Companies Act, 1956

1
 Nature & Meaning
• An association of like-minded persons formed for
the purpose of carrying on some business or
undertaking.
• It denotes a joint stock enterprise in which the
capital is contributed by a large number of people.
• A company owes its existence either to a special
Act of Parliament or to Company Legislation.
• A company is a legal person separate from and
capable of surviving beyond the lives of its
members. 2
 Nature & Meaning
• Company means a company formed and registered
under the Companies Act, 1956 or under the previous
law relating to companies. [Sec 3(1)(ii)]
• “An association of many persons who contribute
money or money’s worth to a common stock and
employ it in some trade or business and who share
profit and loss arising therefrom.” Lord Justice James
• It has a distinct legal personality and is capable of
enjoying rights and is subject to obligations different
from those enjoyed or borne by its members. 3
 Characteristics
• Corporate Personality
• Limited Liability
• Perpetual Succession
• Separate Property
• Transferability of Shares
• Common Seal
• Contractual Rights
• Capacity to sue and be sued
• Limitation of Action
• Separate Management
• Termination of its Existence 4
 Types of Business Organisations
Non Corporate
• Proprietorship
• Collective Ownership
• HUF
• Partnership
• Partnership at Will
• Joint Ventures

5
Types of Business Organisations
Corporate
• Reg. Companies
• Unlimited Companies
• Pvt. Ltd. Companies
• Pub. Ltd. Companies
• Govt. Companies
• Corporation Statutory
• Co-op
• Trust
• Society 6
Lifting or piercing of corporate veil
• Corporate personality must be used for legitimate
business purpose only.
• In case of fraudulent or dishonest use the
individual concerned is not allowed to take shelter
behind the corporate personality.
• The principle is called lifting of the corporate veil.
• It makes the controlling person liable for debts and
obligations.
7
 Corporate veil under judicial
interpretation
• Where the corporate character is used for fraud or i
mproper conduct.
• To escape a decree for specific performance.
• Where a corporate façade is only an agency instrum
entality.
• For determining character or status of the company.
• Evasion of taxes and duties.
8
Classification of Companies

9
 On the Basis of Incorporation

• Chartered Companies

• Statutory Companies

• Registered Companies

10
 On the Basis of Liability

• Unlimited Companies
• Companies limited by Guarantee
• Companies limited by shares
• Companies limited by shares and Guarantee

11
 On the Basis of Membership

• Private Company
• Public Company
• Holding Company
• Subsidiary Company

12
 Private Company
• A company which has a min. paid-up capital of
Rs.100,000 and by its Articles –
• (a) restricts the right to transfer its shares;
• (b) limits the number of its members to fifty;
• (c) prohibits any invitation to subscribe for any shares
in, or debentures of the company; and
• (d) prohibits any invitation or acceptance of deposits
from public. [Sec 3(1)(iii)]
• Must necessarily have its own Articles of Association.
• Should have at least two directors.
• The word 'Private Limited' must be added at the end of
its name.
13
Conversion of a private company
into a public company

14
 Conversion by default
• Where a default is made by in complying with the
provisions of Section 3(1)(iii), i.e.
• restriction on transfer of shares;
• limitation of the number of members to fifty;
• prohibition of invitation to the public to buy shares
or debentures; and
• prohibition of invitation or acceptance of deposits
from the public;
• The company ceases to enjoy the privileges and
exemptions conferred on a private company. 15
 Conversion by operation of law
• Where not less than 25% of its paid-up capital is held
by one or more bodies corporate; or
• where the annual average turnover is not less than Rs
25 crores or more for three consecutive financial
years; or
• where a private company holds 25% of the paid-up
capital of a public company; or
• where a private company accepts, or renews deposits
from the public.
• In case a private company becomes a public
company, it shall inform the RoC within three
months. 16
 Public Company
• A Public Company means a company which -
• is not a Private Company;
• has a minimum paid-up capital of Rs 5 lakhs or
such higher capital as may be prescribed;
• is a private company which is a subsidiary of a
company which is not a private company. [S. 3 (1)
(iv)]
• It consists of not less than seven members and
three directors.
• Distinction between a public company and a privat
e company.
17
 Holding & Subsidiary Company
• A company is deemed to be the holding company of
another if, but only if, that other is its subsidiary." [Sec
4(4)]
• Where a company controls the composition of Board of
Directors of another company, the latter becomes the
subsidiary of the former; or
• When a company holds more than half of the equity
capital of another company, the latter becomes the
subsidiary company of the former; or
• Where a company is subsidiary of another company
which is itself a subsidiary of the controlling company,
the former becomes the subsidiary of the controlling
company.
18
 Government Company
• A Government Company means any company in
which not less than 51 per cent of the paid-up share
capital is held by
• (a) the Central Government, or
• (b) any State Government or Governments, or
• (c) partly by the Central Government and partly by
one or more State Governments.
• A subsidiary of a Government company is also
called a Government company.
19
 Statutory Corporations
• Formed under an Act of Parliament or State Legislature.
• Change in its structure is possible only by a legislative
amendment.
• Immunity from Parliamentary scrutiny in day-today
working.
• Freedom in regard to personnel, its employees are not
civil servants.
• It is a body corporate having characteristics of a
corporation.
• Independent finances- Obtains funds by borrowing and
through revenue derived from sale of goods/services.
• Commercial Audit - audit is entrusted to CAG.
• Operation on business principles. 20
 Foreign Companies
• Incorporated in a country outside India and has a place
of business in India.
• Every foreign company shall, within 30 days, file with
RoC the following documents:
• A certified copy of the Charter, Statutes, Memorandum
and Articles of the company in English.
• The full address of the registered or principal office of
the company.
• A list of the directors and secretary of the company.
• The names and addresses of any person/s resident in
India, authorised to accept notices.
21
 Foreign Companies
• The full address of the principal place of business
in India.
• The documents which a foreign company has to
file with the Registrar, shall be delivered
• to the Registrar of the state where the principal
place of business of the company is situated and
• also with the Registrar at New Delhi.

