UNIT-1

INTRODUCTION OF A COMPANY

2.1. INTRODUCTION

Nowadays, to start or carry on a business requires huge investments. It may not be possible for
a single person to fulfill all his financial requirements. Thus, the persons are generally desirous
of carrying on joint business enterprises. To such persons, the law offers a choice between a
partnership and a company. The partnership is suitable for small-scale business, in which the
partners take personal interest and work together with mutual trust and confidence. But
sometimes, the persons like to start business on large scale requiring huge investments which
cannot be financed by the resources of a few persons. In such cases, the formation of a
company is the only choice. It may, however, be noted that even for a small-scale business, a
company offers certain privileges as compared to partnership, such as the limited personal
liability of the members. The law relating to companies is contained in THE COMPANIES
ACT, 2013, which has repealed the existing Companies Act, 1956. The new Companies Act,
2013 contains 470 sections and 7 Schedules. Initially, only 98 sections of the new Act were
made effective
w.e.f. 12.9.2013 vide Notification F.No. 1/15/2013-CL. V dated 12.9.2013. Subsequently,
majority of the remaining sections and schedules have been made effective w.e.f. 1.4.2014 vide
Ministry of Corporate Affairs notification dated 26.3.2014. The entire text has been re-written
keeping in view the new provisions of the Companies Act, 2013 as amended by the Companies
(Amendment) Act, 2015.

In this chapter, we shall discuss the legal meaning of the term 'company', its advantages and
disadvantages. Various kinds of companies along with the legal provisions relating thereto
will also bediscussed in this chapter.

Note: In our discussion on the law relating to companies from Chapters 2 to 24, unless
otherwisestated, sections mentioned are those of the Companies Act, 2013.

2.2. DEFINITION OF A COMPANY

The term 'company' may be defined as a group of persons associated together to achieve some
common objective. This, however, is not the legal definition. In legal sense, a company
means an association of persons incorporated under the existing law of a country. The legal
definition of a company has been amended by the new Companies Act, 2013 and is given in
Section 2(20) of this Act which reads as under:

"Company means a company incorporated under this Act or under any previous company

law". Thus, in legal sense a company is one which is incorporated (i.e., formed) under the

Companies Act,
2013 or under any previous company law'. The previous company law here means the
Companies Act, 1956 and earlier Companies Acts. This definition, however, is not exhaustive.
Strictly speaking, the term 'company' is not defined in Section 2(20). It simply emphasises the
formation and registration of the company. The meaning and nature of the company becomes
clear after looking into its characteristics, as discussed in the next article. The legal meaning
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 of the term 'company', as revealed by these characteristics, may be summed up as under:

A company is a voluntary association of persons formed under the Company Law, to

achieve some common objectives, having a separate legal entity, independent and
separate from its members, with a perpetual succession and a common seal, if any, and
with capital divisible into transferable shares.

Following points are important to be noted with regard to the definition of a company:
1. Legally not every association of persons is a company; only such association of
persons shall be a company which is registered under the Companies Act, 2013 or
under any previous Companies Act.

2. A company is, legally, regarded as a person, which has rights and duties at law.
However, it is not a natural person as human beings are. It is only a legal or artificial
person, recognised by the law. Since, the company is created by law i.e., by
registration under the Companies Act, it is known as a legal person, and as it has no
body, no soul or conscience, no physical existence except in the eyes of law, it is
known as artificial person.

3. Though the company is a legal or artificial person, yet it really exists and is not a
fictitious person.

4. A company, being an artificial legal person, possesses similar rights and owes similar
obligations like natural persons. Thus, a company can do everything like a natural
person except the acts which are purely of personal nature, e.g., taking oath, seeking
election, marriageor divorce.

5. Though, the company is a person, the sentence of imprisonment cannot be imposed on a

company. Thus, where the violation of any provision of the Companies Act attracts penalty by
way of imprisonment only, the company cannot be punished for the violation of such a provision.
2.3. CHARACTERISTICS OF A COMPANY OR ADVANTAGES OF INCORPORATION

We have discussed, in the last article, the legal definition of the term company. A company
formed and registered under the Companies Act has certain special characteristics, which
reveal the nature of a company. These characteristics are also called the advantages of a
company because as compared with other business organisations, these are in fact, beneficial
for a company. Following are the special characteristics of a company:

1. It has a separate legal entity: It is an important characteristic of a company that it has

a separate legal entity. It means that the existence of a company is independent and
separate from its members. In law, the company is regarded as an artificial legal person,
which deals in its own name. Thus, a member of a company cannot be held liable for the
acts of a company even if he holds the substantial part of company's share capital. Under
the law, an incorporated company is a distinct entity, and although all the shares may be
practically controlled by one person, in law a company is a distinct entity and it is not
permissible or relevant to enquire whether the directors belonged to the same family or
whether it is, as compendiouslydescribed, a one-man company.
2. It has a perpetual succession: The term 'perpetual succession' may be defined as the
continuous existence. A company has a perpetual succession i.e., company never dies. The
membership of a company may change from time to time, but it does not affect the
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company's continuity. In other words, the members may come and go, but the company can
go on for ever. This, however, does not mean that a company can never come to an end. As a
company is created by the process of law, it can also be brought to an end by the process of
law. Thus, a company comes an end when it is wound up according to the provisions of the
Companies Act. It may, however, be noted that till a company is wound up according to law,
it continues to exist. Thus the death, insanity or insolvency of the members does not affect
the corporate existence of the company in any way. Moreover, the admission of members also
does not affect entity of new members. The company remains the same entity inspite of the
total change in membership.

EXAMPLE 2.5. A and his son B were the only members of a private limited company. While
going on a business trip, both of them died in an air crash. In this case, the company does not
come to an end. It continues to exist, as the company has a perpetual succession (i.e., continuous
existence). Here, the legal representatives of the deceased members shall become entitled to
their shares by way of transmission of shares.

3. It has a separate property: We know that company is a legal person in the eyes of
law. It can, therefore, hold the property in its own name. All the property in the name of the
company is its separate property which is controlled, managed and disposed of by the
company in its own name. Thus, the company is the owner of its assets and capital. The
members cannot claim to be the owner of the company's property. It is to be noted that a
member does not have even an insurable interest in the property of the company i.e., he
cannot insure company's property in his own name for his own benefit.

4. It has capacity to sue and being sued: We know that a company is a legal person and
has independent existence. Being a legal person, the company can file suits against others in
its own name.Similarly, the suits against the company can also be filed in company's name.

EXAMPLE 2.7. A, a company, was carrying on a cycle manufacturing business. It

purchased certain cycle parts from B, another company, and paid the price of the same. But B
supplied the cycle parts of substandard quality. In this case, A may file a suit against B for the
recovery of the damages.

If, in the above example, B supplies the cycle parts of standard i.e., contracts quality but A
fails to pay the price, then B can file a suit against A for the recovery of the price of the cycle
parts. Note: A criminal complaint can be filed by the company in its own name but it must be
represented by a natural person. A complaint which is not represented by a natural person is
liable to be dismissed in the same way in which an individual complaint is liable to be
dismissed in the absence of complainant.

5. It has a common seal: We know that a company is a legal person, but it is not,
physically, in existence. Thus, it cannot sign its name. It has a common seal which is used as
a substitute for its signature. The common seal is the official signature of a company. As a
matter of fact, every company must have a common seal with its name engraved on the same.
The company being not physically in existence, it acts through natural persons, who are the
directors of the company.

Note: It is important to note that the requirement of having a 'common seal' by the company has
been made optional by the Companies (Amendment) Act, 2015. This Amendment Act has
amended Section 9 of the Companies Act, 2015, and in view of the amended section, it is not
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obligatory for a company to have a common seal.

6. Its members have limited liability: As a matter of fact, it is the principal advantage
of carrying the business under limited companies. A company may be limited by shares or by
guarantee. In a company limited by shares, the liability of a member is limited to the extent of
nominal value of the shares held by him. If the shares are partly paid, the liability of a
member is limited to the extent of unpaid value of shares held by him. And if the shares are
fully paid, the liability of the member is nil.

EXAMPLE 2.9. A was a member of a company limited by guarantee. He guaranteed that in

the event of winding up of the company he would contribute 1,000 to the assets of the
company. In this case, A's liability is limited to the extent of 1,000 and no more. And this
liability will arise only when the company goes into liquidation.

Note: The companies limited by shares, and guarantee will be discussed in detail in Art. 2.13.
7. Its shares are freely transferable: The capital of a company is divided into parts, and
each part is called the share. The shares of a company are freely transferable and can be
purchased and sold in share market. This characteristic of a company is recognised by
"Section 44 of the new Companies Act, 2013 which reads as under:

"The shares or debentures or other interest of any member in a company shall be movable
property, transferable in the manner provided by the articles of the company".

Thus, the shares of the company are transferable like a movable property. Every member is
free to sell his shares in the open market, and to get back his investment without having to
withdraw the money from the company. This provides liquidity to the investor (member) and
stability to the company because the company is in no way affected as the investments
remain with the company.

EXAMPLE 2.10. A holds 100 fully paid shares of 20 each in a public limited company. He is
in immediate need of money. In this case, A may transfer (i.e., sell) his shares to another
person say B, and get the amount. On a valid transfer, B will become the shareholder of the
company. In this transfer of shares, the company is not affected as the amount is not
withdrawn from the company.

It may, however, be noted that restrictions on transferability of shares are imposed in case of
a private limited company. In case of a private limited company, the shares can be transferred
only according to the conditions laid down in the Articles of Association of the company.

All the above discussed characteristics clearly explain the legal meaning of the term company

8. It has several other advantages: Apart from the above advantages available to a
company, it enjoys several other advantages also, such as
(a) a company has an autonomy and independence to form its own policies and implement
them in accordance with the provisions contained in its memorandum, articles of
association and the Companies Act. (b) a company attracts professional management, and
thus helps in promotion of professional management and efficiency (c) a company has the
privilege of collecting interest free money from the public, for its business, by making a
public issue or through private placement of shares and other securities (d) the
restrictions, with certain exception, on the purchase of its own shares by the company,
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provide permanence of capital collected and stability to the company and protection to
some extent to the creditors of the company.

2.9. KINDS OF COMPANIES

Though there are many kinds of companies, yet the following are important from the subject
point ofview:

1. Chartered companies. 2. Statutory companies. 3. Registered companies.

4. Private companies. 5. Public companies. 6. One person companies. 7. Holding and
subsidiarycompanies. 8. Government companies. 9. Foreign companies.

2.10. CHARTERED COMPANIES

A chartered company is one which is incorporated (formed) under a Special Charter granted
by the King or Queen of England in the exercise of prerogative powers e.g., East India
Company, Bank of England, Standard Chartered Bank. The chartered companies are governed
by the provisions of the Special Charter, under which they are formed. The charter defines the
nature and power of such companies. It may be noted that after independence, the chartered
companies are rarely found in India. Moreover, the Companies Act, 1956 does not apply to
such companies.
2.11. STATUTORY COMPANIES OR CORPORATIONS

A statutory company is one which is incorporated by a Special Act of the Legislature (i.e., by
the Act of Parliament or State Legislature). It may be noted that an Act is specially passed to
create a statutory company e.g., the Life Insurance Corporation of India was created by the Life
Insurance Corporation Act, the Food Corporation of India was created by the Food Corporation
of India Act. The statutory companies are also known as 'corporations'. Such companies are,
generally, created for the public utility services, and their main object is not to earn profits, but
to serve the general public. The nature and powers of such companies are defined by the
Special Act, under which they are created. However, the provisions of the Companies Act are
also applicable to them in so far as they are consistent with the provisions of the Special Act.

A statutory company resembles with the company created under the Companies Act as it has a
separate legal entity, and the liability of its members it also limited. However, it may not be
required to use the word 'Limited' after its name. Moreover, it is also not required to have
'memorandum' and 'articles of association'. Following are some of the important provisions
relating to the statutory companies:

1. A change in the structure of a statutory company is possible only by amending the

Special Act under which it is created.

2. The audit of a statutory company is conducted under the control and supervision of
Auditor General of India.

3. The annual report of working of a statutory company is required to be placed

before theParliament or State Legislature, as the case may be.

It may be noted that statutory companies or corporations are considered 'State' for the
purpose of Article 12 of the Constitution of India, and thus are required to observe principles

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of equality in their contractual dealings ¹4. In a case before the Supreme Court, the Regional
Engineering College, Srinagar was considered to be 'State' and was held bound by the
principles of equality in the matter of selection of students for admission.

Note: Though a corporation is regarded as state, but protection by way of sanction under
Section 197 of the Code of Criminal Procedure (Cr.P.C.) is not available to the officers of
the corporation. As per Section 197 of Cr.P.C. when a public servant is accused of any
offence, an action against him can be taken with the previous sanction of the Central
Government or the State Government. But if any officer of a corporation is to be removed
due to his being guilty of an offence, such sanction is not required.

2.12. REGISTERED COMPANIES

A registered company is one which is formed and registered under the Companies Act,
2013. It also includes an existing company, which was formed and registered under the
earlier Companies Acts. It may be noted that a registered company comes into existence
when it is registered (i.e., its name is entered in the register meant for this purpose) under
the Companies Act, and a certificate of incorporation is granted to it by the Registrar of
Companies. The registered companies are governed by the provisions of the Companies
Act, 2013, and by the rules and regulations laid down in the 'memorandum' and 'articles' of
association of the companies. These are the commonly found companies in India, and are
the subject of our discussion of the Company Law. The registered companies may be of two
kinds, namely:

1. Limited companies
2. Unlimited companies
2.13. LIMITED COMPANIES

A limited company is one in which the liability of the members is limited i.e., the members are
liable upto a limited amount, and beyond that limit they cannot be asked to contribute anything
towards the payment of
company's liabilities. Thus, if in the event of winding up of a company, the assets of the
company are not sufficient to pay its liabilities, then the private property of the members
cannot be utilised for the payment of company's liabilities. It may be noted that a limited
company is required to add the word 'Limited' after its name. The limited companies may be
of two kinds, namely (a) companies limited by shares, and (b) companies limited by
guarantee.

1. Companies limited by shares: A company limited by shares is one in which the

liability of the members is limited to the extent of nominal value of shares held by them. If the
shares are fully paid i.e., all the amount of share has already been paid, then the liability of the
members is nil. And if the shares are partly paid, then the liability of the members is limited to
the extent of the amount which remains unpaid, e.g., if a member has purchased 100 shares of a
company of the face value of 10 each, and has already paid 5 per share. In this case, the
maximum liability of the members is * 5 per share i.e., 500 in total. It may be noted that the
liability of the members can be enforced during the continuation (i.e., existence) of the
company, or during its winding up. Thus, the members can be asked to pay the unpaid amount
on their shares at any time. This is the most common kind of companies. The companies limited
by shares may be either 'private' or 'public' companies. The private and public companies will
be discussed in Arts. 2.15 and 2.16 respectively.
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2. Companies limited by guarantee: A company limited by guarantee is one in which the
liabilityof the members is limited to such amount as he undertakes to contribute to the assets of
the company in the event of its being wound up. The amount of guarantee is fixed in the
'memorandum of association' of the company. The guaranteed amount may differ from member
to member. It may be noted that the liability of the member can be enforced only at the time of
winding up of the company. Thus, the members cannot be asked to pay the guaranteed amount
during the continuation of the company. A company, limited by guarantee, may or may not
have the share capital. If the company has the share capital, then the members are also liable to
pay the unpaid amount on their shares. However, the amount of guarantee can be called only at
the time of winding up of the company.
It may be noted that the companies limited by guarantee are generally non-trading
companies, and they are not formed for the purpose of earning profits, e.g., companies
carrying charitable activities, companies formed for the promotion of art, sports, science and
culture etc. The companies limited by guarantee may also be either 'private' or 'public'
companies.

The important features of a company limited by guarantee may, therefore, be summed up as under.

(a) The memorandum of a guarantee company must contain a clause

stating that the members shall contribute a fixed sum of money towards the
assets of the company in the event of its winding up.

(b) The amount of guarantee must be stated in the memorandum

(c) The guarantee company must have articles.

(d) The liability of the members to pay the guaranteed amount arises only when the company
goes into liquidation and not when it is a going concern.

Note: The words 'Limited' or 'Private Limited' are to be used by the public' or 'private
companies as the last words of their name only if the company is incorporated (ie, formed)
with limited liability If any person or persons use these words in their name without being
incorporated with limited liability, each of such persons shall be punishable with a minimum
fine of 500 but may entend to 2000 for every day for which such names have been used in the
name of their business concern (Section 453, the Companies Act, 20131

2.14. UNLIMITED COMPANIES

An unlimited company is one in which the liability of the members is unlimited i.e. the
members are also personally liable for the payment of companies' liabilities. Thus, if in the
event of winding up of a company, the assets of the company are not sufficient to pay its
liabilities, then the private property of the members can also be utilised for the payment of
company's liabilities It may, however, be noted that due to separate legal entity of the company,
its creditors cannot file a suit against the members directly. The members can be asked to
contribute their property at the time of winding up of the company if its assets are not sufficient
to pay its liabilities. As a matter of fact, the liability of members of such companies is unlimited
as that of partners of a partnership firm. It may be noted that the articles of association of an
unlimited company should state the number of members with which the company is to be
registered. And if the company has share capital, the articles should also state the amount of
shares with which it is to be registered. The unlimited companies may also be either 'private' or
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 'public' companies.

It may be noted that a company registered as an unlimited company may subsequently

convert itself into a limited company. However, it can be so converted subject to the
provision that any debts, liabilities, obligations or contracts incurred or made by or on behalf
of the unlimited company before such conversion are not affected by the conversion [Sections
18 and 65, Companies Act, 2013].

Note: The unlimited companies are rarely found in these days.

2.15. PRIVATE COMPANIES

This point is discussed under the following sub-heads.

2.15.1. Definition of a Private Company

A private company is defined in Section 2(68) of the new Companies Act, 2013, which
correspond to Section 3(1)(iii) of the Companies Act, 1956, and section 2(68) has been
amended by the Companies (Amendment) Act, 2015 w.e.f. 29-5-2015. Which has removed
the minimum paid up share capital requirement of rupees one lakh for the formation of a
private company.

As per amended Section 2(68), a private company is one which has a minimum paid up
share capital of such sum as may be prescribed, and by its articles of association, puts the
following restrictions on itself:
1. Restricts the right to transfer its shares, if any.

2. Limits the maximum number of its members to 200 (excluding the present or past
employees ofthe company).

3. Prohibits any invitation to the public to subscribe for any shares or debentures, of the
companyi.e., it should not make public issue of its securities.

