COMPANY LAW I

TABLE OF CONTENTS
1. THE CONCEPT OF CORPORATE PERSONALITY AND KINDS OF COMPANIES..................3
1.1. PERSONALITY..................................................................................................................3
1.2. TRACING THE JURISPRUDENCE........................................................................................3
1.3. TWO THEORIES.................................................................................................................4
1.4. FOUR THEORIES — FICTITIOUS PERSONS.........................................................................6
1.5. MODERNISED VERSION OF LEGAL PERSONALITY.............................................................7
1.6. FEW SPECIFIC FEATURES — CORPORATE BODY:............................................................9
1.7. WHAT IS THE DIFFERENCE BETWEEN A BODY CORPORATE AND COMPANY?.................10
1.8. PIERCING THE CORPORATE VEIL...................................................................................10
2. CONCEPT OF CONTROL.......................................................................................................15
2.1. SECTION 2(60)...............................................................................................................15
2.2. POSITIVE & NEGATIVE CONTROL..................................................................................16
2.3. QUALITATIVE CONTROL................................................................................................17
3. KINDS OF COMPANIES........................................................................................................18
3.1. CLASSIFICATION............................................................................................................18
3.2. PUBLIC COMPANY — LISTING CRITERIA......................................................................19
3.3. CATEGORIES OF OWNERSHIP.........................................................................................20
3.4. CATEGORISATION ON THE BASIS OF LIABILITY..............................................................22
4. INCORPORATION..................................................................................................................23
4.1. PROMOTION...................................................................................................................23
4.2. FEASIBILITY DETERMINATION.......................................................................................23
4.3. FINANCING.....................................................................................................................24
4.4. DRAFTING OF THE DOCUMENTS.....................................................................................24
4.5. PROMOTERS...................................................................................................................25
4.6. PRE INCORPORATION CONTRACTS.................................................................................27
5. MEMORANDUM OF ASSOCIATION......................................................................................29
5.1. OVERVIEW.....................................................................................................................29
5.2. RELEVANT CLAUSES......................................................................................................30
5.3. GENERAL REQUIREMENTS FOR AMENDMENT/ALTERATION PROCESS...........................31
5.4. LIMITATIONS..................................................................................................................33
5.5. ALTERATION OF SHARE CAPITAL CLAUSE....................................................................35
6. ARTICLES OF ASSOCIATION...............................................................................................36
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7. SHARES.................................................................................................................................40
7.1. NATURE.........................................................................................................................40
7.2. TYPES OF EQUITY SHARES............................................................................................41
7.3. REDUCTION & CANCELLATION OF SHARE CAPITAL......................................................42
7.4. PAID & UNPAID SHARES...............................................................................................46
7.5. REVISION — REDUCTION..............................................................................................47
8. SUPPORT CLASSES...............................................................................................................48
8.1. SHARES..........................................................................................................................48
8.2. BUY-BACK.....................................................................................................................55
8.3. DEBENTURES.................................................................................................................58
8.4. PRIVATE PLACEMENT....................................................................................................59

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1. THE CONCEPT OF CORPORATE PERSONALITY AND KINDS OF COMPANIES

05.07.2022

1.1. Personality
Personality is the distinct self of anyone. It is an entity that is capable of being governed by
the law. It:
- Has legal existence
- Has rights and duties
- Is a corpus and animus
Corpus is a body that is corporated by law. A combination of all animuses will give you
corpus. Personality is a cumulative of rights/ obligations/ duties which has a legal protection.
Personality is the treatment of a person before the eyes of law. Having a personality means
having a legal personality

1.2. Tracing the Jurisprudence

First Stage
The first stage of evolution was subject. Initially, there was no such thing as personality. We
had one single concept and that is of the sovereign. The scope of governance of the sovereign
lead to the formation of subjects. There was no principle of personality here. This was the
understanding of Austin that law is the command of sovereign. Law is everything the
sovereign asks his subjects to do.
As we move further and have a monarchical democracy, we started to have a more
individualistic understanding. This understanding gave us the term personality that was
synonymously used with identity.
Second Stage
The second stage of evolution is personality/ identity. Every person has his own personality.
Every person has a collective part of citizenship and in his own individual capacity, can be
governed by the law. The legal sense hasn’t developed and that is why personality and
identity is used synonymously. This gives us the understanding of natural persons.
Every single person was born and can be considered as a part of this collection known as
subjects/ country/ nation state. On an individual level, he has his own personality, his own
choices, decisions etc.
Third Stage
Humans faced renaissance and got smarter. The semblance of law comes into the picture for
the first time. We divide identity into two: societal and legal.
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Societal understanding of personality becomes identity. It is no longer synonymous. The

legal understanding of personality becomes the governing link between the sovereign and the
subjects as opposed to the previous developments. It became a vertical relationship. Both the
parties are at a different level of power. This vertical relationship was explained through
personality. At this point also, it is not strictly legal. We are still talking in the nature of
governance.
Fourth Stage
Until now, there is no semblance of law. Now, the law comes into the picture. We are
transforming from a monarchical form of government to a civilised form of government.
Now, we had rights, obligations and duties. Any person who is said to be a legal person is
said to have the above.
Legal personality in the fourth stage is about rights, obligations and duties. An individual
who can exercise these three elements can be said to be a legal person. A legal person can be
a natural person or juridical person. Legal personality involved an element of legal
capacity which implied a particular person (natural) is capable of executing legal
documents. Execution refers to completion or signing.
- First question- how do you define legal document?
- Second question- what do you understand by capacity?

1.3. Two theories

▪ Triangular Approach

Legal personality will be having three ends. Triangle has two distinct arms which will
connect. Capacity is there when there is economic interest i.e., financial gains/ financial
losses. In the olden days, we primarily had an agrarian society based on barter system.
Capitalism was booming at that point. Executing legal document along with a corresponding
legal interest.
Economic interest + legal interest = capacity to execute legal document
For a legal personality to exist, you need to have both.
At that time, guilds existed. Guild is an example of corpus and animus. They came together
to form guilds.

▪ Social Interest Theory

Social interest theory was given by Ihring.

Triangular Approach was taken to address these intricacies. Social Interest Theory by
Sociological School, Iring. Legal Personality can be explained through a triangle (it has two
distinct arms which connect to a single common point). Capacity only comes when the

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person has economic interest [1.] (i.e., financial gains and losses). The person should also
have a corresponding legal interest (stemmed from substantive laws) [2.].
 Crux: Economic Interest + Legal Interest (i.e., protection of economic interest
through substantive laws) = Legal Person
First time law got involved in the definition/meaning of legal person(ality).
In Guilds, various members came together to form a guild for protecting private interests.
These were nothing but associations. They were a combination of certain individuals to
represent their economic interest collectively. If individuals within the Association can be
regarded as natural persons, can the association be also considered to be an NP? Two schools
of thought arose
1. Superimposition of the triangular approach (TA)--> TA theory can be applied here
to consider the association a LP. Since it’s representing the economic interests of its
members, it can be considered to be LP. At the same time, it will be an
artificial/fictitious person. It will be a legal person but a fictitious entity ( = juridical
person).
2. Realist School--> association will be a real person. If we are considering an
association, it is having similar attributes of a real person; only the physical aspect is
absent. However, in terms of personality, only the treatment under eyes of law is
relevant; thus, physical existence does not matter. Limitation: thought process /
mental faculties. Humans can think independently. Can an association do the same?
The treatment under eyes of law is the same---> emanates from the actual/real persons
who comprise it

Note:
Difference between obligation and duty is that obligation arises from the duties. If a duty is
sanctioned by the force of law, it becomes an obligation. If you have a right, it becomes
liability. Right refers to legal sanctions. Right in terms of legal sanctions plus corresponding
duties will give rise to an obligation to perform.

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06.07.2022
Personality was being governed by citizenship and governance. Guilds were nothing but
associations. What did they do? It was nothing but a combination of several individuals
coming together to represent their economic interest. A question arose whether the
association that is doing nothing but representing the interest of the natural person also be
regarded as legal person?
The unanimous approach was that a legal person can be defined to be an association through
the triangular approach theory. The scope of a natural person is being broadened. A natural
person is legal person because he can think it through and is aware of rights, obligations and
duties. An argument came that an association can be a legal person but at the same time, it
will be an artificial or fictitious person.
The other school of thought said that an association will be a real person i.e., realist school.
They said that when we are talking about a real person or artificial person, we are discussing
in what sense? Why look at it from the eyes of law and not the eyes of society? This is
because an association has rights. The collective rights are represented. It has obligations that
are collective obligations. There are duties which are again, collective duties.
If we are considering an association, it represents similar attributes of a natural person. It just
does not have a physical appearance but there are thought processes and mental faculties
involved. But the question the realist school had to answer was can an association understand
the law without natural person helping out?
Legal person was at that time, a natural person. Now, we are adding more by including
juridical person in its ambit as well. Legal person is the wider classification. We are coming
from a broader classification to a narrow one

1.4. Four theories — fictitious persons

1) Legal fiction theory
This theory is a derivative of the triangular approach theory. When you create a
fictitious entity for the protection of legal interest, then the basis of that personality

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is arising from that interest. Natural persons or animus create the juridical legal
person which is nothing but a fiction or a figment of imagination or an artificial entity
to protect the collective interest. If you remove it out of equation, the entire structure
falls.
The basic premise of this theory was to accord protection to the natural persons
involved in a juristic entity and protect their interests against the defaulter. As per
fiction theory, a personality is attached to corporations, institutions, and funds by a
pure legal fiction. The personality attributed to the corporate is different from that of
its members.
Fiction theory suggests there are two fictions working together:
(1) resulting in creation of fictitious entity, i.e. the name/ identity given to them,
(2) when the corporate is bestowed with will of an individual, which enables the
entity to operate in legal scenario.
So, both these elements have to be there to enable the entity to operate in legal
scenario. This double fiction is what established a personality of corporate different
from its member. Association is the legal fiction that is protecting the interest of the
animus. The associating members are the cause for the existence. Animus or natural
persons are the cause for the protection of their collective interest.

2) Concession theory
These two theories differ in terms of the source. In the legal fiction theory, the source
is animus. However, in the concession theory, the source is animus + sovereign.
According to this theory, without sovereign, the structure will fall. The sovereign will
be allowing you or permitting the natural person to move forward. This is
procedural requirement, not a substantial requirement, which emanates from the state.
For example, in the License Raj, to establish a company, you need permission from
the government.
It is a derivative of the analytical school of thought. They consider that the law is
created by the state for the governance of natural persons.
As per concession theory, sovereign gives certain rights to abstract entity, it ascribes
some personality to abstract entity that allows it to operate as a natural person. you
create a fictitious entity by giving the concession. By concession some rights are
accorded not physical existence. If you take away the concession, the company gets
lost. The very reason as to why juristic persons are existing is the concession given by
the sovereign.

3) Bracket or Symbolic theory

It is a derivative of the sociological school of thought. The evolution of law happens
due to the evolution of the society. It is very similar in approach and complements
the purpose theory. A juridical entity is an artificial entity which is created to
represent the collective interest of natural persons. If we are talking about another

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interest which is not similar to collective interest, for this specific interest, the
juridical entity will not be a legal person.
As an abstract entity, a company does not have any legal identity. The concession that
it gets creates a legal identity out of an abstract entity. To ensure this entity works
properly, we need a stringent structure. This SS ensures how and when the entity
can function- this put limits on scope and operation of entity- so it will be considered
a legal identity only when it works within thar SS. So, this SS is a bracket that has
been placed to put limit.
For example, Memorandum of association (MoA). It contains an object clause which
provides the broad areas or aspects or arenas where the company is going to function/
eligible to function. Only when these areas are being stuck to, the company will be
considered a separate legal entity. If we move beyond the bracket, the body
corporate will no longer be considered a separate legal identity . Any actions for
thereon you can’t make the company liable for its actions. It will attract piercing of
the corporate veil, and come to the constituents.

4) Purpose theory
The objectives can evolve as long as they satisfy the collective requirement. You can
keep whatever objectives you want to choose. Shortcomings of the bracket theory
was that the lack of evolution part was solved by purpose theory. The Purpose
theory took bracket theory and made it better. The scope can expand, given your
interest and requirements. Bracket was not giving us possibility for expansion of
scope
For example, trade unions are also associations. Legal persons can file cases on
labour hours, wages and working conditions. Now, they want to talk about maternal
or paternal leaves or menstrual leaves. If this is going to be added to the trade union
objectives, they have to be agreed upon by every single number. If not, they can’t
move forward
In a company, there is MoA and AoA. MoA contains an objects clause. If you go
beyond that, the company does not function and if it does, it is individual liability and
company cannot be held liable. Here, we don’t have the understanding of majority or
minority just about yet. So, it has to be unanimously adopted.

07.07.2022

1.5. Modernised version of legal personality

A corporate legal person is divided into two:

▪ Body corporate

▪ Corporate bodies

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The scenario before the case of Salomon v. A Salomon & Co. Ltd. was that company is one
form of corporate body. Until then, the concept of corporate legal personality had not
evolved.

SALOMON V. A SALOMON & CO. LTD

This case was first heard in the High Court, then the Court of Appeals and finally, the House
of Lords. First, it was a sole proprietorship and then, company was formed. 99% of the
company belonged to Salomon and the rest 1% belonged to two sons. Certain grievances
were raised and there were loans that were defaulted upon. A question arose that who will be
paying these loans. A case was filed against Aron Salomon. He said I am a part of the
company; I am not the company.
The High Court said that Aron Salomon will be liable. The reason the High Court gave was
that there was no distinction between the company and him. The reason given was because he
owned 99% of the company. It was appealed to the Court of Appeals. The Court of Appeals
upheld the High Court decision. One was the liability aspect, and the other was the
understanding of the provision of the company in the eyes of law.
The House of Lords said two things:
Firstly, Aron is liable, but the reasoning is different. He is liable not because the company
took the loan. But he is liable on account of fraud. He took the loan, converted the business
into company and lost the loan. Now, he is trying to put the loan default on the company. It is
an individual liability.
A question arose if there can be a distinction when Aron owns 99%? The House of Lords said
there are 2 forms of legal entities:

▪ One is corporate body that includes almost all the forms of juridical entities.

▪ Second is body corporate i.e., personality that we will come to know as corporate
legal personality.
A corporate legal personality is the subset of legal personality which gave us body corporate.
A body corporate is different from a corporate body. They did not define body corporate, but
they gave its features. A company is a body corporate. One of the essential implications are
separate legal identity or corporate veil. It can be sued, and it can sue in its own name. It
can also take its own decision, which is an example of the realist approach. The company
became the mixing point of artificial school of thought and legal school of thought.
Observation
Their Lordships of the House of Lords observed:
“...the company is a different person altogether from the subscribers of the memorandum;
and though it may be that after incorporation the business is precisely the same as before,
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the same persons are managers, and the same hands receive the profits, the company is not,
in law, their agent or trustee. The statute enacts nothing as to the extent or degree of
interest, which may, be held by each of the seven or as to the proportion of interest, or
influence possessed by one or majority of the shareholders over others. There is nothing in
the Act requiring that the subscribers to the memorandum should be independent or
unconnected, or that they or any of them should take a substantial interest in the
undertakings, or that they should have a mind or will of their own, or that there should be
anything like a balance of power in the constitution of company.”

08.07.2022
Body corporate is the final classification of legal personality. It is the narrowest possible
classification.

1.6. Few specific features — Corporate Body:

1) Separate Legal Existence
The question came because of the question of liability. There is a corporate veil between the
corporation and the individuals comprising it. There is Memorandum of Association (MoA),
which provides for the corporation’s independent legal existence and identity under the law
as it is the charter of the corporation. The implication being that the existence of juridical
entities is not dependent on the natural persons.
2) Perpetual Succession

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Company will continue to exist even if the natural person who formed it is no longer in
existence. For instance, Reliance Industries Ltd. was formed by Dhirubhai Ambani, but its
existence continued even after his death.
Moreover, on a daily basis, there is a change in the shareholding pattern of the company. But
thi has no effect on the succession of the company.
3) Legal liability
The ability to sue someone and be sued by someone. This legal liability arises in the name of
the body corporate. Right results in a corresponding duty. Its jural contradiction is
obligation. Right will amount to an obligation, which if violated will amount to liability.
Corporate body that is not a body corporate (such as, partnerships, joint ventures, several
liability, etc.). If that becomes an LLP, it will become a body corporate. Trust is not a body
corporate- in general parlance, we do consider but as far as liability is concerned, it is always
trustee. You can initiate legal proceedings. Counter is that legal proceedings can be initiated
against you.
4) Common Seal
It was the identity of the company. If that seal is there, we will assume that this particular
document has been executed. However, this requirement has been removed, now it is optional
and not mandatory [2015 amendment]. Now that we have technological advancements, we
have logos, letterheads, etc.