22
 Section 25 Companies
• The object is to promote a social cause.
• May earn profits but not allowed to distribute it as
dividend to members.
• License granted by Central Government.
• Not required to use the word Ltd. or Pvt. Ltd.
• Registered without paying stamp duty on
Memorandum and Articles.
• Cannot alter its object without previous approval
of Central Government.
23
Incorporation of Companies

24
 Steps for formation of a company
• Types of Company
• Availability of Name
• The Memorandum and Articles of Association duly
signed, and stamped.
• The agreement, if any with any individual for
appointment as its Managing or whole-time director.
• Consent of directors in Form 29.
• Notice of Registered address in Form 18 to be given
within 30 days of the date of incorporation.
• Particulars of Directors in Form 32.
25
 Steps for formation of a company
• Payment of Registration Fees.
• Power of attorney, to fulfill various legal and other
formalities.
• Statutory Declaration in Form No. 1 that all
requirements of the Companies Act and the rules
thereunder have been complied with.
• The declaration should be made by either an advocate
of Supreme Court / High Court, a practicing Chartered
Accountant or a director, or a manager or a secretary
named in the Articles of the proposed company.
[Section 33 (2)] 26
 Promoters
• According to SEBI (Substantial Acquisition and
Takeover) Regulations, 1997 the term promoters
means:
• the person or persons who are in control of the
company ;or
• person or persons named in any offer document as
promoters.
• a relative of the promoter within the meaning of Section
6 of the Companies Act.
• Should be members of HUF only;or
• Are husband or wife; or
• Related to other as indicated in Schedule IA. 27
 Promoters
• in case of a corporate body :
• i) a subsidiary or a holding company; or
• ii) any company in which the promoters hold
10% or more equity capital; or
• iii) any body corporate in which a group of
individuals or corporate bodies or a
combination thereof holds 20% or more of
equity capital.
28
 Judicial interpretation
• Whether one is promoter or not will be determined
with reference to the nature of the role he/they play
in implementing the objectives for which the
company is formed.
• The persons who assume the primary responsibility
of matters relating to promotion of a company are
called Promoters.
• 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.
29
 Judicial interpretation
• Promoter is a term not of law but of business
usually summing up in a single word a number of
business operations familiar to the commercial;
world by which a company is generally brought in
to existence. (Bowen L.J., 1880)
• Who constitutes a promoter in a particular case is
therefore a question of fact.
• A promoter may be a natural person or a
company.

30
 Memorandum of Association
• It contains the fundamental rules regarding the
constitution of the company.
• It lays down how the company is going to be constituted
and what work it shall undertake.
• It sets out the constitution of the company.
• It is a foundation on which the structure of the company
stands.
• Its purpose is to enable the shareholders, creditors, and
those who deal with the company to know what is the
permitted range of its enterprise.
• It defines as well as confines the power of the company.
31
 Contents of the Memorandum
• Name Clause
• Registered Office / Situation Clause
• Object Clause- main objects and other objects
• Liability Clause- limited by share or guarantee
• Capital Clause.
• Association Clause

32
 Name Clause
• A company not to be registered under a name which is
undesirable, identical or too nearly resembles another
company. [Section 20]
• It must not be misleading or intended to deceive with
reference to its object.
• A mere similarity of name does not give right to
injunction, there should be likelihood of deception or
confusion.
• The name and address must be printed or affixed
outside every office in English and local language.
• Inadvertent mistake in name can be changed by passing
an ordinary resolution and by obtaining written
approval of Central Government. 33
 Situation Clause

• Only the state in which the Registered Office is

situated is mentioned.
• Exact address can be filled with RoC separately
in Form 18 within 30 days of incorporation.

34
 Object Clause
• Must divide object clause into two sub-clauses -
Main Objects and Other Objects.
• It determines the purpose and capacity of the
company hence carry great importance.
• Acts beyond this ambit are ultra vires and hence
void. Even the entire body of shareholders cannot
ratify such acts.
• Subscribers enjoy unrestricted freedom to choose
the objects.
35
 Doctrine of ultra vires
• An act or transaction, which may not be illegal, is
beyond company's power by not being within the
object of the Memorandum.
• An act ultra vires the company is incapable of
ratification.
• Act which is intra vires the company but outside
the authority of directors may be ratified by the
company in proper form.
• The shareholders can ratify an act ultra vires the
directors.
36
 Effect of ultra vires transaction
• Injunction to restrain the company from doing an
ultra vires act.
• Personally liability of the directors.
• Ultra vires contract are void ab initio.
• An ultra vires borrowing does not create a
relationship of a debtor and creditor.
37
 Liability Clause
• The Memorandum of a company limited by shares
or by guarantee shall state that the liability of its
members is limited.
• Where the liability is limited by shares, a member
can be called upon to pay only the unpaid balance
on his shares.
• In case the company is limited by guarantee the
members are liable up to the maximum amount
which they have guaranteed.
• Where the company is limited by both share and
guarantee the liability of members is dual.
38
 Capital Clause
• Shares must be of fixed value.
• Nominal, authorised or registered capital.
• Not authorised to issue capital beyond its
authorised capital unless the Memorandum is
altered.
• In case of unlimited company having share capital,
the liability is unlimited as against creditors only
in case of winding up.
• In case of going concern, liability is limited to
shares subscribed.
39
 Association Clause
• Must be signed by each subscriber in presence of
one witness.
• Each subscriber must take at least one share.
• A subscriber cannot, after registration of company,
repudiate his liability even on the ground that he
was induced to sign by misrepresentation.