Thus, in case of a private company, its articles must expressly contain the three restrictions,
namely (a) members' right to transfer shares should be restricted, however not totally prohibited,
(b) the maximum number of members should be 200 (and minimum two), and there should be
no invitation to the public to subscribe for its shares or debentures i.e., the issue of prospectus
should be prohibited.
• Under section 631 of the Companies Act, 1956, the maximum limit of
fine was upto 500 only.

Note: The requirement of minimum paid up share capital of rupees one lakh for the
formation of a private company has been removed by the Companies (Amendment) Act,
2015 w.e.f. 29-5-2015. This step has been initiated by the government to promote the easy
formation of companies and the establishment of business units under various schemes of the
government.

The removal of minimum capital limit may have positive effect if there will be
control andsurvelliance over the working of companies.

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Now the government may, by rules, prescribe the paid up capital requirements for the
formation of a company.

2.15.2. The Manner of Restrictions on Members' Right to Transfer Shares

The object of restricting the members' right to transfer their shares is probably to enable the
company to keep the number of its members within the prescribed limit of 200. It is to be
noted that the Companies Act does not specify the manner in which the members' right to
transfer the shares is to be restricted. However, it has been held by the courts that the
restriction upon transfer of shares means any restriction which will give some control to the
company over transferability. Generally, the restrictions on members' right to transfer their
shares take the following two common forms:

1. Right of pre-emption: The 'right of pre-emption' means existing members' preferential

right to purchase the shares of other members as and when sold. The articles of association of
the company may contain a clause that when a member wishes to sell some or all of his
shares, he shall first offer them to the other existing members at a price to be determined in
the manner set out in the articles. It may, however, be noted that under the pre-emption clause,
a member is not bound to sell his shares to other members unless they (other members) or
some of them agree to buy all the shares which he offers for sale¹5.

2. Directors' powers to refuse to register transfer of shares: The articles of association

of the company may contain a clause giving powers to the directors to refuse to register the
transfer of shares. However, this power must be exercised by the directors in good faith and for
the benefit of the company. Thus, we see that in case of a private company, the members' right
to transfer their share is restricted. It may, however, be noted that the 'restrictions' does not
mean prohibitory restrictions. As a matter of fact, there cannot be absolute prohibition on
members' right to transfer shares. The reason for the same is that the transferability of shares is
one of the characteristics of a company, which has been recognised by Section 44 of the
Companies Act, 2013.

In case a private company is a limited company, then it must add the words "private limited' at
the end of its name. Generally, the membership of a private company is confined, more or less
to friends or relatives.
The private companies enjoy certain advantages (privileges) over the other companies,
which will bediscussed in Art. 2.21.

2.15.3. Important Points Relating to Private Companies

Following important points may be noted in connection with a private company:

1. A private company must have a minimum paid up capital of such amount as may be
prescribed bythe government by rules.

2. In computing the number of members, the joint holders of shares shall be counted as one person i.e.,
two or more persons holding the shares jointly shall be treated as one single member.

3. In case, a private company is limited company, then it must add the words Private
Limited at the end of its name.

4. A private company need not necessarily be a company having share capital. Thus, in
case of a private company having no share capital, there is no question of restrictions on
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 members' right to transfer their shares. However, the articles of such a company must
contain the other statutory restrictions.

5. The legal position (i.e., status) of a private company is similar to that of a public
company i.e.,it is a separate legal entity.

6. In case of private companies, it is only the number of members that is limited to 200.
and not the number of debenture-holders. Thus, a private company may issue debentures to
any number of persons. However, the debentures can be issued privately i.e.. without
inviting the public to subscribe for the same. This is so because the invitation to the public to
subscribe for any shares or debentures of the company is prohibited by its articles.

Notes: 1. In case of private companies, certain restrictions are imposed by its articles of
association. It, therefore, follows that a private company must have its own articles of
association

2. The private companies were, for the first time, introduced in the Indian Company Law by
the Companies Act of 1913. Until 1913, all the registered companies were known as the
public companies.

Changes brought in by the Companies Act, 2013

1. The maximum limit of number of members has been increased to 200 from 50 prescribed
under the earlier Compani Act, 1956.

2. The private company can also be formed with one member only, as the concept of 'One
Person Company' has been introduced in the new Companies Act, 2013.

3. The requirement of minimum paid up share capital of rupees one lakh for the formation of
a private company has now been removed by the Companies (Amendment) Act, 2015 w.e.f.
29.5.2015.

2.16. PUBLIC COMPANIES

This point is discussed under the following sub-heads.

2.16.1. Definition of a Public Company

A public company is defined in Section 2(71) of the new Companies Act, 2013, which
correspond to Section 3(1)(iv) of the Companies Act, 1956. The new section 2(71) has
recently been amended by the Companies (Amendment) Act, 2015 w.e.f. 29-5-2015 which
has removed the minimum paid up share capital requirement of 5 lakhs for the formation of
a public company.

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A per amended Section 2(71), a public company means a company, which

(a) is not a private company;

(b) has minimum paid-up capital of such amount as may be prescribed.

Thus a public company may be defined as an association of persons consisting of not less than
seven members, which is registered under the Companies Act with a minimum paid up capital
of the prescribed amount and which is not a private company within the meaning of this Act.

It may, however, be noted that the 'articles of association' of a public company may,
sometimes contain restriction on the issue of or transfer of shares. But despite such
restrictions, if any, the company remains public company as the other statutory restrictions
are not there. It may be noted that generally a company is considered as a public company,
unless it is clear from its constitution that it is a private company.

2.16.2. Important Points Relating to Public Companies

Following points are important to note in connection with a public company

1. A public company must have such paid up capital as may be prescribed by the
government byrules.
2. A private company which is subsidiary of a public company will be treated as a public
company even where such subsidiary company continues to be a private company as per
its articles [Section 2(71), proviso].
3. In case of public companies, there are no restrictions in its articles, (a) on transfer of
shares, (b) on maximum number of members (though minimum must be 7), and (c) on the
invitation to general public to subscribe for its shares.

4. The requirement of minimum paid up share capital of 5 lakhs for the formation of public
company has been removed by the Companies (Amendment) Act, 2015. Now a public
company can be formed with such minimum paid up share capital as may be prescribed
by the government by rules.

This step has been initiated by the government to promote the easy formation of companies the
establishment of business units under various schemes of the government. The removal
minimum capital limit may have positive effect if there will be control and survelliance over
working of companies.

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 Changes brought in by the Companies Act, 2013

The definition of a public company as given in Section 2(71) of the new Companies Act, 2013 is
substantially on the same lines as given in the earlier Act.

1. The new definition has, however, removed the ambiguity surrounding the status of a private
company which is a subsidiary of a public company.

2. It is clarified in the definition itself that any private company which is subsidiary of a public
company shall be deemed to be a public company even where such subsidiary company
continues to be a private company as per its articles of association.

3. The definition given in the earlier Companies Act, 1956 did not provide as to whether such
subsidiary company will have the articles of a public company or a private company.

4. The requirement of minimum paid up share capital of 5 lakhs for the formation of a public
company has now been removed by the Companies (Amendment) Act, 2015 w.e.f. 29.5.2015.

2.17. ONE PERSON COMPANY

The concept of 'one person company' is a new concept and has been introduced in the
company law forthe first time.

It is defined in Section 2(68) of the Companies Act, 2013 as under:

"One person company means a company which has only one person as a member".

Thus, a one person company can legally be formed under the Companies Act, 2013. Following
points areimportant in this regard:

1. Only a natural person can be a member of a one person company.

2. One person company can only be formed as a private limited company [Section 3].

3. The words 'One Person Company' shall be mentioned in brackets below the name of the
companywherever its name is printed, affixed or engraved [Section 12(3)].

4. The memorandum of one person company shall indicate the name of other person who
shall become member of the company in the event of death or incapacity of the single
member [Section 3(1), first proviso].

Note: The concept of 'one person company' has, already been discussed in chapter 1 in
Article on 'New Concepts'.
2.18. HOLDING AND SUBSIDIARY COMPANIES

We know that a holding company is one which has control over another company. And the
company, over which the control is exercised, is called the subsidiary company. It may be
Loted that the 'holding' and 'subsidiary' companies are relative terms. A company is a holding
company of another if the other is its subsidiary. The circumstances in which such type of
control is exercised (i.e., in which one companybecomes the holding and the other a subsidiary)
12
are contained in Section 2(87) of the new Companies Act, 2013 which have been made
effective from 12.9.2013. Earlier these circumstances were contained in Section 4 of the
Companies Act, 1956. As per new provisions of section 2(87), one company shall become a
subsidiary of another company (i.e., holding company) in the following circumstances.

1. Control over the composition of Board of Directors Section 2(87)(i)]: Where, one
company controls the composition of the Board of Directors of another company, then the
former becomes the holding company, and the latter a subsidiary company (i.e., subsidiary of
the holding company). A company shall be deemed (i.e., considered) to have control over the
composition of the Board of Directors of another company, if it has the powers, of its own, to
appoint or remove all or majority of the directors of the other company [Section 2(87),
Explanation (b)].

EXAMPLE 2.31. The Board of Directors of company A consists of 10 directors. Another

company B is formed, which has 5 directors, out of which 4 have been appointed by the
company A. In fact, the company A has full powers to appoint 4 directors of company B. In
this case, company A is the holding company, and the company B its subsidiary as the former
has full powers to appoint majority of the directors of the latter.

Notes: 1. The fact that the majority of directors, over which the control is exercised by the
holding company, will remain on the Board only upto the next annual meeting is not
material. In such a case, the relationship of holding and subsidiary company is established at
least for the time being.

2. The holding company need not be a member of the subsidiary company. The holding
company may control the composition of Board of Directors of the subsidiary company
without holding the majority of shares in the subsidiary. The ways, by which the holding
company may have powers to appoint or remove directors of the subsidiary company, may be
as under:

(a) The 'memorandum' or 'articles' of the subsidiary company may confer such powers
upon theholding company.

(b) There may be contract between the holding and subsidiary company conferring such
powersupon the former.

This note is based on the observations made in Pennington, Company Law, 796 (5th Edn. 1985).

2. Holding of majority of shares [Section 2(87)(ii)]: Where, one company holds the
'majority of shares' in another company, then the former becomes the holding company. And
the latter a subsidiary company. The term 'majority of shares' means more than half (50%) of
the total share capital of the company. Thus, a company becomes a holding company if it
holds more than 50% of the total shares of another company.

Here, the total share capital means the aggregate of

(a) equity share capital; and

(b) convertible preference share capital.

Note: Under section 4 of the earlier Companies Act, 1956, the requirement was holding of
more than 50% of the total equity capital only. The new provisions includes both kinds of
13
share capital namely, equity as well as convertible preference.

EXAMPLE 2.32. A is a company registered under the Companies Act having share capital
of 5 lacs divided into 5000 equity shares of 100 each. Out of the total shares, 2600 shares are
held by B another company. In this case, B is the holding company and A, the subsidiary
company. Here, more than half of the nominal value of the total share capital of company A is
held by company B.
It may be noted that to fulfil the requirement of this clause, the majority of shares in the
subsidiarycompany may be held by the holding company itself of its own or together with
one or more of its subsidiary companies.

Notes: 1. Under this clause, the holding company will also be the member of a subsidiary
companywhere it directly holds the shares in the subsidiary company.
2. A holding company cannot, directly or indirectly purchase its own shares
through its subsidiary company [Section 70 of the new Companies Act, 2013].

3. Subsidiary of another subsidiary company [Section 2(87), Explanation (a)]:

Where, one company is the subsidiary of another company, which itself is a subsidiary
company of some other company, then the first mentioned company shall also become the
subsidiary of the last mentioned company.

EXAMPLE 2.33. Company A is a subsidiary of company B and the company B is the

subsidiary of another company C. In this, the company A will also become the subsidiary of
company C. Now suppose another company D is also the subsidiary of company A. In that case,
the company D will become the subsidiary of company B, and consequently also the subsidiary
of company C.

Under this clause also, the holding company need not be the member of a subsidiary
company. In the above example, company C is the holding company of the company A, but
it (C) is not directly the member of the subsidiary company (4).

Thus, a company is the holding company of another (i.e., subsidiary company) if it exercises
any oneof the above types of control over the other company.

Notes: 1. It is to be kept in mind that both, the holding company and its subsidiary
company, are the separate legal entities.

2. A subsidiary company is prohibited from holding shares in its holding company,

except as a trustee or legal representative of a deceased member. And the holding company
shall not allot or transfer any of its shares to its subsidiary company, any such allotment or
transfer of shares shall be void [Section 19 of the Companies Act, 2013 w.e.f. 12.9.2013]

3. The definition contained in the Indian section is wider than that of Section 154 of the
English Companies Act, 1948. Under the English section, for a company to be a holding
company of another company, both the following requirements must be fulfilled: (a) It must
be a member of the other company, and

(b) It must also control the composition of the Board of Directors of that other company.
However, under the Indian section, it is enough for a company to have control over the
14
composition of the Board of Directors of the other company.

4. As the holding company need not be a member of the subsidiary company, the
relationship of holding and subsidiary company may also exist where there is no share
capital.
2.19. GOVERNMENT COMPANIES

The definition of a government company' is contained in Section 2(45) of the Companies

Act, 2013 which is almost similar to the definition contained in Section 617 of the
Companies Act, 1956.

The new section has been made effective with effect from 12.9.2013, and the definition given
below is as per new Section 2(45).

A Government company is one in which 51% or more of the paid up share capital is held by
the Central Government, or by any one or more State Governments, or partly by Central
Government or partly by one or more State Governments. The required percentage of share
capital, to be held by the Central Government and/or by the State Government, may be either
of equity share capital or of preference share capital or of both. Even if the holding by the
Central or State Government consists of only preference shares carrying no voting rights, the
company will still be a Government company. A subsidiary of a Government company is
also a Government company.

EXAMPLE 2.34. A & Co. Ltd. is a public company having paid up share capital of 20 lacs
(₹ 10 lacs equity share capital + 10 lacs preference share capital). Out of the total paid up
share capital, 7 6 lacs of equity share capital are held by the Central Government, and 5 lacs
of preference share capital are held by Punjab Government. In this case, A & Co. Ltd. will be
a Government company as more than 51% of its total paid up share capital is held by the
Central and State Governments jointly.
Here, A & Co. Ltd. will also be a Government company, even if the required percentage
of share capital is held by the Central Government alone, or by the State Government
alone.

It may be noted that the takeover, by the Government, of the management of a company
under some legislative Act does not make it a Government company. In a case before the
Delhi High Court, the management of the company was taken over by the Government under
the provisions of the Industrial Development Regulation Act, 1951, and after takeover
company was not held to be the Government company.

The important provisions relating to the Government companies may be summed up as under.
1. The auditor of a Government company is appointed by the Comptroller and Auditor
General of India. The appointment of the auditor in respect of a financial year shall be made
by the Comptroller and Auditor General within a period of 180 days from the
commencement of the financial year. The auditor so appointed shall hold office till the
conclusion of the annual general meeting [Section 139(5), the Companies Act, 2013]

2. In those cases, where the Central Government is a member of a Government company,

it is the duty of the Central Government to cause to be prepared (i.e., got prepared) an annual
report on the working and affairs of the company. Such report must be got prepared within
15
three months of the annual general meeting before which the audit report of the company is
placed. The report, so prepared, is to be laid before the both houses of Parliament together with
a copy of the audit report and the comments, if any, of the Comptroller and Auditor General of
India.
3. In those cases where in addition to the Central Government, any State Government
is also amember of a Government company, the report as stated
above, shall also be laid before the State Legislature. But where the Central Government is
not a member then the State Government which is the member of the Government company
shall cause to be prepared the annual report within the same time as stated above, and
thereafter as soon as may be, lay it before the State Legislature.

Notes: 1. The above two provisions relating to the annual report are contained in Section
394 of the Companies Act, 2013. The provisions of this section shall also apply to a
Government company in liquidation Section 394 has been made effective w.e.f. 12.9.2013,
as they apply to any other Government company'

2. A Government company is a separate legal entity independent from its shareholders,

who maybe Central Government and/or State Governments.

3. Ordinarily, a Government company will be presumed not to be a servant or agent of

the State. Bu inference may be drawn that such company is an agent of the Government, if in
substance, it also perform the governmental function [Heavy Engg. Mazdoor Union v State
of Bihar, (1969) 39 Comp. Cases 905 (SC)

4. If the Government company or other statutory corporate body is an instrumentality or

agency of the Government (i.e., State), it would be an 'authority', and therefore 'state' within
the meaning of Article 12 the Constitution of India, and will be subject to the same
constitutional limitations as the Government and a writ will lie against it. [Som Prakash
Rekhi v. Union of India, (1981) 51 Company Cases (SC); Central Inland Water Transport
Corpn. Ltd. v. Brojo Nath Ganguly, (1986) 60 Company Cases 797 (SC)]. For the purpose of
invoking writ jurisdiction of the court, a nationalised bank has also bee equated with a
Government company. [State of Gujrat v. Central Bank of India, (1988) 63 Company Cases
598 (Gujarat) (DB)].

2.20. FOREIGN COMPANIES

This point is discussed under the following sub-heads.

2.20.1. Definition of a Foreign Company

In simple words, a foreign company is one which is incorporated (i.e., formed) outside India
Legally, it has now been defined in Section 2(42) of the Companies Act, 2013. As per
Section 2(42), a foreign company means any company or body corporate incorporated outside
India, which -

(a) has a place of business in India whether by itself or through an agent, physically a
through electronic mode, and

(b) conducts any business activity in India in any other manner.

16
Thus, a 'foreign company' is one which is incorporated outside India and which apart from
having a place of business in India also conducts any business activity in India. It is to be noted
that having or establishing a place of business indicates something more than an occasional
connection. A company will have an established place of business in India, if it has a specified
or identifiable place at which it carries on business, such as an office, store house, godown a
other premises which indicates that the company has a concrete connection with such particular
premises¹7. Thus, there must be some specific location readily identifiable with the company
where some substantial business activity of the company is being carried on. A place of
business is not considered to be established in India where a foreign company has merely posted
a representative in India only for the purposes of seeking orders.

2.20.2. Foreign Company and Foreign Controlled Company

The expression foreign company' is to be distinguished from a foreign controlled company'

'foreign controlled company' means a company (Foreign or Indian) in which majority
shareholders and voting power is in the hands of foreign individual and/or foreign bodies
corporates.

Whereas a 'foreign company' is one which is incorporated outside India and has a place of
business in India and also conducts any business activity in India.