1.7. What is the difference between a body corporate and company?

A company is registered under the Companies Act. There is no difference as such. This is
because the Nomenclature can be different but the features are the same. If a body corporate
is incorporated under LLP, it is LLP- if it is incorporated as a society, it becomes society.

1.8. Piercing the Corporate Veil

A company acts as a cell membrane vis-à-vis the natural persons that comprise it, which is
called the corporate veil. The sum total of individual interests and consciousness become an
entity. When the company is working in accordance with MOA, it has been determined by
natural persons. The moment it goes beyond MoA, it loses its body corporate features. It
is no longer a legal person. This activity is called the piercing of the corporate veil. It is the
act of removing the distinction.

Read Section 2(60)- talks about officer in default.

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11.07.2022

1.8.1. Impact of the corporate veil

The corporate veil is to protect the natural persons from the unnecessary and unwarranted
liabilities which often arose against the natural persons.
For example, one person convinces everyone to go on a mass bunk – everyone should not be
held liable for the act of one person.
With every single innovation comes its own challenges. When this came, laws were not ready
and they suggested individual liabilities.
Then came the question whether this should be pierced or not. This understanding of
corporate veil became questionable. Why? Question arose with respect to scope and nature.

1.8.2. When can the Corporate Veil be Pierced?

This question arose in the case of Cotton Corporation India Ltd. v. GC Odusumath. Piercing
of corporate veil will entail that you disregard the corporate identity and hold the natural
persons liable. Court said that if we remove or pierce the corporate veil, we are violating the
basic principle of body corporate.
Furthermore, the court elaborated upon when the corporate veil can be pierced:
1) Corporate veil is not absolute: It was evolved to help the people. It should be
interpreted in a limited sense. We should be careful about how and when we pierce
the veil. To pierce the veil, there should be compelling reasons. What are these
compelling reasons?
a. By the requirement of Statute: Section 447 is a provision pertaining to fraud
and how it does not prescribe the liability of the company; that a company
cannot do fraud because it is acting in furtherance of the collective will.
b. Public Interest: If it is going against public interest, it is wrong. If nothing is
mentioned in statute, we go by public interest. Public interest is always a case-
based analysis. The requirement for public interest will always be different
Read-
https://www.lawteacher.net/cases/salomon-v-salomon.php
https://en.wikipedia.org/wiki/Salomon_v_A_Salomon_%26_Co_Ltd
https://indiankanoon.org/doc/50527052/

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12.07.2022

1.8.3. Countering Illegal Transactions/Circumventions

Gotan Limestone Co. Pvt. Ltd. v. Rajasthan Kharij Udyog

Here, we have multiple forms of entities. There is a firm F, which has a mining license. F is a
partnership firm having 4 partners. The license has a requirement that in case of transfer, the
directors will remain same.

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Normally, a company has three arms- one is subsidiary company where it has 50% or more
shareholders plus it can be a wholly owned subsidiary depending on the percentage- 100%
is wholly owned subsidiary. These are usually under the holding company. Together, we call
it a corporate structure or corporate groups.

Coming back to the case, now, there is an entity X. X and F have no relationship whatsoever.
But F wants to transfer the mining lease. The transfer requirement is same directors. Is direct
transfer possible? No cause different directors and entities are not the same. X incorporated a
company A.
In A, the partners of F became directors of A. Structurally speaking, there is no relation
between X and A.

Side-Info: Standard form of contracts- biased towards one party, cannot be amended.
There were 2 transactions
i. Transaction 1: between F and A concerning transfer of mining license
ii. Transaction 2: takeover of A by X

In takeover, you essentially buyout the other company. When you buy a company, the
ownership will change. Then, all the assets and liabilities will automatically shift without
an actual transfer taking place. The government challenged the mining license saying that
it was transferred to X who does not have the same directors.
There is a distinction between a firm and a company- they are 2 different entities. The
transaction was between partnership firm and company. Transaction 2 was never a
transfer- it was a takeover. Because it was a takeover, it will not qualify as transfer.

Now, a question arises whether transaction 1 is valid. It can only be valid when partnership
firm and company A are two separate entities. Are A and F two different entities or one? Can
the corporate veil of A be removed? If this veil has been removed, there will be no difference
between A and F.
Here, we are saying that A does not have an individual existence of its own.

13.07.2022
Lease is an agreement in which certain rights are transferred.
(what is the longest period for a lease? 99 years)
Every company has assets. The asset of A was lease agreement. Takeover of A by X. When
there is a takeover, all the assets and liabilities belong to the other person. What was the

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takeover amount? If lease was for 1 lakh, the takeover amount was also 1 lakh. F had the
license. F gave lease of license to A.
Govt. cancelled the license. License is an agreement between govt and F. If someone has
cancelled, they have breached the contract. Transaction between X and A was not a transfer.
The easier way to gain access was takeover. But in doing so, you are bypassing the entire
regulatory mechanism that has to be faced. If there is a loophole, govt. is losing out on
money.
When we are going for the valuation of takeover, there is an element of inflation that we have
to consider. Intent becomes very important.
Why was this company created?
The only purpose was facilitation of transfer of license through lease. There was no other
requirement. For this purpose, we would not consider A as a different entity. Thus, the court
removed the corporate veil of A. Entire sham of a takeover. It is violating the law because it
was done to bypass the legal requirements.
Thus, in this case, the veil of corporate entity was used to give effect to an illegal
transaction by dividing it into two separate transactions. It was held that the lessee privately
and unauthorizedly cannot sell its rights for consideration and profits from rights belong to
State as it is an illegal transfer.
What if F was a company?
X could have taken over F directly. With respect to notice to the regulators, 1956 act was
amended to include this. Irrespective of whether it is a merger, amalgamation, takeover or
acquisition, any process which changes the current position or structure of the company, in
that case, notice has to be sent to all the regulators.

14th July, 2022

State of UP v. Renusagar Power Company

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Hindalco was a public company and floated a company called Renusagar. Renusagar was a
wholly owned subsidiary of Hindalco. Hindalco entered into an agreement and sought
permission from UP for power generation. For this, license was gained by Hindalco in
Renusagar’s name.
Expenses for the power generation plant was taken up by Hindalco. Here, there is a power
purchase agreement (PPA) involved. There are 2 clauses relevant for us:

i. Price Clause: It stated that the agreement will be on arm’s length price (ALP). This is
the Market price. [concept of ALP: the transactions between unrelated parties are
done at an open market price and accordingly, ALP demonstrates the price that
should have been charged between related parties had those parties were not
related to each other].

Side-Note on Related Party Transactions & ALP:

Informal negotiation between the parties becomes a problem when there is holding and
subsidiary company and control. Control has a strong influence over the Companies Act.
Control can come about in two ways:
- one is shareholding (objective aspect) and
- the other is through a subjective mechanism.
Control should be taken seriously because whenever a company transacts, it is relevant in the
interests of the shareholders. In the Indian scenario, 90% of the businesses are family owned.
There will be an element of influence. You cannot force your shareholders to sustain losses.

At that point, a reference point or law was needed. We started calling these transactions as
related party transactions (RPTs). It is a transaction between two parties who are known to
each other and have some amount of influence over each other. 1956 Act did not include
anything related to related party transactions.
When the legal development happened, there were two options:
- either ban transactions or
- regulate them.
Banning did not make sense because 90% businesses are family businesses. Regulation point
became the price at which such transactions are entered into. As long as the price is at the
arm’s length price, then it is final. If you go below that price, you are in trouble, that is
outrightly banned. Amendment was in 2013. The transaction will be based on two things:

- 2(77)- defines relatives

- 2(78)- talks about related parties
[READ THE PROVISIONS ON RPT AND THIS BAN]

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Case (contd.)
ii. Quantity clause: This was tricky. They said that the quantity of electricity will be
determined on what? As per the financial needs of Renusagar.
So, let’s say renusagar has a financial requirement of 1 lakh and per unit is 10 rupees. Total
quantity- 10,000. Implication of this clause was that it was dependent on renusagar, not
dependent on hindalco. Irrespective of the fact whether we need that much or not, we will
still order. Even if there was surplus, doesn’t matter but we will order. That is commissioned
to cater to the financial requirements of Renusagar. We are not talking about profit but break-
even point (Break-even point = no profit no loss (profit is exactly 0)).

When power generation started, there are two requirements

First one is transmission license- why?
Because it is regulated by the government. It is a part of the sovereign function.
Second is the requirement of a tariff duty- why?
We use natural resources for power generation and the government has ownership. Because
you are using and making a profit out of it, you pay a tariff duty.
When the power generation actually started, the government demanded tariff duty from
Renusagar. Renusagar’s response was they would not give. Their contention was that they
would pay no tariff duty was because the power generation was not meant for the purpose of
profit.

Actual profit and loss do not come into perspective. No tariff duty because transmission
was not for a third party or a profitable purpose.

15th July
Why was tariff duty required? It is imposed when you are making a profit and there is third
party transmission involved. Renusagar contended none of these are true. There is zero
requirement of actual profit. But it should be transferred to third party.
Government stated that general rule suggests that they are different entities. If they are
different entities, this transmission is not for its own consumption, it is to a third party. State
argument was that corporate veil should be maintained in this case and separate identities
should be maintained. Profit arises only when you’re selling it to a third party. Intent should
be profit intent. Whether they are getting an actual profit or not does not matter.
Even if they are related parties, it is still a different entity. The question is are these entities
operating differently? If the answer is affirmative, then yes it will be considered a third-party
transaction.

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Renusagar took a different approach. We need to look at whether renusagar as an entity can
function without hindalco. They gave a scenario where hindalco is not in existence.
Would Renusagar have any shareholders? No.
Would a board of directors exist? No because the board is appointed by shareholders.
The only thing that would exist is renusagar as a company on paper only. Remove hindalco
from existence and renusagar as a company would fall. There is no functional difference,
but only a structural difference. They are different on paper but functionally, they are the
same because there is no difference, the transaction should not be interpreted in the lines of
corporate veil. The transaction is not with a third party but merely furthering one’s own
consumption.
What is the relevance of that?
Court agreed to that saying functionally speaking, there is no difference. They were talking
about the ability of Renusagar to generate power. They came to a conclusion that renusagar
cannot generate power on its own without hindalco. If they are able to generate power on its
own, then this agreement is third party.
Two things- one is license, second is assets
i. Who acquired the assets? Hindalco acquired it and then gave it to Renusagar
ii. Who was responsible for the assets for power generation? Hindalco
Court said if we look at the responsibility, it was dependent on these two things. If we
remove these two things, whether power generation is possible? Ability was being derived by
renusagar from Hindalco. For that reason, we cannot consider hindalco and renusagar as two
different entities. The problem was that Electricity Act only talked about third party
transactions
What rule of interpretation would the court have followed here? Literal interpretation was not
helping us or providing recourse. The court said that the entire transaction was nothing but
hindalco’s own source of power. It was power generation meant for personal consumptions.

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16th July, 2022

2. CONCEPT OF CONTROL

2.1. Section 2(60)

Inclusive List —
1) Whole time director. independent directors are not included.
2) Key managerial personnel. Directors authorised by Board- and given his consent.
Immediate authority of the Board. Person under whose advice/directions Board is
accustomed to work. When the corporate veil is lifted, the concept comes into the
picture.
3) Control. influence exercised by a person or a group of persons to alter, modify or
execute a decision by a company.
The corporate veil is lifted when the company has acted beyond its scope. If the company has
acted in that manner, it means that there is one person dictating the terms and has forced the
company to act in that manner. The directors are the ones who initiate the decision. Directors
take the decision, they do not execute it.

Directors will still be responsible for the purpose of control. Not using the term individual.
Two acts- 1956 and 2013. 1992- Scam happened. When Harshad Mehta scam happened, the
entire economy was in shambles. Needed a regulator who can regulate the stock market-
SEBI. It was established in 1992. When SEBI became regulator, they decided to be more
specific in figuring out who can be help responsible. Hence, came the understanding of
control for the first time. Control was very narrow.

Who can prevent things from happening? Which shareholders can prevent a decision from
being taken?
First approach to defining control- more than 25% criteria came along. According to the
1956 Act, there was ordinary resolution and special resolution. The difference was the
affirmation threshold, i.e., basically how many people will have to say yes. Regulators said
that the board is the one which initiates decision but shareholders are the owners. Board of
directors are agent.

The ownership is with shareholders but on behalf of the shareholders, board is running the
company. They select few people to become directors, run the company on behalf of the

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shareholders. Principal- agent relationship- if the agent acts beyond scope, he will be
responsible.
Why 25%? Ordinary resolution- daily affairs of the company
Threshold- more than 50% for Special resolution- deemed so because of the impact on the
existing shareholders. This significantly and substantially affects the interests of the
shareholders. For example, expansion of the company.
When we say control, we say that all those individuals who have the ability to distort or
refuse the special resolutions will be regarded as shareholders. We call this negative
control. Control does not enable you to pass a resolution but prevents a resolution from being
passed.

18th July, 2022

2.2. Positive & Negative Control

Subhkam Ventures v. SEBI

This case primarily pertained to a takeover. What is the actual notion, and feasibility of
negative control? In negative control, the shareholder is not taking a decision, but preventing
one.
SEBI’s Policy: SEBI opined that protective covenants, such as affirmative votes extended to
the nominee director of the investor on matters such as amendment of the articles of
association, changes in share capital, approval of the annual business plan, restructuring of
the investee company, the appointment of key officials of the company, etc. qualifies as
acquisition of control by the investor. However, on appeal, SAT observed that control is a
power by which on one hand an investor can command a company to do what it wants to do.
It was also clarified by SAT that the power by which an acquirer can prevent a company from
doing what the latter wants to do cannot by itself qualify as ‘control’. SEBI appealed against
the SAT order before the Supreme Court (but settlement happened before SC’s decision).
Crux is that SEBI propounded that negative control should be accepted.
It was contended to increase the threshold to more than 50% from 25%; why?
a. since ordinary resolutions can be stopped, the shareholder comes in tandem with
the director vis-a-vis decision making power [this pertains to passing Ordinary
Resolutions, i.e., taking a decision];
b. additionally (i.e., as a bonus), Special Resolutions can be prevented [this pertains
to preventing Special Resolutions].
The Court said that if you are talking about control, then you cannot have negative
connotation, in the general parlance, you have it both ways - in affirmative and negative
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connotation, hence you need both positive and negative control - hence we reached the
threshold for 50.1%.

2.3. Qualitative Control

How do you define positive control? Came to 50% threshold. You can take affirmative
and negative impact on resolutions that are being passed. Positive control had an issue. There
was a problem with public listed companies. Because the shareholding pattern is very fragile.
There are billions of shareholders. There is a dispute and not all people have an equal amount
of share.
If someone does not have more than 50% shares, will you say that there is no control.
Regarding this, in 2006, we had the JJ Irani committee (Committee on corporate governance).
The Committee talked about control because it affected the decision making process of
companies. It talked about influence not quantity.
We have a qualitative assessment which gives two things
1) Appointment of majority of directors: if someone is appointing a majority of
directors, then if that person asks them to do something, they would do. Nominee
directors are appointed by third-companies to appoint the interests of the appointing
authority(ies). Courts have construed this to simply mean directors, and not
necessarily majority of the directors. It depends on the facts and circumstances of
each case.
For instance, if a person has the authority to appoint only one director but a
managing one (managing director has a casting vote; comes when there is a debt
log). MCA has made it “directors” now.
2) Policy and managerial decisions: there is an affirmative veto; these are standalone
rights given to certain people because of their shareholding (however, these
arrangements are private, do not occur in a public issue). If the person has an
affirmative vote, it can be exercised notwithstanding any debt log.
Difference: Casting vote is with MD, in case there is a tie while Affirmative veto is with
certain shareholders, without their approval, you can’t go ahead with resolution.

19th July, 2022

Our major idea- hold people who we want to hold responsible- why shareholders? Look at
the people who can make decisions. X appoints the majority of directors but if X asks them to
do something, would they or would they not do it? Nominee. If A is appointing nominee, the
only work of the nominee is to protect the interest of A. Policy decisions- affirmative veto.
Public issue will not be having these clauses. Private dealings of the public companies-
issuing shares to specific people- they give them certain rights. If they are going through
public issue, they have to follow regulations

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Appointment of majority of directors- courts have interpreted it as even if it is directors

and not majority, then control is there. Normal average size of board in India is 9
directors. Huge threshold to touch. But if you are appointing directors, that has to be read
along with policy and managerial decisions. There needs to be some right to take decisions
along with right to appointment of directors. If it is majority, that is standalone. If it is not
majority, it needs to have a qualifying aspect. Difference between nominee and managing
director is casting vote.
[][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][]
[][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][][]
[][][][][][][][][][][][][][][]

20.07.2022
Module III
You can only exercise the veto when you have an interest. Only when your interests are being
affected by a resolution, will you be given an affirmative veto. Or else, no veto.