40
 Articles of Association
• Articles are by-laws or rules and regulations for
the govern the management of its internal
affairs and conduct of business.
• It also includes regulation contained in Table A
of Schedule I.
• Deals with the rights of the members inter se.
• Articles are subordinate to and controlled by
Memorandum.
41
 Articles of Association

• Unlimited companies, companies limited by

guarantee and private companies must have
their own Articles of Associations.
• Must be printed, divided into paragraphs,
numbered consecutively, stamped adequately,
signed by each subscriber to Memorandum and
duly witnessed.
42
 Alteration of Articles
• Subject to the provisions of the Act and
Memorandum, a company, by special
resolution alter the Articles. [Section 31]
• The alteration binds members in the same way
as original Articles.
• A company cannot in any manner deprive
itself of the powers to alter its Articles.
43
 Limitation on Alteration
• Must not exceed the power in the Memorandum.
• Must not be inconsistent with the provisions of the Act.
• Must not include anything illegal or opposed to public
policy.
• Must be bona fide for the benefit of the company.
• Must not constitute fraud on minority.
• Cannot be altered so as to have retrospective effects.
• In case of listed companies approval of Stock Exchange
is required. 44
 Constructive Notice
• Constructive notice seeks to protect the company
against the outsiders.
• Memorandum and Articles when registered becomes
public documents.
• Can be inspected by any one on payment of nominal
fees.
• Every person has the means of ascertaining and is
consequently presumed to know the exact power, the
extant to which powers are delegated to directors and
any limitations impose thereby.
• It is regarded not only as having read the documents
but also having understood them according to their
proper meaning. 45
 Indoor Management
• Indoor management operates to protect the
outsider against the company.
• Person contracting with the company are
presumed to know the provisions/ contents of
the Memorandum and Articles.
• It is no part of the duty of an outsider to see
that the company carries out its own internal
regulations.
46
 Prospectus
• "Any document described or issued as a
prospectus and includes
• any notice,
• circular,
• advertisement, or
• other document
• inviting deposits from the public or
• for the subscription or purchase of any shares
in, or debenture of a body corporate." [(Section
2(36)]
47
 What constitute a Prospectus?
• An invitation to public.
• Invitation be by or on behalf of the company.
• Invitation must be to subscribe or purchase.
• Must relate to shares / debentures or other
instrument.
• Judicial Pronouncements

48
 Statement in lieu of Prospectus
• Promoters are required to prepare a draft
prospectus known as statement in Lieu of
Prospectus.
• A copy of it must be filled with the RoC at least
three days before any allotment of shares is
made.
• It contains similar particulars as are required for
a prospectus.
• No minimum subscription is required to be
stated.
49
 Statement in lieu of Prospectus
• If the statement contains any misinformation
or omission, the liability, civil and criminal, is
same as in case of Prospectus - Fine up to Rs
10,000.
• The process of issuing securities through a
statement in lieu of prospectus is a kind of
private placement.
50
 Shelf Prospectus
• Concept introduced by Amendment Act 2000 by the
insertion of Section 60A.
• A prospectus issued by any financial institution or
bank for one or more issues of securities.
• Public Financial Institutes, public sector banks or
scheduled banks whose main object is financing shall
file a shelf prospectus.
• Not required to file prospectus afresh at every stage
of offer by it within the period of validity of such
prospectus. 51
Information Memorandum (Sec 60B)
• "Information Memorandum means
• a process undertaken prior to the filling of a
prospectus
• by which a demand for the securities proposed to
be issued is elicited and
• the price and terms of issue is assessed
• by means of a notice, circular, advertisement or
document."
52
 Information Memorandum
• Companies intend to issue securities may
circulate Information Memorandum to public.
• Offer a Red-Herring prospectus 3 days before
the opening of offer.
• "Red-herring prospectus means a prospectus
which does not have complete particulars on the
price of the securities offered and the quantum
of securities offered."
53
 Abridged Prospectus
• Every application form to contain a prospectus.
• The Central Govt. has prescribed that there
should be one Abridged Prospectus with every
two application forms,
• attached by way of a perforated lines containing
the information under the following points:

54
 Abridged Prospectus
• The information in Abridged Prospectus to be given
under 9 heads:
(a) General Information
(b) Capital Structure of the company
(c) Terms of the Present Issue
(d) Particulars of the Issue
(e) Company, Management & Project
(f) Financial Performance for last 5 years
(g) Payments / Refunds
(h) Particulars of Companies under Same Management
(i) Management's perception of Risk Factors 55
 Share Capital
• In relation to a company limited by share it means share
capital - in terms of rupees divided into specified number
of shares of a fixed amount each.
• The memorandum must state the amount of capital and its
various division.
• (a) Nominal, Authorised or Registered Capital
• (b) Issued Capital
• (c) Subscribed Capital
• (d) Called-up Capital
• (e) Un-called Capital
• (f) Paid-up Capital 56
 Meaning and Nature of Shares
• "A share means a share in the share capital of a
company, and includes stocks except where a
distinction between stocks and shares is expressed
or implied." [Section 2(46)]

• "The interest of a shareholder in a company

measured by a sum of money, for the purpose of
liability in the first place and of dividend in the
second." Farewell J
57
 Meaning and Nature of Shares

• "An interest measured by a sum of money and

made up of diverse rights conferred by Articles."
The Supreme Court of India

• "A share is right to participate in the profits made

by a company, while it is a going concern and
declares dividend, and in the assets when it is
wound up."
58
 Kinds of Shares
• Two classes of Shares [Sec 86 as amended in 2002]
-
(A) Equity Share [Sec 85(2)]
• "Equity Share Capital means all share capital which
is not preference share capital."
• The equity shareholders receive dividend out of
profits declared in AGMs.
• Dividend declared only after depreciation
allowance and payment of preference shareholders.
• Voting right is in proportion to paid-up equity
capital. 59
 Kinds of Shares
(B) Preference Shares [Sec 85(1)]
• Preference shares capital is that part of share
capital which fulfills following two conditions:
• (i) carries preferential right with respect to
dividend- fixed amount or at fixed rate; and
• (ii) carries preferential right with respect to
repayment of capital on winding up.
60
 Sweat Equity Shares
[Sec 79A, 1999)
• Sweat Equity Shares means equity shares issued to
employees or directors
• at a discount for consideration other than cash
• for providing know-how or making available rights in the
nature of intellectual property or
• value addition by whatever name called.
• Issue must be authorised by a special resolution.
• Resolution to specify number, current market price and
consideration of shares, and the class or classes of
directors or employees. 61
 Sweat Equity Shares
• One years has, at the date of the issue,
elapsed since the company was entitled to
commence business.
• If shares are listed, the issue must be in
accordance with SEBI regulations.
• All limitation, restriction and provisions of
equity shares are applicable.
62
Sources of Capital