2.26.COMPARISON BETWEEN A PRIVATE COMPANY AND A PUBLIC COMPANY

The following table gives the comparison between a private company and a public
company: Private Company Public Company

S.NO PRIVATE COMPANY PUBLIC COMPANY

.
1 It is formed and registered under the
Companies Act, and is also a separate
legal entity.
2 In this case, the minimum number
of persons required to form a
company is two.
3 In this case, the maximum number of
members must not exceed 200
4 In this case, the right of members to
transfer their shares is restricted i.e., the
shares are not freely transferable.
5 It is prohibited from issuing a prospectus
i.e., it cannot invite offers from the
general public to subscribe for its shares
or debentures.
17
It is also formed and registered under the
Companies Act, and is a separate
legal entity.
In this case, the minimum number
of persons required to form a
company is seven.
In this case, there is no such restriction on
the maximum number of members.
In this case, the right of members to
transfer their shares is not restricted
i.e., the shares are freely
transferable.
It is not prohibited from issuing a
prospectus i.e., it can invite offers from
the general public to subscribe for its
shares or
 debentures.

6 It must have minimum of two directors.
7 Its conversion to a public company
does not require approval of the
Tribunal.
8 In this case, the quorum required for
holding a meeting is of two members
i.e., there must be at least two members
personally present for holding the
company
meetings.
9 It enjoys certain special privileges.
It must have minimum of three directors.
Its conversion to a private company
requires approval of the Tribunal.
In this case, the quorum required for
holding a meeting shall depend upon
the number of members of the
company.
It does not enjoy any special privileges.

1.19. CORPORATE SOCIAL RESPONSIBILITY

The concept of 'corporate social responsibility' (i.e., CSR) has been introduced in the
company law, and legal provisions in this regard are made in Section 135 of the Companies
Act, 2013. This is a new initiative of Ministry of Corporate Affairs to ask corporate to
contribute towards society. It is a paradigm shift (i.e., fundamental change in approach) in
this area since earlier there were only volumtary guidelines for CSR, and now there is a
mandatory provision for CSR by some specified companies which is expected to cover a
huge number of companies in India. It may add sense of responsibility and contribution
among corporate. It is expected to be beneficial to different class of people such as children,
women, uneducated, unemployed etc towards which such CSR activities maybe focussed.

The legal provisions incorporated in Section 135 with regard to corporate social
responsibility may be stated as under:

1. Applicability to Companies [Section 135(1): The provisions of corporate social

responsibility shall be applicable to every company having the below mentioned net worth or
turnover or net profits, during any financial year:
(a) net worth of 500 crores or more; or
(b) turnover of 1,000 crores or more; or
(c) net profit of 5 crores or more.
2. Constitution of Corporate Social Responsibility Committee [Section
135(1)]: Every company falling in the above category shall constitute a Corporate
Social Responsibility Committee of the Board of directors.

The committee shall consist of 3 or more directors, out of which atleast one director
shall be an independent director.
Note: The composition of the above CSR committee shall also be disclosed in the report of
Board ofDirectors attached to the financial statement of the company [Section 135(2)].

3. Functions of Corporate Social Responsibility Committee [Section

18
135(3)]: TheCorporate Social Responsibility Committee shall:

(a) formulate and recommend to the Board, a Corporate Social Responsibility Policy
which shall indicate the activity or activities to be undertaken by the Company as
specified in Schedule VII;
(b) recommend the amount of expenditure to be incurred on the activities related to CSR; and
(c) monitor the Corporate Social Responsibility Policy of the company from time to time.

4. Responsibility of the Board of Company [Section 134(4)]: The

responsibilities of the board are as under:

(a) Approval of Policy: After taking into account the recommendations made by Corporate
Social Responsibility Committee, the Board shall approve the Corporate Social
Responsibility Policy for the company and disclose contents of such Policy in its report and
also place it on the company's website, if any, in such manner as be prescribed [Section
135(4)(a)].

(b) Ensure compliance of policy: The Board shall ensure that the activities as
included in the Corporate Social Responsibility Policy of the company are undertaken
by the company [Section 135(4)(b)].

(c) Ensure spending by the company: The Board shall make every endeavour to ensure that
the company spends, in every financial year, atleast two per cent of average net profits of the
company made during three immediately preceding financial years in pursuance of its Corporate
Social Responsibility Policy. If the company fails to spend such amount, the Board shall, in its
report made under clause (o) of subsection (3) 134, specify the reasons for not spending the
amount [Section 135(5)].

5. Activities included in CSR Policy (Schedule VII]: The activities which shall be
included by companies in their Corporate Social Responsibility Policy are the activities
relating to

( i) eradicating extreme hunger and

poverty; ( ii) promotion of education;
( iii) promoting gender equality and empowering women;
( iv) reducing child mortality and improving maternal health;
( v) combating human immunodeficiency virus, acquired immune deficiency syndrome,
malaria and other diseases;
( vi) ensuring environmental sustainability;
( vii) employment enhancing vocational
skills; ( viii) social business projects;
( ix) contribution to the Prime Minister's National Relief Fund or any other fund set up by
the Central Government or the State Governments for socio-economic development
and relief and funds for the welfare of the Scheduled Castes, the Scheduled Tribes,
other backward classes, minorities and women; and
( x) such other matters as may be prescribed.

19
 UNIT-2

FORMATION OF A COMPANY

3.1. INTRODUCTION

We know that a company is a separate legal entity which is formed and registered under the
Companies Act. It may be noted that before a company is actually formed (i.e., formed and
registered under the Companies Act), certain persons, who wish to form a company, come
together with a view to carry on some business for the purpose of earning profits. Such persons
have to decide various questions such as
(a) which business they should start, (b) whether they should form a new company or take
over the business of some existing company, (c) if new company is to be started, whether
they should start a private company or public company, (d) what should be the capital of the
company etc. After deciding about the formation of the company, the desirous persons take
necessary steps, and the company is actually formed. Thereafter, they start their business.
Thus, there are various stages in the formation of a company from thinking of starting a
business to the actual starting of the business. In this chapter, we shall discuss these stages
along with the legal provisions relating to them.

3.2. STAGES IN FORMATION OF A COMPANY

Following are the three stages in the formation of a company:

1. Promotion of a company.
2. Registration and incorporation of a company.
3. Commencement of business.

3.3. PROMOTION OF A COMPANY

It is the first stage in the formation of a company. We have discussed in Art. 3.1 that before a
company is actually formed, certain persons plan about the starting of some business, and after
arriving at the decision about the formation of a company, they take necessary steps in this
regard. The promotion of a company refers to all those steps which are taken from the time of
having an idea of starting a company to the time of the actual starting of the company business.
Thus, 'formation of a company' means originating the idea of forming a company, and taking
necessary steps in this regard. The persons who think of forming a company and take necessary
steps in its formation are known as 'promoters' or 'company promoters'. The legal meaning of
the term 'promoters', their legal status (position), functions, duties and obligations, liabilities,
and the remuneration payable to them will be discussed in Arts. 3.8 to 3.13.

3.4. REGISTRATION AND INCORPORATION OF A COMPANY

This point is discussed under the following sub-heads:

3.4.1. Formation of the Company

It is the second stage in the formation of a company, and the company comes into existence
when it is registered under the Companies Act, 2013. The persons associated for any lawful
purpose may form the same by getting it registered with the Registrar of Companies. These
persons may decide to form any of the following type of company [Section 3(1)]:

(a) Public company: 7 or more persons may form the company by getting it registered
with theRegistrar;

(b) Private company: 2 or more persons (not exceeding 200) may form the company by
getting it registered with the Registrar.
(c) One person company: One person may also form a company by getting it registered
with theRegistrar. It would always be a private company only.

The company so formed, whether public or private, may be of the following two types, namely
[Section 3(2)]:
1. Limited company (limited by shares or limited by guarantee).
2. Unlimited company.

Note: Section 3 of the new Companies Act, 2013 corresponds to Section 12 of the Companies
Act, 1956. There is no change in the provision with regard to above discussion. The additional
point made in new section 3 discussed above, is with regard to formation of a 'one person
company'.

3.4.2. Procedure for Registration and Incorporation

The procedure for registration and incorporation of the company involves the following steps:

1. Application to the Registrar for availability of name: An application for availability of

proposed name should be made to the Registrar in the prescribed form. The Registrar shall then
inform about the availability of proposed name. Thereafter, the company is got registered by
filing an application with the Registrar of Companies of the area in which registered office of the
company is to be situated. Such an application is filed by the promoters, and must be
accompanied by requisite fees and documents.

2. Filing of documents and information with Registrar [Section 71: After getting the
approval of name, the application for registration of the company should be filed with the
Registrar alongwith the following documents and particulars:

(a) The 'memorandum of association': It is the document which describes the scope of
company activities It must be signed by the required number of persons which are necessary
for the formation of company, and who come forward to form it (i.e., seven in case of public,
and two in case of private company) [Section 7(1)(a)].

(b) The 'articles of association': It is the document which contains the rules and
regulations of the company. It must also be signed by all the persons who sign the
memorandum of association [Section 7(1)(a)].

(c) Prescribed declaration: A declaration in the prescribed form stating that all the
requirements of the Companies Act, 2013 and rules made thereunder in respect of registration
have been complied with. Such a declaration should be given by [Section 7(1)(b)]:

(i) an advocate, a chartered accountant, cost accountant or a company secretary in

practice who is engaged in the formation of the company; and

(ii) a person named in the articles as a director, manager or secretary of the

(d) Affidavit of subscribers and first directors: An affidavit from each of subscribers to
memorandum, and from first directors named in 'articles' to the effect that they are not
convicted and have not been found guilty of any fraud, misfeasance or breach of duty under
this Act or under any previous company law during the last 5 years and all the documents
filed with the Registrar are correct and complete [Section 7 (1)(c)]:

(e) Correspondence address: The address for correspondence till the registered
office of thecompany is established [Section 7(1)(d)].
(f) Particulars of subscribers: The complete particulars of name including surname or
family name, residential address, nationality and prescribed particulars of every subscriber
to the memorandum including their proof of identity [Section 7(1)(e)].

(g) Particulars of first directors: The complete particulars of name, as stated above,
including proof of identity of persons named in Articles as first directors. The particulars of
Director Identification Number (DIN) should also be given [Section 7(1)(e)].

(h) Consent to act as directors and particulars of interest: The consent to act as
directors, and particulars of interest of first directors mentioned in company's articles of
association [Section 7(1)(g)].

3. Registration by the Registrar: When the application for registration of the company
alongwith the requisite fee and above documents is presented to the Registrar for registration,
the Registrar shall satisfy himself regarding compliance of legal formalities, such as(a) The
company is proposed to be formed for lawful object.

(b) The 'memorandum of association' has been signed by the requisite number of
persons (i.e., seven in case of public, and two in case of private company).

(c) The 'memorandum of association' and the 'articles of association' are prepared
according to the provisions of the Companies Act i.e., they do not go against the Companies
Act.

(d) The prescribed declaration, affidavits and particulars have been duly signed and filed.
(e) The name of the company is acceptable i.e., the name is neither prohibited nor is similar to
the name of anyexisting company.

On being satisfied with all the above points, the Registrar will registrar the company and all
documents, and place the name of the company in a registrar known as the 'Register of
Companies' [Section 7(2)].

4. Issue of certificate of incorporation: After the registration, the Registrar issues a

'certificate of incorporation' (i.e., a certificate of the formation of company) in the prescribed
form to the effect that the proposed company is incorporated. In this way, the company is formed
and comes into existence [Section 7(2)].

3.8. PROMOTER OR COMPANY PROMOTER

This point is discussed under the following sub-heads:

3.8.1. General Definition of a Promotor

The term 'promoter' or 'company promoter' may be defined as a person who thinks of
forming a company, and actually brings it into existence. This term is used in many company
matters. The Companies Act itself uses it in various Sections and imposes liability on the
promoters. Following are some of the important definitions:
1. "A promoter is one who undertakes to form a company with reference to a given project and
to set it going, and who takes the necessary steps to accomplish that purpose". Twycross v.
Grant (1877) 2 CPD 469, 541.
-Cockbourn CJ
3.9. FUNCTIONS OF PROMOTERS

Following are the main functions of promoters:

1. To originate an idea of starting a business and forming a company.

2. To investigate the idea and know whether the formation of the company is possible and profitable.

3. To collect the requisite number of persons necessary for the formation of the company, and to
find out the first directors.

4. To settle the name of the company.

5. To settle the details of the 'memorandum' and 'articles of association of the company, and to
get these documents drafted and printed, and to arrange for the registration of the company.

6. To arrange for the preparation of the 'prospectus' and its issue.

7. To enter into preliminary contracts.

8. To pay preliminary expenses.

9. To arrange for the loan etc., from various financial institutions.

10. To perform such other functions as are necessary for the formation of the company.

11. 11. To conduct the negotiations for the purchase of business where it is intended to purchase an
existingbusiness.

MEMORANDUM OF ASSOCIATION

4.1. INTRODUCTION

The 'memorandum of association' briefly called the memorandum is the first importan
document to be filed with the Registrar at the time of formation of the company. The legal
definition, meaning and purpose of 'memorandum' is given here under:

1. Legal definition: The 'memorandum' is legally defined in Section 2(56) of the Companies
Act, 2013, as under:

'Memorandum' means memorandum of association of a company as originally formed or as

altered from time to time in pursuance of any previous company laws or of this Act.

Thus, legally a memorandum means

(a) a memorandum as originally formed by the company, or

(b) a memorandum as altered by the company from time to time.

2. Meaning of memorandum: The memorandum is a document which lays down the

powers and objects of the company, and the scope of operations of the company beyond
which its activities cannot go.

It may rightly be called as a charter of the company as it contains the fundamental conditions
upon which the company is incorporated. It regulates the relationship of the company with the
outside word. The memorandum of company is a public document and every person who deals
with the company is presumed to have the sufficient knowledge of its contents.
3. Purpose of memorandum: The main purpose of the memorandum of association is to
enable shareholders, creditors and all those persons who deal with the company to know what
are its powers, and what is the range of its activities. Thus, the shareholders will come to
know for what purpose their investment is going to be utilised. They will also know the risk
involved in the investment. The other persons dealing with the company shall also know
whether their dealings are in relation to the matters within the objects of the company.

Note: The provisions with regard to memorandum of association have been modified and are
provided in Section 4 of the Companies Act, 2013. The new section makes a departure from
the Companies Act, 1956 in the following respects:

(a) Now only Main Object Clause is required in the memorandum of association and
there is no provision of having Other Objects Clause. The requirement of approval of
shareholders for pursuing other objects have been done away with.
(b) The requirements with regard to the name of the company have been made part of the
Act andstated in Section 4 itself. Earlier these were prescribed in naming guidelines.

(c) The provisions pertaining to liability of a member in a company limited by shares have
been modified. Now the liability of the members of such a company is limited to the amount
unpaid, if any, on the shares held by them, including premium if any. Under the Companies Act,
1956, the liability was limited to the amount unpaid on the face value of the shares.

4.2. FORM OF MEMORANDUM OF ASSOCIATION

Following legal provisions have been made in this regard:

1. The forms of memorandum of association are given in Tables A, B, C, D and E in

Schedule I of the Companies Act, 2013. The memorandum of a company must be in one of
such forms as may be applicable to the company, or in a form as near to these tables as the
circumstances admit [Section 4(6)].

2. The memorandum of association must be printed, and divided into paragraphs which
should beconsecutively (serially) numbered.

3. The memorandum should be signed by the required number of subscribers (seven

in case ofpublic company and two in case of a private company).

4. The subscribers must sign in the presence of at least one witness, who shall attest the
signatures of each subscriber. Every subscriber must also add his address, description and
occupation, if any. The witness shall also write his address, description and occupation
accordingly.

5. Only a person Sui juris i.e., who is capable of entering into a contract on his own, can
subscribe to the memorandum of association.

Notes: 1. An artificial legal person such as a company or body corporate is competent to

subscribe to thememorandum.
2. The memorandum of association must be stamped according to the provisions of the Stamp
Act. The stamp duty is paid as prevalent in the State in which the registered office of the
company is to be situated.

4.3. CLAUSES (CONTENTS) OF MEMORANDUM OF ASSOCIATION

The memorandum of association of every company must have the following clauses: 1. Name
Clause. 2. Registered Office Clause. 3. Objects Clause. 4. Liability Clause. 5. Capital Clause. 6.
Association or Subscription Clause.
4.4. NAME CLAUSE

This clause of 'memorandum of association' contains the name of the proposed company. The
company being a legal person, must have a name to establish its identity. As a matter of fact,
the name is the symbol of personal existence of the company. A company may choose any
suitable name it likes. This point may be discussed under the following sub-articles:

4.4.1. Legal Rules Relating to Selection of Name

The following rules as contained in Section 4 of the Companies Act, 2013, must be
observed while selecting a name of the company:

1. The name should not be undesirable: The name of the company should not be
undesirable in the opinion of the Central Government. If it is so, the company cannot be
registered with such a name [Section 4 (2)(b)]. This provision enables the Central
Government to reject a name withou giving any reason.

2. The name should not be identical with another company's name: The name of the
company should not be identical with the name of an already existing company. It should
also not too closely resemble the name of another existing company [Section 4(2)(a)]. The
purpose of prohibiting the use of such names is that the company must not create an
impression that it is carrying on the business of another well established company. If the
company gets registered with such a name, the other company with whom the name
resembles can also apply to the court for an order that the new company be restrained from
having an identical name.

EXAMPLE 4.1. A was carrying on a business under the name of 'Buttercup Dairy Company'.
After some time, a new company was incorporated under the name of "Buttercup Margarine
Company Ltd. A brought a legal action against the new company and sought an order that it
should be restrained from using the name of A's company. A contended that the name used by
the new company created the impression th the two companies were closely connected. The
court passed the order restraining the new company from using that name. [Ewing v Buttercup
Margarine Company Ltd. (1917) 2 Ch: 1 However, in order to obtain in injunction from the
court, the resemblance between the two names must be such as to be 'calculated to deceive' the
customers. The name is said to be 'calculated to deceive' when it suggests that a company
adopting it is in some way connected or associated with the existing company. If the name does
not create such impression, the courts may refuse to grant injunction.

EXAMPLE 4.2. A company was registered under the name of "The Society of Motor
Manufacturing and Traders Ltd." Subsequently, another company was registered under the
name of "Motor Manufacturing and Traders Mutual Insurance Ltd." The first company brought
an action to restrain the use of this name. I was held that the name of the new company could
not be regarded as one 'calculated to deceive'. The court observed that "Anyone who took the
trouble to think about the matter, would see that the defendant company was an insurance
company, and that the plaintiff society was a trade protection society, and I do not think that
the defendant company is liable to have its business stopped unless it changes its name simply
because a thoughtless person might unwarrantedly jump to the conclusion that it is connected
with the plaintiff society In this case, the name is not 'calculated to deceive' because the names
do not suggest that the companies are connected or associated with each other. Because the
first company is a trading company whereas the other is an insurance company. A man of
mind can distinguish between the two.

