'vires' means powers. Thus term “Ultra
Ultra Vires vires” means doing an act beyond the powers. An act which is Ultra Vires may fall
under any of the following category:—
Case law of The memorandum of the company in the said case defined its objects thus: “The
Ashbury Railway objects for which the company is established are to make and sell, or lend or hire,
Carriage and Iron railway plants to carry on the business of mechanical engineers and general
Co. Ltd. v Riche contractors…….”.
The company entered into a contract with M/s. Riche, a firm of railway contractors
to finance the construction of a railway line in Belgium. On subsequent repudiation
of this contract by the company on the ground of its being ultra vires, Riche
brought a case for damages on the ground of breach of contract, as according to
him the words “general contractors” in the objects clause gave power to the
company to enter into such a contract and, therefore, it was within the powers of
the company. More so because the contract was ratified by a majority of
shareholders.
The House of Lords held that the contract was ultra vires the company and,
therefore, null and void.
The Court held that if every shareholder of the company had been in the room and
had said, “That is a contract which we desire to make, which we authorise the
directors to make”, still it would be ultra vires.
The shareholders cannot ratify such a contract, as the contract was ultra vires the
objects clause, which by Act of Parliament, they were prohibited from doing.
The purpose of doctrine of ultravires has been defeated as now the object clause
can be easily altered, by passing just a special resolution by the shareholders.
2. An act ultra-vires  It is an act which is beyond the powers of the directors. If company does any
the directors act which is ultra-vires the directors, the act is not altogether void.
 It can be ratified by the general body of shareholders. When the act is so
ratified, company becomes bound by the same
3. An act ultra-vires  It is an act which is beyond the powers given by the articles of association.
the articles of  An Act which is ultra-vires the articles is also not altogether void and
association inoperative.
 It can also be ratified by the company by passing a special resolution. Thus -
company becomes bound by such act
4. An act ultra-vires  It is an act which is beyond the powers given by the memorandum of
the memorandum association.
of association  Any such acts are wholly void and inoperative as they are outside the legal
powers of the company. The company is not bound by such acts. Any such
acts cannot be ratified even by the whole body of shareholders.
2.12 BINDING FORCE OF MEMORANDUM AND ARTICLES OF ASSOCIATION [Section 10]
Meaning of Term- Upon registration, the memorandum and articles of association bind the company
Binding Force and its members to the same extent as if they had been signed by the company and
each member respectively.
Members bound to Memorandum and Articles constitute a contract between the members and the
the Company companies, thus members are bound to the company by whatever is contained in
these documents.
[Boreland’s Trustee v Steel Brothers and Co. Ltd.]
 Articles of the company provided that the shares of any member who'
became bankrupt would be sold to other persons at a price fixed by the
directors.
 B, a shareholder became bankrupt and his trustee in bankruptcy claimed
that he was not bound by the articles and could therefore, sell those shares
at their true value.
 It was held that the trustee in bankruptcy was bound by the Articles as it
constituted a binding contract between the members and the company
2. Company bound  The 'articles of association' of a company contained a provision that "the
to the members directors, with the sanction of the company at a general meeting, declare a
dividend to be paid to the members".
 Instead of paying the dividend in cash to the shareholders, the company
passed a resolution to give 'debenture -bonds' to the shareholders.
 A member brought an action for restraining the directors from acting on the
resolution.
3. Between  Members of the company, among themselves are also bound by the
members inter se provisions of MOA and AOA.
 Even though memorandum and articles do not create any express contract
between the members of the company. Still members are bound between
themselves only on the basis of an implied contract.
4. Between the [Eley v Positive Government Life Assurance Co. Ltd.]

Company and  "The Articles of the company contained a provision that Eley would be the
outsider  life time solicitor for the company and would not be removed from office
except for misconduct.
 Eley acted as solicitor to the company and also became a member of the
company.
 The company terminated his services. He sues the company for damages for
breach of contract.
 It was held that, Articles cannot be basis of a contract between the
company and an outsider.
28 Theory Module 1
2.13 CONSTRUCTIVE NOTICE OF MEMORANDUM AND ARTICLES OF ASSOCIATION
Meaning of  Memorandum and Articles of Association on their registration become public

Constructive Notice documents.
 Every person dealing the company is presumed to have the knowledge of the
contents of these Documents and also to have understood them according to
their proper meaning.
In Whose Favour This document operates in favour of company and operates against the person
this Doctrine dealing with company
Operate
[Kotla Venkata  The 'articles of association' of a company contained a provision that all deeds
Swami v Ram and important documents should be signed by three officers of the company
Murthi] namely, the managing director, Secretary, and working director.
 A accepted a deed of mortgage executed by the secretary and working director
only.
 It was held that A could not claim any right under this deed as it was invalid.
The court held that had he (A) consulted the articles of association, he would
have known that such deed was need to be executed by three specified officers
of the company
2.14 DOCTRINE OF 'INDOOR MANAGEMENT'
1. Meaning of This  Every person dealing with the company is presumed to have understood the
Doctrine contents of company's memorandum and articles of association.
 If he enters into a contract with the company which is contrary to the provisions
of memorandum articles of association, then he will not get any right under
such contract.
 Such rule has one exception which is known as 'doctrine of indoor
management'.
 According to this doctrine, a person dealing with the company is not presumed
to the knowledge of internal proceedings of the company
[Rule in Royal  The directors of a company were authorized by the articles to borrow on bond
British Bank, such sums of money, as authorized from time to time, by a resolution of the
Turquand] company, in General Meeting.
 The directors borrowed money from Turquand and issued a bond to him. No
resolution of the company, as was required to be passed according to the
Articles of Association was passed.
 It was held that Turquand could sue the company on the bond, as he was
entitled to assume that the resolution of the company in General Meeting
authorizing the directors to borrow money had been passed.
2.15 EXCEPTIONS TO THE DOCTRINE OF INDOOR MANAGEMENT
1. Knowledge of Where a person dealing with the company has knowledge of irregularities regarding
irregularities the internal management. In such case, he cannot take benefit of the doctrine of
indoor management.
[Howard v Patent Ivory Manufacturing Co]
The articles of association of a company contained a provision that directors have
the power to borrow on behalf of company `1,00,000 without any resolution, And
for any amount exceeding that, the consent of the shareholders was necessary by
way of resolution.
Directors themselves lent to the company an amount exceeding the borrowing
powers of the company but no resolution was passed to authorize such borrowing.
It was held that the company is liable to the extent of `1,00,000 only.
2. Negligence or If there are adequate ground for suspicious around the transaction which requires
Suspicion of some enquiry, in such a case also, person dealing with the company cannot take
irregularities benefit of the doctrine of indoor management.
[Anand Bihari Lal v Dinshaw & Co]
 A, an accountant of a company, agreed to transfer some property of the
company to B and B accepted this transfer of company's property.
 The transfer was held to be void; as such a transfer of company's property was
apparently beyond the scope of an accountant's authority.
3. No knowledge of Where a person dealing with the company has not in fact gone through company's
articles of memorandum and articles of association, he cannot claim protection under this
association: principal.
4. Forgery: Sometimes, a person dealing with the company relies upon a document which is
forged by the officer of the company. In such cases, he cannot take the benefit of
doctrine of Indoor management.
[Rubben v Great Fingal Consolidated]
 The secretary of the company issued a share certificate in favour of Rubben by
forging the signatures of two directors under the seal of the company.
 'R' wanted to be registered as a member but the company refused to register him
as a member.
 'R' contended that since signatures were part of internal management and he had
no means to ascertain the genuineness of the signatures, therefore he should be
protected.
 The court held that the share certificate is not binding on the company.
2.16 ARTICLE OF ASSOCIATION
Meaning and  The articles of association of a company are its rules and regulations, which are
Contents framed to manage its internal affairs.
(Section 5)  Just as the memorandum contains the fundamental conditions upon which
along the company is allowed to be incorporated, so also the articles are the
internal regulations of the company
30 Theory Module 1
 The articles play a part subsidiary to memorandum of association. They accept
the memorandum as the charter of incorporation, and proceed to define the
duties, the rights and powers of the governing body and the company,
 It also define the mode and form in which changes in the internal regulation of
the company may from time to time be made.
 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.
 A company may adopt all or any of the regulations contained in the model
articles applicable to such company.
Entrenchment: Usually an article of association may be altered by passing special resolution but
entrenchment makes it more difficult to change it.
So entrenchment means making something more protective.
Contain provisions for entrenchment: The articles may contain provisions for
entrenchment to the effect that specified provisions of the articles may be altered
only if conditions 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 agreed to by all the members of the
company in the case of a private company and by a special resolution in
the case of a public company.
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.
Example on Example-1-Mr. Tarun promoted an education start up and got it registered as a
entrenchment private limited company. Initially he and his family are holding all shares in the
company. In the article of association of company it is written that Mr. Tarun will
remain director of the company for lifetime. But he has a fear that tomorrow if 75%
or more shares in the company are held by non family members then by passing a
special resolution article may be changed and he may be removed from the post of
director.
Therefore, it was also written in the article that he can be removed from the post of
director only if 95% votes are cast in favour of the resolution. This is
entrenchment.
Example-2- If PQR Company subscribes 20% shares of XYZ, a Private Ltd.
company. Remaining 80% shares are held by promoters and family. Tomorrow if
XYZ private limited approaches any Bank for a loan, the bank officials would read
the Articles & would ask to get the consent of PQR Company.
Now, if there is no entrenchment provision, then ‘XYZ’ may, after passing a
special resolution remove the minority right and can borrow beyond the limit.
In order to control it, the entrenchment provisions are usually compelled by the
minority to make the majority responsible and the minority in these provisions can
get incorporated a clause saying that borrowing beyond a particular limit or
issuances of shares is to be done only after the requisite consent of minority has
been obtained.
Alteration in AOA The law with respect to alteration of articles is as follows:

(Section 14) (1) Alteration by special resolution: Company shall pass a special resolution to
alter its articles.
(2) 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:
(3) Filing 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, within a period of fifteen days
(4) Any alteration made shall be valid: Any alteration of the articles registered as
above shall be valid as if it were originally contained in the articles.
(5) 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]
2.17 ACT TO OVERRIDE MEMORANDUM, ARTICLES, ETC. [Section 6]
According to section 6 of the Act,—

 the provisions of this Act shall have effect irrespective of anything to the contrary contained in the
 memorandum or articles of a company, or
 in any agreement executed by it, or
 in any resolution passed by the company in general meeting or
 by its Board of Directors,
 any provision contained in the memorandum, articles, agreement or resolution shall, to the extent to
which it is repugnant (in conflict) to the provisions of this Act, become or be void, as the case may
be.’
 In simple words, the provisions of this Act shall have overriding effect.
2.18 COPIES OF MEMORANDUM, ARTICLES, ETC., TO BE GIVEN TO MEMBERS [Section

17]
According to section 17 every company on being so requested by a member, shall send copies of the
following documents within seven days of the request on the payment of fees—
 the memorandum;
 the articles; and
 every agreement and every resolution.
In case of default, the company and every officer who is in default shall be liable for each default, to a
penalty of one thousand rupees for each day during which such default continues or one lakh rupees,
whichever is less.
32 Theory Module 1
2.19 COMMENCEMENT OF BUSINESS ETC. [Section 10A]
1. A company having a share capital shall not commence any business or exercise any borrowing
powers unless—
(a) a declaration is filed by a director within a period of 180 days of the date of incorporation of the
company in such form and verified in such manner as may be prescribed, with the Registrar that every
subscriber to the memorandum has paid the value of the shares agreed to be taken by him on the date of
making of such declaration; and
(b) The company has filed with the Registrar a verification of its registered office as provided in sub-section
(2) of section 12.
2. If any default is made in complying with the requirements of this section, the company shall be liable
to a penalty of fifty thousand rupees and every officer who is in default shall be liable to a penalty of one
thousand rupees for each day during which such default continues but not exceeding an amount of one
lakh rupees.
(1) 3. Where no declaration has been filed with the Registrar within a period of 180 days of the date of
incorporation of the company and the Registrar has reasonable cause to believe that the company is not
carrying on any business or operations,
(2) he may, initiate action for the removal of the name of the company from the register of companies.
As per Rule 23A [Declaration at the time of commencement of business.] of the Companies (Incorporation)
Rules, 2014, the declaration under section 10A by a director shall be in prescribed form with prescribed
fees and the contents of the said form shall be verified by a Company Secretary or a Chartered Accountant
or a Cost Accountant, in practice:
Provided that in the case of a company pursuing objects requiring registration or approval from any
sectoral regulators such as the Reserve Bank of India, Securities and Exchange Board of India, etc., the
registration or approval, as the case may be from such regulator shall also be obtained and attached with
the declaration.
2.20 CONVERSION OF COMPANIES ALREADY REGISTERED [Section 18]
According to Section 18 of the Companies Act, 2013,

a company may convert itself in some other class of company by altering its memorandum and articles of
association.
Following is the law with respect to the conversion of the companies already registered
o 1. By alteration of memorandum and articles: A company of any class registered under this Act may
convert itself as a company of other class under this Act by alteration of memorandum and articles of the
company in accordance with the provisions of this Chapter.
o 2. File an application to the Registrar: Wherever such conversion of companies is required to be done,
the company shall file an application to the Registrar, who shall after satisfying himself that the provisions
applicable for registration of companies have been complied with, close the former registration of the
company.
3. Issue a certificate of incorporation: After registering the required documents, issue a certificate of
incorporation in the same manner as its first registration.
4. No effect on the debts, liabilities etc. incurred before conversion: The registration of a company
under this section shall not affect any debts, liabilities, obligations or contracts incurred or entered into, by
or on behalf of the company before conversion and such debts, liabilities, obligations and contracts may
be enforced in the manner as if such registration had not been done.
2.21 HOLDING AND SUBSIDIARY COMPANIES TRANSACTION [Section 19]
Subsidiary According to section 19 of the Companies Act, 2013, no company shall, either by
company not to itself or through its nominees
hold shares in its (i) hold any shares in its holding company, and
holding company-
(ii) no holding company shall allot or transfer its shares to any of its subsidiary
companies, and any such allotment or transfer of shares of a company made
to its subsidiary company shall be void
Exceptions (a) where the subsidiary company holds such shares as the legal representative
of a deceased member of the holding company; or
(b) where the subsidiary company holds such shares as a trustee; or
(c) Where the subsidiary company is a shareholder even before it became a
subsidiary company of the holding company.
Special Note The subsidiary company referred to in the above exceptions shall have
a right to vote at a meeting of the holding company only in respect of the shares
held by it as a legal representative or as a trustee, as referred to in clause (a) or
clause (b) of the said exceptions
2.22 SERVICE OF DOCUMENTS [Section 20]
A. To the Company
1.Where All documents belonging to company shall be served upon it at its Registered
documents shall be Office
delivered
2. How Delivery It shall be either through—

shall be ensured  registered post, or
 speed post, or
 courier service, or
 Hand delivery, or
 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.
3. Special Point In case any AOA provide any other provision which is inconsistent with provisions
as contained under section 20, then any such clause in AOA shall be invalid
B. To the ROC/Members
Mode of delivery Document may be served on Registrar or any member by sending it to him by—
♦ post, or
♦ registered post, or
♦ speed post, or
34 Theory Module 1
♦ courier, or
♦ by delivering at his office or address, or
♦ by such electronic or other mode as may be prescribed:
However in the case of a Nidhi, the document may be served only on members who
hold shares of more than one thousand rupees in face value or more than one per
cent, of the total paid-up share capital of the Nidhis whichever is less.
For other shareholders, document maybe served by a public notice in newspaper
circulated in the district where the Registered Office of the Nidhi is situated; and
publication of the same on the notice board of the Nidhi.
Special right to A member may request for delivery of any document through a particular mode, for
member which he shall pay such fees as may be determined by the company in its annual
general meeting
Delivery by Post- (i) in the case of a notice of a meeting, at the expiration of forty eight hours after
Special Point 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.
2.23 AUTHENTICATION OF DOCUMENTS, PROCEEDINGS AND CONTRACTS [Section 21]
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—
 any key managerial personnel, or
 an officer or employee of the company duly authorized by the Board in this behalf.
2.24 EXECUTION OF BILLS OF EXCHANGE, ETC. [Section 22]
1. A bill of exchange, hundi or 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 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, authorise 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 seal, the above authorisation 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
Chapter 3
MEMBERSHIP IN A COMPANY
Synopsis
3.1 Definition of Member [Section 2(55)] 35
3.2 Difference between Member and Shareholder 35
3.3 Who can become a member 36
3.1 DEFINITION OF MEMBER [Section 2(55)]
Companies Act defines a member in the following words
1 The subscribers to the Memorandum of a company shall be deemed to have agreed to become
members of the company, and on its registration, shall be entered as members in its register of members.
2 Every other person who agrees in writing to become a member of a company and whose name is
entered in its register of members shall be a member of the company.
3 Every person holding equity share capital of a company and whose name is entered as beneficial
owner in the records of the depository shall be deemed to be a member of the concerned company.'
3.2 DIFFERENCE BETWEEN MEMBER AND SHAREHOLDER
General Rule Member means persons whose name is entered in register of member of company.
They may also be called as shareholder. Thus the terms Members and Shareholders
may be used interchangeable.
Exceptions 'Ram' is a member of a company limited by shares. His name is placed on the Register
of members. Now, in the following three situations he will cease to be a shareholder,
though he continues to be the member of the company:
1. On sale  He gives the share certificate representing the shares to Y.

 Ram is no longer a shareholder as he has sold the shares
 But the name of Ram continues to be on the Register of members till the
transfer of shares is registered by the company in favour of Y.
During Such Period, even though Ram will be a member, but not shareholder
2. On death  Ram dies and his property, including shares, is inherited by Y, his legal
representative.
36 Theory Module 1
 Ram is no longer the shareholder. Y is holding the shares in his own right
and, therefore, can rightly be called the shareholder. But Ram continues to
be the member as his name still appears on the Register of members.
3. On becoming  Ram becomes insolvent and his property, including shares, vests in the
insolvent Official Receiver or Official Assignee.
 The Official Receiver or Assignee is holding the shares in his own right.
 Therefore, Ram is no longer the shareholder, though he continues to be the
member of the company.
4. Subscriber of A person who subscribes to the memorandum of association immediately becomes

MOA the member, even though no shares are allotted to him. Till shares are allotted to the
subscriber, he is a member but not the shareholder of the company.
5. In case of In the case of a company limited by guarantee having no share capital or an unlimited
Company limited company having no share capital, there will be only 'members' but no 'shareholders'.
by guarantee
3.3 WHO CAN BECOME A MEMBER
1. Minor  Since a minor is not competent to enter into a valid contract, he cannot become
a member of the company.
 Minor shall not be liable to pay any unpaid calls on shares
 Company may transfer fully paid up shares to Minor since no further liability is
attached to them.
Right to Repudiate 1 Both the company and minor can repudiate the allotment.
the Allotment
during Minority 2 In either case, the company has to refund all moneys received from minor in
respect of the shares allotted to him.
3 If neither party repudiates allotment, the name of the minor shall continue to
appear on the register of members, but even then a minor incurs no personal
liability
4 On attaining the age of majority (i.e., 18 years),the minor may repudiate the
allotment of shares within a reasonable time. But if he does not do so, or does
something which shows that he has accepted the shares, he will be liable as a
member.
Diwan Singh v Punjab High Court held that there is no legal bar to minor becoming a member of a
Minerva Films Ltd company by acquiring shares (by way of transfer) provided the shares are fully paid
and no further obligation or liability is attached to them. Minor can become member
by transfer or transmission, but a company may not allow a minor to be a member by
allotment.
2. Company  Since company is a legal person and is competent to enter into a valid contract,
it can become the member of another company.
 Authorized by its articles is essential
Chap. 3 Membership in a Company 37
Exception In following 2 circumstances, company cannot become a member
1. A company cannot purchase its own shares
2. A subsidiary company cannot become a member of its holding company
3. Partnership firm  A partnership firm is not a legal entity separate from its members. Therefore, it
cannot buy shares in its own name.
 A firm may hold shares in the names of individual partners
4. Foreigner A foreigner may become a member of a company registered in India. However, he

will have to obtain the prior approval of RBI.
5. Trustee  A 'trustee' is a person who holds the shares for the benefit of another person.
 Trustee can be a member in his own name, and not for the benefit of others.
6. Joint The following are the legal provisions relating to joint shareholders:
shareholders
1 The joint shareholders are counted as one member for determining whether
the numbers of members of a private company exceeds 50.
2 They will also be counted as one for quorum of a meeting.
3 There is no requirement to deliver more than one share certificate.
4 The company may pay dividend to a person whose name is first written on
the register of members
7. Trade union A trade union registered under the Trade Unions Act can also become a member.
8. Co-Operative They are the legal persons and can hold property in their own name thus can become
Society and Society a member of a company
9. HUF HUF is not a separate person, therefore cannot become a member of a company.
Chapter 4
PROSPECTUS
Synopsis
4.1 Meaning of Prospectus [Section 2(70)] 38
4.2 Public Offer and Private Placement [Section 23] 38
4.3 Deemed Prospectus or Prospectus by Implication or Offer for Sale [Section 25] 39
4.4 Matters to be Stated in the Prospectus [Section 26] 39
4.5 Variation In Terms of Contract or Objects in Prospectus [Section 27] 40
4.6 Offer of Sale of Shares by Certain Members of Company [Section 28] 41
4.7 Public Offer of Securities to be in Dematerialised Form [Section 29 along with Companies (Prospectus
and Allotment of Securities) Rules, 2014] 41
4.8 Advertisement of Prospectus [Section 30] 43
4.9 Shelf Prospectus [Section 31] 44
4.10 Red Herring Prospectus [Section 32] 45
4.11 Misleading Prospectus or Prospectus Containing Untrue Statement 45
4.12 Penalty for Fraudulently Inducing Persons to Invest Money [Section 36] 46
4.13 Action by Affected Persons [Section 37] 46
4.14 Punishment for Fraud 47
4.15 Legal Rules under the Companies Act, 2013 47
4.16 Offer of Invitation for Subscription of Securities on Private Placement (Section 42) 48
4.1 MEANING OF PROSPECTUS [Section 2(70)]
Meaning Section 2(70) defines the Prospectus as

“Any document described or issued as a prospectus
and includes a red herring prospectus (section 32), or
shelf prospectus (section 31), or
any notice, circular, advertisement or other document inviting offers from the public
for the subscription, or purchase of any securities of a body corporate”
4.2 PUBLIC OFFER AND PRIVATE PLACEMENT [Section 23]
1. Modes of issue 1. to public through prospectus; or

by Public 2. through private placement; or
Company
3. through a rights issue or a bonus issue, and
4. in case of a listed company or a company which intends to get its securities
listed, with the provisions of the Securities and Exchange Board of India Act,
1992 and the rules and regulations made there under.
Chap. 4 Prospectus 39
2. Modes of issue 1. By way of Right issue or Bonus issue

by Private 2. Through Private Placement
Company
4.3 DEEMED PROSPECTUS OR PROSPECTUS BY IMPLICATION OR OFFER FOR SALE

[Section 25]
1. Meaning  Where the company allots or agrees to allot any securities

 With a view that such securities would be offered to public for sale
 Any such document by which this offer for sale to public is made
 shall be deemed to be a prospectus issued by a company and
 All provisions applicable to prospectus shall be applicable to it with specified
modification.
2. Presumption It will be evident that an allotment or an agreement to allot securities was made
with Deemed with a view to offer them to public in case:-
Prospectus (a) Shares were offered to the public for sale within 6 months after they were
allotted or agreed to be allotted to issuing house, or
(b) Whole consideration in respect of shares/debentures had not been received by
the company.
4.4 MATTERS TO BE STATED IN THE PROSPECTUS [Section 26]
1. Contents of the Every prospectus issued by or on behalf of a public company shall be dated and
prospectus signed and shall state such information and set out such reports on financial
information as may be specified by the Securities and Exchange Board in
consultation with the Central Government:
Provided that until the Securities and Exchange Board specifies the information and
reports on financial information under this sub- section, the regulations made by the
Securities and Exchange Board under the Securities and Exchange Board of India
Act, 1992, in respect of such financial information or reports on financial
information shall apply.
Prospectus shall 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 of this Act, the Securities Contracts (Regulation) Act, 1956 and the
Securities and Exchange Board of India Act, 1992 and the rules and regulations
made thereunder
2. No requirement (a) Right Shares- To the issue to existing members or debenture-holders of a

of Prospectus company, of a prospectus or form of application relating to shares in or debentures
of the company, whether an applicant has a right to renounce the shares or not in
favour of any other person; or
(b) Bonus Shares- to the issue of a prospectus or form of application relating to
shares or debentures which are in all respects uniform with shares or debentures
previously issued and for the time being dealt in or quoted on a recognised stock
exchange.
40 Theory Module 1
4.4 MATTERS TO BE STATED IN THE PROSPECTUS [Section 26]
3. Date of The date indicated in the prospectus shall be deemed to be the date of its
Prospectus publication.
4. Prospectus to be No prospectus shall be issued by or on behalf of a company unless on or before the

issued after date of its publication, there has been delivered to the Registrar for registration, a
registration and copy thereof signed by every person who is named therein as a director or proposed
compliance with director of the company or by his duly authorised attorney.
other formalities:
5. Experts A prospectus issued shall not include a statement purporting to be made by an

‘excluded from expert unless
making a statement  the expert is a person who is not, and has not been, engaged or interested
in the formation or promotion or management, of the company;
 has given his written consent to the issue of the prospectus;
 has not withdrawn such consent before the delivery of a copy of the
prospectus to the Registrar for registration; and
 a statement to that effect shall be included in the prospectus.
6. Compliances Every prospectus issued under sub-section (1) 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 by this section to be attached to the copy so
delivered or refer to statements included in the prospectus which specify these
documents.
7. Compliance of The Registrar shall not register a prospectus unless the requirements of this section
requirements of with respect to its registration are complied with and the prospectus is accompanied
this section before by the consent in writing of all the persons named in the prospectus.
registration
8. Period for the No prospectus shall be valid if it is issued more than ninety days after the date on
issue of prospectus which a copy thereof is delivered to the Registrar
4.5 VARIATION IN TERMS OF CONTRACT OR OBJECTS IN PROSPECTUS [Section 27]
Special Resolution A company shall not, vary the terms of a contract referred to in the prospectus
except by way of special resolution.
Notice of resolution The details of the notice in respect of such resolution to shareholders, shall also be
to shareholders published in the newspapers (one in English and one in vernacular language) in the
city where the registered office of the company is situated indicating clearly the
justification for such variation.
Exit offer to The dissenting shareholders being those shareholders who have not agreed to the
dissenting proposal to vary the terms of contracts or objects referred to in the prospectus, shall
shareholders be given an exit offer by promoters or controlling shareholders at such exit price,
and in such manner and conditions as may be specified by the Securities and
Exchange Board by making regulations in this behalf.
Provisions as per  Where the company has raised money from public through prospectus and has
Companies any unutilized amount out of the money so raised, it shall not vary the terms of
(Prospectus and contracts referred to in the prospectus or objects for which the prospectus was
Allotment of issued except by passing a special resolution through postal ballot.
Securities) Rules,  The advertisement of the notice of resolution passed for varying the terms of
2014 any contract or altering the objects of the prospectus shall be published
simultaneously with dispatch of Postal Ballot Notices to Shareholders.
 The notice shall also be placed on the website of the company, if any.
4.6 OFFER OF SALE OF SHARES BY CERTAIN MEMBERS OF COMPANY [Section 28]
Provision (1) Where certain members of a company propose, in consultation with the Board of
Directors to offer, whole or part of their holding of shares to the public, they may do
so in accordance with such procedure as may be prescribed.
(2) Any document by which the offer of sale to the public is made shall, for all
purposes, be deemed to be a prospectus issued by the company and all laws and rules
made thereunder as to the contents of the prospectus and as to liability in respect of
mis-statements in and omission from prospectus or otherwise relating to prospectus
shall apply as if this is a prospectus issued by the company.
(3) The members, whether individuals or bodies corporate or both, whose shares are
proposed to be offered to the public, shall collectively authorise the company, whose
shares are offered for sale to the public, to take all actions in respect of offer of sale
for and on their behalf and they shall reimburse the company all expenses incurred
by it on this matter.
Exceptions to According to Rule 8(1), the provisions of Part I of Chapter III namely “Prospectus
certain Matters: and Allotment of Securities” and rules made thereunder shall be applicable to an
offer of sale referred to in section 28 except for the following, namely:—
(a) the provisions relating to minimum subscription;
(b) the provisions for minimum application value;
(c) the provisions requiring any statement to be made by the Board of directors in
respect of the utilization of money; and
(d) any other provision or information which cannot be compiled or gathered by the
offeror, with detailed justifications for not being able to comply with such
provisions.
4.7 PUBLIC OFFER OF SECURITIES TO BE IN DEMATERIALISED FORM [Section 29 along

with Companies (Prospectus and Allotment of Securities) Rules, 2014]
Which company  Every company making public offer; and

need shares in
 Such other class or classes of public companies as may be prescribed,
Demat Form
shall issue the securities only in dematerialised form by complying with the
provisions of the Depositories Act, 1996 and the regulations made thereunder.
Any company, other than a company mentioned above may convert its securities into
dematerialised form or issue its securities in physical form in accordance with the
provisions of this Act or in dematerialised form in accordance with the provisions of
the Depositories Act, 1996 and the regulations made thereunder.
42 Theory Module 1
Dematerialisation of Securities: Promoters of every public company making a
public offer of any convertible securities may hold such securities only in
dematerialised form.
It is provided that the entire holding of convertible securities of the company by the
promoters held in physical form up to the date of the initial public offer shall be
converted into dematerialised form before such offer is made and thereafter such
promoter shareholding shall be held in dematerialised form only.
In case of such class or classes of unlisted companies as may be prescribed, the
securities shall be held or transferred only in dematerialised form in the
manner laid down in the Depositories Act, 1996 and the regulations made
thereunder.
Issue of securities in dematerialised form by unlisted public companies:
According to Rule 9A(1), every unlisted public company (excluding a Nidhi, a
Government company and a wholly owned subsidiary) shall issue the securities only
in dematerialised form and also facilitate Dematerialisation of all its existing
securities in accordance with provisions of the Depositories Act, 1996 and
regulations made there under.
Conversion of securities in dematerialised form:
Every unlisted public company making any offer for issue of any securities or
buyback of securities or issue of bonus shares or rights offer shall ensure that before
making such offer, entire holding of securities of its promoters, directors, key
managerial personnel has been dematerialised in accordance with provisions of the
Depositories Act, 1996 and regulations made there under.
Responsibility of every holder of securities of an unlisted public company:
According to Rule 9A (3), every holder of securities of an unlisted public company:
(a) who intends to transfer such securities on or after 2nd October, 2018, shall get
such securities dematerialised before the transfer; or
(b) who subscribes to any securities of an unlisted public company (whether by way
of private placement or bonus shares or rights offer) on or after 2nd October,
2018
shall ensure that all his existing securities are held in dematerialized form before
such subscription.
Application to the depository:
As per Rule 9A, every unlisted public company shall facilitate Dematerialisation of
all its existing securities by making necessary application to a depository as defined
in section 2(1)(e) of the Depositories Act, 1996 and shall secure International
Security Identification Number (ISIN) for each type of security and shall inform all
its existing security holders about such facility.
Obligations of every unlisted public company:
According to Rule 9A(5), every unlisted public company shall ensure that—
(a) it makes timely payment of fees (admission as well as annual) to the depository
and registrar to an issue and share transfer agent in accordance with the
agreement executed between the parties;
(b) it maintains security deposit, at all times, of not less than two years’ fees with
the depository and registrar to an issue and share transfer agent, in such form as
may be agreed between the parties; and
(c) it complies with the regulations or directions or guidelines or circulars, if any,
issued by the Securities and Exchange Board or Depository from time to time
with respect to dematerialisation of shares of unlisted public companies and
matters incidental or related thereto.
Prohibition on defaulting unlisted public company:
Rule 9A further states that no unlisted public company which has defaulted in sub-
rule (5) shall make offer of any securities or buyback its securities or issue any bonus
or right shares till the payments to depositories or registrar to an issue and share
transfer agent are made.
Application of certain provisions:
Provisions of the Depositories Act, 1996, the Securities and Exchange Board of
India (Depositories and Participants) Regulations, 2018 and the Securities and
Exchange Board of India (Registrars to an Issue and Share Transfer Agents)
Regulations, 1993 shall apply mutatis mutandis to dematerialisation of securities of
unlisted public companies.
Filing with the Registrar:
Rules 9A prescribes that every unlisted public company governed by Rule 9A shall
submit Form PAS-6 to the Registrar with such fee as provided in the Companies
(Registration Offices and Fees) Rules, 2014 within 60 days from the conclusion of
each half year duly certified by a company secretary in practice or chartered
accountant in practice.
Reporting of difference:
As per Rule 9A, the company shall immediately bring to the notice of the
depositories any difference observed in its issued capital and the capital held in
dematerialised form.
Grievances redressal mechanism:
the grievances, if any, of security holders of unlisted public companies under Rule
9A shall be filed before the Investor Education and Protection Fund Authority
(IEPF).
Initiation of action by IEPF Authority:
Investor Education and Protection Fund Authority shall initiate any action against a
depository or participant or registrar to an issue and share transfer agent after prior
consultation with the Securities and Exchange Board of India
4.8 ADVERTISEMENT OF PROSPECTUS [Section 30]
Provision of Section According to Section 30, where an advertisement of any prospectus of a company
is published in any manner, it shall be necessary to specify therein the contents of
its memorandum as regards the following:
(i) the objects,
(ii) the liability of members and the amount of share capital of the company,
(iii) the names of the signatories to the memorandum,
(iv) the number of shares subscribed for by the signatories, and
(v) the capital structure of the company.
44 Theory Module 1
4.9 SHELF PROSPECTUS [Section 31]
1. Why Shelf  A public company is required to issue a prospectus for raising finance from
Prospectus the public.
 Every time a fresh issue of securities is made, issuing a fresh prospectus is
a costly and time consuming process.
 In order to minimize such burden, the concept of 'shelf prospectus' is
introduced which will be valid for a period of one year.
2. Document For any subsequent offering within the validity period only an 'information
required along with memorandum' for updating the information under the specified heads is required
Shelf Prospectus to be filed.
3. Meaning of Shelf It means a prospectus in respect of which the securities or class of securities
Prospectus included therein are issued for subscription in one or more issues over a certain
period without the issue of a further prospectus.
4. By Whom Any class or classes of companies, as the Securities and Exchange Board may
Shelf Prospectus is provide by regulations in this behalf, may file a shelf prospectus with the Registrar.
required to be filled
5. Validity For a period not exceeding one year which shall commence from the date of
opening of the first offer of securities under that prospectus
6. Benefit of Filing A company filing a shelf prospectus with the Registrar shall not be required to
Shelf Prospectus issue prospectus afresh at every stage of offer of securities by it within a period of
validity of such shelf prospectus.
Thus at the time of making any subsequent offer, company shall-
 File an updated Information memorandum
 Issue to the public, updated information memorandum along with shelf
prospectus
7. Information  Creation of New Charge; and

Memorandum shall  Changes in Financial position of company which has occurred between the
contain material first offer of security, previous offer of security and the succeeding offer of
facts which security.
pertains to
8. Intimation of Where a company or any other person has received applications for the allotment of
change to securities along with advance payments of subscription before the making of any
applicants such change, the company or other person shall intimate the changes to such
applicants and if they express a desire to withdraw their application, the company
or other person shall refund all the monies received as subscription within fifteen
days thereof.
9. Shelf prospectus Where an information memorandum is filed, every time an offer of securities is
with information made with all the material facts with the registrar, such memorandum together with
memorandum the shelf prospectus shall be deemed to be a prospectus.
deemed to be
prospectus:
4.10 RED HERRING PROSPECTUS [Section 32]
1. Meaning of Red- "Red-herring prospectus" means a prospectus which does not have complete
herring Prospectus particulars on the price of the securities offered and the quantum of securities
offered.
2. Issue of red Company proposing to make an offer of securities may issue a red herring
herring prospectus prospectus prior to the issue of a prospectus.
prior to prospectus
3. Filing with the A company proposing to issue a red herring prospectus shall file it with the
registrar Registrar at least three days prior to the opening of the subscription list.
4. Obligation and A red herring prospectus shall carry the same obligations as are applicable to a
any variation in prospectus and any variation between the red herring prospectus and a prospectus
the red herring shall be highlighted as variations in the prospectus.
prospectus is same
as that of
prospectus
5. Prospectus with Upon the closing of the offer of securities, the prospectus stating therein the total
the details not capital raised and the closing price of the securities and any other details as are not
included in the red included in the red herring prospectus shall be filed with the Registrar and the
herring prospectus Securities and Exchange Board.
4.11 MISLEADING PROSPECTUS OR PROSPECTUS CONTAINING UNTRUE STATEMENT

Meaning of (a) It contain any statement which is untrue, and
misleading (b) It omits any matter which is calculated to mislead.
prospectus
Liability incase of Mis-statement in prospectus
Criminal liability Where a prospectus, issued, circulated or distributed under this Chapter, includes
for misstatements any statement which is untrue or misleading in form or where any inclusion or
in prospectus omission of any matter is likely to mislead, every person who authorizes the issue
(Section 34): of such prospectus shall be liable under section 447:
Provided that nothing in this section shall apply to a person if he proves that such
statement or omission was immaterial or that 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.
Civil liability for Company and every person who—
misstatements in (a) is a director of the company at the time of the issue of the prospectus;
prospectus
(Section 35) (b) has authorised himself to be named and is named in the prospectus as a director
of the company, or has agreed to become such director,
(c) is a promoter of the company;
(d) has authorised the issue of the prospectus; and
(e) is an expert referred in section 26,
shall, be liable to pay compensation to every person who has sustained such loss or
damage.
46 Theory Module 1
No person shall be (a) that, having consented to become a director of the company, he withdrew his
liable u/s 35, if he consent before the issue of the prospectus, and that it was issued without his
proves authority or consent; or
(b) that the prospectus was issued without his knowledge or consent, and that on
becoming aware of its issue, he forthwith gave a reasonable public notice that it
was issued without his knowledge or consent.
(c) that, he had reasonable ground to believe and did up to the time of the issue of
the prospectus believe, that the person making the statement was competent to
make it and that the said person had given the consent required u/s 26 to the
issue of the prospectus and had not withdrawn that consent before delivery of a
copy of the prospectus for registration or, to the defendant's knowledge, before
allotment thereunder.
Liability on Where it is proved that a prospectus has been issued with intent to defraud the
defraud applicants for the securities of a company or any other person or for any fraudulent
purpose, every person referred to in sub-section (1) shall be personally responsible,
without any limitation of liability, for all or any of the losses or damages that may
have been incurred by any person who subscribed to the securities on the basis of
such prospectus.
4.12 PENALTY FOR FRAUDULENTLY INDUCING PERSONS TO INVEST MONEY [Section 36]
When this Section is attracted where any person who, induces or attempts to induce another
Provision shall person to enter into, or to offer to enter some agreement by making any false,
apply deceptive or misleading statement, promise or forecast or by any dishonest
concealment of material:
Attempt to induce 1 Any agreement for, the acquisition, disposal, subscribing for, or underwriting
must be to enters Shares or debentures
into any of
2 Any agreement for the purpose of securing any profit to any of the parties from
following
the yield of shares or debentures, or from fluctuations in the value of shares or
agreement
debentures
3 Any agreement for obtaining credit facilities from any bank or financial
institution.
4.13 ACTION BY AFFECTED PERSONS [Section 37]
Why this Section  The need for these types of suits was felt during the time of Satyam Scam,
where a large group of people were cheated regarding their hard-earned money
invested in Stock Market.
 During said scam, 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.
 Lacs of investors who lost their hard earned money 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.
Right to submit The section 37 of the Companies Act, 2013, provides that a suit may be filed or any
suit other action may be taken by any person, group of persons or any association of
persons who have been affected by any misleading statement or the inclusion/
omission of any matter in the prospectus.
4.14 PUNISHMENT FOR FRAUD
Meaning of fraud “Fraud” in relation to affairs of a company or any body corporate, includes-
 any act,
 omission,
 concealment of any fact, or
 abuse of position
committed by any person, or any other person with the connivance in any manner,
with intent to deceive, to gain undue advantage from, or to injure the interests of, the
company or its shareholders or its creditors or any other person whether or not there
is any wrongful gain or wrongful loss
Provisions of Sec  According to section 447 of the Act, any person who is found to be guilty of
447 fraud involving an amount of at least ten lakh rupees or one per cent. of the
turnover of the company, whichever is lower shall be punishable with
imprisonment for a term
which shall not be less than six months but which may extend to ten years and shall
also be liable to fine which shall not be less than the amount involved in the fraud,
but which may extend to three times the amount involved in the fraud:
 Provided that where the fraud in question involves public interest, the term
of imprisonment shall not be less than three years.
 Provided further that where the fraud involves an amount less than ten lakh
rupees or one per cent. of the turnover of the company, whichever is lower,
and does not involve public interest, any person guilty of such fraud shall be
punishable with imprisonment for a term which may extend to five years or
with fine which may extend to fifty lakh rupees or with both.
4.15 LEGAL RULES UNDER THE COMPANIES ACT, 2013
1. Minimum Minimum  It means receipt of an application for at least 90% of the

subscriptions and Subscription shares issued
application money  No allotment shall be made unless the amount of minimum
[Section 39] subscription has been subscribed and received by company
Application  It the amount which is payable on each share along with the
money application for purchase or shares.
 This amount must not be less than 5% of the nominal value of
shares.
48 Theory Module 1
2. Consequences in Company shall keep the entire amount received on application with Scheduled
case of failure to bank and in case company failed in obtaining Minimum Subscription within 30
received Minimum days, or such period as may be prescribed by SEBI, the amount received shall be
Subscription returned within such time and manner as may be prescribed.
3. Provisions as per Where the minimum subscription amount has not been subscribed, then the
According to the application money shall be repaid within a period of fifteen days from the closure
Companies of the issue.
(Prospectus and Directors of the company who are officers in default shall jointly and severally be
Allotment of liable to repay that money with interest at the rate of fifteen percent per annum. The
Securities) application money to be refunded shall be credited only to the bank account from
Rules, 2014 which the subscription was remitted.
4. Listing of public  Every public company, who intends to offer its shares or debentures to the
issue with public for subscription by the issue of a prospectus, must make an application
recognized stock to at least one recognized stock exchange for permission for its shares or
exchange debentures to be dealt with the stock exchange.
[Section 40]  Such an application shall be made prior to issue of shares
 Fact of Such Application must be stated in Prospectus
 No allotment shall be made unless approval has been obtained from all such
stock exchange where such application was filed.
4.16 OFFER OF INVITATION FOR SUBSCRIPTION OF SECURITIES ON PRIVATE

PLACEMENT (Section 42)
Meaning of The term "private placement" means any offer of securities or invitation to subscribe
Private securities to a select group of persons by a company (other than by way of public
Placement offer) through issue of a private placement offer letter
Prescribed Conditions
1. Offer/invitation The offer of securities or invitation to subscribe securities, only to a select group of
to number of persons who have been identified by the Board subject to maximum to 200 persons
persons in a financial year
It does not include- qualified institutional buyers and employees of the company
being offered securities under a scheme of employees stock option as per provisions
of section 62(1)(b)
Special Note Restrictions aforesaid would be reckoned individually for each kind of security that
is equity share, preference share or debenture.
2. Issue of Private A company making private placement shall issue private placement offer and
Placement offer application in such form and manner as may be prescribed to identified persons,
letter whose names and addresses are recorded by the company in such manner as may be
prescribed:
Provided that the private placement offer and application shall not carry any right of
renunciation.
3. No fresh Private No fresh offer or invitation under this section shall be made unless the allotments
placement till with respect to any offer or invitation made earlier have been completed or that offer
completion of or invitation has been withdrawn or abandoned by the company:
earlier offer Provided that, subject to the maximum number of identified persons, a company
may, at any time, make more than one issue of securities to such class of identified
persons as may be prescribed.
4. No No company issuing securities under this section shall release any public
Advertisement advertisements or utilise any media, marketing or distribution channels or agents to
inform the public at large about such an issue.
5. Submission of A company making any allotment of securities under this section, shall file with the
Return of Registrar a return of allotment within fifteen days from the date of the allotment in
Allotment such manner as may be prescribed, including a complete list of all allottees, with
their full names, addresses, number of securities allotted and such other relevant
information as may be prescribed
If a company defaults in filing the return of allotment within the period prescribed,
the company, its promoters and directors shall be liable to a penalty for each default
of one thousand rupees for each day during which such default continues but not
exceeding twenty-five lakh rupees.
6. Offer/invitation Where a company, listed/unlisted, makes an offer to allot or invites subscription to

to more than more than the prescribed number of persons, the same shall be deemed to be an offer
prescribed to the public.
number of persons
7. Payment of All monies payable towards subscription of securities under this section shall be paid
amount through cheque or demand draft or other banking channels but not by cash.
Provided that a company shall not utilise monies raised through private placement
unless allotment is made and the return of allotment is filed with the Registrar
8. Time for A company making an offer or invitation under this section shall allot its securities
allotment of within 60 days from the date of receipt of the application money for such securities
securities
9. Default in Where the company is not able to allot the securities within stated period, it shall
allotment of repay the application money to the subscribers within 15 days from the date of
securities completion of sixty days and if the company fails to repay the application money
within the aforesaid period, it shall be liable to repay that money with interest @ of
12% per annum from the expiry of the sixtieth day:
Provided that monies received on application under this section shall be kept in a
separate bank account in a scheduled bank and shall not be utilised 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.
10. Consequences If a company makes an offer or accepts monies in contravention of this section, the
of default company, its promoters and directors shall be liable for a penalty which may extend
to the amount raised through the private placement or two crore rupees, whichever is
lower, and the company shall also refund all monies with interest as specified in sub-
section (6) to subscribers within a period of thirty days of the order imposing the
penalty.
50 Theory Module 1
The Companies (Prospectus and Allotment of Securities) Rules, 2014, provides certain limitations on the
companies with respect to making of a private placement
1. Previous The proposed offer of securities or invitation to subscribe securities has been
approval of previously approved by the shareholders of the company, by a Special Resolution
shareholder Provided that in the explanatory statement annexed to the notice for the general
meeting the basis or justification for the price (including premium, if any) at which
the offer or invitation is being made shall be disclosed.
Provided further that this sub-rule shall not apply in case of offer or invitation for.
non-convertible debentures, where the proposed amount to be raised through such
offer or invitation does not exceed the limit as specified in clause (c) of sub section
(1) of section 180 and in such cases relevant Board resolution under clause (c) of
subsection (3) of section 179 would be adequate:
Provided also that in case of offer or invitation for non-convertible debentures,
where the proposed amount to be raised through such offer or invitation exceeds the
limit as specified in clause (c) of sub-section (1) of section 180, it shall be sufficient
if the company passes a previous special resolution only once in a year for all the
offers or invitations for such debentures during the year.
2. Minimum The value of such offer or invitation per person shall be with an investment size of
Investment not less than twenty thousand rupees of face value of the securities;
Chapter 5
SHARES — MEANING AND TYPES
Synopsis
5.1 Shares of a Company and Share Capital 51
5.2 Difference between Share and Stock 52
5.3 Meaning of Preference Shares 52
5.4 Underwriting Commission and Brokerage [Section 40] 52
5.5 Brokerage 53
5.6 Difference between Brokerage and underwriting Commission 53
5.7 Kinds of Shares [Section 43] 53
5.8 Share Certificate [Section 46] 54
5.9 Voting Rights of a Member [Section 47] 55
5.10 Variation of Right of Shareholders [Section 48] 56
5.11 Calls on Shares [Section 49] 57
5.12 Payment of Calls in Advance [Section 50] 57
5.13 Payment of Dividend in Proportion to Amount Paid-Up [Section 51] 57
5.14 Issue of Securities at Premium [Section 52] 57
5.15 Issue of Shares at Discount [Section 53] 58
5.16 Issue of Sweat Equity Shares [Section 54 read with as per the Rule 8 of the Companies
(Share and Debentures) Rules, 2014] 58
5.17 Redemption of Preference Share Capital [Section 55] 60
5.18 How the Shares can be Transferred or Procedure of Transfer of Shares [Section 56] 60
5.19 Forged Transfer 62
5.20 Punishment for Personation of Shareholder [Section 57] 62
5.21 Refusal to Register Transfer and Appeal Against Refusal [Section 58] 62
5.22 Rectification of Register of Members [Section 59] 63
5.23 Further Issue of Shares 63
5.24 Further Issue of Shares 64
5.25 Conversion of Debentures or Loan into Shares [Section 62(4)] 64
5.26 Issue of Convertible Debenture by Company [Section 62(3)] 65
5.27 ESOPS by Unlisted Company 65
5.28 Bonus Shares [Section 63] 66
5.29 Notice to be Given to Registrar for Alteration of Share Capital [Section 64] 67
5.30 Reduction of Share Capital [Section 66] 67
5.31 Procedure for Reduction of Share Capital 67
5.32 Difference Between Reduction of Capital and Cancellation of Capital 68
5.33 Loan or Assisstance by the Company for the Purchase of its Own Shares [Section 67] 68
5.34 Buy-Back of Shares [Section 68] 69
5.35 Prohibition on Buy Back of Shares [Section 70] 71
5.1 SHARES OF A COMPANY AND SHARE CAPITAL

Share-Meaning The term 'share' is defined in Section 2(84) of the Companies Act, which reads as
under:
"Share means a share in the share capital of a company, and includes stock".
52 Theory Module 1
5.2 DIFFERENCE BETWEEN SHARE AND STOCK
Difference Share Stock
No
1 Shares may be fully paid up or partly paid up Stock shall be fully paid up only
2 Shares cannot be transferred in fractions Stock can be transferred in fractions
3 Shares has distinctive numbers No such distinctive numbers shall apply
for Stock
4 Shares can be issued originally Stock cannot be issued originally
5 No resolution of members is required prior to issue Stock can be issued only after passing of
of shares O/R
6 No such Authorization is required for issue of shares Stock can be converted only when AOA
of company so authorized
5.3 MEANING OF PREFERENCE SHARES

Meaning A Shares which have some preferential rights over the other types of shares i.e., which
enjoy some priority over the equity shares.
Condition for the A company having a share capital may, if so authorised by its articles, issue
Issue of preference preference shares subject to the following conditions, namely:-
shares (a) the issue of such shares has been authorized by passing a special resolution in
the general meeting of the company
(b) the company, at the time of such issue of preference shares, has no subsisting
default in the redemption of preference shares issued either before or after the
commencement of this Act or in payment of dividend due on any preference
shares.
Preferential Rights 1. Preference right as to payment of Dividend
available to 2. A preferential right as to the repayment of capital: In the event of winding up
Preference Share of the company, the amount paid on preference shares must be paid back before
anything is paid to the equity shareholders.
5.4 UNDERWRITING COMMISSION AND BROKERAGE [Section 40]

1. Meaning of  It represent an agreement which takes place between the company and some
Underwriting other party known as underwriter whereby underwriter agrees with company to
Agreement acquire the that portion of shares from company which may not be subscribed by
the public.
 He is usually being paid some compensation for his services which is regarded
as underwriting commission.
2. Authorization by Company must be authorized through its AOA to pay such commission.
AOA
3. Amount of In case of 5% of the price at which the shares are issued or Rate mentioned under
commission shall Shares articles
not exceed Whichever is lower
In case of 2.5 % of the price at which the debentures are issued or Rate as per the
debentures Article
Whichever is lower
Chap. 5 Shares — Meaning and Types 53
4. Rate of The amount or rate of the commission paid/Payable must be disclosed in the
Commission/ prospectus or in the statement in lieu of prospectus along with the number of shares
Number of shares or debentures underwritten
to be disclosed As per Companies (Meeting of Board and its powers) Rules, 2014
Company having a Paid-Up share capital of `10.0 Cr or more shall not pay
underwriting commission of more than 1% except with prior approval by members
through Special Resolution
5.5 BROKERAGE
(1) It represents the sum paid the company to any person for placing the shares of company.
(2) Section 40(6) empowers the company to pay brokerage to a person who carries the business as a broker,
thus it cannot be paid to a person who directly applies for shares or who had casually induced others to
subscribe.
(3) No authorization is required as per the Article.
(4) Company can pay brokerage at such rate as may be reasonable
5.6 DIFFERENCE BETWEEN BROKERAGE AND UNDERWRITING COMMISSION

1. Broker is a person who enters into an agreement for placing the shares of company to other persons
whereas Underwriter enters into an agreement to take unsubscribed shares.
2. If broker fails to place any share, he is not personally liable to take them nor is he entitled to any
brokerage. On the other hand, the underwriter is bound to
5.7 KINDS OF SHARES [Section 43]

Equity shares with  The holders of any such equity shares have normal voting rights on every
voting rights resolution placed before the company at any general meeting
 His voting right on a 'poll' shall be in proportion to his share of the paid up equity
capital of the company
Equity shares with The holders of any such equity shares shall have differential rights as to dividend,
differential rights voting or otherwise
Provisions applicable for issue of Equity Shares with Differential Voting Right- As per the Companies
Rule-4 -(Share Capital and Debentures) Rules, 2014
1. Extent of Such the voting power in respect of shares with differential rights of the company shall not
Issue exceed 74% of total voting power including voting power in respect of equity shares
with differential rights issued at any point of time
2. No Default for  Repayment of matured Deposits
following  Redemption of debentures or preference shares
 Payment of Dividend
3. No Default for  Payment of dividend on preference shares
following  Repayment of any term loan from a public financial institution or State level
financial institution or scheduled Bank or interest payable thereon or
 Statutory payments relating to its employees to any authority or
 Crediting the amount in Investor Education and Protection Fund to the Central
Government
54 Theory Module 1
Provided that a company may issue equity shares with differential rights upon expiry of five years from the
end of the financial Year in which such default was made good
4. No Default in  SEBI, 1992
Compliance of  FEMA, 1999
 Securities (Contracts) Regulation Act, 1956
 RBI Act, 1934
5. No default in Company has not defaulted in filling of financial statements and annual returns for 3
Filling of FYs preceding the relevant FY
6. Approval by The Articles of Association must authorize the issue of such equity shares
AOA
7. Approval by Approval of shareholders must be obtained in general meeting by passing an ordinary
Shareholders resolution.
Provided that where the equity shares of a company are listed on a recognized stock
exchange, the issue of such shares shall be approved by the shareholders through
postal ballot;
8. Requirement of Notice of said ordinary resolution must provide for
Notice  The rate of voting right, and
 The rate of dividend which the equity share capital with differential voting right
shall carry.
9. Conversion of The company will not be allowed to convert its equity capital with normal voting
Equity Share with rights into equity share capital with differential voting rights and vice-versa.
Normal Voting
right into Shares
with Differential
Voting Right
10. Bonus and The holders of equity shares with differential rights as to voting or dividend shall be
Dividend on such entitled to bonus shares and right shares of the same class.
Shares
5.8 SHARE CERTIFICATE [Section 46]