3. KINDS OF COMPANIES

3.1. Classification
They define certain things i.e., the nature of the company, the relation of the company with
other entities, the source of financing available to the company and fourthly, the place of
incorporation.
1) Nature of the company
This deals with the regulatory framework of the company. Based on the nature of the
company, the regulatory framework or applicable laws will change. In this, we have two
classifications:
 Public Company
The reason as to why we say public companies have better scrutiny is because of the
involvement of the public. It has a higher degree of regulation. People may not have an idea
of corporate structure but are there only for profits. Because there is an involvement of the

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public at large, if the company is involved in wrongdoing, a lot of people will be affected by
it.
Regulatory framework of public company- Companies Act + relevant rules of companies
+ SEBI regulations
SEBI is the regulator of listed entities. The threshold for the same is a minimum of 7
shareholders.
 Private Company
For private companies, the idea is that they are necessarily close knit units or closed units.
They get to decide the functioning of the company. The min. members are 2 and max. is
200. Once the distinction is there, there are further subsets. Private companies are further
divided into: (they are still private companies but there are certain exceptions).
1) Small company
Section 2(85)- any company with a paid up share capital of less than 2 crores or turnover of
20 crores or less.

2) One person company

This is based on the concept of corporate sole. It is owned by one person. Section 2(62) of the
Companies Act, 2013 deals with this. It is not going into the financial situation but only at the
incorporation stage. The purpose of creation of these two companies was to give them tax
benefits.
21.07.2022

3.2. Public Company — Listing Criteria

In public company, based on listing criteria, we have two companies:
1) Unlisted companies
2) Listed companies
In private companies, both are like subsets within the main. In a public company, you can
either be listed or unlisted. Listing enables/allows you to trade shares in the stock
exchange. Primary market is the market where the public unlisted and the private
company operate. Secondary market is when the only company that can operate is a public
listed company. Shares are listed on the stock exchange. The only person who can sell the
shares in the primary market is the company. The shares will be bought by investors decided
by the company.
In the secondary market, private individuals are selling the shares and they are selling it to
entities or private entities. It is not a direct transaction. Stock exchange acts as an agent on
behalf of both the seller and the buyer. A private company cannot function in a secondary
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market unless it undergoes listing. Listing is enrolling yourself in the stock exchange. The
difference between SEBI regulations and companies act is that it is way tougher. When
you’re incorporating yourself, you can choose to be either of this.
In the primary market, there is private placement of public unlisted, public listed and
private companies. In the secondary market, there is public issue. Only public listed
companies can go. Public issue is a lengthy procedure; it takes time and it doesn’t give you
immediate financing. While going for public issue, there is a possibility of failure as well.
Three reasons are time, restrictions wrt how much amount can be raised, fear of failure. You
are essentially giving your future, financial responsibilities to anyone. At any slightest sign of
danger, people sell out shares.
Why public issue?
Apart from listed companies, two others involved are public unlisted and private companies.
There is numeral restriction wrt private placement. Yearly, you can have a max of 200
placements.
Market Capitalisation is at least 5 times the valuation. Once the subscription stage reaches
90%, the IPO is declared successful. Various considerations arise during the issue of shares.
Then comes allotment of shares. The last step is listing.
Corporate Group is a group of companies which are inter-related to, or are influenced by,
each other. This can be described in terms of control [qualitative/quantitative], or influence
[this can be by a person who is not a part of the co.; like, indirectly controlling w/o having
any say in the decision], exercised.
Sec. 2(6) defines an Associate Company: any co. where any other co. has at least 20%
shares in it [‘significant influence’ means control of at least twenty per cent. of total share
capital, or of business decisions under an agreement”].
For instance, neither positive nor negative control is there, the holding co. (a completely
unrelated co.) exercises influence over the associate company (presuming the co. who has
>20% ownership is a wholly owned subsidiary of the holding co.).
The Tata Trust Example. Horizontal Relationship pertains to indirect influence or indirect
control. Because with all these entities, there is one common majority shareholder.
Independent directors should not be related to the holding co. or the subsidiary co. [however,
if the relation is that of an associate co., there is indirect influence]; as a protection
mechanism for investors, there is a statutory requirement for independent directors.
Indirect control: if these entities can be related to a common third party who can
influence the decisions in both these entities...this will amount to indirect control.
For example, how Tata Trust influences the decisions of all separate groups of body
corporates (i.e., Power, Steel, Motors, TCS, etc.).

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“person acting in concert” are those people who have a common object. On paper,
shareholding is separate; however, in practice, one person exercises the shareholding.

25.07.2022
1- 50%- vertical relationship
2- 20-50%- no vertical relationship, but rather a horizontal relationship, which brings a
relationship as an associate company, corporate group exists only
3- below 19% i.e., 0-20%- no vertical or horizontal relationship, corporate group ends
completely
If the shareholding of C in D is 19%, then D will not be regarded as associate company at all
For a subsidary – you need 50%, wholly owned is 100%, associate is 20%.
Even if the wholly owned sub has 20% in B, the actual control is being exercised by holding.
As holding has direct influence.

28.07.2022

3.3. Categories of Ownership

Ownership has 3 categories: (Not in terms of Public or Pvt. Company, these attributes are not
mutually exclusive)
1. Government Company: ownership stake of government is more than 50%. Controlling
stake is that of a government, often it is a statutory body, and after which the rest is left for
private players - to provide expertise and speed (think JV). Under Article 12 a government
company would be regarded as State, under the head of other authorities - for example
DMRC. All the Mahartna and Navratna and DMRC, are government companies. If there is
disinvestment, then it will still be regarded as State, as it has statutory backing, but would not
be GC anymore, as there is no controlling stake. There must be positive control of
government.
For example, for LIC IPO, the government will give IPO for certain classes of shares, which
would ascribe controlling stake to Government.
2. Domestic Company - Those companies which are owned by resident Indians - if a
resident Indian owns the majority stake of the company
3. Foreign Company - Section 2(42) Any company owned by a non-resident would be a
foreign company.
Firstly, why is this classification is being made:

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1. For the purpose of computing tax liability of a resident and non-resident are completely
different
2. There is flat rate of 30% for corporate tax, and domestic company would have no other
option. Previously the two ways were:

1. Branch office - extensions of the company itself, not outsourced - it does not have an
existence of its own, no vertical or horizontal relationship, simply a property where the
company physically manifests ) - hence foreign company was made for liability or regulatory
framework - there was no jurisdiction to control, extradition can’t be done for normal day to
day regulatory non-compliance. Now, the FC, through its branch office, was having income,
and now the Indian government said that income is being generated, place of generation is
India, and the proper taxation regulators would also be India. Hence, you pay us tax - there
are two regulators, we are merely operating a branch office in your country, we are being
taxed in Country A, and are being subject to tax regulator of that Company, as it violates the
basic principle - one income should only be taxed once. Hence, if we are already paying tax
to our sovereign. The counter-argument to this is place of effective management and place of
incorporation - both of these are in country A, if we remove either of these, then there would
be no income. The problem arose that human and material were being used of India, market
compliance and permissions, but Indian government was not getting anything of commission
out of it.
Out of this, came Double Tax Avoidance Agreement, which was a sovereign agreement,
which is between the countries, a sort of bilateral FTA. Here, we are talking about 2 absolute
rights, the position of one sovereign in relation to another - principle of sovereign equality,
they would be regarded on equal footing, due to exclusive jurisdictions. DTAA provided for a
principle, Principle of Attributability - The taxes will be limited to the amount attributable to
a particular sovereign. Now, we are trying to divide the income, with separate taxations. We
are creating two separate jurisdictions for an income. There is no commonality of income
which is happening. The question arose - who would divide these incomes, as private
individual, we cannot determine the Rate of taxation, which would be determined between
the sovereign. Generally, the principle followed here is the position of relevance in
generation of that income, for example if you provide them resources and huge market, then a
heavier stake would be given, but there is nothing specific or straight jacket formula. This is
why a DTAA is one of the most difficult agreements to enter into. Hence, DTAA is used as a
mechanism to mediate and mitigate between two absolute interests.
2. Indian subsidiary of a foreign company (not a mandate earlier, hence no compliance

1.08.2022

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3.4. Categorisation on the basis of liability

1. Unlimited
2. Limited

Limited
Whenever we come across the name of the company, either it is Pvt. Ltd. Or ltd. Hence, the
term “limited” describes the extent of liability of its owners. How do we limit this liability?
1. Shares, which is usually the case of companies. The total value of the company would be
the value of the share x total number of shares held. This becomes the share capital. This will
be the corpus now. If the company
2. Guarantee, if the company is doing something and if there is a default, then we guarantee
to pay till a particular amount, which is made in terms of contribution to the corpus of the
company. You give a percentage amount at the time of formation, or you give a written
undertaking that this particular percentage is guaranteed by us. Hence, the person pledges a
certain percentage.
How would this percentage be determined?
It would be on the basis of corpus of the company, the total capital of the company. Hence,
we firstly determine what is the share capital (since no shares, we call it corpus), and the of
the total, how much a person contributes or is willing to contribute to that. Now, this
percentage becomes a limitation on the liability of the guarantor. Let’s say there is a
company, having a total corpus of 100 crores. Mr. A guarantees 10 Cr. Hence, what is the
liability of Mr. A with respect to the company? 10%. Now, the company has various
categories of assets, one being corporate assets and the second are the shareholders or
guarantors, as they are the owners here. Let’s say the total assets are of 2,000 crores, and the
total default is 2,100 Cr. First, corporate assets are used, and then we are left with 100 Cr,
which would be paid by shareholders or guarantors. Now, the question is who will pay how
much.
The concept of limited liability determines how much you would be paying in such a
situation where you are the last resort. Now, either we can make the shareholders liable for
the entire amount, we can’t if it is of limited liability, which is determined by their share
value or contributing value. Now, let’s see how we will calculate this liability. Company
corpus is 200 Cr. Liability will be on the basis of the corpus, and not the outstanding debt, as
if the basis is debt, then the nature of shareholder will be made to a creditor.

Unlimited
You will be paying the entire amount of the outstanding debt. It derives certain elements
from limited liability, like the aspect of percentage, for example the percentage of
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contribution or pledge made - it would be made in separate tranches of calculation, which is

called pro rata calculation. People will be made to pay the first tranche of liability, surviving
which the next round of calculations would be made.
These attributes of kinds and categorisation of companies are mutually exclusive, different
attributes ascribe to the company, on the basis of which we can do categorisation.

03.08.2022

4. INCORPORATION
1) Promotion
2) Registration
3) Commencement of business
Incorporation is the cumulation of these three steps. Do not get confused between
incorporation and promotion.

4.1. Promotion
This is the first aspect. Promotion is the act where you hide concreteness to a particular idea.
It starts with an idea- a business idea- which can in the long run be converted to a successful
or at least viable business. Ideally, first you go for commercial steps and then legal steps.
They are mutually exclusive. You can carry out legal steps without commercial steps

4.2. Feasibility determination

This is the second aspect. There are three elements:
i. Technical
ii. Economic
iii. Logistical
When you determine feasibility, you do it on these three counts. If it is not solving anything,
it is not a viable option. Nobody can stop you but will not be economically viable. Tech
startups- have to look at the tech difficulties they’ll face. It can always be a business- the
question is if it is sustainable in the long run
For example, Economic feasibility aims at sustainability of the business. Moreover, there is a
need to have a logistical set up- who are suppliers, distributors. Without carrying out
assessments, it will become a burden. Ideally, commercial steps come first.

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4.3. Financing
This is the third aspect.
Seed financing: Angel investors- different regulation- those venture capitalist firms, high net
individuals or investment banks. If they’re there from the start, they are angel investors.
VCF- if they come on later- mid- high companies- come in, take their profit and go. Angel
investors are much more supportive- they will stay unless and until the company is able to
sustain itself. At the time of incorporation, we have seed financing. Once incorporated, it can
be anything
Series financing- comes at a much later stage. Any other mode of financing is allowed- no
longer dependent- have established business- it is up and running- focus is on expansion.
Angel investors- purpose is to start, not expansion. Further expansion carried out by VCF,
etc. This forms the commercial aspect.

4.4. Drafting of the documents

This is the Fourth aspect. Includes drafting of MoA and AoA. Either the first three steps
and then, drafting of documents or outrightly to drafting and registration - There is no bar.
Once you get the certificate of incorporation, business has to be commenced within 12
months. This process usually takes more than 12 months. After 12 months, company becomes
dormant company
MOA: Name, location, objective, shareholding, liability. These are the 5 clauses that MoA
need. MoA essentially dictates the interaction of the company with the outside world.
MoA deals with third party. There is a need for harmony and uniformity.
AoA: It deals with the interrelationship of the company with its members. Members
includes everyone who is a part of the company. Shareholders are only those that hold shares.
AoA would determine how a company would operate, how it would run. Shareholders- pass a
resolution- which resolution, what threshold and who will vote. These are the three questions
that AoA will answer. All these internal procedures that enable a company to transact. The
permission of the company to transact- MoA. All the enabling factors are under AoA. If they
are internal procedure, it will come under AoA. AoA does not have a fixed pattern. It is
drafted in accordance with the needs of the company. In MoA, the content may vary but the
process will be the same

04.08.2022

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4.5. Promoters
Section 2(69) of the Companies Act, 2013. Promotion is carried out by promoters
(69) ― “promoter” means a person—
(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:
Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a
professional capacity; (emphasis supplied)

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Qualifying any one of those conditions will make you promoter. Prospectus is issued when
you want the public to subscribe to your company; it contains details. In those returns, they
have to identify who classifies as a promoter.
Qualitative aspect of identifying promoter- look into control. Promoter has rights, duties,
obligations. A scenario common in 21st century.
Company A- Sarthak is promoter- majority shareholder- 51%. After a point of time, he
reduced his shareholding and now holds 10%. He has appealed to SEBI- no longer holding
shares, role in the company has reduced- don’t wanna be promoter. SEBI does not have a
process written down in law. Despite being declassified as promoter, Sarthak can still be
involved in company policy decision making. What does SEBI do in such a situation? Can
bring under ambit of officer in default but the liability for that is not the same as promoter. A
parallel drawn to sexual harassment laws
Promoter- less companies. This becomes a problem because who do you hold liable? SEBI
has proposed moving away from the definition of promoter to a person in control. Moving
back to control, not only quantitative but also qualitative. Bright line test- something with
clarity and should help us objectively determine.
We still lack a perfect test. Most effective way is to analyse from a case by case basis. Court
is focused on identifying who is in the driver seat of the company. Control aspect- results in
two kinds of shareholding.
1) promoter shareholding
2) non promoter shareholding
There is a distinction between controlling shareholding and shareholders in control. The idea
of promoter- why it is redundant is that it is a pyramidical scheme. When talking about
control group and removing promoters, we are not going by these definitions- only the test in
sub section c. Control group of the company- whether this individual is falling or not. If he is
a person in control and lacks a position in the company, he falls under 2(69)(b). The moment
he is being declassified, it cannot be 2(69)
Officers in default- some say or responsibility in the company. Promoter is not defined as the
person who promotes the company. All the provisions are same. Because even if you are
creating a loophole under one provisions, you have other provisions. The idea is to have three
connected boxes. Combined framework of promoter, officer in default and control.
Distinction between control group and corporate group
a. Corporate group- from the perspective of the company
b. Control group- looking within the company- internal assessment of the company
Rights and liability- creating a position in the company that promoters don’t want. If one is
named, the rest of the assessments don’t come into the picture. For instance, Paytm-
promoterless company- neither in their incorporation documents nor in their annual returns.