3. The name should not constitute an offence under law: The name of the company
should not constitute an offence under any law for the time being in force [Section
4(2)(b)]
Note: It is a new provision which was not there under the earlier Companies Act, 1956.

4. The name should not be a prohibited one: The name of the company should not
prohibited by the Emblems and Names (Prevention of Improper Use) Act, 1950. This Act
prohibits the use of the name and emblems of (a) U.N.O. and World Health Organisation,
(b) Indian National Flag, (c) The official Seal and Emblem of Central and State
Government, (d) The name and pictorial representation of Mahatma Gandhi, and Prime
Minister of India.

5. The name should end with words Limited or Private Limited: The public company
with limited liability must add the word 'Limited' at the end of its name, and the private
company the word 'Private Limited' [Section 4(1)(a)). The purpose of adding these words
is that all persons dealing with the company should have a clear notice that the liability of
the members is limited. It may be noted that in case of companies in which the liabilities of
members are limited, the company's name is incorrect without the use of the words
'Limited' or 'Private Limited as the case may be. If any contract is made on behalf of the
company by misdescription of its name i.e., by using incorrect name, then the officers of
the company who made the contract will be personally liable. However, the word 'Limited'
need not be used in full. The abbreviation "Lid." may be used for this word.

EXAMPLE 4.3. A was the director of AB & Co. Ltd. He accepted a bill of exchange on
behalf of the company and signed his name as director of AB & Co. In this case, as the word
'Limited' is omitted from the name of the company. A is personally liable to pay the amount
of the bill of exchange.

[Basudeo Lal v. Madan Lal AIR 1969 Orissa 107; Atkins & Co. v. Wardle (1889) Sometimes, the
word 'Limited' is accidentally omitted from the name of the company, e.g., where the impression of
the rubber stamp is not complete on the paper, or where the stamp is longer than the paper itself etc.
In such cases, the persons signing the documents on behalf of the company cannot be personally held
liable.

EXAMPLE 4.4. A and B were the two directors of AB & Co. Ltd. A bill of exchange drawn
on the company in its proper name was accepted by A and B on behalf of the company. But
the rubber stamp containing the name of the company was longer than the paper of the bill of
exchange, and the word "Ltd." was missed while affixing the stamp. In this case, A and B are
not personally liable for the amount of the bill of exchange as the omission of the word 'Ltd'.
was accidental. Here, the company will be liable to pay the amount of the bill of exchange.

Note: The companies formed for the promotion of commerce, art, science, religion, charity etc,
may not use the word 'Limited' at the end of their names if they get a licence from the Tribunal
to that effect [Section 4(1)(a), proviso]. This has already been discussed in detail in Chapter 2
in Art. 2.30.
6. Certain names to be used only with permission of Central Government: The
company name containing the following words or expressions can be used by the company
only with the previous approval of the Central Government [Section 4(3)]:

(a) any word or expression which is likely to give an impression that the company is in any way
connected with or having patronage of the Central Government, any State Government or any local
authority, corporation or body constituted by the Central or Statement Government; or

b) any word or expression as may be prescribed by the rules.

Note: It is a new provision which was not there under the earlier Companies Act, 1956.

4.4.2. Reservation of Name

Legal rules in this regard are made in Section 4(4), (5) of the Companies Act, 2013 which are as under:

1. Application to Registrar [Section 4(4)]: Any person may make an application, in the
prescribed manner accompanied by prescribed fee, to the Registrar for reservation of (a) the
name of the proposed company; or

(b) the name to which the company proposes to change its name.
2. Reservation by Registrar [Section 4(5)]: On receipt of the application, the Registrar
may reserve the name for 60 days from the date of application. While doing so, the Registrar
shall take into consideration the information and documents furnished alongwith the
application.

3. Consequences of reservation of name by false information [Section 4(5)(ii)]:

Where, after reservation of name, it is found that the name was applied by furnishing wrong
and incorrect information, then the following consequences would follow:

(a) If the company has not been incorporated, then the reserved name shall be cancelled,
and the person making the application shall be liable to a penalty which may extend to Rs.
one lakh.

(b) If the company has been incorporated, then the Registrar may, after giving an
opportunity of being heard to the company, proceed as under:

(i) direct the company to change its name within a period of 3 months, after passing an
ordinaryresolution; or

(ii) take action for striking off the name of the company from the Register of companies; or

(iii) make a petition for winding up of the company.

4.4.3. Display of Name

The name of the company with which it is registered must be made known to the public. In
this regard, the following steps are required to be taken by the company [Section 12(3)]¹: (a)
The name of the company must be painted on the outside of every place where the business of
the company is carried on.

(b) The name of the company together with the address of its Registered Office must be
engraved on its seal.
 (c) The name of the company together with the address of its Registered Office must also
be mentioned in all business letters, negotiable instruments, orders, receipts, notices and all
other official publications.

Notes: 1. The word 'Company' or 'Co.' or any other similar word need not form part of the
name of the company. Thus, the names such as 'AB Traders Ltd.' or 'AB Traders (Pvt.) Ltd.'
are proper names even if the word 'company' is not used.

2. Abbreviated names are not allowed at the first instance. An established company may
change its name into an abbreviated form by showing that it has become well-known in its
field under it abbreviation [DCA Circular No. 4/93, Dated 31-3-1993].

4.5. REGISTERED OFFICE CLAUSE

This clause of 'memorandum of association' contains the name of the State in which the
Registered Office of the company is to be situated [Section 4(1)(b)]. Following provisions are
to be noted relatingto the registered office of the company:

1. Establishment of registered office: The registered office of the company must be in

existence (i.e., established) on and from the 15th day of incorporation of the company. and
at all times thereafter [Section 12(1)].

2. Verification to be filed with the Registrar: The verification of the situation of the
registered office must be given to the Registrar of Companies within 30 days of the
incorporation of the company [Section 12(2)].
The failure to comply with the provisions of this section is punishable with fine of ₹1000 per day
default, but not exceeding one lakh.

3. Importance of registered office: Its importance becomes clear from the following points:

(a) The situation of company's registered office determines the domicile of the
company. The domicile is important to determine the jurisdiction of the courts in which
the legal actions are to be brought by or against the company.

(b) All the important documents and books of the company such as Annual Returns,
Minutes Books, Register of Members, etc., are kept in the registered office. Moreover, all
important communications, notices, circulars, process of court and other correspondence
relating to the company are also addressed to its registered office.

Note: The expressions 'registered office' and 'head office' are not the same. The 'registered
office' is one with which the company is to be registered and to which all communications and
notices may be addressed. And the 'head office' is one where the substantial business of the
company is carried on and its negotiations are conducted. Usually, the 'registered office' and
the 'head office' are at the same place, but it need not be so. The 'head office' (or principal
office) may be located elsewhere than the 'registered office'. The law requires that the notice of
situation of the 'registered office' must be given to the Registrar of Companies. But there is no
such requirement in respect of 'head office'.
 Changes brought in by the Companies Act, 2013
1. The requirement of having registered office by the company is now necessitated on and from
the 15th day of its incorporation instead of 30th day of incorporation [Section 12(1)].

The verification of registered office is required to be furnished by the company to the Registrar

2. within a period of 30 days of its incorporation. There is no change on this point [Section
12(2)]. 3. The penalty for non-compliance of provisions of section 12 has been increased from 500
per day of default to 1000 per day but not exceeding rupees one lakh [Section 12(8)].

4.6. OBJECTS CLAUSE

This clause of 'memorandum of association' contains the objects for which the proposed
company is to be formed [Section 4(1)(c)]. It is the most important clause of the memorandum,
and should be drafted very carefully. The objects of the company must state in clear and definite
terms:

(i) The objects for which the company is proposed to be incorporated; and
.

(ii) Any matter considered necessary in furtherance of the stated objects

The choice of objects rests with the subscribers to the memorandum. They are free to
choose any lawful objects for their company. This is, however, subject to the following
restrictions:

(a) The objects should not be illegal or against the public policy, e.g., formation of a
company for conducting lotteries, trading with enemy, etc.

(b) The objects should not be against the provisions of the Companies Act. (c) The objects
should not be against the general law of the land, e.g., the law prohibits gambling. No
company can be formed for that purpose.

Thus, the company must be formed for lawful objects which should not be against the
provisions of the Companies Act, or any other Indian Law for the time being in force in the
country.
Note: The Companies Act, 2013 makes a departure from the Companies Act, 1956 with regard
to object clause. Now only the main object clause required in the memorandum of association,
and there is no provision for other objects clause [Section 4].

4.7. PURPOSE OF OBJECTS CLAUSE

The purpose of requiring the company to state its objects in clear and definite terms may be
summed up as under:

1. It informs the members (i.e., the shareholders), the kind of business in which their
mone may be used. No doubt that the company is the owner of its capital. But in reality
capital has been contributed by the shareholders. Therefore, the shareholders must know the
purpose for which their money will be utilised.

2. It informs the persons dealing with the company, the powers of the company. In this it
provides a certain degree of protection to the creditors who can ascertain the power of the
company. When they know that the company is formed for sound objects, it give them a
feeling of security.

3. It also serves the public interest, as the activities of the company are confined to a
defined field and the company cannot go beyond these activities.

Once the company is registered with the objects defined in the memorandum, it can exercise the
powers as are necessary for the attainment of its objects. However, a company cannot do
anything which is outside the scope of its stated objects. If it does any such act, is ultra vires and
is void. Such act cannot be ratified by the company even if the whole body of shareholders
agrees to it. (The doctrine of ultra- vires will be discussed later in this chapter).

Though the activities of the company should be confined to the objects specified in
memorandum of association, but the object clause is not to be construed i.e., interpreted
strictly for the purpose of company's activities. The company may, therefore, do such acts
which are fairly incidental to the objects/powers stated in the memorandum of association.

EXAMPLE 4.5. A company acquired a piece of land for the purpose of its railways. The
company constructed arches on this land, and the railroad (i.e., railway line) of the railway
company was carried over these arches. The company let out the arches as workshops. The
running of workshops in the arches was objected by certain persons, and it was claimed that
the letting out the arches for this purpose is ultra vires the company. It was held that the
letting out of the arches was fairly incidental to the powers of the company and thus was valid.
The court observed that to hold otherwise, would be like contending that the railway
companies are not entitled to sell the hay which grows on their banks so as to make
something out of it
However, the acts which are not reasonably incidental to the objects of the company will be
void andinoperative on the ground of ultra-vires.

EXAMPLE 4.6. The memorandum of association of a company authorised it to acquire gold

mines in 'Mysore and elsewhere'. The company wanted to acquire mines in another country
Ghana. The compart supported its action on the ground that the word 'elsewhere' authorised the
company to acquire mine another country also. It was held that the company could not do so
as the word 'elsewhere' could not be taken to mean any other place outside India.

More discussion and examples on the above point relating to the objects of the company wit be
given in Art. 4.17.

4.8. LIABILITY CLAUSE

This clause of 'memorandum of association' contains the nature of liability of the members the
company. This clause is necessary for those companies in which the liability of the member is
limited. The memorandum of such companies must state that the liability of the members
limited.
The proposed company may be limited by shares, or by guarantee. In these cases, t
liability clause should state as under:

1. In case of companies limited by shares: The liability clause must state that the
liability of the members shall be limited to the amount unpaid, if any, on shares held by him
Section 4(1)(d)(i)]. If the shares are fully paid (i.e., all the amount has been paid), the the
liability of the members is nil.

2. In case of companies limited by guarantee: The liability clause must state that the
liability of the members shall be limited by guarantee. In such cases, the liability clause will also
state the amount which every member undertakes to contribute to the assets of the company in
the event of its winding up [Sections 4(1)(d)(ii)). This means that if at the time of winding up of
the company, the assets of the company fall short to pay its debts and liabilities, then members
shall contribute to the assets of the company, the amount which they have undertaken to pay. It
may be noted that a member cannot be asked to pay anything before the company goes into
liquidation.

4.9. CAPITAL CLAUSE

This clause of „memorandum of association' contains the amount of share capital with which
the company is to be registered. This clause should also state the number and value of shares
into which the capital of the company is divided. [Section 4 (1) (e)]. The capital with which the
company is registered is called the registered', 'nominal' or 'authorised' capital. The effect of
this clause is that the company cannot issue more shares than are authorised by its
memorandum of association, except by altering the memorandum as provided by Section 94.

The usual way to state the capital in the memorandum of association is as under: "The capital of the
companyis 50,00,000 divided into 5,00,000 equity shares of 10 each".

4.10. ASSOCIATION OR SUBSCRIPTION CLAUSE

This clause of 'memorandum of association' contains the names of the persons who sign the
memorandum and states that they are willing to form themselves into a company. These persons
are called subscribers. In this clause, the subscribers must make a declaration reading as under
"We, the several persons whose names and addresses are subscribed, are desirous of being
formed into a company in pursuance of this memorandum of association, and we respectively
agree to take the number of shares in the capital of the company set opposite our respective
names”2.

This declaration must be signed by each subscriber in the presence of at least one witness who
must attest the signatures. Moreover, every subscriber must also write his name, address,
description and occupation, if any, and the number of shares which he takes. It may be noted
that every subscriber must take at least one share. In case of a public company, the
memorandum must be signed by at least seven subscribers, and in case of a private company
by at least two subscribers. After the memorandum is actually registered, no subscriber can
withdraw his name on any ground whatsoever. The memorandum of association concludes
with the subscription clause This being the concluding clause, it need not be numbered.

4.11. ALTERATION OF MEMORANDUM OF ASSOCIATION

The provisions relating to alteration of memorandum are provided in Section 13 of the

Companies Act, 2013, which correspond to Sections 16, 17, 18, 19, 21 and 23 of the
Companies Act, 1956.

The new Section 13 has been made effective w.e.f. 1.4.2014 vide Ministry of
Corporate Affairs Notification dated 26.3.2014, and the discussion below is as per new
section.
The memorandum of association is a very important document of a company. It cannot be
altered by the sweet will of the members of the company. It can be altered only by following the
procedure as prescribed in the Companies Act. It may be noted that the right of the company to
alter its memorandum is strictly limited to the provisions of the Companies Act. The procedure
of alteration of memorandum as prescribed in Section 13 is as under: resolution; and

(a) By passing special

(b) By complying with procedure specified in this section.

It is important to note that now special resolution has been prescribed for all changes
in the memorandum unlike for different resolutions for different clauses prescribed
under the earlier Companies Act, 1956 the alteration of memorandum is discussed
under the following heads:

1. Alteration of name clause.

2. Alteration of registered office clause.

3. Alteration of objects clause.

4. Alteration of liability clause.

5. Alteration of capital clause.

These clauses are also known as conditions of memorandum and can be altered in
accordance with the legal provisions as discussed in the following pages.

4.12. ALTERATION OF NAME CLAUSE

This point may be discussed under the following sub-articles/topics:

4.12.1. Alteration of Name by the Company on its Own [Section 13]

Legal provisions in this regard are provided in Section 13 of the Companies Act, 2013, which
correspond to Section 21 of the Companies Act, 1956. Section 13 has been made effective wel
1.4.2014 vide MCA Notification dated 26.3.2014, and its provisions may be stated as under:

1. Procedure of alteration [Section 13(1)(2)]

A company may alter (i.e., change) its name at any time. The only requirement is that
the change must be made by adopting the following procedure prescribed under Section
13:

(a) By passing a special resolution; and

(b) By obtaining the approval of Central Government in writing.

However, the approval of Central Government is not required when the change involves the
addition or deletion of the word 'Private' on the conversion of a public company into a private
company or vice versa[Section 13(2), proviso].

2. Filing with the Registrar [Section 13(6)]:The company shall file the following with the Registrar:

(a) Special resolution altering the name; and

(b) Approval of Central Government obtained for change of name. The special resolution
should be filed with the Registrar within 30 day of passing as under Section 117 every
special resolution is required to be filed with the Registrar within 30 days after passing.
3. Registration of alteration (Section 13(9)(10)]: The Registrar shall register the
alteration and certify the registration within 30 days from the date of filing the special
resolution with him [Section 13(9)].

No alteration shall have any effect until it has been so registered by the Registrar [Section 13(10)].

4. Issue of fresh certificate of incorporation [Section 13(3)]: When any change in the name of the
companyis made, then

(a) the Registrar shall enter the new name in the Register in place of the old name and
issue a fresh certificate of incorporation with new name;
(b) the change in the name shall be complete and effective only on the issue of fresh certificate.

4.12.2. Rectification of Name on Central Government Directions [Section 16]

Legal provisions in this regard are provided in Section 16 of the Companies Act, 2013, which
correspond to Section 22 of the Companies Act, 1956, which has been made effective w.e.f.
1.4.2014 vide MCA Notification Dt. 26.3.2014.

As per Section 16, the company is bound to change its name on Central Government
directions. However, the company can change the name in this case by passing an
ordinary resolution. The provisions of Section 16 may be stated as under:

1. Where the name is identical or resembles the name of an existing company Section
16(1)(a)]:Where on its own, the Central Government is of the opinion that the registered name
of the company is identical or too nearly resembles with the name of an existing company,
then the Central Government may suo moto (i.e., on its own) direct the company to change its
name.

• One such directions the company shall change its name within 3 months from the
issue ofsuch directions.

• The company can change its name by adopting an ordinary resolution for this purpose.

2. Where the name is identical or resembles to a registered trade mark (Section 16(1) (b)]:
Where on an application by the proprietor of a registered trade mark the Central Government is of
the opinion that the registered name of the company is identical with or too nearly resembles with an
existing trade mark, then the Central Government may direct the company to change its name.

● On such directions, the company shall change its name within 6

month from the issue of such directions.

• The company can change its name by passing on ordinary resolution for this purpose. •
The application by the proprietor of a registered trade mark must be made within 3 years of
registration of the name of the company.

Notes: 1. The time limit of rectification of name under this clause has been increased to 6 months
as against 3 months under earlier section 22 of the Companies Act, 1956.

2. The time limit for making application to the Central Government by the proprietor of
registered trade mark has now been reduced to 3 years from
5 years prescribed under earlier Section 22 of the Companies Act, 1956.

3. Notice of change to the Registrar [Section 16(2)]: Where the company changes its name
as stated in points (1) and (2) above, then
(a) the company shall give a notice of change to the Registrar within 15 days of change along
with the order of Central Government; and

(b) on receipt of such notice of change, the Registrar shall carry out necessary changes in (i)
the certificate of incorporation, and (ii) memorandum of association. Note: The time period of
filing notice of change with the Registrar has been reduced to 15 days as against 30 days
prescribed under Section 22 of the Companies Act, 1956.