63
 From Promoters
• Private companies cannot invite general public
to subscribe its share capital.
• Public companies can raise the necessary
capital by private placement without inviting
the general public to subscribe. (not made to
more than 49 persons at a time)

64
 From Public
• By issuing a prospectus.
• By an offer for sale or by deemed prospectus:
• a) Company offers/agrees to allocate shares to a
financial institution or an Issue House for sale to
public.
• (b) The issue house publishes a document called an
Offer For Sale at a price higher than what its holder/s
had paid or at par.
• The document is deemed to be a prospectus u/s 64(1).
65
 From Public
• By placing of shares:
• a) A broker or an underwriter finds
persons who wish to buy shares.
• (b) The broker acts merely as an agent.
• (c) No need to issue a prospectus.

66
 From Existing Shareholders

• By issue of right shares to existing shareholders

[Sec 81] allotted in proportion to their existing
holding. Eg. 2 shares for every lot of 5 shares.
• Companies are required to issue Letter Of Offer
to the existing shareholders of the company.

67
 Book Building
• A process by which demand for proposed securities
is build up and a fair price and quantum of the issue
is determined.
• The Book Runner Lead Manager (BRLM)
maintains a book wherein bids by individual and
institutional investors (through syndicate member-
merchant banker) are recorded.
• Syndicate member have an underwriting agreement
with BRLM and BRLM in turn enter into an
underwriting agreement with the company. 68
 Book Building
• Two scheme of book building process - 75% Scheme
(i.e. 75% of the issue size is offered by book building
process and the balance 25% by fixed price method) and
100% Scheme (i.e. the entire issue size is offered by
way of book building process).
• SEBI has allowed all companies to make issue through
Book Building (earlier upwards of Rs 25 crores issue).
• 60% of issue size through Book Building Process be
issued to QIBs failing this, the company is required to
make maximum public offering of 25%. 69
 Issue of Shares at a Premium
[Section 78]
• Companies may issue shares at premium
irrespective of the fact whether the shares are listed
or not.
• No restriction in Companies Act on issue at
premium, the only restriction is on the utilization
of premium amount.
• Premium cannot be treated as profit as such the
amount not available for distribution as dividend.
• Premium amount must be kept in separate account
called Securities Premium Account.
70
 Issue of Shares at a Premium
• If premium is received in kind, an amount equal to
premium amount must be transferred to Securities
Premium Account.
• Premium to be used only for the following purposes as
mentioned in Section 78(2):
• (i) for issuing fully paid bonus shares;
• (ii) for writing off preliminary expenses;
• (iii) for writing off commission, discount expenses on
issue of debentures; and
• (iv) for providing for premium payable on redemption
of Redeemable Preference Shares or debentures. 71
 Issue of Shares at a Discount
[Section 79]
• Must be of a class already issued.
• At least one year must elapse from the receipt of
certificate of commencement of business.
• Must be authorised by resolution in the AGM
specifying the maximum rate of discount.
• Resolution must be confirmed by the CLB.
• Rate of discount cannot exceed 10% or as
permitted by the CLB.
72
 Issue of Shares at a Discount
• Must be issued within 2 months of the
sanction by CLB.
• The prospectus must contain particulars of
discount.
• If default is made, the officer in default shall
be liable to fine of Rs 500.
• Partly paid forfeited shares if reissued as fully
paid it amounts to issue of shares at discount
and therefore invalid.
73
 Further Issue of Shares
[Section 81]
• Called Right Shares.
• May be issued at any time after two years from
incorporation or one year from first allotment,
whichever is earlier.
• Must be offered to the existing shareholders in
proportion to their holding.
• For listed company, information on quantum and
proportion shall be supplied to the concerned stock
exchange.
• Company must give notice of offer and the number of
shares offered to existing shareholders. 74
 Further Issue of Shares
• Give shareholders 15 days to decide.
• The notice must state the shareholder's right to
renounce the offer in whole or in part in favour of some
other person.
• The board may dispose of the shares in a manner
beneficial to the company.
• Condition of issue of shares to persons other than
existing shareholders.
• [Section 81 (1A)]:
• 1. Pass a special resolution in general meeting, and
• 2. In case of ordinary resolution Central Govt.'s
approval must be obtained.
75
 Bonus Issue
• When company accumulates large distributable
profits it convert it into capital.
• Divide the capital among the existing
shareholders in proportion to their entitlement.
• Members do not have to pay for such shares.
• Bonus issue is a machinery for capitalizing
distributable profits.
• Bonus shares is not income and hence not
taxable. 76
 Bonus Issue
• Paid-up capital increases.
• Conversion of free reserves, like general
reserve, capital redemption reserve,
development rebate reserve, securities premium
account, etc.
• Must be authorised by the Articles.
• Must be sanctioned in the AGM on the
recommendation of the board.
• Authorised capital must be increased wherever
necessary. 77
 Employee Stock Option Scheme
• "Employee Stock Option means
• the option given to the whole-time directors,
officers or employees of a company,
• which gives such directors, officers or
employees the benefit or right to purchase or
subscribe
• at a future date,
• the securities offered by the company at a pre-
determined price." [Section 2(15A)]
78
 Employee Stock Option Scheme
• The offer is subject to approval of shareholders
by a special resolution.
• Minimum one year period is prescribed between
the grant of offer and its vesting.
• After the lapse of one year the period would be
determined by the company.
• ESOP Scheme to be under the superintendence
and direction of Compensation Committee of the
board. 79
 Surrender of Shares
• It is a short-cut to forfeiture. Initiative of members.
• Surrender valid only when Articles provides for the
same. No provision in Companies Act, 1956.
• Surrender is permitted where forfeiture is justified.
• Forfeiture and surrender leads to termination of
membership.
• Surrender amounts to reduction of capital.
• But instead of surrender, if the shares are transferred to
a nominee of the company then there is no reduction.
[Collector of Moradabad v. Equity Insurance Co. Ltd.
(1948)]
80
 Forfeiture of Shares
• Only when authorised by the Articles.
• For non-payment of calls.
• Must be effected by a board resolution.
• The power must be used bona fide.
• Proper notice must be given.
• Forfeiture of fully paid share only in case of expulsion
of members where Articles authorises.
• Forfeited shares may either be canceled or re-issued at