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Proviso in 2(69)- comes in cases where you are an advisor or independent director- not
promoter even if you qualify the subjective criteria.
05.08.2022

4.6. Pre incorporation contracts

Rent a space to create office, Hire workers, Procurement of raw materials, etc. It is the duty
of the promoter to actually promote the functioning of the company. Promotion is important
to gather funds.
Pre incorporation contracts are v necessary. Company is a separate legal entity. When the
company is not actually incorporated, there is no registration that has happened
It is not a separate legal entity
This can be divided into two time periods

4.6.1. Pre specific relief act, 1963

The incorporation of a company is synonymous to the existence of the very company. There
were two major problems. Company is not into existence yet- no rights, obligations and
duties. If promoter enters into contracts with third parties before incorporation, what will
happen? Since the company is not into existence, there is no separate legal entity and the
problem of liability arises. Promoter does everything for the benefit of the company. You
cannot make the company liable after incorporation because uncertainties.
Nature of the agreement before the act. In case of the incorporation contracts, they are similar
to minor. Minor has no financial obligations in case of default. Pre incorporation
contracts- beneficial contracts- this was the term used before the 1963 act. Beneficial
contracts- analogy drawn to minor. Since company is not a separate legal entity yet, it has no
obligations. There is still a huge problem of who will be liable in case default happens.
Promoters were not liable for any default- just like a minor. Before the Specific relief act,
there was one more phase of interpretation. Section 127 of the ICA- Third party had no
recourse here. Beneficial contracts are void and as a result, no liability

4.6.2. Post Specific Relief Act, 1963

Section 15(h) and Section 19(e)- these gave remedy
15(h)- Where the promoters of a company have made a contract before its incorporation for
the purposes of the company and it is warranted by the terms of incorporation, the company
may enforce it
Warranted- should fall in the objectives- objective is the subject matter. Warranted by terms
of incorporation- bracket theory- company is not a legal person if it falls out of the bracket

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Objective clause in MoA- “and or other related activities”- ejusdem generis- auxiliary matters
will also fall. Solely talking about the right of the company to sue for the enforceability of the
contract
It does not talk about the right of the third party to sue the company [Section 19(e)]
The differentiation is that it is the right of the company to sue and it is the right of the
third party to sue. Section 15(h)- strangers right to sue. Stranger will be the company- as a
promoter, I enter into a contract.
And the other party provides funds. Privity of contract. If promoter does for the benefit of the
company, it is the stranger. Because the company is still not in existence. If the company was
in existence and was a separate legal entity, we would not call it a stranger.
Vali Pattabhirama Rao v. Sri Ramaniya, 1983
There was a promoter- A- he acquired a lease agreement. He enters into lease agreement on
behalf of partnership firm. The partnership firm is being converted into company. After
becoming promoter of the company, a question arises regarding the liability. Lease agreement
is the pre incorporation contract.
The court said that the company holding such lease would fall under the ambit of stranger
deriving benefit out of a contract as although not in existence during the formation of the
contract. However, that does not discount that it was the ultimate beneficiary.
Section 15(h)- gives right to company to sue third party. We have to be v careful as to when
we make the stranger liable.
Section 15- talks about a scenario where no novation
Section 19- subsequent title- only arises from a contractual perspective when you are falling
under the category of privity of contract
The distinction between the two provisions is one is a right and the other is a liability
Specific relief act- talks about the liability of both the promoters and the company

08.08.2022
DIN- Director’s Identification Number. This number is important because they are a
prerequisite for eligibility as being appointed as director.
Why this is important? There are certain restrictions on the number of companies where a
person can hold the position of a director. If we don’t have this number, we can’t really know
where this person is holding the position of a director. In the MCA website, this number can
be searched and where this person used to be a director and is a director currently comes up.
This identification number is v important. You would not be allowed to continue or be
appointed a director without this.

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Normally, when you look at directors, they go for a preferential voting system. And it is this
appointment process that differentiate the first director from every other director that comes
in the company. Normally, we appoint directors- shareholders are responsible for
appointment. The reason being shareholders are the owners and directors are the managers
Imagine a company that is just starting out. It is to be incorporated- it is still in the process of
registration. There will not be shareholders- if no shareholders, who will appoint directors?
Promoters.
When a company starts, promoters assume the position of shareholders or directors. When
they assume the role of directors, the process of appointment is of election. After the
incorporation, promoters may not be in the company but still, they will be regarded as person
in control because of appointment. This appointment is prior to incorporation. Even though
they are optional clauses, it needs to be decided that who the shareholders are and who the
directors are.
A promoter who is promoting a company will be regarded as person in control even if
he doesn’t fall squarely within the definition of Section 2(69). This financial interest
incentivises directors to take appropriate decisions in the company. Remaining of the
registration procedure is procedural- go through the documents.

 DOCTRINE OF INDOOR MANAGEMENT

The doctrine of indoor management, also known as Turquand rule is a 150-year old
concept, which protects the outsiders against the actions done by the company.
If there is a said indoor or internal procedure that is reasonably expected to be carried out by
the company, then it would be appropriate on part of the 3rd party to assume that such
internal requirements have been complied with before a contract has been entered into.
Turquand rule- even if all necessary actions are taken to ascertain company’s capacity- the
third party will not be responsible for knowing everything about the internal decision-making
process.
Exp.:- my responsibility is not to see what your credit limit is, but just that you should have
all necessary qualifications to apply for such credit. The question will be your ability to pay
back the credit and that is the due diligence I do. Any procedure involving internal decision
making is not my responsibility. The third party is always given benefit of doubt when some
internal mechanism is concerned.
The doctrine originated from the landmark case Royal British Bank v. Turquand (1856) 6
E&B 327.
Section 176, best example of indoor management. It says that the irregularities in the
appointment of directors will not invalidate any of the contractual obligations that have
been undertaken.

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Let us say AoA suggests directors are empowered to enter into contracts on behalf of the
company. So I will ensure he is indeed the director.
But whether the particular provision is complied with, there may be possibility that if you
have 5 names of directors, we take a vote and top 3 people having highest number of votes
are appointed by directors, this is one by the shareholder.
What if we do not follow that process and appoint someone else and not the top 3 so this
gives rise to irregularity in the appointment procedure.
And after this, what if the irregularly appointed person enters into contracts.
In that case company cannot take ground that contract is invalid because the wrong person
entered into the contract, because the third party will be protected here by doctrine of indoor
management.
What happens if we follow the judgments of SC or other forums related to doctrine of IM?
Here, there are certain exceptions.
1. Knowledge of irregularity
Let us say, AOA suggests that directors in their own capacity can borrow up to 10 lac rupees,
but this amount can be increased to 20 lacs after special resolution. Directors approached to
bank for 20 lacs. Now if here bank has an idea that special resolution is pending/ not has been
passed. Here if bank still proceeds to give them bank, and there is default, bank will not be in
a position to claim the entirety of 20 lacs, because bank had the knowledge that directors
did not have capacity.

2. Suspicion of irregularity
If you have a suspicion that process in question have not been followed in toto and additional
requirements have not been complied with and still you do not take any amount of due
diligence to clarify your suspicion, then it that case you cannot claim. Like in POA case, if
you have suspicion, you ask for doc showing POA, you exercise due diligence and make
reasonable inquiry- if you don’t do this, you will not be able to claim indoor management
claim. If they provide POA but obtaining of POA had some irregularity- that is a different
thing.

3. Act of forgery
It is a tricky situation, since forgery is a criminal act anyway. Let us say AOA suggests that
POA has to be signed by MD and two senior most directors. Now you got sign of latter but
forged the signatures of the MD and the third party was not aware of the forgery. They asked
for doc, got it but did not know that the doc was forged. In this case also company cannot be

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liable for forgery, the person who forged will be liable because this is a criminal wrong.
So, third party will have remedies but not against the company, but against the individual.

 DOCTRINE OF CONSTRUCTIVE NOTICE

This doctrine is based on the rule of caveat emptor. Caveat emptor is in regard to doctrine of
constructive notice. If doctrine of CN is based on CE, and we say buyers have to be beware,
then the question is they have to beware of what?
When you go to registrar’s office, he maintains the records, you can tell the name of the
company and the docs will be out for you. So, from there you can analyse and read. So, due
diligence is that you see if the company has the authority to do the contract they are doing.
Doctrine of CN is more so to ascertain or prove principle of contributory negligence. So,
the company says yes, we were wrong, but even the other party did not exercise due
diligence. So, other party entering into the contract also has a duty.
Provisions related to this doctrine:
Section 117(3) is to be read with Rule 34 of the Companies Incorporation Rules [provided for
mechanism of inspection for any resolution or infernal documents].
Section 399 of the CA [any person may inspect any document kept by the registrar in
accordance with rule made…including MoA and AoA]
Provisions about nature of certain documents to be field with registrar. When submitted, they
become public document and can be inspected by giving certain fees in registrar’s office, or
online website.
So doctrine of constructive notice [DCN] is more so to ascertain the principle of contributory
negligence. That it is okay if a company accepts we are at fault and we moved beyond what
our MoA suggested, but due diligence was not done by the other party as well.[1]

Constructive notice says that the party entering into the contract also has reasonable
responsibility, so if they have not carried out reasonable assessment of a situation concerning
contractual abilities of a particular company, then it might be a ground wherein company
violating MoA might be let go of performing its obligations. This is acquiescence on part of
other party who agreed to enter into the contract, despite looking at the MoA and AoA
(being public documents).

What about docs that are not there on public platform?

CN is only limited to reasonable requirements, as in, for the documents that are easily
available. Hence, CN further substantiated by doctrine of indoor management.

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In common law, especially India, we follow adversarial system - the basic rule for it is always
passing on the blame to others.

 DOCTRINE OF ULTRA VIRES

When you have an object clause in MoA, then ultra vires is an extension of object clause.
Object clause not only concerns the limitations but what are the powers of the company, as in
how the company can act in a capacity. If you do not, it will not be considered in ordinary
course of business.
Ultra vires suggests that if object clause is providing for certain stipulations, like company
will limit its operations to a certain sandbox, and if you go beyond that all contract you enter
into will become null and void. There may be a part performance on your part and if the
other party does not keep their end of the bargain, in that case you will not be receiving any
kind of remedies for that, for the simple reason that contract itself is null and void and is not
valid. There is no legality attached to it.
If the situation is reversed, and the other party performs their part but the company refused to,
then the question will be more about the damages, and less about the performance. The
company will not be liable, but the person responsible or such contract will be liable in
his/her individual capacity to pay the damages or the consideration amount stipulated in
contract for performance of the other party.
This is somewhat connected to delegated legislation- whenever the legislature empowers the
executive to make a certain legislations (like CA was made by the legislature, but all the rules
within the act was executive’s work as the MCA as an executive body drafted those). Imagine
a situation where Companies rules go beyond what the CA stipulates, then it cannot be
allowed. Similarly MoA outlines powers and limitation of what company is expected to
do, now the company may undertake any of the operation unless it is within scope of object
clause. This broad phrase is to be interpreted by ejusdem generis, but the base understating
is that there are certain restriction imposed wrt the company which will not be affected in any
circumstances.

Case Law
Dr. A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India.
Facts:
The case was about the LIC. Before its conversion in 1956, when LIC was established, it was
a statutory body regarded as United Life Insurance Company which was established in 1882
and thereafter, it was registered as an insurance company under the Life Insurance Act of
1938. In 1955, there was an Extraordinary General Meeting and a said resolution was passed.

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The resolution said that a donation of Rs. 2 lakhs was to be sanctioned from out of the
shareholder’s dividend account to a certain trust. This trust was formed with an object to
promote technical or business knowledge, including knowledge in insurance, both as law
and as an activity.
Under this extraordinary meeting, another resolution was passed saying directors were
authorized to pay the aforementioned amount to the trustees when the said trustee will be
formed. Accordingly, once the trust was formed, the said amount was paid.
The interesting fact is that- members of the trust were the shareholders of the company itself,
but apart from that, the company itself in its corporate capacity was also a member of the
trust. So per se, there was no delineation b/.w the company and the trust.
Life insurance Corporation Act came into force on 1st July, 1956 where one of the provisions
was related to appointing all the assets and liabilities related to the control of business of
insurance vested in the Life Insurance Corporation. The said company was taken over by the
LIC. Once that happens, LIC sought the refund amount paid to the said trust. The Life
Insurance Corporation Act gives power to the corporation by Section 51(a) to apply to the
tribunal to sort relief in respect of payments made by the insurers, not necessary for the
purpose of controlled business which was done during the five years preceding the date of
vesting the powers.

LIC’s Arguments:
LIC said that the resolution was dated to 1955 and the payments made in insurance were of
an ultra vires nature, and hence, were void ab intio and the appellant was liable to pay the
refund amount when asked. It further argued that
- the donations are not in the company’s interest or its business scope, an
- even if it is not directly against business, it was not regarded even in general practice
a s a proper practice through which the company accrue a substantial benefit or
advantage to help the company in the long term.
Hence, the said act was completely against the object clause wherein the object clause states-
the company can act in a manner which results in substantial advantage of the company.

Counter Arguments:
- First of all, it was an extraordinary resolution and in the resolution itself the first
thing the company did was to authorize the directors to make the payment. So, the
directors did not operate beyond the scope of the MoA and it is valid.
- If you talk about the AoA, then AoA was authorizing directors to make donations
wrt any charitable or benevolent object for any public or general object of utility
- The source of this income was from the shareholders dividend account, and not from
the general assets of the company. Whenever we talk about source of finance or a
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company, we have different sources. There is normal account maintaining all for
money for the share, another for security premium, equity finances, etc. Like that
there is a shareholder dividend- that a particular account is intended for all the
deposits form money that accrues as dividend. Dividend is a payment which the
shareholders get on existing shares they hold in account. So this will not be
regarded as assets of the company, but of the shareholders. so if the shareholders
themselves are agreeing to make a payment out of this particular account, then if the
same is challenged then there is clear delineation or division and it does not
undermine the autonomy of the company.
- When taking about the resolution and the timeline of the entire payment, this payment
was made way before the company was taken ob., so if we take the circumstances
where the company was not taken over by the LIC, then the payment would have been
processed. So now that the LCI has taken over the company, it should not create
deterrence in such payment since the resolution that empowered the company to
which the source of payment can be traced back to, it pre-dates the acquisition by
LIC. You cannot retrospectively question a resolution that was passed, before you
take over.

Court’s Decision:
The court based its analogy on 2 different grounds. The first ground was about what the
object clause suggested, and the second one was wrt the shareholder’s dividend account.
Mr. Mudaliar took ground that the money taken for donation as given out of shareholder’s
dividend account which is why shareholder’s had the sole power of deposition over that
particular account. Any kind of dividend that is in question is made to shareholder and not
used for nay ordinary business activity of the company.
While looking at the object clause, the court discussed 3 relevant sub-clauses to the case.
- The first sub clause pertained to the nature of business that the company was eligible
to carry out. The court said the company is authorized to carry out life insurance
business in all its branches and all kinds of indemnity and guarantee business, and for
that purpose se to enter into all contracts or arrangements.
- The second sub clause was about investment. The company is authorized to invest
and deal with funds and assets of the company on such securities and investment and
in such manner as decide from time to time which will be fixed by AOA. So, the
scope of business was wrt either carrying out investment activities or deal with
funds or utilize the existing assets of the company in such manner as determined by
AoA. So even if you talk about any sort of lending or investment, it has to be
determined by the AoA. And in this case the AoA did not speak anything about
donations.

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- Court also took note of another miscellaneous clause [sub-clause (5) here]. While
taking about UV, we noted we might come across generic clauses. In this case, it
talked about “company is authorized to do all such other things.” now this is a very
vague and generic statement and is required to be qualified with further interpretation.
We will have to take recourse to the concept of ejusdem generis. This clause (5) says
“company is authorized to do all such other things in furtherance of the other objects
allowed in the MoA”. Now how do we interpret “all other things” is a pertinent
question. Court said scope of “all other things” will be limited by the
specifications/limitations mentioned in all other clause preceding this. So when
question is carrying out investing or guarantee business, then all other things shall
mean only the direct act of investment or will be referring to all ancillary
procedures required to achieve the objectives as previously mentioned. The act of
donation does not fall under any of the clauses mentioned relating to the scope of
contractual capacities. Hence, it would not be regarded as a supposed objective as
donating for development of technical understanding and awareness about insurance
in general public.
- Now since it is established company cannot do it then can the shareholders do it?
Considering it goes out from their dividend account. The court analyzed the position
of shareholder’s dividend account under the CA 2013- and said although shareholder
dividend account although it contains the funds/dividend to be dispersed to the
shareholder and is under their disposition, but such power of disposition arises ONLY
WHEN the dividend has been declared, and not otherwise. Pursuant to such
declaration some amount has been deposited, only then shareholders get the right to
dispose of the particular amount. If no declaration is made wrt payment of dividend,
then we cannot claim the account is under the disposition of the shareholder.
Therefore, in the facts since there was no declaration of dividend of any nature, the
funds do not fall under the disposition of the shareholder, and rather the company
itself will be having the power of disposition of amount in that account.

Conclusion:
So any kind of disbursement in this event will be limited by the scope and limitation of the
object clause, which contains nothing about donations made for furthering technical
awareness about insurance business among general crowd. Hence, the money had to be
refunded by the trust to the LIC.