4. Penalty for non-compliance of directions (Section 16(4)]: If the company fails to

comply with the directions of Central Government for change of name, then the penalty
shall be as under:

(a) the company shall be punishable with fine of Rs. 1000 for every day during which the
default continues; and

(b) every officer of company who is in default shall be punishable with minimum fine of
Rs. 5,000which may extend to Rs. one lakh.

5. Right, obligations and legal proceedings not affected by change: The change of name
does affect the rights and obligations of the company. It also does not affect pending legal
proceedings by or against the company. Such legal proceedings may be continued by its new
name.

After the change of name has been effected and registered in the register of companies, the
legal proceedings, if any, should be commenced by the company in its new name. The
legal proceedings commenced by the company in its old name may not be held competent
by the court.

EXAMPLE 4.7. A tea company had changed its name from Malhati Tea Syndicate Ltd.' to
'Malhati Tea and Industries Ltd.' The company filed a writ petition in the High Court in its
former name. It was held that the writ petition filed by the company was not competent. The
court observed that after the new name has been registered, the company is not authorised to
commence a legal proceeding in its former name. [Malhati Tea Syndicate Ltd. v. Revenue
Officer, AIR 1973 Calcutta 78]

However, where, after the change of name, any legal proceeding is commenced against the
company in its old name, it is a case of mere misdescription of name³. Such a defect can be
cured by substituting the new name with the permission of the court.

Note. A change of name does not bring into existence a new company. The company remains the
same entity as it was before. Only the name of the company changes. No doubt, a new certificate
of incorporation has to be issued, but that does not incorporate a new company. Thus, on the
change of name, neither a company is dissolved nor does any new company come into existence.
 Changes brought in by the Companies Act, 2013

1. In case of company name identical with registered trade mark, time limit for change of name by the
company has been increased from 3 to 6 months [Section 16(1)(b)], Refer to Art 4.12.2. (point 2).

2. In case of name identical with registered trade mark, time limit for making application to Central
Government for directions of change of name has been reduced from 5 years to 3 years [Section 16(1)(b)].
Refer to Art

3. In case of change on Central Government directions, the period filing the notice of change with the
Registrar has been reduced from 30 to 15 days [Section 16(2)].

4.13. ALTERATION OF REGISTERED OFFICE CLAUSE

Legal provisions with regard to alteration of registered office clause are provided in Sections
12 and 13 of the Companies Act, 2013, which were earlier contained in Sections 17, 18 and
146 of the Companies Act, 1956.

The provisions of Sections 12 and 13 have been made effective w.e.f. 1.4.2014 vide MCA
Notification dated 26.3.2014, and may be discussed as under:

4.13.1. Change of Registered Office within the Local Limits of the City

The company can shift its registered office from one place to another within the local limits of
the city, town or village in which the registered office is situated by complying with following
requirements:

1. Board Resolution: The company shall pass a Board resolution to that effect; and

2. Notice of change: The company shall give a notice of change of situation of registered office
to the Register within 15 days of the change [Section 12(4)]. On receipt of notice of change, the
Registrar shall record the same. Strictly speaking this change does not involve alteration of
memorandum. Note: The time limit of giving notice of change in situation to Registrar has
been reduced to 15 days as against 30 days prescribed under Section 146(2) of the Companies
Act, 1956.

4.13.2. Change of Registered Office from One City to Another within Same State

This change also does not involve the alteration of memorandum. Legal provisions/steps
required forsuch a change are:

1. Procedure of change [Section 12(5)]: The company can shift its registered office outside the
local limits i.e., from one city to another by passing a special resolution to that effect. 2. Notice
of change [Section 12(4)]: On shifting the registered office, the company shall give a notice of
change of situation of registered office to the Registrar within 15 days of the change.

3. Filing of special resolution [Section 117]: The company shall file the special resolution,
bringing change in situation of registered office, with the Registrar within 30 day of passing
the resolution.

Note: The time limit of giving notice of change of situation of registered office has been
reduced to 15 days as against 30 days prescribed under Section 146(2) of the Companies Act,
1956.

4.13.3. Change from Jurisdiction of One Registrar to another Registrar within Same State

Legal provisions/steps required for such a change are:

1. Procedure of change [Section 12(5), proviso]: The company can shift its registered
office from jurisdiction of one Registrar to the jurisdiction of another Registrar by adopting
the following procedure:

(a) By passing special resolution to that effect; and

(b) By obtaining confirmation from Regional Director to the shifting of office. The special
resolution passed by the company shall be filed by the company with the Registrar within
30 days of passing[Section 117].

(a) Confirmation by Regional Director [Section 12(5), proviso]: A company shall not
change the place of its registered office from jurisdiction of one Registrar to that of another
unless such change is confirmed by the Regional Director. Legal provisions in this regard
are:
(b) Application to Regional Director: The company shall make application for
confirmation to the Regional Director in the prescribed manner.

(c) Communication of confirmation by the Regional Directors: On receipt of

application, the Regional Director shall communicate the confirmation to the company within
30 days from the date of receipt of application [Section 12(6)].

(d) Filing of confirmation by the company: The company shall file the confirmation
with theRegistrar within 60 days of date of confirmation [Section 12(6)].

(e) Registration and certificate of confirmation: On receipt of confirmation, the

Registrar shall register the same and issue certificate of registration of change within 30 days
from the date of filing such confirmation [Section 12(6)].

2. Certificate of registration of change [Section 12(7)]: The certificate of registration of

change issued by the Registrar, as stated in point(d) above, shall be a conclusive evidence that
all the requirement of the Companies Act, 2013 with respect to change of registered office have
been compliedwith.

3. Effective date of change [Section 12(7)]: The change of registered office shall take
effect from the date of certificate of registration of change of registered office as stated above,

4. Notice of change [Section 12(4)]: On shifting the registered office, the company
shall give a notice of change of situation of registered office to the Registrar within 15 days
of change.

Note: This time limit was 30 days under Section 146(2) of the Companies Act, 1956.

4.13.4. Change of Registered Office from One State of Another

Such a change in the registered office requires alteration of memorandum, and legal
provisions in this regard may be stated as under:
1. Procedure of change [Section 13(1) (4)]: The company can shift its registered office from
one Stateto another by adopting the following procedure. a special resolution, and

(a) By passing

(b) By obtaining the approval of the Central Government.

Thus, the first step for such a change is to pass a special resolution and the second step is to
apply to the Central Government for its sanction. It may be noted that the alteration of
registered office from one State to another shall not take effect unless it is confirmed by the
Central Government on a petition [Section 13(4)].

2. Procedure of obtaining approval of Central Government [Section 13(4)(5)]: Legal

provisions forobtaining approval of Central Government are:

(a) The company shall make an application for approval to the Central Government
such form and manner as may be prescribed [Section 13(4)].

(b) The Central Government shall satisfy itself about the following before passing
its order[Section 13(5)]:

(i) that the alteration has the consent of creditors, debenture - holders and other persons
concerned with the company; or
(ii) that sufficient provision (or security) has been made by the company for due discharge
of all its debts and obligations.

(c) The Central Government shall dispose of (i.e., decide) the application within 60 days.

Note: Under the earlier Companies Act, 1956, no time limit was prescribed for the Central
Government to dispose of the application as stated in point(c) above.

3. Filing requirements by the company [Section 13(6)(7)]: These are as under:

(a) Special resolution: The special resolution altering the registered office clause shall be
filed by the company with the Registrar of the State in which registered office is situated [Section
13(6)].

The special resolution should be filled with the Registrar within 30 days of passing as
under Section 117 every special resolution is required to be filed with the Registrar within
this period of 30 days.

(b) Certified copy of Central Government order of approval: Legal requirements of

filing this certified copy by the company are as under Section 13(7)]:

• It shall be filed with the Registrar of each State, who shall register it •
Itshall be filed in such time and in such manner as may be prescribed.
• The Registrar of new State (Le.. where office is being shifted) shall
issue afresh certificate of incorporation indicating alteration.

4. Registration of alteration (Section 139(10): The Registrar shall register the

alteration of shifting of registered office to another State, and shall certify the registration
within 30 days from date of filing special resolution within (Section 13(9)). No alteration of
memorandum shall have any effect until it is so registered with the Registrar [Section 13(10)]

5. Notice of change of situation (Section 12(4): On shifting the registered office, the
company shall give a notice of change of situation of registered office to the Registrar within
15 days of change.

Note: This time limit was of 30 days under earlier Section 146(2) of the Companies Act, 1956.

6. New certificate of incorporation (Section 13(7): The Registrar of State where registered
office is being shifted shall issue a fresh certificate of incorporation indicating the alterations.

Notes: 1. The State's objection to the shifting of registered office out of State on the ground
of loss of revenue or adverse effect on employment opportunities, is not a relevant
consideration

3. Where the shifting of company's registered office from one State to another is refused once,
it is not abar to ordering change subsequently if the circumstances are so altered so as to
make the shifting of registered office necessary in the interest of the company. Thus, the
shifting of registered office from one State to another cannot be refused by the Central
Government on the ground that the change in company's registered office has already been
refused once. (See Promode Kumar Minal v. v. Southern Steele Ltd. (1980) 50 Company C y
Cases $55 (Calcutta))
4. ALTERATION OF OBJECTS CLAUSE

The legal provisions in this regard are provided in Section 13 of the Companies Act, 2013,
which were earlier contained in Sections 17 and 18 of the Companies Act, 1956. The
provisions of Section 13 (ie, steps required for alteration of objects) may be stated as under

1. Procedure for change (Section 13(1)(8): The procedure for change of objects clause may be
discussed as under:

(a) Procedure in general (Section 13(1)]: The company can change the object
clause of its memorandum by passing a special resolution to that effect.

(b) Procedure where company has unutilised money raised for its objects [Section
13(8)]: A company which has raised money from public (through prospectus) for its objects and
still has unutilised money, cannot change its objects for which money is so raised unless:

i. a special resolution is passed by the company; and

ii. the justification for change is indicated by publishing prescribed particulars of the special
resolution in newspaper and placing the details on company website, if
any.
iii. an opportunity to exit is given to the dissenting shareholders.

2. Filing of special resolution [Section 13(6)(a)): The company shall file with the
Registrar thespecial resolution altering the objects clause.

The special resolution should be filed with the Registrar within 30 days of passing as under
Section 117 every special resolution is required to be filed with the Registrar within 30 days of
passing.

3. Registration of alteration (Section 13 (9)(10)]: The Registrar shall register the

alteration and certify the registration within 30 days from the date of filing the special
resolution with him.
No alteration of memorandum shall have any effect until it has been so registered with the
Registrar [Section 13(10)].

Changes brought in by the Companies Act, 2013

1. Earlier, under the Companies Act, 1956, the alteration of object clause was allowed only if it was
necessary for the purposes specified in Section 17 of that Act.
Now, in the Companies Act, 2013, there is no provision corresponding to Section 17, as such no
specified purpose is required to be shown for change of objects clause. However, there has to be
justification for alteration of object clause.

2.Where company has unutilised money raised for the objects, then additional compliance is
required as stated in point (1)(b) above. Earlier, there was no such provision under the Companies
Act, 1956.

4.14. ALTERATION OF LIABILITY CLAUSE

We know that an important characteristic and advantage of a company is the limited liability
of members (shareholders). As a matter of fact, it is the main attraction for persons to invest
their money in the company. Generally, the company cannot alter the liability clause of its
memorandum so as to increase the liability of the members. The liability of members can be
increased only if the concerned member agrees in writing.
4.15. ALTERATION OF CAPITAL CLAUSE

The company may alter the capital clause of its memorandum by adopting the procedure
prescribed in the Companies Act. It may, however, be noted that the company can alter
(change) its capital only if it is so authorised by its 'articles of association'. Certain alterations in
the capital clause may be made by passing an ordinary resolution, and certain by a special
resolution. Following types of alterations can be made simply by passing an ordinary
resolution:

1. Increase of share capital by issue of new shares.

2. Consolidation or sub-division of existing shares into shares of larger or smaller amount.

3. Conversion of fully paid shares into stock, and conversion of stock into fully paid shares.

4. Cancellation of unissued shares.

However, if the alteration is by way of 'reduction of share capital', it can be made only by
passing a special resolution and obtaining the confirmation from the Tribunal. The alteration of
the capital clause will be discussed in detail in Chapter 8.

ARTICLES OF ASSOCIATION

5.1. INTRODUCTION

The 'articles of association', briefly called 'articles', is the second important document which has
to be filed with the Registrar at the time of registration of the company.

The legal definition and meaning of 'articles of association' is given hereunder:

1. Legal definition: The 'articles of association' is legally defined in Section 2 (5) of the
Companies Act, 2013 as under:

"Articles' means articles of association of a company as originally framed or altered from

time to timeor applied in pursuance of any previous company or of this Act."

Thus, legally the articles means

(a) The articles as originally framed; or

(b) The articles altered or applied by the company from time to time.
2. Meaning of articles: The 'articles of association is a document containing the rules and
regulations framed by the company for its own governance. In other words, (these are the rules,
regulations and bye- laws for the internal management of the company. Following points are
important to note with regard to articles

(i) The 'articles of association' is subordinate to and controlled by the 'memorandum of

association'. The 'memorandum of association' lays down the objects and powers of the
company, and the 'articles of association' lays down the modes in which the objects of the
company are to be carried out by the members.

(ii) As this document is subordinate to the 'memorandum of association' therefore framing

the rules and regulations it must be kept in view that they do not exceed the
powers of the company given by the 'memorandum of association'. Moreover, these rules and
regulations must not be contrary to the provisions of the Companies Act.
5.2. IMPORTANCE OF ARTICLES OF ASSOCIATION

The articles of association' of a company play a very important role in the management of the affairs
of a company. The Companies Act contains many provisions under which the company can act only if
it is authorised by its articles. Following are some of the important provisions wherein the company
can act only ifso authorised by its articles:

1. To issue redeemable preference shares [Section 55].

2. To accept calls in advance from shareholders [Section 50].

3. To increase share capital [Section 61 (1) (a)].

4. To consolidate and divide its share capital into shares of larger amount than existing shares
[Section 61 (1) (b)].

5. To convert its fully paid-up shares into stock, and to reconvert that stock into fully paidup shares
[Section 61 (1) (c)].

6. To sub-divide its shares into shares of smaller amount than is fixed by the memorandum
[Section 61 (1)(d)].

5.3. FORM OF ARTICLES OF ASSOCIATION

The forms of 'articles of association' are given in Tables F, G, H, I and J in Schedule I of the
Companies Act, 2013. The articles of association of a company must be in one of such model
forms as may be applicable to the company [Section 5 (6)].
A company may adopt all or any of the regulations contained in these model articles
applicable to such company [Section 5(7)].
The articles of association must be printed and divided into paragraphs which should be
consecutively (serially) numbered. Generally, each paragraph should contain one regulation.
This document should be signed by the subscribers to the 'memorandum of association'
[Section 7). They must also write their address, description and occupation, if any. The
subscribers should sign in presence of at least one witness who shall attest the signature of
each subscriber. The witness shall also write his address, description, occupation accordingly.

5.4. CONTENTS OF ARTICLES OF ASSOCIATION

Legal provision in this regard are provided in Section 5 of the Companies Act, 2013, which
were earlier contained in Section 26, 27, 28 and 29 of the Companies Act, 1956.

Section 5 has been made effective w.e.f. 01.4.2014 vide MCA Notification dated 26.3.2014, and
as per this section the articles of a company shall contain the following contents:
1. Regulations for management of company [Section 5 (1)]: The 'articles of association' of a
company contains the rules and regulations which are framed for the internal management of the
company. Thus, such rules and regulations are contained in it which are necessary to carry out the
objects of the company. Usually, the 'articles of association' of a company contain the rules and
regulations on the following matters.
1. Definition of important terms and phrases. 2. Adoption or execution of pre-incorporation
contracts. 3. Share capital and the rights of the shareholders. 4. Allotment of shares.
5. Procedure as to making of calls on shares. 6. Procedure as to forfeiture of shares. 7. Transfer of shares.
8. Lien on shares. 9. Share certificate and share warrants. 10. Alteration of share capital. 11.
Conversion of shares into stocks. 12. Dividend, reserves and capitalisation of profits. 13.
Appointment of managerial personnel e.g., directors etc. 14. Meetings. 15. Borrowing powers. 16.
Accounts and audit. 17. Common seal of the company. 18. Voting rights and proxies. 19. Winding
up of the company.
2. Matters as may be prescribed by rules [Section 5 (2)]: The articles of company shall
also contain such matters as may be prescribed by rules made by Central Government.

3. Additional matters [Section 5 (2), proviso]: The articles of a company may also
contain such additional matters as may be considered necessary for management of the
company.

The subscribers may frame rules and regulations on any matter which is necessary for internal
management of the company. But these provisions must not conflict with the provisions of the
Companies Act. Moreover, these should also not go beyond the powers of the company as
contained in its 'memorandum of association'. Any provision of the articles of association
which is contrary to the provisions of the Companies Act or beyond the powers of the
company shall be void and inoperative [Section 6] e.g., Section 123 of the Companies Act
declares that no dividend shall be paid by the company except out of profits. If any provision
is made in the articles which is contrary to this section shall be void. Thus, the articles cannot
sanction something which is forbidden by the Companies Act.

EXAMPLE 5.1. The articles of association' of a company contained a provision that a

petition for winding up of the company can be filed in the court only if the following
conditions are satisfied:
(a) minimum two directors consented to writing for filing such petition.

(b) a resolution to wind up the company was passed at a general meeting.

(c) the applicant held minimum one-fifth of the issued capital.

A petition for winding up of the company was filed in the court on the grounds specified in the
Companies Act. However, none of the above conditions was fulfilled at the time of filing the
petition for winding up. The company contended that the winding up petition is not maintainable
as the conditions laid down in articles had not been complied with. The court held that the
winding up petition is maintainable as the conditions laid down in the articles were contrary to
the provisions of the Companies Act.

The articles of association of a private company must also contain the three statutory
restrictions which make the company a private one, under Section 2 (68).

4. Provisions for entrenchment [Section 5 (3), (4), (5)]: The articles may contain provisions
for entrenchment (i.e., additional safeguards for alternation) stating that certain specified
provision of articles may be altered only if more restrictive conditions or procedure is complied
with. In simple words, the articles may now contain such provisions which provide very difficult
procedure (than special resolution) for alteration of certain specified provisions of articles.