1. Meaning 1. A certificate, issued under the common seal, if any, of the company or signed by
two directors or by a director and the Company Secretary, wherever the company has
appointed a Company Secretary, specifying the shares held by any person, shall be
prima facie evidence of the title of the person to such shares.
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.
3. Where a share is held in depository form, the record of the depository is the prima
facie evidence of the interest of the beneficial owner.
4. If a company with intent to defraud issues a duplicate certificate of shares, the
company shall be punishable with fine which shall not be less than five times the face
value of the shares involved in the issue of the duplicate certificate but which may
extend to ten times the face value of such shares or rupees ten crores whichever is
higher and every officer of the company who is in default shall be liable for action
under section 447.
Other Physical entitlement to a particular portion of share capital is prima facie evidenced
requirements for by way of a share certificate which has to be
share certificate • Distinctively numbered; &
• To be issued under common seal of the company or signed by two directors or
by a director and the Company Secretary, wherever the company has appointed
a Company Secretary.
In case required, duplicate certificate could be issued post necessary compliances and
investigations.
The aforesaid requirements are not there in case of dematerialized shares or shares
held in electronic form with any depository. In that case records of the depository
will be treated as prima facie evidence of the right involved.
Dematerialisation After the depositories started functioning in India, the listed shares are required to be
(in short ‘Demat’) held in electronic form.
of Securities: Even banks and financial institutions insist for demat of securities for creation of
charge.
Rule 9A of the Companies (Prospectus and Allotment of Securities) Rules, 2014,
requires every unlisted public company to issue the securities only in dematerialised
form and also facilitate Dematerialisation of all its existing securities.
According to Rule 9A(3), every holder of securities of an unlisted public
company,—
(a) who intends to transfer such securities, shall get such securities dematerialised
before the transfer; or
(b) who subscribes to any securities of an unlisted public company (whether by way
of private placement or bonus shares or rights offer) shall ensure that all his
existing securities are held in dematerialized form before such subscription.
Rule 9A(11) states that Rule 9A shall not apply to an unlisted public company which
is:
(a) a Nidhi;
(b) a Government company; or
(c) a wholly owned subsidiary.
Since only unlisted public companies (subject to exceptions) are covered by Rule 9A
and therefore, it is not necessary for a private limited company to get its securities
dematerialised.
5.9 VOTING RIGHTS OF A MEMBER [Section 47]

1. Voting Rights of  Every member holding an equity share has a right to vote on every resolution
Equity placed before the company.
Shareholders  Voting right on a poll shall be in proportion to his share of the paid up equity
capital of the company.
2. Voting Rights of Every member holding a preference share has a right to vote only on resolutions
Preference which directly affect the rights attached to his preference shares.
Shareholders
3. When the rights 1. Resolution for the winding up the company
are taken as
2. Resolution for the repayment or reduction of its share capital
affected
56 Theory Module 1
4. Circumstances If the dividend has remained unpaid for period of 2 years or more prior to the date of
under which a the commencement of the meeting.
Preference
Shareholder has
Right to Vote on
Every Resolution
5. Proportion of The proportion of the voting rights of equity shareholders to the voting rights of the
voting rights preference shareholders shall be in the same proportion as the paid-up capital in
respect of the equity shares bears to the paid-up capital in respect of the preference
shares.
6. Exemption to In case of private company, section 47 shall not apply where memorandum or articles
Private Limited of association of the private company so provides.
Company The above-mentioned exception shall be applicable to a private company which has
not committed a default in filing its financial statements under section 137 or annual
return under section 92 with the Registrar.
Thus, Private company could be more innovative in terms of voting rights if permitted
by their Memorandum of Association or Article of Association.
5.10 VARIATION OF RIGHT OF SHAREHOLDERS [Section 48]

1.Approval from Before any such variation, company need to obtain prior approval from
Shareholders 1. Shareholders having 3/4th shares of such class or
2. Through Special Resolution
Provided that if variation by one class of shareholders affects the rights of any
other class of shareholders, the consent of three-fourths of such other class of
shareholders shall also be obtained and the provisions of this section shall apply
to such variation.
2. Authorization Any such variation can be made only when, power of such variation is contained
1. Under MOA or AOA of company
2. Terms of issue of these shares
3. Right to Appeal 1. An appeal can be submitted to Tribunal by shareholder who is not willing to
provide his consent and holding at least 10% of shares of this class
2. Such appeal shall be submitted to the court within 21 days of such variation
4. Other The company shall, within thirty days of the date of the order of the Tribunal, file a
Formalities copy thereof with the Registrar.
5. Punishment for where any default is made in complying with the provisions of this section, the
Default: punishment shall be as under:
• company: It shall be punishable with fine which shall not be less than twenty-
five thousand rupees but which may extend to five lakh rupees;
• every officer of the company who is in default: He shall be punishable with
imprisonment for a term which may extend to six months or with fine which
shall not be less than twenty-five thousand rupees but which may extend to five
lakh rupees, or with both.
5.11 CALLS ON SHARES [Section 49]
1. Meaning A "Call" may be defined as a
 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
 at any time during the continuance of a company
2. Resolution of The call must be made by a resolution Passed of board of directors. The resolution
Board must specify the amount of the call, and the time and place of payment of calls.
3. Uniform basis Calls shall be made on a uniform basis, on all shares, falling under the same class.
[Section 49] Shares of the same nominal value on which different amounts have been paid up shall
not be deemed to fall under the same class.
4. Bona fide The call must be made bona fide in the best interest of the company. Power to call
should not misused by directors to make calls for their personal benefits
5. Compliance of The call must be made strictly in accordance with the provisions of the articles of the
AOA company
6. Notice to be Proper notice shall be served on members stating the date, time and last date for
Served Properly payment of call. Any irregularity in issuance of notice will invalidate the notice, in
spite of the fact that such irregularity was not material.
5.12 PAYMENT OF CALLS IN ADVANCE [Section 50]

1. Authorization as Company, if so authorized by the articles, may accept from their shareholder the
per AOA unpaid amount on his shares, in advance of calls.
Voting Right The shareholder is not entitled to voting rights in respect of the moneys so paid by
him until the same would, but for such payment, become presently payable
2. Interest Company may pay interest on calls in advance, if so authorized by the Articles at the
Payment rate so prescribed in AOA
5.13 PAYMENT OF DIVIDEND IN PROPORTION TO AMOUNT PAID-UP [Section 51]
A company may, if so authorised by its articles, pay dividends in proportion to the amount paid- up on each
share.
5.14 ISSUE OF SECURITIES AT PREMIUM [Section 52]

1.Meaning Issue of shares at a price higher than the nominal value is termed as issue of Security
at Premium.
2. Restriction for There is no restriction on the issue of shares at premium. Thus company is free to
such issue issue the shares at premium.
3. Authorization by No prior authorization is required as per AOA
AOA
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4. Purpose for It can be used by company for the following four purposes.
which amount on
1 Issuing of fully paid bonus shares to the members of the company.
Sec Premium can
be utilized 2 Writing off the expenses, commission paid, or discount allowed on the issue of
shares or debentures of the company.
3 Providing for the premium payable on the redemption of preference shares or
debentures of the company.
4 Writing off the preliminary expenses of the company.
5 For the purchase of its own shares or other securities under section 68
5.15 ISSUE OF SHARES AT DISCOUNT [Section 53]

1. Meaning of Issue The issue of shares at a discount means the issue of shares at a price less than the
at Discount nominal value.
2. Whether such According to section 53, a company shall not issue shares at a discount, except in the
issue shall be case of an issue of sweat equity shares given under section 54 of the Companies Act,
allowed 2013. Any share issued by a company at a discounted price shall be void
3. Exception A company may issue shares at a discount to its creditors when
 its debt is converted into shares in pursuance of any statutory resolution plan or
 debt restructuring scheme in accordance with any guidelines or directions or
regulations specified by the Reserve Bank of India under the Reserve Bank of
India Act, 1934 or the Banking (Regulation) Act, 1949
4. Penalty for non- Where any company fails to comply with the provisions of this section, such company
compliance and every officer who is in default shall be liable to a penalty which may extend to an
amount equal to the amount raised through the issue of shares at a discount or five
lakh rupees, whichever is less, and the company shall also be liable to refund all
monies received with interest at the rate of twelve per cent. per annum from the date
of issue of such shares to the persons to whom such shares have been issued
5.16 ISSUE OF SWEAT EQUITY SHARES [Section 54 read with As per the Rule 8 of the
Companies (Share and Debentures) Rules, 2014]
1. Meaning of  It means the equity shares issued by the company to its employees or directors at
Sweat Equity a discount or for consideration other than cash.
[Section 2(88)]  These shares are issued to the employees or directors for providing know-how to
the company or for making available to the company the rights in the nature of
intellectual property rights or value additions, by whatever name called.
The legal provisions relating to issue of sweat equity shares are as follows
1. Class of Shares Sweat equity shares to be issued by the company should pertain to the class of shares
to be issued as which the company has already issued.
Sweat Equity
2. Resolution Authorized by a special resolution in GM is required
3. Details to be The resolution should specify the following particulars:
provided in (a) Number of shares.
resolution
(b) Current market price of shares.
(c) Consideration. if any, for which such shares are to be issued.
(d) Class of directors or employees to whom such shares are to be issued.
4. Requirement in Regulation framed by SEBI shall be duly complied with in case shares of a company
case of Listed are listed on a recognized stock exchange
Company
5. Central The sweat equity shares should be issued in accordance with the guidelines as may be
Government prescribed in this behalf by Central Government.
directions to be
complied
6. Meaning- As per the Rule 8 of the Companies (Share and Debentures) Rules, 2014
Employee (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 a 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
7. Other conditions 1. The special resolution authorizing the issue of sweat equity shares shall be valid
as prescribed by for making the allotment within a period of not more than twelve months from the
Rule 8 in relation date of passing of the special resolution.
to issue of sweat 2. The company shall not issue sweat equity shares for more than fifteen percent of
Equity Shares the existing paid up equity share capital in a year or shares of the issue value of rupees
five crores, whichever is higher:
Provided that the issuance of sweat equity shares in the Company shall not exceed
twenty five percent, of the paid up equity capital of the Company at any time.
Provided further that a startup company may issue sweat equity shares not exceeding
fifty percent of its paid up capital upto five years from the date of its incorporation or
registration
3. The sweat equity shares issued to directors or employees shall be locked in/non-
transferable for a period of three years from the date of allotment
4. The sweat equity shares to be issued shall be valued at a price determined by a
registered valuer as the fair price giving justification for such valuation.
5. The valuation of intellectual property rights or of know how or value additions for
which sweat equity shares are to be issued, shall be carried out by a registered valuer,
who shall provide a proper report addressed to the Board of directors with justification
for such valuation.
8. Treatment of According to Rule 8(9), where the sweat equity shares are issued for a non-cash
non-cash consideration on the basis of a valuation report in respect thereof obtained from the
consideration registered valuer, such non-cash consideration shall be treated in the following
manner in the books of account of the company:
(a) where the non-cash consideration takes the form of a depreciable or amortizable
asset, it shall be carried to the balance sheet of the company in accordance with
the accounting standards; or
(b) where clause (a) is not applicable, it shall be expensed as provided in the
accounting standards.
9. Maintenance of According to Rule 8 (14), the company shall maintain a Register of Sweat Equity
Register Shares in Form No. SH.3. It shall be maintained at the registered office of the
company or such other place as the Board may decide.
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10. Sweat equity According to Section 54 (2), the rights, limitations, restrictions and provisions as are
shareholders to for the time being applicable to equity shares shall be applicable to the sweat equity
rank pari passu shares issued under Section 54 and the holders of such shares shall rank pari passu
with other equity with other equity shareholders.
shareholders:
5.17 REDEMPTION OF PREFERENCE SHARE CAPITAL [Section 55]

Provision (1) No company limited by shares shall, after the commencement of this Act, issue
any preference shares which are irredeemable.
(2) A company limited by shares may, if so authorised by its articles, issue preference
shares which are liable to be redeemed within a period not exceeding twenty years
from the date of their issue subject to such conditions as may be prescribed:
A company may issue preference shares for a period exceeding twenty years (but not
exceeding thirty years) for infrastructure projects, subject to the redemption of 10%
of such preference shares beginning 21st year onwards or earlier, on proportionate
basis, at the option of such preferential shareholders.
Provided further that—
(a) no such shares shall be redeemed except out of the profits of the company which
would otherwise be available for dividend or out of the proceeds of a fresh issue
of shares made for the purposes of such redemption;
(b) no such shares shall be redeemed unless they are fully paid;
(c) where such shares are proposed to be redeemed out of the profits of the company,
there shall, out of such profits, be transferred, a sum equal to the nominal amount
of the shares to be redeemed, to a reserve, to be called the Capital Redemption
Reserve Account,
(3) No such shares shall be redeemed unless they are fully paid.
(4) Where a company is not in a position to redeem any preference shares or to pay
dividend, if any, on such shares in accordance with the terms of issue, it may, with the
consent of the holders of three-fourths in value of such preference shares and with
the approval of the Tribunal on a petition made by it in this behalf, issue further
redeemable preference shares equal to the amount due, including the dividend thereon,
in respect of the unredeemed preference shares, and on the issue of such further
redeemable preference shares, the unredeemed preference shares shall be deemed to
have been redeemed:
Provided that the Tribunal shall, while giving approval under this sub-section, order
the redemption forthwith of preference shares held by such persons who have not
consented to the issue of further redeemable preference shares.
Explanation.—For the removal of doubts, it is hereby declared that the issue of further
redeemable preference shares or the redemption of preference shares under this
section shall not be deemed to be an increase or, as the case may be, a reduction, in
the share capital of the company.
5.18 HOW THE SHARES CAN BE TRANSFERRED OR PROCEDURE OF TRANSFER OF

SHARES [Section 56]
1. Execution of For transferring a shares, member need to execute an instrument of transfer of
Transfer Deed shares, called as “Transfer Deed”.
2. Presentment of The instrument of transfer must be in the prescribed form i.e. and presented to the
deed to ROC prescribed authority i.e. ROC, before it is signed by the transferor or transferee and
before any entry is made in it.
3. Submission to Instrument need to be submitted to the company along with share certificate.
company Submission can either be by transferor or transferee.
4. Delivery of Within 60 days from the date of presentation to the prescribed authority.
Instrument to the
Company
5. Notice in the Case Where transferor submit an application of transfer of partly paid up shares, transfer
of Transfer of Partly must not be registered unless the company gives notice of the application to the
Paid Shares transferee and the transferee makes no objection to the transfer within 2 weeks from
the receipt of the notice.
6. Time limit for  In case of Subscriber to MOAWithin 2 months from incorporation of
issue of Share company
certificate  In case of allotment of securitiesWithin 2 months from allotment
 In case of transfer or transmission of shares  Within one months after the
application for registration of the transfer of such shares.
 In case of any allotment of DebenturesWithin 6 months from allotment
7. Where First proviso to section 56(1) states that where the instrument of transfer has been
Instrument of lost or the instrument of transfer has not been delivered within the prescribed period,
Transfer lost/not the company may register the transfer on such terms as to indemnity as the Board
delivered: may think fit.
8. Instrument of It is provided that the provisions of this sub-section [i.e. section 56(1)], in so far as
Transfer not it requires a proper instrument of transfer, to be duly stamped and executed by or on
required in case of behalf of the transferor and by or on behalf of the transferee, shall not apply with
Bonds issued by a respect to bonds issued by a Government company, provided that an intimation by
Government the transferee specifying his name, address and occupation, if any, has been
Company delivered to the company along with the certificate relating to the bond; and if no
such certificate is in existence, along with the letter of allotment of the bond.
Further, the provisions of section 56(1) shall not apply to a Government Company
in respect of securities held by nominees of the Government.
The above exceptions are applicable to a Government Company, which has not
committed a default in filing its financial statements under section 137 or Annual
Return under section 92 with the Registrar
Incase of the company is empowered to register, if it receives an intimation of transmission
Transmission- of any right to securities by operation of law from any person to whom such right
Power of Company has been transmitted. In other words, there is no need for submission of instrument
to Register of transfer in case of transmission of shares.
Transmission of
Shares not affected
Transfer of Security the transfer of any security or other interest of a deceased person in a company made
of the Deceased by his legal representative shall, even if the legal representative is not a holder
Person by his Legal thereof, be valid as if he had been the holder at the time of the execution of the
Representative: instrument of transfer.
7. Special provision  Provisions of this section, in so far as it requires a proper instrument of transfer,
to be duly stamped and executed by or on behalf of the transfer or and by or on
behalf of the transferee, shall not apply with respect to bonds issued by a
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Government company, provided that an intimation by the transferee specifying
his name, address and occupation, if any, has been delivered to the company
along with the certificate relating to the bond; and if no such certificate is in
existence, along with the letter of allotment of the bond
5.19 FORGED TRANSFER

Meaning  Forged Transfer' means, transfer of shares made on the basis of forged transfer
deed.
 The instrument of transfer is said to be forged when transferor's signatures
bearing on it are forged.
Consequences of Restoration of True owner can compel the company to restore his name to the
Forged Transfer name of register.
Claim to True owner can also claim any dividend which may not have been
Dividend paid to him during the intervening period.
Right of bona  If the company had issued a share certificate to the transferee
fide Purchaser on a forged transfer and he further sold them to another buyer
who has acted in good faith, then the purchaser will have no
right to be registered as shareholder.
 However, he can claim damages from the company (if
company has not indemnified itself by the first transferee
who used the forged instrument of transfer to get the shares
transferred in his name) on the ground since he has acted on
the faith of the share certificate issued by the company.
 Company in turn can claim damages from the person who has
submitted said forged transfer deed to it.
5.20 Punishment for Personation of Shareholder [Section 57]

Provision If any person deceitfully personates—
• as an owner of any security or interest in a company, or
• as an owner of any share warrant or coupon issued in pursuance of the Companies
Act, 2013, and
thereby obtains or attempts to obtain any such security or interest or any such share
warrant or coupon, or receives or attempts to receive any money due to any such
owner,
such person shall be punishable with imprisonment for a term which shall not be less
than one year but which may extend to three years and with fine which shall not be
less than one lakh rupees but which may extend to five lakh rupees
5.21 REFUSAL TO REGISTER TRANSFER AND APPEAL AGAINST REFUSAL [Section 58]
Private companies 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,
based upon some unreasonable conditions, 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 transferee may appeal to the Tribunal against the refusal
within a period of thirty days  Where notice of rejection is received
within a period of 60 days  In case no notice has been sent by the company
Public Companies 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 ninety days of the delivery of the instrument of
transfer or intimation of transmission, appeal to the Tribunal.
Rights available to The Tribunal, while dealing with an appeal may, after hearing the parties, either
tribunal 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
5.22 RECTIFICATION OF REGISTER OF MEMBERS [Section 59]

Remedy to the Appeal to Tribunal may be submitted by aggrieved party if the name of any person
aggrieved for not is, without sufficient cause,
carrying the changes  entered in the register of members of a company, or
in the register of
 after having been entered in the register, is, omitted there from, or
members:
 if a default is made, or unnecessary delay takes place in entering in the
register
Order of the The Tribunal may, after hearing the parties to the appeal by order, either
Tribunal  dismiss the appeal or
 direct that the transfer or transmission shall be registered by the company
within a period of ten days of the receipt of the order, or
 direct rectification of the records of the depository or the register and direct
the company to pay damages, if any, sustained by the party aggrieved.
Other Points 1. The provisions of this section shall not restrict the right of a holder of securities,
to transfer such securities and any person acquiring such securities shall be
entitled to voting rights unless the voting rights have been suspended by an
order of the Tribunal.
2. Where the transfer of securities is in contravention of any of the provisions of the
Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board
of India Act, 1992 or this Act or any other law for the time being in force, there
the Tribunal may, on an application made direct any company or a depository to
set right the contravention and rectify its register or records concerned.
5.23 FURTHER ISSUE OF SHARES

1. Meaning of Right of Pre-Emptive means that any further issue of shares by the company must be
Right Issue/ offered to its existing shareholders.
Pre-emptive Right/
Further Issue
[Section 62]
64 Theory Module 1
2. Notice to  The offer to the existing shareholders must be made by giving notice to them.
Shareholders  The notice must specify the number of shares offered, and the time within which
the offer is to be accepted.
 It should not be less than 15 days or such lesser number of days as may be
prescribed and not exceeding 30 days from date of the offer.
Provided that notwithstanding anything contained in this sub-clause and sub-
section (2) of this section, in case ninety percent, of the members of a private
company have given their consent in writing or in electronic mode, the periods
lesser than those specified in the said sub-clause or sub-section shall apply
 The notice must inform the shareholders that if the offer is not accepted within the
specified time, it shall be deemed to be declined.
The notice as referred above shall be dispatched through registered post or speed
post or through electronic mode or courier or any other mode having proof of delivery
to all the existing shareholders at least three days before the opening of the issue.
3. Renouncement The notice must also inform the shareholders that they have the right to renounce all
or any of the shares, offered to them, in favour of their nominees.
5.24 FURTHER ISSUE OF SHARES

To Whom-Right 1. To employees under a scheme of employees’ stock option, subject to special
Shares shall be resolution passed by company and subject to the conditions as may be prescribed; or
offered Provided for private limited company, it shall be an ordinary resolution
2. To any persons, if it is authorised by a special resolution, if the price of such
shares is determined by the valuation report of a registered valuer subject to such
conditions as may be prescribed.
Exceptions i.e. (i) If the existing shareholders to whom the shares are offered decline to accept the
situations where shares.
shares can be (ii) Conversion of Debentures or loans into shares
offered to an
(iii) Conversion of Debentures or loan into shares based upon the directions issued
outsiders
by Central Government
(iv) Any Re-issue of forfeited shares also can be issued without being offered to the
existing shareholder. Since they are does not treated as further allotment of
shares.
5.25 CONVERSION OF DEBENTURES OR LOAN INTO SHARES [Section 62(4)]

1. When such  Where any debentures have been issued to, or
Conversion shall be  loans have been obtained from,
done
 the Government by a company,
 the Central Government may,
 if in its opinion it is necessary in the public interest so to do,
 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 that Government to be reasonable in
the circumstances of the case,
 Such direction may be issued even if the terms of issue of such debentures or the
terms of such loans do not include a term providing for an option for such
conversion.
2. Terms and The Central Government shall order conversion on such terms and conditions
condition of such as appear to it to be reasonable
conversion
3. Factors to be 1 Financial position of the company
Considered
2 Rate of interest payable on the debentures or the loans
3 Current market price of the shares in the company
4. Position if such The company may
terms are not within 60 days from the date of communication to it of such order prefer an appeal
acceptable to the to the Tribunal in regard to such terms and conditions
company
5. Consequences Where the Government has, by an order directed that any debenture or loan or any
where order by CG part thereof shall be converted into shares in a company and where no appeal has
ha the impact of been preferred to the Tribunal or where such appeal has been dismissed, then the
increase in memorandum of company shall, by such order having the effect of increasing the
Authorised Share authorised share capital of the company, stand altered and the authorised share capital
Capital of such company shall stand increased by an amount equal to the amount of the value
of shares which such debentures or loans or part thereof has been converted into.
5.26 ISSUE OF CONVERTIBLE DEBENTURE BY COMPANY [Section 62(3)]

1. Authority to  Company can issue debentures or loan which is convertible into shares or it can
issue such shares also issue debentures or loans with where shareholder has an option to subscribe
for new shares.
 Any such issue of debentures or loan must carry the terms regarding conversion
thereof into shares.
2. Requirement of Such debentures or loans can be issued only after issuing S/R, requirement thereof
Resolution can be exempted if debentures are issued to Government or loans are taken from
government.
5.27 ESOPs by Unlisted Company

Special Resolution Issue of Employees’ Stock Option Scheme has been approved by the shareholders of
the company by passing a special resolution.
‘Employee’ means (a) a permanent employee of the company who has been working in India or outside
India; or
(b) a director of the company, whether a whole-time director or not but excluding an
independent director; or
(c) an employee as defined in clause (a) or (b) of a subsidiary, in India or outside
India, or of a holding company of the company
but does not include-
(i) an employee who is a promoter or a person belonging to the promoter group; or
(ii) a director who either himself or through his relative or through any body
corporate, directly or indirectly, holds more than ten per cent of the outstanding
equity shares of the company:
Provided that in case of a startup company, the conditions mentioned in sub-clauses
(i) and (ii) shall not apply up to ten years from the date of its incorporation or
registration.
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Other Conditions (a) There shall be a minimum period of one year between the grant of options and
vesting of option:
It is provided that in a case where options are granted by a company under its
Employees Stock Option Scheme in lieu of options held by the same person under
an Employees Stock Option Scheme in another company, which has merged or
amalgamated with the first mentioned company, the period during which the
options granted by the merging or amalgamating company were held by him
shall be adjusted against the minimum vesting period required under this clause;
(b) The company shall have the freedom to specify the lock-in period for the shares
issued pursuant to exercise of option.
(c) The Employees shall not have right to receive any dividend or to vote or in any
manner enjoy the benefits of a shareholder in respect of option granted to them,
till shares are issued on exercise of option.
(d) The option granted to employees shall not be transferable to any other person.
(e) The option granted to the employees shall not be pledged, hypothecated,
mortgaged or otherwise encumbered or alienated in any other manner.
(f) Subject to clause (d), no person other than the employees to whom the option is
granted shall be entitled to exercise the option.
(g) In the event of the death of employee while in employment, all the options
granted to him till such date shall vest in the legal heirs or nominees of the
deceased employee.
(h) In case the employee suffers a permanent incapacity while in employment, all
the options granted to him as on the date of permanent incapacitation, shall vest
in him on that day.
(i) In the event of resignation or termination of employment, all options not vested
in the employee as on that day shall expire. However, the employee can exercise
the options granted to him which are vested within the period specified in this
behalf, subject to the terms and conditions under the scheme granting such
options as approved by the Board.
5.28 BONUS SHARES [Section 63]

1. Authorization The 'articles of association' of the company must authorize the issue of bonus shares.
by AOA
2. Sources of  Undistributed profits available for dividend
Bonus issue  Security Premium Account
 Capital Redemption Reserve
3. Approval of The issue of bonus share must be sanctioned (i.e., approved) by the shareholders in
Shareholders the general meeting through passing of OR
4. Requirement in The guidelines issued by the SEBI for the issue of bonus shares, must be complied
case of Listed with
Company
5. Shares must be The bonus shares are issued to the existing shareholder holding fully paid-up shares.
fully Paid-up If their shares are partly paid-up, these should be made fully paid-up
6. Other conditions 1. it has not defaulted in payment of interest or principal in respect of fixed deposits
to be satisfied or debt securities issued by it;
2. it has not defaulted in respect of the payment of statutory dues of the employees,
such as, contribution to provident fund, gratuity and bonus
3. The company which has once announced the decision of its Board recommending
a bonus issue, shall not subsequently withdraw the same.
5.29 Notice to be Given to Registrar for Alteration of Share Capital [Section 64]
1. Submission of Where—
details to ROC (a) a company alters its share capital in any manner specified in sub-section (1) of
section 61;
(b) an order made by the Government under sub-section (4) read with sub-section
(6) of section 62 has the effect of increasing authorised capital of a company; or
(c) a company redeems any redeemable preference shares,
the company shall file a notice in the prescribed form with the Registrar within a
period of thirty days of such alteration or increase or redemption, as the case may
be, along with an altered memorandum.
2. Non compliance Where any company fails to comply with the provisions of section 64, such company
and every officer who is in default shall be liable to a penalty of 500 rupees for each
day during which such default continues, subject to a maximum of five lakh rupees
in case of a company and one lakh rupees in case of an officer who is in default
5.30 REDUCTION OF SHARE CAPITAL [Section 66]

A company may by a special resolution, reduce the share capital in any of the following manner:—
(a) extinguish or reduce the liability on any of its shares in respect of the share capital not paid-up; or
(b) either with or without extinguishing or reducing liability on any of its shares,—
(i) cancel any paid-up share capital which is lost or is unrepresented by available assets; or
(ii) pay off any paid-up share capital which is in excess of the wants of the company, alter its
memorandum by reducing the amount of its share capital and of its shares accordingly:
Provided that no such reduction shall be made if the company is in arrears in the repayment of any deposits
accepted by it, either before or after the commencement of this Act, or the interest payable thereon.
5.31 PROCEDURE FOR REDUCTION OF SHARE CAPITAL

1. Resolution A special resolution must be passed at a general meeting.
2. Action to be The Tribunal shall give notice of every application made to it to the Central
taken by tribunal Government, Registrar and to the Securities and Exchange Board, in the case of
listed companies, and the creditors of the company and shall take into consideration
the representations, if any, made to it by that Government, Registrar, the Securities
and Exchange Board and the creditors within a period of three months from the date
of receipt of the notice
Provided that where no representation has been received from the Central
Government, Registrar, the Securities and Exchange Board or the creditors within
the said period, it shall be presumed that they have no objection to the reduction.
The Tribunal may, if it is satisfied that the debt or claim of every creditor of the
company has been discharged or has been secured or his consent is obtained, make
an order confirming the reduction of share capital on such terms and conditions as it
deems fit
68 Theory Module 1
3. Submission to The company shall deliver a certified copy of the order of the Tribunal and of a
ROC minute approved by the Tribunal showing—
(a) the amount of share capital;
(b) the number of shares into which it is to be divided;
(c) the amount of each share; and
(d) the amount, if any, at the date of registration deemed to be paid-up on each share,
to the Registrar within thirty days of the receipt of the copy of the order, who shall
register the same and issue a certificate to that effect.
4. Objection by Where the name of any creditor entitled to object to the reduction of share capital
Creditors under this section is, by reason of his ignorance of the proceedings for reduction or
of their nature and effect with respect to his debt or claim, not entered on the list of
creditors, and after such reduction, the company commits a default, within the
meaning of section 6 of the Insolvency and Bankruptcy Code, 2016, in respect of
the amount of his debt or claim
(a) every person, who was a member of the company on the date of the registration
of the order for reduction by the Registrar, shall be liable to contribute to the
payment of that debt or claim, an amount not exceeding the amount which he
would have been liable to contribute if the company had commenced winding
up on the day immediately before the said date; and
(b) if the company is wound up, the Tribunal may, on the application of any such
creditor and proof of his ignorance, settle a list of persons so liable to contribute,
and make and enforce calls and orders on the contributories settled on the list, as
if they were ordinary contributories in a winding up.
5.32 DIFFERENCE BETWEEN REDUCTION OF CAPITAL AND CANCELLATION OF

CAPITAL
Difference Reduction of Capital Cancellation of Capital
No.
1 Company need to pass Special Resolution under Company need to pass Ordinary
Section 66 Resolution under Section 61
2 Interest of creditors are affected here, thus their No such interest of Creditors is affected
consent need to be obtained or their debt need to be
satisfied
3 Reduction may or may not result in alteration under Cancellation will alter the Capital clause
Capital clause of MOA of MOA
4 Prior approval of tribunal is mandatory No such approval is required
5 It will reduce the paid up share capital of company It will not have any impact on Paid up
share capital
5.33 LOAN OR ASSISSTANCE BY THE COMPANY FOR THE PURCHASE OF ITS OWN
SHARES [Section 67]
No Agreement to A public company cannot give loan or any financial assistance to any person to
Purchase its own acquire its own share or shares of its holding company
share
Application to Section 67 shall not apply to private companies—
private limited (a) in whose share capital no other body corporate has invested any money;
company
(b) if the borrowings of such a company from banks or financial institutions or
anybody corporate is less than twice its paid up share capital or fifty crore rupees,
whichever is lower; and
(c) such a company is not in default in repayment of such borrowings subsisting at
the time of making transactions under this section.
Exceptions In Following Cases, company can purchase its own shares:
1. Banking Loan given by a banking company in the ordinary course of its
Company business.
2. Acquisition Where some scheme is draft according to which some provision of
by Trustees money is made to enable the trustees to acquire fully paid shares in
the company or its holding company to be held for benefit of the
employees of the company.
3. Loan to Where the loan is given by the company to its employees (other
employees than the directors or manager or KMP) to enable them to acquire
shares in the company to be held by them as beneficial owners.
Amount of said loan cannot exceed the employees' salary for a
period of six months.
5.34 BUY-BACK OF SHARES [Section 68]

1. Meaning of Buy It means purchase by a company of its own shares. Legal provisions relating to Buy-
Back back:
2. Sources of Buy (i) Its free reserves or
Back (ii) Securities premium account or
(iii) Proceeds of an issue.
However, the proceeds of an earlier issue of a kind of shares cannot be used to buy-
back the same kind of shares.
3. Authorization A company can purchase its shares only if the buy-back is authorized by AOA
by AOA
4. Resolution A company can purchase its shares only by passing a special resolution in the GM
5. Exception There is no requirement of SR, if the following conditions are satisfied
1 Bur Back is allowed by Board by passing of BOD resolution
2 Buy-Back does not exceed 10% of the aggregate of paid up equity share capital
and free reserves
6. Completion of All Formalities pertaining to Buy Back need to be completed within year from the
Buy Back date of passing the special resolution or BOD Resolution as the case may be.
7. Restriction on The amount involved in the buy-back must not be more than 25% of company's
Buy Back paid-up capital and free reserves.
Buy-Back of equity It should not exceed 25% of company's total paid-up equity
shares capital in that financial year.
8. Shares to be Buy The buy-back can be of fully paid-up shares only
Back
70 Theory Module 1
9. Ratio to be Ratio of the Debt/Equity is not more than 2 times.
maintained
10. Requirement The buy-back of shares listed on any recognized stock exchange should be in
for Listed accordance with the regulations made by the SEBI
Companies
11. Treatment of The shares bought back by the company must be extinguished and physically
Shares Buy destroyed by the company within 7 days of the last date of completion of buy-back
Backed
12. Buy-back from  Existing security holders on a proportionate basis; or
whom  Open market; or
 by purchasing the securities issued to employees of the company pursuant to a
scheme of stock option or sweat equity.
13. Declaration of Company shall before making any buy-back, file with the Registrar and the SEBI
Solvency declaration of solvency in the form as may be prescribed which should state that
company would not become insolvent within a period of 1 year of the date of
declaration adopted by the Board
14. Restriction on No offer of buy-back, shall be made within a period of one year from the date of the
further buy back closure of the preceding offer of buy-back, if any.
14A. Time limit Every buy-back shall be completed within twelve months from the date of passing the
for Completion of special resolution or a resolution passed by the Board at general meeting authorizing
Buy-Back the buy-back
15. Requirement of The notice of the meeting at which special resolution is proposed to be passed must
Notice be accompanied by an explanatory statement, which shall contain the following:—
 Full and complete disclosure of the all material facts;
 Requirement for the buy-back;
 Class of security intended to be buy-back;
 Amount to be invested under the buy-back; and
 Time limit for completion of buy-back.
16. Transfer of Where a company purchases its own shares out of free reserves or securities premium
certain sums to account, then a sum equal to the nominal value of the share so purchased shall be
Capital transferred to the capital redemption reserve account and details of such transfer shall
Redemption be disclosed in the balance sheet.
Reserve account
17. Extinguish- where a company buys back its own securities or other specified securities, it shall
ment of Securities extinguish and physically destroy the shares or securities so bought-back within seven
days of the last date of completion of buy-back.
18. Cooling Period where a company completes a buy-back of its shares or other specified securities
under this section, it shall not make further issue of same kind of shares including
allotment of further shares under Section 62(1)(a) or other specified securities 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.
5.35 PROHIBITION ON BUY BACK OF SHARES [Section 70]
1. No Buy Back A company cannot purchase its own shares through any subsidiary company
from Subsidiary including its own subsidiary company.
2. No buy Back A company cannot purchase its own shares through any investment company or
through a group of investment companies
Investment
company
3. No Default in  Payment of deposit or interest thereon
 Redemption of debentures or preference shares or
 Repayment of a term loan including interest thereon to any financial institution
or a bank.
 Payment of Dividend
However where the default is remedied and a period of three years has lapsed after
such default ceased to subsist, there such buy-back is not prohibited.
4. No Non-  section 92, relating to annual report,
Compliance of  section 123, default in declaration of dividend
 Section 127, Punishment for failure to distribute dividends and
 Section 129, relating to form and contents of balance sheet, and profit and loss
account.
Chapter 6
GENERAL MEETINGS
Synopsis
6.1 Register to be Maintained by Companies [Section 88 read with Rule 3 & Rule 5 of the Companies
(Management & Administration) Rules, 2014] 74
6.2 Foreign Register [Section 88(4) read with Rule 7] 75
6.3 Declaration in Respect of Beneficial Interest in any Share [Section 89] 76
6.4 Register of Significant Beneficial Owners in a Company [Section 90] 76
6.5 Closure of Register of Members or Debenture Holders [Section 91] 79
6.6 Annual Return [Section 92] 80
6.7 Place of Keeping and Inspection of Registers, Returns, etc. [Section 94] 81
6.8 Annual General Meeting [Section 96] 82
6.9 Extra Ordinary General Meeting [Section 100] 83
6.10 Calling of Extraordinary General Meeting by Requisitionist [Companies (Management and
Administration) Rules, 2014] 85
6.11 Proper Authority for Calling AGM 85
6.12 Notice [Sections 101] 86
6.13 Ordinary Business and Special Business [Section 102(2)] 87
6.14 Explanatory Statement [Section 102] 88
6.15 Quorum for GM [Section 103] 88
6.16 Proper Chairmanship [Section 104] 90
6.17 Proxies [Section 105] 90
6.18 Voting [Section 106 to 109] 92
6.19 Voting Through Electronic Means: [Section 108 read with Rule 20 of the Companies (Management &
Administration) Rules, 2014] 95
6.20 Passing of Resolution By Postal Ballot [Section 110 read with Rule 22 of Companies (Management &
Administration of Companies) Rules, 2014] 97
6.22 Circulation of Members' Resolution [Section 111] 98
6.23 Appointment of Representative 99
6.24 Resolution [Section 114] 99
6.25 Special Notice [Section 115 read with Rule 23] 100
6.26 Resolutions Passed At Adjourned Meeting [Section 116] 100
6.27 Minutes [Section 118 read with Rule 25 of the Companies (Management and Administration) Rules,
2014 101
6.28 Inspection of Minute-Books of General Meeting [Section 119] 103
6.29 Maintenance and Inspection of Documents in Electronic Form [Section 120 read with Rule 27, 28 and 29
of the Companies (Management and Administration) Rules, 2014] 103
6.30 Report on Annual General Meeting [Section 121] 104
6.31 Applicability to One Person Company 104
Chap. 6 General Meetings 73
List of Sections & Relevant rule numbers, which you need to learn before exams
Section Provision Rule Provision
No. No.
Companies (Management and Administration) Rules, 2014.
88 Register of Members, etc. 5 Maintenance of the Register of
Members etc. Under Section 88
7 Foreign Register of Members,
Debenture Holders, Other Security
Holders or Beneficial Owners
Residing Outside India
89 Declaration in Respect of Beneficial Interest
in any Share
90 Register of significant beneficial owners in
a company
91 Power to Close Register of Members or 10 Closure of Register of Members or
Debenture-Holders or Other Security Holders. Debenture Holders or Other
Security Holders
92 Annual Return 11 MGT-7
94 Place of keeping and Inspection of Registers, 14 Inspection of Registers, Returns etc,
Returns, etc.
96 Annual General Meeting
97 Power of Tribunal to Call Annual General
Meeting
98 Power of Tribunal to Call Meetings of
Members, etc.
99 Punishment for Default in Complying with
Provisions of Sections 96 to 98
100 Calling of Extraordinary General Meeting. 17 Calling of Extraordinary general
meeting by requistionists.
101 Notice of Meeting 18 Notice of the Meeting
102 Explanatory Statement
&
Types of Business
103 Quorum for Meetings.
104 Chairman of Meetings.
105 Proxies 19
106 Restriction on Voting Rights
107 Voting by Show of Hands.
108 Voting through Electronic Means 20 Voting Though Electronic Means
109 Demand for Poll
74 Theory Module 1
Section Provision Rule Provision
No. No.
110 Postal Ballot 22 Procedure to be followed for
Conducting Business through Postal
Ballot
111 Circulation of Members' Resolution
112 Representation of President and Governors in
Meetings.
113 Representation of Corporations at Meeting of
Companies and of Creditors.
114 Ordinary and Special Resolutions.
115 Resolutions Requiring Special Notice
116 Resolutions Passed at Adjourned Meeting.
117 Resolution to be submitted to ROC
118 Minutes
119 Inspection of Minute-Books of General
Meeting
120 Maintenance and Inspection of Documents in 27 Maintenance and Inspection of
Electronic Form Document in Electronic Form
121 Report on Annual General Meeting
122 Applicability of this Chapter to One Person
Company
6.1 REGISTER TO BE MAINTAINED BY COMPANIES [Section 88 read with Rule 3 & Rule 5 of
the Companies (Management & Administration) Rules, 2014]
Applicable to Every company shall keep and maintain the following registers in such form and in
Which Company 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; and
(c) register of any other security holders.
Thus, the Register of members shall separately indicate the equity shareholders and
preference shareholders residing in India and outside India.
Time period for Entries have to be made in the Register within 7 days of the date of approval by the
entries in register Board or Committee thereof
Place where Rule 5 also states that the registers shall be maintained at the registered office of
register shall be the company unless a special resolution is passed in a general meeting authorizing
maintained the keeping of the register at any other place within the city, town or village in
which the registered office is situated or any other place in India in which more
than 1/10th of the total members entered in the register of members reside.
Other information Any order passed by the authority attaching the shares or relating to dividends is
also to be referred also required to be referred in the register of members. Hypothecation and pledge
in register of shares is also required to be entered in the register of members
Particular in Rule 3 prescribes that every company limited by shares, shall, from the date of its
register registration, maintain a register of its members in Form MGT-1. In case of a
company not limited by shares, the register shall contain the following particulars,
in respect of each member—
• Name of the member, address (registered office address in case the member is a
body corporate); email address; Permanent Account Number or Corporate
Identity Number (‘CIN’); Nationality; in case member is a minor-name of his
guardian and the date of birth of the member, name and address of the
nominee;
• Date of cessation;
• Amount of guarantee, if any;
• Any other interest, if any; and
• Instructions, if any, given by the member with regard to sending of notices, etc.
Maintenance of Rule 4, states that every company which issues or allots debentures or any other
register of security shall maintain a separate register for debenture holder or security holder in
debenture holders Form MGT-2.
Index of names Section 88 mentions that every register maintained under section 88 shall include
an index of names included therein. Rule 6 of the Companies (Management &
Administration) Rules, 2014 which state that the maintenance of index is not
necessary where the number of members is less than 50.
6.2 FOREIGN REGISTER [Section 88(4) read with Rule 7]
1. Applicability A company which has share capital or which has issued debentures or any other
security may, keep in any country outside India, a part of the register of members
or as the case may be, of debenture holders or of any other security holders or of
beneficial owners, resident in that country
2. Change in The company shall, within thirty days from the date of the opening of any foreign
Register register, file with the Registrar notice of the situation of the office and
In the event of any change in the situation of such office or of its discontinuance,
shall, within thirty days from the date of such change or discontinuance, file notice
with the Registrar of such change or discontinuance.
3. Format A foreign register shall be deemed to be part of the company's register known as
"principal register" of members or of debenture holders or of any other security
holders or beneficial owners
The foreign register shall be maintained in the same format as the principal register.
4. Submission of The company shall—

Record to Indian (a) transmit to its registered office in India a copy of every entry in any foreign
Office register within fifteen days after the entry is made; and
(b) keep at such office a duplicate register of every foreign register duly entered up
76 Theory Module 1
5. Authentication The rules prescribes that the entries in the registers and index included therein shall
be authenticated by the company secretary of the company or by any other person
authorised by the Board for the purpose, and the date of the board resolution
authorizing the same shall be mentioned.
6.3 DECLARATION IN RESPECT OF BENEFICIAL INTEREST IN ANY SHARE [Section 89]
1. Declaration by A person whose name is entered in the register of members of a company as the
person registered as holder of shares in that company but who does not hold the beneficial interest in
shareholder such shares (hereinafter referred to as "the registered owner"), shall file with the
company, a declaration to that effect in Form No. MGT.4, within a period of thirty
days from the date on which his name is entered in the register of members of such
company:
Provided that where any change occurs in the beneficial interest in such shares, the
registered owner shall, within a period of thirty days from the date of such change,
make a declaration of such change to the company in Form No. MGT.4
2. Declaration by Every person acquiring a beneficial interest in shares of a company not registered in
Beneficial owner his name (hereinafter referred to as "the beneficial owner") shall file with the
company, a declaration disclosing such interest in Form No. MGT.5, within thirty
days after acquiring such beneficial interest in the shares of the company:
Provided that where any change occurs in the beneficial interest in such shares, the
beneficial owner shall, within a period of thirty days from the date of such change,
make a declaration of such change to the company in Form No. MGT.5
3. Meaning of For the purposes of this section and section 90, beneficial interest in a share
Beneficial Interest includes, the right or entitlement of a person alone or together with any other
person to—
(i) exercise or cause to be exercised any or all of the rights attached to such share;
or
(ii) receive or participate in any dividend or other distribution in respect of such
share.
3A. Exemption Trust which is created, to set up a Mutual Fund or Venture Capital Fund or such
other fund as may be approved by SEBI. These entities need not file the
declarations as envisaged under this section.
4. Penalty If any person fails to make a declaration as required, he shall be liable to a penalty
of fifty thousand rupees and in case of continuing failure, with a further penalty of
two hundred rupees for each day after the first during which such failure continues,
subject to a maximum of five lakh rupees.
5. Exemption In case of Government company - Section 90 shall not apply.

Provided no default in existence in filing the financial statement u/s 137 or annual
return u/s 92
6.4 REGISTER OF SIGNIFICANT BENEFICIAL OWNERS IN A COMPANY [Section 90]
1. By Whom  Every individual, who

 acting alone or
 through one or more persons or
 trust, including a trust and persons resident outside India,
 holds beneficial interests, of not less than twenty-five per cent or such other
percentage as may be prescribed
 in shares of a company or the right to exercise, or the actual exercising of
significant influence or control as defined in clause (27) of section 2, over the
company
 then he shall make a declaration to the company, specifying the nature of his
interest and other particulars, in such manner and within such period as may be
prescribed:
1A. Companies An individual who—

(Significant (i) acting alone or together, or
Beneficial Owners)
Amendment Rules, (ii) through one or more persons or trust,
2019 (Amendment Possess one or more of the following rights or entitlements in the Reporting
Rules) Company (i.e. the company in respect of which SBO declaration is required to be
filed)—
(i) holds indirectly, or together with any direct holdings, not less than 10% of
the shares;
(ii) holds indirectly, or together with any direct holdings, not less than 10% of
the voting rights in the shares;
(iii) has the right to receive or participate in not less than 10% of the total
distributable dividend, or any other distribution, in a financial year
through indirect holdings alone, or together with any direct holdings;
(iv) Has the right to exercise, or actually exercises, significant influence or
control, in any manner other than through direct holdings alone.
1B. Significant “Significant influence” means the power to participate, directly or indirectly, in the
influence financial and operating policy decisions of the reporting company but is not control
or joint control of those policies.
1C. Majority stake Means

(i) holding more than one-half of the equity share capital in the body
corporate; or
(ii) holding more than one-half of the voting rights in the body corporate; or
(iii) Having the right to receive or participate in more than one-half of the
distributable dividend or any other distribution by the body corporate.
2. Direct and when an individual holds any rights or entitlement directly in the reporting
Indirect company, the said individual shall not be considered as SBO. An individual will be
shareholding considered to hold a right or entitlement directly in the Relevant Company, if he
satisfies any of the following criteria:
(a) the shares in the Relevant Company representing such right or entitlement
are held in the name of such individual;
(b) the individual holds or acquires a beneficial interest in the shares of the
Relevant Company under section 89(2) of the CA 2013, and has made a
declaration in this regard to the Relevant Company.
78 Theory Module 1
Indirect shareholding is, when a shareholder is a (a) Body corporate; (b) Hindu
Undivided Family (c) Partnership (d) Trust (e) Pooled investment vehicle.
3. Onus on the The duty is on the reporting company to identify a SBO and cause such SBO to
reporting company make a declaration in the prescribed Form.
As per the Amendment Rules, every reporting company shall give notice in the
Form BEN-4 to any person whom the company knows or has reasonable cause to
believe—
(a) to be a significant beneficial owner of the company;
(b) to be having knowledge of the identity of a significant beneficial owner or
another person likely to have such knowledge; or
(c) to have been a significant beneficial owner of the company at any time
during the three years immediately preceding the date on which the notice
is issued, and who is not registered as a significant beneficial owner with
the company as required under this section.
Also, according to the section 90 of the Act read with amended rules every
company shall maintain a register of significant beneficial owners in Form No.
BEN-3 which shall be open for inspection during business hours, at such
reasonable time of not less than two hours, on every working day as the board may
decide, by any member of the company on payment of such fee as may be specified
by the company but not exceeding fifty rupees for each inspection.
4. Non-Receipt of The company shall,—

Intimation to (a) where that person fails to give the company the information required by the
company notice within the time specified therein; or
(b) where the information given is not satisfactory,
apply to the Tribunal within a period of fifteen days of the expiry of the period
specified in the notice, for an order directing that the shares in question be
subject to restrictions with regard to transfer of interest, suspension of all rights
attached to the shares and such other matters as may be prescribed.
5. Order by Tribunal may, after giving an opportunity of being heard to the parties concerned,
Tribunal make such order restricting the rights attached with the shares within a period of
sixty days of receipt of application or such other period as may be prescribed.
6. Right to appeal The company or the person aggrieved by the order of the Tribunal may make an
available to application to the Tribunal for relaxation or lifting of the restrictions placed, within
aggrieved party a period of one year from the date of such order:
Provided that if no such application has been filed within a period of one year from
the date of the order, such shares shall be transferred, without any restrictions, to
the authority constituted under section 125, in such manner as may be prescribed
7. Declaration by (a) Every individual who is a SBO in the Reporting Company, as on the date
SBO of commencement of the Amendment Rules, is required to file a
declaration with the Reporting Company in Form BEN-1 within 90 days
from such commencement. In turn, the Reporting Company will be
required to file the said disclosure with the Registrar within 30 days of
receiving it from the SBO.
(b) Any individual, who subsequently becomes a significant beneficial owner
in the Reporting Company or whose significant beneficial ownership
undergoes any change, is required to file a declaration with the Reporting
Company in Form BEN-1 within 30 days of such acquisition or change.
(c) If an individual becomes a significant beneficial owner in the Reporting
Company or her significant beneficial ownership undergoes any change
within ninety days of the commencement of the Companies (Significant
Beneficial Owners) Amendment Rules, 2019, it shall be deemed that such
individual became the significant beneficial owner or any change therein
happened on the date of expiry of ninety days from the date of
commencement of said rules, and the period of thirty days for filing will be
reckoned accordingly
8. Non- The amended Rules will not be applicable where the shares of the Relevant
Applicability Company are held by:
(a) the Investor Education and Protection Fund Authority;
(b) its holding company which has complied with section 90 of CA 2013 and
the Rules, provided that the details of such holding company are reported in
Form BEN-2;
(c) the Central Government, any State Government or any local authority;
(d) an entity/body corporate controlled wholly or partly by the Central
Government and/or State Government(s);
(e) investment vehicles such as mutual funds, alternative investment funds
(AIFs), Real Estate Investment Trusts (REITs) and Infrastructure
Investment Trusts (InVITs) registered with and regulated by the Securities
and Exchange Board of India; and
(f) Investment vehicles regulated by the Reserve Bank of India, Insurance
Regulatory and Development Authority of India or Pension Fund
Regulatory and Development Authority.
9. Exemption In case of Government company - Section 90 shall not apply.