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5. MEMORANDUM OF ASSOCIATION

5.1. Overview
MoA- how will you define memorandum? In the simplest terms, it is the charter of the
company. It tells you everything i.e., the scope of the company etc. It contains clauses
which regulate the interrelationship of a company. When talking about MoA, we always have
to read it along with the articles. It can’t be read on a standalone basis.
The question of what is answered by MoA - what the company can or cannot do?
The question of how is answered by AoA- how the charter is to be interpreted or how the
objectives or details mentioned within the charter are to be achieved i.e., the procedural
part.
For example, delegated legislation. If you look at company, there is Companies Act and
Rules. The Executive makes the rules. The Rules aren’t any different; they only mention how
the objectives are to be achieved. Similarly, the same relationship exists between MoA and
AoA. MoA will tell you scope, limitations etc. MoA regulates the interrelationship.
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It is important from the perspective of two specific categories of people:

1) members- clarity wrt the position in the company
2) outsiders- two questions:
i) how would the outsiders come to know about the MoA?
AoA, MoA, minutes of the meeting are public documents, as per Section 399. Outsiders can
easily access it. It is a legal mandate.
ii) why is it important?
Whether the company is allowed to enter into the transaction or not?
Caveat emptor principle- let the buyer be aware. It is the responsibility of the outsider to be
aware of such scenarios. How would he be aware? By looking at MoA. The scope of a
memorandum is always absolute. It determines the scope of legal liability of the company. It
can be amended. At any point of a time when a scope is mentioned, it is absolute
CA2 course- until 6th module.

09.08.2022

5.2. Relevant Clauses

There are 6 clauses:
1) Name clause
It is the asset of the company. Every single intellectual property is asset of the company. It
signifies certain values- both monetary and non-monetary. There has to be criteria as to how
to decide name
Criteria is in:
1) Section 4 of the Companies Act, 2013
2) Rule 8 of the Companies Incorporation Rules
Should not go against any particular statute. The primary act to be looked into is Use of
Names and Emblems Act, 1950. This act provides for a list of names which cannot be used
because they signify something of national importance. Any logo, name or words protected
under the Trademarks Act cannot be violated or used. It may not be the intent, but it may lead
to deception from the consumer’s perspective. This is something that trademarks act doesn’t
allow.
Deception when?
Choosing a deceptively similar name. Deceptively similar can only be protected in areas
where the protected trademark is in operation
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For example, P&G Ltd.- FMCG Products. Pee & Gee Ltd.- mining company.
Phonetically, there is a similarity. They are deceptively similar but working in a different
sector. Here, the trademark will not be violated. If you’re someone who moved into the
sector first, you get first hit or approach at the consumers.
There was a case where the word and the symbol of Om were in question. Phonetically and
symbolically speaking, they are same thing. Trademark registry said that Om cannot be
protected under trademark. It is a religious symbol. It is a word of generic or mass use.
Because of this, it will not be granted protection. This is a restriction of where you can or
cannot get trademarks

2) Registered office
3) Objective
4) Share capital
5) Liability
There is a uniformity that is required. 5 clauses will be found in Schedule I. Liability will be
providing details of whether it is limited liability or unlimited liability
6) Subscription clause
Only wrt one person company. One would not find this clause in any other company.
Subscription cause talks about nomination- nomination of a member. Subscription clause
talks about what will happen if the present person who is in the company is not able to take
forward the business.

10.08.2022
The name of the company, or of a foreign parent with an Indian subsidiary, cannot be against
public morality and policy. Hence, all substances barred under the eyes of law would not be
suited to be the name of the company. We always look at the names from the consumer
perspective. Hence, the names would be indicative of the business. Hence, the name of the
company should be in the form of, for example in the manufacturing sector, XYZ Mfg. Co.
Ltd. Therefore, if we name a company XYZ Co. Mfg. Pvt. Ltd., what attributes can we garner
from here?
Hence, from the name itself, we have been able to figure out these many factors. Hence, any
other criteria or qualification would be mentioned in the name itself. Hence, apps use the
name technology in their company name, like Swiggy and Uber would have the word
technology in common, they would have servers and data aggregators.
Don’t mention whether it’s unlisted or listed- just say that it is public. The words of national
importance cannot be used in a derogatory manner.
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5.3. General requirements for Amendment/Alteration Process

1. BoD Proposal
2. BoD Resolution- approval is simple majority
Simple majority should not be interpreted as voting rights. If there are 7 and 4 vote
affirmative, it is passed.
Ordinary resolution threshold- 51%
Special resolution- 75%
Why do we want to make alteration of the MoA restrictive in nature?
It affects the very foundation of the company. It is the charter of the company and the very
fabric of the company. Hence, we want to ensure that the changes in this fabric has to be
more and more inclusive of most shareholders, with the 75% having more considered
shareholders. At the same time, getting a special resolution passed is more restrictive, to get
this passed is more difficult, and we want to prevent adverse changes in the very foundation
of the company. The Approval of the BOD is distinct from this resolution, as that is an
executive decision to agree to propose it to the owners.
We have to be much more careful and restrictive for the different kind of changes when it
comes to the Shareholders. This is the reason that the Promoter shareholding is restricted to a
maximum of 75%. Hence, we are still in the realm of possibility that one person can make all
the changes. Hence, we find it even more difficult. Hence, after this resolution, we file an
application to the MCA to allow the alteration for which the resolution has been passed.
Hence, these requirements are common for all the clauses.

17.08.2022
The 2nd part of the MoA is objectives.
Why is the object clause important?
MoA talks about 2 things: positive connotation and negative connotation. The moment you
exceed them, the doctrine of ultra vires comes into the picture. In this case, the company
will not be regarded as a separate legal personality.
Now, the question comes- how do you go about drafting objectives?
Two considerations:
 Public interest- should not go against public interest
 Public morality- should not go against basic public morality
The most comprehensive definition of public interest and public morality has been given in
the Booz Allen- arbitration case. This case talks about what would constitute public morality
and public interest. What is public interest?

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1. Should not be illegal, vide creation of market so as to defraud the public. Only top
level people are benefitted. These sort of objectives cannot be incorporated in the
MoA. Pyramid scheme is legally valid, like multi-level marketing, so cannot be
stopped. Cannot have a company specifically for ponzi or pyramid schemes.
2. Public morality is v dicey. All products manufactured by Love and Care like Gillette.
Hindustan and Unilever merged. Unilever was a UK company. Public morality is very
subjective i.e., what might be moral or immoral in India is not the same as a US
company. Indian medical association is a threshold. Beyond that, it comes under the
category of recreational drugs. Marijuana for recreational purposes is banned. For
medicinal purposes, it is okay. We have to differentiate. If it is for recreational
purpose, we have to differentiate since it will go against public morality. Can use
0.05% for medicinal purpose
Now comes the alteration part:
General Requirements:
1. BoD
2. Shareholders Special Resolution
3. Filing of MGT-14 seeking permission from central government
Specific Requirements

Once shareholders pass a special resolution, a form comes into the picture. Public listed
company conduct raising of capital from public shareholders. Unless and until all the money
has been utilised, you cannot alter objectives. Go for a special resolution again- assenting and
dissenting shareholders. Exit mechanism is an option given to dissenting shareholders to sell
their shares and leave the company. If you give money for a particular reason and change the
objectives, how exactly is it fair?

18.08.2022
Whenever you raise money through a public issue, you have a prospectus in question. That
provides the objective. If you alter the object clause, you go beyond the purpose for which
the capital was raised. It results in a fraudulent inducement of capital. Resorting to fraud for
raising capital from the people.
Breach of trust and material change of circumstances- Section 56 of the ICA, 1872.
Raising money for objective i.e., foundation for which the money is raised results in a
material change of circumstances. The exception came in terms of exit mechanism. An
option to leave is given to the dissenting shareholders i.e., take the money and leave the
company. Without the exit mechanism, if any resolution is passed, you get stuck at central

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government’s permission. That if you’re not following proper procedure, you wont get
permission. If you’re being coerced, it is known as oppression and mismanagement.
Share capital- No. of shares that can be issued and exact position in the company if and
when you invest.

5.4. Limitations
1) Authorised share capital- total amount you can raise through the issue of shares. That
limitation is represented through authorised share capital- this is the cap or limit on the max
amount of equity capital. If authorised share capital is rupees 10 lakhs, it means that the max
amount you can raise through the issue of shares is that much.
How to determine it?
Based on the question of the number of shares. To determine the number of shares, what is
the other info that we need? Value of the shares. If one share is of x value, then how many
shares would be amounting to 10 lakhs? This value is known as face value. Face value tells
you how much amount of ownership stake that you have in the company
3 main concepts
no. of shares - 1000, face value of a share- 10; ownership in the company is limited to 10,000

19.08.2022
• Is that seat taken?
• That’s my lap
• I know what I said
Authorised share capital
From this, the company determines what will be the limit i.e., how many shares we want to
issue. Depending on this question, we determine the face value. Face value is actually
representing the lowest denomination or part of a company. Now, a common mistake
people often do is they confuse face value with other prices. Face value is the financial value
of one single share
• Issue price
• Listing price
• Market price

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These three have nothing to do with face value. If face value is rupees 10, issue price is not
10 These three prices are relevant for public issue process.
Issue price
It is the price at which a share is issued. If the issue price is 100 rupees, that means that one
has to pay 100 rupees to buy the share. To have a 10 rupees share in a company, you have to
pay 100 rupees. It will come in the primary market. Why?
Fixed issue- company outrightly determines what the price is going to be.
For example, 150 for the face value of share rupees 10. Post market research, for 10 rupees
ownership, one pays 150. Company decides issue price. Company is going for public process.
It has not been completed yet
Listing process gives us the eligibility to trade in stock exchange and it is due to a specific
category of people i.e., public shareholders. It is a third party transaction.
In the secondary market, companies cannot determine prices. Why? Demand and supply.
Market price is determined on the basis of demand and supply. Company becomes so
huge that private placement does not satisfy the capital requirements. Issue price is usually
when we go for a public issue process. When we go for private placement, we determ`ine a
price. The role of that price is the same as issue price but we call it contractual pricing.
The reason being that it is negotiable between the problems.
Standard form of contract has unilateral terms and conditions. Issue price is decided
unilaterally. Contract price, on the other hand, plays the same role as issue price but it is
negotiable
Book building process- instead of giving an outright price without any option, you give
them a range. It is used to determine the comfort zone of people. Promissory estoppel is like
pinky promise
• BLACK COFFEEEEEEEEEE
Market price and listing price are often the same. The same analogy is drawn to directors and
first directors. Once you are done with the issue, there is a change in the company- promoter
shareholding and public shareholding- eligible for secondary market. The opening price at
which the shares get traded for the first time is the listing price. The price at which you start
in the secondary market is the listing price. The moment the trading continues, you have
market price. Market price is what decides the market capitalisation.

22.08.2022
Now, the amount raised at a particular point of time, out of the total corpus of capital
authorised to be raised by the company (the authorised share capital) out of which a certain
amount can be issued, is called the issued share capital in that certain situation. Now comes
the alteration part.
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5.5. Alteration of Share Capital Clause

There is an exception regarding 75% special resolution threshold. It says that any resolution
that is under Section 61 of the Act, would require an ordinary resolution. So what is S. 61?
There are 2 kinds of changes and alteration which can be made to share capital clause - where
the position of issued capital or of position of every single shareholder is not affected.
Those changes that doesn’t affect the shareholders position is contained under Section 61.
Consolidation is an example of S. 61 - we change the lower denomination shares into higher
denomination shares. For example the total is 1000 Rs, currently divided into 100 shares of
10 Rs each. Now we want to change this, and reduce the number of shares, without affecting
the shareholding. We do this by increasing the face value. Now, earlier, a person has
shareholding of 100 Rs, therefore he would have 10 shares. Now, by increasing the FV of the
share from 10 to 100 would be 1 share, rather than 10 shares. Therefore, the position of
shareholding, in relation to each other, remains the same. Only the number of shares is being
changed, hence, functionally speaking, the position in the company is not being changed, and
the position remains the same with respect to the other shareholders and the company itself.

In case the rights are being changed, and the rights of existing shareholders are being
changed, then Section 61 would not be affected.
Place of registration and liability clause
The procedure would be general and specific. In the PoR clause, then there is only additional
requirements relating to transfer of registered office clause, as regards as to how the transfer
takes place:
1. Within jurisdiction of the RoC with whom the Company is registered. In that case, we only
have to normally alter, as regards just changing the name in the company documents etc. This
means that at the time of Central Governments approval we file the resolution with the RoC
as well, and tell them the change in address.
2. The problem arises when it is outside jurisdiction, that is within any other RoCs
jurisdiction, when we have to change the RoC altogether. In this case, apart from this
alteration process, there is also an additional transfer process. So what are the steps regarding
this? First, application to RoC2 for registration and intimation to RoC1. Second step is
between the RoC, wherein RoC 2 would be verifying the documents that we have filed with it
with RoC1. Now, upon verification and acceptance of application by ROC2, we have to file
another application with RoC1 for delisting and removal of the name of the company from
the registers/roster of the RoC. This is the third step. Cumulatively

23.08.2022

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6. ARTICLES OF ASSOCIATION
We would be concerned with Sections 5 and 14, along with Companies Incorporation Rules,
2014. There are 3 particular documents through which a company derives its authority.
● First, there is the Companies Act, 2013, and within this Act a company has to create
its own niche and corner.
● MoA talks about the question of what - what are the powers, limitations, liabilities,
shareholding clause, what the company can do and not do.
● And the third document comes to clarify the how aspect - in what manner and
fashion do we exercise these powers. This is answered by the Articles of Association
(AOA).
Unlike the MOA, the AOA are strictly peculiar and specific to a company. This is because
MOA has a proper structure, a model structure which cannot be deviated from. In AOA, that
restriction is not there. For this scope, there is Section 5(1). This talks about the internal
management. Hence, anything and everything which is required, and any bye-laws which
are important and relevant to ensure the proper internal management of the company, become
the AOA. This becomes the scope or the applicability of Section 5. Hence, we should only be
concerned with internal management. Here, the conduct of the internal affairs of the company
are provided for. Hence, the provisions of the Act and Rules are supplemented by bye-laws
and regulations of the Company, thereby resulting in the AOA. Companies Act provides only
for the bare minimum requirements, as it regulates different types of companies, and hence it
caters to every single person out there. It cannot be excessively specific.
For example, if we take the MD. CA provides that MD is any director having substantial
managerial powers. Hence, normally, all directors would have managerial powers, and CA
does not define substantial, and it is the AOA which would clarify and complement the
provisions of the CA when it comes to a specific company.
Section 5(1) - it provides what the AOA would normally govern - the internal management
and functioning of the Company. However, we need a base document for forming the AOA
Section 5(2)- two aspects:
1) the articles SHALL contain all clauses mentioned in MOA
Articles provide a procedural framework. They do not give you substantive rights. Articles
focus on one thing- internal management
(3) 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.
More restrictive approach in comparison to the Companies Act
Special resolution- 75%. If one wants to change it to 90%, it will be allowed. Reducing it to
66% will not be allowed. Changes that you are bringing is valid and fine as long as it does not
go against companies act
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24.08.2022
Amendment is happening. What is nature of the amendment. Resolution- increases the
threshold Section 5(3)
2 mistakes:
A lot of info that is not required- like what is AoA, relevance of AoA. Just because threshold
is changed, it is not entrenchment. Is it within the scope of entrenchment?
Public company- entrenchment threshold is 75%
Private company- threshold is 100%
Valid in case of public company. Invalid in case of private and valid in case of public.
Applicability of 5(3) is restricted to special resolution.
First, scope of the section- anything that alters, affects or changes the position of the
company or the shareholders or debenture holders- special resolution
Subquestion pertaining to a fact- stick to the fact. If you know the case law, write only when
the factual matrix is being justified

25.08.2022
Alteration- Section 14
Any alteration question- first thing to do is look into the nature of the transaction. 2nd
category of alteration is that any alteration that can have the effect of conversion . Actual
conversion is not happening.
Why only effect and not actual conversion?
Articles deal with internal management.
• Private company- shares are transferable subject to restrictions
• Public company- easily transferable
Articles say that shares can be transferred to members of this company only. If it is removed,
in effect a public company. Alteration- special majority- entrenchment- but vice versa will
not be allowed. You cannot say that entrenchment provision is going to be used for a more
restrictive approach.
Section 5(3)- special resolution. Section 5(3) can be made applicable to all the special
majority resolutions. Section 5(3) is itself not a special resolution. Applicability of 5(3) is
wrt all the special resolutions with the exception of 5(3) itself. Entrenchment provisions
will always have a 75% threshold, it cannot be changed. Exception will be 5(3) itself.