It is a new provision in the Companies Act, 2013 and it would provide additional layer of
protection to the investors. Other important provision in this regard are:

(i) These provisions shall only be made either, (a) on formation of the company, of (b)
by an amendment in articles agreed to by all the members of the company in case of a
private company andby special resolution in the case of a public company [Section 5 (4)].

(ii) Where the articles contain such provisions for entrenchment, whether on formation or
by amendment, the company shall give notice of such provision to the Registrar in such form
and manner as may be prescribed [Section 5 (5)]. Note: The provisions of entrenchment as
stated above, are new which were not there under the earlier Companies Act, 1956.

5.5. ALTERATION OF ARTICLES OF ASSOCIATION

The provisions relating to alteration of 'articles' of a company are provided in Section 14 of the
Companies Act, 2013, which were earlier contained in Section 31 of the Companies Act, 1956.
Section 14 has been made effective w.e.f. 1.4.2014 vide MCA notification dated 26.3.2014, and
its provisions are discussed as under:

1. Procedure for alteration Section 14 (1)]: This sub-section makes the following provisions:

(a) Alteration in general: The company alter its articles of association at any time by passing
a special resolution.

(b) Alteration having the effect of conversion of a public company into a private
company: The alteration of articles which has the effect of conversion of a public company into a
private company can be made by the company as under [Section 14 (1), second proviso]:

by passing a special resolution; and

by obtaining approval of Tribunal.
Note: No such approval of Tribunal is requited for conversion of a private company into
a publiccompany.

2. Filing requirements by the company: These requirements are as under:

 (a) Filing of special resolution: The special resolution altering the articles shall be
filed by the company with the Registrar within 30 days of passing [Section 117, under this
section every special resolution is required to be so filed].

(b) Filing of copy of Tribunal order and altered articles: The company shall file the
alterations, copy of Tribunal order of approval and a printed copy of altered articles with the
Registrar within 15 days in the prescribed manner [Section 14 (2)]. On receipt of these
documents, the Registrar shall register the same. Note: The time limit of filing of the Tribunal
order and altered articles with the Registrar has been reduced to 15 days as against one month
under earlier Section 31 of the Companies a c t 1956.

3. Statutory right of alteration: A company can alter its articles of association as a matter of
right. Section 14 gives a clear and statutory power to the company to alter its articles of
association. It is to be noted that this power of the company cannot be taken away in any
manner. Thus, if there is a clause in the articles of association providing that the company will
not alter its articles, the clause will be invalid on the ground that it is contrary of the Companies
Act. Similarly, a company cannot deprive itself of this statutory power by entering into a
contract with any one. The altered articles shall be binding on the members in the same way as
original articles [Section 14 (3)].

4. Important points: Following points are important to note with regard to alteration of articles:

(a) When an alteration is made in company's articles, every copy of articles issued after the
date of alteration shall be in accordance with the alteration. On default, the company and
every officer in default shall be punishable with fine which may extend to 1000 for each
copy so issued. [Section 40]

(b) The articles of association can be altered only by passing a special resolution. Even a
clerical mistake in the articles of a company can be rectified by passing a special
resolution. It cannot beset right by application to the court.

(c) The mere passing of special resolution inconsistent with existing articles is enough
unless it expressly alters the articles concerned [Halsbuy's Law of England 4th Edn. Vol.
7 para 454, page257).
Changes brought in by the Companies Act, 2013

1. The approval of the Tribunal is required for alteration which has the effect of converting public company
into a private company. In the earlier Companies Act, 1956, the approval of Central Government was
required.

2. Every alteration alongwith the printed copy of altered articles is required to be filed with the Registrar
within 15 days of passing special resolution as against one month required under Section 31 of the earlier
Companies Act, 1956.

5.13. COMPARISON BETWEEN MEMORANDUM AND ARTICLES OF ASSOCIATION

Following table gives the comparison between the memorandum and articles of
association:

S.NO MEMORANDUM OF ARTICLES OF ASSOCIATION

. ASSOCIATION
1 It defines the objects and powers of
thecompany.
2 It is the supreme document as it
defines the constitution of the
company. As a matter of fact, it is
the charter of the
company
3 It regulates the relationship of the
company the with the outsiders, as
the objects and powers of the
company are made known to the
outsiders through this
document.
4 It cannot be easily altered. The
company has to follow strict
procedure for the alteration of its
registered office clause for shifting
the registered office
from one state to another.
5 Any act which is ultra vires (i.e.,
beyond powers) the memorandum,
is wholly void and cannot be ratified
even by the whole body of
shareholders. As a matter of fact, the
company cannot go beyond the
scope of its memorandum of
association.
It contains the rules and regulations of the
company which are formed for the
purpose of carrying out the objects as laid
down in the
memorandum of association.
It is subordinate to the memorandum of
association. In case of any conflict
between the two, the memorandum shall
prevail.
It regulates the internal management of
company, as the rules and regulations
contained in it describe the internal
procedureto be followed by the company.
It can be easily altered as compared to
memorandum of association.
Any act which is ultra vires the articles
of association may be ratified by the
shareholders. Acts ultra vires the articles
of association are merely irregular and
not void. However, such act can be
ratified only if it is within the scope of
memorandum of association.

5.14. FORMS OF ARTICLES OF ASSOCIATION AS GIVEN IN TABLES F, G, H, I

AND J OFSCHEDULE I

The Tables F, G, H, I and J of Schedule I of the Companies Act, 2013 contain the forms of
'articles ofassociation' of various types of companies.

The type of company and the corresponding table containing the form of articles of
association is as under:

S.NO. TYPE OF COMPANY ARTICLE FORM

1 Company Limited by Shares Table-F
2 Company Limited Guarantee and Having a Table-G
share capital
3 Company Limited Guarantee and not Table-H
Having a share capital
4 Unlimited Company and Having a Share Table-I
Capital
5 Unlimited Company and not Having a Table-J
Share Capital
 UNIT-3

PROSPECTUS AND SHARECAPITAL

6.1. INTRODUCTION

After formation, the company needs the necessary amount of money to finance its busines
activities. The necessary money for this purpose may either be raised (or collected) from the
general public, or be obtained through private contracts. However, the required money is
generally raised from the public, as the private money may not be sufficient for the needs of
the company. As a matter of fact, it is the great advantage of forming a public¹ company. The
money from the general public is raised by inviting deposits from the public, or by inviting
offers to purchase the shares or debentures of the company.
Such deposits or offers may be invited from the public by issuing a document known as
'prospectus'. In this chapter we shall discuss the definition of prospectus and other legal
provisions relating to prospectus.

6.2. DEFINITION OF PROSPECTUS

The term prospectus is defined in Section 2 (70) of the Companies Act, 2013, which reads a under:

"A prospectus means any document described or issued as prospectus and

includes(a) ashelf prospectus referred in Section 31; or

(b) a red-herring prospectus referred in Section 32: or

(c) any notice or circular, advertisement or other document inviting

offers from the public

for the subscription or purchase of any securities of, a body corporate". or In other words, a
prospectus means any invitation issued to the public inviting it to take shares debentures of the
company. Such invitation may be in the form of (a) a shelf prospectus; or (b) red-herring
prospectus; or (c) a document or a notice, circular, advertisement, etc. The only requirement is
that the invitation must be made (or issued) to the public.

EXAMPLE 6.1. An advertisement in a newspaper stated that "some shares are still available
for sale according to the terms of the company which may be obtained on application". It was
held that the advertisement was a prospectus as it invited the public to purchase shares.

The above definition reveals the following ingredients of a prospectus:

(a) There must be an invitation to the public.

(b) The invitation must be to subscribe or purchase shares or debentures of the company.

(c) The invitation must be made by or on behalf of the company or in relation to a

proposedcompany.

It may be noted that a public company must issue a prospectus if it wishes to raise public
money by issue of shares. However, a private company is not required to issue a prospectus
at all, because it is prohibited from inviting the public to subscribe for its shares or
debentures.
Note: Shelf prospectus, and Red-hearing prospectus will be discussed later in this chapter.

6.3. PUBLIC ISSUE OF PROSPECTUS OR ISSUE OF PROSPECTUS TO THE PUBLIC

We have discussed, in the last article, that a prospectus must be 'issued to the public'. The
word 'public'here does not mean 'public at large'.
It means 'any section of the public' howsoever selected. In fact, it is used here as opposed to
'private communications'. Thus, where an invitation is made to the friends or relatives of the
directors, it will not be an invitation to the public, and, therefore, not a prospectus.

EXAMPLE 6.2. The managing director of a company prepared a document which was in the
form of a prospectus. The document was marked as 'strictly private and confidential'. But the
document did not contain all material facts required to be disclosed by the Companies Act. It
was circulated among the directors and their friends. A an outsider, received this document
through some friend of a director. On the basis of this document, A applied for the shares of
the company. It was held that the document received by A was not a prospectus as it was
merely a 'private communication' between the directors and their friends.

As a matter of fact, the requirement of 'public issue' is that the invitation must be open to
anyone who wishes to invest his money in the company. If this requirement is fulfilled, the
invitation will be a prospectus even if it is made to limited section of the 'public' e.g., an
advertisement among a group or class of persons only.

EXAMPLE 6.3. A company prepared some document in the form of a prospectus. The
copies of this document were sent and distributed only among the members of certain 'gas
companies'. It was held to be an offer of shares to the public', although the officer was not to
the public at large.

6.4. PUBLIC OFFER AND PRIVATE PLACEMENT

Legal provision in this regard are contained in Section 23 of the Companies Act, 2013 which
is a new provision, and has been made effective w.e.f. 1.4.2014 vide Notification dated
26.3.2014.

Section 23 is a new section which clearly provides the manner in which the securities can be
issued bythe public as well as private companies. The provisions of this section are as under:

1. Issue of Securities by a Public Company [Section 23(1)]: A public company may issue
securitiesonly in the following manner:

(a) to public through prospectus (herein referred to as “public offer") after complying with
Part 1 ofthis Chapter III, or

(b) through private placement after complying with Part II of this Chapter III, or

(c) by way of rights issue or bonus issue in accordance with the provisions of this Act and
in case of a listed company, according to SEBI regulation; or

Here, the term "public offer" includes initial offer or further offer of securities to
the public by a company, or an offer for sale of securities to the public by an
existing shareholder, through issue of a prospectus [Section 23, Explanation].
2. Issue of Securities by a Private Company [Section 23(2)]: A private company may issue
securitiesonly in the following manner:
(a) through private placement after complying with Part II of this Chapter III; or
(b) by way of rights issue or bonus issue in accordance with the provisions of this Act.

6.5. PUBLIC OFFER OF SECURITIES TO BE IN DEMATERIALISED

FORM Legal provisions in this regard are provided in Section 29 of the
Companies Act, 2013, which correspond to Section 68-B of the Companies
Act, 1956, which has been made effective w.e.f. 12.9.2013 vide Notification F.No. 1/15/2013
CL.Vdated 12.9.2013.

The provisions of new Section 29 are as under:

1. Every company making public offer of securities shall issue the securities only in
dematerialised form by complying with the provisions of the Depositories Act, 1996 and the
regulations made thereunder [Section 29(1)(a)].

2. Other class or classes of companies as may be prescribed by the ruler made under the
Act, shall also issue securities only in dematerialised form [Section 29(1)(b)].

3. Any company, other than the company stated in points (1) and (2) above, may proceed
as under [Section 29(2)]:

(a) may convert its securities into dematerialised form; or

(b) may issue its securities in accordance with the provisions of this Act, or

(c) may issue its securities in dematerialised form in accordance

with theprovisions of the Depositories Act, 1996.
Changes brought in by the Companies Act, 2013

Dematerialised form irrespective of initial offer and size of issue: Earlier under Section 68-B,
only a company making initial offer of any security for a sum of 10 crores or more was required
to issue the securities in dematerialised form. Now (a) every company making public offer, and
(b) the prescribed companies are required to issue securities in dematerialised form.

6.6. REQUIREMENTS FOR ADVERTISEMENTS OF PROSPECTUS

Legal provisions in this regard are provided in Section 30 of the Companies Act, 2013,
which correspond to Section 66 of the Companies Act, 1956, which has been notified (te,
made effective)
w.e.f. 12.9.2013.

Section 30 states that where an advertisement of any prospectus of a company is published in

anymanner, then it shall be necessary to specify in the advertisement

1. The contents of memorandum as regards

(a) the objects of the company,

(b) the liability of members of the company

(c) the amount of share capital of the company.
2. The names of signatories to the memorandum and the number of shares subscribed by them.

3. The capital structure of the company.

Changes brought in by the Companies Act, 2013

Relaxation withdrawn: Under earlier Section 66 of the Companies Act, 1956, the
company was not required to specify in the advertisement, (a) the contents of memorandum
(b) the signatories to the memorandum and (c) the number of shares subscribed by
signatories. Now the provision providing this relaxation has been dispensed with i.e.,
dropped.

6.7. LEGAL RULES RELATING TO THE ISSUE OF PROSPECTUS

Legal rules/provisions relating to the issue of prospectus are provided in Section 26 of the
Companies Act, 2013, which were earlier contained in Section 55, 56, 57, 58 and 60 of the
Companies Act, 1956.

Section 26 has been notified (i.e., made effective) w.e.f. 1.4.2014 vide MCA Notification
dated 26.3.2014, and the rules/provisions relating to the issue of prospectus, as provided in this
section, are as under:

Following are the legal rules and provisions relating to the issue of prospectus:

1. The signing of prospectus: Every prospectus issued by the company must be signed
by every person who is named in it as director or a proposed director or by his duly
authorised attorney [Section 26(1)(4)].

2. The date of prospectus: The prospectus of a company must be dated. The date of
prospectus is considered to be the date of its publication [Section 26(1), (3)
Explanation].

3. The consent of an expert (Section 26(5)]: Generally, a statement, relating to the

company, purporting to be made by an expert cannot be included in the prospectus.
However, the statement of an expert may be included in the prospectus if the concerned
expert is not engaged in or interested in the formation, promotion or management of the
company. The following conditions must also be satisfied for inclusion of expert's
statement in the prospectus [Section 26(5)]:

(a) The expert must have given his written consent to the issue of prospectus;
(b) The expert must not have withdrawn his consent before delivery of
prospectus for registration.

(c) The fact that the expert has given his written consent and has not withdrawn the
same must be stated in the prospectus.

Note: 'Expert' includes an engineer, a valuer, a chartered accountant, a company secretary, a

accountant and any other person who has the power or authority to issue a certificate in pursu
of any law for the time being in force [Section 2(38), the Companies Act, 2013]

4. The registration of prospectus: A copy of prospectus must be filed with the Regist of
Companies for registration before the prospectus is issued to the public. The copy prospectus
sent for registration must be signed by every director or proposed director the company
[Section 26(4)].
The prospectus so filed must also be accompanied by written consent of all the person
named inprospectus [Section 26(7)].

On compliance of these requirements, the Registrar shall register the prospectus.

5. Time for issue of prospectus [Section 26(8)]: The prospectus must be issued by
company within 90 days after the date of delivery of copy of prospectus to the Registra
for registration.

The prospectus shall not be valid if it is not issued within this period of 90 days.

6. Disclosures on the issued prospectus [Section 26(6)]: Every prospectus issued by the
companyshall, on the face of it

(a) state that a copy of prospectus has been delivered to the Registrar for
registration, and also

(b) specify the documents attached to the copy so delivered.

7. The terms of contracts not to be varied: After the registration of the prospectus, the
terms of any contract stated in the prospectus cannot be varied except with the approval of
members in the general meeting.

8. Issue of application form for share or debentures: When the company issues a
application form for the purchase of its shares or debentures, then the form must be
accompanied by an abridged form of prospectus². However, in anyone of the following
cases, the abridged form of prospectus is not required to be issued:

(a) Where the shares or debentures are not offered to the public [Section 33 (1)].

(b) Where the invitation is made inviting person to enter into an underwriting
agreemen with respect to the shares or debentures [Section 33 (1)].

These provisions were earlier contained in Section 56(3) of the Companies Act, 1956, which
are now incorporated in Section 33 of the new Companies Act, 2013. Section 33 has been
made effective w.e.f. 12.9.2013.

The purpose of allowing the issue of abridged prospectus is to reduce the expenses a
public issue. However, the full prospectus has to be maintained in the office of the
company.

6.8. CONTENTS OF PROSPECTUS

We know that a prospectus is issued to the public to purchase the shares or debentures of the
company. Every person wants to invest his money in some sound undertaking. The soundness
of a company can be judged from the prospectus of a company. Thus, the prospectus must
disclose the true nature of company's activities which enable the public to decide whether or
not to invest money in the company.

The provisions relating to the contents of prospectus are provided in Section 26 of the
Companies Act, 2013, which were earlier contained in Section 56 and Schedule - II of the
Companies Act, 1956.
Now, the contents of prospectus are listed out in Section 26 itself as against in the Schedule
under theearlier Companies Act, 1956.

The contents of prospectus, as listed in Section 26, may be stated as under:

1. General Information [Section 26(1)(a)]: Every prospectus issued by the company shall
state thefollowing information, namely:

(1) names and addresses of the registered office of the company, com any secretary.
Chief Financial Officer, auditors, legal advisers, bankers, trustees, if a y, underwriters
and such otherpersons as may be prescribed.

(ii) dates of the opening and closing of the issue, and declaration about the issue of
allotment letters and refunds within the prescribed time;

(iii) a statement by the Board of Directors about the separate bank account
where all monies received out of the issue are to be transferred and disclosure of
details of all monies including utilised monies out of the previous issue in the
prescribed manner; (iv) details about underwriting of the issue;

(v) consent of the directors, auditors, bankers to the issue, expert's opinion, if of
such otherpersons, as may be prescribed; any, and

(vi) the authority for the issue and the details of the resolution passed therefor; (vii)
procedure and time schedule for allotment and issue of securities;

(viii) capital structure of the company in the prescribed manner;

(ix) main objects of public offer, terms of the present issue and such other particulars
as maybe prescribed;

(x) main objects and present business of the company and its location,
schedule ofimplementation of the project;

(xi) particulars relating to

(a) management perception of risk factors specific to the project;

(b) gestation period of the project;

(c) extent of progress in the project;

(d) deadlines for completion of the project; and

(e) any litigation or legal action pending or taken by a Government Department

or a statutory body during the last five years immediately preceding the year
of the of the company; issue of prospectus against the promotor of the
company

(xii) minimum subscription, amount payable by way of premium, issue of shares

otherwisethan on cash;

(xiii) details of directors including their appointments and remuneration, and such
particulars of the nature and extent of their interests in the company as may be
prescribed; and

(xiv) disclosures in such manner as may be prescribed about sources of

 promoter's contribution;
2. Reports of Financial Information Section 26(1)(b)]: Every prospectus issued by company
shall setout the following reports for the purposes of the financial information namely:

(1) reports by the auditors of the company with respect to its profits and losses a
assets andliabilities and such other matters as may be prescribed.