a discount not exceeding an amount already paid.
• If shares are re-issued at price more than the face value,
the excess shall constitute a premium and transferred to
securities premium account. 81
 Prohibition on Buy Back
• A company cannot buy its own shares as it
amounts to reduction of share capital without
court's consent. [Section 77(1)]
• A company may not get another person to buy
its share on its behalf, indirectly.
• A public company or its subsidiary must not
finance the purchase, directly or indirectly, of
its own shares or of its holding company.
82
 Exceptions
• Company may redeem redeemable preference shares
u/s 80.
• A banking company may lend money in the ordinary
course of business to buy shares.
• Financial assistance for purchase of fully paid shares
by trustee of or for share held for the benefit of
employees of the company.
• Loan may be advanced to the bona fide employee other
than directors, or managers to purchase fully paid
shares for amount not exceeding six months' salary /
wages.
• Company may buy its share from a member under a
Court order under Section 402. 83
 Buy back of own share u/s 77A
• Subject to provision of Sub section (2) of
Section 77A & 77B a company may purchase
its own shares or other specified securities, out
of:
• Its free reserve, securities premium account, or
proceeds of any shares or specified securities.
• Buy back may be in one of the following
modes:
• From existing security holder on proportionate
basis (tender method). 84
 Buy back of own share u/s 77A
• From the open market (through Stock
Exchanges).
• From odd lot holders.
• From employees securities issued under ESOP
or Sweat Equity.
• All shareholders must have same right of
participating in the buy-back.
85
 Conditions of Buy-back
• Must be authorised by the Articles.
• Special resolution is AGM authorizing Buy-
back.
• Buy-back is, or less than, 25% of paid-up
capital or free reserves in that financial year.
• Debts owned by company is not more than
twice its capital and free reserves after such
buy-back. (Central Govt. may relax the ratio)
• Buy-back should complete within 12 months
from passing of special resolution. 86
 Conditions of Buy-back
• Declaration of solvency (Form 4A) signed by
the MD and one director must be filled with the
RoC and SEBI.
• After buy-back is complete the securities must
be physically destroyed within 7 days.
• Company shall not make a further issue of
shares / securities for 6 months, except by way
of bonus shares.
• Prescribed return in Form 4C to be filled with
RoC and SEBI within 30 days.
87
 Conditions of Buy-back
• The company must maintain a register of buy-
back mentioning the consideration paid, date of
cancellation / destruction of securities.
• Contravention of Section 77A would make the
company or officer punishable with fine up to
Rs 50,000 and /or imprisonment up to 2 years.
• If buy-back is out of free reserve, a sum equal
to the nominal value of shares be transferred to
securities premium account and disclose in the
balance sheet. 88
 Prohibition for Buy-back [Sec 77B]
• No company shall directly or indirectly purchase its
own securities:
• Through any subsidiary including its own subsidiary
or,
• Through any investment company.
• If any default in repayment of deposit, interest
thereon, redemption of debenture / preference shares,
payment of dividend, repayment of any term loan is
subsisting.
• If company has not complied with provisions of
Sections 159, 207 and 211 of the Act. 89
 Depository System
• The Depository Act provides for the establishment of
one single or multiple depositories.
• Depository must be formed and registered as a
company under Companies Act.
• Must also be registered with the SEBI and obtain a
Certificate of Commencement of Business from SEBI.
• The investors opting to join depository mode are
required to enter into an agreement with depository
through a participant who acts as an agent of the
depository.
• The companies issuing securities are also required to
have an agreement with the Depository.
90
 Depository System
• Custodians, banks, financial institutions, large
corporate brokerage firms, NBFCs, etc. may acts as
participants of depositories.
• Share certificate belonging to investors are
dematerialized and their names are entered in the
records of the depository as beneficial owner.
• The investor's names in the company's register are
replaced by the name of depository as the registered
owner of the securities.
• The depository does not have any voting rights or other
economic rights in respect of dematerialized securities.
91
 Depository System
• Shares in the depository mode are fungible and do
not have distinctive numbers.
• The ownership changes are done automatically on
the basis of delivery v. payment.
• The companies give the holder of eligible securities
the option to avail the services of depository.
• Investors desirous of joining depository are required
to surrender the share certificate to the issuer
company.
• The beneficial owners also have a right to opt out of
the depository and claim the share certificate. 92
 Depository System
• There has to be regular, mandatory flow of information
about the details of ownership in the depository record
to the company concerned.
• If the transfer of securities is in contravention of the
provisions of SEBI, SICA, 1985 or any law for the time
being in force, the depository, company, investor,
participant or SEBI shall have a right to make an
application to the CLB for rectification of register or
record.
• The Act requires the depository to indemnify for loss
caused to the beneficial owner due to negligence of
depository or its participants. 93
 Board of Directors
• The Board of Directors of a company is a nucleus
selected according to the procedure prescribed in the
Act and the Articles of Association, out of the entire
mass of shareholders and even non-shareholders.
• Acting collectively as a Board of Director, they can
exercise all the powers of the company except those,
which are prescribed by the Act to be specifically
exercised by the company in the general meeting.
• Directors, as a body, frame the general policy of the
company, direct its affairs, appoints the company
officers, ensures that they carry out their duties and
recommend to the share holders regarding distribution
of dividend.
94
 Board of Directors
• There are mainly two types of company directors -
Executive Directors or Whole-Time Directors (MD,
Technical Directors) and, Non-executive or part-time
Directors who are professionals and serve on the board
of many companies.
• Executive directors have employment stake in the
company. They wield substantial power, enjoy
maximum remuneration, perquisites, fees, commission
and allowances.
• Part-time directors get only sitting fees for the board
meetings attended by them and wield little or no
powers.
95
 Board of Directors
• "A director includes any person occupying
the position of director by whatever name
called." [Section 2(13)]