Provided no default in existence in filing the financial statement u/s 137 or annual
return u/s 92
6.5 CLOSURE OF REGISTER OF MEMBERS or DEBENTURE HOLDERS [Section 91]
1. Applicable This section is applicable in case of closure of register of member as well as

register of debenture holders:
2. Maximum 1. At one time-30 Days

Closure allowed 2. For Entire Year- 45 Days
upto
3. Publication of Company shall publish notice intimating such closure atleast 7 days before such
Notice closure in a vernacular as well as English newspaper having wide circulation in the
place where the registered office of the company is situated and publish the notice
on the website as may be notified by the Central Government and on the website, if
any, of the Company.
80 Theory Module 1
4. In case of private Incase of Private Ltd Companies notice served on all members not less than seven
company days prior to closure of the register of members or debenture holders or other
security holders is sufficient.
It does not require of giving any advertisement or publishing the notice on the
website as given above.
6.6 ANNUAL RETURN [Section 92]
1. Application Every company shall prepare an annual return containing the particulars as they
stood on the close of the financial year.
2. Particulars stated (a) its registered office, principal business activities, particulars of its holding,
in the annual subsidiary and associate companies;
return (b) its shares, debentures and other securities and shareholding pattern;
(c) its indebtedness;
(d) its members and debenture-holders along with changes therein since the close
of the previous financial year;
(e) its promoters, directors, key managerial personnel along with changes therein
since the close of the previous financial year;
(f) meetings of members or a class thereof, Board and its various committees
along with attendance details;
(g) remuneration of directors and key managerial personnel;
(h) penalty or punishment imposed on the company, its directors or officers and
details of compounding of offences and appeals made against such penalty or
punishment;
(i) matters relating to certification of compliances, disclosures as may be
prescribed;
(j) details, as may be prescribed, in respect of shares held by or on behalf of the
Foreign Institutional Investors indicating their names, addresses, countries of
incorporation, registration and percentage of shareholding held by them; and
(k) such other matters as may be prescribed, and signed by a director and the
company secretary, or where there is no company secretary, by a company
secretary in practice:
Whereas with respect to One Person Company and small company, the annual
return shall be signed by the company secretary, or where there is no company
secretary, by the director of the company.
3. Filing of copy Every company shall file with the Registrar a copy of the annual return, within
with the registrar sixty days from the date on which the annual general meeting is held or where no
annual general meeting is held in any year within sixty days from the date on which
the annual general meeting should have been held
4. Form for Annual As per Rule 11 of the Companies (Management & Administration) Rules,
Return 2014,
Every company shall prepare its annual return in Form MGT-7
5. Signing by whom Annual return has to be signed by a director of the company and the company
secretary; and
in case, there is no company secretary, by a company secretary in practice.
However, in relation to One Person Company and small company, the annual return
shall be signed by the company secretary, or where there is no company secretary,
by the director of the company
6. Signing in case of Sub-section 2 of section 92 read with Rule 11(2) of the Companies (Management
Listed Company & Administration) Rules, 2014, provides that the annual return, filed by
(i) a listed company or
(ii) a company having
 paid-up share capital of ` 10 crore or more; or
 a turnover of ` 50 crore or more,
shall be certified by a Company Secretary in practice and the certificate shall be in
Form MGT-8. It must state that the annual return discloses the facts correctly and
adequately and that the company has complied with all the provisions of the Act.
6.7 PLACE OF KEEPING AND INSPECTION OF REGISTERS, RETURNS, ETC. [Section 94]
1. Provision for The registers required to be kept and maintained by a company under section 88
Maintaining and copies of the annual return filed under section 92 shall be kept at the registered
office of the company:
Provided that such registers or copies of return may also be kept at any other place
in India in which more than one-tenth of the total number of members entered in
the register of members reside, if approved by a special resolution passed at a
general meeting of the company.
Provided further that the period for which the registers, returns and records are
required to be kept shall be such as may be prescribed.
Preservation of Register of Members etc. and Annual Return
(1) The register of members along with the index shall be preserved permanently
and shall be kept in the custody of the company secretary of the company or any
other person authorized by the Board for such purpose; and
(2) The register of debenture holders or any other security holders along with the
index shall be preserved for a period of eight years from the date of redemption of
debentures or securities, as the case may be, and shall be kept in the custody of the
company secretary of the company or any other person authorized by the Board for
such purpose.
(3) Copies of all annual returns prepared under section 92 and copies of all
certificates and documents required to be annexed thereto shall be preserved for a
period of eight years from the date of filing with the Registrar.
(4) The foreign register of members shall be preserved permanently, unless it is
discontinued and all the entries are transferred to any other foreign register or to
the principal register. Foreign register of debenture holders or any other security
holders shall be preserved for a period of eight years from the date of redemption
of such debentures or securities.
(5) The foreign register shall be kept in the custody of the company secretary or
person authorised by the Board.
82 Theory Module 1
2.Provision for The registers and their indices and the copies of all the returns shall be open for
Inspection inspection by any member, debenture-holder, other security holder or beneficial
owner, during business hours without payment of any fees and by any other person
on payment of such fees as may be prescribed.
Any such member, debenture-holder, other security holder or beneficial owner or
any other person may—
(a) take extracts from any register, or index or return without payment of any fee;
or
(b) require a copy of any such register or entries therein or return on payment of
such fees as may be prescribed.
Provided that such particulars of the register or index or return as may be
prescribed shall not be available for inspection under sub-section (2) or for taking
extracts or copies under this sub-section.
If any inspection or the making of any extract or copy required is refused, the
company and every officer of the company who is in default shall be liable, for
each such default, to a penalty of one thousand rupees for every day subject to a
maximum of one lakh rupees during which the refusal or default continues.
The Central Government may also, by order, direct an immediate inspection of the
document, or direct that the extract required shall forthwith be allowed to be taken
by the person requiring it.
6.8 ANNUAL GENERAL MEETING [Section 96]
Company which is Every company (other than a One Person Company) must hold in each year a
bound to Hold? general meeting in addition to any other meetings as its annual general meeting
(AGM).
When AGM needs to be Held?
1. Holding of a First  It must be held within 9 months of the end of financial year
Annual General
Meeting Note Where the company hold first AGM as per the above provisions
than it shall not be necessary for the company to hold any annual
general meeting in the year of its incorporation:
2. Subsequent  To be Held within 15 months of previous meeting.

Annual General  To be held within 6 months of the end of the financial year.
Meeting
Extension of The registrar is empowered to extend the time up to three months
time by the within which any annual general meeting (other than the first)
Registrar should be held
3. Time and Place Time Every annual general meeting shall be called during business
for conducting an hours, that is, between 9 a.m. and 6 p.m.
AGM Meeting
Place  Either at the registered office of the company or
 At some other place within the city town or village in which
the registered office of the company is situated.
 The words "some other place within the city, town or village in
which the registered office of the company is situate", the
words "such other place as the Central Government may
approve in this behalf” shall be substituted for a Government
company
 For Section 8 Companies, time, date and place of each annual
general meeting are decided upon before-hand by the board of
directors having regard to the directions, if any, given in this
regard by the company in its general meeting
Day On any day except national holiday
4. Provision for Annual general meeting of an unlisted company may be held at any place in India
Unlisted company if consent is given in writing or by electronic mode by all the members in advance
5. Exemption by Central Government may exempt any company from the provisions of this sub-
CG section subject to such conditions as it may impose.
6. Business 1. Ordinary Business

Transacted at the 2. Special Business (If Required)
Meeting
7. Power of 1 In case default is occurred in holding an Annual general meeting in

Tribunal accordance with Section 96, the Tribunal may on application of any member
[Section 97] call/direct the calling of an Annual general meeting
2 It may also pass a direction that anyone member present in member or proxy
shall be deemed to constitute meeting.
3 Any Said meeting shall be deemed to be an annual general meeting of the

company.
9.Consequences of  If the default is made by the company in holding Annual General Meeting in
Default [Section 99] accordance with Section 96 or
 In complying in any direction given by Tribunal under Section 97
 Company and its every officer who are at default shall be punishable with fine
upto `1,00,000 and in case of the continuing default with a further fine upto
` 5,000 for every day during continuation of default
6.9 EXTRA ORDINARY GENERAL MEETING [Section 100]
1. Who can call? Extraordinary General Meeting may be called by

 Board,
 Requisitionists or
 Tribunal.
2. EGM by Board 1. Suo motu i.e. The Board may, whenever it thinks fit, call an extraordinary
of Directors on their own general meeting.
2. On Board on the requisition of the required number of the

Requisition of members can call an extraordinary general meeting. Required
the Members number of members will be as follows:
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3. Meaning of Case A For Members holding at least 10% of the paid up share capital of
Required Numbers company having the company carrying voting power
share capital
CaseB For Members having at least 1/10 of the total voting power
company having
no share capital
4. Requirement as The requisition must contain all the matters for consideration of which the meeting
to Requisition is to be called. Requisition must be signed by all the Requistionists. In case of joint
shareholders, a requisition signed one or some of them for the purpose of this
section is also sufficient.
5. Action to be The Board of Directors must proceed within 21 days of the deposit of the
taken by Board requisition to convene a meeting which must be held within 45 days of such
upon receipt of deposit of the requisition with the company.
Requisition
6. EGM by If the board fails to call an EGM, than such a meeting shall be called by the
Requisitionist requistionists themselves. Every effort should be made in conducting the meeting in
themselves Sec similar manner as it is called by BOD
100(4)
7. Time limit for Where the meeting is called by the Requisitionists, such meeting must be held
holding EGM before the expiry of 3 months from the date of deposit of requisition.
called on
requisition of
member
8. Right of If default is made in calling the meeting by the board and Requisitionists themselves
Requisitionists proceed to call an EGM. They shall be entitled to claim all reasonable expenses
incurred by them for convening a meeting from the company.
8A. Location of An extraordinary general meeting of the company, other than of the wholly owned
EGM subsidiary of a company incorporated outside India, shall be held at a place within
India
9. Consequences of If quorum remains absent in a meeting called u/s 100(4), the meeting, shall stand
absence of quorum cancelled
10. Consequences Any reasonable expenses incurred by the requisitionists in calling a meeting, shall
for Director who be reimbursed to the requisitionists by the company and the sums so paid shall be
are at default deducted from any fee or other remuneration payable to such of the directors who
were in default in calling the meeting.
11. Extraordinary Where for any reason it is impracticable to call a general meeting other than Annual
Meeting by General Meeting, the Tribunal may:—
Tribunal  Either on its own motion or
[Section 98]
 On the application of any director (whether or not the member) or
 Any member of the company entitled to vote at a meeting,
Order a meeting to called, held and conducted in such manner as it thinks fit.
Such directions may include a direction that one member present in person or
by proxy shall be deemed to constitute the meeting.
12.Consequences  If the default is made by the company in complying in any direction given by
of Default Tribunal under Section 97
[Section 99]  Company and its every officer who are at default shall be punishable with fine
upto `1,00,000 and in case of the continuing default with a further fine upto
`5,000 for every day during continuation of default
6.10 CALLING OF EXTRAORDINARY GENERAL MEETING BY REQUISITIONIST

[Companies (Management and Administration) Rules, 2014]
1. Requisition for The members may requisition convening of an extraordinary general meeting, by
convening of EGM providing such requisition in writing or through electronic mode at least clear
by members twenty-one days prior to the proposed date of such extraordinary general meeting.
2. Notice with The notice shall specify the place, date, day and hour of the meeting and shall
details as to the contain the business to be transacted at the meeting.—
place, date etc. Explanation.—For the purposes of this sub-rule, it is here by clarified that
requistionists should convene meeting at Registered office or in the same city or
town where Registered office is situated and such meeting should be convened on
any day except national holiday
3. No explanatory No explanatory statement as required under section 102 need be annexed to the
statement annexed notice of an extraordinary general meeting convened by the requistionists and the
to the notice requistionists may disclose the reasons for the resolution(s) which they propose to
move at the meeting.
4. Serving of notice The notice of the meeting shall be given to those members whose names appear in
of the meeting 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.
5. No meeting Where the meeting is not convened, the requistionists shall have a right to receive
convened 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.
6. Mode of giving The notice of the meeting shall be given by speed post or registered post or through
notice 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.
6.11 PROPER AUTHORITY FOR CALLING AGM

1. BOD  Board of Directors is normally the proper authority.
 Neither the Managing director nor the secretary has an individual power to con-
vene such meeting unless authorized by the Board.
 Any notice by a Secretary or any director calling for a meeting would be a void
notice, unless the same was ratified by BOD.
2. Members As per the provision of Section 100 i.e. in case of failure of BOD to call EGM.
3. Tribunal They can call an AGM as per section 97 and an EGM as per section 98
86 Theory Module 1
6.12 NOTICE [Sections 101]
1. By whom The notice must be given in writing or by electronic mode by the proper authority
which would normally be the Board of Directors.
Section 101 shall apply to a private company; unless otherwise specified in
respective sections or the articles of the company provide otherwise;
2. Service of notice The notice may be served

 Personally or
 Sent through post to the registered address of the members and in the
absence of any registered office in India, to the address, within India
furnished by him to the company for the purpose of serving notice to him or
 Through electronic mode.
If, however, a member wants the notice to be served on him under a certificate or
by registered post and has deposited money with the company thereafter, the
notice must be served accordingly; otherwise service will not be deemed have been
effected.
Service on the joint holder may made by serving it on the one whose name
appears first in the register of members.
Service of notice shall be deemed to have been effected in the case of notice of
meeting on the expiry of 48 hours since the posting of the same.
3. Length of the The length of the notice must be 21 clear days i.e. while computing the 21 days, the
Notice day of service of the notice and day of holding of the meeting are to be excluded.
The words "twenty one days", shall be substituted by the words "fourteen days"
for Section 8 company
4. Effect of (i) An accidental omission to give notice to or the non-receipt of notice by any
Accidental member or any other person to whom it should be given shall not invalidate the
Omission or Non- proceedings of the meeting.
Receipt of notice (ii) If a meeting is called based upon willful omission than meeting is invalid and
on Meeting Sec proceedings therein are also invalid.
101(4)
Any 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 v C.H. Musselwhite & Sons Ltd]
5. Who are entitled (i) Every member of the company.

to receive the (ii) Legal Representative/Official Assignees
Notice?
(iii) Auditor of a company
(iv) Every director of company
6. Service of Notice Where a notice is sent by post, It shall be deemed to be received at the expiration of
the 48 hours after the letter containing the same is posted.
7. Contents of the  Company's full name and the address of its registered office.
Notice  The place date and hour of the meeting.
 The statement of the business to be transacted
 Resolution to be proposed
 In case of companies having share capital, the notice must also state that
members are entitled to appoint proxy and proxy need not be a member.
8. Exemption to Section 101 shall apply, unless otherwise specified in respective sections or the
Private Limited articles of the company provide otherwise
Company
Shorter Notice – 1st Proviso to Section 101
1. When this Notice "Provided that a general meeting may be called after giving shorter notice than that
can be given specified in this sub-section if consent, in writing or by electronic mode, is accorded
thereto—
(i) in the case of an annual general meeting, by not less than 95% of the members
entitled to vote thereat; and
(ii) in the case of any other general meeting, by members of the company—
(a) holding, if the company has a share capital, majority in number of members
entitled to vote and who represent not less than 95% of such part of the
paid-up share capital of the company as gives a right to vote at the meeting;
or
(b) having, if the company has no share capital, not less than 95% of the total
voting power exercisable at that meeting:
2. Till when such Either before, during or even after the meeting
Consent could be
obtained?
3. How should such It must be obtained in writing

Consent be
obtained?
Note In case a meeting was held on short notice, for which consent could not be obtained
from all the members, still meeting would be Valid, unless it can be proved that
members have been prejudiced.
4. Placing of notice The notice of the general meeting of the company shall be simultaneously placed
at website on the website of the company if any and on the website as may be notified by the
Central Government.
6.13 ORDINARY BUSINESS AND SPECIAL BUSINESS [Section 102(2)]
Ordinary business Following four businesses to be transacted at Annual General Meeting shall be
considered as ordinary business:
 Consideration of financial statements and the reports of the Board of
Directors and auditors;
 Declaration of Dividend.
 Appointment of Directors in the place of those retiring.
 Appointment of, and fixing of the remuneration of the auditors.
88 Theory Module 1
6.13 ORDINARY BUSINESS AND SPECIAL BUSINESS [Section 102(2)]
Special Business All businesses except the above four businesses to be transacted at AGM would be
regarded as special business.
6.14 EXPLANATORY STATEMENT [Section 102]
1. When Whenever any special business is to be transacted at the meeting, an explanatory

statement is required to be annexed to the notice. It shall include
2. Material facts (a) the nature of concern or interest, financial or otherwise, if any, in respect of each
related to special items of—
business (i) every director and the manager, if any;
(ii) every other key managerial personnel; and
(iii) relatives of the persons mentioned in sub-clauses (i) and (ii);
(b) any other information and facts that may enable members to understand the
meaning, scope and implications of the items of business and to take decision
thereon.
3. It shall also Where any item of special business to be transacted at a meeting of the company
contain relates to or affects any other company, the extent of shareholding interest in that
other company of every promoter, director, manager, if any, and of every other key
managerial personnel (KMP) of the first mentioned company shall, if the extent of
such shareholding is not less than two per cent. of the paid-up share capital of that
company, also be set out in the statement.
4. Application to Section 102 shall apply to a private company; unless otherwise specified in
private limited respective sections or the articles of the company provide otherwise;
company
5. Misc Point In case of non-disclosure or insufficient disclosure in any statement made by

promoter, director, manager or other key managerial personnel which results into
any benefit for themselves or their relatives, then the same profit derived shall have
to be compensated by him.
6.15 QUORUM for GM [Section 103]
1. Meaning of It means minimum number of members that must be present in order to constitute a
Quorum valid meeting.
2. Quorum Public No of members as on the Quorum

Required for Company date of meeting
General Meeting
Upto 1000 5 Members Personally Present
More than 1000 but upto 5000 15 Members personally Present
Above 5000 30 Members personally Present
Pvt Company 2 members personally present

3. Who will be (i) A member of the company

considered as (ii) Authorized representative of a body corporate. [Section 113)]
Member Personally
Present (iii) Representative of President/Governor of the state. [Section 112]
4. Who will not be (i) Proxy appointed by the member.

considered as (ii) Proxy appointed by authorized representative of a body corporate/
Member Personally Representative of President/Governor.
Present
5. When Quorum Quorum must be present throughout the General Meetings

Required?
6. Counting of They cannot be counted for Quorum except in following 2 circumstances.

Proxy for the (i) In case of the Annual general meeting convened, conducted and held by the
Purpose for the Tribunal. [Section 97]
Quorum
(ii) In case of the General meeting other than Annual General Meeting convened,
conducted and held by the Tribunal. [Section 98]
7. Effect of Absence If the Quorum is not present within half an hour from the time appointed for
of Quorum holding of the meeting, the meeting shall stand adjourned to the same day in the
next week at the same time and place, or to such other date and such other time and
place as the Board may determine
Provided that in case of an adjourned meeting or of a change of day, time or place
of meeting under clause (a), the company shall give not less than three days notice
to the members either individually or by publishing an advertisement 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.
Note If at adjourned meeting quorum is not present within half an hour, members present
shall form quorum. A single member shall not constitute quorum at an adjourned
meeting.
8. One Member 1 In case of the Annual general meeting convened, conducted and held by the
Quorum? Tribunal [Section 97]
2 In case of the General meeting other than Annual General meeting convened,
conducted and held by the Tribunal [Section 98]
9. Circumstances If all the members are present, it is immaterial that the quorum required is more
Where Quorum than the total number of members
goes Immaterial? [Re. Express Engineering Works Ltd.]
Private limited respective sections or the articles of the company provide otherwise;
company This exception shall be applicable to a private company which has not committed a
default in filing its financial statements under section 137 or annual return under
section 92 with the Registrar
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6.16 PROPER CHAIRMANSHIP [Section 104]
1. Appointment of Unless the article of a company provides otherwise, the members personally present
Chairman at the meeting shall elect one of them to be the chairman thereof on a show of
hands.
 If a poll is demanded on the election of the chairman (whether before/after the
election of chairman on a show of hand) then it shall be taken forthwith and the
person elected as chairman on show of hands shall exercise all the powers of
chairman.
 If some other person is elected chairman as a result of poll he shall be the
chairman for the rest of the meeting.
2. Voting Rights of Chairman is entitled to exercise one vote as a member of a company and second/
a Chairman casting vote as a Chairman in case of equality of votes (if articles provides) on a
show of hands or a poll. As he is not a member Chairman is entitled to exercise only
second/casting vote as a chairman in case of equality of votes on a show of a hand
or a poll.
section 92 with the Registrar
6.17 PROXIES [Section 105]

1. Who Appoint a Every member who is entitled to attend and vote at a meeting of the company shall
Proxy be entitled to appoint another person (whether a member or not) as his proxy to
attend and vote instead of himself.
2. Proxy-Company Member of company having no share capital is entitled to appoint proxy only if
having no share Article of Association so provide
capital Companies (Management and Administration) Rules, 2014
A member of a company registered under section 8 shall not be entitled to appoint
any other person as his proxy unless such other person is also a member of such
company.
3. Proxy-Limit on Companies (Management and Administration) Rules, 2014
no of member A person appointed as proxy shall act on behalf of such member or number of
members not exceeding fifty and holding in aggregate not more than 10 per cent of
the total share capital of the company carrying voting rights. However, a member
who is holding more than 10 per cent of the total share capital of the Company
carrying voting rights, may appoint a single person as a proxy and such person shall
not act as a proxy for any other person or shareholder.
4. Duties of Proxy Proxy is Bound to Vote According to the Directions of the Member Appointing Him
since relationship between a member and his proxy is that of principal and agent.
5. Limitations of a  A proxy (if not member) shall not be entitled to speak at the meeting.
Proxy  A proxy is not counted for the purpose of quorum except under Section 97
& 98
6. Who can be Any Person (whether member or not)

appointed as a
Proxy
7. Statement Notice calling a meeting shall contain a statement that member can appoint proxy
authorizing and proxy need not necessarily be a member of a company.
appointment of
Proxy in Notice
8. Legal  In writing
Formalities  Signed by the member/his attorney
regarding
instrument  (If the appointer is body corporate, the instrument should be under its seal)
Appointing Proxy  In Form specified under MGT-11
9. Deposit of Proxy It should be submitted to the company

Form  48 hours before the meeting
 In case Article provides any further shorter period than it should be complied
with
10. Appointment of  Should be as per the AOA

Proxy in Case of  In absence thereof, first named joint holder should sign the proxy.
Joint Holdings?
11. Relationship The relationship between a member and his proxy is that of a principal and agent.
Between Member The proxy is bound to vote according to the directions of the member appointing
and Proxy him.
12. Penalty for If for the purpose of any meeting of a company, invitations to appoint as proxy a
dispatch of notice person or one of a number of persons specified in the invitations are issued at the
at company’s company’s expense to any member entitled to have a notice of the meeting, every
expense 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, company may dispatch proxy form and may also provide a list of persons
willing to be appointed as proxy where a request in writing is made by members in
this behalf.
13. Revocation of 1 When a member appointing a proxy, personally attend the meeting.
Proxy
2 When a member appointing a proxy, appoint another proxy at a later date, in
such a case person appointed proxy subsequently shall be treated as proxy
3 Where intimation of death or insanity is received prior to commencement of

meeting (whether original or adjourned)
4 Where intimation of transfer of shares is received by company prior to

commencement of meeting (whether original or adjourned)
14. Rights of a 1 A proxy shall be entitled to vote in case of voting by poll even if an article does
Proxy not provide so
92 Theory Module 1
2 Proxy can vote on show of hand only of such power is expressly provided by
Article.
3 A proxy may demand for poll
company This exception shall be applicable to a private company which has not
committed a default in filing its financial statements under section 137 or
annual return under section 92 of the Act, with the Registrar.
16. Inspection of Every member entitled to vote at a meeting of the company, or on any resolution to
proxy be moved thereat, shall be entitled during the period beginning twenty-four hours
before the time fixed for the commencement of the meeting and ending with the
conclusion of the meeting, to inspect 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.
6.18 VOTING [Section 106 to 109]
(1) Restriction on Voting Rights [Section 106]
[Section 106]- 1 In case of non-payment of Calls due on shares

Restriction on
Voting Power, only 2 In case of non-payment of other dues against the members
if Article so provide
3 Where right of lien is exercised by the company in respect of shares
Section 106 also suggests that a company shall not prohibit any member from exercising his voting rights
on any other ground except the grounds mentioned in (1).
On a poll taken at a meeting of a company, a member entitled to more than one vote, or his proxy, where
allowed, or other person entitled to vote for him, as the case may be, need not, if he votes, use all his votes
or cast in the same way all the votes he uses.
Simple Meaning- Member shall have the right to use his voting right differently
In case of private company - Section 106 shall apply, unless otherwise specified in respective sections or
the articles of the company provide otherwise.
This exception shall be applicable to a private company which has not committed a default in filing its
financial statements under section 137 or annual return under section 92 of the Act, with the Registrar
(2) Voting by show of hands (Section 107)
1. How a Resolution A resolution when put to vote at a meeting shall be decided by a show of hands
shall be decided unless a poll is demanded under Section 109 or the voting is carried out
electronically.
2. Voting by Show On a show of hands, each member shall have one vote. Unless the articles
of Hands otherwise provide, proxies are not entitled to vote in case of such a voting.
3. How the result A declaration by the chairman to the effect that whether the resolution was carried
should be declared or not, if carried whether unanimously or by majority, is required to be entered in
the minute book and such entry shall be conclusive evidence of the fact.
4. Exemption to Pvt Section 107 shall apply, unless otherwise specified in respective sections or the
Ltd Company articles of the company provide otherwise.
This exception shall be applicable to a private company which has not committed a
section 92 of the Act, with the Registrar.
5. Special Point An insolvent shareholder -Whether can vote at the meeting by show of hands?
Yes, an insolvent shareholder so long as he remains in the register of the company
as a member, is entitled to exercise his votes which are attributed to his status as
member.
(3) Demand For Poll [Section 109]
1. When the poll Either before or after the declaration of the resolution of a voting on a show of
shall be taken hands.
[Section 109]
2. Who can demand Chairman on his own motion

a poll [Section 109]
In case of a company Any member or Members, present in person or by
having share capital proxy and holding shares
 Which carry at least 10% of the voting power, or
 Paid up capital of 5,00,000 or such higher amount
as may be prescribed has been paid-up
In case any other Any member or members present in person or by proxy

company and having at least 1/10th of total voting power
3. Withdrawn of  The demand for poll may be withdrawn at any time before the declaration of
Demand for Poll result.
 Withdrawn must be by the person or persons who made the demand.
4. Time for Taking Immediately. Where A poll demanded on a resolution for the
Poll adjournment of the meeting or for the election of
chairman
Within the expiry of A poll demanded on other resolution

48 hours from the
demand for poll
5. Powers of To regulate the manner in which the poll should be conducted

Chairman
Regarding poll
6. Appointment of Where a poll is to be taken, the Chairman of the meeting shall appoint such number
Scrutinizers of persons, as he deems necessary, to scrutinize the poll process and votes given on
the poll and to report thereon to him in the manner as may be prescribed.
7. The duties of a • To ensure proper conduct of the polling process;

scrutinizer shall be • To maintain proper records of the poll;
as follows–
• To submit a report to the Chairman of the meeting which shall contain the
details of votes cast in the favour and against the resolution; and
94 Theory Module 1
• To ensure that the compliance of the provisions of section 109 and Rule 21.
• The scrutinizer shall give a report to the Chairman in Form MGT-13 as per
Rule 21 of the Companies (Management & Administration) Rules, 2014.
The procedure describing the manner in which the Chairman shall get the poll
process scrutinized in Rule 21 is as follows—
• The Chairman of the meeting shall ensure that—
 The Scrutinizers are provided with the Register of Members, specimen
signatures of the members, Attendance Register and Register of Proxies.
 The Scrutinizers are provided with all the documents received by the
Company pursuant to sections 105, 112 and section 113.
 The Scrutinizers shall arrange for Polling papers and distribute them to the
members and proxies present at the meeting; in case of joint shareholders,
the polling paper shall be given to the first named holder or in his absence
to the joint holder attending the meeting
 The Scrutinizers shall keep a record of the polling papers received in
response to poll, by initialing it.
 The Scrutinizers shall open the Polling box in the presence of two persons
as witnesses after the voting process is over.
 In case of ambiguity about the validity of a proxy, the Scrutinizers shall
decide the validity in consultation with the Chairman.
 The Scrutinizers shall ensure that if a member who has appointed a proxy
has voted in person, the proxy’s vote shall be disregarded.
 The Scrutinizers shall count the votes cast on poll and prepare a report
thereon addressed to the Chairman.
 Where voting is conducted by electronic means under the provisions of
section 108 and rules made thereunder, the company shall provide all the
necessary support, technical and otherwise, to the Scrutinizers in orderly
conduct of the voting and counting the result thereof.
 The Scrutinizers’ report shall state total votes cast, valid votes, votes in
favour and against the resolution including the details of invalid polling
papers and votes comprised therein.
 The Scrutinizers shall submit the Report to the Chairman who shall
counter-sign the same.
 The Chairman shall declare the result of Voting on poll. The result may
either be announced by him or a person authorized by him in writing.
 The scrutinizers appointed for the poll, shall submit a report to the
Chairman of the meeting in Form No. MGT.13 and the report shall be
signed by the scrutinizer and, in case there is more than one scrutinizer by
all the scrutinizer, and the same shall be submitted by them to the
Chairman of the meeting within seven days from the date the poll is taken.
8. Application to Section 106, 107 and 109 shall apply to a private company; unless otherwise
Private limited specified in respective sections or the articles of the company provide otherwise;
section 92 of the Act, with the Registrar.
6.19 VOTING THROUGH ELECTRONIC MEANS: [Section 108 read with Rule 20 of the
Companies (Management & Administration) Rules, 2014]
1. Application According to section 108 of the Companies Act, 2013, the Central Government may
prescribe the class or classes of companies and manner in which a member may
exercise his right to vote by the electronic means.
2. Companies Every listed company or a company having not less than one thousand shareholders,
as prescribed shall provide to its members facility to exercise their right to vote at general meetings
by electronic means.
3. Procedure to Some terms to be remembered:—

be followed (i) Remote E-Voting: "Remote E-Voting" means the facility of casting votes by a
member using an electronic voting system from a place other than venue of a
general meeting.
(ii) Voting by Electronic Means: "Voting by Electronic Means" includes "remote e-
voting" and voting at the general meeting through an electronic voting system
which may be the same as used for remote e-voting.
Procedure: —
(i) Notice of the meeting: The notice shall be sent to all the members, directors and
auditors of the Company. The mode of sending notice shall be either of the
following:
(a) By registered post or speed post; or
(b) Through electronic means, namely, registered e-mail ID of the recipient; or
(c) By courier service.
(ii) After the notice is sent to members, the notice shall be required to be placed on the
website, if any, of Company and of the agency
(iii) The notice of the meeting shall state:
(a) That the facility being provided by the company with respect to voting by
electronic means
(b) That the facility for voting, either through electronic voting system or ballot
or polling paper shall also be made available at the meeting and members
who have not already cast their vote by remote e-voting shall be able to
exercise their right at the meeting.
(c) That in-spite of casting the vote by remote e-voting prior to the meeting,
members may also attend the meeting; however they shall not be permitted to
cast their vote again.
(iv) Notice shall:
(a) indicate the process and manner for voting by electronic means;
(b) indicate the time schedule including the time period during which the votes
may be cast by remote e-voting;
(c) provide the details about the login ID;
(d) specify the process and manner for generating or receiving the password and
for casting of vote in a secure manner.
(v) Public notice: A public notice by way of an advertisement shall be required to be
published upon completion of dispatch of notices of meeting at least 21 days
before the date of general meeting in the following:
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(a) At least once in a vernacular language of the district in which the registered
office of the company is situated; and
(b) At least once in English language in an English newspaper having country-
wide circulation.
The advertisement shall disclose the following matter:
(a) Statement that the business may be transacted through voting by electronic
means;
(b) Date and time of commencement and end of remote e-voting;
(c) Cut-off date;
(d) Manner of obtaining the login ID and password by persons who have
acquired shares and become members of the company.
Further, the public notice shall be required to be placed on the website of the
company, if any and of the agency
(vi) the facility for remote e-voting shall remain open for not less than three days and
shall close at 5.00 p.m. on the date preceding the date of the general meeting
(vii) During the period when facility for remote e-voting is provided, the members of
the company, holding shares either in physical form or in dematerialized form, as
on the cut off date, may opt for remote e-voting:
(viii) The facility shall be blocked at the end of the remote e-voting period.
(ix) One or more scrutinizer shall be appointed by the board of directors, who may be
practicing professional (Chartered Accountant/Cost Accountant/Company
Secretary/an Advocate/any other person not in employment of the company).
The scrutinizer may take the assistance of a person but such person shall also not
in employment of the company but who shall be well-versed with the electronic
voting system
(x) At a general meeting, once the discussion on the resolution on which voting is to
be held is over, the Chairman shall allow voting, with the assistance of scrutinizer,
by use of ballot or polling paper or by using an electronic voting system for all
those members who are present at the general meeting except for who have
availed remote e-voting facility.
(xi) After the conclusion of voting at the general meeting, the scrutiniser shall,
immediately first count the votes cast at the meeting, thereafter unblock the votes
cast through remote e-voting in the presence of at least two witnesses (who shall
not be in the employment of the company).
Thereafter, Scrutiniser shall give a consolidated report specifying the total votes
cast in favour or against, if any, not later than three days of conclusion of the
meeting, to the Chairman or a person authorised by him
The Chairman or a person authorised by him in writing shall declare the result of
the voting forthwith.
(xii) The scrutiniser shall maintain a register either manually or electronically to record
the assent or dissent received, mentioning the particulars of the members, number
of shares held by them, nominal value etc.
(xiii) The register and all other papers relating to voting by electronic means shall
remain in the safe custody of the scrutiniser until the Chairman considers,
approves and signs the minutes and thereafter, the scrutinizer shall hand over the
register and other related papers to the company.
(xiv) The results declared along with the report of the scrutiniser shall be placed on the
website of the company, if any and on the website of the agency immediately after
the result is declared by the Chairman.
However, in case of listed companies, the respective companies shall be required
to forward the results to the concerned stock exchange(s) where its equity shares
are listed
(xv) Subject to receipt of requisite number of votes, the resolution shall be deemed to
be passed on the date of the relevant general meeting.
6.20 PASSING OF RESOLUTION BY POSTAL BALLOT [Section 110 read with Rule 22 of
Companies (Management & Administration of Companies) Rules, 2014]
1. Meaning of "Postal Ballot" includes voting by shareholders by postal or electronic mode instead
Postal Ballot of voting personally
2. For Which A company—

Business/Agenda (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.
Provided that any item of business required to be transacted by means of postal
ballot under clause (a), may be transacted at a general meeting by a company which
is required to provide the facility to members to vote by electronic means under
section 108, in the manner provided in that section
Provided further that One Person Companies and other companies having members
upto two hundred are not required to transact any business through postal ballot
2. Procedure of 1 Following Notice to all members shall be send along with following:—
Resolution by :- a draft resolution
Postal Ballot
:- Pre-paid envelop
:- Poll Paper
2 The notice must request the members to send their assent or dissent in
writing on a postal ballot within 30 days from the date of the posting of the
letter.
3 The notice must be sent
(a) by Registered Post or speed post, or
(b) through electronic means like registered e-mail id or
(c) through courier service
4 Members to provide their assent or dissent.
5 Company is also required to publish an advertisement in a leading newspaper
along with one vernacular newspaper stating the fact of displacement of
ballot paper.
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3. A company shall 1 Buy-back of own shares by the company under sub-section (1) of section 68
pass following
Resolutions 2 Variation in the rights attached to a class of shares or debentures or other
through Postal securities
Ballot only.
3 Issue of shares with differential voting rights as to voting or dividend;
4 Change in place of registered office out side local limits of any city, town or
village
5 Alteration in the object clause of memorandum;
6 Alteration of articles of associations in relation to deletion or insertion of

provisions defining private company;
7 Sale of whole or substantially the whole of undertaking of a company section

180
8 Giving loans or extending guarantee or providing security in excess of the

limit Prescribed under sub-section (3) of Section 186
9 Election of a director under Section 151
10 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
Procedure to be followed
1. Appointment of The board of directors shall appoint one scrutinizer, who is not in employment of
Scrutinizer the company, who, can conduct the postal ballot voting process in a fair and
transparent manner;
2. Willingness of The scrutinizer shall be willing to be appointed
Scrutinizer for
such appointment
3. Maintenance of The scrutinizer shall maintain a register either manually or electronically to record
Register their assent or dissent received, mentioning the particulars of the shareholder and
details of postal ballots which are received in defaced or mutilated form and postal
ballot forms which are invalid.
6.22 CIRCULATION OF MEMBERS' RESOLUTION [Section 111]

1. Number of A company shall, on requisition in writing of such number of members, as
Members required required in section 100 (Calling of EGM), give notice to members of any
to move an resolution and circulate to members any statement with respect to the matters
application referred to in proposed resolution
2. Duty of Company Company shall
(a) Give notice to members entitled to have notice of meeting of any resolution
which is intended to be moved
(b) Circulate to members entitled to have notice of meeting any statement with
regard to any proposed resolution to be dealt with at general meeting
3. No liability to (a) a copy of the requisition signed by the member is deposited at the registered
send Notice unless office of the company
 At least 6 weeks before the meeting in case of requisition proposes a
resolution.
 At least 2 weeks before the meeting in case of any other requisition.
(b) Requisitionist has deposited a sum reasonably sufficient to meet the company's
expenses in giving effect to the requisition
4. No Circulation by If CG is satisfied on basis of application of the company or any other aggrieved

Company person, that the right is being abused to secure needless publicity for defamatory
matter.
5. Deemed Where however, after a copy of a requisition requiring notice of a resolution has
Submission been deposited at the registered office of the company, an annual general meeting
is called on a date within six weeks after the copy has been deposited, the copy,
although not deposited within the time required by this subsection, shall be
deemed to have been properly deposited for the purposes thereof.
6.23 APPOINTMENT OF REPRESENTATIVE
1. Representation of  Where a president or Governor is a member of any company, they may appoint a
the President and person to attend meeting in their place as their Representative.
Governors [Section  Said Representative shall be treated as a member personally present thus he
112] avails all power thereof.
2. Representation of  Where a company is a member of another company, it may attend the meeting of
Body Corporate any other company through a representative.
[Section 113]  The representative must be appointed by a resolution of the board of directors.
 The person so appointed is entitled to exercise the same rights and powers
(including the right to vote by proxy) on behalf of the company as the member
personally present may exercise.
6.24 RESOLUTION [Section 114]
Difference • Most matters come before a meeting by way of a motion recommending that the
between Motion & meeting may express approval or disapproval or take certain action or order
Resolution something to be done.
• A motion is a proposal, and a resolution is the adoption of a motion duly made
and seconded. But every motion need not be followed by a resolution, as where
a motion is made for the adjournment of the meeting.
• A motion whether it is passed for the closure of discussion or adjournment, etc.
can be passed by an ordinary resolution unless there is a specific provision in the
articles.
Ordinary A resolution shall be an Ordinary Resolution when

Resolution  The notice of general meeting required under the Act has been duly given,
[Section 114(1)]
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The votes cast (whether on a show of hands, or electronically or on a poll) including
the casting vote if any of the chairmen exceed the votes if any cast against the
resolution.
Meaning of A resolution shall be a Special Resolution when

Special Resolution  The notice of general meeting required under the Act has been duly given,
[Section 114(2)]
 The votes cast (whether on a show of hands, or electronically or on a poll) are at
least 3 times the number of votes if any cast against the resolution
 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.
Special Provision In addition to the requirements of the Act, a company’s own articles may prescribe
for special resolution where under the Act only an ordinary resolution is necessary.
However, where the Act specifies for a special resolution, the articles cannot provide
for the different kind of resolution.
6.25 SPECIAL NOTICE [Section 115 read with Rule 23]
1. When such Where, any Special Notice is required to be issued than, notice of the intention to
Notice to be move the resolution is required to be given to the company not earlier than three
Delivered months but at least fourteen 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
2. Eligibility 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 five lakh rupees has been paid up on the date of the notice.
3. Procedure after  The company shall upon receipt of such notice

receiving said  Provide notice of any such resolution to its members in the same manner as a
Notice notice of GM.
 Provide notice to the members either by advertisement in a newspaper having
an appropriate circulation or in any other mode allowed by Articles
 Such notice shall be send at least 7 days before the meeting.
4. Resolutions for  To provide that a retiring auditor shall not be re-appointed.

which Special  To appoint an auditor other than retiring one.
Notice is required
 To appoint a director other than retiring one.
 To remove a director before expiry of time of the term.
 To appoint another director in place of removed director.
6.26 RESOLUTIONS PASSED AT ADJOURNED MEETING [Section 116]
According to section 116 of the Companies Act, 2013, where a resolution is passed at an adjourned
meeting of—
(a) a company; or
(b) the holders of any class of shares in a company; or
(c) the Board of Directors of a company,
then, the resolution shall, for all purposes, be treated as having been passed on the date on which it was in
fact passed, and shall not be deemed to have been passed on any earlier date.
Example: The extra-ordinary general meeting of the company, PB Private Limited was due to be held on
23rd September 2018. However, due to want of quorum, the meeting was adjourned to a later date on 1st
October 2018 and two resolutions were passed on that date. Now, as per section 116 of the Companies Act,
2013, the said two resolutions shall be deemed to have been passed on the original date of meeting, i.e. 1st
October 2018 and not on the earlier date.
6.27 MINUTES [Section 118 read with Rule 25 of the Companies (Management and Administration)
Rules, 2014
Meaning of Minute It refers to a process of keeping of a record of proceedings at a meeting including
decision arrived at such meeting.
Obligation to Every company shall maintain minutes of all proceedings of general meetings.
maintain minutes Entries of the proceedings must be made in the books kept for that purpose within
thirty days of the conclusion of every such meeting concerned, or passing of
resolution by postal ballot
Provisions  The minute book shall be consecutively numbered.
regarding Minute  The minutes of each meeting shall contain a fair and correct summary of the
Book proceedings that took place at the concerned meeting.
 All appointments made at any of the meetings aforesaid shall be included in the
minutes of the meeting.
 In the case of a Board Meeting or a meeting of a committee of the Board, the
minutes shall also contain–
 The names of the directors present at the meeting; and
 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.
 Any of the following matter shall not be included in the minutes of the
meeting, which in the opinion of the Chairman of the meeting–
 Is or could reasonably be regarded as defamatory of any person; or
 Is irrelevant or immaterial to the proceedings; or
 Is detrimental to the interests of the company.
 The matter to be included or excluded in the minutes of the meetings shall be at
the absolute discretion of the Chairman of the meeting.
 The minutes kept in accordance with the provisions shall serve as the evidence
of the proceedings therein.
 Where the minutes have been kept in accordance with this section, until the
contrary is proved, the meeting shall be deemed to have been duly called and
held, and all proceedings thereat to have duly taken place, and the resolutions
passed by postal ballot to have been duly passed and in particular, all
appointments of directors, key managerial personnel, auditors or company
secretary in practice, shall be deemed to be valid.
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Procedure for Rule 25 of the Companies (Management & Administration) Rules, 2014 prescribes
maintenance of the procedure for maintenance of minutes of proceedings of general meeting,
minutes meeting of Board of Directors and other meetings and resolutions passed by postal
ballot as follows—
• A distinct minute book shall be maintained for each type of meeting namely:
(i) general meetings of the members;
(ii) meetings of the creditors
(iii) meetings of the Board; and
(iv) meetings of each of the committees of the Board.
• The minutes of proceedings of each meeting shall be entered in the books
maintained for that purpose along with the date of such entry within thirty
days of the conclusion of the meeting.
• In case of every resolution passed by postal ballot, a brief report on the postal
ballot conducted including the resolution proposed, the result of the voting
thereon and the summary of the scrutinizer’s report shall be entered in the
minutes book of general meetings along with the date of such entry within
thirty days from the date of passing of resolution.
• Each page of every such book shall be initialed or signed and the last page of
the record of proceedings of each meeting or each report in such books shall
be dated and signed—
(i) in the case of minutes of proceedings of a meeting of the Board or of a
committee thereof, by the chairman of the said meeting or the chairman of
the next succeeding meeting;
(ii) in the case of minutes of proceedings of a general meeting, by the
chairman of the same meeting within the aforesaid period of thirty days or
in the event of the death or inability of that chairman within that period, by
a director duly authorised by the Board for the purpose;
(iii) In case of every resolution passed by postal ballot, by the chairman of the
Board within the aforesaid period of thirty days or in the event of there
being no chairman of the Board or the death or inability of that chairman
within that period, by a director duly authorized by the Board for the
purpose.
• The minute-books of the Board and committee meetings shall be preserved
permanently and kept in the custody of the company secretary of the company
or any director duly authorized by the Board for the purpose and shall be kept
in the registered office or such place as Board may decide.
Exemption to Section 118 shall not apply as a whole except that minutes may be recorded within
Section 8 companies 30 days of the conclusion of every meeting in case of companies where the articles
of association provide for confirmation of minutes by circulation
The exceptions, modifications and adaptations, shall be applicable to a section 8
company which has not committed a default in filing its financial statements under
137 or Annual Return under section 92 with the Registrar.
6.28 INSPECTION OF MINUTE-BOOKS OF GENERAL MEETING [Section 119]
How shall the As per section 119 of the Companies Act, 2013, the books containing the minutes
inspection take place of the proceedings of any general meeting of a company shall–
• Be kept at the registered office of the company; and
• Be open for inspection, during business hours, by any member, without
charge, subject to such reasonable restrictions as specified in the articles of the
company or as imposed in the general meeting. However, at least 2 hours in
each business day shall be allowed for inspection.
Any member shall be entitled to be furnished, within seven working days after he
has made a request in that behalf to the company, and on payment of such fees as
may be prescribed, with a copy of any minutes referred.
Penalty for  If any inspection is refused by the company to the member, or
contravention  if the copy of minute-book is not furnished within the time specified,
then the company shall be liable to a penalty of ` 25,000 and every officer of the
company who is in default shall be liable to a penalty of ` 5,000 for each such
refusal or default as the case may be.
Power of Tribunal In addition to penalty, in the case of any such refusal or default, the Tribunal may,
by order, direct an immediate inspection of the minute-books or direct that the
copy required shall forthwith be sent to the person requiring it.
Rule 26 – Copy of Any member shall be entitled to be furnished, within seven working days after he
minute book of has made a request in that behalf to the company, with a copy of any minutes of
general meeting— any general meeting, on payment of such sum as may be specified in the articles of
association of the company, but not exceeding a sum of ten rupees for each page or
part of any page:
Provided that a member who has made a request for provision of soft copy in
respect of minutes of any previous general meetings held during a period
immediately preceding three financial years shall be entitled to be furnished, with
the same free of cost.
6.29 MAINTENANCE AND INSPECTION OF DOCUMENTS IN ELECTRONIC FORM [Section

120 read with Rule 27, 28 and 29 of the Companies (Management and Administration) Rules, 2014]
1. Requirement of The said section seeks to provide that any document, record, register or minute,
this Section etc., required to be kept by a company or allowed to be inspected or copies given
to any person by a company under this Act, may be kept or inspected or copies
given, as the case may be, in electronic form in such form and manner as may be
specified.
2. Rule 27 Rule 27 of the Companies (Management and Administration) Rules, 2014 talks
about the maintenance and inspection of documents in electronic form. It states
that every listed company or a company having at least 1000 shareholders,
debenture-holders and other security holders, may maintain its records, as required
to be maintained under the Act or rules made thereunder, in electronic form.
3. Rule 28 Rule 28 sets out the security of records maintained in electronic forms and
mentions that the Managing Director, Company Secretary or any other director or
officer of the company as the Board may decide shall be responsible for the
maintenance and security of electronic records.
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4. Rule 29 Rule 29 states that where a company maintains its records in electronic form, any
duty imposed by the Act or rules made there under to make those records available
for inspection or to provide copies of the whole or a part of those records, shall be
construed as a duty to make the records available for inspection in electronic form
or to provide copies of those records containing a clear reproduction of the whole
or part thereof, as the case may be on payment of not exceeding 10 rupees per
page.
6.30 REPORT ON ANNUAL GENERAL MEETING [Section 121]
(1) Every listed public company shall prepare in the prescribed manner 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 this Act and the rules made thereunder.
(2) The company shall file with the Registrar a copy of the report within thirty days of the conclusion of the
annual general meeting with such fees as may be prescribed, or with such additional fees as may be
prescribed, within the time as specified, under section 403.
(3) If the company fails to file the such report before the expiry of the period specified under section 403,
the company shall be punishable with fine which shall not be less than one lakh rupees but which may
extend to five lakh rupees and every officer of the company who is in default shall be punishable with
fine which shall not be less than twenty-five thousand rupees but which may extend to one lakh rupees.
6.31 APPLICABILITY TO ONE PERSON COMPANY
1. The provisions of sections 98 & 100 to 111 (both inclusive) shall not apply to a One Person
Company.
2. The ordinary businesses as mentioned under clause (a) of sub-section (2) of section 102 which a
company, other than a One Person Company, is required to transact at its annual general meeting,
shall be transacted, in case of One Person Company as well
3. For the purposes of section 114, any business which is required to be transacted at an annual
general meeting or other general meeting of a company by means of an ordinary or special
resolution, it shall be sufficient if, in case of One Person Company, the resolution is
communicated by the member to the company and entered in the minutes-book required to be
maintained under section 118 and signed and dated by the member and such date shall be deemed
to be the date of the meeting for all the purposes under this Act.
4. Where there is only one director on the Board of Director of a One Person Company, any
business which is required to be transacted at the meeting of the Board of Directors of a company,
it shall be sufficient if, in case of such One Person Company, the resolution by such director is
entered in the minutes-book required to be maintained under section 118 and signed and dated by
such director and such date shall be deemed to be the date of the meeting of the Board of
Directors for all the purposes under this Act.
Chapter 7
PUBLIC DEPOSITS
Synopsis
7.1 Deposits 105
7.2 Provisions Regarding Acceptance of Deposits 107
7.3 Punishment for Contravention of Section 73 or Section 76 [Section 76A] 112
7.1 DEPOSITS
According to section 2(31) of the Act, the term ‘deposit’ includes any receipt of money by way of deposit
or loan or in any other form, by a company, but does not include such categories of amount as may be
prescribed.
According to the Companies (Acceptance of Deposits) Rules, 2014, following categories of amount may
not be considered as deposit—
(i) Any amount received from the Central Government or a state Government, or from any other source
whose repayment is guaranteed by the Central Government or a State Government, or any amount
received from a local authority, or any amount received from a statutory authority constituted under
an Act of Parliament or a State Legislature
(ii) Any amount received from foreign Governments, foreign international banks, multilateral financial
institutions etc. subject to the provisions of Foreign Exchange Management Act, 1999
(iii) any amount received as a loan or facility from any banking company.
(iv) Any amount received as a loan or financial assistance from Public Financial Institutions
(v) any amount received against issue of commercial paper or any other instruments issued in accordance
with the guidelines or notification issued by the Reserve Bank of India;
(vi) any amount received by a company from any other company;
(vii) any amount received and held pursuant to an offer made in accordance with the provisions of the Act
towards subscription to any securities (including share application money or advance towards
allotment of securities, pending allotment);
Explanation: If the securities for which application money or advance for such securities was
received cannot be allotted within 60 days from the date of receipt of the application money or
advance for such securities and such application money or advance is not refunded to the
subscribers within 15 days from the date of completion of 60 days, such amount shall be treated as
a deposit under these rules.
(viii) any amount received from a person who, at the time of the receipt of the amount, was a director of
the company or a relative of the director of the Private company.
Provided that the director of the company or relative of the director of the private company, as the
case may be, from whom money is received, furnishes to the company at the time of giving the
money, a declaration in writing to the effect that the amount is not being given out of funds
106 Theory Module 1
acquired by him by borrowing or accepting loans or deposits from others and the company shall
disclose the details of money so accepted in the Board’s report;
(ix) any amount raised by the issue of bonds or debentures secured by a first charge or a charge ranking
pari passu with the first charge on any assets excluding intangible assets of the company or bonds or
debentures compulsorily convertible into shares of the company within 10 years
(x) any amount raised by issue of non-convertible debenture not constituting a charge on the assets of
the company and listed on a recognised stock exchange as per applicable regulations made by
Securities and Exchange Board of India
(xi) any amount received from an employee of the company not exceeding his annual salary under a
contract of employment with the company in the nature of non- interest-bearing security deposit;
(xi) any non-interest-bearing amount received or held in trust
(xii) any amount received for the purposes of, the business of the company – as an advance for the supply
of goods or provision of services accounted for, as advance
(xiii) any amount brought in by the promoters of the company by way of unsecured loan in pursuance of
the stipulation of any lending financial institution or a bank
(xiv) any amount accepted by a Nidhi company in accordance with the section 406 of the Act.
(xv) any amount received by way of subscription in respect of a chit under the Chit Fund Act, 1982
(xvi) any amount received by the company under any collective investment scheme in compliance with
regulations framed by the Securities and Exchange Board of India
(xvii) an amount of twenty five lakh rupees or more received by a start-up company, by way of a
convertible note (convertible into equity shares or repayable within a period not exceeding five years
from the date of issue) in a single tranche, from a person.
Explanation.—For the purposes of this sub-clause,—
1. "Start-up company" means a private company incorporated under the Companies Act, 2013 or
Companies Act, 1956 and recognised as such in accordance with notification number G.S.R.
180(E), dated 17th February, 2016 issued by the Department of Industrial Policy and
Promotion, Ministry of Commerce and Industry;
2. "Convertible note" means an instrument evidencing receipt of money initially as a debt, which
is repayable at the option of the holder, or which is convertible into such number of equity
shares of the start-up company upon occurrence of specified events and as per the other terms
and conditions agreed to and indicated in the instrument.
(xviii) any amount received by a company from Alternate Investment Funds, Domestic Venture Capital
Funds and Mutual Funds registered with the Securities and Exchange Board of India in accordance
with regulations made by it.
As per Rule 2 (1) (d), the term ‘Depositor’ means:

(i) any member of the company who has made a deposit with the company in accordance with the
provisions of sub- section (2) of section 73 of the Act, or
(ii) any person who has made a deposit with a public company in accordance with the provisions of section
76 of the Act.
Thus, we may conclude that
 any member of a private or public company who has deposited money with his company is a
‘depositor’.
 any person (even if not a member of the company) who has deposited money with a public company is
also a ‘depositor’.
Chap. 7 Public Deposits 107
ELIGIBLE COMPANY
A public company, having—
 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
In Addition, the prohibition with respect to the acceptance or renewal of deposit from public shall not
apply to the following types of companies:
(i) any banking company;
(ii) any non-banking financial company (NBFC) as defined in the Reserve Bank of India Act, 1934;
(iii) any housing finance company (HFC) registered with the National Housing Bank established under the
National Housing Bank Act, 1987
7.2 PROVISIONS REGARDING ACCEPTANCE OF DEPOSITS
From Members From Public
Passing of a A company is required to pass a resolution The ‘eligible company’ is required to

Resolution: in general meeting for acceptance of obtain the prior consent by means of a
deposits from its members. special resolution in general meeting and
also file the said resolution with the
Registrar of Companies before making any
invitation to the public for acceptance of
deposits.
However, an ‘eligible company’, which is
accepting deposits within the limits
specified under section 180(1)(c), may
accept deposits by means of an ordinary
resolution.
Issuance of a Issuance of a circular to its members Issuance of a Advertisement to its