(2) reports relating to profits and losses for each of the five financial years
immediately preceding the financial year of the issue of prospectus including such
reports of subsidiaries and in such manner as may be prescribed:

Provided that in case of a company with respect to which a period of five yea has not
elapsed from the date of incorporation, the prospectus shall set out in su manner as
may be prescribed, the reports relating to profits and losses for each of the financial
years immediately preceding the financial year of the issue of prospects including such
reports of its subsidiaries;

(iii) reports made in the prescribed manner by the auditors upon the profits and
losses of the business of the company for each of the five financial years immediately
preceding issue and assets and liabilities of its business on the last date to which the
accounts of the business were made up, being a date not more than one hundred and
eighty days before the issue of the prospectus:

Provided that in case of a company with respect to which a period of five yea has not
elapsed from the date of incorporation, the prospectus shall set out in the prescribed
manner, the reports made by the auditors upon the profits and losses of the business of
the company for all financial years from the date f its incorporation, and assets and
liabilities of its business on the last date before the issue of prospectus, and

(iv) reports about the business or transaction to which the proceeds of the
securities areto be applied directly or indirectly;

3. Declaration of Compliance [Section 26(1)(c)]: The prospectus issued by the company

shall make a declaration about the compliance of the provisions of this Act and a statement to
the effect that nothing in the prospectus is contrary to the provisions of this Act, the Securities
Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992
and the rules and regulations made thereunder;

4. Matters and Reports as Prescribed [Section 26(1)(d)]: The prospectus issued by the
company shall also state such other matters and set out such other reports as may be
prescribed by rules made by the Central Government. Note: Exceptions (Section 26(2)]

The provisions of Section 26(1) relating to contents of prospectus, as stated in above three
points shall not apply in the following cases:

(a) to the issue of prospectus to the existing members or debenture- holders of

a company whether or not the applicant has a right to renounce the shares in favour of
any otherperson under Section 62(1)(a)(ii); or

(b) to the issue of prospectus relating to the shares or debentures which are, in
all respect, uniform with the shares or debentures previously issued and for the time
being dealt orquoted on recognised stock exchange.
6.9. GOLDEN RULE AS TO FRAMING OF PROSPECTUS
We know that a prospectus is a document which induces the public to invest their money in the
shares or debentures of the company. The public invest the money in the company on the basis
of the information disclosed in the prospectus of the company. Therefore, the prospectus must
present before the public, the whole picture of the company. All the material facts relating to
the nature of the company must be truly, honestly and accurately disclosed in the prospectus. It
should neither contain any mis- statement (i.e., untrue or misleading statement) nor omit to
disclose any material fact. This is known as the golden rule as to the framing of prospectus.
This golden rule was laid down by KINGDERSELY VC in New Brunswick Co. v. Muggeridge
(1860) 3 LT 651; 30 LJ Ch. 242, which may briefly be stated as under:

Those who issue a prospectus hold out to the public great advantages which will accrue to the
persons who will take shares in the proposed undertaking. The public is invited to take shares
on the faith of the representations contained in the prospectus, and it is at the mercy of
company promoters. Therefore everything must be stated with strict and scrupulous accuracy.
Nothing should be stated as a fact which is not so, and no fact should be omitted the existence
of which might, in any degree, affect the nature or quality of the privileges and advantages
which the prospectus holds out as inducement to take shares. In simple words, the „golden
rule' is that the true nature of company's activities and business should be disclosed in the
prospectus. And the prospectus as a whole must not give a misleading impression.

6.10. LIABILITY FOR MISLEADING STATEMENTS AND OMISSION OF

FACTS INTHE PROSPECTUS

We have discussed, in the last articles, that a prospectus should disclose the whole picture of
the company. It should neither contain any mis-statement, i.e., untrue or misleading
statement nor omit to disclose any material fact. If there is any mis-statement or omission of
material facts, then the directors, promoters, the persons responsible for the issue of the
prospectus, and the company incur a liability for the same, which may be discussed under the
following heads:

1. Civil liability for mis-statement in prospectus [Section 35].

2. Criminal liability for mis-statement in prospectus [Section 34].

3. Liability of the company.

6.11. CIVIL LIABILITY FOR MIS-STATEMENT IN PROSPECTUS

The civil liability means the liability to pay damages or compensation. The civil liability for
the issue of false or misleading statement is now provided in Section 35 of the Companies
Act, 2013 which was earlier contained in Section 62 of the Companies Act, 1956. The new
section has been made effective
w.e.f. 12.9.2013 and its provisions may be discussed as under:

1. Persons liable for mis-statement: When a false or misleading prospectus is issued by the
company, then the following persons are liable to pay compensation to every person who has
suffered any loss or damage by purchasing shares or debentures of the company relying upon
the faith of the prospectus:

(a) The company;

(b) Every person who is director of the company at the time of issue of prospectus;
(c) Every person who has authorised himself to be named as a director in the prospectus;
(d) Everyperson who has agreed to become, a director of the company.
(e) Every person who is a promoter of the company; (f) Every person who has
authorised the issue of prospectus;
(f) Every person who is an expert.

Note: Now the civil liability has been expressly extended to experts. Earlier, there was no such clause.

SHARE CAPITAL

8.1. INTRODUCTION

We have discussed, in the last chapter, that the amount required by the company for its business
activities is raised by the issue of shares. The amount so raised is called the share capital (or
capital) of the company. The share capital of a company may be of two kinds, namely:

1. Preference share capital.

2. Equity share capital".

The preference share capital is the sum total of the preference shares of the company. And
the equityshare capital is the sum total of the equity shares of the company. The 'preference'
and equity' shares have already been discussed in details in the previous chapter on 'shares
of a company'.

It is important to note that the shares capital is not an essential clause for the formation of a
company under the Companies Act, 2013. A company may be registered with or without the
share capital. The companies limited by guarantee or unlimited companies need not have any
share capital. But where the 'memorandum of association' of a company provision for share
capital, then the memorandum must state the amount of share capital and its division into
various types, and also the number and value of shares.

8.2. TYPES OR CATEGORIES OF SHARE CAPITAL

The term 'capital' in connection with a company is used in different senses. Keeping this
aspect in view, the capital of the company may be categorised as under:

1. Authorised capital: It mean such capital as is authorised by the memorandum of a to be

the maximum amount of share capital of the company [Section 2(8), the Companies Au
2013]. In simple words, it is the maximum amount of capital stated in company's
memorandum of association with which the company intends to be registered. It is also
called the 'nominal 'registered' capital. In fact, it is the maximum amount of share capital
which can be issued by a company during its life time. The authorised capital is divided
into shares of fixed amount. The authorised capital may be increased or reduced by the
company by passing an ordinary resolution
2. Issued capital: It means such capital as the company issues from time to time for
subscription [Section 2(86), the Companies Act, 2013]. In simple words, it is that part of
the authorised (nominal) capital which is actually offered (issued) to the public for
subscription. It indicates the amount which is open for public subscription. It is not
obligatory for the company to issue whole of its authorised capital.
The company may issue whole or any part of it, and keep the balance for future
requirements. However, the issued capital cannot exceed the authorised capital.
Note: The part of the authorised capital which is not issued to the public, is known as the
'unissued capital'.
3. Subscribed capital: It means such part of the capital which is for the time being
subscribed by the members of a company [Section 2(86), the Companies Act, 2013]. In simple
words, it is that part of the issued capital which is actually subscribed (i.e., taken up) by the
public. i.e., for which the applications are received from the public and the shares have been
allotted to the public. The subscribed capital depends upon the response from the investing
public which is received the basis of issued capital.

4. Called-up capital: It means such part of the capital, which has been called for payment
Section 2(15), the Companies Act, 2013]. In simple words, it is that part of the subscribed
capital which is actually demanded by the company to be paid. The company may not be in
need of the entire amount of the capital subscribed by the public. The company may call such
amount from the subscribers as is required by it.

Note: The part of the subscribed capital which is not called by the company is known as the
'uncalled capital'. It may be called according to requirements subject to the terms of issue of
shares, and the provisions of 'articles of association'.

5. Paid-up capital: It is that part of called-up capital which has been actually paid by the
members (subscribers). In other words, the total money received on shares is known as the
paid-up capital [Section 2(64), the Companies Act, 2013].

6. Reserve capital: It is that part of the uncalled capital which cannot be called by the
company except in the event of its winding up. The company may, by a special resolution,
declare that a portion or whole of the uncalled capital shall not be called except in the event of
its winding up

EXAMPLE 8.1. A company mentioned in its memorandum of association 10 lakhs as its capital
divided into 10,000 shares of 100 each. The company was registered with this amount as its
capital. In this case, this amount of 10 lakhs is the authorised (or nominal) capital of the
company.

Now suppose that the company offers 8,000 shares to the public. It represents the issued
capital of the company which is 8 lakhs (8,000 x 100). The balance of 2 lakhs is the 'unissued
capital'. O of these 8,000 shares offered to the public, the company receives only 5,000
applications for the purchase of its shares. It represents the subscribed capital of the company
which is 5 lakhs (5,000 100). The balance of 3 lakhs (8-5) is the unsubscribed capital. If the
company requires, it can call entire amoun from the subscribers. However, the company calls
30 (
10 on application, 10 on allotment and 10 on first call) on each share subscribed by the
public. It represents the called-up capital of the company which is 1,50,000 (5,000 x 30).
The balance of
3.5 lakhs (5,000
70) is the uncalled capital Now suppose that a member to whom 100 shares were allotted,
does not pay the first call of 10 m his shares. The 'paid- up capital' of the company will be
1,49,000 (1,50,000 1,000). The amount 1,000 is known as 'calls in arrears', and is still the part
of uncalled capital.

8.3. PUBLICATION OF AUTHORISED, SUBSCRIBED AND PAID-UP CAPITAL

Legal provisions in this regard are made in Section 60 of the Companies Act, 2013, which
correspond to Section 148 of the Companies Act, 1956.

Section 60 has been notified (i.e.. made effective) w.e.f. 12.9.2013, and it seeks to provide
 the mandatory publication of subscribed capital and paid-up capital in case of publication
of authorised capital.

This section makes the following legal provisions:

1. Mandatory publication of subscribed and paid-up capital alongwith authorised capital
Section 60(1)]: Where any notice, advertisement or other official publication, or any business
letter, bill heads, or letter paper of a company contains a statement of the amount of the
authorised capital of the company, Then such notice advertisement etc. shall also contain a
statement of the amount of subscribed and paid up capital.

2. Penalty of default Section 60(2): The penalty for default in complying with the above
requirements is as under

(a) The company shall be liable to pay a penalty of Rs. 10,000 for each default; and
(b) Company's every officer in default shall be liable to pay a penalty of Rs. 5,000 for each default

Note: Under earlier section 148 of the Companies Act, 1956, the penalty was of fine extending
upto Rs 10,000 There was to provision with regard to the penalty by fine for each default, as is
now the case.

8.4. ALTERATION OF SHARE CAPITAL

We know that the capital of the company is mentioned in the capital clause of its
memorandum of association. The company may alter its share capital by altering the capital
clause of its memorandum of association. However, the company may do so only if it is
authorised by its articles of association. The company may alter its share capital in anyone of
the following ways (Section 61(1)

1. Increase its authorised share capital by issuing new shares.

2. Consolidate and divide the whole or any part of its share capital into shares of larger
amount, eg. consolidation of 1,000 shares of? 10 each into 500 shares of 20 each.
However, where such consolidation and division of share capital results in change in the
voting percentage of shareholder, then it can be done only with the prior approval of the
Tribunal (Section 61(1)(b), proviso). It is a new proviso, which was not there in earlier
Section 94 of the Companies Act, 1956.
3. Sub-divide the whole or any part of its share capital into shares of smaller
amount e.g., subdivision of 1,000 shares of 10 each into 2,000 shares of 5 each.
4. Convert all or any of its fully paid-up shares into stock, or reconvert the stock into fully
paid up shares of any denomination.
5. Cancel those shares which have not been taken up by any person and thereby diminish
the amount of its share capital accordingly. Such cancellation of shares does not amount
to reduction of capital as only such shares are cancelled which were not taken by any
person.

The alteration of share capital as stated above may by made be the company by passing an
undmary resolution at a general meeting. Such alteration does not require any confirmation of
the Tribunal However, within 30 days of the alteration (e. passing of the resolution of
alteration), the company must give notice, of such alteration, to the Registrar of Companies.
On receipt of the notice, the Registrar shall record the same and make necessary alteration in
company's memorandum or articles of association [Section 64].

To sum up, the legal requirements for the alteration of share capital of the company, may be
stated as under:
(a) The articles of association' of the company must contain a clause authorising the
company to alter its share capital. If the articles contain no such clause, then the articles
must first be amended by a special resolution before the power to alter share capital is
exercised by the company.
(b) The company should pass an ordinary resolution at its general meeting to alter the share capital.
(c) The power to alter share capital should be exercised in a bona fide manner and in the
interest of the company as a whole and not for the benefit of any particular group.

8.5. INCREASE IN SHARE CAPITAL

The company may increase its share capital in two ways, namely:
1. By further issue of shares.
2. By conversion of debentures or loan into shares.

8.6. FURTHER ISSUE OF SHARES

We have already discussed that a company limited by shares may increase its share capital by
issuing new shares. Generally, the companies do not issue the whole of its authorised capital
at once. Only a portion of it is offered to the public, and the further shares are offered as and
when the amount is required. It may, however, be noted that the directors cannot offer these
new shares at their discretion. If they are allowed to issue the shares at their discretion, they
would naturally offer the new shares to their nominees and increase their own majority. Thus,
certain restrictions are imposed by the Companies Act on the further issue of the shares
[Section 62]. And, these restrictions apply as and when the company proposes to increase its
subscribed capital (within the limit of authorised capital) by allotment of further shares.
Legal provisions in this regard are made in Section 62 of the Companies Act,
2013, whichcorrespond to Section 81 of the Companies Act, 1956.
Section 62 has been made effective w.e.f. 1.4.2014, and its provisions may be discussed
under thefollowing heads:
1. Offer of shares to existing shareholders [Section 62(1)(a)].
2. Offer of shares to employees [Section 62(1)(b)].
3. Offer of shares to outsiders [Section 62(1)(c)].

8.6.1. Offer of Shares to Existing Shareholders

When, at any time, a company having a share capital proposes to increase its subscribed
capital by issue of further shares, then the new shares must be offered to the existing equity
shareholders in proportion to the paid up capital on the shares held by them on that date of the
offer [Section 62(1)(a)]. The shares issued to the existing shareholders are called the right
shares, and the issue of such shares is called the right issue'. The shareholder's right to receive
these shares is called as the 'pre-emptive right of the shareholders. The object of this rule is
that there should be an equitable distribution of shares, and the holding of shares by each
shareholder should not be affected by the issue of new shares.

Legal requirements to be complied in this case are as under:

1. Offer by giving notice: The offer to the existing shareholders must be made by giving notice
to them. The notice must specify the number of shares offered, and the time within which the
offer is to be accepted. And such time should not be less than 15 days and not exceeding 30
days from the date of the offer [Section 62(1)(c)(i)].

Following points are to be noted with regard to the notice of offer:

(a) The notice must inform the shareholders that if the offer is not accepted
within thespecified time, it shall be deemed to be declined.

(b) The notice must also inform the shareholders that they have the right to renounce
all or anyof the shares, offered to them, in favour of their nominees.

(c) The notice must be despatched to all existing shareholders atleast 3 days
before theopening of the issue.

2. Directors discretion to dispose of the shares: If the offer is declined or is not accepted by
the shareholders within the specified time, then the board of directors may dispose of such
shares according to their discretion. However, they must exercise their discretion in such
manner which is not dis-advantageous to the shareholders and the company. Similarly, if some
shares are left after the proportionate allotment to the existing shareholders, they may also be
disposed of by the directors in the same manner [Section 62(1)(a)(iii)].

8.6.2. Offer of Shares to Employees

Apart from existing shareholders, the offer of new shares can also be made to the
employees under ascheme of employees' stock option [Section 62(1)(b)].

'Employees' stock option' means the option given to directors, officers or employees of a
company which gives such directors, officers or employees the benefit or right to purchase or
to subscribe for the shares of the company at a future date at a pre-determined price [Section
2(37)].

The offer of new shares to the employees can be made only after complying with the
following legal requirements:
1. Approval by special resolution: The company should seek the approval of
shareholders bypassing a special resolution; and

2. Compliance of prescribed conditions: The company should comply with such

conditions as maybe prescribed by rules made by the Central Government.

8.6.3. Offer of Shares to Outsiders

The new shares may also be offered to the outsiders to the total exclusion of the existing
shareholders or employees [Section 62(1)(c)].
 Changes brought in by the Companies Act, 2013
1. Applicability to private companies: The application of new provisions has been extended to
private companies also as against earlier Section 81 which applied to public companies only.

2. Applicability to every further issue: The new provision shall be applicable to the company
whenever it plans to increase subscribed capital by further issue. Earlier, the provisions of Section
81 were applicable only (a) to further issue after 2 years from the formation of the company, or (b)
to issue made after expiry of one year after first allotment, whichever is earlier.

3. Time limit for acceptance of offer by existing shareholders: The maximum time of offer as
stated in Art. 8.6.1 (point 1) above has been fixed at 30 days as against no such limit in the earlier
Section 81.

4. Offer to employees: Now, the fresh shares may also be offered to employees as stated in
Art. 8.6.2 above. Earlier there was no such provision in Section 81.

The shares can be so offered if the following conditions are satisfied:

1. If the company passes a special resolution in the general meeting deciding to
offer newshares to the outsiders, and

2. If the price of such shares is determined by valuation of report of a

registered valuersubject to such conditions as may be prescribed.

Thus after complying with the requirements of Section 62, as discussed above, the
company mayproceed to issue further shares.

8.7. CONVERSION OF DEBENTURES OR LOAN INTO SHARES

Sometimes, the company has raised a loan by issuing debentures to government, or has
otherwise taken loan from the government. In such cases, the Central Government has the
power to direct the company that such debentures or loan shall be converted into the shares of
the company [Section 62 (4) to (6)]. Further legal provisions in this regard are as under:

1. Increase in authorised capital: Where the conversion has the effect of increasing the
authorisedcapital of the company, then on such conversion of debentures or loan into shares,
the authorised capital of the company will stand increased by an amount equal to the value
of such shares [Section 62(6)].