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26.08.2022
1. 5(3)
This suggests that we can have a more restrictive approach, in terms of procedures
mentioned in the articles. Hence, this approach is concerning altering the thresholds
mentioned in Articles. Hence, if there is a procedure mentioned in articles, which has a
requirement of special resolution, that can be changed through 5(3). On a standalone, can it
be included under the Articles? No. It cannot be used to change the threshold mentioned for
itself. It is only mentioned for the procedures mentioned in the Articles. As 5(3) itself cannot
be included in AoA, hence the threshold for 5(3) cannot be changed.

If we look at the proviso of 5(1), once this alteration has been made, after the date of
alteration, then the company changes to a public company, and if in effect, without actual
conversion, then from the date of alteration the company ceases to be a private company. We
are going for a particular alteration. Now, if we go for alteration from Pvt. To Public, then
what is the procedure?
The passing of 75% special resolution. Now, if that is done, now, only when we change from
public to private, then we have to take the permission of the government. FOFR is a kind of
restriction, as normally the shares of a public company are freely transferable, but if we alter
the articles to include an ROFR restriction, without actually converting to a Pvt. Company,
which is a restriction, then in effect , there is a conversion. Why?
Because in a public company there are non-promoter shareholding, then there is an element
of public interest involved. Hence, the central government would require the company to
make necessary amendments to the MoA, to give this particular resolution of alteration of
AoA for ROFR, an actual and real affect. This would be that there would be a contradiction
between the MoA and the AoA. This requirement would also exist vice-versa, meaning that
necessary amendments would also have to be made when the MoA suggests that it is a Pvt.
Company, and the AoA suggests that is is a company which has ceased to be a private
company, then there would be a problem. Now, if the alteration is made and it has not been
filed with the RoC, then how would the people know that a change has been made. (Suppose
a company does not have a website).

If it ceases to be a private company, then what is the effect? It becomes public company, in
effect. Hence, the MoA has to be changed, which would result in misrepresentation if the
MoA is not changed. But because it is a private company, there would not be a concern about
misrepresentation till the MoA has been changed. This is because the MoA cannot be
violated, and since it deals with the outside world, necessary changes have to be made.

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For the purposes of this discussion, public does not strictly mean public listed company, but
public listed as well as public unlisted company.

31.08.2022
 Relevant facts
First relevant transaction- who are the parties, nature of the transaction and issue
Nature- sale agreement- price is given
Parties- Bowman Pvt. Ltd. and Avantal
Issue- discounted price
Related parties- RPT
Relevant facts- how to establish control?
BM group- 99% stake in Bowman Pvt. Ltd.
Interpreting the fact line by line
- If the connection is established with Avantal, no need to move further
- Possible connection of Avantal with the BM Group
- Negative veto is not control
- Shareholding is not substantial enough to establish control
- Control says appointment of directors
- What is left is directors
- 1 wholetime director does not fall directly under control
- Chairperson- leads the people- has a casting vote
- Even if you’re not appointing majority of directors, key managerial personnel
- Exigency was covid- commercial decision
- “Marginally lower” can be a potential argument- economic side
- Not many law points- have to use commercial logic

01.09.2022

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7. Shares
Share- bundle of rights
Out of this bundle, one will be ownership, voting, dividends. These rights- what do they
signify? What would it mean? Your position in the company.
When talking about shares, in very simple terms, it means a share within the company but
that sounds like a reiteration. Let’s change the word and call it a stake. You own a stake in
the company and have rights wrt a part in the company which may be expressed in any of the
mechanisms. It is a document or certificate which grants you a bundle of rights of any
combination and signifies your position in relation to the company. A shareholder’s rights
are only wrt the company.

7.1. Nature
If share is a document, how do you signify? You call it an asset. Asset is a property, maybe
movable or immovable and the second aspect is having an economic or a financial value. If
share is an asset, whether it regarded as goods?
Section 2(7) of the Sale of Goods Act- defines movable goods. When you interpret share,
read it along with Section 44 of the Companies Act, 2013.
Shares can come within the definition of movable good but there is an exception- you cannot
transfer shares. Then, comes Section 44. It suggests two things:
1) Nature of share as a movable asset or goods
2) Restricted transferability or transferable goods in accordance with AoA
When talking about nature, there will be two aspects but there is an exception that under the
SoGA, the transferability is an exception. You cannot alienate or transfer a share just like
property. Section 44 says that any transfer that will happen will be as per the AoA and not
the SoGA. If transfer of share is allowed under SoGA, you are undermining everything that
is dealing with the constituent documents of the company. This is why the restriction was put.
You cannot transfer a share as a movable good under SoGA. If you want to transfer, it has to
be in accordance with Articles.
Shares- Ownership & Profit. Based on these rights, we define the various kinds of share
capital a company can have. The most relevant one being equity share capital.
43. Kinds of share capital. —The share capital of a company limited by shares shall be of
two kinds, namely:—
(a) equity share capital—
(i) with voting rights; or
(ii) with differential rights as to dividend, voting or otherwise in accordance with such rules
as may be prescribed; and
(b) preference share capital:
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Both of them are equity shares but we can have a different permutation and combination of
what kinds of rights the shares possess. Equity share capital has two categories:
Equity shares with voting rights- a proportionate basis or pro rata basis. They go for a
1:1 ratio. This ratio is called pro rata basis. This proportionate basis may be disrupted in
some instances. It is disrupted which results in permutation or combination of various things
i.e., resulting in a ratio that is not proportionate. So, we go for a disproportionate ratio.
Disproportionate ratio is regarded as differential rights shares.

Differential rights shares- It means both voting and profits.

If person A has equity shares with voting rights and person B has differential rights shares, if
A has 10 shares- how many votes? 10. DVR becomes problematic since 10 shares can
translate into 100 votes. It can also translate to 5 votes.
Look at the shareholding structure of Facebook.

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02.09.2022

7.2. Types of Equity Shares

Preference shares only concern themselves with profits and the preference that is being
conferred upon. Equity shares are of:
1) Equity shares with voting rights
A position in the company is not absolute, it is relative. 10% means she has 10% stake and
her position in the company will be determined by that. If there is a bundle of rights, it has to
be determined by something.
1:1- two variables here- one variable is the number of shares and the other variable is the
rights. Don’t be fixated on voting rights; it can be any rights. When it is pro rata basis or
proportionate, then it becomes an equity share with voting rights. The number of shares are
directly proportional to the rights we’re getting.
Because it’s a proportion, sometimes, it may be skewed or changed.
2) Differential rights shares
Here, the primary difference is that we have 1:x. We have two variables: one being the
number of shares and second, being the rights. This x will be something that will be higher. 1
share can give you 2 votes or a lower proportion of rights. Either is possible.
I. Class A- 1:1
II. Class B- 1:10
III. Class C- 5:1
This classification of shares is done on the basis of intent. This intent is based on
classification of shareholders.
1) Qualified Institutional Buyer
They are the bedrock of the company. They are huge corporate bodies who have a great
understanding of the market to invest a huge sum into the company. We consider them a
separate class because of two things-
a) financial prowess and
b) market presence.
They have deep pockets and have a great understanding of the market; they have separate
risk assessment teams. The foundation of the company has to be stable and if that is not the
case, the entire superstructure falls. Because they are well funded, they can take the risks. We
give them the highest limit i.e., 50%. This 50% is often cumulative. These people have
long term goals.
2(ss) of ICDR Regulations, 2018

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2) Institutional Investor
Institutional investors is any investor who invests more than 2 lakhs based on the face
value. The price of one particular share within the company is face value. Total amount is
more than 2 lakhs based on the
3) Retail Investor
A retail investor is an individual or a non-professional investor. They are the most volatile
group of investors in any company. So, the company is very careful while giving shares.
Every single time there is a takeover attempt, they always first attack the retail investors
because of this reason- once they have shares, they’ll push their way forward.

26.09.2022

7.3. Reduction & Cancellation of share capital

Authorised is the cap. Here, the discussion is surrounding the issue. Reduction of share
capital is reducing the financial ability of the company. The normal practice that is
followed is that we take these shares, pass a resolution and for example, total issue of capital
is 10,00,000. Financial ability is determined by shares that are issued; authorised does not
matter. Issued is inclusive of both existing and prospective.
The amount for which the call for money has not been done is prospective. They will act as a
reserve fund. 10,00,00 is total financial ability. Why? This is the amount of money you have
raised. Shares are a source of equity finance only. Out of this 10,00,000, a call for money
amounting to 1,00,000 has been made. Shares with respect to which call for money has been
made is existing financial ability. How many shares are already paid to us? One can use this
money for financing operations. Any money raised through equity instruments is equity
finance. Prospective we have 9,00,000.
When we go for reduction, we are cancelling the shares. Let’s say 50% of unpaid. Face value
is 10 rupees. Unpaid shares are shares wrt call for money has not been made. These 9L
rupees will be unpaid. If face value is 10 rupees, we have 90,000 shares. 50% of the same is
cancelled. 45,000 shares are there. What is the prospective amount that can be raised?
4,50,000.
2 provisions i.e., Section 61 and Section 66 deal with this. In the CA, be careful of the
difference between the two.
Section 61:

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61. Power of limited company to alter its share capital.—(1) A limited company having a
share capital may, if so authorised by its articles, alter its memorandum in its general
meeting to—

(a) increase its authorised share capital by such amount as it thinks expedient;

(b) consolidate and divide all or any of its share capital into shares of a larger amount than
its existing shares:

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;

(c) convert all or any of its fully paid-up shares into stock, and reconvert that stock into fully
paid-up shares of any denomination;

(d) sub-divide its shares, or any of them, into shares of smaller amount than is fixed by the
memorandum, so, however, that in the sub-division the proportion between the amount paid
and the amount, if any, unpaid on each reduced share shall be the same as it was in the case
of the share from which the reduced share is derived;

(e) cancel shares which, at the date of the passing of the resolution in that behalf, have not
been taken or agreed to be taken by any person, and diminish the amount of its share
capital by the amount of the shares so cancelled.

(2) The cancellation of shares under sub-section (1) shall not be deemed to be a reduction of
share capital.

Section 66

66. Reduction of share capital.—(1) Subject to confirmation by the Tribunal on an

application by the company, a company limited by shares or limited by guarantee and having
a share capital may, by a special resolution, reduce the share capital in any manner and in
particular, may—

(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:

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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.

(2) The Tribunal shall give notice of every application made to it under sub-section (1) to the
Central 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.

(3) The Tribunal may, if it is satisfied that the debt or claim of every creditor of the company
has been discharged or determined 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:

Provided that no application for reduction of share capital shall be sanctioned by the
Tribunal unless the accounting treatment, proposed by the company for such reduction is in
conformity with the accounting standards specified in section 133 or any other provision of
this Act and a certificate to that effect by the company‘s auditor has been filed with the
Tribunal.

(4) The order of confirmation of the reduction of share capital by the Tribunal under sub-
section (3) shall be published by the company in such manner as the Tribunal may direct

(5) The company shall deliver a certified copy of the order of the Tribunal under sub-section
(3) and of a 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.

(6) Nothing in this section shall apply to buy-back of its own securities by a company under
section 68. (7) A member of the company, past or present, shall not be liable to

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any call or contribution in respect of any share held by him exceeding the amount of
difference, if any, between the amount paid on the share, or reduced amount, if any, which is
to be deemed to have been paid thereon, as the case may be, and the amount of the share as
fixed by the order of reduction.

(8) Where the name of any creditor entitled to object to the reduction of share capital 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 is unable, within the meaning of sub-section (2) of section 271, to
pay 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 as aforesaid, if it thinks fit, 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. (9) Nothing in sub-section
(8) shall affect the rights of the contributories among themselves. (10) If any officer of the
company—

(a) knowingly conceals the name of any creditor entitled to object to the reduction;

(b) knowingly misrepresents the nature or amount of the debt or claim of any creditor; or (c)
abets or is privy to any such concealment or misrepresentation as aforesaid,

he shall be liable under section 447.

(11) If a company fails to comply with the provisions of sub-section (4), it shall be punishable
with fine which shall not be less than five lakh rupees but which may extend to twenty-five
lakh rupees.

One of the differences between cancellation and reduction is extinguishment

Similarities:
i) both provisions state cancel shares,
ii) diminish the amount of share capital
What is the difference?
Once a share is issued, you have some liability. If you refuse liability, you refuse share as
well. Hence, we go for cancellation. It is not adding anything by contributing to paid up share

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capital. It becomes an additional burden. Hence, cancellation i.e., under Section 61.
Cancellation is used in both provisions but if we look at the impact, in Section 61, it is known
as diminution.
Effectively, they can be a source of income but they cannot be mobilised unless one is
paying. If you don’t pay, then value is not there. If one has an asset which has no use or
value, we dispose it off or alienate them.
Securities premium accounts can be used in a limited manner which is in no way related to
the company. Free reserves of the company are salary accounts. It is used for daily expenses.
Securities premium account is investment i.e., used to expand business or pay dividends.
Under Section 61, there is a default and the step taken is more of a reaction . Under
Section 66, the company is acting on its own accord, which is more dangerous.
Diminution is a reaction. When you can’t mobilise an asset, you sell it off. Here also, it is the
same since the share is not helping in any manner. The decision to remove is coming as a
reaction; so, it is legal or valid. It can be done by passing an ordinary resolution and then
going for alteration in the MOA. MOA because there is a change in the issued share
capital. In this case, the company should not be subjected to a high threshold of compliance.
That is why ordinary resolution.

29.09.2022
If cancellation or removal of shares are a reaction to the default, then cancelling will be
regarded as diminishing. Whenever talking about diminishing share capital, it HAS to be in
respect to unpaid shares only. It never happens with respect to paid up shares.
Section 47- Shareholders rights- voting rights are based upon paid up share capital. If you are
touching paid up share capital, you are directly affecting voting rights.

7.4. Paid & Unpaid Shares

Paid Shares
If the share price is 10 rupees and you only paid 5, the share will be unpaid to extent of 5
rupees. When you go for reduction for unpaid shares, you will be reducing the amount of
liability, like reducing 5 to 1. When you do this, you are not removing the share entirely; the

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share will be there, but you have reduced the amount of money the company will be getting
from that share.

Unpaid Shares
Section 66(1)(a)- without extinguishing or reducing liability on any of the shares. If changes
are made in liability, the voting rights would be affected because voting rights are in
proportion to the amount paid up. So if you are reducing liability on shares, you are reducing
voting rights in a prospective manner.

The company going for reduction has to make an application to the Tribunal and only
upon confirmation, you go for it. Here, the initiation point is tribunal. Usually, there is a
board proposal and resolution.

7.5. Revision — Reduction

The basic idea is reduction in financial ability. For that, we have to create financial ability.
Let’s say we have issued 1,00,000 shares and each share has the face value of 100, the
financial ability will be 1 crore.
It is putting a limit on the company. Whenever there is a home loan, the bank office comes
and checks. Similarly, whenever we give object, it has two reasons:
1) transparency- so that the shareholders know why exactly the money is being raised.
2) to create a restriction- unauthorised use of money or misutilisation of money should
not be there.
Call for money - 20% - 20 lakhs
Specific reason - establishment of an undertaking
Stock performance fell- so instead of 20 lakhs, the job is done in 18 lakhs. The excess amount
is 2 lakhs. If the money has been raised but not utilised, the liability pertaining to the right
cannot be utilised. Therefore, the company will resort to reduction with respect to 2000
shares.
This has nothing to do with the object clause of MoA. The purpose for which call for money
has been done is very restricted. Call for money does not require a resolution, therefore,
no exit mechanism. We have to return the money to the shareholders. It also needs to be
determined how much amount is to be paid to which shareholder.

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01.10.2022
Selective reduction of shares is a tool to curb any kind of dissent and intimidate any
shareholder having influential shareholding. Differential voting rights talks about a class of
shares. Anyone having 10% voting rights in a listed entity can approach the tribunal under
Section 241 of the Companies Act, 2013. From the perspective of the company, I will be a
problematic person.
Here, selective reduction becomes a problem. By selective reduction, 10% can be reduced. If
you take away influential shareholders, what remains is fractional shareholders. On the
ground of commercial wisdom, selective reduction was never regulated. There was complete
authority to act in any manner whatsoever without any checks and balances.