Circular/ including therein a statement showing members including therein a statement
Advertisement  the financial position of the showing
containing company,  the financial position of the
Statement company,
 the credit rating obtained,
 the total number of depositors and  the credit rating obtained,
 the amount due towards deposits  the total number of depositors and
in respect of any previous deposits  the amount due towards deposits in
accepted by the company and respect of any previous deposits
 such other particulars in such form accepted by the company and
and in such manner as may be  such other particulars in such form
prescribed; and in such manner as may be
prescribed;
Exemption Provisions with respect to issue of circular, filing the copy of such circular with the
Registrar, depositing of certain amount and certification as to no default committed,
shall not apply to a private company:
108 Theory Module 1
(A) which accepts from its members monies not exceeding one hundred per cent. of
aggregate of the paid-up share capital, free reserves and securities premium account;
or
(B) which is a start-up, for five years from the date of its incorporation; or
(C) which fulfils all of the following conditions, namely:
(a) which is not an associate or a subsidiary company of any other company;
(b) if the borrowings of such a company from banks or financial institutions or any
body corporate is less than twice of its paid-up share capital or fifty crore
rupees, whichever is lower; and
(c) such a company has not defaulted in the repayment of such borrowings
subsisting at the time of accepting deposits under this section.
certificate of a certificate of the statutory auditor of the a certificate of the statutory auditor of the
the statutory company shall be attached in Form DPT- company shall be attached in Form DPT-1,
auditor 1, stating that the company has not stating that the company has not committed
committed default in the repayment of default in the repayment of deposits or in
deposits or in the payment of interest on the payment of interest on such deposits
such deposits
In case a company had committed a In case a company had committed a default
default in the repayment of deposits in the repayment of deposits accepted
accepted either before or after the either before or after the commencement of
commencement of the Act or in the the Act or in the payment of interest on
payment of interest on such deposits, a such deposits, a certificate of the statutory
certificate of the statutory auditor of the auditor of the company shall be attached in
company shall be attached in Form DPT- Form DPT-1, stating that the company had
1, stating that the company had made good made good the default and a period of five
the default and a period of five years has years has lapsed since the date of making
lapsed since the date of making good the good the default
default
Filing of The company is required to file a copy of The company is required to file a copy of
Circular the circular containing the statement with the circular containing the statement with
the Registrar within 30 days before the the Registrar within 30 days before the date
date of issue of the circular of issue of the circular
Requirement of The company is required to deposit, on or The company is required to deposit, on or

Deposit before 30th of April each year, at least before 30th of April each year, at least 20%
Repayment 20% of the amount of its deposits of the amount of its deposits maturing
Reserve maturing during the following financial during the following financial year and
Account year and kept in a scheduled bank in a kept in a scheduled bank in a separate bank
separate bank account to be called deposit account to be called deposit repayment
repayment reserve account. reserve account.
Certification as The company needs to certify that it has The company needs to certify that it has
to No default in not committed any default in the not committed any default in the
Repayment repayment of deposits accepted either repayment of deposits accepted either
before or after the commencement of this before or after the commencement of this
Act or payment of interest on such Act or payment of interest on such
deposits. deposits.
In case a default had occurred, the In case a default had occurred, the
company made good the default and a company made good the default and a
period of five years had lapsed since the period of five years had lapsed since the
date of making good the default. date of making good the default.
Provision of The company may provide security, if Every company which accepts secured
Security any, for the due repayment of the amount deposits from the public shall within thirty
of deposit or the interest thereon. Further, days of such acceptance, create a charge on
if security is provided, the company shall its assets.
take steps for the creation of charge on the The amount of charge shall not be less than
property or assets of the company. the amount of deposits accepted. The
charge shall be created in favour of the
deposit holders in accordance with the
prescribed rules.
In respect of creation of security Rule 6
states that the company accepting secured
deposits shall create security by way of
charge on its tangible assets only.
Application to In case a company fails to repay the

Tribunal if the deposit or part thereof or any interest
Company fails thereon, the depositor concerned may
to Repay apply to the Tribunal for an order directing
the company to pay the sum due or for any
loss or damage incurred by him as a result
of such non- payment and for such other
orders as the Tribunal may deem fit
Using the The deposit repayment reserve account The deposit repayment reserve account
Amount of shall not be used by the company for any shall not be used by the company for any
Deposit purpose other than repayment of deposits purpose other than repayment of deposits
Repayment
Reserve
Account
Tenure for A company is not permitted to accept or A company is not permitted to accept or
which Deposits renew deposits (whether secured or renew deposits (whether secured or
can be unsecured) which is repayable on demand unsecured) which is repayable on demand
Accepted or in less than six months. or in less than six months.
Further, the maximum period of Further, the maximum period of
acceptance of deposit cannot exceed thirty acceptance of deposit cannot exceed thirty
six months. six months.
Exception to For the purpose of meeting any of its short-term requirements of funds, a company may
the rule of accept or renew deposits for repayment earlier than six months subject to the condition
tenure of six that:
months: (i) such deposits shall not 10% of the aggregate of the paid-up share capital, free
reserves and securities premium account of the company; and
(ii) such deposits are repayable only on or after three months from the date of such
deposits or renewal.
Maximum A company is permitted to accept or  From its members: The amount of

Amount of renew any deposit from its members such deposit together with outstanding
Deposits including other such deposits outstanding deposits from the members as on the
as on the date of acceptance or renewal
110 Theory Module 1
maximum up to 35% of the aggregate of date of acceptance or renewal can be
its paid-up share capital, free reserves and maximum 10% of the aggregate of its
securities premium account. paid-up share capital, free reserves and
securities premium account;
 From Persons other than its
Members: The amount of such deposit
together with the amount of outstand-
ing deposits (excluding deposits from
members) on the date of acceptance or
renewal can be maximum 25% of the
aggregate of its paid-up share capital,
free reserves and securities premium
account.
Incase of Government company
Max 35% of (PUC + free Reserve +
Secured Prem)
Exception
a private company may accept from its members monies not exceeding 100% of aggregate of the paid-up
share capital, free reserves and securities premium account
In addition, the maximum limit in respect of deposits to be accepted from members shall not apply to
following classes of private companies:
(i) a private company which is a start-up, for five years from the date of its incorporation;
(ii) a private company which fulfils all of the following conditions, namely:
(a) which is not an associate or a subsidiary company of any other company;
(b) the borrowings of such a company from banks or financial institutions or any body-corporate is
less than twice of its paid- up share capital or fifty crore rupees, whichever is less; and
(c) such a company has not defaulted in the repayment of such borrowings subsisting at the time of
accepting deposits under section 73:
Appointment of Following provisions are required to be Following provisions are required to be
Trustee for observed in this respect: observed in this respect:
Depositors • One or more trustees for depositors • One or more trustees for depositors
need to be appointed by the company need to be appointed by the company
for creating security for the deposits. for creating security for the deposits.
• A written consent shall be obtained • A written consent shall be obtained
from the trustee before their from the trustee before their
appointment. appointment.
• A statement shall appear in the • A statement shall appear in the circular
circular or advertisement with or advertisement with reasonable
reasonable prominence to the effect prominence to the effect that the
that the trustees for depositors have trustees for depositors have given their
given their consent to the company for consent to the company for such
such appointment. appointment.
Qualifications Not eligible if:—
(a) is a director, key managerial personnel or any other officer or an employee of the
company or of its holding, subsidiary or associate company or a depositor in the
company;
(b) is indebted to the company, or its subsidiary or its holding or associate company or a
subsidiary of such holding company;
(c) has any material pecuniary relationship with the company;
(d) has entered into any guarantee arrangement in respect of principal debts secured by
the deposits or interest thereon;
(e) is related to any person specified in clause (a) above.
Removal of No trustee for depositors shall be removed from office after the issue of circular or
Trustee advertisement and before the expiry of his term except with the consent of all the
directors present at a meeting of the board. In case the company is required to have
independent directors, at least one independent director shall be present in such
meeting of the Board.
Filling of The application shall contain a declaration The application shall contain a declaration
Application made by the intending depositor to the made by the intending depositor to the
Form for effect that the deposit is not being made effect that the deposit is not being made
making out of any money borrowed by him from out of any money borrowed by him from
Deposits any other person. any other person.
Deposits in In case the depositors so desire, deposits In case the depositors so desire, deposits
Joint Names may be accepted in joint names not may be accepted in joint names not
exceeding three. exceeding three.
A joint deposit may be accepted with or A joint deposit may be accepted with or
without any of the clauses, namely, without any of the clauses, namely,
“Jointly”, “Either or Survivor”, “First “Jointly”, “Either or Survivor”, “First
named or Survivor”, “Anyone or named or Survivor”, “Anyone or
Survivor”. These clauses operate on Survivor”. These clauses operate on
maturity. maturity.
Deposit Receipt Within a period of twenty one days from Within a period of twenty one days from
the date of receipt of money or realization the date of receipt of money or realization
of cheque or date of renewal, the company of cheque or date of renewal, the company
is required to furnish a deposit receipt to is required to furnish a deposit receipt to
the depositor or his agent the depositor or his agent
Disclosures in A public company shall disclose in its A public company shall disclose in its
Financial financial statements by way of note about financial statements by way of note about
Statements the money received from its directors. In the money received from its directors. In
case of a private company it shall disclose case of a private company it shall disclose
in its financial statements by way of note in its financial statements by way of note
about the money received from the about the money received from the
directors or the relatives of directors. directors or the relatives of directors.
Penal Rate of In case the company fails to repay deposits In case the company fails to repay deposits
Interest (both secured and unsecured) on maturity, (both secured and unsecured) on maturity,
after they are claimed, it shall pay penal after they are claimed, it shall pay penal
rate of interest of eighteen per cent per rate of interest of eighteen per cent per
annum for the overdue period. annum for the overdue period.
Credit Rating The ‘eligible company’ shall be required to
obtain the rating (including its net-worth,
liquidity and ability to pay its deposits on
due date) from a recognised credit rating
agency.
112 Theory Module 1
Premature After the expiry of six months but before the actual date of maturity, if a depositor
Repayment of requests for premature repayment, the rate of interest payable shall be one percent less
Deposits than the rate which would be payable for the period for which the deposit has actually
run.
In this respect it is to be noted that the period for which the deposit has run, if it contains
any part of the year which is less than six months then it shall be excluded; otherwise if
that part is six months or more it shall be taken as one year.
Reduction of rate of interest is not applicable in the following cases:
 Where the deposit is prematurely repaid to comply with Rule 3 i.e. premature
repayment made in order to reduce the total amount of deposits to bring it within the
permissible limits; or
 Where the deposit is prematurely repaid to provide for war risk or other related
benefits to the personnel of naval, military or air forces or to their families during the
period of emergency declared under Article 352 of the constitution.
7.3 PUNISHMENT FOR CONTRAVENTION OF SECTION 73 OR SECTION 76 [Section 76A]
Where a company accepts or invites any deposit in contravention of conditions prescribed under section 73
or section 76 or rules made thereunder or
if a company fails to repay the deposit or part thereof or any interest due thereon within the time specified
under section 73 or section 76 or rules made thereunder:—
(a) the company shall, in addition to the payment of the amount of deposit and the interest due, be
punishable with fine which shall not be less than one crore rupees or twice the amount of deposit
accepted by the company, whichever is lower; and
(b) every officer of the company who is in default shall be punishable with imprisonment which may extend
to seven years and with fine which shall not be less than twenty-five lakh rupees but which may extend
to two crore rupees, or with both
Provided that if it is proved that the officer of the company who is in default, has contravened such
provisions knowingly or wilfully with the intention to deceive the company or its shareholders or
depositors or creditors or tax authorities, he shall be liable for action under section 447.
Chapter 8
DEBENTURES
Synopsis
8.1 Meaning of Debentures 113
8.2 Companies (Share Capital and Debentures) Rules, 2014 [Rule 18] Conditions for issue of secured
Debentures 113
8.3 Debenture Trustees: Appointment and Functions [Section 71(5)] 114
8.4 Debenture Redemption Reserve (DRR) [Section 71] 116
8.1 MEANING OF DEBENTURES
Meaning Section 2(30) of the Companies Act, 2013 defines the term “debenture”
 which 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.
Provided that—
(a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act,
1934; and
(b) such other instrument, as may be prescribed by the Central Government in
consultation with the Reserve Bank of India, issued by a company,
shall not be treated as debenture
8.2 COMPANIES (SHARE CAPITAL AND DEBENTURES) RULES, 2014 [Rule 18] Conditions for
issue of secured Debentures
The company shall not issue secured debentures, unless it complies with the following conditions,
namely:—
1. Tenure & An issue of secured debentures may be made, provided the date of its redemption shall
Eligible not exceed ten years from the date of issue.
Companies Provided that the following classes of companies may issue secured debentures for a
period exceeding ten years but not exceeding thirty years
(i) Companies engaged in setting up of infrastructure projects;
(ii) ‘Infrastructure Finance Companies’ as defined in clause (viia) of sub-direction (1)
of direction 2 of Non-Banking Financial (Non-deposit accepting or holding)
Companies Prudential Norms (Reserve Bank) Directions, 2007;
(iii) ‘Infrastructure Debt Fund Non-Banking Financial companies’ as defined in clause
of (b) direction 3 of Infrastructure Debt Fund Non-Banking Financial Companies
(Reserve Bank) Directions, 2011
114 Theory Module 1
2. Charge such an issue of debentures shall be secured by the creation of a charge, on the
Creation properties or assets of the company, having a value which is sufficient for the due
repayment of the amount of debentures and interest thereon;
3. Debenture the company shall appoint a debenture trustee before the issue of prospectus or letter of
Trustee offer for subscription of its debentures and not later than sixty days after the allotment
of the debentures, execute a debenture trust deed to protect the interest of the debenture
holders
4. Security The security for the debentures by way of a charge or mortgage shall be created by the
company in favour of the debenture trustee
8.3 DEBENTURE TRUSTEES: APPOINTMENT AND FUNCTIONS [Section 71(5)]
1. Appointment of No company shall issue a prospectus or make an offer or invitation to the public or
debenture trustees to its members exceeding five hundred for the subscription of its debentures,
unless it has appointed one or more debenture trustees
Before the appointment of debenture trustee or trustees, a written consent shall be
obtained from such debenture trustee or trustees proposed to be appointed and a
statement to that effect shall appear in the letter of offer issued for inviting the
subscription of the debentures
2. Eligibility for No person shall be appointed as a debenture trustee, if he—

appointment for (i) Beneficially holds shares in the company;
Debenture Trustees
(ii) Is a promoter, director or key managerial personnel or any other officer or an
employee of the company or its holding, subsidiary or associate company;
(iii) Is beneficially entitled to moneys which are to be paid by the company
otherwise than as remuneration payable to the debenture trustee;
(iv) Is indebted to the company, or its subsidiary or its holding or associate
company or a subsidiary of such holding company;
(v) Has furnished any guarantee in respect of the principal debts secured by the
debentures or interest thereon;
(vi) Has any pecuniary relationship with the company amounting to two per cent.
or more of its gross turnover or total income or fifty lakh rupees or such
higher amount as may be prescribed, whichever is lower, during the two
immediately preceding financial years or during the current financial year;
(vii) is a relative of any promoter or any person who is in the employment of the
company as a director or key managerial personnel;
3. Functions (a) satisfy himself that the letter of offer does not contain any matter which is
inconsistent with the terms of the issue of debentures or with the trust deed;
(b) satisfy himself that the covenants in the trust deed are not prejudicial to the
interest of the debenture holders;
(c) call for periodical status or performance reports from the company;
(d) communicate promptly to the debenture holders defaults, if any, with regard to
payment of interest or redemption of debentures and action taken by the trustee
therefor;
Chap. 8 Debentures 115
(e) appoint a nominee director on the Board of the company in the event of—
(i) two consecutive defaults in payment of interest to the debenture holders; or
(ii) default in creation of security for debentures; or
(iii) default in redemption of debentures.
(f) ensure that the company does not commit any breach of the terms of issue of
debentures or covenants of the trust deed and take such reasonable steps as
may be necessary to remedy any such breach;
(g) inform the debenture holders immediately of any breach of the terms of issue
of debentures or covenants of the trust deed;
(h) ensure the implementation of the conditions regarding creation of security for
the debentures, if any, and debenture redemption reserve;
(i) ensure that the assets of the company issuing debentures and of the guarantors,
if any, are sufficient to discharge the interest and principal amount at all times;
(j) do such acts as are necessary in the event the security becomes enforceable;
(k) call for reports on the utilization of funds raised by the issue of debentures-
(l) take steps to convene a meeting of the holders of debentures as and when such
meeting is required to be held;
(m) ensure that the debentures have been converted or redeemed in accordance
with the terms of the issue of debentures;
(n) perform such acts as are necessary for the protection of the interest of the
debenture holders and do all other acts as are necessary in order to resolve the
grievances of the debenture holders.
4. Application to  Where at any time the debenture trustee comes to a conclusion that the assets
Tribunal of the company are insufficient or are likely to become insufficient to
discharge the principal amount
 He may file a petition before the Tribunal
 The Tribunal may, after hearing the company and any other person interested
in the matter, by an order, impose such restrictions on the incurring of any
further liabilities as the Tribunal thinks necessary in the interest of holders of
the debentures.
4A. Meeting of all The meeting of all the debenture holders shall be convened by the debenture trustee
the debenture on—
holders (a) requisition in writing signed by debenture holders holding at least one-tenth in
value of the debentures for the time being outstanding;
(b) the happening of any event, which constitutes a breach, default or which in the
opinion of the debenture trustees affects the interest of the debenture holders.
5. Casual Vacancy Board may fill any casual vacancy in the office of the trustee but while any such
in Office of vacancy continues, the remaining trustee or trustees, if any, may act
Debenture Trustee Provided that where such vacancy is caused by the resignation of the debenture
trustee, the vacancy shall only be filled with the written consent of the majority of
the debenture holders.
6. Removal from Any debenture trustee may be removed from office before the expiry of his term
Office only if it is approved by the holders of not less than three fourth in value of the
debentures outstanding, at their meeting
116 Theory Module 1
7. Provision with (a) A trust deed for securing any issue of debentures shall be open for inspection
regard to Debenture to any member or debenture holder of the company, in the same manner, to the
Trust Deed same extent and on the payment of the same fees, as if it were the register of
members of the company; and
(b) A copy of the trust deed shall be forwarded to any member or debenture holder
of the company, at his request, within seven days of the making thereof, on
payment of fee.
8. Limit on amount Before the issue of debentures, the Board of Directors of the company shall obtain
to be borrowed approval of the shareholders through special resolution if the borrowings by issuing
debentures together with the amount already borrowed exceed the aggregate of
company’s paid-up share capital, free reserves and securities premium amount.
Temporary loans obtained from the company’s bankers in the ordinary course of
business are not to be included in the borrowings.
8.4 DEBENTURE REDEMPTION RESERVE (DRR) [Section 71]

1. Requirement Where debentures are issued by a company under this section, the company shall
create a debenture redemption reserve account out of the profits of the company
available for payment of dividend and the amount credited to such account shall
not be utilised by the company except for the redemption of debentures.
Provisions as per Companies (Share Capital and Debentures) Rules, 2014
2. Conditions Pvt Placement Public Offering
as prescribed
1 All India Financial Institutions
regulated by Reserve Bank of India
and Banking Companies
Nil Nil
2 other Financial Institutions within the
meaning of clause (72) of section 2
of the Companies Act, 2013 and
NBFCs Nil Nil
3 For listed companies (other than All Nil Nil

India financial Institutions and
Banking Companies)
4 for unlisted companies, (other than All 10 percent, of the 10 percent, of
India financial Institutions and value of the the value of the
Banking Companies) outstanding outstanding
debentures; debentures
Special Note In case of partly convertible debentures, Debenture Redemption Reserve shall be
created in respect of non-convertible portion of debenture
3. Maintenance Following class of companies, as are required to create Debenture Redemption Reserve
of Specified shall on or before the 30th day of April in each year, invest or deposit, as the case may
securities be, a sum which shall not be less than 15%, 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:—
(i) in deposits with any scheduled bank, free from any charge or lien;
Chap. 8 Debentures 117
(ii) in unencumbered securities of the Central Government or of any State
Government;
(iii) in unencumbered securities mentioned in 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;
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
Pvt Placement Public Offering
1 All India Financial Institutions Nil Nil
regulated by Reserve Bank of
India and Banking Companies
2 other Financial Institutions within Nil Required
the meaning of clause (72) of
section 2 of the Companies Act,
2013 and NBFCs
3 For listed companies (other than Nil Required
All India financial Institutions
and Banking Companies)
4 for unlisted companies, (other than Required Required
All India financial Institutions and
Banking Companies)
.
Chapter 9
CHARGE
Synopsis
9.1 Creation of Charge on the Assets of the Company 118
9.2 Fixed Charge or Specific Charge 118
9.3 Floating Charge 118
9.4 Crystallisation of Floating Charge 119
9.5 Items where Charge can be Created 119
9.6 Registration of Charges 119
9.7 Legal Provisions Relating to Registration of Charges 120
9.8 Effects of Non-Registration 124
9.1 CREATION OF CHARGE ON THE ASSETS OF THE COMPANY
Charge-Meaning “charge” has been defined as an interest or lien created on the property or assets of
Sec 2(16) a company or any of its undertakings or both as security and includes a mortgage.
Note-1 Charge also include the terms “Hypothecation”, “Pledge” and “Mortgage”
Note-2 Charge which are created on company’s assets may broadly be classified in two
parts:—
1. Fixed charge, and
2. Floating charge.
9.2 FIXED CHARGE OR SPECIFIC CHARGE

Meaning A charge is said to be fixed or specific when it is made specifically to cover assets
which are ascertained and definite or are capable of being ascertained and defined,
at the time of creating the charge e.g. land, buildings, or heavy machinery.
Other Important 1 The company cannot deal with the property charged in the ordinary course of
Points its business without obtaining prior consent of lender.
2 The company can create another specific charge on the same property.
However, in such a case, the specific charge which is which is created first
takes priority over the subsequent charge.
9.3 FLOATING CHARGE
Meaning A floating charge is a charge on a class of assets present and future which in the
ordinary course of business is changing from time to time and leaves the company
free to deal with the property as it sees fit until the holders of charge take steps to
enforce their security.
Chap. 9 Charge 119
Other Important 1 The company can deal with the property charged till the charge becomes fixed.
Points
2 The company can create a subsequent specific charge on the same property
having priority over the floating charge.
3 The company cannot create a second floating charge, over the same property,
having priority over the first floating charge.
9.4 CRYSTALLISATION OF FLOATING CHARGE
Meaning  The terms 'crystallizations of the charge' may be defined as the conversion of
a floating charge into a fixed charge.
 It is essential so as to protect the interest of the money-lenders having a
floating charge over company's assets.
Circumstances 1 When the company ceases to be a going concern i.e., when it creases to carry
where on the business.
crystallization
takes place 2 When the company makes default in the repayment of the principal amount of
money or Interest and the charge-holder brings a legal action to enforce the
security.
3 When the company comes to be wound up i.e., goes into liquidation.
4 When the receiver is a appointed by the court for taking possession of the
property
9.5 ITEMS WHERE CHARGE CAN BE CREATED
1. Movable and The company can create charge on all or any of its property which may be
Immovable movable or Immovable, present or future. Thus, the company can also create
charge on its book debts as these are part of company's current assets.
2. Intangibles Charge can also be created on Intangible assets like G/w, Patent, Copyright, TM
etc.
3. Books of A/cs The company cannot create charge on its books of accounts. The reason for the
same is that these books are to be kept by the company at its office and are open
for inspection.
4. Reserve Capital The company can also not create charge on its 'reserve capital'
5. Uncalled Capital The company can if so authorized by its MOA/AOA create charge on its 'uncalled
capital'.
9.6 REGISTRATION OF CHARGES
Section provides that the following charges must be registered with the Registrar of Companies. Otherwise,
such charges shall be void, and the charge-holders will not get the benefit of the securities if the company
goes into liquidation:—
120 Theory Module 1
1 A charge for the purpose of securing any issue of debentures.
2 A charge on uncalled share capital of the company.
3 A charge on any immovable property wherever situated
4 A charge on any book debts of the company.
5 A charge, not being a pledge, on any movable property of the company.
6 A floating charge on the undertaking or any property of the company including stock.
7 A charge on calls made, but not paid.
8 A charge on a ship or any share in a ship.
9 A charge on goodwill, or a patent, or a license under a patent, on a trade mark, or a copy right.
9.7 LEGAL PROVISIONS RELATING TO REGISTRATION OF CHARGES
1. Duty of the According to section 77 of the Companies Act, 2013, it shall be duty of the
company to register company creating a charge, to register the particulars of the charge signed by the
charges company and the charge holder together with the instruments, if any, creating such
charge in such form, on payment of such fees and in such manner as may be
prescribed, with the registrar within 30 days of creation.
2. Registration by The Registrar may, on an application by the company, allow such registration to be
the registrar made within a period of 300 days of such creation on payment of such additional
-For Charge fees as may be prescribed.
Created before 02- Provided further that if registration is not made within a period of 300 days of such
11-2018 creation, the company shall seek extension of time in accordance with section 87.
3. Condonation of For Charge Created Charge Created on or after

delay by Registrar- before 02-11-2018 02-11-2018
For Charge Created Period for within a period of 30 days within a period of 30 days of
on or after submission of of the date of creation of the date of creation of the
02-11-2018 CHG-1 the charge charge
Extension within a period of 300 within a period of 60 days of
allowed by ROC days of such creation such creation
till + +
on payment of such on payment of such additional
additional fees fees
Still not company shall seek within a period of next 60
submitted extension of time in days
accordance with section +
87
Payment of Advelorum fees
The Registrar may, on being satisfied that the company had sufficient cause for not
filing the particulars and instrument of charge, if any, within a period of 30 days of
the date of creation of the charge, allow the registration of the same after 30 days
but within a period of 60 days of the date of such creation of charge or
modification of charge on payment of additional fee.
Chap. 9 Charge 121
The company is required to make an application to the Registrar in the prescribed
form for seeking extension of time. It should be supported by a declaration from
the company signed by its company secretary or a director that such belated filing
shall not adversely affect the rights of any other intervening creditors of the
company.
3A. Verification of A copy of every instrument creating (or modifying) any charge and required to be
Instrument of filed with the Registrar, shall be verified as follows:
Charge (a) in case of property situated outside India: where the instrument or deed
relates solely to the property situated outside India, the copy shall be verified by a
certificate issued either-
• Under the seal, if any, of the company, or
• Under the hand of any director or company secretary of the company, or an
authorised officer of the charge holder, or
• Under the hand of some person other than the company who is interested in the
mortgage or charge;
(b) In case of property situated in India (whether wholly or partly): where the
instrument or deed relates to the property situated in India (whether wholly or
partly), the copy shall be verified by a certificate issued under the hand of any
director or company secretary of the company or an authorised officer of the
charge holder.
Thus, in case the instrument or deed relates solely to a property situated outside
India, the copy may also be additionally verified by a certificate issued under the
hand of some person other than the company who is interested in the mortgage or
charge.
This type of verification is not possible when the instrument or deed relates to the
property situated in India, whether wholly or partly.
3B. Issue of If a charge is registered with the Registrar, a certificate of registration of such
Certificate of charge shall be issued in Form CHG-2 to the company and, as the case may be, to
Registration the person in whose favour the charge is created.
The certificate so issued by the Registrar shall be conclusive evidence that the
requirements of this Chapter and the rules made thereunder as to registration of
creation of charge have been complied with.
3C. Subsequent It is provided that any subsequent registration of a charge (i.e. registered within the
Registration not to extended period instead of original thirty days) shall not prejudice any right
prejudice Rights of acquired in respect of any property before the charge is actually registered by the
Charge-holder company.
In other words, rights of the lender or charge-holder shall not get affected and shall
remain as they were before the actual registration (i.e. rights acquired from the date
of creation of charge) even if the charge is actually registered within the extended
period.
4. Application for where a company fails to register the charge within the period 30 days, without
registration of prejudice to its liability in respect of any offence under this Chapter, the person in
charge [Sec 78] whose favour the charge is created may apply to the Registrar for registration of the
charge within a period of fourteen days after giving notice to the company
Provided that where registration is effected on application of the person in whose
favour the charge is created, that person shall be entitled to recover from the
company the amount of any fees or additional fees paid by him to the Registrar for
the purpose of registration of charge.
122 Theory Module 1
5. Section 77 to Provisions as stipulated u/e 77 shall apply in following cases

apply in certain (a) a company acquiring any property subject to a charge; or
matters [Sec 79]
(b) any modification in the terms or conditions or the extent or operation of any
charge registered under that section.
As per the (The Companies (Registration of Charges) Rules, 2014), where the
particulars of modification of charge is registered under section 79, the Registrar
shall issue a certificate of modification of charge. The certificate issued by the
Registrar shall be conclusive evidence that the requirements as to modification of
charge, have been complied with.
5A. Meaning of ‘Modification’ includes variation in any of the terms and conditions of the
Modification agreement including change in rate of interest which may be by mutual agreement
or by operation of law. Variation in extent or operation of any charge is also a kind
of modification. Even if the rights of a charge holder are assigned to a third party, it
will be regarded as a modification.
Some other examples of ‘modification’ are as under:
1. where the charge is modified by varying any terms and conditions of the
existing charge through an agreement;
2. where the modification is in pursuance of an agreement for enhancing or
decreasing the limits;
3. where the modification is by ceding a pari passu charge;
4. where there is change in rate of interest (other than bank rate);
5. where there is change in repayment schedule of loan; (not applicable in case of
working loans which are repayable on demand); and
6. where there is partial release of the charge on a particular asset or property.
6. Date of notice of Charge shall be considered as registered from date of registration by ROC
charge
7. Satisfaction of According to section 82 of the Companies Act, 2013, a company shall give
Charge intimation to the Registrar about the payment or satisfaction in full of any charge
registered under this Chapter within a period of thirty days from the date of such
payment or satisfaction
Provided that the Registrar may, on an application by the company or the charge
holder, allow such intimation of payment or satisfaction to be made within a period
of three hundred days of such payment or satisfaction on payment of such
additional fees as may be prescribed.
The Registrar shall, on receipt of intimation, cause a notice to be sent to the holder
of the charge calling upon him to show cause within such time not exceeding
fourteen days, as to why payment or satisfaction in full should not be recorded as
intimated to the Registrar
If no cause is shown, by such holder, the Registrar shall order that a memorandum
of satisfaction shall be entered in the register of charges and shall intimate the
company about it.
8. Power of Section 83 of the Companies Act, 2013 provides powers to the registrar to make
Registrar to make entries with respect to the satisfaction and release of charges where no intimation
entries of has been received by him from the company.
satisfaction and
Chap. 9 Charge 123
release in absence of (i) The Registrar may, on evidence being given to his satisfaction with respect to
intimation from any registered charge,—
company (a) that the debt for which the charge was given has been paid or satisfied in
whole or in part; or
(b) that part of the property or undertaking charged has been released from the
charge,
enter in the register of charges a memorandum of satisfaction of the fact that part of
the property has been released from the charge, despite the fact that no intimation
has been received by him from the company.
(ii) The Registrar shall inform the affected parties within thirty days of making the
entry in the register of charges.
9. Companies According to the Companies (Registration of Charges) Rules, 2014 with respect to
(Registration of the satisfaction of charge—
Charges) Rules, (1) A company shall within a period of thirty days from the date of the payment or
2014 satisfaction in full of any charge registered, give intimation of the same to the
Registrar along with the fee.
(2) Where the Registrar enters a memorandum of satisfaction of charge in full, he
shall issue a certificate of registration of satisfaction of charge
10. Punishment for According to section 86 of the Companies Act, 2013,

contravention (1) If any company is in default in complying with any of the provisions of this
Chapter, the company shall be liable to a penalty of five lakh rupees and every
officer of the company who is in default shall be liable to a penalty of fifty
thousand rupees.
(2) If any person willfully furnishes any false or incorrect information or
knowingly suppresses any material information, required to be registered in
accordance with the provisions of section 77, he shall be liable for action under
section 447.
11. Rectification by (1) The Central Government to order rectification of Register of Charges in the
Central following cases of default —
Government in (i) when there was omission in giving intimation to the Registrar with respect to
Register of Charges payment or satisfaction of charge within the specified time;
(Sec 87)
(ii) when there was omission or mis-statement of any particulars in any filing
previously made to the Registrar. Such filing may relate to any charge or any
modification of charge or with respect to any memorandum of satisfaction or other
entry made under Section 82 (Company to report satisfaction of charge) or Section
83 (Power of Registrar to make entries of satisfaction and release).
Before directing that the ‘time for giving the intimation of payment or satisfaction
shall be extended’ or the ‘omission or mis-statement shall be rectified’,
the Central Government needs to be satisfied that such default was accidental or
due to inadvertence or because of some other sufficient cause or it did not
prejudice the position of creditors or shareholders.
The application in Form CHG-8 shall be filed by the company or any interested
person.
The order of rectification shall be made by the Central Government on such terms
and conditions as it deems just and expedient.
124 Theory Module 1
“According to Rule 12 of the Companies (Registration of Charges) Rules, 2014:
The Central Government may on an application filed in Form No. CHG-8 in
accordance with section 87—
(a) direct rectification of the omission or misstatement of any particulars, in any
filing, previously recorded with the Registrar with respect to any charge or
modification thereof, or with respect to any memorandum of satisfaction or other
entry made in pursuance of section 82 or section 83,
(b) direct extension of time for satisfaction of charge, if such filing is not made
within a period of three hundred days from the date of such payment or
satisfaction.”
12. Date of Notice of Where any charge on any property or assets of a company or any of its
Charge [Sec 80] undertakings is registered under section 77, any person acquiring such property,
assets, undertakings or part thereof or any share or interest therein shall be deemed
to have notice of the charge from the date of such registration.
13. Intimation of (1) If any person obtains an order for the appointment of a receiver of, or of a
Appointment of person to manage, the property, subject to a charge, of a company or if any person
Receiver or appoints such receiver or person under any power contained in any instrument, he
Manager [Sec 84] shall, within a period of thirty days from the date of the passing of the order or of
the making of the appointment, give notice of such appointment to the company
and the Registrar along with a copy of the order or instrument and the Registrar
shall, on payment of the prescribed fees, register particulars of the receiver, person
or instrument in the register of charges.
(2) Any person appointed under sub-section (1) shall, on ceasing to hold such
appointment, give to the company and the Registrar a notice to that effect and the
Registrar shall register such notice.
9.8 EFFECTS OF NON-REGISTRATION
1. Charge become The charge shall be void against the liquidator and any creditor of the company in
Void event of winding up of company. Thus unregistered charge holder shall be treated as
unsecured creditor therein.
2. Money become Money secured by charge immediately becomes payable.

payable
3. Security become The security for the debt may not be valid but the debt itself remains good as simple
invalid debt.
4. Position of In case an earlier charge and a subsequent charge have been created. Said
Subsequent Charge subsequent charge would get priority over unregistered charge
Chapter 10
MCA
Synopsis
10.1 MCA-21 Programme 125
10.2 Benefit of MCA 125
Practical Question 126
10.1 MCA-21 PROGRAMME
1 Based upon the recommendation of the Department of Information and Technology, the Ministry of
Company Affairs (MCA) has launched an e-governance initiative though a project named "MCA21".
It envisages the electronic filing of all documents relating to company matters on the MCA portal. In
the process of e-filing system, the Registrar of Company (ROC) office will become the Back office of
the ministry.
2 This project covers all the services provided by the Registrar of Companies (ROC) starting from the
incorporation of a new company. The project would provide e-services including names search,
registration of new companies, filing of various returns and statutory documents under the Companies
Act, 1956.
3 The system would also enable on filing and access for statutory documents like memorandum of
association, articles of association, certificate of incorporation etc. The project serves the interest of
all the key stake holders and the public at large.
4 Also professionals need no longer to visit the officers of ROC and would be able to interact with the
Ministry using MCA 21 portal from their offices or home or going to the facilitation centers which
have been set up.
5 The permanent documents of existing companies like, Memorandum of Association, Articles of

Association, current charge documents, etc. which were maintained in paper form across various
Registrar of Companies (RoC) offices have been converted into electronic format through the
introduction of this project.
10.2 BENEFIT OF MCA
MCA 21 seeks to fulfill the requirements of the various stakeholders. The key benefits of MCA 21 project
are the back office process relates to:
1 Expeditious incorporation of companies
2 Simplified and ease of convenience in filing of Forms & Returns
3 Better compliance management

126 Theory Module 1
4 Customer centric approach
5 Inspection of public documents of companies anytime from anywhere
6 Registration as well as verification of charges anytime from anywhere
7 Timely redressal of investor grievances
Practical Question
Quest-1 Discuss various steps required for e-filling
Hint Companies can adopt the E-filling on following ways

1. The Company representative can upload the e-Forms on the MCA portal through the
‘Annual Filing Corner’ link
2. The Company representative can prepare the e-Forms as per guidelines, get them digitally
signed by the authorized signatory, copy them in a CD or a pen drive and visit the nearest
“Registrar’s Front Office” (RFO). RFO staff will assist in uploading of eForms on MCA
portal.
3. The Company representative can also contact any of the Certified Filing Centers (CFCs)
for the Annual Filing of e-Forms by paying the service charges to the CFCs.
Steps required for submitting e-forms
1. Select a category to download an eForm from the MCA portal (with or without the
instruction kit.
2. At any time, read the related instruction kit to familiarise with the procedures (download
the instruction kit with eform or view it under Help menu).
3. Fill the downloaded e-Form.
4. Attach the necessary documents as attachments.
5. Use the Prefill button in eForm to populate the greyed out portion by connecting to the
Internet.
6. The applicant or a representative of the applicant needs to sign the document using a
digital signature.
7. Click the Check Form button available in the eForm. System will check the mandatory
fields, mandatory attachment(s) and digital signature(s).
8. Upload the eForm for pre-scrutiny. The pre-scrutiny service is available under the
Services tab or under the eForms tab by clicking the Upload eForm button. The system
will verify (pre-scrutinise) the documents. In case of any inadequacies, the user will be
asked to rectify the mistakes before getting the document ready for execution (signature).
9. The system will calculate the fee, including late payment fees based on the due date of
filing, if applicable.
10. Payments will have to be made through appropriate mechanisms - electronic (credit card,
Internet banking) or traditional means (at the bank counter through challan).
(a) Electronic payments can be made at the Virtual Front Office (VFO)or at PFO
(b) If the user selects the traditional payment option, the system will generate 3 copies of
pre-filled challan in the prescribed format. Traditional payments through cash,
cheques can be done at the designated network of banks using the system generated
Chap. 10 MCA 127
challan. There will be five banks with estimated 200 branches authorised for
accepting challan payments.
11. The payment will be exclusively confirmed for all online (Internet) payment transactions
using payment gateways.
12. Acceptance or rejection of any transaction will be explicitly communicated to the
applicant (including facility to print a receipt for successful transactions).
13. MCA 21 will provide a unique transaction number, the Service Request Number (SRN)
which can be used by the applicant for enquiring the status pertaining to that transaction.
14. Filing will be complete only when the necessary payments are made.
15. In case of a rejection, helpful remedial tips will be provided to the applicant.
Chapter 11
DIVIDEND
Synopsis
11.1 Declaration of Dividend (Section 123) 128
11.2 Declaration of Dividends Out of the Free Reserves 129
11.3 Interim Dividend 130
11.4 Unpaid Dividend Account (Section 124 of the Companies Act, 2013) — Section 124 131
11.5 Investor Education and Protection Fund (Section 125) 132
11.6 Right of Dividend, Rights Shares and Bonus Shares to be held in Abeyance (Section 126 of the
Companies Act, 2013) 133
11.7 Punishment for Failure to Distribute Dividends (Section 127 of the Companies Act, 2013) 133
11.1 DECLARATION OF DIVIDEND (Section 123)
1. To be declared Dividend shall be declared or paid by a company for any financial year only—
out of (a) out of the profits of the company for that year arrived at after providing for
depreciation, or
(b) out of the profits of the company for any previous financial year 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.
"Provided that in computing profits any amount representing unrealised gains,
notional gains or revaluation of assets and any change in carrying amount of an
asset or of a liability on measurement of the asset or the liability at fair value shall
be excluded
2. Transfer to A company may, before the declaration of any dividend in any financial year,
Reserve transfer such percentage of its profits as it may consider appropriate to the reserves
of the company.
Therefore, such transfer is not mandatory and the percentage to be transferred to
reserves is to be decided at the discretion of the company.
The second proviso to section 123(1) of the Companies Act, 2013 permits a
company to declare dividend out of the free reserves subject to the rules prescribed
in this behalf. No other reserve can be utilized for the purposes of declaration of
such dividend.
In case of Government Company - said proviso of Section 123(1) shall not apply in
which the entire paid up share capital is held by the Central Government, or by any
Stale Government or Governments or by the Central Government and one or more
State Governments.
Chap. 11 Dividend 129
3. Dividend only No company shall declare dividend unless carried over previous losses and
after adjustment of depreciation not provided in previous year or years are set off against profit of the
losses and company of the current year. [4th proviso to Section 123(4)]
Unabsorbed
Depreciation
4. Depreciation In terms of section 123(2), the rates contained in Schedule II to the Companies Act,
shall be provided 2013 are the minimum rates below which companies are not permitted to charge for
as per schedule II depreciation and therefore there is no bar in providing a higher rate of depreciation.
5. Depositing of In terms of section 123(4), the amount of the dividend, including interim
amount of dividend, shall be deposited in a scheduled bank in a separate account within five
dividend days from the date of declaration of such dividend.
In case of Government Company- Section 123(4) shall not apply in which the entire
paid up share capital is held by the Central Government, or by any Stale
Government or Governments or by the Central Government and one or more State
Governments or by one or more Government Company.
6. Payment of According to section 123(5):

dividend: (a) Dividends are payable in cash. Dividends that are payable to the shareholder in
cash may be paid by cheque or warrant or in any electronic mode.
(b) Dividend shall be payable only to the registered shareholder of the share or to
his order or to his banker.
7. Prohibition on The Act by virtue of Section 123(6) provides that a company which fails to comply
declaration of with the provisions of section 73 (Prohibition on acceptance of deposits from public)
dividend and section 74 (Repayment of deposits, etc., accepted before the commencement of
this Act) shall not declare any dividend on its equity shares, so long as such failure
continues,
11.2 DECLARATION OF DIVIDENDS OUT OF THE FREE RESERVES
(a) The rate of dividend declared does not exceed the average rates at which dividend was
declared by it in the 3 years immediately preceding that year.
However, this rule will not apply if a company has not declared any dividend in each of the
three preceding financial year.
(b) The total amount to be drawn from the accumulated profits earned in previous years and
transferred to the reserves does not exceed an amount equal to 1/10th of the sum of its paid-up
capital and free reserves as appearing in the latest audited financial statement.
The amount so drawn must first be utilized to set off losses incurred in the financial year
before any dividend in respect of equity shares is declared.
(c) The balance of reserves after such drawal shall not fall below 15% of its paid-up capital as
appearing in the latest audited financial statement.
Example C Ltd has a paid-up capital of ` 200 lakhs and accumulated Reserves of ` 240 lakhs. Loss for
the year ending 31st March 2020 is ` 30 Lakhs. Dividend was declared at the following rates
during the three years immediately preceding.
130 Theory Module 1
Year 1 9%
Year 2 10%
Year 3 12%
What is the maximum rate at which the company can declare dividend for the current year.
Solution Condition-a- Average rate = 10.3% 3
Therefore, the rate of dividend shall not exceed 10.3%. i.e. 10.3% of Paid up Capital i.e. ` 200
lakhs = ` 20.6 lakhs
Condition-b-
Paid-up capital + Free reserves = ` (200 + 240) Lakhs
(Assuming all reserves are free) = 440 Lakhs
10% thereof = ` 44 Lakhs
Less: loss for the year = ` 30 Lakhs
Amount available = 14 Lakhs
Hence the quantum of dividend is further restricted to ` 14 lakhs.
Condition c:
Accumulated Reserves ` 240
Lakhs
Proposed withdrawal declaration of dividend 14 Lakhs Balance
of Reserves ` 226
Lakhs
This is more than 15% of paid-up capital (i.e 15% of ` 200
Lakhs) i.e. ` 30
lakhs.
Thus, the company can declare a dividend of ` 14 lakhs i.e. at a
rate of 7% on its paid-up capital of ` 200 lakhs.
11.3 INTERIM DIVIDEND
Meaning According to section 2(35), “dividend” includes any interim dividend.
Provision for According to section 123(3)

payment of The Board of Directors of a company may declare interim dividend during any
interim dividend financial year or at any time during the period from closure of financial year till
holding of the annual general meeting out of the surplus in the profit and loss
account or out of profits of the financial year for which such interim dividend is
sought to be declared or out of profits generated in the financial year till the quarter
preceding the date of declaration of the interim dividend:
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
three financial years
11.4 UNPAID DIVIDEND ACCOUNT (SECTION 124 OF THE COMPANIES ACT, 2013) — Sec
124
1. Transfer of (1) Where a dividend has been declared by a company but has not been paid or
unpaid amount to claimed within thirty days from the date of the declaration to any shareholder
Unpaid Dividend entitled to the payment of the dividend,
account the company shall, within seven days from the date of expiry of the said period
of thirty days, transfer the total amount of dividend which remains unpaid or
unclaimed to a special account to be opened by the company in that behalf in any
scheduled bank to be called the Unpaid Dividend Account.
(2) The company shall, within a period of ninety days of making any transfer to
the Unpaid Dividend Account, prepare a statement containing the names, their
last known addresses and the unpaid dividend to be paid to each person and place it
on the web-site of the company
2. Consequences of If any default is made in transferring the total amount to the Unpaid Dividend
default Account of the company, it shall pay, interest on so much of the amount as has not
been transferred to the said account, at the rate of twelve per cent per annum from
the date of such default
3. Claiming of Any person claiming to be entitled to any money transferred to the Unpaid
amount Dividend Account of the company may apply to the company for payment of the
money claimed.
4. Treatment of Any money transferred to the Unpaid Dividend Account of a company which
unclaimed amount remains unpaid or unclaimed for a period of seven years from the date of such
lying in unpaid transfer shall be transferred by the company along with interest thereon to the Fund
dividend account established under sub-section (1) of section 125 i.e. Investor Education and
Protection Fund
All shares in respect of which dividend has not been paid or claimed for seven
consecutive years or more shall be transferred by the company in the name of
Investor Education and Protection Fund along with a statement containing such
details as may be prescribed:
Provided that any claimant of shares transferred above shall be entitled to claim
the transfer of shares from Investor Education and Protection Fund in
accordance with such procedure and on submission of such documents as may
be prescribed.
Explanation.—However, if any dividend is paid or claimed for any year during the
said period of seven consecutive years, the share shall not be transferred to Investor
Education and Protection Fund.
5. Non Compliance If a company fails to comply with any of the requirements of this section, such
company shall be liable to a penalty of one lakh rupees and in case of continuing
failure, with a further penalty of five hundred rupees for each day after the first
during which such failure continues, subject to a maximum of ten lakh rupees and
every officer of the company who is in default shall be liable to a penalty of
twenty-five thousand rupees and in case of continuing failure, with a further
penalty of one hundred rupees for each day after the first during which such failure
continues, subject to a maximum of two lakh rupees.
132 Theory Module 1
11.5 INVESTOR EDUCATION AND PROTECTION FUND. (SECTION 125)

(1) The Central Government shall establish a Fund to be called the Investor Education and Protection Fund
(herein referred to as the Fund).
(2) There shall be credited to the Fund—
(a) the amount given by the Central Government by way of grants after due appropriation made by
Parliament by law in this behalf for being utilised for the purposes of the Fund;
(b) donations given to the Fund by the Central Government, State Governments, companies or
any other institution for the purposes of the Fund;
(c) the amount in the Unpaid Dividend Account of companies transferred to the Fund under sub-
section (5) of section 124;
(d) the amount in the general revenue account of the Central Government which had been transferred
to that account under sub-section (5) of section 205A of the Companies Act, 1956;
(e) the amount lying in the Investor Education and Protection Fund under section 205C of the
Companies Act, 1956;
(f) the interest or other income received out of investments made from the Fund;
(g) the amount received under sub-section (4) of section 38;
(h) the application money received by companies for allotment of any securities and due for refund;
(i) matured deposits with companies other than banking companies;
(j) matured debentures with companies;
(k) interest accrued on the amounts referred to in clauses (h) to (j);
(l) sale proceeds of fractional shares arising out of issuance of bonus shares, merger and amalgamation
for seven or more years;
(m) redemption amount of preference shares remaining unpaid or unclaimed for seven or more years;
and
(n) such other amount as may be prescribed:
Provided that no such amount referred to in clauses (h) to (j) shall form part of the Fund unless such
amount has remained unclaimed and unpaid for a period of seven years from the date it became due for
payment.
(3) The Fund shall be utilised for—
(a) the refund in respect of unclaimed dividends, matured deposits, matured debentures, the application
money due for refund and interest thereon;
(b) promotion of investors' education, awareness and protection;
(c) distribution of any disgorged amount among eligible and identifiable applicants for shares or
debentures, shareholders, debenture-holders or depositors who have suffered losses due to wrong
actions by any person, in accordance with the orders made by the Court which had ordered
disgorgement;
(d) reimbursement of legal expenses incurred in pursuing class action suits under sections 37 and 245 by
members, debenture-holders or depositors as may be sanctioned by the Tribunal; and
(e) any other purpose incidental thereto,
in accordance with such rules as may be prescribed:
Provided that the person whose amounts referred to in clauses (a) to (d) of sub-section (2) of section 205C
transferred to Investor Education and Protection Fund, after the expiry of the period of seven years as per
provisions of the Companies Act, 1956, shall be entitled to get refund out of the fund in respect of such
claims in accordance with rules made under this section.
Explanation.—The disgorged amount refers to the amount received through disgorgement or disposal of
securities.
(4) Any person claiming to be entitled to the amount may apply to the authority constituted under sub-
section (5) for the payment of the money claimed.
(5) The Central Government shall constitute, an authority for administration of the Fund consisting of a
chairperson and such other members, not exceeding seven and a chief executive officer, as the Central
Government may appoint.
(6) The manner of administration of the Fund, appointment of chairperson, members and chief executive
officer, holding of meetings of the authority shall be in accordance with such rules as may be prescribed.
(7) The Central Government may provide to the authority such offices, officers, employees and other
resources in accordance with such rules as may be prescribed.
(8) The authority shall administer the Fund and maintain separate accounts and other relevant records in
relation to the Fund in such form as may be prescribed after consultation with the Comptroller and Auditor-
General of India.
(9) It shall be competent for the authority to spend money out of the Fund for carrying out the objects
(10) The accounts of the Fund shall be audited by the Comptroller and Auditor- General of India at such
intervals as may be specified by him and such audited accounts together with the audit report thereon shall
be forwarded annually by the authority to the Central Government.
(11) The authority shall prepare in such form and at such time for each financial year as may be prescribed
its annual report giving a full account of its activities during the financial year and forward a copy thereof
to the Central Government and the Central Government shall cause the annual report and the audit report
given by the Comptroller and Auditor-General of India to be laid before each House of Parliament.
11.6. RIGHT OF DIVIDEND, RIGHTS SHARES AND BONUS SHARES TO BE HELD IN

ABEYANCE (SECTION 126 OF THE COMPANIES ACT, 2013)
Where any instrument of transfer of shares has been delivered to any company for registration and the
transfer of such shares has not been registered by the company, the company shall:—
(a) transfer the dividend in relation to such shares to the Unpaid Dividend Account referred to in section
124 unless the company is authorised by the registered holder of such share in writing to pay such
dividend to the transferee specified in such instrument of transfer; and
(b) keep in abeyance in relation to such shares any offer of rights shares under clause (a) of sub-section (1)
of section 62 and any issue of fully paid-up bonus shares in pursuance of first proviso to sub-section (5)
of section 123.
11.7 PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDENDS (SECTION 127 OF THE

COMPANIES ACT, 2013)
Penalty for non- According to this section:

compliance (1) Where a dividend has been declared by a company but has not been paid or the
warrant in respect thereof has not been posted within thirty days from the date of
declaration to any shareholder entitled to the payment of the dividend, every
director of the company shall, if he is knowingly a party to the default, be
punishable with imprisonment which may extend to two years.
134 Theory Module 1
(2) He shall also be liable for a fine which shall not be less than 1,000 rupees for
every day during which such default continues.
(3) The company shall also be liable to pay simple interest at the rate of 18% p.a.
during the period for which such default continues.
Exceptions However, the following are the exceptions under which no offence shall be deemed
to have been committed:
(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the
payment of the dividend and those directions cannot be complied with and
the same has been communicated to him;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawful y adjusted by the company against any
sum due to it from the shareholder; or
where, for any other reason, the failure to pay the dividend or to post the warrant
within the period under this section was not due to any default on the part of the
company.
Chapter 12
ACCOUNT
Synopsis
12.1 Books of Account, etc., to be kept by Company (Section 128) 135
12.2 Financial Statement (Section 129) 137
12.3 Re-Opening of Accounts on Court or Tribunals Order (Section 130) 139
12.4 Voluntary Revision of Financial Statement or Board’s Report (Section 131) 139
12.5 Constitution of National Financial Reporting Authority (Section 132) 140
12.6 Financial Statement, Board’s Report, etc. (Section 134) 143
12.7 Corporate Social Responsibility (Section 135 Read with the Companies (CSR Policy) Rules, 2014) 145
12.8 Right of Member to Copies of Audited Financial Statement (Section 136) 152
12.9 Copy of Financial Statement to be Filed with Registrar (Section 137) 153
12.10 Internal Audit (Section 138) 155
12.1 BOOKS OF ACCOUNT, ETC., TO BE KEPT BY COMPANY (Section 128)

1. Maintenance of (a) Every company shall prepare and keep at its registered office
books of accounts  books of account and other relevant books and papers and
[Section 128(1)]
 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.
(b) Such books of Accounts shall be kept on accrual basis and according to the
double entry system of accounting.
(c) The company may also keep all or any of the books of accounts at any other
place in India as the Board of directors may decide.
In such a case, the company should file with the Registrar of Companies, a notice in
writing giving the full address of that place within 7 days of the Boards’ decision.
(AOC-5)
Electronic form of Books of accounts [as per Rule 3 of the Companies
(Accounts) Rules, 2014
The Companies (Accounts) Rules, 2014 provides that the company may keep its
books of account or other relevant papers in electronic mode.
The books of account and other relevant books and papers maintained in electronic
mode shall:
(1) Remain accessible in India so as to be usable for subsequent reference.
(2) The back-up of the books of account and other books and papers of the
company maintained in electronic mode, including at a place outside India, if
any, shall be kept in servers physically located in India on a periodic basis.
(3) The company shall intimate to the Registrar on an annual basis at the time of
filing of financial statement following relevant information related to service
provider—
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(a) the name of the service provider;
(b) the internet protocol address of service provider;
(c) the location of the service provider (wherever applicable);
(d) where the books of account and other books and papers are maintained on
cloud, such address as provided by the service provider.
2. Proper books of (a) Proper books of account relating to the transactions effected at the branch office
account in relation in India or outside India shall be kept at that branch office.
to a branch of the (b) Proper summarized returns periodically must be sent by the branch office to the
company: company at its registered office or the other place as decided by the Board of
[Section 128(2)] directors.
3. Persons who can (a) The books of account and other books and papers maintained by the company
inspect [Section within India shall be open for inspection at the registered office of the company or at
128(3)] such other place in India by any director during business hours.
Provided that the inspection in respect of any subsidiary of the company shall be
done only by the person authorised in this behalf by a resolution of the Board of
Directors.
[Rule 4(4) of the Companies (Accounts) Rules, 2014]
(a) The summarized returns of the books of account of the company kept and
maintained outside India shall be sent to the registered office at quarterly
intervals
(b) Where any other financial information maintained outside the country is
required by a director, the director shall furnish a request to the company
(c) The company shall produce such financial information to the director within 15
days of the date of receipt of the written request.
(d) The financial information shall be sought for by the director himself and not by
or through his power of attorney holder or agent or representative.
4. Employee to Where an inspection is made under sub-section (3), the officers and other employees
co-operate of the company shall give to the person making such inspection all assistance in
[Section 128(4)] connection with the inspection.
5. Period of (a) The books of account of every company together with the vouchers relevant to
Maintenance any entry in such books of accounts shall be kept in order by the company for a
[Section 128(5)] minimum period of 8 financial years immediately preceding a financial year.
(b) Where the company had been in existence for a period of less than 8 years, it
shall maintain the books in respect of all such preceding years.
(c) Where an investigation has been ordered in respect of the company, the Central
Government may direct that the books of account may be kept for such longer
period as it may deem fit.
6. Persons (a) The following persons are responsible for the maintenance of proper books of
responsible for account—
Maintenance & (1) The managing director, the whole-time director in charge of finance, the
Penalty Chief Financial Officer; or
[Section 128(6)]
(2) any other person of a company charged by the Board.
(b) If any of the persons mentioned above contravenes such provisions, they shall
be punishable with Fine which shall not be less than `50,000 but which may
extend to `5 lakh
Chap. 12 Account 137
12.2 FINANCIAL STATEMENT (Section 129)
(1) Form of (a) The financial statements shall-