2. Conversion in public interest: The Central Government may order the conversion
debentures or loan into shares if it appears to the government that such conversion is
necessary in the public interest. Such conversion may be ordered by the Central Government
even if the terms of the issue of debentures or loan do not contain any provision for
conversion. The Central Government shall order conversion on such terms and conditions as
appear to it to be reasonable [Section 62(4)].

3. Considerations for making order: In determining the terms and conditions of

conversion, the Central Government must taken into consideration the following factors
[Section 62(5)].

(1) The financial position of the company.

(ii) The original terms of the issue of debentures or the terms of the loan.
(iii) The rate of interest payable on debentures or loan.

(iv) Such other matters as government may consider necessary.

Notes 1. The company is required to send copy of the conversion order to the Registrar
within 30 days so that he may effect necessary alterations in company's memorandum
[Section 64(1)],

2. The company may prefer an appeal to the Tribunal within 60 days of communication of
order if it is not satisfied with the terms and conditions of conversion [Section 62(4), proviso)

8.8. REDUCTION OF SHARES CAPITAL

As a matter of fact, the reduction of share capital is unlawful except when it is confirmed by
the Tribunal. The share capital of a company is the only security on which the creditors rely
The reduction of capital reduces the funds out of which the creditors are to be paid. Due to this
reason, the power of the company to reduce its share capital is closely guarded by Section 66
of the Companies Act, 2013*. Thus, the company can reduce its capital only by adopting
prescribed procedure as discussed in the next article.

It may be noted that by adopting the prescribed procedure, the company limited by shares
or a company limited by guarantee and having a share capital may reduce its share capital
in any of the following ways:
1. Extinguishing may extinguish or reducing liability on unpaid capital [Section
66(1)(a)]: The company or reduce the liability on any of its shares in respect of the unpaid
share capital not paid-up. In other words, the company may reduce the liability of its
members for the unpaid amount of the shares.

EXAMPLE 8.2. A company has issued 1000 shares of 100 each. And 80 are paid on each
share. In this case, the company may extinguish the further liability of 20 per share by
reducing the share of 100 to 80 as fully paid up share. In this way the company's capital will
be reduced by 20, 000 (1000 × 20).
2. Cancellation of lost paid-up capital [Section 66(1)(b)(i)]: The company may cancel
and paid up share capital which is lost or is unrepresented by any available assets.

EXAMPLE 8.3. A company has a share capital of 10 lakhs divided into

10.000 shares of 100 each. The shares are fully paid up. The company has lost ₹ 2 lakhs in its
business, and the worth of company's assets is reduced by this amount of 2 lakhs. After this
loss, the company has the assets worth 8 lakhs which represent the share capital of 10 lakhs.
In this case, the company may write off the unrepresented amount, and make each share of 80
fully paid up. Or in the alternative, the company may make the share of 100 as one on which
80 have been paid up, and the balance as unpaid. In this way, the company's capital will be
reduced by 2 lakhs (10,000 20).

3. Paying off excess paid-up capital [Section 66(1)(b)(ii)]: The Company may pay off any
paid-upshare capital which is in excess of the requirements of the company.

EXAMPLE 8.4. A company has a share capital of 5 lakhs divided into 50,000 shares of 10
each. The shares are fully paid up. But the company's requirement is only of 4 lakhs. In this
case the company may return * 2 per share to the shareholders and make the shares of 8 each
as fully paid up. In this way, the company's capital will be reduced by rupees one lakhs.
 8.9. PROCEDURE FOR REDUCTION OF SHARE CAPITAL

The procedure (or steps required) for reduction of share capital are provided in Section
66 of theCompanies Act, 2013, and are as under:

1. Authorisation in articles: A company can reduce its share capital only if it is

authorised by its 'articles of association' to reduce the capital. If the articles of association do
not contain any provision for the reduction of capital, the articles must first be altered so as
to authorise the company to reduceits capital.

2. Procedure for reduction: Where the company is authorised by its articles of

association, it may reduce its share capital by adopting the following procedure [Section
66(1)]: (a) By passing a special resolution for the reduction of the capital, and (b) By
obtaining confirmation of the Tribunal.

3. Confirmation of Tribunal: The confirmation of Tribunal is obligatory for reduction

of share capital. The confirmation of Tribunal is obtained by the company by making an
application to the Tribunal. On receipt of such application by the Tribunal, the following
provisions shall apply:

(a) Notice of application: The Tribunal shall give notice of every application of
confirmation to thefollowing [Section 66(2)]:

• to the Registrar,
• to the Central Government;
• to the creditors of the company
• to the Securities and Exchange Board of India (SEBI), in case of lasted companies
Note: It is a new provision which was not there under the earlier Companies Ac. 1956

(b) Consideration of objections: The Tribunal shall take into consideration

representations, if any, made to it by the government. Registrar, credinors or the within 3
months from the date of receipt of notice [Section 66/2)]
Where no such representation is received by the Tribunal within this penol y months, then it
shall bepresumed that they have no objection to the reduction 66(2), proviso].
Note: It is also a new provision which was not there under the earlier Companies Act,

(c) Order of confirmation: On taking into consideration the objections, if any, and being
satisfied about the interest of the creditors, the Tribunal may make an one confirming the
reduction of share capital on such terms and conditions, as it deem fit The Tribunal shall make
an order of confirmation ifit is satisfied about the following namely [Section 66(3):

(1) that the debt or claim of every creditor has been discharged or
determined or (2) that the debt or claim of every creditor has been
secured; or (3) that theconsent of every creditor has been obtained.
Note: No application for share capital shall be sanctioned by the Tribunal unless app
treatment, proposed by the company for such reduction, is in conformity with accom
standards (as specified in Section
133 or any other provision of this Act), and a certificate t effect by company's auditor has
been filed with the Tribunal [Section 66(3), provisoj, It a new provision.

4. Publication of Tribunal order: The order of Tribunal confirming the reduction

of shee capital shall be published by the company in such manner as the Tribunal
 may dire is the mandatory requirement [Section 66(4)).
If the company fails to comply iwth this requirement, it shall be punishable with minimu fine
of Rs. 5 lakh which may extend to Rs. 25 lakhs (Section 66(11)

5. Filing requirements by company: These are as under:

(i) Filing of special resolution: The special resolution passed by the company
reduction of share capital shall be filed by the company with the Registrar witn days of
passing as under Section 117, every special resolution is required to be filed.

(ii) Filing of certified copy of Tribunal order: The certified copy of the order of
Tribus shall be delivered by the company to the Registrar within 30 days of receipt of
one On receipt of the same, the Registrar shall register the same and issue a certificates
that effect [Section 66(5)]. A copy of minute approved by the Tribunal showing t
following shall also be so filed:

(a) amount of share capital.

(b) number of shares into which it is to be divided,
(c) amount of each share, and
(d) amount, if any, at the date of registration deemed to be paid-up on each share

6. Other important provisions: Following provisions are important to note with regards
reduction ofshare capital:

(i) No reduction of share capital is allowed if the company is in arrears in the

repayme of any deposits accepted by it or the interest payable thereon (Section 66(1), It is a
new provision which was not there in the earlier Companies Act, 1956.

(ii) The provisions of Section 66 relating to reduction of share capital shall not apply
to buy-back by the company of its own shares under Section 68 [Section 66(6)].

Changes brought in by the Companies Act, 2013

The changes in the new provisions are in the following respects:

1. The reduction of share capital is not allowed if the company is in arrears in the repayment of
any deposits accepted by it [Section 66(1), proviso].

2. The Tribunal is now required to give the notice of every application of confirmation to the
Central Government, Registrar and Securities and Exchange Board of India, and creditors for their
objection, if any, to the reduction [Section 66(2).

8.10. LIABILITY OF MEMBERS AFTER REDUCTION OF SHARE CAPITAL

After reduction of the share capital, the liability of members becomes as reduced by the
company and as ordered by the Tribunal [Section 66(7)]. A member shall be liable to pay the
amount which is deemed to have been unpaid on his shares. His liability is limited to the
difference between the amount of share as reduced by the company and the amount paid on
the share e.g., if ₹ 100 share is reduced to 80 per share and 50 is already paid on the share.
The liability of the member is to pay 30 on each share.

However, in one case, the members remain liable to pay the original nominal value of the
shares even if there is a reduction of capital. Such case arises when a creditor entitled to
object to reduction is left out of the list of the creditors, and subsequently the company is
unable to pay his claims. In such cases, in order to meet the claim of such creditor, the
 members shall be liable to pay that amount on their shares which they would have been
liable to pay before the reduction of capital (Section 66(8)).

Note: If any officer of the company knowingly conceals the name of any creditor entitled to
object the reduction, or knowingly misrepresents the nature or amount of debt of any creditor,
then he is liable to be punished for fraud under Section 447

8.11. RESTRICTIONS ON PURCHASE BY COMPANY OF ITS OWN SHARES

Legal provisions in this regard are made in Section 67 of the Companies Act, 2013 which
has been notified (1.e., made effective) w.e.f. 1.4.2014 vide MCA Notification dated
26.3.2014.

As per Section 67(1), no company limited by shares or by guarantee and having a share
capital shall have the power to buy its own shares unless the consequent reduction of share
capital is effected underthe provisions of this Act.

In simple words, a company can purchase its shares only by following the procedure for
reduction ofshare capital as discussed earlier in the chapter.

The reason for restricting company's right to purchase its own shares is that the creditors
give credit to the company on the faith that the capital shall be applied only for the purpose
of the business. And, therefore, they have the right to say that the company shall retain its
capital and not return it to the shareholders. However, in the following cases the company is
not taken to have purchased its shares, when it has:

(a) redeemed its redeemable preference shares.

(b) forfeited its shares for non-payment of calls, or

(c) accepted a valid surrender of shares.
These points have already been discussed in detail in the previous chapter.
Note: Under the Companies Act, 1956, restriction on companies for purchase of its own
shares were provided in Section 77 of the Act.

8.12. LOAN BY THE COMPANY FOR THE PURCHASE OF ITS OWN SHARES

A public company cannot give loan or any sort of financial assistance to any person to enable
him to purchase company's own shares or shares of its holding company [Section 67 (2)].
Thus, an agreement by the company to give loan for the purchase of company's own shares is
void. A guarantee given by the company for the performance of such agreement is also void.
However, this restriction does not apply in the following cases [Section 67(3)]:

1. Where the loan is given by a banking company in the ordinary course of its business.
2. Where according to a scheme, a provision of money is made to enable the trustees to
purchase fully paid shares in the company or its holding company to be held for the benefit of
the employees of the company.
3. Where the loan is given by the company to its employees (other than the directors, or key
managerial personnel) to enable them to purchase shares in the company to be held by them as
beneficial owners. However, the amount of loan cannot exceed the employees' salary for a
period of six months.

8.13. BUY-BACK OF SHARES

 The buy-back means the purchase by the company of its own shares. This facility enables the
companyto go back to the holders of its own shares and make an offer to purchase such shares
from them.

The legal provisions relating to buy-back of shares are provided in Sections 68, 69 and 70 of
the Companies Act, 2013 which correspond to Section 77A, 77-AA and 77-B of the
Companies Act, 1956, are discussed as under:

1. Sources (funds) for the buy-back [Section 68(1)]: A company can purchase its
own shares out of:

(a) its free reserves; or

(b) security premium account; or
(c) proceeds of the earlier issue of shares.

However, the proceeds of an earlier issue of a kind of shares cannot be used to buy-back the
same kindof shares.

Note: Where a company purchases its own shares out of free reasons or security premium
account, then a sum equal to the nominal value of shares purchased has to be transferred to the
Capital Redemption Reserve Account and its details should be disclosed in the Balance Sheet
(Section 69(1)].

2. Persons from whom to buy-back [Section 68(5): The buy-back of shares by the
company maybe

(a) from existing shareholders on a proportionate basis;

(b) from open market;
(c) by purchasing the securities issued to company's employees pursuant to scheme of
stock option or sweat equity.

3. Conditions of buy-back [Section 68(2)]: A company cannot purchase its own-shares

unless it complies with the following conditions:

(a) Authorisation by articles: A company can purchase its own shares only if
buy-back is authorised by company's articles of association [Section 68(2)(a)].

(b) Passing of special resolution: A company can purchase its own shares only by
passing a special resolution in the general meeting of the company authorising the buy-back.
However, in the following cases, the passing of special resolution is not required and the
buy-back can be made by Board resolution only [Section 68(2)(b)]:

(1) where the buy-back is 10% or less of the total paid-up equity capital and free
resources of the company, and
(ii) such buy-back has been authorised by the Board by means of Board resolution
passed at its meeting.

Note: Before making buy-back in view of special resolution or Board resolution, the company
must file a declaration of solvency with the Registrar and SEBI. This declaration should state
that the company is capable of meeting all its liabilities and will not be rendered insolvent
within one year of the date of declaration. It should be signed by at least 2 directors one of
whom should be a managing director, if any. However, no such declaration is required to be
filed with SEBI by a company whose shares are not listed on any recognised stock exchange
 [Section 68(6)].

(c) Amount of buy back: The amount involved in the buy-back must not be more
than 25% of company's paid-up capital and free reserves. However, the buy-back of equity
shares in any financial year should not exceed 25% of company's total paidup equity capital
in that financial year [Section 68(2)(c)].

(d) Debt equity ratio: The debt equity ratio after the buy-back should not be more
than 2:1 unless a higher ratio is prescribed by the Central Government for certain class of
companies [Section 68(2)(d)].

It means that after the buy-back, the ratio of debt (secured and unsecured) owed by the
company is not more than twice the paid-up capital and free reserves.
(e) Shares to be fully paid-up: The buyback of shares by the company can be of fully
paid-upshares only [Section 68(2)(e)].

(f) Buy-back of listed and unlisted shares: Legal provisions in this regard are as under:
● The buy-back of shares listed on any recognised stock exchange should be in accordance
with theregulations made by the Securities and Exchange Board of India [Section 68(2)(f)].

• The buy-back of other shares not listed on any stock exchange should be in accordance
with suchguidelines as may be prescribed in this regard [Section 68(2)(g)].

4. Gap between offers of two buy-backs [Section 68(2), proviso]: No offer of buy-back
shall be made by the company within a period of one year reckoned from the date of the
closure of the preceding offer of buy-back, if any. It means that the gap between two
offers of buy-back must be at least of one year.
5. Completion of buy-back [Section 68(4)]: Every buy-back by the company must be
completed within a period of one year from the date of passing a special resolution or
Board resolution, as the case may be, for the buy- back of shares.

6. Extinction of bought-back shares (Section 68(7)]: The shares bought back by the
company must be extinguished and physically destroyed by the company within 7 days of the
last date of completion of buy-back.

7. Register of bought-back shares (Section 68(9): The company shall maintain the register
of bought-back shares stating (a) consideration paid for the shares bought-back, (b) date of
cancellation of shares bought-back, (c) date of extinguishing and physically destroying the
shares, (d) such other particulars as may be prescribed.

8. Filing of return (Section 68(10)]: After the completion of the buy- back, the company
should file a return with the Registrar of companies and the Securities and Exchange Board of
India (SEBI) within 30 days of completion of buy-back. The return should contain the
prescribed particulars.

However, no such return is required to be filed with the SEBI by a company whose share are
not listed on any recognised stock exchange.

9. No further issue of same kind after buy-back [Section 68(8)]: After the completion
buy-back of shares, the company cannot make a further issue of the same kind of share
within a period of 6 months from completion of buy-back.
However, the issue of bonus shares and the conversion of preference shares or debentures
into equityshares is allowed.
 10. Penalty for non-compliance [Section 68(11)]: If the company makes default in
complying with the above discussed provisions of Section 68, the penalty is as under:
(a) company is punishable with minimum fine of rs .one lakh which may extend toRs.3 lakh;and

(b) company‟s every officer in default is punishable as under:

• with imprisonment upto 3 years; or
• with minimum fine of Rs. one lakh which may extend to Rs. 3 lakhs; or with both.

11. Transfer of amount to capital redemption reserve account [Section 69]: This Section
69 makes the following provisions in this regard:

(a) Transfer of amount: Where the company purchases its own shares out of free
reserves or securities premium account, then a sum equal to the nominal value of shares
purchased should be transferred to the Capital Redemption Reserve Account, and its details
should be disclosed in the balance sheet [Section 69(1)].

(b) Application of amount: The Capital Redemption Reserve Account may be

applied by the company in paying up unissued shares of the company to be issued to be
members of the company as fully paid bonus shares [Section 69(2)].

12. Prohibition of Buy-Back of Shares [Section 70]: The buy-back is prohibited in certain
circumstances as provided in Section 70. This section prohibits the buy-back through the
medium of other companies, and provides that

(a) A company cannot purchase its own shares through any subsidiary company including
its ownsubsidiary company.

(b) A company cannot purchase its own shares through any investment company.
(c) A company cannot purchase its own shares if it is in default in the repayment of
deposit or interest on it, redemption of debentures or preference shares, or
repayment of a term loan or interest thereon to any financial institution or a bank, or
the payment of dividend to any shareholder.

However, the buy-back is not prohibited if the above sated default is remedied, and a period
of 3 years has lapsed after such default ceased to exist.
Note: A company can also not purchase its own shares, directly or indirectly, if the
company has not complied with the provisions of (a) Section 92, relating to annual return, (b)
Section 123, relating to declaration of dividend. (c) Section 127, relating to default in
distributing dividend, and Section 129, relating to financial statements.

Changes brought in by the Companies Act, 2013

1. No buy-back within one year of earlier buy-back: Now, as stated in point (4) above, no
offer of buyback shall be made within a period of one year from the date of close of the preceding
buy-back offer, if any. Earlier under Section 77A, such a restriction was only in respect of offer of
buy back made in pursuant to Board resolution, and not in pursuant to special resolution of
company.

2. Enhanced penalty: Earlier the punishment under Section 77-A(11) was imprisonment upto
2 years; or fine upto Rs. 50,000; or both. Now it is increased as stated in point (10) above.

3. Buy-back in smaller lots: Earlier under Section 77-A, buy-back was allowed from odd lots
i e., smaller lots than the marketable lot specified by a stock exchange. Now, this provision has
been dispensedwith.

4. Application of Capital Redemption Reserve Account: Earlier there was not provision in
Section 77A for application of Capital Redemption Reserve Account. Now, a specific provision
in made in Section 69(2) in this regard as stated in point (11) above.

5. Buy-back in case of certain defaults: Now, a company can make buy-back of shares if the
defaults, as stated in point (12) above, is remedied and a period of 3 years has lapsed thereafter.
Earlier there was no such provision under Section 77-A.