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Before under the 1956 Act, it could be done via special resolution. Now, approval from the
tribunal is required. If it is paid up, it exists. If it is prospective, it is unpaid.
Section 61 talks about cancellation of shares in the same manner that Section 66 does. There
are two differences:
1) It is limited to ONLY unpaid share capital
2) The point of initiation is the company in Section 66, not the shareholders who take the
lead
When we normally go for reduction, the direct impact is that the equity to debt ratio (total
financing of the company) is skewed because debt is remaining constant and equity is going
down.
Once going for reduction, you cannot reissue the shares.
Process is known as diminution of share capital. If it is under Section 66, it is reduction.
When talking about equity debt ratio, how is it determined? Equity capital, if the paid up
capital is reduced, the amount of equity capital will go down. The debt amount is remaining
constant. The impact of the ratio is that the percentage of debt will increase as opposed to
equity.
Ratio - 2:1- 66.66% debt and 33.33% equity. This is the obligation.
When we go for reduction, the ratio gets skewed. The Tribunal first sees:
1) whether there is outstanding credit (debt)
2) whether there is outstanding payments in lieu of dividend owed by the company to
the shareholder
If yes, the Tribunal would not allow reduction. Outstanding credit means any kind of
credit i.e., debentures, loans, etc. Internal loan from the shareholders or directors, dividend
payment due to shareholders. Second will be all external payments. Once we ensure that all
these payments have been made and there are no outstanding payments, reduction can
happen.
1) for what reason reduction is being done?
2) in what manner- is it proportionate or selective?
3) what is the position of the company after the reduction?
We are giving the company a clear look as to what is situation pre and post reduction. Why,
how and what needs to be answered along with details pertaining to these two conditions.
Section 241 has a direction of the Tribunal.

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Company Support Class

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8. SUPPORT CLASSES

8.1. Shares
Stock is a cumulative understanding of shares. If you have 10 shares, individually, it is a
share. But stock or stake in the company is the entirety of these 10 shares. Because shares
represent a bundle of rights, we divide them into various categories. This is given in Section
43 of the Companies Act, 2013.
1) Equity shares
Equity shares connotes a position which is directly proportional to the rights enjoyed by the
holders in an entity. This document will give you rights which are proportionate to your
position (numeric aspect). Whatever position you enjoy will be proportional to the numeric
element that is present. Rights will be proportionate to the number of shares. This proportion
is wrt the entirety of the company.
Definition of a share in the Companies Act- not defined. Equity shares necessarily translate
into the understanding of ownership. When you become an owner, you become an owner.
There are 3 contracts when it comes to shares:
1) Share Subscription Agreement- you agree to subscribe to shares. It will always be
in the primary market. Here, they haven’t been issued; it is a private arrangement or
a private contract. It can be between company and any individual.
2) Share Purchase Agreement- they have already been issued. You are buying them.
Company is not involved in this. It is between two private individuals. The reason is
that if I am the owner, it is a freely transferable instrument.
3) Shareholder’s Agreement- this is a resultant document arising out of either a share
subscription agreement or a share purchase agreement. Once you are an equity
shareholder, you need to have a shareholder agreement which is between the
shareholder and company. This is between the shareholder and the company. All
these regulations, duties, obligations, rights are contained in this agreement.
In the share subscription or purchase agreement, you will talk about how the shares are going
to be issued, how much they are going to be issued etc.
Dividend- return on investment that you get. Equity is usually proportionate. But in certain
cases, for incentivising some of the shareholdings, we do not really ourselves to the
proportional understanding of 1:1.

Section 48
To ensure that we are getting investments, we need to give them something extra. Section 48
says that shares are nothing, but a bundle of rights issued by the company. These rights can
be changed. As the company who is issuing shares, I have the autonomy to take a call relating
to when these rights can be changed on the basis of commercial wisdom. Section 48 says that
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variation of shareholder’s rights. Section 43 read with Section 48, we get equity shares
with the ability of the rights being varied. Section 43 says equity shares and Section 48
says variation.
Because of this variation, this proportional aspect of equity shares is something that can be
changed. Wrt one share, we can give you more rights or lesser rights. The two connotations
of the variation of shareholder’s rights are:
i) x:1 or
ii) 1:x- meaning one individual share will carry much more rights
For every individual shares, rights can be increased or decreased. This is giving us classes of
shares. Differential Voting shares or Different rights shares- both are the same. Class A, B, C
is for the purpose of ease.
1) Equity with voting rights
2) Differential rights
We go for x:1 and 1:x- 3 classes of shares, not 2. Everytime we issue a share with differential
rights, another class.
Share Capital and Debenture Rules, 2014- no matter what, differential voting rights will
not exceed a certain percentage- 74%- equity with voting rights shares will still remain; you
cannot completely remove them.
2) Preference shares
The position is not the same as equity shareholder. Equity shareholders are owners, but
preference shareholders are not owners. They do not have any ownership rights as a
general norm. In certain cases, the amount of money that we are raising is not enough or
sufficient to run the company. Debt equity ratio- 2:1. This is an ideal ratio. We always regard
equity shares on a relative basis.
Declaration of dividend is not mandatory and while talking about proceeds, then dead.
Nobody can force you to declare a dividend. It only becomes a right once declared and not
before that.
Waterfall mechanism- hierarchy
- Secured creditors
- Unsecured creditors
- Shareholders- preference and equity
Arya to Simran:

Mmm, baby, I don't understand this

You're changing, I can't stand it
My heart can't take this damage
And the way I feel, can't stand it
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Mmm, baby, I don't understand this

You're changing, I can't stand it
My heart can't take this damage
And the way I feel, can't stand it
Mmm, baby, I don't understand it

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5th October, 2022

Preference share is a kind of share whose only preference is giving its holder a right of
primacy or preference in terms of payment of dividend or payment of proceeds.

How and when to declare dividends:

S123, suggests there is nothing under companies act to declare. Right to dividend and right to
declaration of dividend is only pertaining to the payment.

The question is there an obligation to declare?

Preference as a general rule have no voting rights with exceptions:
a) Right of preference only: dividend is declared but remains unpaid for a duration of two
years
b) After two years, the position of preference shareholders is converted to equity shareholders
c) No voting rights with the exception
i. Any resolution affecting the interest of preference shares
ii. Once the payment has been done, there is a return.

We have only one class of shares i.e., equity with voting rights. This means 1:1. Section 48
says that without creating a different class i.e., Class B, we can change the ratio to 3:1 or 1:3.
Both are allowed because it is talking about variation. It should be given in the MoA that
the company can issue DVR shares.
Creation of the class is the complete discretion of the company. Company can pass a
proposal suggesting that the rights of the existing shares has been altered. If there is only one
class, uniform variation will have to be made. Variation be done in a manner that creates
multiple classes or one class. If multiple classes, then Section 48 along with Section 43.
When we are varying the rights that can happen in two ways:
1. Through section 43, you create various classes of shares based on the different types
of rights available to you.
2. Standalone- When we are interpreting Section 48 only it results in the standalone
application. When we have the right, we are only varying certain share without creating a
new class.
Equity with Voting Rights: 1:1 is the norm. Section 48 says that without creating a different
class using section 48 we can make this vary into say 1:3 or 1:2. Creation of a class is the
complete discretion of the company. They need not make a different class for the standalone
purpose.

Class based voting

According to Section 48, we need to reach 75%. Shareholders reach 75% - class of
shareholders becomes a problem. As a result, this becomes class-based voting. This is another
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form of investor protection. Only 4 companies in India have. If special resolution, there is
another group who will act as check and balance. Even though petty shareholders, they still
form a class. Even if one class passes 100%, cumulatively, it is 75%. It’ll be a nightmare. Just
because you are giving rights, does not mean that it is absolute.
48. Variations of shareholders’ rights.—(1) Where a share capital of the company is
divided into different classes of shares, the rights attached to the shares of any class may be
varied with the consent in writing of the holders of not less than three-fourths of the issued
shares of that class or by means of a special resolution passed at a separate meeting of the
holders of the issued shares of that class,—
(a) if provision with respect to such variation is contained in the memorandum or articles of
the company; or
(b) in the absence of any such provision in the memorandum or articles, if such variation is
not prohibited by the terms of issue of the shares of that class:
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.
The rights of every class may be varied by a written consent, which is not less than 3/4th
(75%)- no concept of resolution being passed.
Duomatic principle comes into play here. Where shareholders having a right to vote at a
general meeting assented to some matter, that assent has the same effect as a resolution
passed in the general meeting would have. Indian companies Act- Section 117(3)(b).
(b) resolutions which have been agreed to by all the members of a company, but which, if not
so agreed to, would not have been effective for their purpose unless they had been passed as
special resolutions;
Consent is similar to voting rights. But instead of casting votes, you simply agree to the
agenda under S117 (3)(b). This makes it easier for the company to pass a resolution. If you
are altering or varying the right of any particular class that can be through consent but
proviso, that if the variation affects rights of any other class. Then, special resolution
happens.
Section 241 read with Section 244- Oppression and Mismanagement
Section 241 gives you a right to approach the tribunal if rights have been infringed upon. The
threshold is under Section 244. It deals with when such an application can be made:
1) Total voting right of 10%- either individually or cumulatively. If not 10%, the number
of shareholders or members must be 100 persons.
Section 48(2) is a problematic affair. It allows the company to vary rights and may prove
prejudicial. Section 241 is usually against the management of the company. A shareholder
resolution is a question of commercial wisdom.

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Please read Section 48

11th October, 2022

There is a mechanism by which we get voting rights. We do not get these rights outrightly.
There is a mechanism or a process through which rights are given. While discussing Section
47, two other Sections need to be taken into consideration: Section 43 and 50.
Section 47(1)- (1) Subject to the provisions of section 43 and sub-section (2) of section 50,—
(a) every member of a company limited by shares and holding equity share capital therein,
shall
have a right to vote on every resolution placed before the company; and
(b) his voting right on a poll shall be in proportion to his share in the paid-up equity share
capital of the company.
Equity rights under Section 47 may be interpreted as equity shares with voting rights or
differential rights. This person was a member of the company and was holding equity shares
shall have the right to vote on every resolution placed before the company.
Equity shareholder- position as owner of the company- outright say and total control with
respect to how and which direction the company is running. They will be voting on every
single resolution.
Preference shareholder- not in control. Their rights are limited to their personal interest.
Reduction of share capital is reducing financial ability. Here, everybody was kung fu
fighting. Those cats were fast as lightning. In fact, it was a little bit frightening. But they
fought with expert timing.

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Expert Notes dated October 11, 2022

Differences
● Equity Shareholder vs Preferential Shareholder — in terms of different levels of
influence they exercise
● the former - a huge role in the ordinary decision making in the company
● the latter - in specific situations their rights are exercisable, i.e., where they are
impacted
● Example (for a scenario where both types of shareholders vote): One instance is
reduction. If shareholding is being reduced - impacts both preference and equity
shareholders
What is the nature of the voting rights? (to what degree can such right be expected and if
one has such rights, what is the applicability of the same) One has to be an equity
shareholders and it will be applicable to all the general resolutions.
Exercise of voting rights shall be in proportion to his position to his holding of the paid up
share capital of the company (and not the entirety of the share capital, just paid up).
Section 43 of CA 2013 provides that a company limited by shares shall be entitled to issue (i)
equity share capital with voting rights or (ii) with differential rights as to dividend, voting or
otherwise in accordance with such rules as may be prescribed by the Central Government.
Sec. 50(2) of CA 2013 suggests if there is a call for money and if extra payment has been
made (beyond the call for money), the shareholder will not get any extra voting rights.
“50. Company to accept unpaid share capital, although not called up.— (1) A company
may, if so authorised by its articles, accept from any member, the whole or a part of the
amount remaining unpaid on any shares held by him, even if no part of that amount has been
called up.
(2) A member of the company limited by shares shall not be entitled to any voting rights in
respect of the amount paid by him under sub-section (1) until that amount has been called
up.” (emphasis supplied)

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But what happens with the money? co. may not return the money (albeit they can refuse
the money as well); however, payment has been made not sought by the money, the company
is mandated not to give (additional) rights to such shareholders.
Every member of a company limited by shares and holding any preference share capital shall
have a right to vote only on the resolutions placed before the company which directly affects
the rights attached to his shares.
Conditions in which right to vote arises [Sec. 47(2)]:
1. Winding Up
2. Repayment or Reduction
3. Any other rights of the preferential shareholder which might get affected. Example: a
Merger
Proviso is making clear that in every possible instance, a parity needs to be maintained b/w
equity and preferential share capital. It states that this is not just for call for money but
voting rights as well. Even though there are different classes of preferential shares, all of
them essentially are equity shareholders as well [“[p]rovided that the proportion of the
voting rights of equity shareholders to the voting rights of the 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” (emphasis supplied)]. Intra-class
classification is not considered for the voting process.
Proviso (latter part) to Sec. 47 of CA 2013 [“[p]rovided further that where the dividend in
respect of a class of preference shares has not been paid for a period of two years or more,
such class of preference shareholders shall have a right to vote on all the resolutions placed
before the company”] read with Section 123 of CA 2013 suggest that where this dividend in
respect of preference shares is not being paid for a period of two years or more, then such
preferential shareholders shall have a right to vote on all resolution presented before the
company. This acts as a deterrence for the companies since they get the right to vote on all
the resolutions until and unless the payment is made. Voting rights of preferential
shareholders is brought at par with equity shareholders.
Summary: Preference shareholders ordinarily vote only on matters directly affecting the
rights attached to preference share capital and on any resolution for winding up of the
company or for the repayment or reduction of the equity or preference share capital. The
voting right of a preference shareholder on poll shall be in proportion to his share in the paid-
up preference share capital of the company. In respect of a resolution on a matter affecting
both equity shareholders and preference shareholders, the proportion of the voting rights of
equity shareholders to the voting rights of the 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. However, where the dividend in respect of a class of
preference shares has not been paid for a period of two years or more, such class of

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preference shareholders shall have a right to vote on all the resolutions placed before the
company [ICSI Handbook].

Syllabus (CA-4): Shares (including reduction): 43, 47, 48, 61, 66. Focus more on the bare act
and less on GK Kapoor.

Expert Notes dated October 12, 2022

Sections 66 and 61 of CA 2013
where do they initiate? Sec. 66 initiates from the company (passing board resolution, taking
permission from tribunal, shareholders’ resolution in the AGM, etc.). The company, and not
the shareholders take the lead. On the other hand, Sec. 61 is specifically made applicable is
few specific circumstances. These circumstances are:
1. where shares in question do not have a shareholders (i.e., shares are issued but not alloted;
they are in the freefall category)
2. there is a call for money with respect to the shares and there is a default
3. The impact is different
How is the impact different? 66(1)(e) is also talking about unpaid shares; when it is paid up
shares u/s 66, we go for reduction; on the other hand, when there are unpaid shares, we go for
cancellation. Difference arises how the share capital is impacted. Under cancellation, only the
issued share capital is impacted/changed/altered. There still exists a possibility that at a later
date, they can reissue the shares which were cancelled since only issued, and not authorised,
part was impacted. Under reduction, both issued and authorised share capitals are impacted.
The impact is that the financial position of the company changes. Because the authorised

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limit comes down. One cannot reissue the shares (unless MOA is amended). But this would
be new issues of shares and not reissue.

8.2. Buy-Back
Expert Notes dated October 3-4, 2022 (Previous Notes on Buy Back)

This is the public issue process - but in reverse. This stems from Sec. 68 read with SEBI
(Buyback) Regulations. Buy Back is an action to affect, or impact, the market price
otherwise determined by the econometrics principles (i.e., the quantifiable aspect).

How will market price be affected by BuyBack? this, generally, particularly happens when
the performance is low, and so is the demand for the company’s shares; one of the primary
reasons behind buyback is to mitigate the effect on Market Price (1.). Another reason is
to prevent hostile takeovers (2.).

We reduce supply of shares, to impact the price notwithstanding the change in demand:
by reducing supply (a.) and creating a false demand (b.)

The promoters, etc. buy back the shares from the shareholders. Company usually offers a
higher price - for profits; suction force needs to be created so that shareholders take up the
buyback; this removes the supply effect problem (since all those shares, which would have
been sold in the market for a lower price, are bought back and cancelled). Now, number of
shares in the market will be reduced

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With respect to hostile takeovers, who are the most vulnerable category of investors?
Retail investors. This creates a concern vis-a-vis when the company is going through a lean
patch. It may result in opportunistic, hostile takeovers. Recent Phenomenon of Blocking
Chinese Investment: Retail investors are the doorway to the company, which might
eventually lead up to hostile takeovers.

Cancellation occurs u/s 68(7); this is to make sure it does not create any further concerns for
institutional shareholders. [ownership >2L = institutional shareholer; others are Retail
shareholers; then there are certain qualifications to be an institutional bank]. So, once a share
is bought back by the company, those shares must be cancelled.