• Only individual, and not a body corporate,
association or firm, shall be appointed as
director. [Section 253]
• "An individual who direct, control, manage,
superintend the affairs of the company in
the form of the board of directors."
96
 Types of Directors
• Professional Directors
• Specialist in different fields of management.
• Income derives principally from sitting fees.
• Nominee Directors
• Appointed by FIs, or Banks
• Powerful tool of project supervision, monitoring and
control.
• Executive Directors
• Is a full time employee of the company.
• May not be members of the board, as such not a
director in strict sense.
97
 Types of Directors
• Independent Directors
• Do not have any material pecuniary relationship or
transaction with the company.
• Entitle to receive director's remuneration.
• Government Directors (Section 408)
• Appointed by the Central Government on the
recommendation of the CLB.
• To safeguard the interest of the company or its
shareholder or in public interest.
• When the operations of the company are conducted in
such a manner as to oppress any member of the
company or in a manner prejudicial to the company.
98
 Types of Directors
• Whole-time Directors [Section 269(1)]
• Includes a director in the whole time employment of the
company.
• Technical director, legal director, works director sales
director if appointed on full time basis.
• A whole-time director is also a managerial person.
[Section 268(1)]
• They cannot accept the office of executive or whole-
time director in any other company.
• There is no restriction on the period of appointment of a
whole time director, he may be appointed for a longer
period. 99
 Types of Directors
• There are mainly two types of company directors -
Executive Directors or Whole-Time Directors (MD,
Technical Directors) and, Non-executive or part-time
Directors who are professionals and serve on the board
of many companies.
• Executive directors have employment stake in the
company. They wield substantial power, enjoy
maximum remuneration, perquisites, fees, commission
and allowances.
• Part-time directors get only sitting fees for the board
meetings attended by them and wield little or no
powers.
100
 Managing Director
• A director who, by virtue of an agreement, or of a
resolution passed in the general meeting or board
meeting or by virtue of the Memorandum or Articles,
is entrusted with substantial power of management and
includes a director occupying the position of MD, by
whatever name called. [Section 2(26)]
• Powers exercised subject to the superintendence,
control, and direction of the company's board of
directors.
• A person who is not a director of the company must be
first appointed as an additional director in accordance
with Section 260 to be appointed as MD.
101
 Managing Director
• He must sign and file his consent to act as a director
pursuant to the provisions of Section 264 and obtain
qualification shares u/s 270.
• He may have dual capacity that of an employee and
agent.
• It obligatory for public companies having paid up
capital of Rs 5 crore or more to appoint a MD or
whole-time director.
• Appointment of MD or whole-time director in a
public company only with the prior approval of the
central govt. 102
 Legal Position of Directors
• Public companies must have at least three
directors. [Section 252]
• The Act does not lay down any qualification,
but it lays down disqualifications.
• Directors are the agent of the company.
• A single director has no authority to bind the
company unless such powers are delegated to
him by the board.
• To some extent directors are also trustee of the
company's properties. 103
 Legal Position of Directors
• Barring directors in the whole time employment,
directors are not in the employment of the
company and are not entitled to any
remuneration beyond what is allowed by the Act,
i.e. sitting fees.
• They are not also required to hold any shares in
the company on whose board they serve.
• A director can hold an office or place of profit in
the company in addition to his usual directorship.
[Section 314]
104
 Qualification of Directors
• According to Sec 274 a person shall not be
capable of being appointed as director if:
• found to be of unsound mind;
• an un-discharged insolvent;
• applied to be adjudicated as an insolvent;
• convicted of any offence involving moral
turpitude and sentenced for not less than six
months and a period of 5 years has not elapsed;
105
 Qualification of Directors
• has not paid any call in respect of shares and six
months have elapsed;
• an order u/s 203 is passed by a court disqualifying
him;
• is already a director of a public company which -
• has not filled annual returns for three years, or
• has failed to repay the deposits or interest thereon
or redeemed its debentures.
• Only individuals can be a director. [Sec 253] 106
 Appointment of Directors
• First directors may be named in the Articles or
subscriber to the memorandum shall be first directors.
• One third of the total directors are liable to retire by
rotation every year and are eligible for re-appointment
in the General Meeting. [Section 256]
• Directors who have been longest in the office to retire
first.
• Directors nominated by financial institutions or by the
Central Govt. u/s 408 are not liable to retirement.
• MD and Whole-time director shall not be liable to retire
by rotation.
107
 Appointment of Directors
• A retiring director may be re appointed at the same
AGM, some other person may also be appointed in
his place. [Section 256(3)]
• At the adjourn meeting, if the vacancy is not filled
and it was not expressly resolved not to fill the
vacancy, the retiring director shall be deemed to
have been reappointed, provided:
• a resolution in the previous meeting to reappoint the
retiring director has not been lost;
• the retiring director has not expressed his
unwillingness to be reappointed; or 108
 Appointment of Directors
• he is disqualified for appointment.
• If the vacancy is not filled at the AGM or the director
is not automatically reappointed, the vacancy may be
filled by the board.
• Any person other than the retiring director may give a
notice not less than 14 days before an AGM about his
candidature as a director or any member may give
such notice signifying his intention to propose him as a
candidate for that office.
• Two or more directors should not be appointed en bloc
or by single resolution. [Sec 263(1)] unless a
resolution to do so has first been agreed by the
meeting without any vote given against it.
109
 Small Shareholder's Director
• A public company having a paid up capital of
Rs.5 crore or above may have a director from
amongst small shareholders.
• Shareholders not less than 1/10th (or 100) of the
total shareholders may elect suo-moto or upon a
notice served at least 14 days before the AGM.
• Listed company shall elect small shareholder's
director through postal ballot while an unlisted
company on the recommendation of the majority
of small shareholders.
110
 Small Shareholder's Director