Financial  give a true and fair view of the state of affairs of the company or companies,
statements
 comply with the accounting standards notified under section 133 and
 shall be in the form or forms as may be provided for different class or
classes of companies in Schedule III.
(b) The above provisions relating to nature and content of financial statement shall
not apply to following companies:
(1) Insurance Companies
(2) Banking companies
(3) Company engaged in the generation or supply of electricity
(4) Any other class of company for which a form of financial statement has been
specified in or under the Act governing such class of company.
(2) Laying of At every annual general meeting of a company, the Board of directors of the
financial company shall lay before the company the financial statements for the financial year.
statements
(3) Consolidated  Where a company has one or more subsidiaries or associate, it shall, in addition
Financial to its own financial statements prepare a consolidated financial statement of the
Statements company and of all the subsidiaries and associates in the same form and manner
as that of its own.
 The Consolidated financial statements shall also be laid before the annual
general meeting of the company along with the laying of its own financial
statement.
 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 as per Rule 5 of the Companies
(Accounts) Rules, 2014.
According to Companies (Accounts) Rules, 2014, the consolidation of financial
statements of the company shall be made in accordance with the provisions of
Schedule III to the Act and the applicable accounting standards.
Provided, a company which is not required to prepare consolidated financial
statements under the Accounting Standards, it shall be sufficient if the company
complies with provisions on consolidated financial statements provided in Schedule
III of the Act.
As per Companies (Accounts) Amendment Rules, 2016,
Provided further that nothing in this rule shall apply in respect of preparation of
consolidated financial statements by a company if it meets the following conditions:
(i) it is a wholly-owned subsidiary, or is a partially-owned subsidiary of
another company and all its other members, including those not otherwise
entitled to vote, having been intimated in writing and for which the proof of
delivery of such intimation is available with the company, do not object to
the company not presenting consolidated financial statements;
(ii) it is a company whose securities are not listed or are not in the process of
listing on any stock exchange, whether in India or outside India; and
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(iii) its ultimate or any intermediate holding company files consolidated financial
statements with the Registrar which are in compliance with the applicable
Accounting Standards.
(4) All provisions The provisions of this Act applicable to the preparation, adoption and audit of the
shall apply for financial statements of a holding company shall, mutatis mutandis, apply to the
consolidation as consolidated financial statements referred to in sub-section (3).
well [Section
129(4)]
(5) Deviations If the financial statements of a company do not comply with the accounting
from Accounting standards, the company shall disclose in its financial statements the following
Standards namely:
[Section 129(5)] (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
(6) Exemptions (a) The Central Government may, on its own or on an application by a class or
[Section 129(6)] 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.
(b) Any such exemption may be granted either unconditionally or subject to such
conditions as may be specified in the notification.
(7) Contravention If a company contravenes the provisions of this section, the managing director, the
whole-time director in charge of finance, the Chief Financial Officer or any other
person charged by the Board with the duty of complying with the requirements of
this section and in the absence of any of the officers mentioned above, all the
directors shall be punishable with
(1) Imprisonment for a term which may extend to 1 year; or
(2) Fine which shall not be less than `50,000 but which may extend to `5
Lakhs; or
(3) Both with imprisonment and fine.
In case of Government company - Section 129 shall not apply to the extent of
application of Accounting Standard 17 (Segment Reporting) to the companies
engaged in defence production.
Example: The Board of Directors of ABC Ltd. wants to circulate unaudited accounts before the Annual
General Meeting of the shareholders of the Company. Whether such an act of ABC Ltd. is tenable?
Answer: Section 129(2) of the Companies Act, 2013 provides that at every annual general meeting of a
company, the Board of Directors of the company shall lay before such meeting financial statements for the
financial year. Further section 134(7) provides that 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.
It, therefore, follows that unaudited accounts cannot be sent to members or unaudited accounts cannot be
filed with the Registrar of Companies. So, such an act of ABC Ltd, is not tenable.
12.3 RE-OPENING OF ACCOUNTS ON COURT OR TRIBUNALS ORDER (Section 130)
1. Re-opening A company shall not re-open its books of account and not recast its financial statements,
only upon unless an application in this regard is made by the Central Government, the Income-tax
application authorities, the Securities and Exchange Board, any other statutory regulatory body or
authority or any person concerned and an order is made by a court of competent
jurisdiction or the Tribunal to the effect that—
(i) the relevant earlier accounts were prepared in a fraudulent manner; or
(ii) the affairs of the company were mismanaged during the relevant period, casting a
doubt on the reliability of financial statements:
2. Tribunal to Provided that the court or the Tribunal, as the case may be, shall give notice to the
serve notice to Central Government, the Income-tax authorities, the Securities and Exchange Board or
applicant any other statutory regulatory body or authority concerned or any other person
concerned and shall take into consideration the representations, if any, made by that
Government or the authorities, Securities and Exchange Board or the body or authority
concerned or any other person concerned before passing any order under this section.
3. Others The accounts so revised or re-cast under sub-section (1) shall be final.
4. Period for No order shall be made under sub-section (1) in respect of re-opening of books of
which such account relating to a period earlier than eight financial years immediately preceding
order may be the current financial year:
issued Provided that where a direction has been issued by the Central Government under the
proviso to sub-section (5) of section 128 for keeping of books of account for a period
longer than eight years, the books of account may be ordered to be re-opened within
such longer period
12.4 VOLUNTARY REVISION OF FINANCIAL STATEMENT OR BOARD’S REPORT (Section

131)
1. Situation of (1) If it appears to the directors of a company that—

Voluntary Revision (a) the financial statement of the company; or
(b) the report of the Board,
do not comply with the provisions of section 129 or section 134 they may prepare
revised financial statement or a revised report in respect of any of the three
preceding financial years after obtaining approval of the Tribunal on an application
made by the company in such form and manner as may be prescribed and a copy of
the order passed by the Tribunal shall be filed with the Registrar:
Provided that the Tribunal shall give notice to the Central Government and the
Income-tax authorities and shall take into consideration the representations, if any,
made by that Government or the authorities before passing any order under this
section.
Provided further that such revised financial statement or report shall not be
prepared or filed more than once in a financial year:
Provided also that the detailed reasons for revision of such financial statement or
report shall also be disclosed in the Board's report in the relevant financial year in
which such revision is being made.
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2. Scope of revision Where copies of the previous financial statement or report have been sent out to
members or delivered to the registrar or laid before the company in general
meeting, the revisions must be confined to—
(a) the correction in respect of which the previous financial statement or report do
not comply with the provisions of section 129 or section 134; and
(b) the making of any necessary consequential alternation.
12.5 Constitution of National Financial Reporting Authority (Section 132)
1. Constitution and (1) The Central Government may, by notification, constitute a National Financial
functioning of Reporting Authority to provide for matters relating to accounting and auditing
NAFRA standards under this Act.
(2) National Financial Reporting Authority shall—
(a) make recommendations to the Central Government on the formulation
and laying down of accounting and auditing policies and standards for
adoption by companies or their auditors, as the case may be;
(b) monitor and enforce the compliance with accounting standards and
auditing standards in such manner as may be prescribed;
(c) oversee the quality of service of the professions associated with
ensuring compliance with such standards, and suggest measures
required for improvement in quality of service and such other related
matters as may be prescribed; and
(d) perform such other functions as may be prescribed.
(3) The National Financial Reporting Authority shall consist of a chairperson, who
shall be a person of eminence and having expertise in accountancy, auditing,
finance or law to be appointed by the Central Government and such other members
not exceeding fifteen consisting of part-time and full-time members as may be
prescribed:
Provided that the terms and conditions and the manner of appointment of the
chairperson and members shall be such as may be prescribed:
Provided further that the chairperson and members shall make a declaration to the
Central Government in the prescribed form regarding no conflict of interest or
lack of independence in respect of his or their appointment:
Provided also that the chairperson and members, who are in full-time employment
with National Financial Reporting Authority shall not be associated with any audit
firm (including related consultancy firms) during the course of their appointment
and two years after ceasing to hold such appointment.
(4) National Financial Reporting Authority shall—
(a) have the power to investigate, either suo moto or on a reference made to it by
the Central Government, for such class of bodies corporate or persons, in such
manner as may be prescribed into the matters of professional or other
misconduct committed by any member or firm of chartered accountants,
registered under the Chartered Accountants Act, 1949:
Provided that no other institute or body shall initiate or continue any
proceedings in such matters of misconduct where the National Financial
Reporting Authority has initiated an investigation under this section;
(b) have the same powers as are vested in a civil court under the Code of Civil
Procedure, 1908, while trying a suit, in respect of the following matters,
namely:—
(i) discovery and production of books of account and other documents
(ii) summoning and enforcing the attendance of persons and examining them
on oath;
(iii) inspection of any books, registers and other documents
(iv) issuing commissions for examination of witnesses or documents;
(c) where professional or other misconduct is proved, have the power to make
order for—
(A) imposing penalty of—
(I) not less than one lakh rupees, but which may extend to five times
of the fees received, in case of individuals; and
(II) not less than five lakh rupees, but which may extend to ten times of
the fees received, in case of firms;
(B) debarring the member or the firm from engaging himself or itself from
practice as member of the Institute of Chartered Accountant of India
for a minimum period of six months or for such higher period not
exceeding ten years as may be decided by the National Financial
Reporting Authority.
(5) Any person aggrieved by any order of the National Financial Reporting
Authority, may prefer an appeal before the Appellate Tribunal in such manner and
on payment of such fee as may be prescribed
(6) The National Financial Reporting Authority shall meet at such times and places
and shall observe such rules of procedure in regard to the transaction of business at
its meetings in such manner as may be prescribed.
(7) The Central Government may appoint a secretary and such other employees as
it may consider necessary for the efficient performance of functions by the
National Financial Reporting Authority under this Act and the terms and conditions
of service of the secretary and employees shall be such as may be prescribed.
(8) The head office of the National Financial Reporting Authority shall be at New
Delhi and the National Financial Reporting Authority may, meet at such other
places in India as it deems fit.
(9) The National Financial Reporting Authority shall cause to be maintained such
books of account and other books in relation to its accounts in such form and in
such manner as the Central Government may, in consultation with the Comptroller
and Auditor-General of India prescribe.
(10) The accounts of the National Financial Reporting Authority shall be audited
by the Comptroller and Auditor-General of India at such intervals as may be
specified by him and such accounts as certified by the Comptroller and Auditor-
General of India together with the audit report thereon shall be forwarded annually
to the Central Government by the National Financial Reporting Authority.
(11) The National Financial Reporting Authority shall prepare in such form and at
such time for each financial year as may be prescribed its annual report giving a
full account of its activities during the financial year and forward a copy thereof to
the Central Government and the Central Government shall cause the annual report
and the audit report given by the Comptroller and Auditor-General of India to be
laid before each House of Parliament.
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National Financial As per NFRA rules, NFRA shall have power to monitor and enforce compliance
Reporting with accounting standards and auditing standards, oversee the quality of service
Authority Rules, under sub-section (2) of section 132 or undertake investigation under sub-section
2018 (NFRA (4) of such section of the auditors of the following class of companies and bodies
Rules). corporate:
(a) companies whose securities are listed on any stock exchange in India or outside India;
(b) unlisted public companies having
 paid-up capital of not less than rupees five hundred crores or
 annual turnover of not less than rupees one thousand crores or
 aggregate, outstanding loans, debentures and deposits of not less than rupees five hundred crores
as on the 31st March of immediately preceding financial year;
(c) insurance companies, banking companies, companies engaged in the generation or supply of electricity,
companies governed by any special Act for the time being in force or bodies corporate incorporated by
an Act in accordance with the Companies Act, 2013;
(d) any body corporate or company or person, or any class of bodies corporate or companies or persons, on
a reference made to the NFRA by the Central Government in public interest; and
(e) a body corporate incorporated or registered outside India, which is a subsidiary or associate company
of any company or body corporate incorporated or registered in India, if the income or networth of such
subsidiary or associate company exceeds 20% of the consolidated income or consolidated networth of
such company or the body corporate
Analysis
Every existing body corporate other than a company governed by these rules, shall inform the NFRA
within 30 days of the commencement of NFRA rules, in Form NFRA-1, the particulars of the auditor as on
the date of commencement of these rules.
A company or a body corporate other than a company governed under NFRA Rules shall continue to be
governed by the NFRA for a period of 3 years after it ceases to be listed or its paid-up capital or turnover or
aggregate of loans, debentures and deposits falls below the limit stated therein
Recommending accounting standards (AS) and auditing standards (SA) –

For the purpose of recommending AS or SA for approval by the Central Government, the NFRA -
(a) shall receive recommendations from the ICAI on proposals for new AS or SA or for amendments
to existing AS or SA;
(b) may seek additional information from the ICAI on the recommendations received under clause (a),
if required.
The NFRA shall consider the recommendations and additional information in such manner as it deems fit
before making recommendations to the Central Government.
Summary
12.6 FINANCIAL STATEMENT, BOARD’S REPORT, ETC (SECTION 134)
1. Authentication The financial statement, including consolidated financial statement, if any, shall be
of Financial approved by the Board of Directors before they are signed on behalf of the Board by
statements the chairperson of the company where he is authorised by the Board or by two
directors out of which one shall be managing director, if any, and the Chief
Executive Officer, the Chief Financial Officer and the company secretary of the
company, wherever they are appointed, or in the case of One Person Company, only
by one director, for submission to the auditor for his report thereon.
Analysis
2. Content of According to Rule 8 of the Companies (Accounts) Rules, 2014, the Board’s Report
Board’s report shall include —
(a) The extract of the annual return as provided under sub-section (3) of section 92;
(b) Number of meetings of the Board;
(c) Directors’ Responsibility Statement;
(ca) details in respect of frauds reported by auditors under sub-section (12) of section
143 other than those which are reportable to the Central Government
(d) a statement on declaration given by independent directors under sub-section (6)
of section 149;
(e) in case of a company covered under sub-section (1) of section 178, company’s
policy on directors’ appointment and remuneration including criteria for
determining qualifications, positive attributes, independence of a director and
other matters provided under sub-section (3) of section 178;
(f) explanations or comments by the Board on every qualification, reservation or
adverse remark or disclaimer made—
(a) by the auditor in his report; and
(b) by the company secretary in practice in his secretarial audit report;
(g) particulars of loans, guarantees or investments under section 186;
(h) particulars of contracts or arrangements with related parties referred to in sub-
section (1) of section 188 in Form AOC-2;
(i) the state of the company’s affairs;
(j) the amounts, if any, which it proposes to carry to any reserves;
(k) the amount, if any, which it recommends should be paid by way of dividend;
(l) material changes and commitments, if any, affecting the financial position of the
company which have occurred between the end of the financial year of the
company to which the financial statements relate and the date of the report;
(m) the conservation of energy, technology absorption, foreign exchange earnings
and outgo
(n) a statement indicating development and implementation of a risk 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;
144 Theory Module 1
(o) the details about the policy developed and implemented by the company on
corporate social responsibility initiatives taken during the year;
(p) Every listed company and every other public company having a paid up share
capital of 25 crore rupees or more calculated at the end of the preceding
financial year shall include (as prescribed under the Companies (Accounts)
Rules, 2014), in the report by its Board of directors, 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.
Provided that where disclosures referred to in this sub-section have been included
in the financial statements, such disclosures shall be referred to instead of being
repeated in the Board's report.
The Central Government may prescribe an abridged Board's report, for the purpose
of compliance with this section by One Person Company or small company
3.Board’s Report In case of a One Person Company, the report of the Board of Directors to be
in case of OPC attached to the financial statement under this section shall, mean 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.
4.Directors’ (a) in the preparation of the annual accounts, the applicable accounting standards
Responsibility had been followed along with proper explanation relating to material departures;
Statement (b) the directors had selected such accounting policies and applied them
:Content 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) the directors had taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of this Act for
safeguarding the assets of the company and for preventing and detecting fraud
and other irregularities;
(d) the directors had prepared the annual accounts on a going concern basis; and
(e) the directors, in the case of a listed company, had laid down internal financial
controls to be followed by the company and that such internal financial controls
are adequate and were operating effectively.
(f) the directors had devised proper systems to ensure compliance with the
provisions of all applicable laws and that such systems were adequate and
operating effectively.
5. Signing of The Board’s report and any annexure thereto shall be signed by its chairperson of
Board’s Report the company if he is authorized by the Board and where he is not so authorized,
shall be signed by at least two directors, one of whom shall be a managing director,
or by the director where there is one director.
6. Contravention (a) If a company contravenes any provisions of this section, the company shall be
liable to a penalty of three lakh rupees
(b) Every officer of the company who is in default shall be liable to a penalty of
fifty thousand rupees.
12.7 CORPORATE SOCIAL RESPONSIBILITY (Section 135 Read with The Companies (CSR
Policy) Rules, 2014)
1. Which Company Every company including its holding or subsidiary, and a foreign company defined
is required to under section 2(42) of the Companies Act, 2013 having its branch office or project
constitute CSR office in India, having
committee: (1) net worth of rupees 500 crore or more, or
(2) turnover of rupees 1000 crore or more or
(3) a net profit of rupees 5 crore or more
During the immediately preceding financial year shall constitute a Corporate Social
Responsibility Committee of the Board.
A Corporate Social Responsibility Committee shall consist of three or more
directors, out of which at least one director shall be an independent director.
Provided that where a company is not required to appoint an independent director
under sub-section (4) of section 149, it shall have in its Corporate Social
Responsibility Committee two or more directors.
Where the amount to be spent by a company under sub-section (5) does not exceed
fifty lakh rupees, the requirement under sub-section (1) for constitution of the
Corporate Social Responsibility Committee shall not be applicable and the functions
of such Committee provided under this section shall, in such cases, be discharged by
the Board of Directors of such company.
Companies Required to have Independent Directors

As per Section 149(4)
Every listed public company shall have at least one-third of the total number of directors as independent
directors and the Central Government may prescribe the minimum number of independent directors in case
of any class or classes of public companies.
Rule 4 of Companies (Appointment & Qualifications of Directors) Rules, 2014
The following class or classes of companies shall have at least two directors as independent directors—
(i) the Public Companies having paid up share capital of ten crore rupees or more; or
(ii) the Public Companies having turnover of one hundred crore rupees or more; or
(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding
fifty crore rupees:
“Net worth” [As per Section 2(57)] means the aggregate value of the paid-up share capital and all
reserves created out of the profits and securities premium account, after deducting the aggregate value of
the accumulated losses, deferred expenditure and miscellaneous expenditure not written off, as per the
audited balance sheet, but does not include reserves created out of revaluation of assets, write-back of
depreciation and amalgamation.
Example:
The statutory auditors of a company were required to issue a certificate on the net worth of the company as
per the requirement of the management as of 30 September 2018 computed as per the provision of section
2(57) of the Companies Act, 2013.
The company had fair valued its property, plant and equipment in the current year which was mistakenly
taken into retained earnings of the company in its books of accounts. Please advise whether this fair
valuation would be covered in the net worth of the company as per the legal requirements.
146 Theory Module 1
Solution:
As per section 2(57) of the Companies Act, 2013, any reserves created out of revaluation of assets doesn’t
form part of net worth. The company fair valued its property, plant and equipment and took that to retained
earnings.
Even if the company has taken the fair valuation to the retained earnings in its books of accounts, the
resultant credit in reserves (by whatever name called) would be in the category of ‘reserves created out of
revaluation of assets’ which is specifically excluded in the definition of ‘net worth’ in section 2(57) and
hence should be excluded by the company.
Example:
ABC Ltd is a company with a turnover of more than `1000 crores and having incurred a loss in one of
the preceding three financial years. Will it be required to comply with CSR?
Answer:
As per section 135(1) of the Act, if any one of the three criteria (whether net worth, or turnover or
net profit) gets satisfied then the company is mandatorily required to comply with the CSR provisions.
Hence ABC Ltd will be required to comply with CSR based on its turnover.
2. Disclosure by The Board's report under sub-section (3) of section 134 shall disclose the
Boards Report composition of the Corporate Social Responsibility Committee.
3. Duties of CSR The CSR Committee shall,—
Committee (a) formulate and recommend to the Board, a CSR 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 CSR Policy of the company from time to time.
4. Duties of Board The Board of every company referred to in sub-section (1) shall,—
(a) after taking into account the recommendations made by the Corporate Social
Responsibility Committee, approve the Corporate Social Responsibility Policy
for the company and disclose contents of such Policy in its report and also place
it on the company's website, if any, in such manner as may be prescribed; and
(b) ensure that the activities as are included in Corporate Social Responsibility
Policy of the company are undertaken by the company.
5. Amount to be The Board of every company shall ensure that the company spends, in every
spend [Section financial year, at least 2% of the average net profits of the company made during the
135(5)] 3 immediately preceding financial years or where the company has not completed
the period of three financial years since its incorporation, during such immediately
preceding financial years, in pursuance of its CSR Policy.
Provided that the company shall give preference to the local area and areas around
it where it operates, for spending the amount earmarked for Corporate Social
Responsibility activities:
Provided further that if the company fails to spend such amount, the Board shall, in
its report made under clause (o) of sub-section (3) of section 134, specify the
reasons for not spending the amount and, unless the unspent amount relates to any
ongoing project referred to in sub-section (6), transfer such unspent amount to a
Fund specified in Schedule VII, within a period of six months of the expiry of the
financial year.
Provided also that if the company spends an amount in excess of the requirements
provided under this sub-section, such company may set off such excess amount
against the requirement to spend under this sub-section for such number of
succeeding financial years and in such manner, as may be prescribed.
6. Treatment of Any amount remaining unspent under sub-section (5), pursuant to any ongoing
amount remaining project, fulfilling such conditions as may be prescribed, undertaken by a company in
unpaid [Section pursuance of its Corporate Social Responsibility Policy, shall be transferred by the
135(6)] company within a period of thirty days from the end of the financial year to a special
account to be opened by the company in that behalf for that financial year in any
scheduled bank to be called the Unspent Corporate Social Responsibility Account,
and such amount shall be spent by the company in pursuance of its obligation
towards the Corporate Social Responsibility Policy within a period of three financial
years from the date of such transfer, failing which, the company shall transfer the
same to a Fund specified in Schedule VII, within a period of thirty days from the
date of completion of the third financial year.
7. Penalty upon If a company is in default in complying with the provisions of sub-section (5) or
default [Section sub-section (6), the company shall be liable to a penalty of twice the amount
135(7)] required to be transferred by the company to the Fund specified in Schedule VII or
the Unspent Corporate Social Responsibility Account, as the case may be, or one
crore rupees, whichever is less, and every officer of the company who is in default
shall be liable to a penalty of one-tenth of the amount required to be transferred by
the company to such Fund specified in Schedule VII, or the Unspent Corporate
Social Responsibility Account, as the case may be, or two lakh rupees, whichever is
less.
8. Exemption from Where the amount to be spent by a company under sub-section (5) does not exceed
constitution of fifty lakh rupees, the requirement under sub-section (1) for constitution of the
CSR committee Corporate Social Responsibility Committee shall not be applicable and the functions
[Section 135(9)] of such Committee provided under this section shall, in such cases, be discharged by
the Board of Directors of such company.
Companies (Corporate Social Responsibility Policy) Rules, 2014
Definition 1: “Corporate Social Responsibility (CSR)” means the activities undertaken by a
Meaning of CSR Company in pursuance of its statutory obligation laid down in section 135 of the Act
in accordance with the provisions contained in these rules, but shall not include the
following, namely:—
(i) activities undertaken in pursuance of normal course of business of the
company: Provided that any company engaged in research and development
activity of new vaccine, drugs and medical devices in their normal course of
business may undertake research and development activity of new vaccine,
drugs and medical devices related to COVID-19 for Financial Years 2020-21,
2021-22, 2022-23 subject to the conditions that—
(a) such research and development activities shall be carried out in
collaboration with any of the institutes or organisations mentioned in item
(ix) of Schedule VII to the Act;
(b) details of such activity shall be disclosed separately in the Annual report
on CSR included in the Board’s Report;
(ii) any activity undertaken by the company outside India except for training of
Indian sports personnel representing any State or Union territory at national
level or India at international level;
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(iii) contribution of any amount directly or indirectly to any political party under
section 182 of the Act;
(iv) activities benefitting employees of the company as defined in clause (k) of
section 2 of the Code on Wages, 2019 (29 of 2019);
(v) activities supported by the companies on sponsorship basis for deriving
marketing benefits for its products or services;
(vi) activities carried out for fulfilment of any other statutory obligations under
any law in force in India;
Definition 2: “Ongoing Project” means a multi-year project undertaken by a Company in

Ongoing Project fulfilment of its CSR obligation having timelines not exceeding three years
excluding the financial year in which it was commenced, and shall include such
project that was initially not approved as a multi-year project but whose duration has
been extended beyond one year by the board based on reasonable justification;
3. Rule 3: Every company including its holding or subsidiary, and a foreign company defined
Application under clause (42) of section 2 of the Act having its branch office or project office in
India, which fulfills the criteria specified in sub-section (1) of section 135 of the Act
shall comply with the provisions of section 135 of the Act and these rules:
Every company which ceases to be a company covered under subsection (1) of
section 135 of the Act for three consecutive financial years shall not be required
to—
(a) constitute a CSR Committee; and
(b) comply with the provisions contained in sub-section (2) to (6) of the said
section, till such time it meets the criteria specified in sub-section (1) of section
135.
4. Rule 4: CSR (1) The Board shall ensure that the CSR activities are undertaken by the company
Implementation itself or through—
(a) a company established under section 8 of the Act, or a registered public trust or
a registered society, registered under section 12A and 80 G of the Income Tax
Act, 1961, established by the company, either singly or along with any other
company, or
(b) a company established under section 8 of the Act or a registered trust or a
registered society, established by the Central Government or State Government;
or
(c) any entity established under an Act of Parliament or a State legislature; or
(d) a company established under section 8 of the Act, or a registered public trust or
a registered society, registered under section 12A and 80G of the Income Tax
Act, 1961, and having an established track record of at least three years in
undertaking similar activities.
(2) (a) Every entity, covered under sub-rule (1), who intends to undertake any CSR
activity, shall register itself with the Central Government by filing the form CSR-1
electronically with the Registrar, with effect from the 01st day of April 2021:
(b) Form CSR-1 shall be signed and submitted electronically by the entity and shall
be verified digitally by a Chartered Accountant in practice or a Company Secretary
in practice or a Cost Accountant in practice.
(c) On the submission of the Form CSR-1 on the portal, a unique CSR Registration
Number shall be generated by the system automatically.
(3) A company may engage international organisations for designing, monitoring
and evaluation of the CSR projects or programmes as per its CSR policy as well as
for capacity building of their own personnel for CSR.
(4) A company may also collaborate with other companies for undertaking projects
or programmes or CSR activities in such a manner that the CSR committees of
respective companies are in a position to report separately on such projects or
programmes in accordance with these rules.
(5) The Board of a company shall satisfy itself that the funds so disbursed have been
utilised for the purposes and in the manner as approved by it and the Chief Financial
Officer or the person responsible for financial management shall certify to the effect.
(6) In case of ongoing project, the Board of a Company shall monitor the
implementation of the project with reference to the approved timelines and year-
wise allocation and shall be competent to make modifications, if any, for smooth
implementation of the project within the overall permissible time period.
Rule 5: CSR (1) The companies mentioned in the rule 3 shall constitute CSR Committee as
Committees under:—
(i) a company covered under subsection (1) of section 135 which is not required to
appoint an independent director pursuant to sub-section (4) of section 149 of the
Act, shall have its CSR Committee without such director;
(ii) a private company having only two directors on its Board shall constitute its
CSR Committee with two such directors;
(iii) with respect to a foreign company covered under these rules, the CSR
Committee shall comprise of at least two persons of which one person shall be
as specified under clause (d) of sub-section (1) of section 380 of the Act and
another person shall be nominated by the foreign company.
(2) The CSR Committee shall formulate and recommend to the Board, an annual
action plan in pursuance of its CSR policy, which shall include the following,
namely:—
(a) the list of CSR projects or programmes that are approved to be undertaken in
areas or subjects specified in Schedule VII of the Act;
(b) the manner of execution of such projects or programmes as specified in sub-rule
(1) of rule 4;
(c) the modalities of utilisation of funds and implementation schedules for the
projects or programmes;
(d) monitoring and reporting mechanism for the projects or programmes; and
(e) details of need and impact assessment, if any, for the projects undertaken by the
company:
Provided that Board may alter such plan at any time during the financial year, as per
the recommendation of its CSR Committee, based on the reasonable justification to
that effect.
Rule 7: CSR (1) The board shall ensure that the administrative overheads shall not exceed five
Expenditure percent of total CSR expenditure of the company for the financial year.
(2) Any surplus arising out of the CSR activities shall not form part of the business
profit of a company and shall be ploughed back into the same project or shall be
transferred to the Unspent CSR Account and spent in pursuance of CSR policy and
annual action plan of the company or transfer such surplus amount to a Fund
150 Theory Module 1
specified in Schedule VII, within a period of six months of the expiry of the
financial year.
(3) Where a company spends an amount in excess of requirement provided under
sub-section (5) of section 135, such excess amount may be set off against the
requirement to spend under sub-section (5) of section 135 up to immediate
succeeding three financial years subject to the conditions that—
(i) the excess amount available for set off shall not include the surplus arising out
of the CSR activities, if any, in pursuance of sub-rule (2) of this rule.
(ii) the Board of the company shall pass a resolution to that effect.
(4) The CSR amount may be spent by a company for creation or acquisition of a
capital asset, which shall be held by—
(a) a company established under section 8 of the Act, or a Registered Public Trust
or Registered Society, having charitable objects and CSR Registration Number
under sub-rule (2) of rule 4; or
(b) beneficiaries of the said CSR project, in the form of self-help groups, collectives,
entities; or
(c) a public authority:
Provided that any capital asset created by a company prior to the commencement of
the Companies (Corporate Social Responsibility Policy) Amendment Rules, 2021,
shall within a period of one hundred and eighty days from such commencement
comply with the requirement of this rule, which may be extended by a further period
of not more than ninety days with the approval of the Board based on reasonable
justification.
Rule 8: CSR (1) The Board's Report of a company covered under these rules pertaining to any
Reporting financial year shall include an annual report on CSR containing particulars specified
in Annexure I or Annexure II, as applicable.
(2) In case of a foreign company, the balance sheet filed under clause (b) of sub-
section (1) of section 381 of the Act, shall contain an annual report on CSR
containing particulars specified in Annexure I or Annexure II, as applicable.
(3) (a) Every company having average CSR obligation of ten crore rupees or more
in pursuance of subsection (5) of section 135 of the Act, in the three immediately
preceding financial years, shall undertake impact assessment, through an
independent agency, of their CSR projects having outlays of one crore rupees or
more, and which have been completed not less than one year before undertaking the
impact study.
(b) The impact assessment reports shall be placed before the Board and shall be
annexed to the annual report on CSR.
(c) A Company undertaking impact assessment may book the expenditure towards
Corporate Social Responsibility for that financial year, which shall not exceed five
percent of the total CSR expenditure for that financial year or fifty lakh rupees,
whichever is less.
Rule 9: Display of The Board of Directors of the Company shall mandatorily disclose the composition
CSR activities on of the CSR Committee, and CSR Policy and Projects approved by the Board on their
its website website, if any, for public access.
Rule 10: Transfer Until a fund is specified in Schedule VII for the purposes of subsection (5) and(6) of
of unspent CSR section 135 of the Act, the unspent CSR amount, if any, shall be transferred by the
amount. company to any fund included in schedule VII of the Act
As per MCA The MCA has provided many clarifications with regard to provisions of Corporate
Social Responsibility under section 135 of the Companies Act, 2013 which are as
under:
(i) Activities undertaken in pursuance of the CSR policy must be relatable to
Schedule VII of the Companies Act 2013
(ii) Expenses incurred by companies for the fulfillment of any Act/ Statute of
regulations (such as Labour Laws, Land Acquisition Act etc.) would not count
as CSR expenditure under the Companies Act.
15. Schedule VII
Activities which may be included by companies in their Corporate Social Responsibility Policies Activities
relating to:—
(i) Eradicating hunger, poverty and malnutrition, "promoting health care including preventive health
care" and sanitation including contribution to the Swach Bharat Kosh set-up by the Central
Government for the promotion of sanitation] and making available safe drinking water.
(ii) promoting education, including special education and employment enhancing vocation skills
especially among children, women, elderly and the differently abled and livelihood enhancement
projects.
(iii) promoting gender equality, empowering women, setting up homes and hostels for women and
orphans; setting up old age homes, day care centres and such other facilities for senior citizens and
measures for reducing inequalities faced by socially and economically backward groups.
(iv) ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal
welfare, agroforestry, conservation of natural resources and maintaining quality of soil, air and
water including contribution to the Clean Ganga Fund set-up by the Central Government for
rejuvenation of river Ganga.
(v) protection of national heritage, art and culture including restoration of buildings and sites of
historical importance and works of art; setting up public libraries; promotion and development of
traditional art and handicrafts;
(vi) measures for the benefit of armed forces veterans, war widows and their dependents;
(vii) training to promote rural sports, nationally recognised sports, paralympic sports and olympic sports
(viii) contribution to the prime minister's national relief fund or any other fund set up by the central govt.
for socio economic development and relief and welfare of the schedule caste, tribes, other
backward classes, minorities and women;
(ix) contributions or funds provided to technology incubators located within academic institutions
which are approved by the central govt.
(x) rural development projects
(xi) slum area development.
(xii) disaster management, including relief, rehabilitation and reconstruction activities.
Explanation.—For the purposes of this item, the term 'slum area' shall mean any area declared as such by
the Central Government or any State Government or any other competent authority under any law for the
time being in force.
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12.8 RIGHT OF MEMBER TO COPIES OF AUDITED FINANCIAL STATEMENT (Section 136)
1. Documents to be  A copy of the financial statements, including consolidated financial

dispatched 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 be 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:
Provided that if the copies of the documents are sent less than twenty-one days
before the date of the meeting, they shall, notwithstanding that fact, be deemed to
have been duly sent if it is so agreed by members—
(a) holding, if the company has a share capital, majority in number entitled to vote
and who represent not less than ninety-five per cent. Of such part of the paid-
up share capital of the company as gives a right to vote at the meeting; or
(b) having, if the company has no share capital, not less than ninety five per cent.
of the total voting power exercisable at the meeting:
2. Provisions in case  In the case of a listed company, the provisions of this sub-section shall be
of Listed Company 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
prescribed form (AOC-3)
 are 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:
3. Power available Provided further that the Central Government may prescribe the manner of
with Central circulation of financial statements of companies having such net worth and
Government turnover as may be prescribed.
4. Listed Companies Provided also that a listed company shall also place its financial statements
to ensure 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:
Provided also that every listed company having a subsidiary or subsidiaries shall
place separate audited accounts in respect of each of subsidiary on its website, if
any: Provided also that a listed company which has a subsidiary incorporated
outside India (herein referred to as "foreign subsidiary")—
(a) where such foreign subsidiary is statutorily required to prepare consolidated
financial statement under any law of the country of its incorporation, the
requirement of this proviso shall be met if consolidated financial statement of
such foreign subsidiary is placed on the website of the listed company;
(b) where such foreign subsidiary is not required to get its financial statement
audited under any law of the country of its incorporation and which does not
get such financial statement audited, the holding Indian listed company may
place such unaudited financial statement on its website and where such
financial statement is in a language other than English, a translated copy of
the financial statement in English shall also be placed on the website
5. Inspection facility A company shall allow every member or trustee of the holder of any debentures
136(2) issued by the company to inspect the documents stated under sub-section (1) at its
registered office during business hours.
Provided that every company having a subsidiary or subsidiaries shall provide a
copy of separate audited or unaudited financial statements, as the case may be, as
prepared in respect of each of its subsidiary to any member of the company who
asks for it
6. Penalty incase of If any default is made in complying with the provisions of this section, the
default company shall be liable to a penalty of twenty-five thousand rupees and every
officer of the company who is in default shall be liable to a penalty of five
thousand rupees.
Rule 11: Manner of Circulation of Financial Statements in Certain Cases
In case of all listed companies and such public companies which have a net worth of more than one crore
rupees and turnover of more than ten crore rupees, the financial statements may be sent—
(a) by electronic mode to such members whose shareholding is in dematerialised format and whose email
Ids are registered with Depository for communication purposes;
(b) where Shareholding is held otherwise than by dematerialised format, to such members who have
positively consented in writing for receiving by electronic mode; and
(c) by despatch of physical copies through any recognised mode of delivery as specified under section 20
of the Act, in all other cases.
12.9 COPY OF FINANCIAL STATEMENT TO BE FILED WITH REGISTRAR (SECTION 137)
1. Filing of financial A copy of the financial statements, including consolidated financial statement, if
statements any, along with all the documents which are required to be or attached to such
financial statements under this Act, duly adopted at the annual general meeting of
the company, shall be filed with the Registrar within 30 days of the date of annual
general meeting
1A. XBRL Format The following class of companies shall file their financial statements and other
documents under section 137 of the Act with the Registrar in e-form AOC-4
XBRL as per Annexure-I:
(i) companies listed with stock exchanges in India and their Indian subsidiaries;
(ii) companies having paid up capital of five crore rupees or above;
(iii) companies having turnover of one hundred crore rupees or above;
(iv) all companies which are required to prepare their financial statements in
accordance with Companies (Indian Accounting Standards) Rules, 2015.
154 Theory Module 1
2. If Financial Where the financial statements are not adopted at annual general meeting or
Statement are not adjourned annual general meeting, such unadopted financial statements along with
adopted the required documents shall be filed with the Registrar within 30 days of the date
of annual general meeting.
The Registrar shall take them in his records as provisional till the financial
statements are filed with him after their adoption in the adjourned annual general
meeting for that purpose.
If the financial statements are adopted in the adjourned annual general meeting,
then they shall be filed with the Registrar within 30 days of the date of such
adjourned annual general meeting.
3. Filing by One A One Person Company shall file a copy of the financial statements duly adopted
Person Company by its member, along with all the documents which are required to be attached to
such financial statements, within 180 days from the closure of the financial year.
4. Company having A company shall, along with its financial statements to be filed with the Registrar,
subsidiaries attach the accounts of its subsidiary or subsidiaries which have been incorporated
outside India and which have not established their place of business in India.
Provided also that in the case of a subsidiary which has been incorporated outside
India (herein referred to as "foreign subsidiary"), which is not required to get its
financial statement audited under any law of the country of its incorporation and
which does not get such financial statement audited, the requirements of the fourth
proviso shall be met if the holding Indian company files such unaudited financial
statement along with a declaration to this effect and where such financial statement
is in a language other than English, along with a translated copy of the financial
statement in English
5. Annual General Where the annual general meeting of a company for any year has not been held, the
meeting not held financial statements along with the documents required to be attached, duly signed
along with the statement of facts and reasons for not holding the annual general
meeting shall be filed with the Registrar within thirty days of the last date before
which the annual general meeting should have been held
6. Penalty [Section If any of the provisions of this section are contravened,—

137(3)] (a) The company shall be liable to a penalty of 10,000 rupees and in case of
continuing failure, with a further penalty of 100 rupees for each day during
which such failure continues, subject to a maximum of 2 lakh rupees, and
(b) The managing director and the Chief Financial Officer of the company, if any,
and,
in the absence of the managing director and the Chief Financial Officer any
other director who is charged by the Board with responsibility of complying with
the provisions of this section, and,
in the absence of any such directorall the directors of the company, shall be:
(1) liable to a penalty of 10,000 rupees and in case of continuing failure, with
further penalty of 100 rupees for each day after the first during which such failure
continues, subject to a maximum of 50,000
12.10 INTERNAL AUDIT (SECTION 138)
1. Companies (a) The following class of companies shall be required to appoint an internal
required to appoint auditor or a firm of internal auditors, namely:—
Internal Auditor: (1) every listed company;
(2) every unlisted public company having—
(A) paid up share capital of 50 crore rupees or more during the preceding
financial year; or
(B) turnover of 200 crore rupees or more during the preceding financial
year; or
(C) outstanding loans or borrowings from banks or public financial
institutions exceeding 100 crore rupees or more at any point of time
during the preceding financial year; or
(D) outstanding deposits of 25 crore rupees or more at any point of time
during the preceding financial year; and
(3) Every private company having—
(A) turnover of 200 crore rupees or more during the preceding financial
year; or
(B) outstanding loans or borrowings from banks or public financial
institutions exceeding 100 crore rupees or more at any point of time
during the preceding financial year.
2. Who is Internal (a) Internal Auditor shall either be a chartered accountant or a cost accountant, or
Auditor such other professional as may be decided by the Board to conduct internal
audit of the functions and activities of the company.
Here, the term “Chartered Accountant” shall mean a Chartered Accountant
whether engaged in practice or not.
(b) The internal auditor may or may not be an employee of the company.
Chapter 13
AUDITOR
Synopsis
13.1 Appointment of auditors (Section 139 of the Companies Act, 2013) 156
13.2 Removal, resignation of auditor and giving of special notice (Section 140 of the Companies Act, 2013) 159
13.3 Eligibility, Qualifications and Disqualifications of Auditors 161
13.4 Remuneration of auditors [Section 142] 162
13.5 Powers and duties of auditors and auditing standards [Section 143] 162
13.6 Auditor not to render certain services [Section 144] 165
13.7 Auditors to sign audit reports, etc. [Section 145] 166
13.8 Auditors to attend general meeting [Section 146] 166
13.9 Punishment for Contravention [Section 147] 166
13.10 Cost Audit [Section 148] 167
13.1 APPOINTMENT OF AUDITORS (Section 139 of the Companies Act, 2013)
(1) Appointment of auditor [Section 139(1)]:

 Every company shall,
 at the first annual general meeting,
 appoint an individual or a firm as an auditor
 who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual
general meeting and
 thereafter till the conclusion of every sixth meeting
 Manner and procedure of selection of auditors by the members of the company at such meeting
shall be such as may be prescribed (Refer Rule-3)
Provided further that before such appointment is made, the written consent of the auditor to such
appointment, and a certificate from him or it that the appointment, if made, shall be in accordance with the
conditions as may be prescribed, shall be obtained from the auditor:
Rule-4 Conditions for Appointment and Notice to Registrar
(1) The auditor appointed under rule 3 shall submit a certificate that -
(a) the individual or the firm, as the case may be, 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.
Chap. 13 Auditor 157
(2) The notice to Registrar about appointment of auditor under fourth proviso to sub-section (1) of section
139 shall be in Form ADT-1 provided also that the certificate shall also indicate whether the auditor
satisfies the criteria provided in section 141:
Provided also that the company shall inform the auditor concerned of his or its appointment, and also file a
notice of such appointment (ADT-1) with the Registrar within fifteen days of the meeting in which the
auditor is appointed.
Explanation.—For the purposes of this Chapter, “appointment” includes reappointment.
Rule-3 Manner and Procedure of Selection and Appointment of Auditors
(1) In case of a company that is required to constitute an Audit Committee under section 177, the
committee, and, in cases where such a committee is not required to be constituted, the Board, shall take
into consideration the qualifications and experience of the individual or the firm proposed to be
considered for appointment as auditor and whether such qualifications and experience are commensurate
with the size and requirements of the company:
Provided that while considering the appointment, the Audit Committee or the Board, as the case may be,
shall have regard to any order or pending proceeding relating to professional matters of conduct against
the proposed auditor before the Institute of Chartered Accountants of India or any competent authority or
any Court.
(2) The Audit Committee or the Board, as the case may be, may call for such other information from the
proposed auditor as it may deem fit.
(3) Subject to the provisions of sub-rule (1), where a company is required to constitute the Audit
Committee, the committee shall recommend the name of an individual or a firm as auditor to the Board
for consideration and in other cases, the Board shall consider and recommend an individual or a firm as
auditor to the members in the annual general meeting for appointment.
(4) If the Board agrees with the recommendation of the Audit Committee, it shall further recommend the
appointment of an individual or a firm as auditor to the members in the annual general meeting.
(5) If the Board disagrees with the recommendation of the Audit Committee, it shall refer back the
recommendation to the committee for reconsideration citing reasons for such disagreement.
(6) If the Audit Committee, after considering the reasons given by the Board, decides not to reconsider
its original recommendation, the Board shall record reasons for its disagreement with the committee and
send its own recommendation for consideration of the members in the annual general meeting; and if the
Board agrees with the recommendations of the Audit Committee, it shall place the matter for
consideration by members in the annual general meeting.
(7) The auditor appointed in the annual general meeting shall hold office from the conclusion of that
meeting till the conclusion of the sixth annual general meeting, with the meeting wherein such
appointment has been made being counted as the first meeting
(2) Term of Auditor [Section 139(2)]:

(a) Section 139(2) provides that listed companies and other prescribed class or classes of companies
(except one person companies and small companies) shall not appoint or re-appoint—
(1) an individual as auditor for more than one term of five consecutive years; and
(2) an audit firm as auditor for more than two terms of five consecutive years.
Provided that—
(i) an individual auditor who has completed his term under clause (a) shall not be eligible for re-
appointment as auditor in the same company for five years from the completion of his term;
(ii) an audit firm which has completed its term under clause (b), shall not be eligible for re-appointment
as auditor in the same company for five years from the completion of such term:
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(b) The Companies (Audit and Auditors) Rules, 2014 has prescribed the following classes of companies for
the purposes of section 139(2):
(1) all unlisted public companies having paid up share capital of rupees 10 crore or more;
(2) all private limited companies having paid up share capital of rupees 50 crore or more;
(3) all companies having paid up share capital of below threshold limit mentioned in (1) and (2) above,
but having public borrowings from financial institutions, banks or public deposits of rupees 50
crores or more.
Provided further that as on the date of appointment no audit firm having a common partner or partners to
the other audit firm, whose tenure has expired in a company immediately preceding the financial year,
shall be appointed as auditor of the same company for a period of five years:
Provided also that, nothing contained in this sub-section shall prejudice the right of the company to remove
an auditor or the right of the auditor to resign from such office of the company.
Rule 6
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.
Explanation.—For the purposes of these rules the term "same network" includes the firms operating or
functioning, hitherto or in future, under the same brand name, trade name or common control.
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 five years.
Section 139(3): Members of a company may resolve to provide that—
(1) in the audit firm appointed by it, the auditing partner and his team shall be rotated at such intervals
as may be resolved by members; or
(2) the audit shall be conducted by more than one auditor.
Section 139(6): First auditors- other than a Government Company
(a) The first auditor to be appointed by the BOD within 30 days of registration of the company;
Tenure: Until the conclusion of the first annual general meeting.
(b) If the Board fails to appoint first auditor it shall inform the membersand members in general
meeting may appoint the first auditor within 90 days at an EGM and
such auditor shall hold office till the conclusion of the first AGM.
Section 139(5): Appointment of subsequent auditors in case of Government Company or any other
company having controlled by State Government or Central Government
C&AG shall appoint an auditor duly qualified to be appointed as an auditor in the case of:
(1) a government company; or
(2) any other company owned or controlled, directly or indirectly, by the CG/SG/CG + SG,
The auditor to be appointed within a period of 180 days from the commencement of the financial year. The
auditor appointed shall hold office till the conclusion of the annual general meeting.
Section 139(7): Appointment of First auditors in case of Government Company or any other
company having controlled by State Government or Central Government
(1) in the case of:
(1) a government company; or
(2) any other company owned or controlled, directly or indirectly, by the CG/ SG/ CG + SG,
first auditor shall be appointed by the C&AGwithin 60 days from registration of the company.
(2) In case the C&AG does not appoint  BOD shall appoint within the next 30 days  In the case of
failure of the BOD  it shall inform the members of the company who shall appoint such auditor within
the 60 days at an EGM, who shall hold office till the conclusion of the first AGM.
Section 139(8): Filling up casual vacancy
By whom Incase of Government Other Companies

Company/ Government
owner/controlled companies
C&AG Within 30 days -------

Else by
BOD Within next 30 days Within 30 days of such vacancy

However
Members If vacancy is caused by the resignation

It shall also be approved by the company at a
GMwithin 3 months of the recommendation
of the Board
Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next AGM
(a) The Board may fill any casual vacancy in the office of an auditor within 30 days but where such
vacancy is caused by the resignation of an auditor, such appointment shall also be approved by the
company at a general meeting convened within three months of the recommendation of the Board.
(b) Any auditor appointed in a casual vacancy shall hold office until the conclusion of the next annual
general meeting.
(c) In the case of a company whose accounts are subject to audit by an auditor appointed by the
Comptroller and Auditor-General of India, casual vacancy of an auditor be filled by the Comptroller
and Auditor-General of India within 30 days.
(d) In case the Comptroller and Auditor-General of India do not fill the vacancy within the said period, the
Board of Directors shall fill the vacancy within next 30 days.
(7) Re-appointment of retiring auditor [section 139(9) and (10)]:
(9) At any annual general meeting, a retiring auditor may be re-appointed at an AGM, if—
(1) he is not disqualified for re-appointment;
(2) he has not given the company a notice in writing of his unwillingness to be re- appointed; and
(3) a special resolution has not been passed at that meeting appointing some other auditor or providing
expressly that he shall not be re-appointed.
(10) Where at any annual general meeting, no auditor is appointed or re-appointed, the existing auditor
shall continue to be the auditor of the company.
13.2 REMOVAL, RESIGNATION OF AUDITOR AND GIVING OF SPECIAL NOTICE (Section

140 of the Companies Act, 2013)
(1) Removal of auditor before the expiry of his term [Section 140(1)]:
(a) The auditor appointed under section 139 may be removed from his office before the expiry of his term
only by a special resolution of the company and after obtaining the previous approval of the Central
Government by making an application in Form ADT-2 and shall be accompanied with the prescribed
fees.
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(b) The application shall be made to the Central Government within 30 days of the resolution passed by the
Board.
(c) The Company shall hold the general meeting within 60 days of receipt of approval of the Central
Government for passing the special resolution.
(d) Giving opportunity of being heard (Audi Alteram Partem): Before taking any action for removal of
auditor before the expiry of his term, the auditor concerned shall be given a reasonable opportunity of
being heard.
(2) Resignation by Auditor [Section 140(2)]
(a) If the Auditor has resigned from the company, he shall file within a period of 30 days from the date of
resignation, a statement in the form ADT-3 with the company and the Registrar.
(b) In case of government companies or company controlled by Central Government or State Government,
the auditor shall also file such statement with the Comptroller and Auditor-General of India also along
with company and the Registrar.
(c) The auditor shall indicate the reasons and other facts as may be relevant with regard to his resignation,
in the statement.
(3) Section 140(3) If the auditor does not comply with the provisions of sub-section (2), he or it shall be
liable to a penalty of fifty thousand rupees or an amount equal to the remuneration of the auditor,
whichever is less, and in case of continuing failure, with further penalty of five hundred rupees for each day
after the first during which such failure continues, subject to a maximum of two lakh rupees
(4) Appointing Auditor other than the Retiring Auditor [Section 140(4)]
(a) If the retiring auditor has not completed a consecutive tenure of 5 years or, as the case may be, 10
years, as provided under sub-section (2) of section 139,—
 special notice shall be required for a resolution at an annual general meeting appointing as auditor a
person other than a retiring auditor, or
 providing expressly that a retiring auditor shall not be re-appointed.
(b) On receipt of notice of such a resolution, the company shall forthwith send a copy thereof to the
retiring auditor.
(c) Where notice is given of such a resolution and the retiring auditor makes with respect thereto
representation in writing to the company (not exceeding a reasonable length) and requests its
notification to members of the company, the company shall, unless the representation is received by it
too late for it to do so,—
(1) in any notice of the resolution given to members of the company, state the fact of the representation
having been made; and
(2) send a copy of the representation to every member of the company to whom notice of the meeting
is sent, whether before or after the receipt of the representation by the company,
(d) If a copy of the representation is not sent as aforesaid because it was received too late or because of the
company’s default, the auditor may (without prejudice to his right to be heard orally) require that the
representation shall be read out at the meeting.
(e) However, if a copy of representation is not sent as aforesaid, a copy thereof shall be filed with the
Registrar.
(5) Incase of fraud by Auditor [Section 140(5)]
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 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:
Provided that 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 fifteen 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:
Provided further that 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 five years from the date of passing of the order and the auditor shall also be liable for action under
section 447.
Explanation I.—It is hereby clarified that the case of a firm, the liability shall be of the firm and that of
every partner or partners who acted in a fraudulent manner or abetted or colluded in any fraud by, or in
relation to, the company or its director or officers.
Explanation II.—For the purposes of this Chapter the word “auditor” includes a firm of auditors.
13.3 ELIGIBILITY, QUALIFICATIONS AND DISQUALIFICATIONS OF AUDITORS
(1) Qualifications of an auditor [Section 141(1) & (2)]:

 A person shall be eligible to be appointed as auditor of a company only if he is a Chartered
Accountant within the meaning of the Chartered Accountants Act, 1949.
 A firm whereof majority of partners practising in India are qualified for appointment as aforesaid
may be appointed by its firm name to be auditor of a company.
(2) Where a firm including a Limited Liability Partnership is appointed as an auditor of a company, only
the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm.
(3) Disqualifications of auditors [Section 141(3)]:
The following persons shall not be qualified for appointment as auditor of a company-
(a) A body corporate other than a limited liability partnership registered under the Limited Liability
Partnership Act, 2008;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of the company;
(d) a person who, or his relative or partner—
(i) is holding any security of or interest in the company or its subsidiary, or of its holding or associate
company or a subsidiary of such holding company:
Provided that the relative may hold security or interest in the company of face value not exceeding
1,00,000 rupees as prescribed under the Company (Audit and Auditors) Rules, 2014.
(ii) is indebted to the company, or its subsidiary, or its holding or associate company or a subsidiary of
such holding company, in excess of ` 5 Lacs; or
(iii) 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 `1 Lac.
(e) a person or a firm who has business relationship with the company, or its subsidiary, or its holding or
associate company or subsidiary of such holding company or associate company.
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According to the Companies (Audit and Auditors) Rules, 2014, the term “business relationship” shall be
construed as any transaction entered into for a commercial purpose, except—
(A) commercial transactions which are in the nature of professional services permitted to be rendered by
an auditor or audit firm under the Act and the Chartered Accountants Act, 1949 and the rules or the
regulations made under those Acts;
(B) commercial transactions which are in the ordinary course of business of the company at arm’s length
price - like sale of products or services to the auditor, as customer, in the ordinary course of business,
by companies engaged in the business of telecommunications, airlines, hospitals, hotels and such other
similar businesses.
(f) a person whose relative is a director or is in the employment of the company as a director or key
managerial personnel;
(g) a person who is in full time employment elsewhere or a person or a partner of a firm holding
appointment as its auditor, if such persons or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than 20 companies (other than one person
companies, dormant companies, small companies and private companies having paid-up share capital
less than one hundred crore rupee)
(h) 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;
(i) a person who, directly or indirectly, renders any service referred to in section 144 to the company or its
holding company or its subsidiary company.
Explanation.—For the purposes of this clause, the term "directly or indirectly" shall have the meaning
assigned to it in the Explanation to section 144.
(3) Vacation of office by an auditor [Section 141(4)]:
If a person appointed as an auditor of a company incurs any of the disqualifications specified in Section
141(3), he shall be deemed to have vacated his office. Such vacation shall be deemed to be a casual
vacancy in the office of the auditor.
13.4 REMUNERATION OF AUDITORS [Section 142]
(1) The remuneration of the auditor of a company shall be fixed in its general meeting or in such manner as
may be determined therein:
Provided that the Board may fix remuneration of the first auditor appointed by it.
(2) The remuneration shall include the expenses, if any, incurred by the auditor in connection with the audit
of the company and
 any facility extended to him, in addition to the fee payable to an auditor,
 but does not include any remuneration paid to him for any other service rendered by him at the
request of the company.
13.5 POWERS AND DUTIES OF AUDITORS AND AUDITING STANDARDS [Section 143]
(1) Right of Auditor

 Right of access at all times to the books of account and vouchers of the company, whether kept at
the registered office of the company or at any other place
 Entitled to require from the officers of the company such information and explanation as he may
consider necessary for the performance of his duties as auditor
 To inquire into the following matters, namely:—
(a) whether loans and advances made by the company on the basis of security have been properly
secured
(b) whether transactions of the company which are represented merely by book entries are
prejudicial to the interests of the company;
(c) whether 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 personal expenses have been charged to revenue account;
Provided that the auditor of a company which is a holding company shall also have the right of access to
the records of all its subsidiaries and associate companies in so far as it relates to the consolidation of its
financial statements with that of its subsidiaries and associate companies
(2) 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
(3) 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 account 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 under sub-section
(8) by a person other than the company’s auditor has been sent to him under the proviso to that sub-
section 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 with reference to financial
statements] in place and the operating effectiveness of such controls;
(j) such other matters as may be prescribed.
(4) 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.
(5) In the case of a company prescribed u/s 139(5) and (7), the Comptroller and Auditor-General of India
shall appoint the auditor and direct such auditor the manner in which the accounts of the company are
required to be audited auditor so appointed shall submit a copy of the audit report to the Comptroller and
Auditor-General of India.
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(6) The Comptroller and Auditor-General of India shall within sixty days from the date of receipt of the
audit report under sub-section (5) have a right to,—
(a) conduct a supplementary audit of the financial statement of the company by such person or
persons as he may authorise in this behalf;
(b) comment upon or supplement such audit report:
Provided that any comments given by the Comptroller and Auditor-General of India upon, or supplement
to, the audit report shall be sent by the company to every person entitled to copies of audited financial
statements under sub-section (1) of section 136 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.
(7) Comptroller and Auditor-General of India may, in case of any company covered under sub-section (5)
or sub-section (7) of section 139, if he considers necessary, by an order, cause test audit to be conducted of
the accounts of such company.
(8) Where a company has a branch office, the accounts of that office shall be audited either by the—
 auditor appointed for the company under this Act; or
 by any other person qualified for appointment as an auditor of the company under this Act and
appointed as such under section 139, or
where the branch office is situated in a country outside India, the accounts of the branch office shall be
audited either by the
 company’s auditor; or
 by an accountant; or
 by any other person duly qualified to act as an auditor of the accounts of the branch office in
accordance with the laws of that country
Provided that the branch auditor shall prepare a report on the accounts of the branch examined by him and
send it to the auditor of the company who shall deal with it in his report in such manner as he considers
necessary.
(9) Every auditor shall comply with the auditing standards.
(10) The Central Government may prescribe the standards of auditing or any addendum thereto, as
recommended by the Institute of Chartered Accountants of India, constituted under section 3 of the
Chartered Accountants Act, 1949, in consultation with and after examination of the recommendations made
by the National Financial Reporting Authority:
Provided that 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.
(11) The Central Government may, in consultation with the National Financial Reporting Authority, by
general 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.
"Provided that until the National Financial Reporting Authority is constituted under section 132, the
Central Govemment may hold consultation required under this sub- section with the Committee chaired by
an officer of the rank of Joint Secretary or equivalent in the Ministry of corporate Affairs and the
committee shall have the representatives from the Institute of Chartered Accountants of India and Industry
Chambers and also special invitees from the National Advisory Committee on Accounting Standards and
the office of the Comptroller and Auditor-General".
(12) If an auditor of a company, has 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 immediately report the matter to the Central Government within such time and in such manner as
may be prescribed (ADT-4).
(13) No duty to which an auditor of a company may be subject to shall be regarded as having been
contravened by reason of his reporting if it is done in good faith.
(14) 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.
(15) If any auditor, cost accountant or Company Secretary in practice do not comply with the provisions of
sub-section (12), he shall be punishable with fine which shall not be less than one lakh rupees but which
may extend to twenty five lakh rupees.
Rule-13-Reporting of Fraud by Auditor
(1) If an auditor of a company, in the course of the performance of his duties as statutory auditor, has
reason to believe that an offence of fraud, which involves or is expected to involve individually an amount
of rupees one crore or above, is being or has been committed against the company by its officers or
employees, the auditor shall report the matter to the Central Government.
(2) The auditor shall report the matter to the Central Government as under:—
(a) the auditor shall report the matter to the Board or the Audit Committee, as the case may be,
immediately but not later than two days of his knowledge of the fraud, seeking their reply or
observations within forty-five days;
(b) 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 along with his comments (on such reply or
observations of the Board or the Audit Committee) to the Central Government within fifteen days
from the date of receipt of such reply or observations;
(c) in case the auditor fails to get any reply or observations from the Board or the Audit Committee
within the stipulated period of forty-five days, he shall forward his report to the Central
Government along with a note containing the details of his report that was earlier forwarded to the
Board or the Audit Committee for which he has not received any reply or observations;
(d) 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;
(e) the report shall be on the letter-head of the auditor containing postal address, e-mail address and
contact telephone number or mobile number and be signed by the auditor with his seal and shall
indicate his Membership Number; and
(f) the report shall be in the form of a statement as specified in Form ADT-4.
(3) In case of a fraud involving lesser than the amount specified in sub-rule (1), the auditor shall report the
matter to Audit Committee constituted under section 177 or to the Board immediately but not later than two
days of his knowledge of the fraud and he shall report the matter specifying the following:-
(a) Nature of Fraud with description;
(b) Approximate amount involved; and
(c) Parties involved.
13.6 AUDITOR NOT TO RENDER CERTAIN SERVICES [Section 144]
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, 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:—
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(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.
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:—
(i) 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, in which such individual
has significant influence or control, or whose name or trade mark or brand is used by such
individual;
(ii) 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, 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.
13.7 AUDITORS TO SIGN AUDIT REPORTS, ETC. [Section 145]
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 in accordance with the provisions of sub-section (2) of section 141
13.8 AUDITORS TO ATTEND GENERAL MEETING [Section 146]
 All notices of any general meeting shall be forwarded to the auditor of the company, and the
auditor shall attend meeting either by himself or through his authorised representative, who shall
also be qualified to be an auditor,
 Auditor shall have right to be heard at such meeting on any part of the business which concerns
him as the auditor
13.9 PUNISHMENT FOR CONTRAVENTION [Section 147]
(1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened,—
 the company shall be punishable with fine which shall not be less than twenty-five thousand rupees
but which may extend to five lakh rupees and
 every officer of the company who is in default shall be punishable with imprisonment for a term
which may extend to one year or with fine which shall not be less than ten thousand rupees but
which may extend to one lakh rupees, or with both.
(2) If an auditor of a company contravenes any of the provisions of section 139, section 143, section 144 or
section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand
rupees but which may extend to five lakh rupees or four times the remuneration of the auditor, whichever is
less:
Provided that if an auditor has contravened such provisions knowingly or wilfully with the intention to
deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with
imprisonment for a term which may extend to one year with fine which shall not be less than fifty thousand
rupees but which may extend to twenty-five lakh rupees or eight times the remuneration of the auditor,
whichever is less
(3) Where an auditor has been convicted under sub-section (2), he shall be liable to—
(i) refund the remuneration received by him to the company; and
(ii) pay for damages to the company, statutory bodies or authorities or to members or creditors of the
company for loss arising out of incorrect or misleading statements of particulars made in his audit
report.
(4) The Central Government shall, by notification, specify any statutory body or authority or an officer for
ensuring prompt payment of damages to the company or the persons
(5) 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, 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
Provided that in case of criminal liability of an audit firm, in respect of liability other than fine, the
concerned partner or partners, who acted in a fraudulent manner or abetted or, as the case may be,
colluded in any fraud shall only be liable
13.10 COST AUDIT [Section 148]

1. Application
 the Central Government may, by order,
 in respect of such class of companies engaged in the production of such goods or providing such
services as may be prescribed,
 direct that particulars relating to the utilisation 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:
Provided that the Central Government shall, before issuing such order in respect of any class of companies,
consult the regulatory body constituted or established under such special Act.
(2) If the Central Government is of the opinion, that it is necessary to do so, it may, by order, direct that the
audit of cost records of class of companies, which have a net worth of such amount as may be prescribed or
a turnover of such amount as may be prescribed, shall be conducted in the manner specified in the order.
(3) The audit under sub-section (2) shall be conducted by a Cost Accountant in Practice who shall be
appointed by the Board on such remuneration as may be determined by the members in such manner as
may be prescribed:
Provided that no person appointed under section 139 as an auditor of the company shall 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.
(4) Rule 14 of the Companies (Audit and Auditors) Rules, 2014 provides that—
(i) in the case of companies which are required to constitute an audit committee—
(A) the Board shall appoint an individual, who is a cost accountant, or a firm of cost accountants in
practice, as cost auditor on the recommendations of the Audit committee, which shall also recommend
remuneration for such cost auditor;
168 Theory Module 1
(B) the remuneration recommended by the Audit Committee under (A) shall be considered and approved
by the Board of Directors and ratified subsequently by the shareholders.
(ii) in the case of other companies which are not required to constitute an audit committee, the Board shall
appoint an individual who is a cost accountant or a firm of cost accountants in practice as cost auditor and
the remuneration of such cost auditor shall be ratified by shareholders subsequently.
(5) An audit conducted under this section shall be in addition to the audit conducted under section 143.
(6) The qualifications, disqualifications, rights, duties and obligations applicable to auditors under this
Chapter shall also apply to a cost auditor appointed under this section and it shall be the duty of the
company to give all assistance and facilities to the cost auditor appointed under this section for auditing the
cost records of the company:
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.
(7) A company shall within thirty days from the date of receipt of a copy of the cost audit report, furnish it
to Central Government along with full information and explanation on every reservation or qualification
contained therein.
(8) If, after considering the cost audit report referred to under this section, 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.
Chapter 14
CONTRACT OF AGENCY
Synopsis
14.1 Introduction — Contract of Agency [Section 182] 169
14.2 Essential of a Contract of Agency 169
14.3 How the Agency is Created 170
14.4 Duties of Agent 171
14.5 Right of Agent 172
14.6 Types of Agent 172
14.7 Relationship of Agency between Husband and Wife 173
14.8 Termination of Agency 173
14.9 Circumstances where Agent can be held Responsible Personally 175
14.10 Position of Principal in Relation to third party 175
14.1 INTRODUCTION — CONTRACT OF AGENCY [Section 182]
1. Agent A person appointed to work for another person on his behalf is known as agent.
2. Principal A person who is represented from the acts of an agent is called the 'principal'.
3. Agency Contract A contract between an agent and his principal is known as contract of agency.
14.2 ESSENTIAL OF A CONTRACT OF AGENCY
1. Agreement  There must be an agreement between principal and agent.

 Such agreement may be express or implied.
2. Contractual According to section 183,

capacity "Any person who is of age of majority according to law to which he is subject,
and who is of a sound mind may employ an agent."
3. Consideration According to section 185 of this Act no consideration is required to create an

agency.
4. Privity of contract An agent acts on behalf of his principal. Any act done by him within the scope of
between principal his authority will be binding on the principal.
and third party
5. Agent is An agent is personally liable to principal.

personally liable to Exception: Where agent is minor or person of unsound mind.
principal
170 Theory Module 1
14.3 HOW THE AGENCY IS CREATED
1. Agency by A person, who has a contractual capacity can appoint another as his agent either by
Express Agreement- the words of mouth or by making written agreement.
[section 187]
2. Agency by Agency relationship can also be created by conduct of parties, and circumstances
Implied Agreement- of case, the same is known as implied agency.
[section 237] Agency by implied agreement may take any of following form:-
(a) Agency by  If some person, either by the words of mouth or in
estoppels writing or by his conduct induces another person to
believe that someone is working as his agent, in reality
he is not his agent.
 Such transaction will be binding on the person so
representing and he will be liable as principal. Such
agency is known as agency by estoppel.
Agency by holding This agency comes into existence when principal himself
out holds out that someone is his agent.
3. Agency by There are certain situations, where it becomes necessary for the person to act as an
Necessity agent of another person without his authority. Such agency is known as 'Agency
by necessity".
When Such Agency 1. Act was done in good faith.
comes into existence 2. Communication with principal was not possible.
3. The act was done with the objective of saving the interest of principal
4. In conducting the act due care has been exercised by agent
4. Agency by  Where a person has done some act for another person without his prior
ratification authority or consent. Later on the person for whom such acts was done can
either reject them or may accept them.
 A situation where he accepts those act, he would becomes bound by the acts as
these have been done by his authority or consent.
 The relationship of agency arising out of situation is known as agency by
ratification.
When Such Agency (a) Acts was done on behalf of principal
comes into existence (b) Existence of the principal
(c) Contractual capacity: The person on whose behalf the act is being done, at
that time he must have contractual capacity.
(d) Full knowledge of principal: Principal prior to ratifying such act must have
full knowledge about that act.
(e) Only lawful act can be ratified.
(f) Entire transaction need to be ratified, where a principal ratify only a part of
transaction, it would be treated as ratification of entire transaction.
(g) Ratification can be done by principal only.
(h) Ratification needs to be done within a reasonable time.
(i) Only those acts which principal has the authority to perform can be ratified.
Chap. 14 Contract of Agency 171
Exercise 1
Question 1 State whether following ratification are valid or in valid:

(a) RAM sells goods which were purchased by RAM's agent without RAM's instruction.
Answer……………………………………………………………………………………
………………………………….
(b) RAM ratifies the acquisition of goods by JAI, i.e. his agent who acquired those goods in
his own name without RAM's authority.
Answer……………………………………………………………………………………
………………………………….
(c) RAM a minor, on attaining majority ratifies the agreement made on his behalf during his
minority.
Answer……………………………………………………………………………………
………………………………….
(d) RAM ratifies 60% of the purchase of goods by JAI, his agent who acquired those goods
on behalf of RAM without his authority.
Answer……………………………………………………………………………………
………………………………….
(e) RAM ratifies the act of JAI who withdrew money after forging RAM's signature.
Answer……………………………………………………………………………………
………………………………….
(f) A company ratifies the contracts entered into by the promoters.
Answer……………………………………………………………………………………
………………………………….
(g) A company ratifies the act done by a director on behalf of a company which is ultra-
vires the company.
Answer……………………………………………………………………………………
………………………………….
14.4 DUTIES OF AGENT
1. Reasonable care An agent must carry his act with a reasonable care, and diligence. In case of any
loss to principal due to negligence, agent would be personally liable to him.
2. Directions of An agent is required to perform his task according to directions of principal.

Principal
3. Use of Diligence It’s a duty of agent to use all reasonable diligence in communicating with his
principal and in obtaining his instructions.
4. Not to act at his An agent must not act at his own, while dealing with third party.
own
5. Secret Profit An agent is not expected to earn any secret profit in any transaction made by him
with third party.
172 Theory Module 1
14.4 DUTIES OF AGENT
6. Account for The agent is bound to pay all sums received by him on behalf of his principal.
Personal gain Even though deduction of money in respect of advances made or expenses-
incurred by him in performing his duty is permissible.
7. No Delegation Agent cannot delegate his authority to a third person without the consent of the
principal except in case where the nature of business requires such delegation.
8. Establish his own The agent should not set up his own title or the title of the third party to the goods
title or property received by him from his principal in the capacity of an agent.
9. Protection where Where, an agency is terminated due to principal becoming insolvent or dying, the
principal died or agent is bound to take all reasonable steps on behalf of the representative for the
become insolvent protection and preservation of the interest of deceased principal.
10. No disclosure of Any information obtained by agent during the course of his employment should
information to not be disclosed to an outsider.
outsiders
12. Render proper An agent is duty bound to render proper accounts to his principal on demand
A/c
14.5 RIGHT OF AGENT
1. Right of An agent has a right to receive remuneration as agreed under the term of
Remuneration agreement and in absence of an agreement reasonable remuneration shall be paid
to him.
2. Right to Recover An agent has a right to retain amount spent by him towards advanced or other
expenditure expenditure incurred in the operation of business of agency.
3. Right of Lien In the absence of any contract to the contrary, an agent is entitled to retain
goods, paper and other property, whether movable or immovable of the principal
received by him until the amount due to him as commission, disbursement and
services in respect of the same has been paid or accounted for to him.
4. Right to Recover An agent has a right to get compensation from principal for all losses suffered in
loss discharging his duty as an agent.
14.6 TYPES OF AGENT

1. Sub-Agent  A person employed by and acting under the control of the original agent
[Section 191]  Sub-agent acts under the control of original agent
 There exists a relation of principal and agent between original agent and
sub-agent.
Situation 1: Where the appointment of sub-agent is proper, his relationship with agent and principal
would be as follows
1. In all transactions and agreements which are undertaken with third party by sub agent, the Principal
will be represented.
2. The original agent will be liable to the principal for the acts of sub-agent.
3. The sub-agent will not directly be liable to the principal. He is appointed by and works under the
control of original agent, thus will be liable to him only.
Situation 2: However where the appointment of sub agent is not proper
1. The principal will not be represented by the acts of subagent.

2. The original agent will be liable for the acts of sub agent both to the principal and to third person.
2. Substituted  A substituted agent is a person who is named by the agent and holds express
Agent: or implied authority from the principal to act for the principal.
 There exists a Privity of a contract between the principal and substituted agent
for such part of business of agency which is entrusted to him.
 Although a substituted agent is an agent of the principal but he is named by
the original agent at the request of principal. [section 194]
 An agent is required to exercise same amount of discretion as a man of a
ordinary prudence would exercise while naming substituted agent for the
principal. Otherwise he is personally responsible to the principal for the acts or
negligence of the substituted agent. [section 195]
14.7 RELATIONSHIP OF AGENCY BETWEEN HUSBAND AND WIFE
Quest-6 K is the wife of A. She Purchased a saree on Credit from B. B Demanded the amount from A.
A refused to make the payment. B filed a suit against A for the same amount. Decide in light
of Indian Contract Act, whether B would succeed.
Hint According to Indian Contract Act, 1872, Where any husband and wife are living together, the
wife is presumed to be an agent of her Husband. Thus, the husband is bound to pay the bills
for household credit purchased by her wife provided the following conditions are satisfied:-
1. Husband and wife must be living together
2. They are living in a Domestic establishment of their own and wife should be in
charge of domestic establishment.
3. Wife must purchase the Article suited to the style in which they are living
Thus if all above conditions are satisfied wife shall be assumed as an agent and husband is
liable
In given case, K is the wife of A. She Purchased a saree on Credit from B. B Demanded the
amount from A. A refused to make the payment. B filed a suit against A for the same amount.
Conclusion-Based upon the assumption that all above conditions are satisfied we may
conclude that A is liable to bear the cost of sarees as purchased by his wife K.
14.8 TERMINATION OF AGENCY
A. Termination of Agency by Act of Parties
1. By agreement The relationship of agency can be terminated by a mutual agreement.

between principal
and agent
174 Theory Module 1
2. Revocation by the The principal can revoke authority of an agent at any time, before the authority
principal has been exercised so as to bind the principal. Such revocation may be either
express or implied by the conduct of the parties.
However, the principal is not empowered to revoke agent's authority under the following situation
and such agency is known as 'Irrevocable Agency'.
Agency coupled with "Where the agent has himself an interest in the property which forms the subject
interest: [section 202] matter of agency, the agency cannot, in the absence of an express contract, be
terminated to the prejudice of such interest.
Where agent has No agency can be terminated, where the agent has incurred his personal liability
incurred personal
liability
Where the agent has it becomes irrevocable, as far as acts which has already done in the agency.
partly exercised his [section 204]
authority
Where agency was for In circumstances where agency was for a fixed period, principal must make
a fixed period, adequate compensation to agent, for pre mature revocation of agency relationship.
3. Termination by an An agent after giving reasonable notice to the principal may also renounce the
agent through business of agency.
renouncing the
business:
B. Termination of Agency by Operation of Law
1. Completion of Where the relationships of agency has been created for doing particular business.
business As soon as the business is completed, agency will be terminated automatically.
2. Expiry of time Where the agent has been appointed for a particular period of time, at the expiry
of that period, he ceases to be an agent.
3. Destruction of An agency which has been created to deal with particular subject matter will be
subject matter terminated on the destruction of that subject matter.
Exercise 2
Provide the amount of Interest in following agency which are coupled with interest
Case-1 Ravi lends 1,00,000 to Namit. At the time of Recovery, Namit refused to pay, however agreed to
transfer his Car to Ravi and authorized him to sell it off to recover his dues.
Answer:-……………………………………………………………………………………………………….
Case-2 Suppose in above case, Ravi was a Car dealer and he also demanded a commission which he
normally charged as Dealer in addition to his dues.
Answer:-……………………………………………………………………………………………………….
14.9 CIRCUMSTANCES WHERE AGENT CAN BE HELD RESPONSIBLE PERSONALLY

1. Where the principal is a Foreign Principal
2. In Case of Undisclosed Principal
3. In Case of Incompetent Principal
4. In Case of Principal not in Existence
5. In Case of Acts not Ratified
6. In Case of Acts in his Own Name
7. In Case of Express Agreement
8. In case of Custom or Usage of Trade
Exercise 2A
Discuss as to who would be liable (out of Principal and Agent) in following cases
1. Where Inspite of Instruction from Principal, Agent Still purchased the goods in his own name
Answer:-…………………………………………………………………………………………………
2. Where it was expressly provided in agreement that Principal would have no liability
Answer:-…………………………………………………………………………………………………
3. Where Agent has done some work which Principal Refused to Ratify
Answer:-…………………………………………………………………………………………………
4. Where Agent is working on behalf of Principal who is Incompetent to Contract
Answer:-…………………………………………………………………………………………………
5. Where it was agreed between Principal and agent that, Agent Would not disclose the name of Principal
and Agent would deal with 3rd Party as a Principal
Answer:-…………………………………………………………………………………………………
14.10 POSITION OF PRINCIPAL IN RELATION TO THIRD PARTY
(i) Liability of the The principal will be responsible further acts and contracts of agent with third party
principal for the
acts with in an
authority of agent:
(ii) Liability of the  Where an agent does acts, some of them fall within the scope of authority and
principal when others are beyond the scope.
agent exceeds  If the acts within and beyond the scope of authority can be separated, the
authority principal will be bound by those acts which are within the scope of authority of
the agent.
 if the acts cannot be separated, the principal will not be bound by such acts and
he is entitled to repudiate all acts done within or beyond the scope of agent's
authority
176 Theory Module 1
Exercise 3
Mannu, instructed Suraj to procure an insurance on the ship. Suraj procures insurance on the ship
as well as cargo. State the legal position in each of the following alternative cases:
Case (a) If two separate insurance policies are issued viz one for ship and another for cargo.
Answer:-……………………………………………………………………………………………………
Case (b) If one comprehensive insurance policy is issued for both ship and cargo.
Answer:-………………………………………………………………………………………………………
Chapter 15
CONTRACT OF BAILMENT
Synopsis
15.1 Definition: Bailment [Section 148] 177
15.2 Essential of Valid Bailment Contract [Section 148] 178
15.3 Classification of Bailment 178
15.4 Duties of Bailor 178
15.5 Duties of Bailee 179
15.6 Right of Bailor 180
15.7 Right of Bailee 180
15.8 Finder of Goods 181
15.9 Termination of Bailment 182
15.10 Definition of Pledge [Section 172] 182
15.11 Right of Pawnor [Section 175] 183
15.12 Pledges by Non-Owner 184
15.13 Difference between Contract of Bailment and Pledge 184
15.1 DEFINITION: BAILMENT [Section 148]
1. Meaning  Delivery of goods by one person to another

 For some purpose
 Upon the condition that
 They shall be returned or disposed of
 According to the directions of person delivering them
2. Parties to the Bailor Person delivering the goods is called the 'Bailor'
Bailment Contract
Bailee Person to whom goods are delivered is called the 'Bailee'
3. Different (1) Delivery of goods by one person to another to be held for the bailor’s use.
examples of (2) Goods given to a friend for his own use without any charge.
Bailment
(3) Hiring of goods.
(4) Delivering goods to a creditor to serve as security for a loan.
(5) Delivering goods for repair with or without remuneration
(6) Delivering goods for carriage.
178 Theory Module 1
15.2 ESSENTIAL OF VALID BAILMENT CONTRACT [Section 148]
1. Contract May be either express or implied.
2 Delivery of Goods  The essence of bailment is delivery of goods by one person to another for some
temporary purpose.
 Actual Delivery: When goods are physically handed over to the bailee by
the bailor.
 Constructive Delivery: Where delivery is made by doing anything that has
the effect of putting goods in the possession of the bailee or of any person
authorized to hold them on his behalf (including Bailor)
3. Purpose  Goods are delivered for some purpose.

 Purpose for which the goods are delivered is usually in the contemplation of
both the bailor and the bailee the same can either be express or implied
4. Return of the Goods which form the subject matter of the bailment should be returned to the
goods bailor or disposed of according to the directions of bailor, after the accomplishment
of purpose or after the expiry of period of bailment.
15.3 CLASSIFICATION OF BAILMENT
1. Gratuitous It is a contract of bailment where no consideration passes between the bailor and
Bailment bailee
2. Non-Gratuitous It is a contract of bailment where some consideration passes between the bailor and
Bailment bailee
15.4 DUTIES OF BAILOR
1. Duty to disclose In case of gratuitous bailment: The bailor is bound to disclose to the bailee faults
faults in the goods in the goods bailed, of which the bailor is aware and if he does not make such
[Section 150] disclosure, he is responsible for damage arising to the bailee directly from such
fault.
In case of non-gratuitous bailment: If the goods are bailed for hire, the bailor is
responsible for such damage, whether he was or was not aware of the existence of
such faults in the goods bailed
Sometimes, the goods bailed are of dangerous nature (e.g., explosives). In such
cases it is the duty of the bailor to disclose the nature of goods.
2. Duty to bear In case of gratuitous bailment:- The bailor must repay to the bailee all necessary
expenses expenses incurred by bailee for the purpose of the bailment.
[Section 158] In case of non-gratuitous bailment:-The bailor is liable for only extra-ordinary
expenses.
3. Duty to It is the duty of the bailor to indemnify the bailee, for any loss suffered by bailee
indemnify the due to the fact that bailor’s title was defective.
bailee for defective
title: [Section 164]
Chap. 19 Contract of Bailment 179
4. Duty to receive  It is the duty of the bailor that when the bailee, returns the goods to him, the
back the goods bailor should receive them.
[Section 164]  If the bailor, without any reasonable reason, refuses to take the goods back, he
is liable to pay the bailee all necessary and incidental expenses, which the
bailee might have incurred in keeping the goods safely.
5. To compensate In case bailment was gratuitous, bailor must compensate the bailee for the loss or
bailee for loss for damage suffered to him consequent to pre mature termination of bailment.
pre mature
termination
[Section 159]
15.5 DUTIES OF BAILEE
1. To take care of  To take care of the goods bailed to him as a man of ordinary prudence would
the goods bailed take of his own.
[Section 151]  Bailee shall not be responsible, for the loss, destruction or deterioration of the
thing bailed in case due care was exercised by him
Exception The bailee, in the absence of any special contract, is not responsible for the loss,
[Section 152] destruction or deterioration of the thing bailed, if he has taken reasonable care as
required under section 151.
2. Not to make As per Section 154, In case of unauthorized use of goods, bailee is liable to make
unauthorized use compensation to the bailor for any damage arising to the goods from or during such
of goods use of them.
[Section 153 & 154] As per Section 153, a contract of bailment is voidable at the option of the bailor, if
the bailee does not use the goods according to the terms and conditions of bailment.
3. Not to mix (a) If the bailee, with the consent of the bailor, mixes the goods of the bailor
bailer’s goods with with his own goods, the bailor and the bailee shall proportionate interest.
his own goods. [Section 155]
(b)  If the bailee, without the consent of the bailor, mixes the goods of the
bailor with his own goods, and the goods can be separated or divided,
the property in the goods remains in the parties respectively;
 But the bailee is required to bear the expenses- of separation or
division and he is also liable to bear any damages arising from the
mixture. [Section 156]
(c) If the bailee, without the consent of the bailor, mixes the goods of the
bailor with his own goods, in such a manner that it is impossible to separate
the goods bailed from the other goods and deliver them back, the bailor is
entitled to be compensated by the bailee for the loss of the goods [Section
157]
4. To return the  It is the duty of the bailee to return the goods bailed, without demand by bailor
goods bailed:  As soon as the time for which they were bailed has expired, Purpose, for which
[Section 160 & 161] they were bailed, has been accomplished.
180 Theory Module 1
If the bailee fails to do so:-
 He shall be responsible for any loss, destruction or deterioration of the goods
 Goods shall be at the risk of bailee.
5. To return any Bailee is bound to deliver to the bailor, any increase or profit which may have
accretion to the accrued from the goods bailed.
goods bailed:
[Section 163]
6. Duty not to set Bailee should not set up his own title or the title of a third party on the goods bailed
up adverse title to him.
15.5A RIGHTS OF BAILOR AND BAILEE AGAINST ANY WRONG DOER (THIRD PARTY)
Suit by bailor & bailee If a third person wrongfully deprives the bailee of the use or possession of the
against wrong doers goods bailed, or does them any injury, the bailee is entitled to use such remedies
[Section 180] as the owner might have used in the like case if no bailment had been made; and
either the bailor or the bailee may bring a suit against a third person for such
deprivation or injury.
Apportionment of Whatever is obtained by way of relief or compensation in any such suit shall, as
relief or compensation between the bailor and the bailee, be dealt with according to their respective
obtained by such suits interests
[Section 181]
15.6 RIGHT OF BAILOR
1. Terminate the The bailor has a right to terminate the contract of bailment if the bailee does any
bailment [Section 153] act which is inconsistent with the conditions of the bailment.
2. To demand return In case of gratuitous bailment of goods, the bailor can demand back the goods at
of goods [Section 159] any time even though the goods were bailed for a specified time or purpose.
3. To claim increase or Bailee is bound to deliver to the bailor, any increase or profit which may have
profit from goods accrued from the goods bailed.
bailed
4. To claim If any damage is caused to the goods bailed because of the unauthorized use of
compensation the goods, the bailor has a right to claim compensation from the bailee.
[Section 180]
15.7 RIGHT OF BAILEE
1. Deliver goods to If the goods are owned and bailed by more than one person, the bailee has a
anyone of the joint right, to delivery back the goods to anyone of the joint owners.
bailers
2. Compensation If the title of bailor is defective and the bailee and consequent to this bailee has
[Section 166] suffered some losses, he has a right to get indemnity for such loss from bailor
3. Right to Recover The bailee has a right to be indemnified in case he suffers any loss because of
Loss in Case of bailer’s refusal to take the goods back.
Bailor's Refusal to
take the Goods Back
4. Rights against any In case any third person

injury to goods  wrongfully deprives the bailee of the use or
 deprive him from possession of the goods bailed, or
 causes any injury to the goods bailed,
The bailee is entitled to use such remedies as the owner might have used in the
like case if no bailment had been made.
5. Right of Lien The bailee has a right to claim his lawful charges and in case bailor refuses to
[Section 170] pay it, bailee is entitled to retain the goods until the charges due in respect of
those goods are paid.
Types of Lien
(a) Particular Lien A particular lien is a right to retain only those goods in respect of which some
[Section 170] charges are due.
(b) General Lien  General lien is a right to retain all the goods as a security for the general
[Section 171] balance of account until the full satisfaction of the claims due whether in
respect of those goods or other goods.
 The general lien is available to other persons only when there is an express
contract to that effect.
 Generally, general lien is available only to bankers, factors, wharfinger,
attorneys of a High Court (only for non-payment of their professional fees)
and policy brokers.
Particular lien General lien

It is available against those goods in respect of It is available against all goods whether in respect of
which some charges are due. which claims are due or not.
It is available only to specific bailee like bankers,
It is available to every bailee factors, Wharfinger’s, attorneys of High Court and
policy brokers.
It is available only when some service involving It is available even when no such service has been
the exercise of labour or skill has been rendered. rendered.
A general lien is not automatic but is recognized
It is automatic through on agreement. It is exercised by the bailee only
by name
15.8 FINDER OF GOODS
Rights of a Finder
l. Right of lien: A finder of goods has the right to keep the goods in his possession till he is paid
[Section 168] his expenses.
182 Theory Module 1
2. Right to recover Where the true owner of goods has declared some reward for the return of lost
reward: [Section 168] goods, the finder can sue the owner for such reward.
3. Right of sale The finder though has no right to sell the goods found in the normal course,
[Section 169] however, he may sell the goods if the real owner cannot be found with
reasonable efforts or if the owner refuses to pay the lawful charges subject to the
following conditions:
(a) when the article is in danger of perishing and losing the greater part of the
value or
(b) when the lawful charges of the finder amounts to two-third or more of the
value of the article found.
15.9 TERMINATION OF BAILMENT
1. Expiry of Fixed On the expiry of the fixed period

Period
2. Fulfillment of On the accomplishment of the specified purpose.

Purpose
3. Unauthorized Usage Unauthorized use of goods by bailee
4. Termination of A gratuitous bailment may be terminated any time

Gratuitous Bailment
5. By Death A gratuitous bailment terminates by the death of either the bailor or the bailee
6. By Notice [Section (a) Where the bailee acts in a manner which is inconsistent with the terms of the
159] bailment, the bailor can always terminate the contract of bailment by giving
a notice to the bailee.
(b) A gratuitous bailment can be terminated by the bailor at any time by giving a
notice to the bailee. However, the termination should not cause loss to the
bailee in excess of the benefit derived by him.
In case the loss exceeds the benefit derived by the bailee, the bailor must
compensate the bailee for such a loss [Section 159].
15.10 DEFINITION OF PLEDGE [Section 172]
As per the provisions of Section 172 of Indian Contract Act, 1872

The bailment of goods as security for payment of a debt or performance of a promise is called “pledge”.
The bailor is in this case called the “pawnor”.
The bailee is called the “pawnee”.
Features of Pleadge - Since Pledge is a special kind of bailment, all the essential of bailment are also
essentials of Pledge. Apart from that, the characteristics of the pledge are:
(1) There shall be a bailment of security against payment or performance of the promise.
(2) The subject matter of pledge is goods.
(3) Goods pledged for shall be in existence
(4) There shall be delivery of goods from pledger to pledgee.
Rights of Pawnee
1. Right of lien: This right can be exercise until:—

[section 173]  Performance of the promise is fulfilled or debt has been satisfied
 Interest due on the debt has been re paid
 All necessary expenses incurred by him with respect to the possession has
been repaid
2. Right to receive The Pawnee can recover from the pawner extraordinary expenses for the
extraordinary preservation of the goods pledged.
expenses incurred:
[section 175]
3. Rights where In case of default by the pawnor, Pawnee can exercise any of the following
pawnor default rights:
(i) He can sue the pawnor upon the default in redemption of the debt or
performance of promise; or
(ii) Pawnee can sell the things pledged on giving the pawnor reasonable notice
of sale.
In case, sale does not fully meet the amount of the debt, Pawnee can proceed for
the balance. If, on the other hand, there is any surplus that has to be accounted
for to the pawnor.
A reasonable notice must be given to pawnor prior to any such sales so that:
(a) The pawnor may meet his obligation as a last chance;
(b) He can supervise the sale to see that it fetches the right price.
15.11 RIGHT OF PAWNOR [Section 175]
1. Right to redeem The pawnor has a right to take back the goods pledged on repayment of the debt
goods pledged with interest and other charges
2. Right to notice in The pawnor has a right to receive a reasonable notice in case the Pawnee intends
case of sale by to sell. Any non compliance thereof by Pawnee would entitle the pawnor to claim
Pawnee damages from Pawnee.
3. Right to surplus In case of sale, the pawnor is entitled to receive from the Pawnee any surplus that
may remain after satisfaction of debt.
4. Right to accretion
5. Right to If any loss is caused to the goods because of mishandling or negligence on the
compensation part of the Pawnee, the pawnor can recover the same.
184 Theory Module 1
15.12 PLEDGES BY NON-OWNER
1. Pledge by a Any pledge made by him shall be valid, provided following conditions are
mercantile agent: satisfied:—
[Section 178]
A He must be in possession either of the goods or the documents of title to
goods,
B Such possession must be with the consent of the owner.
C The pawnor must act in good faith; and
D The Pawnee should have no notice of the pawnor's defect of title, if any.
2. Pledge by person Where a person obtains possession of goods under a Voidable contract the pledge
in possession under a created by him is valid provided:
Voidable contract (a) The contract has not been rescinded before the contract of pledge,
[Section 178A]
and
(b) the Pawnee acts in good faith
3. Pledge by Pawnee will get a valid title provided he acted in good faith
co-owner in
possession
4. Pledge where Where a person pledges goods in which he has only a limited interest i.e. pawnor
pawnor has only a is not the absolute owner of goods, the pledge is valid to the extent of that
limited interest interest.
[Section 179]
5. Pledge by seller or A seller, in whose possession, the goods have been left after sale or a buyer who
buyer in possession with the consent of the seller, obtains possession of the goods, before sale, can
make a valid pledge, provided the pawnee acts in good faith and he has no
knowledge of the defect in title of the pawnor.
15.13 DIFFERENCE BETWEEN CONTRACT OF BAILMENT AND PLEDGE
Basis of Difference Contract of Bailment Contract of Pledge
1. Purpose Bailment might be for any purpose Pledge means a bailment for some
specific purpose i.e. as security for
payment of debt
2. Usage of goods Bailee is entitled to use the goods as Pawnee cannot use the goods pledged
per the terms of Bailment
3. Right to sell Bailee can either retain the goods or he After providing a due notice pawnee has a
can sue the bailor for his dues right to sell them
4. Consideration The bailment may be made for Pledge is always made for a
consideration or without consideration. consideration.
Chapter 16
CONTRACT OF INDEMNITY
Synopsis
16.1 Meaning of Indemnity [Section 124] 185
16.2 Parties under Indemnity Contract 185
16.3 Characteristics of Indemnity 185
16.4 Rights of Indemnity Holder [Section 125] 186
16.5 When does the Liability of Indemnifier Arise? 186
16.6 Contract of Guarantee [Section 126] 187
16.7 Parties under the Contract of Guarantee 187
16.8 Essential Characteristics of a Contract Of Guarantee 187
16.9 Difference Between Contract of Indemnity and Contract of Guarantee 188
16.10 Continuing Guarantee - Meaning and its Revocation 188
16.11 Nature and Extent of Surety's Liability [Section 128] 189
16.12 Rights of Surety 190
16.13 Discharge of Surety [Section 130 to 144] 190
16.1 MEANING OF INDEMNITY [Section 124]
Meaning According to section 124 of Indian contract Act, "a contract of indemnity is a,
contract by which one party promises to save the other from loss caused to him
either by the conduct of the promisor himself or by the conduct of any third party.”
16.2 PARTIES UNDER INDEMNITY CONTRACT
Indemnifier A party who promise to indemnify the loss
Indemnity Holder A party whose losses are made good by indemnifier
16.3 CHARACTERISTICS OF INDEMNITY
1. Valid Contract A contract of indemnity is a contract, thus it must satisfy all essential conditions of
a valid contract.
2. It also include It not only includes express promise but also an implied promise for compensating
implied promise losses.
3. Promise of A contract of indemnity is made primarily for compensating losses of another party
Compensation which may be caused to him
 either by the conduct of party or
 by any event or accident
 Action of any other person
186 Theory Module 1
Exercise 1
Question 1: Decide About the following Indemnity Contracts

Case 1: A Induces B to attend a particular lecture and if he could not understand it , he can get the entire
fees refunded from A
Answer:………………………………………………………………………………………………………
Case 2: A lecturer himself induces the students to attend his lecture and if they could not understand he will
re-imburse their entire fees
Answer: ……………………………………………………………………………………………………
Case 3: An insurance company agreed with A that incase of any loss to his property they will compensate
him for all losses
Answer: ………………………………………………………………………………………………………
Case 4: An insurance company agreed with Ram that incase of his death, they will compensate his family
Answer: ……………………………………………………………………………………………………
Quest 2 X asks Y to beat Z and promises to indemnify Y against the consequences. Y beats Z and
is fined `1,000. Can Y claim `1,000 from X?
Answer
16.4 RIGHTS OF INDEMNITY HOLDER [Section 125]
1. Right to recover An indemnity holder is entitled to recover the amount of damage which he has been
damages compelled to pay to another party in a suit to which contract of indemnity is
applicable.
2. Right to recover An indemnity holder is also entitled to claim all costs which he has incurred for
costs defending himself in a suit to which the promise of indemnity is applicable.
3. Right to recover In a contract of indemnity if the indemnity holder has made any payment to another
other payments party on the compromise of that suit to which contract of indemnity is applicable, he
is entitled to recover such payment from the indemnifier provided:—
 Indemnity holder has acted as a person of reasonable prudence and has
comply with the order of indemnifier
 Such compromise has been allowed by the indemnifier.
16.5 WHEN DOES THE LIABILITY OF INDEMNIFIER ARISE?
When As soon as the liability of indemnity holder arises and becomes ascertain, he may
call upon the indemnifier to protect him from losses.
Chap. 16 Contract of Indemnity 187
16.6 CONTRACT OF GUARANTEE [Section 126]
Meaning Meaning of Guarantee Contract:-According to section 126 of this Act,

 "A contract of guarantee is a contract
 to perform the promise or discharge the liability
 Of third person in case of his default".
16.7 PARTIES UNDER THE CONTRACT OF GUARANTEE
1. Principal Debtor A person who is primarily liable to pay debt or discharge obligation
2. Surety A person who takes responsibility of paying the obligation in case promisor fails to
pay
3. Creditor A person to whom the principal debtor is liable to pay and surety gives guarantee
16.8 ESSENTIAL CHARACTERISTICS OF A CONTRACT OF GUARANTEE
1. Essentials of a The contract of guarantee must possess all essentials of a valid contract.
valid contract
2. Exceptions 1 Principal debtor need not be competent to contract. In case the principal
debtor is incompetent, the surety would be regarded as the principal debtor
and would be personally liable to pay.
2 Consideration received by the principal debtor is a sufficient consideration

to the surety for giving the guarantee
3. Concurrence of In a contract of guarantee concurrence of all three parties to a contract of guarantee

the party is essential e.g. in case, if some one becomes surety to the creditor without the
consent of principal debtor, the contract is not enforceable.
4. Primary liability In a contract of guarantee there is a primary liability on the principal debtor to
of someone repay or to discharge obligation.
5. Form of a May be made in writing or by the words of mouth.

contract
6. No involvement of Guarantee obtained by creditor by means of misrepresentation is not valid.

misrepresentation
[Section 142 & 143]
Exercise 2
Question 1-HARI sells material to NAMIT. Decide whether the agreement of guarantee valid in following
cases:
Case (a): If AJAY agrees to pay for the goods in default of NAMIT.
Answer…………………………………………………………………………………………………………
188 Theory Module 1
Exercise 2
Case (b): If AJAY requests HARI to allow a credit period of 1 year to NAMIT and in lieu promises that, he
will pay for the goods if NAMIT defaults. HARI agrees.
Answer…………………………………………………………………………………………………………
Question 2: HARI agrees to sell goods to NAMIT on the guarantee of AJAY for payment of price in event
of default by NAMIT. Decide whether the agreement of guarantee valid in following cases:
Case (a): If HARI is a minor
Solution:- ……………………………………………………………………………………………………
Case (b): If AJAY is a minor
Solution:- ……………………………………………………………………………………………………
Case (c): If NAMIT is a minor
Solution:- ……………………………………………………………………………………………………
16.9 DIFFERENCE BETWEEN CONTRACT OF INDEMNITY AND CONTRACT OF

GUARANTEE
Basis of Difference Contract of Indemnity Contract of Guarantee
1. Meaning It is a contract made for It is a contract, to perform the

Compensating losses of another party caused promise or discharge liability of
to him either by the conduct of the parties or third party in case of his default.
from an event or accident.
2. Number of There are two parties in a contract namely In a contract of guarantee, there are
Parties indemnity holder and indemnifier. three parties, the principal debtor,
creditor and the surety
3. Number of In indemnity there is only one contract that There are three contracts in
Contract is between indemnity holder and indemnifier guarantee.
One between principal debtor and
creditor, another between surely and
creditor and third one between
principal debtor and surety.
4. Nature of Under contract of indemnity, the liability of In a contract of guarantee, the

liability indemnifier who makes promise to liability of the surety is secondary in
compensate the loss, is primary in nature nature
16.10 CONTINUING GUARANTEE - Meaning and its Revocation
Meaning of A guarantee which extend to series of transactions is called as continuing

Continuing guarantee.
Guarantee
[Section 129]
Circumstances where it can be revoked:
By notice of Continuing guarantee may at any time be revoked by the surety for all future
Revocation transactions by giving notice of revocation to the creditor. In such case, the surety
[Section 130] will be liable for all those transactions which have taken place till that notice.
By death of surety A continuing guarantee may also be revoked in case of death of the surety.
[Section 131] However for the series completed prior to the death of surety, the estate of surety
will be liable even without giving a notice of death to the creditor.
Special Case (i) A guarantees payment to a grocer to the amount of `2,000 for any grocery
that is being purchased time to time by his wife. Grocer supplies more than
the value of `2000 which is paid by the A. Afterwards grocer again supplies
the grocery to the value of `8,000. State the liability of A.
(ii) X guarantees payment to Y of the price of the four laptops sets to be sold by
Y to X and to be paid for in a month. Y delivers the sets to X. X pays for
them. Later on Y delivers three more sets to X. State the liability of X.
Hint (i) According to Section 129 of the Indian Contract Act, 1872 a guarantee which
extends to a series of transactions is called a ‘continuing guarantee’. The liability of
the surety in such a guarantee continues until the performance or discharge of all
the transactions entered into or the guarantee is withdrawn.
In the given case guarantee given by A was a continuing guarantee and thus he is
accordingly liable to grocer to the extent of `2000.
(ii) In this case, the guarantee given by X is not a continuing but infact it is a
specific guarantee. Therefore in the given case X is not liable for the price of the
three sets which are supplied later to Y.
16.11 NATURE AND EXTENT OF SURETY'S LIABILITY [Section 128]
1. Liability of Liability of the surety is co-extensive with that of the principal debtor. He is liable
surety is for those sums that the principal debtor is liable for. His liability cannot be more
'co-extensive' than that of principal debtor.
2. Liability of the In a contract of guarantee, the principal debtor is primarily liable to pay or
surety is secondary discharge liability. It is only at his default, the liability of the surety arises.
3. Liability is In case of continuing guarantee, the liability of the surety extends to a series of
continuous in transaction over a period of time.
nature
4. Liability of the Once the principal debtor commits default, immediately the creditor may proceed
surety is immediate against the surety. In is not necessary that he should first sue the principal debtor or
in nature give notice to the principal debtors.
5. Surety may limit Surety has a right to limit his liability. He can do it by declaring it expressly at the
his liability time of making a contract of guarantee. In such a case, irrespective of all other
factors, the liability of the surety will not go beyond that limit as declared by him.
6. Liability of the Liability of the surety is conditional in nature. It will arise only when the principal
surety is debtor commits default.
conditional
190 Theory Module 1
16.12 RIGHTS OF SURETY
A. Rights against principal debtor
1.Right of If the principal debtor commits default, and the surety pays the debt to the creditor,
subrogation: the surety steps in to the shoes of creditor. The surety will avails all the rights
[Section 140] which the creditor has against the principal debtor.
2.Right of In a contract of guarantee, there is an implied promise by the principal debtor that
indemnity: any loss caused to surety will be indemnified by the principal debtor. Therefore
[Section 145] surety is entitled to recover entire sum which he has rightfully paid under the
contract of guarantee.
B. Rights of surety against the creditor:
1.Right to claim Where the principal debtor has given securities in addition of guarantee, of the
securities: debt. In case he fails to repay and the surety becomes liable to pay. The surety is
[Section 141] entitled to those securities which are held by the creditor.
 Even if surety has no knowledge of such security, still above entitlement
would exist.
 If the creditor loses or without the consent of surety, parts with, any
security, the surety is discharged from his liability to that extent.
2.Right of set off If the principal debtor has got any cross claim against the creditor, the surety
becomes entitled to set off that claim against the creditor.
3. Right to share If there has been some reduction in the amount of debt being guarantee by the
reduction surety. The surety is entitled to such reduction.
C. Rights against co-sureties
1. Right of Where two or more persons stand sureties for the same debt either jointly or
contribution - severally, the co-sureties are liable to pay equal share of the whole debt.
[Section 146 & 147]
2. Co-sureties Co-security may fix up the limit on their respective liability. Even then they will be
giving guarantee liable in equal ratio subject to the maximum of the amount of guarantee given by
for different them.
amount
3. Right to share Where any co-security has received any benefit, all other co-securities are entitled
security benefit to share benefit out of that.
16.13 DISCHARGE OF SURETY [Section 130 to 144]
1. By Notice of In a contract of continuing guarantee the surety by giving notice to the creditor may
revocation: revoke the contract for future transactions.
[Section 130]
2. By death of A contract of continuing guarantee is also revoked at the death of the surety for the
surety: future transaction.
[Section 131]
3. By Novations By mutual consent of all parties, original contract of guarantee may be replaced by
new contract. In such case the surely will be discharged from his liability in the
original contract.
4. By variation in Any variation of a contract of guarantee by the creditor and principal debtor
the terms of without consent of the surety will discharge him from his liability as to transaction
contract: subsequent to such change.
[Section 133]
5. By release or The liability of the surety is secondary in nature. Thus, if the principal debtor is
discharge of released or discharged from his liability, the liability of the surety will also come to
principal debtor: an end.
[Section 134]
6. By composition In case of any composition between the creditor and principal debtor whereby the
with principal creditor extends time of payment or makes promise not to sue the principal debtor
debtor: in case of his default. The surety will be discharged from his liability in that
[Section 135] contract of guarantee.
7. By loss of In case the creditor loses security or even a part with it without consent of the
security: surety, the surety will be discharged from his liability to that extent.
[Section 141]
Exercise 3
Case No. 1: A, B and C are sureties to D for a sum of `3,000 lend to E. E makes default in payment.
Answer: Liability of A Shall be ………………………………………………………………………………
Answer: Liability of B Shall be …………………………………………………………………………….
Answer: Liability of C Shall be ………………………………………………………………………………
Case No. 2: A, B and C as sureties for D, enter into three separate bonds, of different amounts-A for
`20,000, B for `40,000 and C for `10,000. Discuss the liability of A, B, C if D makes default to the extent
of (a) `30,000 (b) `90,000
Answer:
Liability If Default is `30,000 If Default is `90,000
A
Case 3: Ravi stand as Surety for Ajay in some loan transaction with Bank. Discuss the right of Surety in
following cases
1. At the time of Loan Ajay Mortgaged the property worth of `10.0 Lacs and availed a loan of
`50.0 Lacs. However without informing Ravi, Bank released the security of Ajay
Answer:-………………………………………………………………………………………..
192 Theory Module 1
2. Ajay helped the bank in recovery of some loan from one of its defaulter and consequent to which, he was
entitled to receive `1,00,000 as commission.
Answer:-………………………………………………………………………………………..
3. Ajay committed a default in Repayment of Loan and his o/s was `11.40 Lacs, Bank waive his right to
Recover `2.0 Lacs
Answer:-………………………………………………………………………………………..
Chapter 17
GENERAL CLAUSE ACT, 1897
Synopsis
17.1 Definitions [Section 3] 193
17.2 Coming into Operation of Enactments [Section 5] 195
17.3 Effect of Repeal [Section 6, 6A, 7 & 8] 195
17.4 Time & Distance [Section 9 to 13] 196
17.5 Power and Functionaries [Section 14 to 19] 197
17.6 Order, Rules, etc. [Section 20 to 24] 198
17.7 Miscellaneous [Section 25 to 30] 199
17.1 DEFINITIONS [SECTION 3]
1. Act "Act", used with reference to an offence or a civil wrong, shall include a series of
[Section 3(2)] acts, and words which refer to acts done extend also to illegal omissions,
2. Affidavit "Affidavit" shall include affirmation and declaration in the case of persons by law
[Section 3(3)] allowed to affirm or declare instead of swearing.
There are two important points derived from the above definition:
1. Affirmation and declaration,
2. In case of persons allowed affirming or declaring instead of swearing.
The above definition is inclusive in nature. It states that affidavit shall include
affirmation and declarations. This definition does not define affidavit. However, we
can understand this term in general parlance. Affidavit is a written statement
confirmed by oath or affirmation for use as evidence in Court or before any
authority.
3. Central Act "Central Act" shall means an Act of Parliament, and shall include—
[Section 3(7)] An Act of the Dominion Legislature or of the Indian Legislature passed before the
commencement of the Constitution, and
Act made before such commencement by the Governor General in Council or the
Governor General, acting in a legislature capacity.
4. Central "Central Government" shall,—