Procedure — Three Steps:

1. Board Proposal
2. Special Resolution
3. SEBI Approval in accordance w its regulations
4. Accept and & Cancellation: document is filed to SEBI again w updated deets

Expert Notes dated October 15, 2022

Section 68: Buyback
Normally, the idea is that whenever a publicly listed company is functioning, how are the
prices maintained? Through market forces of supply and demand. Basically, he discssed the
basic aspects of how demand and supply work. This is usually exercised where supply is very
high and demand is very low. This, through market forces, would lead to a decline in prices.
Sometimes, this decline can be sharp as well.
[fucked up internet connection, missed out on a few minutes’ notes! Refer to my
previous notes on Buyback dated Oct. 3-4, 2022]
Whenever company is going to loss, short term shareholders become the loose ends.
Why? because of two reasons: first, there is less demand ); second, the supply is too hight.
The fall is price is not a small fall but it is catastrophic (share prices crash like anything).
Otherwise, what will happen is price will fall and shares will crash because shareholders will
sell. Through buyback, shares are sold to the company, and not other shareholders If the

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company wants short term gains without impacting their market position, they simply go for
buyback.
What is the incentive to share their shares to the company? Company offers a higher
price to those shareholders, on the condition they sell those shares to the company itself.
Simultaneously, there is a creation of demand. There is a suction force created through
buyback. Shares, which would have otherwise gone in the system/market, thereby affecting
the price, they are used to create a demand (as they are sold to the company itself, they do not
go to the market). Any third party, who is not privy to the buyback, gets the impression that
there is an increased demand.
This controls prices, prevents a fall. The buyback does enough to control the fall in the
price. Then, equilibrium of demand and supply is achieved. This equilibrium leads to stability
of prices. ‘Increase’ in price may not happen, but the goal was anyway to arrest the fall in
price.
He reiterated the point how another purpose behind buybacks is to prevent hostile
takeovers by foreign, especially Chinese, companies. For instance, government had
released a policy in 2019 that FDI from countries bordering India must first go through
governmental approval.
Opportunistic Takeovers: takeovers taking over the ownership of the company when the
company is going through significant losses. These losses make the retail investor easy
targets for these competitor firms. They get a headway into the company. After this, they
have a sureshot. They can give an open offer, with an exceptionally high price. Company has
no autonomy vis-a-vis who is buying the shares, so it is outside its control.
In this regard, buyback is an element of mitigation: it is the one line of defence against
opportunistic takeovers. Since company asks shareholders to sell shares to them, and not to
the predatory investors. But this, in no way prevents the shareholders to sell it to the firms.
Thus, it is merely a mitigation strategy, but it cannot ensure these shares are not sold
externally. The possibility of hostile/opportunistic takeovers is still there.
What would be a prevention strategy? Right of first refusal in the Shareholder’s
Agreement. That is, the shareholders can be pre-empted from selling their shares externally;
company will have the right to buy the shares first.
Sec. 58:
“(1) If a private company limited by shares refuses, whether in pursuance of any power of the
company under its articles or otherwise, to register the transfer of, or the transmission by
operation of law of the right to, any securities or interest of a member in the company, it
shall . . . send notice of the refusal to the transferor and the transferee or to the person giving
intimation of such transmission, as the case may be, giving reasons for such refusal.
. . . (2) Without prejudice to sub-section (1), the securities or other interest of any member in
a public company shall be freely transferable: Provided that any contract or arrangement

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between two or more persons in respect of transfer of securities shall be enforceable as a

contract.” (emphasis supplied)
Basically, sub-clause (1) prevents such shares. But sub-clause (2) provides validity to such
ROFR contractual clauses in the shareholders’ agreements.
[Extra Information: A right of first refusal (“ROFR”) is a contractual entitlement of a party
to enter into a business transaction with the counterparty (to a contract) which such
counterparty is desirous of executing with a third party. When tested on the principles of
contract law in India, such contracts are held to be valid so long as the ROFR is exercised
during the original or mutually extended term of the original contract between the parties
which contains the ROFR clause. A ROFR clause in the term sheet gives investors the choice
to buy shares from the company before the shares are offered to an outside party. If they
exercise this right, the issue price must be the price offered to the third party.]
Sec. 67(1): “No company limited by shares or by guarantee and having a share capital shall
have power to buy its own shares unless the consequent reduction of share capital is effected
under the provisions of this Act” (emphasis supplied). Once bought back, shares have to be
necessarily and mandatorily reduced from issue capital. This is done to prevent
multiplicity of shareholders and also company’s control over those shares (like how
these shares are also extinguished under Sec. 68(7) [“shall extinguish and physically destroy
the shares or securities so bought back within” (emphasis supplied)] for this purpose).
The Public Issue (ICDR) is with regard to There are four chapters: equity, preference,
convertible debt instruments, and debentures. Buyback will be of the security only.
Board Proposal: Commercial Viability and Legal Effect are considered. Once this has been
done, the next part of the shareholder comes. Whenever you give an agenda for buybacks,
there needs to be a shareholders’ meeting (in this agenda, all the information about the
buyback is given to the shareholders). Meeting can be an AGM or EGM. First, the
commercial viability is assessed. Second, explain what the rationale is and at what price the
buyback will happen - including the method determination of price will be explained [The
price is determined with the help of a registered valuer]. Third, after the buyback is done,
what will be the position of the company - an outright picture is given, including
considerations of any negative impact on the company. Then finally, a Special Resolution
may be passed.
Four different people are informed post Special Resolution:
1. Registrar
2. Central Government: With public listed company comes the element of public
interest. Permission has to be taken.
3. SEBI: whenever we are considering secondary markets, i.e., capital markets, SEBI is
the regulator. Every single detail of the buyback is given to SEBI.
4. Stock Exchange: whenever this buyback happens, because it is a secondary market,
stock exchange will be used. It plays the role of a clearing house. It will act as a

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facilitator: will take shares from shareholders and give it to company and will take
money/consideration from company and give it to the shareholders.
SEBI Buyback Regulations, 2019. These are not being discussed comprehensively at the
moment.

Explain what the rationale is and at what price the buyback will happen. The price will be
determined with the help of a registered valuer, who will give details as to how the price was
arrived at.
Third, once buyback has been done, what will be the position of the company?
Wherein you will be giving an outright picture wrt the lack of possibility of negative impact
on the company, arising out of this buyback. It is a special resolution since the company
position will be changed and shareholder’s rights are affected.
Inform 4 different people-
1) The Registrar of Companies- because all the documents have been filed there
2) The Central Government- it is a public listed company and there comes a possibility
or element of public interest.
3) SEBI- whenever we talk about secondary markets, it is SEBI who is the regulator of
capital markets
4) Stock Exchange- the role is that of a clearing house.

8.3. Debentures
There are primarily two ways for a business to raise financial capital: debt and equity.

Equity financing is the term used to describe the process of raising capital through the sale of
shares, i.e., the sale of a company’s ownership. Whereas, debt financing is the process
through which a corporation raises money by selling investors debt instruments. One of the
debt instruments - Debentures

Definition: 2(30) ― debenture includes debenture stock, bonds or any other instrument of a
company evidencing a debt, whether constituting a charge on the assets of the company or
not.

A debenture is a loan document that certifies the company’s obligation to repay the principal
amount plus interest at a predetermined rate.

Why are they issued?

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They are issued when the company wants to raise money but not dilute its shareholding.
Debentures are loan which a company borrows from general public. Although Companies
can borrow money from Bank, Banks generally place restriction on how that money can be
used. ex- borrowed fund can be used only for capital expenditure or they limit companies’
ability to raise additional funds till this loan is repaid. etc.
Thus, most companies in order to avoid this go for loan from general public i.e. Debentures.

Pros for the investors –

 A debenture pays a regular interest rate return to investors.
 In the event of a corporation’s bankruptcy, the debenture is paid before common
stock shareholders.

Types of Debentures
1. Based on convertibility
Section 71 empowers the company to convert debentures into shares (in whole or in part) at
the time of redemption. Convertible Debentures are which can be converted into the shares
of the issuing company at the expiry of a certain date whereas non-convertible cannot be
converted into shares. Thus, we can say that convertible debentures are a hybrid of equity
and debt financing.
A convertible debenture can be partially or fully converted into equity. Partially convertible
debentures (PCDs) involve redeeming a fraction of the value of the security for cash and
converting the other part into equity. A fully convertible debenture (FCD) involves a full
conversion of the debt security into equity at the issuer’s notice. The full conversion of
debentures to equity is a method used to pay off debt in kind with equity.

OFCDs [Optionally Fully- Convertible Debentures]: OFCDs are debentures that, after the
expiration of a predetermined date, may be converted into shares at the option of the
investor or the debt holder. It is the company which determines the rate at which the
debentures will be converted, normally at the time of issue. For instance, a company may
decide that ten debentures will be converted to one share.

Further, CCDs are a hybrid instrument because of the fact that they are at present a debt but
will eventually be equity. They are compulsory and automatically convertible into equity
shares at a predetermined time or upon the occurrence of a predetermined event.

Requirements of s. 71:
71(1) allows the company to issue debentures with the option to convert them into shares
either wholly or in part – requires special resolution at a general meeting
71(2) debentures can’t carry voting rights in ordinary course of business. But debenture
holders may have voting rights when their interests are affected such as when the company is
winding up or when the is going through a restructuring.
71(4): A DRR requires the corporation to create a debenture redemption service to protect
investors from the possibility of a company defaulting

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Companies (Share Capital and Debentures) Rules requires the DRR to be 25%.
71(5) – debenture trustee needs to be appointed before prospectus is issued or an offer is
made to the public
A trust is a fiduciary arrangement that allows a third party, or trustee, to hold assets on behalf
of a beneficiary or beneficiaries. A Debenture Trustee is appointed by the issuer company
and is given the task to protect the interests of the debenture holders and he will also serve as
a mediate factor between the issuer company and the debenture holder.
Typically, the issuer company will mortgage its property in the name of the Debenture
Trustee and he shall solely exercise his powers as a trustee over it. This means that the
Debenture Holders can’t use such mortgaged property and they can benefit from it when the
Debenture Trustee sells such property in order to redeem their debentures.

71(8) – company will pay interest and redeem debentures in accordance with the terms of
their issue
71(9) – petition by DT that assets are insufficient to discharge principal  apply to NCLT 
hears company and other interested persons  may pass an order restricting the company
from incurring further liability
71(10) – default by company  application to NCLT by debenture holders or DT  order to
repay forthwith
71(11) - default is made in complying with the order of the Tribunal  every officer in
default punishable
71(12) – contract to take up and pay for debentures is specifically enforceable

2. Debentures Based on Registration

Registered vs. Bearer
When debts are issued as debentures, they may be registered to the issuer. In this case, the
transfer or trading in these securities must be organized through a clearing facility that alerts
the issuer to changes in ownership so that they can pay interest to the correct bondholder.
A bearer debenture, in contrast, is not registered with the issuer. The owner (bearer) of the
debenture is entitled to interest simply by holding the bond.

3. Based on Redemption
Redeemable debentures clearly spell out the exact terms and date by which the issuer of the
bond must repay their debt in full. Irredeemable (non-redeemable) debentures, on the other
hand, do not hold the issuer liable to repay in full by a certain date. Because of this,
irredeemable debentures are also known as perpetual debentures. These are either
redeemed upon the firm’s liquidation or when the company chooses to pay them off.
Irredeemable debentures are not allowed to be issued in India under CA, 2013.

4. On the basis of Security:

 Secured Debentures: Debentures that are issued against a security/collateral
are called secured debentures. In other words, a charge is made against the assets
of the issuing company.

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 Unsecured Debentures: Debentures which are issued without any charge

against the issuing company’s assets are called unsecured debentures

ISSUE PROCESS

Step 1: Call for a Board Meeting

Call and hold a Board meeting to determine which sorts of debentures the Company will
issue. Pass resolutions seeking approval of the following items at the Board meeting:
 Private placement offer letter
 Appointment of a Debenture Trustee and Sanction of Debenture Trustee Agreement
 Appointment of an expert for approval of a borrowing power increase, if necessary
 To allow the creation of a charge on the company’s assets.
 Accept the Terms and Conditions of the Debenture Subscription Agreement.
 The extraordinary general meeting of shareholders will be held on the following day,
date, and hour.

Step 2: Setup an Extraordinary General Meeting

Hold an extraordinary general meeting and pass a special resolution authorizing the issuance
of convertible secured debentures to increase the company’s borrowing ability and
authorizing the Board to place a charge on the company’s assets.

Step 3: Filing of a Documents with RoC

Prepare and file the following documentation once the debenture issue has been approved.
 Fill out Forms PAS 4 and PAS 5 and submit them to the Registrar of Companies in
Form GNL 2.
 File a Form Number MGT – 14 Offer Letter with the Registrar of Companies (ROC).
 File a copy of the Board of Directors’ resolutions, Special Resolutions, Debenture
Subscription Agreements, Debenture Trustee Agreements, and other documents with
the Registrar of Companies using Form Number MGT – 14.
 After allocating debentures, file Form No. PAS – 3 relating to return of allocation
with the Registrar of Companies (ROC).
 Fill out Form Number CHG – 9 to create a charge on the Company’s assets.

Step 4: Issue of Debenture Certificate

In the case of any debenture allocation, the certificate of debenture should be issued within
six months of the date of allocation.
Can debenture carry voting rights? Because the shareholders are the owners of the
company having voting rights, then the company would not want to dilute such voting rights,
hence would it be absolutely no voting rights or limited restrictions (like preference
shareholders). Now, S. 230 provides as well as 241, that in case of you are a creditor raising a
complaint or application under 241 needs to have 5% of o/s debt, and voting rights would be
on the basis of this debt. Hence, S. 230 talks about arrangements, which requires a dual
majority is needed (let’s say special resolution) - there also the creditors would be having a

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75% requirement, which would be depending on the o/s debt. Now, debenture instruments are
debt instruments.
Now, in the ordinary course of business, it is not allowed. But they do get voting rights when
their interest is strictly affected (like in cases where the entire position of the company is
called into question - like the winding-up or restructuring, then they do get voting rights.
In India, only redeemable debentures can be sold in India. When we are converting any
kind of redeemable debentures, then we have to convert - you give the debentures and get
paid in full. Do not categorise them, they are features, which may be made applicable to a
single debenture - redeemable convertible debenture - you redeem the debenture and get back
your principal amount.
In case of debentures, the principal amount is based on the face value.
1. Redeemable feature allows redeeming the debenture during the maturity period,
before it ends.
2. One may want to leave the company during maturity. Just ask for the principal
amount without rest of the interest
Convertible: after maturity, instrument becomes an equity instrument. But what happens
when one does not want to become the equity shareholder but want to remain a debenture
holder.

21st October, 2022

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8.4. Private Placement

Private placement is made only to a select group of people who are identified by board and
the number should not exceed 50 or any higher number as prescribed, in a financial year.
If we look at placement rules, they tell no. of private placement that can be done. They
prescribe that maximum no that can be done is 200 in one financial year but if we talk
about one single instance, in one single instance it cannot exceed 50.

1) BoD Proposal
The need for placement
(3)- a tentative list to whom the shares will be issued
2) General Meeting
Discussions regarding the final list- accept in entirety or suggest changes (removal of
names) or reject
3) Offer
Co issues on offer document to the approved list- negotiating the offer
4) Acceptance
If negotiations go through, they accept the offer. If they fail, they don’t go through.
Negotiations happen with respect to the offer. They do not constitute promissory
estoppel. The only form of acceptance will be an outright agreement that is entered
into by the parties. When an offer is being made, compliance has to be ensured at both
stages.

Startups will be more inclined towards blogger investors who will provide bedrock of the
capital. For example, sharks form the bedrock in Shark Tank.
We have excluded QIBs- Qualified Institutional Buyers- 2(ss) of SEBI ICDR
QIBs have been excluded saying that any placements made to the QIBs would be excluded
during the calculation of the total number of placements. QIBs are different from institutional
investors. QIBs are predominantly juristic personalities like mutual funds, hedge funds,
banks, CICs (Core Investment Companies), meaning that these are the companies whose
MoA object clause is investing in other companies. Institutional Investors can be individuals
also.
Institutional- any investor above 2 lakhs and is not specifically a QIBs will be an institutional
investor. Example, Rakesh Jhunjhunwala. Even though they are not qualified, they do have a
financial hold over the company.

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This is a company which cannot take a lot of hits. Hence, QIBs is being excluded.
When going for private placement, it is a secondary mechanism that listed companies can
follow but for private companies, it is their primary mechanism. Hence, we have excluded
QIBs. The reason is not any kind of profit and if you bring in QIBs, it is different from retail
investors. Even if there are losses, QIBs can take hits. It will not affect them.
If considering institutional investors, they will fall under 50/200.

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