• Hold office for a maximum period of three years.

• Same person may be reappointed for another term
if so decided.
• He is treated as director for all purposes but
cannot be appointed as MD or whole-time
director.
• No individual can hold office of Small
Shareholder's Director at the same time in more
than 2 companies. 111
 Removal, Retirement and Resignation
• A director may be removed from his office
before the expiry of his term by:
• Shareholders u/s 284.
• Central Government u/s 388B - 388E.
• Company Law Board u/s 397 & 398
• A director ceases to hold office if he retires by
rotation at an AGM, unless reappointed.
112
Removal, Retirement and Resignation

• No provisions in Companies Act for

resignation by director.
• May resign any time by giving reasonable
notice to the company.
• Oral resignation at an AGM, if accepted,
becomes effective.
• Resignation is irrevocable without the
consent of AGM.
113
 Managerial Remuneration
• Not defined in the Act but reference to be found in
Sections 198, 309, 311 and 387 suggesting that
director and managerial personnel are entitled to
receive managerial remuneration.
• Managerial Remuneration may take the form of
monthly payment, say, salary or a specified
percentage of net profits or a commission and /or by
way of a fee for each meeting of the board, besides
any or all of the following:
• Rent free accommodation;
• Any other amenity provided free of charge or at
concessional rate; and 114
 Managerial Remuneration
• Any insurance, annuity, or gratuity.
• Payment received for holding an office/place
of profit is not managerial remuneration.
[Section 309(1)]
• The overall Managerial Remuneration payable
not to exceed 11% of the net profit. [Section
198 (1)]
• MD and Whole-time directors may be paid a
monthly salary or specified percentage of net
profit. [Section 309 (3)]
115
 Remuneration to Non-Exe Directors
• Non-executive directors may be paid
remuneration either:
• Monthly, quarterly or annual payment with
approval of Central Govt.;
• By way of commission authorised by special
resolution.
• In either case remuneration shall not exceed:
• 1% of net profit if company has MD or whole-
time director;
• 3% of net profit in any other case.
116
 Remuneration to Non-Exe Directors

• The company with the approval of Central Govt. in

an AGM authorise a higher commission than 1% or
3%.
• Such resolution shall remain in operation for five
years, though renewable.
• If a director is paid sitting fees for attending board
meeting it shall not be considered for computing
overall Managerial Remuneration u/s 198
• Provisions of Sections 309 and 198 shall not apply
to a private company. 117
 Co. having no or Inadequate Profits
• Capital of company • Monthly Remuneration
• Less than 1 crore • 75,000
• B/wn Rs 1 and Rs 5 cr • 1,00,000
• B/w Rs 5 and Rs 25 cr
• 1,25,000
• B/w Rs. 25 and Rs 100
cr
• Above Rs 100 crore • 1,50,000
• 2,00,000

118
 Managerial Remuneration
• In addition, the managerial personnel shall also
be eligible for:
• Contribution to PF, Superannuation Fund or
annuity fund to the extent not taxable under
Income Tax Act, 1961;
• Gratuity @ not exceeding half a month's salary
for each completed year;
• Encashment of leave at the end of tenure.
• In case of an expatriate managerial person:
119
 Managerial Remuneration
• Children education allowance - maximum Rs
5000 per month per child;
• Holiday passage for children, spouse and
members of family; and
• Leave travel concession.
• All remuneration payable aforesaid shall be
subject to approval by a resolution in AGM.
120
Powers and Duties of Directors

121
Only At Board Meetings [Sec 292(1)]
• The following powers can be exercised by the
directors at the Board meetings:
• Powers to make calls on shareholders for
unpaid money.
• Power to issue debenture.
• Power to borrow otherwise than debentures.
• Power to invest the funds of the company.
• Power to make loans.
• Power to print Share Certificate.
122
Other Powers exercised at Board Meeting
• Power to fill casual vacancy in the office of
directors.
• Power to make donation to political parties. [Sec
293A(2)]
• Power to accord sanction for contracts in which one
or more directors are interested. [Sec 297(4)]
• Disclosure of interest by an interested director. [Sec
299(1)]
• Power to receive notice of disclosure of director's
shareholding. [Sec 308(2)]
123
 Other Powers

• Power to appoint a person MD if he is MD of

one and not more than one company. [Sec
316(2)]
• Power to make a declaration of solvency in
voluntary winding up and in respect of buy
back. [Sec 488 (1) & 77A)
• Power to constitute audit committee and
specify terms of reference thereof. [Sec 292A]
124
Power exercisable with approval of AGM
[Sec 293 (1)]
• The board of directors shall not except with the consent
in the general meeting:
• Sell, lease or otherwise dispose off the whole or
substantially the whole of the undertaking of the
company.
• Remit or give time for any repayment of any debt due by
a director.
• Borrow money in excess of the aggregate of the paid-up
capital and its free reserve.
• Contribute to charitable and other funds not directly
relating to the business of the company, any amount
exceeding Rs. 50,000. 125
 Statutory Duties
• Duty to attend board meetings. [Section 283(1)(g)]
• If the director fails to attend three consecutive
meetings or all meetings for a period of three
months, without obtaining leave of absence from
the board his office shall be automatically fall
vacant.
• Duty not to contract without board's consent.
• Duty to disclose interest. [Section 299-300]
• Duty to make disclosure. [Section 305]
• Of his appointment or relinquishing of office within
20 days to the company. 126
 Statutory Duties
• Duty to make disclosure of shareholding. [Sec 308]
• Duty to convene Statutory Meeting, AGMs and
EGMs. [Sec 165, 166 & 169]
• To disclose receipt from transfer of property. [Sec
319]
• To disclose receipt of compensation from
transferee of shares. [Sec 320]
• Duty to file declaration of solvency (buyback &
voluntary winding up). [Sec 77A & 488]
• To file return of allotments. [Sec 75]
127
 Company Meetings
• A company being an artificial person expresses its will
or takes its decision through resolutions passed at
regularly convened meeting of the general body of the
shareholders, and the directors.
• The companies Act provide the shareholders a forum of
self-protection, which is general meeting of
shareholders.
• The shareholders can use the forum to appoint directors
as well as auditors of their own choice who may
safeguard them from the possible manipulation.
• The business of the meeting is conducted in the form of
resolutions proposed and passed. 128
 Types of Company Meetings
• Shareholders Meetings:
– Statutory Meeting under Section 165;
– Annual General Meetings under Section 166;
– Extraordinary General Meetings:
– Convened by directors suo moto between two
AGMs.
– Convened by directors on requisition under
Sec 169.