Government In relation to anything before the commencement of the Constitution, mean the
[Section 3(8)] Governor General or the Governor General in Council, as the case may be, and shall
include,—
1. in relation to functions entrusted, to the Government of a Province, the
Provincial Government acting within the scope of the authority given to it
194 Theory Module 1
2. In relation to the administration of a Chief Commissioner’s Province, the Chief
Commissioner acting within the scope of the authority given to him, and
In relation to anything done or to be done after the commencement of the
Constitution, mean the President, and shall include-
1. In relation to functions entrusted to the Government of a State, the State
Government acting within the scope of the authority given to it,
2. In relation to the administration of a Part C State (before the commencement of
the Constitution (Seventh Amendment) Act, 1956, the Chief Commissioner or
the Lieutenant - Governor or the Government of a neighboring State or other
authority acting within the scope of the authority given to him, and
3. In relation to the administration of a Union territory, the administrator thereof
acting within the scope of the authority given to him.
5. Commencement "Commencement" used with reference to an Act or Regulation, shall mean the day
[Section 3(13)] on which the Act or Regulation comes into force
Coming into force or entry into force (also called commencement) refers to the
process by which legislation; regulations, treaties and other legal instruments come
to have legal force and effect.
A Law cannot be said to be in force unless it is brought into operation by legislative
enactment, or by the exercise of authority by a delegate empowered to bring it into
operation. The theory of a statute being “in operation in a constitutional sense”
though it is not in fact in operation has no validity. [State of Orissa v
Chandrasekhar Singh Bhoi]
6. Enactment "Enactment" shall include a Regulation (as hereinafter defined) and any Regulation
[Section 2(19)] of the Bengal, Madras or Bombay Code, and shall also include any provision
contained in any Act or in any such Regulation as aforesaid.
7. Financial Year Financial year shall mean the year commencing on the first day of April.
[Section 3(21)] The term Year has been defined under Section 3(66), which means calendar year
which starts from January to December.
8. Good Faith A thing shall be deemed to be done in “good faith” where it is in fact done honestly,
[Section 3(22)] whether it is done negligently or not;
The question of good faith under the General Clauses Act is one of fact.
It is to determine with reference to the circumstances of each case.
Thus, anything done with due care and attention, which is not malafide is presumed
to have been done in good faith. For eg: An authority is not acting honestly where it
had a suspicion that there was something wrong and did not make further enquiries
The term “Good faith” has been defined differently in different enactments. This
definition of the good faith does not apply to that enactment which contains a
special definition of the term “good faith” and there the definition given in that
particular enactment has to be followed. This definition may be applied only if there
is nothing repugnant in subject or context, and if that is so, the definition is not
applicable.
9. Government ‘Government’ or ‘the Government’ shall include both the Central Government and
[Section 3(23)] State Government.
Chap. 17 General Clause Act, 1897 195
10. Government ‘Government securities’ shall mean securities of the Central Government or of any
Securities State Government, but in any Act or Regulation made before the commencement of
[Section 3(24)] the Constitution shall not include securities of the Government of any Part B state;
11. Immovable "Immovable property" shall include land, benefits to arise out of land, and things
Property attached to the earth, or permanently fastened to anything attached to the earth.
[Section 3(26)] It is an inclusive definition. It contains four elements:
(a) land,
(b) benefits to arise out of land,
(c) things attached to the earth and
(d) things permanently fastened to anything attached to the earth.
Where, in any enactment, the definition of immovable property is in the negative
and not exhaustive, the definition as given in the General Clauses Act will apply to
the expression given in that enactment.
Example 1: In Shantabai v State of Bombay, the Supreme Court pointed out that
trees must be regarded as immovable property because they are attached to or
rooted in the earth.
An agreement to convey forest produce like tendu leaves, timber bamboos etc., the
soil for making bricks, the right to build on and occupy the land for business
purposes and the right to grow new trees and to get leaves from trees that grow in
further are all included in the term immovable property
Example 2: Right of way to access from one place to another, may come within the
definition of Immovable property whereas to right to drain of water is not
immovable property. Any machinery fixed to the soil, standing crops can be held as
immovable property according to the General Clauses Act, 1897.
17.2 COMING INTO OPERATION OF ENACTMENTS [SECTION 5]
Date of operation Where any Central Act is not expressed to come into operation on particular day,
then it shall come into operation on the day on which it receives the assent.
In the case of a Central Act made before the commencement of the Constitution, of
the governor general, and in the case of an Act of Parliament, of the President.
Examples
17.3 EFFECT OF REPEAL [SECTION 6, 6A, 7 & 8]
Effect Where this Act, or any (Central Act) or Regulation made after the commencement
of this Act, repeals any enactment hitherto made or hereafter to be made, then,
unless a different intention appears, the repeal shall not-
 Revive anything not in force or existing at the time at which the repeal
takes effect, or
 Affect the previous operation of any enactment so repealed or anything
duly done or suffered thereunder, or
 Affect any right, privilege, obligation or liability acquired, accrued or
incurrent under any enactment so repealed, or
196 Theory Module 1
 Affect any penalty, forfeiture or punishment incurred in respect of any
offence committed against any enactment so repealed, or
 Affect any investigation, legal proceeding or remedy in respect of any such
right, privilege, obligation, liability, penalty, forfeiture or punishment as
aforesaid.
Repeal of Act Where any (Central Act) or Regulation made after the commencement of this Act
making textual repeals any enactment by which the text of any (Central Act) or Regulation was
amendment in Act amended by the express omission, insertion or substitution of any matter, then,
or Regulation unless a different intention appears, the repeal shall not affect the continuance of
[Section 6A] any such amendment made by the enactment so repealed and in operation at the
time of such repeal.
Revival of repealed In any (Central Act) or Regulations made after the commencement of this Act, it
enactments shall be necessary, for the purpose of reviving, either wholly or partially, any
[Section 7] enactment wholly or partially repealed, expressly to state that purpose.
This section applies also to all (Central Acts) made after the third day of January,
1968 and to all Regulations made on or after the fourteenth day of January, 1887.
Construction of (1) Where this Act, or any (Central Act) or regulation made after the
references to commencement of this Act, repeals and re-enacts, with or without notification, any
repealed provision of a former enactment, then references in any other enactment or in any
enactments instrument to the provision so repealed shall, unless a different intention appears, be
[Section 8] construed as references to the provision so re-enacted.
(Where before the fifteenth day of August, 1947, any Act of Parliament of the
United Kingdom repealed and re-enacted, with or without modification, any
provision of a former enactment, then references in any (Central Act) or in any
Regulation or instrument to the provision so repealed shall, unless a different
intention appears, be construed as reference to the provision so reenacted.)
17.4 TIME & DISTANCE [Section 9 to 13]
Commencement In any, (Central Act or Regulation made after the commencement of this Act, it shall
and termination be sufficient, for the purpose of excluding the first in a series of days or any other
of time period of time, to use the word ‘from”, "and", for the purpose of including the last in
[Section 9] a series of days or any other period of time, to use the word "to", This section applies
also to all (Central Acts) made after the third day of January, 186, and to all
Regulation made on after the fourteenth day of January, 1887.
Computation of Where, by any (Central Act) or regulation made after the commencement of this Act,
time any act or proceeding is directed to allowed to be done or taken in any Court or
[section 10] office on a certain day or within a prescribed period, then, if the Court or office is
closed on that day or that day or the last day of the prescribed period, the act or
proceeding shall be considered as done or taken in due time if it is done or taken on
the next day afterwards on which the Court or office is open.
Provided that nothing is this section shall apply to any act or proceeding to which the
(Indian Limitation Act, 1877 (15 of 1877), applies.
This section applies also to all (Central Acts) and Regulations made on or after the
fourteenth day of January 1887
Measurement of In the measurement of any distance, for the purpose of any (Central Act) or
distance Regulation made after the commencement of this Act, that distance shall, unless a
[Section 11] different intention appears, be measured in a straight line on a horizontal plane.
Duty to be taken Where, be any enactment now in force or hereafter to be in force, any duty of
prorata in customs or exercise, or in the nature thereof, is leviable on any given quantity, by
enactment weight, measure or value of any goods or merchandise, then a like duty is leviable
[Section 12] according to the same rate on any greater or less quantity.
Gender and In all (Central Acts) and Regulations, unless there is anything repugnant in the
number subject or context - Words importing the masculine gender shall be taken to include
[Section 13] females, and words in the singular shall include the plural, and vice versa.
17.5 POWER AND FUNCTIONARIES [SECTION 14 TO 19]

Powers conferred Where, By any (Central Act) or Regulation made after the commencement of this
to be exercisable Act, any power is conferred then (unless a different intention appears) that power
from time to time may be exercised from time to time as occasions requires.
[Section 14] This section applies also to all (Central Acts) and Regulations made on or after the
fourteenth day of January 1887.
Power to appoint Power to appoint to include power to appoint ex officio. Where, by any Central Act
to include power or Regulation, a power to appoint any person to fill any office or execute any
to appoint function is conferred, then, unless it is otherwise expressly provided, any such
ex-officio appointment, if it is made after the commencement of this Act, may be made either
[Section 15] by name or by virtue of office
Power to appoint Where, by any (Central Act) or Regulation, a power to make any appointment is
to include power conferred, then, unless a different intention appears, the authority having (for the
to suspend or time being) power to make the appointment shall also have power to suspend or
dismiss dismiss any person appointed (whether by itself or any other authority) in exercise of
[Section 16] that power.
Substitution of In any (Central Act) or Regulation made after the commencement of this Act, it shall
functionaries be sufficient, for the purpose of indicating the application of a law to every person or
[Section 17] number of persons for the time being executing the function of an office, to mention
the official title of the officer at present executing the functions, or that of the officer
by whom the functions are commonly executed.
This section applies also to all (Central Acts) made after the third day of January,
1868, and to all Regulations made on or after the fourteenth day of January, 1887.
Successors Successors.
[Section 18] (1) In any Central Act or Regulation made after the commencement of this Act, it
shall be sufficient, for the purpose of indicating the relation of a law to the successors
of any functionaries or of corporations having perpetual succession, to express its
relation to the functionaries or corporations.
Official chiefs and In any (Central Act) or Regulation made after the commencement of this Act, it shall
subordinates be sufficient, for the purpose of expressing that a law relative to the chief or superior
[Section 19] of an officer shall apply to the deputies or subordinates lawfully performing the
duties of that office in the place of their superior, to prescribe the duty of the
superior. This section applies also to all (Central Act) made after the third day of
January, 186, and to all Regulations made on or after the fourteenth day of January
1887.
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17.6 ORDER, RULES ETC [SECTION 20 TO 24]
Construction of Where, by any (Central Act) or Regulation, a power to issue any (notification), order,
notifications, etc., scheme, rule, form, or bye-law is conferred, then expressions used in the
issued under (notification), order, scheme, rule, form or bye-law, if it is made after the
enactments commencement of this Act, shall, unless there is anything repugnant in the subject or
[Section 20] context, have the same respective meaning as in the Act or Regulation conferring the
power.
Power to issue, to Where, by any (Central Act) or Regulations, a power to (issue notifications) orders,
include power to rules, or bye-laws is conferred, then that power includes a power, exercisable in the
add to, amend, like manner and subject to the like sanction and condition (if any), to add to, amend,
vary or rescind vary or rescind any (notifications), orders, rules or bye-laws so (issued).
notifications,
orders, rules, or
bye-laws
[Section 21]
Making of rules Where, by any (Central Act) or Regulation which is not to come into force
or bye-laws and immediately, on the passing thereof, a power is conferred to make rules or bye-laws,
issuing of orders or to issue orders with respect to the application of the Act or Regulation, or with
between passing respect to the establishment of any Court or office or the appointment of any Judge
and commence- or officer thereunder, or with respect to the person by whom, or the time when, or the
ment of enactment place where, or the manner in which, or the fees for which, anything is to be done
[Section 22] under the Act or Regulation, then that power may be exercised at any time after the
passing of the Act or Regulation, but rules, bye-laws or orders so make or issued
shall not take effect till the commencement of the Act or Regulation
Provisions Where, by any (Central Act) or Regulation, a power to make rules or bye-laws is
applicable to expressed to be given subject to the condition of the rules or bye-laws being made
making of rules or after previous publication, then the following provisions shall apply, namely:- The
bye-laws after authority having power to make the rules or bye-laws shall, before making them,
previous publish a draft of the proposed rules or bye-laws for the information of person likely
publication to be affected thereby.
[Section 23] The publication shall be made in such manner as that authority deems to be
sufficient, or, if the condition with respect to previous publication so requires, in
such manner as the (Government concerned) prescribed.
There shall be published with the draft a notice specifying a date on after which the
draft will be taken into consideration.
The authority having power to make the rules or bye-laws, and where the rules or
bye-laws are to be made with the sanction, approval or concurrence of another
authority, that authority also, shall consider any objection or suggestion which may
me received by the authority having power to make the rules or bye-laws from any
person with respect to the draft before the date so specified.
The publication in the (Official Gazette) of a rule or bye-law purporting to have been
made in exercise of a power to make rules or bye-laws after previous publication
shall be conclusive proof that the rule or bye-law has been duly made.
Continuation of Where any (Central Act) or Regulation, is after the commencement of this Act,
orders, etc., issued repealed and reenacted with or without modification, then, unless it is otherwise
under enactments expressly provided any (appointment notification) order, scheme, rule, form or bye-
repealed and law (made or) issued under the repealed Act or Regulation shall, so far as it is not
re-enacted inconsistent with the provisions re-enacted, continue in force and be deemed to have
[Section 24] been (made or) issued under the provision s so reenacted, unless and until it is
superseded by any (appointment, notification) order, scheme, rule, form or bye-law,
(made or) issued under the provisions so re-enacted (and when any (Central Act) or
Regulation, which, by a notification under Section 5 or 5A of the Scheduled Districts
Act, 1874 or any like law, has been extended to any local area, has, by a subsequent
notification, been withdrawn form the re-extended to such area or any part thereof,
the provision s of such Act or Regulations shall be deemed to have been repealed and
re-enacted in such area or part within the meaning of this Section.
17.7 MISCELLANEOUS [SECTION 25 TO 30]
Recovery of fines Sections 63 to 70 of the Indian Penal Code (45 of 1860) and the provision s of the
[Section 25] Code of Criminal Procedure (5 of 1898) for the time being in force in relation to the
issue and the execution of warrants for the levy of fines shall apply to all fines
imposed under any Act, Regulation, rule or bye-law, unless the Act, Regulation, rule
or bye-law contains and express provision to the contrary.
Provisions as to Where an act or omission constitutes an offence under two or more enactments, then
offences the offender shall be liable to be prosecuted and punished under either or any of
punishable under those enactments, but shall not be liable to be punished twice for the same offence.
two or more
enactments
[Section 26]
Meaning of Where any (Central Act) or Regulation made after the commencement of this Act
service by post authorizes of requires any document to be served by post, where the expression
[Section 27] "serve" or either of the expressions "give" or "send" or any other expression in used,
then, unless a different intention appears, the service shall be deemed to be effected
by properly addressing pre-paying and posting by registered post, a letter containing
the document, and unless the contrary is proved, to have been effected at the time at
which the letter would be delivered in the ordinary course of post.
Citation of (1) any (Central Act) or Regulation, and in any rule, bye-law, instrument or
enactments document, made under, or with reference to any such Act or Regulation, any
[Section 28] enactment may be cited by reference to the title or short title (if any) conferred
thereon or by reference to the number and year thereof, and any provision in an
enactment may be cited by reference to the section or sub-section of the enactment in
which the provision is contained.
Saving for The provisions of this Act respecting the construction of Acts, Regulations, rules or
previous bye-laws made after the commencement of this Act shall not affect the construction
enactment, rules of any Act, Regulation, rule or bye-law made before the commencement of this Act,
any bye-laws although the Act, Regulation, rule or bye-law is continued or amended by an Act,
[Section 29] Regulation, rule or bye-law made after the commencement of this Act.
Chapter 18
INTERPRETATION OF STATUTE
Synopsis
18.1 Introduction 200
18.2 Rules of Interpretation/Construction — (A) Primary Rules 202
18.3 Other (Secondary) Rules of Interpretation 205
18.4 Internal aids to Interpretation/Construction 206
18.5 External Aids to Interpretation/Construction 208
Construction Interpretation of Law
Drawing conclusion that lie beyond the direct Art of finding true sense of word expressed in
expression of words used statute (Act)
Example: Example:
Document should be executed- Now think beyond Contract may in writing –

the word used  Emails
 WhatsApp
 Chat
Thus, word writing shall be understood as per
curried scenario
Rules of Interpretation
Primary Rules – Secondary Rules –
1. Literal Construction 1. Effect of usage
2. Reasonable 2. Noscitur Sociis
3. Harmonious
4. Beneficial
5. Ejusdem Generis
6. Exceptional
18.1 INTRODUCTION
‘Statute’ ‘Statute’ generally means the laws and regulations of every sort without
considering from which source they emanate.
Normally, the term denotes an Act enacted by the legislative authority (e.g.
Parliament of India).
Chap. 18 Interpretation of Statute 201
The Constitution does not use the terms ‘statute’ though one finds the terms ‘law’
used at many places.
The terms ‘law’ is defined as including any ordinance, order, bye-law, rule,
regulation, notification, and the like. In short ‘statute’ signifies written law in
contradiction to unwritten law.
‘Document’ Generally understood, a document is a paper or other material thing giving

information, proof or evidence of anything.
For example, Section 3 of the Indian Evidence Act, 1872 states that ‘document’
means any matter expressed or described upon any substance by means of letters,
figures or marks or by more than one of those means, intended to be used, or which
may be used, for the purpose of recording that matter.
Section 3(18) of the General Clauses Act, 1897 states that the term ‘document’ shall
include any matter written, expressed or described upon any substance by means of
letters, figures or marks, or by more by than one of those means which is intended
to be used, or which may be used, for the purpose of recording this matter.
Elements of Documents
Matter—This is the first element. Its usage with the word “any” shows that the
definition of document is comprehensive.
Substance—Next element on which a mental or intellectual element comes to find
a permanent form.
Record—It must be certain mutual or mechanical device employed on the
substance. It must be by writing, expression or description
Means—This represents forth element by which such permanent form is acquired
and those can be letters, any figures, marks, symbols which can be used to
communicate between two persons.
Space for Drawing and example
‘Instrument’ It means a formal legal document which creates or confirms a right or records a
fact.
It is a formal writing of any kind, such as an agreement, deed, charter or record,
drawn up and executed in a technical form.
It also means a formal legal document having legal effect, either as creating liability
or as affording evidence of it.
Section 2(14) of the Indian Stamp Act, 1899 states that ‘instrument’ includes every
document by which any right or liability is or purports to be created, transferred,
extended, extinguished or recorded.
‘Deed’ The Legal Glossary defines ‘deed’ as an instrument in writing purporting to effect
some legal disposition.
Deeds are instruments though all instruments may not be deeds.
202 Theory Module 1
‘Interpretation’ ‘Interpretation’ is the process by which the real meaning of an Act and the intention
of the legislature in enacting it is ascertained.
Interpretation may be either ‘legal’ or ‘doctrinal’.
It is ‘legal’ when there is an actual rule of law which binds the Judge to place a
certain interpretation of the statute.
It is ‘doctrinal’ when its purpose is to discover ‘real’ and ‘true’ meaning of the
statute.
‘Legal’ interpretation is sub-divided into ‘authentic’ and ‘usual’.
It is ‘authentic’ when rule of interpretation is derived from the legislator himself;
It is ‘usual’ when it comes from some other source such as custom or case law.
‘Doctrinal’ interpretation may again be divided into ‘grammatical’ & ‘logical’.
It is ‘grammatical’ when the court applies only the ordinary rules of speech for
finding out the meaning of the words used in the statute.
On the other hand, when the court goes beyond the words and tries to discover the
intention of the statute in some other way, then it is said resort to what is called a
‘logical’ interpretation.
Space for Chart
18.2 RULES OF INTERPRETATION/CONSTRUCTION-(A) PRIMARY RULES
Rule of Literal Sometimes, occasions may arise when a choice has to be made between two
Construction interpretations – one narrower and the other wider or bolder.
In such a situation, if the narrower interpretation would fail to achieve the manifest
purpose of the legislation, one should rather adopt the wider one.
For example, when we talk of disclosure of the nature of the concern or interest’
of a director or the manager of a company in the subject-matter of a proposed
motion, we cannot confine the words to Pecuniary Concern or Interest alone but
we have to include any concern or interest whatever.
Here a restricted narrow interpretation would defeat the very purpose of the
disclosure.
The phrase and sentences are to be construed according to the rules of grammar.
Example E.g: - As per Sec 135, Co. Prescribed shall undertake 1 or more of activities as
prescribed in sched-VII
As per sched-VII, co. may engage itself in promoting education
Now education shall be given wider interpretation & includes Traffic education,
Health education
Rule of Reasonable According to this Rule, the words of a statute must be construed so as to lead to a
Construction: sensible meaning.
Generally the words or phrases of a statute are to be given their ordinary meaning.
Thus, if the Court finds that giving a plain meaning to the words will not be a fair
or reasonable construction, it becomes the duty of the court to depart from the
dictionary meaning and adopt the construction which will advance the remedy and
suppress the mischief
Example As per Sec 105 of c. Act, 2013

Any member of co entitled to attend & vote at meeting of Co. shall be entitled to
appoint another person as hid proxy
:- Proxy so appointed shall not have any right to speak at meeting
:- Now by following the rule use should depart from ordinary meaning of word
“Speak” & should adopt more sensible meaning, whereby it means “Proxy
shall have no right to Participate in discussion of meeting”
Rule of When there is doubt about the meaning of the words of a statute, these should be
Harmonious understood in the sense in which they harmonise with the subject of the enactment
Construction and the object which the legislature had in view.
Where there are in an enactment two or more provisions which cannot be
reconciled with each other, they should be so interpreted, wherever possible, as to
give effect to all of them.
This is what is known as the Rule of Harmonious Construction.
Let us take an example: according to section 96 of the Companies Act, there must
be not more than fifteen months between two consecutive annual general meetings
of a company. Act further requires the Board of directors to lay at every annual
general meeting of a company a financial statement, within six months from end of
Financial year.
From this, we can easily make out that except the first annual general meeting
which is subject to different rules, an annual general meeting is to be held subject to
the following rules:
(i) It must be held not later than 15 months from the date of the previous
general meeting.
(ii) Further, it must be held later than six months of the date of the balance
sheet.
Rule of Beneficial Where the language used in a statute is capable of more than one interpretation, the
Construction or the most firmly established rule for construction is the principle laid down in the
Heydon’s Rule Heydon’s case
Or The rule which is also known as ‘purposive construction’ or mischieve rule,
Golden Rule enables consideration of four matters in construing an Act:
Or Purposive (1) what was the law before the making of the Act;
Construction (2) what was the mischief or defect for which the law did not provide;
Or (3) what is the remedy that the Act has provided; and
Mischief Rule (4) what is the reason for the remedy. The rule then directs that the courts must
adopt that construction which ‘shall suppress the mischief and advance the
remedy’.
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Example Acc. To Section 2(d) of Prize competition Act, 1955 Prize Competition has
been defined as
Any Competition in which Prize are offered for solution of any Puzzle based upon
building – up arrangemed/combination/permutation of letters, words or figure
Now the issue arises as to whether this Act applies to competition which involve
substantial skill & are not in nature of gambling.
Supreme Court, after referring to the Previous stated Law & mischief that
continued under that law held that, “Having regard to history of legislation we are
of the opinion that the Competition which are sought to be controlled by the Act are
only those Competitions in which success will not depend upon substantial skill
[Chamarbaugwalla v Union of India]
Rule of Exceptional (a) The Common Sense Rule: Although full effect must be given to every word,
Construction however if no sensible meaning can be fixed to a word or phrase, or if it would
defeat the real object of the enactment, it should be eliminated.
They ought to be construed ‘utres magis valeat quampereat’ meaning thereby
that it is better for a thing to have effect than to be made void.
(b) Conjunctive and Disjunctive Words ‘or’ ‘and’: The word ‘or’ is normally
disjunctive whereas ‘and’ is normally conjunctive. However, at times they are
read as vice versa to give effect to the manifest intention of the legislature.
E.g of “&”/“or”
As per Section 439 of C. Act 1956
An application for winding up u/s 433(b) shall be presented
(i) By ROC or contributory or
(ii) Such application shall be submitted within 14 days from last day on
which statutory meeting ought to be held
Now, here the word “or” shall be considered as “&” else it will lead to
absurd meaning
(c) ‘May’, and ‘shall’:
‘May’: word ‘may’ in a statutory provision would not by itself show that the
provision is directory in nature.
In some cases the legislature may use the word ‘may’ as a matter of pure
conventional courtesy and yet intend a mandatory force.
Therefore, in order to interpret the legal import of the word ‘may’, we have to
consider various factors
The use of the word shall would not of itself make a provision of the act
mandatory.
It has to be construed with reference to the context in which it is used.
Thus, as against the Government the word ‘shall’ when used in statutes is to be
construed as ‘may’ unless a contrary intention is manifest.
May/shall
As per Section 3 of Companies Act, 2013, Company may be formed for any
lawful purpose
Now, here word May would means that ……………………………………
Rule of Ejusdem The term ‘ejusdem generis’ means ‘of the same kind or species’.
Generis Rule of ejusdem generis means that where specific words are used and after those
specific words, some general words are used, the general words would take their
colour from the specific words used earlier.
For instance ‘in the expression inconsequence of war, disturbance or any other
cause’, the words ‘any other cause’ would take colour from the earlier words ‘war,
disturbance’ and therefore, would be limited to causes of the same kind as the two
named instances.
Similarly, where an Act permits keeping of dogs, cats, cows, buffaloes and other
animals, the expression ‘other animals’ would not include wild animals like lions
and tigers, but would mean only domesticated animals like horses, etc.
Example E.g. Arms, ammunition, gun powder or any other goods

Now word “Any other goods” means goods of similar nature
18.3 OTHER (SECONDARY) RULES OF INTERPRETATION
Effect of usage (i) ‘Optima Legum interpresest consuetudo’ (the custom is the best interpreter
of the law); and
(ii) ‘Contempranea expositoest optima et fortissima in lege’ (the best way to
interpret a document is to read it as it would have been read when made).
Therefore, the best interpretation/construction of a statute or any other
document is that which has been made by the contemporary authority.
Example As per Sec 6 of Indian Post Office Act, 1898

:- Govt shall not be responsible for any less or damage, which may occur in
Consequence of any telegram officer failing in his duty with respect to receipt,
transmission or delivery of any message, &
:- No such officer shall be responsible for any loss or damage unless he causes the
same negligently or fraudulently.
:- Now following the above rule: It has been held by different courts that above
immunity is available only in case of ordinary posts & registered post but not in
case speed post as the concept of speed post was not in existence at the time
when law was written.
Associated Words When two words or expressions are coupled together one of which generally
to be Understood in excludes the other, obviously the more general term is used in a meaning excluding
Common Sense the specific one.
Manner On the other hand, there is the concept of ‘Noscitur A Sociis’ (‘it is known by its
associates’), that is to say ‘the meaning of a word is to be judged by the company it
keeps’.
When two or more words which are capable of analogous meaning are coupled
together, they are to be understood in their cognate sense. They take, as it were,
their colour from each other.
Example Word Commercial establishment means an establishment which carries a any

business, trade or Profession
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Now the term profession shall be construed or interpreted with associated words i.e.
“Business or Trade”
Thus, it was held that Private dispensary for charitable Purpose does not fall within
the definition of commercial Establishment
18.4 INTERNAL AIDS TO INTERPRETATION/CONSTRUCTION
Long Title An enactment would have what is known as a ‘Short Title’ and also a ‘Long
Title’.
The ‘Short Title’ merely identifies the enactment and is chosen merely for
convenience, the ‘Long Title’ on the other hand, describes the enactment and does
not merely identify it.
Example If we use a short title i.e. ‘FEMA’ we may not know the object, scape & Purpose of
the Act however upon using a long title i.e. “Foreign Exchange management Act”,
it Provide us the object for which this law was foamed
Preamble The Preamble expresses the scope, object and purpose of the Act more
comprehensively than the Long Title.
The Preamble may provide the ground and the cause of making a statute and the
evil which is sought to be remedied by it.
Preamble to an Act discloses the primary intention of the legislature but can only be
brought in as an aid to construction if the language of the statute is not clear.
Example Preamble of C. Act 2013 states that it is An Act to consolidate & amend the law
relating to companies
Heading and Title Heading and Titles prefixed to sections or groups of sections can legitimately be
of a Chapter referred to for the purpose of construing the enactment or its parts.
Example Chapter X of companies Act deals with “Audit & Auditor” through section 139 to
section 148
Thus by looking at the chapter we may understand the Purpose & object of section
139 to section 148
Marginal Notes Marginal notes appended to Articles of the Constitution have been held to be part of
the Constitution as passed by the Constituent Assembly and therefore have been
made use of in construing the Articles.
Example Generally held view is that – Marginal Notes appended to a Section cannot be used
for Construction the section
In CIT v Ahmed bhai Umar-bhai & Co.
It was held by SC that Marginal notes in any Indian statutes or in any Act of
Parliament cannot be referred to far Purpose of Constructing the statute”
Definitional 1. Restrictive and extensive definitions: When a word is defined to ‘mean’ such
Sections/Clauses and such, the definition is ‘prima facie’ restrictive and exhaustive we must restrict
the meaning of the word to that given in the definition section.
But where the word is defined to ‘include’ such and such, the definition is ‘prima
facie’ extensive: here the word defined is not restricted to the meaning assigned to it
but has extensive meaning which also includes the meaning assigned to it in the
definition section.
2. Ambiguous definitions: Incase we find that the definition section may itself be
ambiguous, and so it may have to be interpreted in the light of the other provisions
of the Act and having regard to the ordinary meaning of the word defined.
Any such definition can not to be read in isolation, in other words, it shall be read in
the context of the phrase which it defines, realising that the function of a definition
is to give accuracy and certainty to a word which would otherwise be vague and
uncertain
Example As Per Industrial Dispute Act, 1947
“Termination of services of a seasonal worker after the work was over does not
amount to retrenchment”
However the termination of employment of daily wager who is engaged in a project
on Completion of such Project with amount to retrenchment if the worker had not
been told when employed that vs employed will end on Completion of Project
(S.M. Nilajkarv v Telecom District Manager, Karnataka)
Illustrations Many Sections have illustrations appended to them. These illustrations follow the
text of the Sections and, therefore, do not form a part of the Sections. However,
illustrations do form a part of the statute and are considered to be of relevance and
value in construing the text of the sections. However, illustrations can not have the
effect of modifying the language of the section and can neither curtail nor expand
the ambit of the section.
Proviso As a general rule, a proviso is added to an enactment to qualify or create an
exception to what is in the enactment: ordinarily a proviso is not interpreted as
stating a general rule.
It is a cardinal rule of interpretation that a proviso to a particular provision of a
statute only embraces the field which is covered by the main provision. It carves out
an exception to the main provision to which it has been enacted as a proviso and to
no other.
Explanation An Explanation may be added to include something within the section or to exclude
something from it.
An Explanation should normally be so read as to harmonise with and clear up any
ambiguity in the main section.
It should not be so construed as to widen the ambit of the section.
Schedules The Schedules form part of an Act. Therefore, they must be read together with the
Act for all purposes of construction.
However, the expressions in the Schedule cannot control or prevail over the
expression in the enactment.
If there appears to be any inconsistency between the schedule and the enactment,
the enactment shall always prevail.
Read the Statute as It is the basic principle that construction of statute is to be of all its parts taken
a Whole together and not of 1 part only.
Any deed must be read as a whole in order to ascertain the true meaning of its
several clauses and all such clauses shall be so interpretated so as to bring them into
harmony with other provisions.
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Example If Section on an Act require notice shall be given, then a verbal notice would be
sufficient. But if another section Provides that notice should be served an person,
then it would obviously indicate that a written notice was intended.
18.5 EXTERNAL AIDS TO INTERPRETATION/CONSTRUCTION
Historical Setting The history of external circumstances which led to formation of Act is of much
significance while construing an Act
Thus we have to take help from all those external or historical facts which are
necessary in the understanding of subject matter & Scope & object of the Act.
Consolidating Preambles to many statues contain an expression such as “An Act to consolidate
Statutes & Previous law etc.
Previous Law In such a case, court may stick to the presumption that it is not intended to alter the
law. New Act just intended to solve doubtful points in statute
Usage Usage is also taken into consideration in constructing an Act.

It is well known that where the language in a statute is doubtful, usage helps to
determine its true meaning, which it has for several years received in interpretation &
which has generally been acted upon by the public. Thus court would be very un-
willing to change that interpretation
Earlier & Later The general Principles is that where there are different statute in existences through
Acts and made at different times & not referring to each other, they shall be taken & construed
Analogous Acts together as I system & as explanatory of each other
Example- Sec. 26 of C. Act & SEBI
Dictionary First we have to refer to the Act in question to find out if any Particular word or
Definitions expression is defined in it. In case we find that a word is not defined in Act itself, we
may sense in which the word is commonly understand. E.g. statutory corporation
Use of Foreign Foreign decisions of countries following the same system of Juris Prudence as our
Decisions own Act. However Prime importance is always given to the language given in Indian
statue.
Chapter 19
NEGOTIABLE INSTRUMENTS ACT, 1881
Synopsis
19.1 Meaning of Negotiable Instrument 210
19.2 Essential Featurers of Negotiable Instruments 210
19.3 Presumption as to NI [Section 118] 210
19.4 Definition of Promissory Note 211
19.5 Bill of Exchange [Section 5] 212
19.6 Definition of Cheque [Section 6] 213
19.7 Classification of Negotiable Instrument [Section 13, 19 & 21] 214
19.8 Some other Critical Concepts 215
19.9 Maturity of Negotiable Instrument [Section 22, 23, 24 & 25] 219
19.10 Different Parties to Negotiable Instruments Holder [Section 8] 220
19.11 Holder in Due Course [Section 9] 221
19.12 Special Privileges of Hdc 221
19.13 Difference between Holder and Holder in Due Course 222
19.14 Liability of maker/drawer of Foreign Bill [Section 134] 222
19.15 Capacity of Parties [Section 26] 223
19.16 Negotiation - meaning [Section 14] 223
19.17 Assignment 224
19.18 Difference between Negotiation and Assignment 224
19.19 Modes of Negotiation 224
19.20 Essential of a Valid Delievery under Negotiation [Section 46] 225
19.21 Endorsement [Section 15] 225
19.22 Types of Endorsement [Section 16, 50, 52, 56] 226
19.23 Conversion of Indorsement in blank into Indorsement in Full [Section 49] 227
19.24 Negotiation Back [Section 90] 227
19.25 Noting and Protesting [Section 99 to 100] 227
19.26 Meaning of Discharge of an Instrument 229
19.27 Meaning of Discharge of a Party 229
19.28 Acceptance [Section 7 and 86] 230
19.29 Crossing of Cheque [Section 123 to 131a] 230
19.30 Payment of Cheque Drawn Generally or Specifically [Section 126] 231
19.31 Material Alteration 232
19.32 Dishonour by Non-acceptance [Section 91] 232
19.33 Dishonour by Non-payment [Section 92] 233
19.34 Notice of Dishonour 233
19.35 No Requirement of Notice of Dishonour [Section 98] 233
19.36 Liability of Paying Banker [Section 129] 234
19.37 Protection to the Paying Banker [Section 85] 234
19.38 Non Liability of Banker Receiving Payment of Cheque [Section 131] 235
19.39 Effect of Non-presentment of Cheque within a Reasonable Time:- [Section 84] 235
19.40 Bouncing of Cheques [section 138 to 142] 235
19.41 Acceptor for Honour [Section 108 to 112] 240
19.42 Holder’s Right to Duplicate of Lost Bill [Section 45a] 241
19.43 Liability of Parties to Negotiable Instrument 241
210 Theory Module 1
19.44 Presentment for Payment 242
19.45 Payment and Interest [Section 78] 243
19.1 MEANING OF NEGOTIABLE INSTRUMENT
1. Instrument The Term Instrument means any written document by which a right is created in
favour of some person.
2. Negotiable The word negotiable means transfer of right in an instrument by one person to
another.
3. Negotiable Negotiable instrument may be defined as documents by which rights vested in a

Instrument person can be transferred to another person by following the provisions contained
under Negotiable Instruments Act, 1881.
4. Definition According to section 13(a) of this Act,

According to NI  "Negotiable instrument" means,
Act
 a promissory note,
 bill of exchange or
 cheque
 payable either to
 order or
 to bearer."
19.2 ESSENTIAL FEATURERS OF NEGOTIABLE INSTRUMENTS
1. Freely In case payable to bearer Merely by giving delivery

transferable.
In case payable to Order By endorsement as well as delivery.
2. Title of Provided he gets instrument

transferee i.e.  before due date,
HDC is good
 for value consideration and
 in good faith.
Thus even if the title of transferor is defective, still title of transferee would not be
affected.
3. NI can be transferred indefinitely
19.3 PRESUMPTION AS TO NI [Section 118]
1. Presumption of That it is drawn or made/on the date which appears on it.

Date
2. Presumption of That every negotiable instrument has been drawn accepted and transferred for value
Consideration consideration.
Chap. 19 Negotiable Instruments Act, 1881 211
3. Presumption of That every lost bill and promissory note were duly stamped.
Stamp
4. Presumption of Endorsement is recorded on the instruments. Thus legally it is presumed that the
Order of instrument has been endorsed in that order, which appears on it.
endorsement
5. Presumption of it is presumed that every negotiable instrument is transferred before the date of
transfer maturity.
6. Presumption of It is presumed that, every holder of an instrument is a holder in due course.

Holder in due
course
19.4 DEFINITION OF PROMISSORY NOTE
1. Meaning According to section 4 of this Act,

 "Promissory Note" is an instrument,
 in writing (not being bank note or currency note)
 containing an unconditional undertaking
 signed by the maker,
 to pay certain sum of money only to
 or to the order of certain person
 or to the bearer of the instrument".
Space for
Clarification by
RBI
Special Case Mr. X executes a promissory note in the following form, 'I promise to pay a sum of
`10,000 after three months'. Decide whether the promissory note is a valid
promissory note.
Hint
2. Characteristics of Promissory Note

(a) In writing It is not necessary that the word 'promise' should be used.
(b) Unconditional The promise to pay must be definite and unconditional.
undertaking to pay Exception  A promise to pay is not conditional of it depends upon an even
which is certain to happen but the time of its occurrence may be uncertain.
(c) Must be signed The promissory note must be signed by the maker.
by the maker
(d) Amount must The amount payable must be certain and not subject to any contingency
be certain
(e) Promise to pay Any promise to pay in kinds or to pay money and partly in kinds is not valid.
money only
212 Theory Module 1
3. Parties to a PN
(a) Maker The person making the PN
(b) Payee Person to whom or to whose order the payment is to be made
19.5 BILL OF EXCHANGE [Section 5]
1. Meaning Section 5 of the Negotiable Instruments Act defines Bill of Exchange as follows
 A BE is an instrument
 in writing
 Containing an
 unconditional order
 signed by the maker,
 Directing a certain person
 to pay certain sum of money only to
 or to the order of certain person
 or to the bearer of instrument"
2. Characteristics of bill of exchange
(a) It must be in writing
(b) It contains an Mere request or a reminder to pay money will not be considered as bill of
order to pay exchange.
(c) The order to Exception "A promise to pay is not conditional of it depends upon an even which is
pay must be certain to happen but the time of its occurrence may be uncertain
unconditional
(d)The sum payable must be certain
(e) It must be signed by the maker
3. Parties to a BE
(a) Drawer The person who draws a BE
(b) Drawee The person on whom BNE is drawn.
(c) Payee The person named in the instruments to whom or to whose order the money is
directed to be paid by the instalment is called as payee.
Exercise 2
Quest-1 Which of the following is a bill of exchange? Give reasons.

(a) "To Ram, Dear Ram, We hereby authorise you to pay on our account, to the order of Jai,
the sum of six thousand rupees."
(b) "`500." "Pay to my order the sum of five hundred rupees, for value received." It is neither
signed by any person as drawer nor addressed to any person as drawee. It is accepted by
Jai.
Ans Case (a)…………………………………………………………………………………………

Case (b)…………………………………………………………………………………………
19.6 DEFINITION OF CHEQUE [Section 6]
1. Meaning-Cheque Section 6 defines cheque as follows:-

 "A cheque is a bill of exchange
 drawn on a specified banker
 and not expressed to be payable, otherwise than on demand
 and it includes the electronic image of truncated cheque and a cheque in
electronic form".
2. Meaning-Cheque  A cheque which contains exact mirror image of a paper cheque,

in Electronic Form  and is generated, written and signed in a secure system ensuring the minimum
safety standards
 with the use of 'digital signature' (with or without biometrics signature)
 and asymmetric crypto system
3. Meaning-  A cheque which truncated during the course of a clearing cycle

Truncated Cheque  either by a clearing house or by the bank
 whether paying or receiving the payment
 Immediately on generation of electronic image or transmission, substituting the
further physical movement of cheque in writing.
4. Parties which are involved in Cheque:-
(a) Drawer A person who issues a cheque
(b) Drawee A Person to whom cheque Is issued i.e. Bank
(c) Payee The person named in the instruments to whom or to whose order the money is
directed to be paid by the instalment is called as payee.
214 Theory Module 1
19.7 CLASSIFICATION OF NEGOTIABLE INSTRUMENT [Section 13, 19 & 21]
1. Bearer and order instruments
Bearer Instrument Any instrument is payable to bearer

(i) Which is expressed to be payable to bearer
or
(ii) On which the last endorsement is an 'endorsement in blank'
It can be negotiated simply by giving delivery of it to the party.
Order Instrument  A negotiable instrument is payable to order,

 which is expressed to be so payable,
 or which is expressed to be payable to particular person
 or his order
2. Time and Demand Instruments
Demand  A promissory note or bill of exchange

Instruments  where, no time of payment is specified and
 a cheque, are payable on demand.
 As soon as the holder gets its possession under demand instruments, he can
demand its payment.
Time Instruments An instrument said to be 'time instrument' if it payable at some time in future. Thus
a time for their payment is specified for them.
3. Meaning of Certain Terms [Section 21]
At Sight/ They are used for PN or BE

On presentment/
On Demand
After Sight The expression after sight under PN means "after presentment" for acceptance (i.e.
sight) and in a BE "after acceptance"
Important Points to  A PN can not be made 'payable to bearer'.

be noted:-  A BE can not be made payable to bearer on demand.
Exercise 3
Quest-1 State with reasons whether each of the following instruments is bearer or order:
(a) A bill is drawn payable to X or bearer.
(b) A bill is drawn payable to X who endorses it in blank in favour of Y.
(c) A bill is drawn payable to X.
(d) A bill is drawn payable to X or order.
Exercise 3
Answer Case (a)…………………………………………………………………………………………

Case (b)…………………………………………………………………………………………
Case (c)…………………………………………………………………………………………
Case (d)…………………………………………………………………………………………
19.8 SOME OTHER CRITICAL CONCEPTS
1. Inchoate Instrument [Section 20]
Meaning Section 20 of Negotiable Instruments Act defines it as follows:-

 " When one person signs and delivers to another
 a paper stamped, in accordance with the law relating to negotiable instru-
ments then in force in India
 and either wholly blank or having written thereon an incomplete
negotiable instrument,
 he thereby gives prima facie authority to the holder thereof to make or
complete, as the case may be, upon it a negotiable instrument
 for any amount specified therein not exceeding the amount covered by
the stamp.
 The person, so signing shall be liable upon such instrument, in the
capacity he signed the same to any holder in due course, for such amount
Provided that no person other than holder in course, shall recover from the person
delivering the instrument any thing in excess of the amount intended by him to be
paid there under."
2. Payment in Due Course [Section 10]
(a) Meaning Section 10 of NI Act:- Payment in due course means,

 Payment in accordance with the apparent tenor of the instrument
 in good faith and
 without negligence to any person in possession thereof
 under circumstances which do not afford a reasonable ground for
believing that he is not entitled to receive payment of the amount
mentioned therein
(b) Essential Characteristics
(i) Apparent tenor The payment of the instrument should be made according to the intention of the
of the instrument parties which appears on the face of the instrument.
(ii) Payment to the It should be made to the holder of the instrument or some other person, who is
holder authorized to get payment on his behalf
(iii) Payment in There should be no reasonable ground to believe that the person to whom the
good faith payment is made is not entitled to receive it.
216 Theory Module 1
[Allahabad Bank Ltd v Kul Bhushan]
In this case, the bank paid a cheque bearing forged signature of the drawer. It was
held that payment was not a payment is due course since paying banker is
required to verify the signatures of its customers
3. Forms Of Bill of Exchange [Section 11 & 12]
Inland Bill (Section A Bill of exchange is said to inland bill

11)  if it is drawn and made payable in India or
 Drawn in India upon any person who is a resident of India even though
it is made payable in foreign country.
Foreign Bill "Foreign Instrument is one which is not a inland instrument"

(Section 12)
4. Instruments without Consideration [Section 43]
Meaning According to section 43 of this Act,

 "A negotiable instrument
 made, drawn, accepted, endorsed or transferred
 without consideration
 Creates no obligation of payment between the parties to the transaction.
 But if any such party has transferred the instrument with consideration
to the holder for consideration,
 Such holder for consideration and
 every subsequent holder deriving title from him
 may recover the amount due on such instrument from
 Transferor for consideration or any prior party thereto".
Simple 1. In case any negotiable instrument is drawn without consideration, it creates

Interpretation no liability to pay between parties to transactions
2. If such instrument is obtained by Holder for consideration, he can recover
from Transferor for consideration and all prior parties
3. If HFC, further negotiate the same to any Holder whether with or without
consideration, then such Holder can also recover from his preceding
Transferor for consideration and all prior parties
Case No. 1 A draws a bill of exchange on B, payable to C or order. C endorsed it to D without

consideration. On maturity bill is dishonored. Whether D can sue C for the
payment?
Ans No, since consideration is missing between both of them
Case No. 2 A draws a bill on B and B accepts it without consideration. A endorses that bill to C
without consideration. C endorses it to D for value consideration. TO whom D can
sue
Ans D being a Holder for consideration can sue all prior parties
5. Partial absence of money consideration [Section 44]
Meaning According to section 44 of this Act

 "when the consideration for which a person signed a promissory note, bill of
exchange or a cheque
 consisted of money
 and was originally absent in part or has subsequently failed in part,
 the sum, which a holder standing in immediate relation with such signor is
entitled from him is proportionately reduced".
Simple 1. If any NI was drawn where consideration was missing in part and only part
Interpretation amount consist of consideration.
2. Regarding immediate parties to such instrument, they can only recover the
amount for which consideration has been passed
3. However, if any such instrument later on transferred to HDC, such HDC is
entitled to recover from all prior parties
Case A draw a bill on B for `1000 payable to the order of A. B accept the bill but later
on dishonour it for non-payment. A sued B on the bill. B proves that it was
accepted for Value of `800 and as on accommodation for balance. How much A
can recover from B?
Ans Only `800 as both of them are in immediate relation, but if such instrument is
obtained by HDC, then such HDC can recover the entire amount of `1,000
Immediate Party As between "A" and "B", since transaction took place between both of them, thus
they are called immediate parties or parties in immediate relations.
6. Partial Failure of Consideration not Consisting of Money [Section 45]
Meaning According to section 45 of this Act,
 "Where the consideration which has partly" failed
 consists of things other than money
 and the value of that failed consideration, can be ascertained without a
collateral enquiry,
 the parties, standing in immediate relation, can recover from each other
 only the proportionately reduced amount and not the whole amount of a
bill"
Further Provided that
 If the value of that failed consideration cannot be ascertained without
collateral enquiry
 the immediate parties to the bill are entitled to recover the full amount of
the bill from each other.
Agra and Masterman Bank v S. Leighton
In this case, A agrees to supply two bales of cotton to B. B accepts a bill for `1000
drawn by A, being the agreed price of two bales. Later on A delivers only one bale
of cotton to B. A sues B on the bill. B can take plea of partial failure of
consideration. It was held that A can recover only `500.
However the above rule applies only in case of immediate parties and the right
of holder in due course will not be affected.
218 Theory Module 1
7. Accommodation Bill
(a) Meaning An accommodation bill means a bill which is drawn, accepted without
consideration.
(b) [Explanation I  The accommodated party

to Section 43]  cannot,
 after he has paid the amount of the bill,
 recover the amount from accommodating party i.e. a person who became a
party to the bill for his accommodation
(c) Holder after The person who becomes the holder of such a bill in good faith and for
maturity Date consideration, after maturity, may recover the amount from any prior party
[Section 59]
8. Drawee in case of need [Section 7 and 115]
Meaning  Where in case of a bill

 Name of any person is given in addition to drawee
 To be resorted, in case of need
 Such a person is called as Drawee in case of need.
[Dore vs If a bill has been duly accepted but dishonoured when presented to drawee in first
Kanchiwalla] instance for payment, it cannot be validly presented for payment to the drawee in
case of need if it was not presented to him for acceptance.
9. Fictitious Payee [Section 42]
Meaning  An acceptor of a bill of exchange
 drawn in a fictitious name
 and payable to the drawer' s order is not,
 by reason that such name is fictitious,
 relieved from liability to any holder in due course claiming under an
endorsement by the same hand as the drawer' s signature,
 and purporting to be made by the drawer.
10. Ambiguous Instrument [Section 17]
Meaning “Where an instrument may be construed either as a promissory note or bill of
exchange, the holder may at his election treat it as either, and the instrument shall
be thenceforward treated accordingly“.
Rights of parties an instrument which is vague and cannot be clearly identified either as a bill of
exchange, or as a promissory note, is an ambiguous instrument.
In other words, such an instrument may be construed either as promissory note, or
as a bill of exchange.
11. Where amount is stated differently in figures and words [Section 18]
If the amount undertaken or ordered to be paid is stated differently in figures and in words, the amount
stated in words shall be the amount undertaken or ordered to be paid.
Exercise 4
Quest-1 State with reasons whether each of the following instruments is an Inland Instrument or a
Foreign Instrument:
(a) A bill drawn in Delhi upon a merchant in Agra and accepted payable in London.
(b) A bill drawn in Jaipur upon a merchant in London and accepted payable in Agra.
(c) A bill drawn in Jaipur upon a merchant in London and accepted payable in London.
(d) A bill drawn in London on a merchant in Agra and endorsed in Jaipur.
Case (a)…………………………………………………………………………………………
Case (b)…………………………………………………………………………………………
Case (c)…………………………………………………………………………………………
Case (d)…………………………………………………………………………………………
19.9 MATURITY OF NEGOTIABLE INSTRUMENT [Section 22, 23, 24 & 25]

1. Meaning of It means a date on which NI falls due for payment
Maturity of NI
2. The promissory  On demand, or
note and bill of  on a specified date, or
exchange may be
payable  after a specified period.
3. Instrument Where the instrument is payable on demand or on presentation or at sight such as a

Payable on demand cheque becomes payable immediately and there is no need to work out its date of
maturity.
4. Time Instrument The need of calculating date of maturity arises in case of promissory note and bill
of exchange which are not payable on demand i.e. Time Instruments
5. Concept of According to section 22 of this Act,
Grace Days "Every promissory note, or bill of exchange which is not expressed to be payable
on demand, is at maturity on third day, after the day on which it is expressed to be
payable".
Thus, to calculate date of maturity three' days of grace' are added to the period
stated in the instrument.
How to calculate the Maturity of an Instrument
1. For PN/BE If a promissory note or bill of exchange is made payable a stated number of
payable after a months:-
stated number of  After date or
month
 After sight or
[Section 23]
 After certain event,
it becomes payable three days after the corresponding date of month after the stated
number of months (section 23).
2. Situation, where If the month in which the period would terminate has no corresponding day, the
month does not period shall be terminating on the last day of such month.
have any
corresponding day
220 Theory Module 1
3. For PN/BE In calculating the date at which promissory note or bill made a certain number of
payable after a days:-
stated number of  After date or
days [Section 24]
 After sight or
 After certain event,
is at maturity, the day of the date of presentation for acceptance or sight or of
protest for acceptance or on which the event happens shall be excluded.
4. Situation where When the day on which a promissory note or bill of exchange is at maturity is a
day of Maturity is a public holiday, the instrument is deemed to be due on preceding business day.
Public Holiday
[Section 25]
5. Where If an instrument is payable by installments, three days of grace are to be allowed on
Instrument is each installment.
payable in
installment
Exercise 5
Case No Date of Date of Payable Maturity Date
Drawing Acceptance
1 30th Jan 05 02nd Feb 05 2 months after date
2 31st Jan 05 02. Feb 05 1 month after date
3 29th Jan 05 03 Feb 05 30 days after date
4 12th July 05 14 July 05 1 month after date
5 28th Sept 05 01st Oct 05 2 months after sight
19.10 DIFFERENT PARTIES TO NEGOTIABLE INSTRUMENTS HOLDER [Section 8]