129
 Types of Meetings…
• Meetings of the Board of Directors.
• Meetings of the Board Committee.
• Class Meetings of Shareholders.
• Meetings of the Debenture holders.
• Meetings of the Creditors.
• Meetings of the Contributories in winding up.

130
 Statutory Meetings [Section 165]
• Companies limited by guarantee and share shall, within
one month and not more than six months from the date
of commencement of business, hold a general meeting
of the members to be called the Statutory Meeting.
• Failure to hold Statutory Meeting renders the company
liable to be wound up u/s 433(b).
• This provision is not applicable to a private company.
[Section 165(10)]
• The board shall, at least 21 days before the day on
which the meeting is held, forward a report to every
member of the company called Statutory Report.
131
Annual General Meeting [Section 166]
• Every company must, in each calendar year, hold an
annual general meeting so specified in the notice
calling it, provided that not more than 15 months
shall elapse between two AGMs.
• First AGM may be held within 18 months from the
date its incorporation.
• Subsequent AGM should be held on the earliest of
the following: [Sec 166 & 210]
• 15 months from the last AGM;
• The last day of the calendar year; or
• 6 months from the close of the financial year. 132
 AGM…
• In case of difficulty in holding meeting the Registrar
may extend time by not more than 3 months.
• Application for extension of time should be made
before the due date of holding AGM.
• Any delay including extension by RoC, shall make
the officer in default punishable with fine extending
up to Rs 50,000 and Rs 2,500 for every day of the
default.
• Delay in completion of audit or annual accounts do
not constitute a special reason justifying extension
of time for holding of AGM.
133
 Time and Place of holding AGM
• Every AGM called after giving 21 days notice must be
held on a day other than a public holiday.
• Should be held on a working day, during business
hours, at the Registered Office of the company, or
• a place within the city, town, or village in which
registered office is situated.
• An adjourned meeting accidentally comes to be held on
a public holiday does not contravenes the provisions of
Section 166 (2).
• Time of subsequent AGMs may be fixed by the Article
or by a resolution in the AGM.
134
 Business Transacted at an AGM
[Section 173]
• Ordinary business relating to:
• Consideration of accounts, Balance Sheet and
report of board and auditor;
• Declaration of dividend;
• Appointment of director in place of those
retiring; and
• Appointment and fixing of remuneration of the
auditors.
• Every other business is a special business.
135
 EGM [Sec 169]
• Every general meeting of company with exception to
Statutory Meeting and AGM is called an EGM.
• Every business at an EGM is a special business, which
arises between two AGMs being urgent, and cannot be
deferred to the next AGM.
• Usually the Articles contain provisions empowering
the board for calling an EGM.
• If there are not within India directors capable who are
not sufficient in number to form a quorum any director
or two members may call an EGM.
136
 Calling of EGM on Requisition
• The board shall on requisition of members holding
1/10th of the paid up capital or voting right, forthwith
call an EGM.
• The requisition shall set the matters for consideration,
duly signed and deposited at the registered office of the
company.
• If the EGM is not called within 21 days of the requisition
the meeting may be called on a day not later than 45 days
from the date of deposit of requisition:
– By requisitionists themselves; or
– By 1/10th of the shareholders or members holding
1/10th of voting right. 137
 Calling of EGM by CLB [Sec186]
• If, for any reason it is impracticable to call an EGM, the
CLB may, either of its own or on an application of any
director ort member:
• order a meeting of the company;
• and give such ancillary or consequential directions as
the CLB thinks expedient.
• A meeting so called shall be deemed to be a meting of
the company duly called, held and conducted.
• The CLB will interfere very sparingly, and only when
the application of a meeting is made bona fide in the
larger interest of the company.
138
 Meeting of Board of Directors
• A meeting of the Board of directors shall be held at least
once in every three months and at least four such
meetings shall be held in one year.
• As long as four meetings are held in a calendar year, the
interval between two meetings may be more than three
months.
• Listed companies are required to hold at least four board
meetings in a year with a maximum time gap of four
months between two meetings. (LA - Clause 49)
• Notice of every meeting of the board shall be given in
writing to every director for the time being in India, and
at his usual address in India to every director. 139
 Board Meetings…
• Failure would make the officer in default punishable
with a fine extending up to Rs 1000.
• The notice should contain the time date and place of
meeting.
• There is no provision for minimum days for giving
notice. It is generally prescribed by the Articles.
• If the notice of the meeting is not given to even one
director the meeting and any resolution passed thereat
would be invalid.
• Notice of the adjourned meeting should be given to the
directors who did not attend the original meeting.
140
 Board Meetings…
• For sine die adjournment and to transact new
business a fresh notice would be required.
• The meeting of the director may be held at any
time and place convenient to directors, outside the
business hours and even on public holiday unless
Articles provides otherwise.
• Good practice demands that the agenda containing
business to be transacted is circulated preferably
along with the notice at least a week before the
date of meeting.
141