1. HOLDER According to section 8 of this Act,
[Section 8]  The holder of a negotiable instrument means
 Any person,
 Entitled in his own name to the possession thereof
 And
 To receive or recover the amount due thereon
 From the party liable thereto."
2. Conditions (i) He should be entitled to possess the instrument in his own name.
need to be
(ii) He should have a right to receive or recover the amount due on the instrument
fulfilled before
from the party liable to pay.
becoming a
Holder
Sarjoo Prasad v  S advanced a sum of `2500 under a promissory note.
Ram Pyari Devi  The note however was executed not in the name of S, but in the name of P who
was 'Benamidar'.
 On maturity S sued to recover the amount from the debtor.
 It was held that he could not recover as he was not a holder having a right of
possession and payment.
19.11 HOLDER IN DUE COURSE [Section 9]

 "holder in due course means
 any person
 who for consideration, becomes the possessor of a negotiable instrument
 if payable to bearer or
 payee or endorsee thereof if payable to order
 before the amount mentioned in it became payable and
Without sufficient cause to believe that any defect existed in the title of a person from
whom he derived his title.
2. Conditions to be fulfilled before a person can claim to be a holder in due course
(a) He must he a 'Holder'
(b) He must he a 'Holder for consideration
(c) He must The holder must have acquired the instrument at or before the date of maturity. In
acquire the case he acquires it after the date of maturity, he will not get better title than that of
instrument transferor.
before maturity
Exception An accommodation bill can be negotiated even after the date of
maturity with all the benefits of a HDC to the transferee.
(d) Holder must The holder must take the instrument in good faith without any negligence.
take the
instrument in
good faith
19.12 SPECIAL PRIVILEGES OF HDC
1. Good title of an Once a NI passes through the hands of a holder in due course it become free from
instruments all defects.
[Section 120] No maker of a promissory note, and no drawer of a bill or cheque and no
acceptor of a bill for the honour of the drawer shall, in a suit thereon by a holder
in due course be permitted to deny the validity of the instrument as originally
made or drawn
2. Holder who Holder of a negotiable instrument who derives a title from a holder in due course
derives a title from has the right thereon of that holder in due course."
HDC Provided the holder was himself not a party to the fraud or illegality which
[Section 53] affected the instrument in some stage of its journey. Thus, any defect in the title of
the transferor will not affect the rights of the holder in due course even if he had
knowledge of the prior defect provided he is himself not a party to the fraud
3. Rights in inchoate Holder in due course can recover full amount as mentioned in that instrument
instrument subject to the amount covered by stamp.
[Section 20]
222 Theory Module 1
19.12 SPECIAL PRIVILEGES OF HDC
4. Liability of prior Every prior party to a holder in due course in a negotiable instrument is liable to
parties [Section 36] him until the instrument is duly satisfied.
5. Right in case of  Where a negotiable instrument has been endorsed and delivered conditionally
conditional delivery or for a special purpose i.e. as collateral security
of an instrument  and not with the intention of transferring property therein absolutely.
[Section 46]
 Property in instrument does not pass to the endorsee and he is merely a bailee
having limited rights against that instrument.
 This however does not affect the right of holder in due course.
 If such an instrument is negotiated to him, the parties liable on the instrument
cannot escape liability.
6. In case of The person liable in a negotiable instrument cannot set up against the holder in
instrument obtained due course the defences that the instrument had been lost or obtained from the
by unlawful means or former by means of an offence or fraud or for an unlawful consideration (Section
for unlawful 58). Thus, a holder in due course acquires a title free from all defects.
consideration
[Section 58]
19.13 DIFFERENCE BETWEEN HOLDER AND HOLDER IN DUE COURSE

1. Consideration  For a holder it is not necessary that he must have given consideration for the
instrument.
 But to be holder in due course consideration must have been given by him
for acquiring an instrument.
2. Maturity  A holder may acquire an instrument even after the date of maturity,
 But holder in due course must get it before' the date of maturity.
3. Title  A holder of an instrument will get same title as the transferor had.
 But the holder in due course gets title better than that of transferor.
4. Privileged position  A holder does not enjoy special position or right.
 While as, the position of a holder in due course is privileged and he gets
special rights.
19.14 LIABILITY OF MAKER/DRAWER OF FOREIGN BILL [Section 134]
The liability of the maker or drawer of a foreign promissory note or bill of exchange or cheque is regulated
in all essential matters by the law of the place where he made the instrument, and the respective liabilities
of the acceptor and endorser by the law of the place where the instrument is made payable
Example A bill of exchange is drawn by A in London where the rate of interest is 15% and
accepted by B payable in Berlin where the rate of interest is 6%. The bill is
indorsed in India and is dishonoured.
An action on the bill is brought against B in India. He is liable to pay interest at
the rate of 6% only. But if A is charged as drawer, he is liable to pay interest at
15%.
19.15 CAPACITY OF PARTIES [Section 26]
1. Minor A minor may draw, indorse, deliver and negotiate such instruments so as to bind
all parties except himself. A minors agreement is void and cannot be ratified
when he attains the age of maturity. A minor cannot bind himself under a
negotiable instrument as his contract is absolutely void.
2. Person of unsound Same as Minor

mind
3. Agent [Section 27] Agent can bind his principal by the transactions on negotiable instrument
provided he has been given authority for that.
4. Legal A legal representative of a deceased person, who signs his name on a promissory
representative note, bill exchange or cheque is liable personally thereon unless he expressly
[Section 29] limits his liability to the extent of the assets received by him
Thus, in the absence of an express contract to the contrary, the liability of a legal
representative is unlimited. However, a legal representative may, by an express
agreement, limit his liability. Further, he may exclude his liability i.e. by adding
the words “Sans recourse or without recourse.”
5. Endorsement by The legal representative of a deceased person cannot negotiate by delivery only, a
Legal Representative promissory note, bill of exchange or cheque payable to order and indorsed by the
deceased but not delivered (Section 57)
A legal representative is not an agent of the deceased. Therefore, a legal
representative cannot complete the instrument if the instrument was executed by
the deceased but could not be delivered because of his death.
6. Liability of agent An agent who signs his name to a promissory note, bill of exchange or cheque
signing [Section 28] without indicating thereon that he signs as agent, or
that he does not intend thereby to incur personal responsibility,
is liable personally on the instrument,
except to those who induced him to sign upon the belief that the principal only
would be held liable.
An agent can be sued by the holder in an action for falsely representing that he
had authority.
7. Liability of legal A legal representative of a deceased person who signs his name to a promissory
representative note, bill of exchange or cheque is liable personally thereon unless he expressly
signing [Section 29] limits his liability to the extent of the assets received by him as such.
19.16 NEGOTIATION - MEANING [Section 14]

 "when a promissory note a bill of exchange or a cheque
 is transferred to any person
 so as to constitute that person as the holder thereof,
 the instrument is said to be negotiated."
224 Theory Module 1
2. Negotiation- Negotiable instrument which is payable to bearer can be transferred only by giving
Bearer delivery of it to the party.
Instrument
3. Negotiation- If it is payable to order, it can be transferred by endorsement and delivery.
Order
Instrument
19.17 ASSIGNMENT
1. Meaning Assignment means
 Transfer of ownership of negotiable instrument
 through a written and registered document
 under the provisions of the Transfer of Property Act, 1882.
 Through making such document, the transferee becomes entitled to possess the
instrument in his own name and recover its payment on due date.
2. Right of The assignee of such instrument will get same title as the assignor has. In other words
Assignee he does not get the right of HDC.
19.18 DIFFERENCE BETWEEN NEGOTIATION AND ASSIGNMENT

S No. Negotiation Assignment
1. In case of Negotiation, consideration is Here Consideration needs to be proved
always presumed
2. Instrument payable to bearer are Assignment is always done by mean of a Written and
negotiated by delivery only, whereas Registered Docs under the Provisions of Transfer of
instrument payable to order are Property Right, 1882.
negotiated by endorsement and
delivery
3. Title of HDC is better than that of Title of assignee is subject to all equities in the title of
transferor assignor. In Other words, assignee gets the right of
assignor only
4. Negotiation can be done only in Assignment can be done in respect of other instrument
respect of negotiable instruments also, in addition to negotiable instruments
19.19 MODES OF NEGOTIATION

Negotiation by A negotiable instrument payable to bearer is negotiable by delivery thereof. Such an
mere delivery - instrument does not require signature of the transferor and the transferee becomes the
(Section 47) holder thereof by mere possession.
Negotiation by A negotiable instrument payable to order is negotiable by the holder by endorsement
endorsement and delivery thereof (Section 48).
and delivery-
(Section 48)
19.20 ESSENTIAL OF A VALID DELIEVERY UNDER NEGOTIATION [Section 46]
Significance of  The process of transfer of negotiable instrument completes with delivery of an

Delivery in instrument to the person concerned.
Negotiation  Under both the modes of negotiation, delivery of an instrument is involved.
 The delivery is essential not only at the time of negotiation but also at the time of
making or drawing of negotiable instrument. The rights in the instrument are not
transferred to the Endorsee unless after the indorsement the same has been
delivered. If a person makes the indorsement of instrument but before the same
could be delivered to the Endorsee the indorser dies, the legal representatives of
the deceased person can’t negotiate the same by mere delivery thereof
Delivery of a negotiable instrument may be

1. Actual A Situation where the instrument is physically handed over by the transferor to the
Delivery transferee
2. Constructive A Situation where the delivery gets effected without any change of actual possession.
delivery
3. Conditional  A Situation where the instrument is delivered with some condition attached, it is
Delivery called a conditional delivery e.g. Delivery of an instrument for security purpose.
 In such a-case the negotiation is not valid, i.e., the property in the instrument does
not pass to the transferee, till the condition is fulfilled.
 However, if it is subsequently negotiated to a holder in due course, he will get a
good title to it and all prior parties shall be liable to him in spite of initial
conditional delivery.
Simple  If "A" deliver a Cheque as security purpose to "B", this will be called conditional
interpretation of delivery and "B" shall be regarded as transferee.
Conditional  However if "B" further negotiate the Cheque to any HDC, then such HDC can
Delivery recover the amount mentioned on cheque from all prior parties including "A"
 Thus "A" cannot plead in front of HDC that such cheque was delivered by him as
security purpose only
19.21 ENDORSEMENT [Section 15]
1. Meaning  "When' the maker or holder of a negotiable instrument

 signs the same,
 Otherwise than as such maker,
 for the purpose of negotiation,
 on the back or face thereof or
 on a slip of paper annexed thereto,
 he is said to endorse the same, and is called the endorser."
2. Endorser The person making the endorsement is called an 'endorser'
3. Endorsee the person to whom the instrument is endorsed is called an 'endorsee'

226 Theory Module 1
19.22 TYPES OF ENDORSEMENT [Section 16, 50, 52, 56]
1. Blank or If the endorser signs his name only and does not specify the name of the endorsee, the
general endorsement is said to be in blank.
endorsement
Space for
example
2. Endorsement If the Endorser, in addition to his signature, also adds a direction to pay the amount
in full or special mentioned in the instrument to, or to the order of, a specified person the endorsement is
Endorsement said to be in full.
Space for
example
3. Partial Any such endorsement which transfers the rights to receive only a part payment of the
Endorsement amount due on the instrument is invalid.
Exception Where an instrument has been paid in part, a note to that effect may be
endorsed on the instrument and it may then be negotiated for the
balance.
Example A makes a promissory note of `2000 in favour of B. B endorsed it to C.
A pays `1000 to C. and this fact is noted on the instrument. C can
negotiate it for remaining balance of `1000.
Pay to D or order `1000 being unpaid residue on the note.
S/d C
4. Restrictive An endorsement which, by express words, prohibits the endorsee from further
endorsement negotiating the instrument or restricts the endorsee to deal with the instrument as
directed by the endorser is called 'restrictive' endorsement.
Space for
example
5. Conditional If the endorser of a negotiable instrument, by express words in the endorsement, makes
endorsement his liability, dependent on the happening of a specified event, although such event may
never happen, such endorsement is called a 'conditional' endorsement.
Space for
example
6. Sans recourse When the endorser expressly excludes his own liability on the negotiable instrument to
endorsement the endorsee or any subsequent holder in case of dishonor of the instrument, the
endorsement is known as 'sans recourse' endorsement.
Such an endorsement is made by adding the words 'sans recourse' or 'without recourse.'
Space for
example
7. Facultative When the endorser expressly gives up some of his rights under the negotiable
endorsement instrument, the endorsement is called a 'facultative' endorsement.
Space for
example
8. ‘Sans frais’ Where the indorser does not want the indorsee or any subsequent holder to incur any
indorsement – expenses on his account on the instrument, the indorsement is ‘sans frais’.
Space for
example
19.23 CONVERSION OF INDORSEMENT IN BLANK INTO INDORSEMENT IN FULL [Section

49]
According to If a negotiable instrument, after having been indorsed in bank, is indorsed in full, the
Section 55 amount of it cannot be claimed from the indorser in full, except by the person to whom
it has been indorsed in full, or by one who derives title through such person.
Example A is the payee holder of a bill. A indorses it in blank and delivers it to B. B indorses it
in full to c or order. C without indorsement transfers the bill to D. D as the bearer is
entitled to receive payment or to sue drawer, acceptor, or A who indorsed the bill in
blank, but he cannot sue B or C. C can sue B as he received the bill form by
indorsement in full. If, however, C instead of passing the bill to D without indorsement
passes it by a regular indorsement, D can claim against all prior parties.
19.24 NEGOTIATION BACK [Section 90]
1. Meaning If a negotiable instrument is during the course of negotiation re-endorsed by the last
endorsee to the original holder or any of previous endorser it is called as 'negotiation
back.'
2. Consequences Person who becomes the holder by reason of negotiation back cannot make any of the
intermediate endorsers liable on the instrument
Example A draws a bill of exchange on B amounting `2000. B Endorsed it to C. C endorses it to

D, D endorsed it to E and E to F. F has again endorsed to C. This is known as
negotiation back and as a result of it C has come back to his original position. And D,
E and F will not be liable to him.
3. Exception where any endorser excludes his liability by the use of the words 'sans recourse' .or
'without recourse to me,' and afterwards becomes the holder .of the instrument, all
intermediate endorsers are liable to him and in case of dishonor he can recover the
amount from all or anyone of them.
Example In the above case, suppose C endorsed the bill in favour of D, san recourse and again
the bill comes back in to the hand of C. Though C is not liable to D, E and F. but all of
them along with A and B will be liable towards C in case the bill gets dishonored.
19.25 NOTING AND PROTESTING [Section 99 to 100]
Meaning of  It refers to a mode of authenticating the fact that a bill or note has been
Noting dishonored.
[Section 99]  Noting is done by a person officially designated for this purpose and such person
is known as Notary Public. Notary Public is appointed by the Central Government
or State Government.
228 Theory Module 1
 A dishonored bill is handed over to a notary public who presents it again for
acceptance or payment as the case may be, and if the drawee or acceptor still
refuses to accept or pay the bill, the notary public records (a) the date of dishonor
(b) the fact of dishonor (c) the reason, if any, assigned for such dishonor and (d)
Notary's charges.
 The fee charged by Notary Public for noting is called Notary's Charges.
Meaning of When a promissory note or bill of exchange has been dishonoured by non- acceptance
Protest or non-payment, the holder may, within a reasonable time, cause such dishonour to be
[Section 100] noted and certified by a notary public. Such certificate is called a protest.
Space for
example
Content of 1. The instrument itself i.e. everything written or printed thereupon.
protest 2. The name of the person for whom and against whom the instrument has been
protested.
3. The fact and reasons for dishonour (a statement that payment or acceptance, or better
security, as the case may be, has been demanded of such person by the notary public;
the terms of his answer, if any, or a statement that he gave no answer, or that he could
not be found). A notary public may make the demand either in person or by his clerk
or, where authorized by agreement or usage, by registered letter.
4. The place and time of dishonour (and, when better security has been refused, the
place and time of refusal).
5. The subscription (signature) of the notary public.
6. In case of acceptance for honor or payment for honor, the name of the person
accepting or paying and the name of the person for whose honor it is accepted or paid
(section 101)
Space for
example
Protest for When the acceptor of a bill of exchange has become insolvent, or his credit has been
better security: publicly impeached, before the maturity of the bill, the holder may, within a reasonable
time, cause a notary public to demand better security of the acceptor, and on its being
refused may, within a reasonable time, cause such facts to be noted and certified as
aforesaid. Such certificate is called a protest for better security.
Space for
example
Notice of When a promissory note or bill of exchange is required by law to be protested, notice of
protest such protest must be given instead of notice of dishonour, in the same manner and
subject to the same conditions; but the notice may be given by the notary public who
makes the protest
Space for
example
Protest for non- All bills of exchange drawn payable at some other place than the place mentioned as
payment after the residence of the drawee, and which are dishonoured by non-acceptance, may,
dishonour by without further presentment to the drawee, be protested for non-payment, in the place
non-acceptance specified for payment, unless paid before or at maturity
Space for
example
Protest of Foreign bills of exchange must be protested for dishonour when such protest is required
foreign bills by law of the place where they are drawn (Sec. 104)
Thus, foreign bills must be protested as the law of most countries has made protest
compulsory in case of dishonour of a bill.
Space for
example
19.26 MEANING OF DISCHARGE OF AN INSTRUMENT
1. Meaning An instrument is said to be discharged only when the party who is ultimately liable
therein is discharged from liability.
2. Modes of Discharge of an Instrument

1. Payment in When a party primarily liable on NI makes the payment in due course.
due Course
2. Cancellation If the holder of an instrument cancels acceptor's or endorser's name with intent to
discharge him, the instrument is discharged.
3. Release If the holder of an instrument renounces his right against all the parties to the
instrument, the instrument is discharged.
4. Party If the acceptor of a bill of exchange becomes its holder at or after maturity in his own
Primarily Liable right, the instrument is discharged.
becoming Holder
19.27 MEANING OF DISCHARGE OF A PARTY

1. By Cancellation If the holder of an instrument cancels the name of any of the parties liable under
[Section 82] the instrument with the intention to discharge him, such party and any subsequent
parties deriving their title from such party are discharged from the liability to the
holder.
2. By Release If the holder of an instrument release any party liable on instrument (other than
[Section 82] the party primarily liable on NI), such a party and all parties subsequent to him
are discharged.
3. By Allowing If the holder of a BE allows the drawee more than 48 hour exclusive of public
drawee more than 48 holiday, all prior parties whose consent is not obtained are discharged from their
hours to Accept liability.
[Section 83]
4. By Qualified If a holder of a bill of exchange elects to take a qualified acceptance, all previous
Acceptance parties whose consent is not obtained to such acceptance are discharged from
liability.
5. By Material any material alteration of a negotiable instrument renders the same void as
Alteration against anyone who is a party thereto at the time of making such alteration and
does not consent thereto.
6. Negotiation Back If a bill of exchange which has been negotiated is, at or after maturity, held by
the acceptor in his own right, all right of action thereon are extinguished.
230 Theory Module 1
7. By Operation of under the Law of On the expiry of the period prescribed for
Law the Limitation Act the recovery of the amount due;
under the Law of On declaration of a party as an insolvent by an order of the
the Insolvency court.
19.28 ACCEPTANCE [Section 7 and 86]
Meaning The bill is said to be accepted, when the drawee signifies his intention for accepting
directions of payment by writing a word' accepted' and making his sign below it.
[Section 7]
Types of Acceptance [Section 86]
General An acceptance of a bill is said to be general, if it is accepted without any condition.

acceptance
Conditional or Where the drawee gives his consent for accepting the bill subject to some condition
qualified such acceptance is known as conditional acceptance.
acceptance
Effect of  Where the acceptance is qualified, the holder of a bill, may at his option, treats
Qualified the bill as dishonored and after giving due notice of dishonor, sue the drawer and
Acceptance prior endorsers.
 However, If he accepts a qualified acceptance without obtaining the consent of
all prior parties thereto, all prior parties whose consent is not obtained are
discharged as against the holder and those deriving title from him.
19.29 CROSSING OF CHEQUE [Section 123 to 131A]
Meaning It refers to a direction which is being issued by a drawer upon the drawee bank not to
pay the cheque at the counter rather present it to the person who presents it through a
banker.
Objective It enables the tracing of a person who receives a payment, thus ensure safety of a
cheque.
Open Cheque A Cheque having no crossing is called as open cheque i.e. A cheque which can be
presented to the banker and can be paid at the counter of the bank is called an open
cheque
Crossed cheque- a crossed cheque can be negotiated just the same way as an open cheque.
Whether
negotiable?
Types of Crossing
1. General According to section 123 of this Act,

Crossing  "where a cheque bears across its face two parallel transverse lines
 the cheque shall be deemed to be crossed generally".
Effect Any Cheque having General Crossing shall be payable to any banker only and not
over the counter i.e. Cash by Paying Banker
2. Special According to section 124 of this Act,

Crossing  "Where a cheque bears across its face
 an addition of the name of banker,
 the cheque shall be deemed to be crossed specially".
Effect Any cheque having special crossing shall be payable to collecting banker only whose
name is mentioned in special crossing
3. Restrictive Where a cheque crossed generally or specially also contain the words' A/c Payee
crossing or A/c only' it is known as restrictive crossing.
Payee Crossing
Effect Restrictive crossing provides a direction to the paying banker that proceeds of a
cheque shall be deposited only in the account of 'payee' whose name is mentioned in
the cheque.
This crossing to be valid must be either with general crossing or with special
crossing
4. Not negotiable According to Section 130,

crossing [Sec 130]  a person taking a cheque crossed generally or specially,
 bearing in either case the word “not negotiable”
 is called as Not Negotiable Crossing
Effect Where Not Negotiable Crossing is there in some instrument, it would means that the
right of endorsee is equivalent to the right of transferor
Thus, the addition of the words not negotiable does not restrict the further
transferability of the cheque, but it entirely takes away the main feature of
negotiability, which is that a holder with a defective title can give a good title to the
subsequent holder in due course.
Who may cross? [Section 125]- A cheque may be crossed by the following parties:
By Drawer A drawer may cross it generally or specially.
By Holder A holder may cross an uncrossed cheque generally or specially. If the cheque is
crossed generally, the holder may cross specially. If cheque crossed generally or
specially, he may add words “not negotiable”.
By Banker A banker may cross an uncrossed cheque, or if a cheque is crossed generally he may
cross it specially to himself. Where a cheque is crossed specially, the banker to whom
it is crossed may again cross it specially to another banker, his agent, for collection.
19.30 PAYMENT OF CHEQUE DRAWN GENERALLY OR SPECIFICALLY [Section 126]
1. Cheque having Where a cheque is crossed generally, the banker on whom it is drawn shall not pay it
General Crossing otherwise than to a banker
232 Theory Module 1
2. Cheque having Where a cheque is crossed specially, the banker on whom it is drawn shall not pay it,
Special Crossing otherwise than to a banker to whom it is crossed or his agent for collection.
19.31 MATERIAL ALTERATION
1. Meaning of An alteration can be called a material alteration if it

Material  Alters or attempts to alter the character of the instrument and
Alteration
 Affects or is likely to affect the contract which the instrument contains or is
evidence of.
2. Material 1 Alteration of date of instrument (e.g. if a bill dated 1st May 1998 is changed to a
alteration bill dated 1st June 1998)
2 Alteration of time of payment (e.g., if a bill payable three months after date is
changed to a bill payable four months after date)
3 Alteration of place of payment (e.g., if a bill payable at Delhi is changed to bill
payable at Mumbai).
4 Alteration of amount payable (e.g., if bill for `1,000 is changed to a bill for
`2,000)
5 Addition of a new party to an instrument.
3. Non-material 1 Conversion of instrument payable to order into one payable to bearer.
alteration
2 Elimination of the words' or order' from an endorsement.
3 Addition of the words 'on demand' to a note in which no time or payment is
expressed.
4 Alteration of one of the clauses of the instrument containing a penal action.
4. Material 1 Filling blanks of inchoate instruments [Section 20]
Alterations
Authorized by 2 Conversion of a blank endorsement into an endorsement in full [Section 49]
the Act 3 Crossing of cheques [Section 125]
(Exceptions to
Sec. 87)
5. Effect of An instrument which is materially altered becomes void against all persons who were
Material parties to it at the time of alteration and did not consent to it.
Alteration
[Sections 87]
19.32 DISHONOUR BY NON-ACCEPTANCE [Section 91]
Meaning A BE is said to be dishonored by non acceptance, when the drawee makes default in
acceptance upon being duly required to accept the bill
Where the drawee is incompetent to contract or the acceptance is qualified the bill may
be treated as dishonored
A bill of exchange is said to be dishonored by non-acceptance in following circumstances
(a) If the drawee does not accept it within forty-eight hours from the time of Presentment.
(b) When the drawee is incompetent to contract.
(c) When the drawee cannot be found after reasonable search.
Analysis
19.33 DISHONOUR BY NON-PAYMENT [Section 92]
When 1. When the party primarily liable (i.e., the maker of the note or acceptor of the bill
or drawee of the cheque) makes default in payment upon being duly required to,
pay the same.
2. When the presentment for payment is excused and the instrument when overdue
remains unpaid. [Section 76]
19.34 NOTICE OF DISHONOUR
1. Notice by It must be given by the holder or by a party liable on the instrument.

whom
2. Notice to To all parties (other than the maker of a note or drawee of a bill or cheque) whom the
whom holder seeks to make severally or jointly liable.
3. Contents of No specific format thereof is available, only requirement is that it must inform the
Notice party to whom it is given that the instrument has been dishonored and in what way and
that he will be held liable thereon.
4. Time limit of Notice must be given within a reasonable time after dishonor.
giving Notice
5. Consequences If notice is not given to any party to whom it is required to be given, within reasonable
of omission to time, such party is discharged from liability on the instrument.
give notice of
Dishonor
19.35 NO REQUIREMENT OF NOTICE OF DISHONOUR [Section 98]
1. Waiver by the A party to a bill or note may give up his right of getting notice of dishonor in favour of
party the holder, by writing the words 'Notice of dishonor is waived' at the time of making
endorsement.
2. Payment When the drawer of a cheque after having drawn the cheque, but before it is presented
stopped for payment countermanded payment.
234 Theory Module 1
3. Party not When the party to whom a notice of dishonor is required to be given could not be
found found after making a reasonable search.
4. Unavoidable Omission to give notice of dishonor is excused if the holder had been in unavoidable
circumstances situations may be death, illness, accident or under other natural calamites.
19.36 LIABILITY OF PAYING BANKER [Section 129]

In case of Where the generally crossed cheque has been presented for the payment and the banker
Cheque Crossed pays it at its counter, otherwise than to a banker, the holder is entitled to sue the bank
Generally for the recovery of loss sustained to him.
In case of Where the Specially crossed cheque has been presented for the payment and the banker
Cheque Crossed pays it at its counter, otherwise than to a specified banker, the holder is entitled to sue
Specifically the bank for the recovery of loss sustained to him.
19.37 PROTECTION TO THE PAYING BANKER [Section 85]

1. In case of Where the banker makes payment of an order cheque in due course, the banker is
Order cheque discharged form the liability
2. Bearer  where a cheque is originally expressed to be payable to bearer, the drawee is
cheque discharge by payment in due course to the bearer thereof,
 Even if any endorsement is imposed on bearer instrument which tends to restrict
further negotiation, still paying banker shall be justified in releasing the payment in
favour of bearer.
CASES ON PARA 19.37

Case-1 A Cheque was issued as payable to Dev or order on Axis Bank. It was negotiated further to Ram
and later to Baba from whose custody it was stolen by Ajay who Brought the cheque to the bank
by forging the signatures of Baba and collected the payment.
Ans As per Section 85, Paying banker is not liable as they are not liable to verify signatures of every
endorser in case of an order instrument.
Case-2 Suppose in Case No-1 above, if Baba was the customer of Axis bank, than what would have
been the answer.
Ans As per Section 85, Paying banker is liable to verify signatures of Drawer i.e. a person issuing
cheque only and they are not liable to verify signatures of every endorser in case of an order
instrument.
Case-3 A Cheque was issued as payable to Dev or order on Axis Bank by ANNA, however the
signatures of ANNA were forged by Dev who brought the cheque to the banker and collected the
payment.
Ans Here paying banker is liable as this cannot be taken as payment in good faith
Case-4 A Cheque was issued as payable to R or Bearer on Axis Bank. It was stolen by Q from the
custody of R and it was brought to the bank, which cleared the cheque.
Ans As per Section 85, Paying banker is justified in releasing the payment in favour of Bearer and
they are not liable even if instrument was stolen provided payment was made in good faith
Case-5 Suppose in above case no 4, it was negotiated by R to A then to B, C and D. From custody of D
it was stolen by Q and brought to the bank which cleared the same. Assuming that at the time of
transfer by C to D, Restrictive Endorsement had taken place still Banker release the payment in
favour of Q.
Ans As per Section 85, Paying banker is justified in releasing the payment in favour of Bearer. In
case of a Bearer instrument, even if any endorsement is imposed, still instrument remains a
bearer instrument only.
19.38 NON LIABILITY OF BANKER RECEIVING PAYMENT OF CHEQUE [Section 131]

A banker who has in good faith and without negligence received payment for a customer of a cheque
crossed generally or specially to himself shall not, in case the title of the cheque proves defective, incur any
liability to the true owner of the cheque by reason only of having received such payment.
In order to avail such a protection, the banker needs to prove the following:
(a) That the banker had received the payment of crossed cheque
(b) That the collection was made by the bank on behalf of the customer
(c) That the collecting bank must have acted in good faith and without negligence.
19.39 EFFECT OF NON-PRESENTMENT OF CHEQUE WITHIN A REASONABLE TIME

[Section 84]
Drawer can be 1 Cheque cannot be presented within a reasonable time of its issue
absolved from
liability if
following 2 Drawer was having sufficient balance in his a/c and cheque should have been
condition are paid, in case the same is being presented within a reasonable time.
satisfied 3 After issue of cheque but prior to presentment for payment, drawee bank fails,
which result into actual damages to the drawer.
19.40 BOUNCING OF CHEQUES [Section 138 to 142]
Meaning of A cheque is said to be bounced or dishonored by non-payment when the drawee of the
Bouncing cheque makes default in payment upon being duly required to pay the same.
Consequences A drawer of a dishonored cheque shall be deemed to have committed an offence and
shall, without prejudice to any other provision of the Negotiable Instruments Act, be
punishable with
 Imprisonment for a term which may extend to 2 year, or
 with a fine which may extend to twice the amount of cheque or
 With both.
Requirements to 1 The cheque should have been dishonored

be satisfied
 due to insufficiency of fund
before imposing
penalty  standing to the credit of the account on which the cheque was drawn or
 for the reason that the amount of cheque drawn on the account exceeds
the sanctioned limit
236 Theory Module 1
2 The cheque should have been issued by the drawer in favour of another person
for the discharge of legally enforceable debt or other liability, in whole or in
part.
3 The cheque should have been presented to the bank within a period of' 3
months from the date on which it is drawn
4 The payee or the holder in due course of the cheque should have made a
demand for the payment of money by providing a written notice to drawer
within 30 days of the receipt of intimation from bank regarding dishonor.
5 The drawer failed to make the payment to the payee or the holder in due course
within 15 days of the receipt of the said notice.
6 The payee or the holder in due course should have lodged a written complaint of
the offence to a Court within one month of the date on which the cause of action
arose under the said provisions. [Section 142]
Presumption in When a cheque is dishonoured, it shall be presumed that the holder of a cheque
Favor of Holder received the cheque for the discharge of any debt or other liability.
[Section 139] In Simple words, it means:-
Defense Which It shall not be a defence in a prosecution of an offence under section 138 that the
May Not Be drawer had no reason to believe when he issued the cheque that the cheque may be
Allowed in any dishonoured on presentment for the reasons stated in that section.
Prosecution
under section
138 [Section 140]
Offences By (1) If the person committing an offence under section 138 is a company, every person
Companies who, at the time the offence was committed—
[Section 141] :- was in charge of, and
:- was responsible to the company for the conduct of the business of the
company,
as well as the company, shall be deemed to be guilty of the offence and shall be liable
to be proceeded against and punished accordingly.
Exception: Provided that nothing contained in this sub-section shall render any
person liable to punishment if he proves that the offence was committed without his
knowledge, or that he had exercised all due diligence to prevent the commission of
such offence.
Where a person is nominated as a director of a company by virtue of his holding any
office or employment in the Central Government or State Government or a financial
corporation owned or controlled by the Central Government or State Government, as
the case may be, he shall not be liable for prosecution under this chapter.
(2) Where any offence under this Act, has been committed by a company and it is
proved that the offence has been committed with the consent or connivance of, or is
attributable to, any neglect on the part of, any director, manager, secretary or other
officer of the company, such director, manager, secretary or other officer shall also be
deemed to be guilty of that offence and shall be liable to be proceeded against and
punished accordingly.
Explanation: For the purpose of this section—
(a) “Company” means any body corporate and includes a firm or other
association of individuals; and
(b) “Director”, in relating to a firm, means a partner in the firm.
Let us Summarize
COGNIZANCE OF OFFENCES [SECTION 142]
Cognizance on A written complaint should have been made to a metropolitan or a first class judicial
written magistrate by the payee, or holder in due course of the cheque.
complaint:
Limitation for such complaint is made within one month of the date on which the cause of action
filing of arises under clause (c) of the proviso to section 138;
complaint Provided that the cognizance of a complaint may be taken by the court after the
prescribed period, if the complainant satisfies the court that he had sufficient cause for
not making a complaint within such period.
Jurisdiction of no court inferior to that of a Metropolitan Magistrate or a Judicial Magistrate of the

court: first class shall try any offence punishable under section 138.
Jurisdiction of (a) if the cheque is delivered for collection through an account, the branch of the
courts for the bank where the payee or holder in due course, as the case may be, maintains the
trial of offence account, is situated; or
(b) if the cheque is presented for payment by the payee or holder in due course,
otherwise through an account, the branch of the drawee bank where the drawer
maintains the account, is situated.
Explanation For the purposes of clause (a), where a cheque is delivered for collection at any
branch of the bank of the payee or holder in due course, then, the cheque shall be
deemed to have been delivered to the branch of the bank in which the payee or holder
in due course, as the case may be, maintains the account.”
Summary: -
238 Theory Module 1
VALIDATION FOR TRANSFER OF PENDING CASES [SECTION 142A]
Where the payee or the holder in due course, as the case may be, has filed a complaint against the drawer of
a cheque in the court having jurisdiction under sub-section (2) of section 142 or the case has been
transferred to that court and such complaint is pending in that court, all subsequent complaints arising out
of section 138 against the same drawer shall be filed before the same court irrespective of whether those
cheques were delivered for collection or presented for payment within the territorial jurisdiction of that
court.
“X” from Delhi “Y” from Sahibabad
Pay “X”
5,00,000
Punjab National Bank

Ghaziabad Branch “Y”
Steps Incident
1 X presented cheque to his Bank i.e. HDFC (Noida Branch)
Cheque Dishonoured
2 Case to be lodged in the court of
………………………………
……………………………..
Having jurisdiction over …………………………………………………………….
POWER OF COURT TO TRY CASES SUMMARILY [SECTION 143]
(1) Trial of All offences under this Chapter shall be tried by a Judicial Magistrate of the first class
Offence: or by a Metropolitan Magistrate and the provisions of sections 262 to 265 (both
inclusive) of the said Code shall, as far as may be, apply to such trials.
In case of summary trial: Provided that in the case of any conviction in a summary
trial under this section, it shall be lawful for the Magistrate to pass a sentence of
imprisonment for a term not exceeding one year and an amount of fine exceeding five
thousand rupees.
In case where no summary trial can be made: Provided further that when at the
commencement of, or in the course of, a summary trial under this section, it appears
to the Magistrate that the nature of the case is such that a sentence of imprisonment
for a term exceeding one year may have to be passed or that it is, for any other reason,
undesirable to try the case summarily, the Magistrate shall after hearing the parties,
record an order to that effect and thereafter recall any witness who may have been
examined and proceed to hear or rehear the case in the manner provided by the said
Code.
Summary:
(2) Speedy Trial: The trial of a case under this section shall, so far as practicable, consistently with the
interests of justice, be continued from day to day until its conclusion, unless the Court
finds the adjournment of the trial beyond the following day to be necessary for
reasons to be recorded in writing.
Summary: -
(3) Speedy and Every trial under this section shall be conducted as expeditiously as possible and an
efficient Disposal endeavour shall be made to conclude the trial within six months from the date of filing
of the complaint.
Summary: -
POWER TO DIRECT INTERIM COMPENSATION [SECTION 143A]

(1) the Court trying an offence under section 138 may order the drawer of the cheque to pay interim
compensation to the complainant—
(a) in a summary trial or a summons case, where he pleads not guilty to the accusation made in the
complaint; and
(b) in any other case, upon framing of charge.
(2) The interim compensation under sub-section (1) shall not exceed twenty per cent. Of the amount of the
cheque.
(3) The interim compensation shall be paid within sixty days from the date of the order under sub-section
(1), or within such further period not exceeding thirty days as may be directed by the Court on sufficient
cause being shown by the drawer of the cheque.
(4) If the drawer of the cheque is acquitted, the Court shall direct the complainant to repay to the drawer the
amount of interim compensation, with interest at the bank rate as published by the Reserve Bank of India,
prevalent at the beginning of the relevant financial year, within sixty days from the date of the order, or
within such further period not exceeding thirty days as may be directed by the Court on sufficient cause
being shown by the complainant.
(5) The interim compensation payable under this section may be recovered as if it were a fine under Code
of Criminal Procedure, 1973.
(6) The amount of fine imposed under section 138 or the amount of compensation awarded under the Code
of Criminal Procedure, 1973, shall be reduced by the amount paid or recovered as interim compensation
under this section
Summary:
OFFENCES TO BE COMPOUNDABLE [Section 147]

Notwithstanding anything contained in the Code of Criminal Procedure, 1973 every offence punishable
under this Act shall be compoundable.
POWER OF APPELLATE COURT TO ORDER PAYMENT PENDING APPEAL AGAINST
CONVICTION [Section 148]
(3) In an appeal by the drawer against conviction under section 138, the Appellate Court may order the
appellant to deposit such sum which shall be a minimum of twenty per cent of the fine or
compensation awarded by the trial Court:
240 Theory Module 1
Provided that the amount payable under this sub-section shall be in addition to any interim compensation
paid by the appellant under section 143A.
(2) The amount referred to in sub-section (1) shall be deposited within sixty days from the date of the
order, or within such further period not exceeding thirty days as may be directed by the Court on sufficient
cause being shown by the appellant.
(3) The Appellate Court may direct the release of the amount deposited by the appellant to the complainant
at any time during the pendency of the appeal:
Provided that if the appellant is acquitted, the Court shall direct the complainant to repay to the appellant
the amount so released, with interest at the bank rate as published by the Reserve Bank of India, prevalent
at the beginning of the relevant financial year, within sixty days from the date of the order, or within such
further period not exceeding thirty days as may be directed by the Court on sufficient cause being shown by
the complainant.
Explanation: Thus, Section 148 provides that in the event of the conviction of the drawer of the cheque, if
the drawer proceeds to file an appeal, the Appellate Court has the power to order the drawer of a cheque to
deposit a minimum of 20% of the fine or compensation awarded by the Magistrate Court in the appeal
preferred against his/her conviction. This amount can be ordered anytime during the pendency of the
appeal. The procedure relating to payment of the above stated fine and refund of the same if the appeal
succeeds, is similar to what has been laid down in Section 143A of the Act.
Summary:
19.41 ACCEPTOR FOR HONOUR [Section 108 to 112]
Meaning:  When a BE has been noted or protested for non-acceptance and

[Section 108]  any person accept it
 for honour of drawer or of any of the endorser
 such person is called as Acceptor of Honour
Acceptor for The person who accepts the bill for the honour is called the acceptor for honour.
Honour
The rights and 1 An acceptor for honour binds himself to all parties subsequent to the party for
liabilities of whose honour he accepts to pay the amount of the bill
acceptor for
honour are as 2 Such party (i.e. a party for whose honour he accepted the bill) and all prior
follows (Simple parties are liable to compensate the acceptor for honour for all loss or damages
Interpretation) sustained by him in consequence of such acceptance.
3 An acceptor for honour cannot be charged unless the bill has, at its maturity,
been presented to the drawee for payment, and has been dishonored by him,
and noted or protested for such dishonor.
Let us Analyze
19.42 Holder’s right to duplicate of lost bill [Section 45A]
Where a bill of exchange has been lost before it is overdue,

 the person who was the holder of it may apply
 to the drawer to give him another bill of the same tenor,
 giving security to the drawer, if required,
 to indemnify him against all persons whatever in case the bill alleged to have been lost shall be
found again.
 If the drawer on request as aforesaid refuses to give such duplicate bill, he may be compelled to do
so.
Let us Analyze
19.43 LIABILITY OF PARTIES TO NEGOTIABLE INSTRUMENT
1. Liability of  The drawer of a bill of exchange or cheque is bound in case of dishonour by the
drawer drawee or acceptor thereof, to compensate the holder, provided due notice of
[Section 30] dishonor has been given to, or received by, the drawer as hereinafter provided.
 The liability of the maker of promissory note is primary, while the liability of
the drawer of a bill arises on dishonour by acceptance or non-acceptance by the
drawee or acceptor respectively. The drawer of a bill, however, can exclude or
limit his liability upon the bill.
 The liability of the drawer of a cheque is primary as in case of dishonour the
holder of the cheque has no remedy against the banker. He can only sue the
drawer.
2. Liability of  The drawee of a cheque having sufficient funds of the drawer in his hands
drawee of cheque properly applicable to the payment of such cheque must pay the cheque when
[Section 31] duly required so to do, and, in default of such payment, must compensate the
drawer for any loss or damage caused by such default.
 The drawee of cheque must always be a banker. The drawee bank is bound to
honour the customer’s cheque if he has sufficient funds of the drawer
applicable to the payment of such cheque. If the drawee bank wrongfully
dishonours the cheque it can be made liable for such default. The liability for
such default is not towards the payee or the holder but towards the drawer. A
bank is liable for dishonour of the cheque, to the drawer (his customer) only
and not to the payee or the holder of the cheque as there is no privity of
contract between the bank and the payee or the holder.
3. Liability of The maker of a promissory note and drawee of a bill of exchange are the person, who
maker of are primarily liable for making payment of the instrument.
promissory note
and drawee of bill
[Section 32]
242 Theory Module 1
4. Liability of The liability of a endorser in the instrument is secondary and conditional in nature.
Endorser The endorser of an instrument is liable to every subsequent holder, in case of
[Section 35] dishonor of instrument provided the following conditions are satisfied.
(i) The instrument has been dishonored by the party who is primarily liable to pay.
(ii) Due notice of dishonor must have been given to or received by such endorser.
(iii) He must have not excluded him from his liability by making "san recourse
endorsement."
5. Liabilities of According to the relevant provisions of this Act, every prior party in a negotiable
prior parties instrument is liable, thereon, to a holder in due course until the instrument is duly
[Section 36] satisfied.
Let us Analyze
19.44 PRESENTMENT FOR PAYMENT
1. Meaning of Presentment for payment implies presenting an instrument to the party for payment.
Presentment for
Payment
2. Provisions Relating to the Presentment for Payment
(a) Instruments for Presentment for payment must be made in respect of all instruments except a
which presentment promissory note payable on demand and which is not payable at a specified place.
required [Section
64]
(b) By Whom Presentment for payment must be made by the holder or his duly authorized agent.
(c) To whom (a) the maker, acceptor or drawee;

[Section 64 and 75] (b) the duly authorized agent of maker, acceptor or drawee;
(c) Legal representative in case of death.
(d) Assignee in case of insolvency.
(d) When No presentment for payment is necessary, and the instrument is dishonored at the
Presentment is due date for presentment in any of the following cases:
Unnecessary
1 If the maker, drawee or acceptor intentionally prevents the presentment of
[Section 76]
the instrument, or
2 If the instrument is not payable at any specified place, and he cannot after
due search be found;
3 If the instrument is payable at his place of business, and he closes such
place on a business day during the usual business hours, or
4 As against any party if, after maturity, with knowledge that the instrument
has not been presented, he makes a part-payment on account of the amount
due on the instrument, or promises to pay the amount due thereon in whole
or in part; or otherwise waive his right to take advantage of any default in
presentment for payment;
Let us Analyze
19.45 PAYMENT AND INTEREST [Section 78]
Situation-1-Where Interest shall be calculated at the rate specified on the amount of the principal
rate of interest is money due thereon, from the date of the instrument, until tender or realization of
provided such amount, or until such date after the institution of a suit to recover such amount
as the court directs.
Situation-2- When Interest on the amount due thereon shall be calculated at the rate of 18% per annum,
no rate of interest is from the date at which the same ought to have been paid by the party charged, until
specified in the tender or realization of the amount due thereon, or until such date after the
instrument— institution of a suit to recover such amount as the court directs.
Let us Analyze
Exercise 5
Question 1 Dated-1st Jan 2013
I order Aman to pay `5.0 Lacs to me after 30 Days
Signatures of Drawer Signatures of Drawee

Vijay
Vijay negotiate the instrument to Kamal and instrument was further negotiated from Kamal
to  Ravi Sunny.
Now Sunny brought the instrument for acceptance to Aman, however Aman show his
willingness to put conditional acceptance as follow
Dated-1st Jan 2013
I order Aman to pay `5.0 Lacs to me after 30 Days

Vijay Accepted only if payment to be made after 90 Days
Aman
Situation No-1:- If sunny do not want to accept this acceptance, then he can sue
…………………………………………………………
244 Theory Module 1
Exercise 5
Situation-2:-Incase Sunny decide to go along with this acceptance, then solve the
following cases
Case-1- He accept the same without obtaining any consent from any prior party
In such a case, following parties shall be absolved from their liabilities
…………………………………………………………………………………
But, Sunny can still recover from……………………………………………………
Case-2- He accept the same after obtaining consent from Ravi
In such a case, following parties shall be absolved from their liabilities
…………………………………………………………………………………
But, Sunny can still recover from……………………………………………………
Question 2 Solve the following problem
Dated-1st Jan 2011
I order Ajay to pay `1.0 Lacs to me after 30 Days

Raj Ajay
RajMaheshSunnyVineet
Vineet brought the instrument for payment to Ajay, however Ajay Refused to pay the
same. Discuss the right of following Parties
1. Vineet = ……………………………………………………………………….
2. Sunny = ………………………………………………………………………
3. Mahesh = ……………………………………………………………………….
4. Raj = …………………………………………………………………………
Question 3 Discuss the right of Holder in following cases:-
Case No-1
Dated-1st Jan 2011
I order A to pay `5.0 Lacs to me 30 Days after sight

R
RXYZ
Problem-1- How many time Z shall approach A
Solution :-…………………………………………………………………
Problem-2-Incase A refused to Accept the bill, discuss the right of Z
Solution :-…………………………………………………………………
Exercise 5
Case No-2
Dated-11st June
I order Y to pay `15.0 Lacs to me after 30 Days

X
XABC
Problem-1- How many time C shall approach Y
Solution:-…………………………………………………………………
Problem-2-Incase Y refused to pay, discuss the right of C
Solution:-…………………………………………………………………
Case No-3
Dated-18st June

X Y
XABC
Problem-1- How many time C shall approach Y
Solution:-…………………………………………………………………
Problem-2-Incase Y refused to pay, discuss the right of C
Solution:-…………………………………………………………………
Question 4 Discuss the right of parties in following cases:-

Case-1- X approached Y for assistance and Y agreed to accept BE for him
Dated-8st Aug

X Y
246 Theory Module 1
Exercise 5
X ZWithout Consideration
Z AWithout Consideration
On due date Y refused to pay, discuss right of
1. A = ………………………………………………………….
2. Z = ………………………………………………………….
3. X = …………………………………………………………..
Dated-8st Aug

X Y
A BWith Consideration
1. B = ………………………………………………………….
2. A = ………………………………………………………….
3. Z = …………………………………………………………..
Dated-8st Aug

X Y
Exercise 5
B CWith Consideration
1. C= ………………………………………………………….
2. B= ………………………………………………………….
3. A= …………………………………………………………..
4. Z= …………………………………………………………..
Dated-8st Aug

X Y
B CWith Consideration
C DWithout Consideration
On due date Y refused to pay, discuss rights of
1. D = ………………………………………………………….
2. C = ………………………………………………………….
3. B = …………………………………………………………..
4. A = …………………………………………………………..
5. Z = …………………………………………………………..
Question 5 Discuss the right of Parties

X had several times sold the goods to Y, however suddenly Y decided to pay through
PN and provide the following to X
248 Theory Module 1
Exercise 5
Dated-8st Aug
I promise to pay `………….to X after 30 Days
Signatures of Promisor
Y
Problem-1-Whether the PN is valid

Answer-
Problem-2-Suppose X decided to fill `10,000 as against the Actual Liability of `6,000,
discuss the right of X
Answer-X Can Recover…………………………………………………..
Problem-3-Suppose X transfer the instrument to Z, who obtain it in good Faith and
for consideration, discuss the right of Z if Actual liab was `6,000 as against `10,000 as
filled on instrument
Answer-Z Can Recover…………………………………………………..
Problem-4-Suppose X decided to fill `8,000 as against the Actual Liability of `6,000,
however at the time of making the note Y placed a stamp of `5, which was covering an
amount of `10,000 assuming rate of stamp duty as 0.05%. Discuss the right of X
Answer-X Can Recover…………………………………………………..
filled on instrument and amount covered by stamp was `20,000
filled on instrument and amount covered by stamp was `8,000
Question 6 Discuss as to whose favour court will take and to whom it will be directed to prove their
point(Quest on Para 19.3)
1. Case of Ravi Kumar v Narayanmurthy
Fact of Case:- A BOE was drawn payable to R and it was accepted by N. No
consideration was involved. R sued N for payment and contended that
consideration was involved
Answer: …………………………………………………………………………
2. Case of Martin v Jasmeen

Exercise 5
Fact of Case:- A PN was drawn payable to J after 1 month(Actual date of drawn
was 17th Oct 2007), Date was kept as blank and J filled the date as 17th Sept and
presented the Instrument for payment on 20th Oct treating it as Maturity Date, M
Refused to pay and challenged the Date
Answer:…………………………………………………………………………
3. Case of Hari lal v Rastogi
Fact of Case:- A Cheque was drawn payable to J, it was endorsed to R. H obtained
the possession by applying coercion. Later on R refused to pay by contending that
the title of H was Defective. H Lodged a case against R.
Answer:-……………………………………………………………………………
Question 7 Following are some alteration imposed on Instruments as stated below. Analyze them
and Discuss, whether they can be classified into Material Alteration or not.
Case Prior After Alteration by Holder
No.
1
Dated-17th June-12 Dated-17th April-12
I promise to pay `1.0 Lacs to X I promise to pay `1.0 Lacs to X

after 90 Days after 90 Days
Signatures Signatures
Y Y
2
Dated-17th June-12 Dated-17th June-12
I promise to pay `1.0 Lacs to X I promise to pay `1.0 Lacs to X

Y Y
3
I promise to pay `1.0 Lacs to X I promise to pay `1.0 Lacs to X or

after 90 Days Z after 90 Days
Y Y
250 Theory Module 1
Exercise 5
4
Pay X or Bearer Pay X or Bearer
`5,00,000 `5,00,000
Axis Bank Signatures Axis Bank Signatures
Karol Bagh Branch Y Karol Bagh Branch Y
5
Pay X or order Pay X or order
`5,00,000 `5,00,000
6
I promise to pay `….Lacs to X I promise to pay `1.0 Lacs to X

Y Y
7
Pay X Pay X
`5,00,000 ` 5,00,000
8
I promise to pay 1,00,000 Lacs to I promise to pay 1,00,000 Lacs to

X on demand X on demand
Y Y

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MODULE 1

1.1 DEFINITION OF A COMPANY

1.2 PRIVATE COMPANIES [Section 2(68)]

1.3 PUBLIC COMPANIES [Section 2(71)]

1.5 SOME OTHER IMPORTANT DEFINITIONS

Relative of Ram = Spouse + Members of HUF + Others

Son including step son Daughter & her husband

Related Party: 2(76), with reference to a company, means—

X Limited XY & Company

MR is a partner of this firm

A Limited X Pvt Limited

D = Member of X Pvt Ltd

Solution From View of A Ltd From View of X Pvt Ltd

Example Decide whether Related party u/s 2(76)

L Pvt Ltd M Pvt Ltd

Solution From view of L Pvt Ltd From View of M Pvt Ltd

Y is a director of this company

Solution From view of Y Ltd From View of Z Ltd

Example Decide whether Related party u/s 2(76)

Z Ltd A Pvt Ltd

“A” is a director and hold 10%

Solution From view of Z Ltd From View of A Pvt Ltd

BOD of Z Ltd is accustomed to

SRE Ltd SRS

SRE acts as per the instructions

(viii) any body corporate which is—

Dealing of X Ltd with

A Ltd S Ltd H Ltd

B. Classification on basis of Liability

F. Formation of companies with charitable objects etc.: [Section 8]

1.7 INCORPORATION OF COMPANY [Section 7]

1.9 MEMBERS SEVERALLY LIABLE IN CERTAIN CASES [Section 3A]

2.1 MEMORANDUM OF ASSOCIATION [Section 2(56)]

Basic  It is the first step in formation of company

2.2 CLAUSES OF MEMORANDUM OF ASSOCIATION [Section 4]

Name Clause [Section 4(1)(a)]

Points to be The name stated in the memorandum shall not be—

2.3 ALTERATION IN NAME CLAUSE OF MEMORANDUM

 By obtaining the approval of Central Government in writing.

 By passing an ordinary resolution, and

 By obtaining the previous approval of the Central Government in writing

 A copy of order of Central Government shall also be filled within 3 month of

 On such communication, ROC will issue a fresh certificate of incorporation

2.4 REGISTERED OFFICE CLAUSE [Section 4(1)(b)]

Labeling of Every company shall—

2.5 ALTERATION OF REGISTERED OFFICE CLAUSE [Section 12]

(A) Change within 1. A resolution of the Board of Directors is required to be passed.

2.6 OBJECTS CLAUSE [Section 4(1)(c)]

2.7 ALTERATION OF OBJECT CLAUSE-PROCEDURE

1 Passing of a special resolution. [Section 13]

2.7 ALTERATION OF OBJECT CLAUSE-PROCEDURE

2.8 LIABILITY CLAUSE [Section 4(1)(d)]

2.9 CAPITAL CLAUSE [Section 4(1)(e)]

2.10 ALTERATION OF CAPITAL CLAUSE [Section 61] — PROCEDURE

2. Alteration can be 1 Increase of its share capital by issue of new shares;

3 Conversion of fully paid shares into stock or vice versa;

4 Sub-dividing the existing shares into shares of smaller amount

5 Cancellation of unissued shares.

3. Requirement of An ordinary resolution is required to be passed.